TIDMSTB
RNS Number : 4167T
Secure Trust Bank PLC
25 March 2021
PRESS RELEASE
Thursday 25 March 2021
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year ended 31 December 2020
A resilient performance. Growth opportunities ahead.
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a Statutory Profit before Tax of GBP20.1
million for the year ended 31 December 2020 (2019: GBP38.7
million).
Having put in place the measures required to maintain customer
service and employee welfare in response to the COVID-19 pandemic,
the Group delivered a resilient performance. The initial UK
lockdown, which followed a strong first quarter, resulted in a
contraction of the balance sheet in the mid-part of the year.
Growth in the final quarter brought revenue up to a similar level
as delivered in 2019. Cost discipline was maintained throughout the
year reducing the cost income ratio by 3.2%.
Impairment charges increased, mostly driven by forward-looking
estimates which take account of the expected deterioration of the
UK economy prior to the recovery from the pandemic taking hold.
Capital ratios improved, given the short duration of the Group's
lending portfolios, and the liquidity position remains very
healthy.
The Group will recommend a final dividend for 2020 of 44 pence.
These results provide the Group with a strong platform from which
to take advantage of economic recovery and return to lending
growth.
FINANCIAL HIGHLIGHTS
Full Year Full Year Change
2020 2019 %
---------------------------- --------- --------- ------
Statutory profit before tax GBP20.1m GBP38.7m (48.1)
---------------------------- --------- --------- ------
Basic earnings per share 87.0p 168.3p (48.3)
---------------------------- --------- --------- ------
Ordinary dividend per share 44p 20p 120.0
---------------------------- --------- --------- ------
Return on average equity 6.1% 13.5% (54.8)
---------------------------- --------- --------- ------
Net interest margin 6.3% 6.5% (3.1)
---------------------------- --------- --------- ------
Cost of Risk 2.3% 1.4% 64.3
---------------------------- --------- --------- ------
Cost income ratio 55.1% 56.9% (3.2)
---------------------------- --------- --------- ------
31 Dec 31 Dec Change
2020 2019 %
-------------------- ----------- ----------- ------
Loan Book GBP2,358.9m GBP2,450.1m (3.7)
-------------------- ----------- ----------- ------
Deposits GBP1,992.5m GBP2,020.3m (1.4)
-------------------- ----------- ----------- ------
CET 1 capital ratio 14.2% 12.7% 11.8
-------------------- ----------- ----------- ------
Total capital ratio 16.4% 15.0% 9.3
-------------------- ----------- ----------- ------
OPERATIONAL HIGHLIGHTS
-- Total customer numbers reduced by 3.9% to 1,536,602 (2019: 1,598,256)
-- Customer satisfaction scores, as measured by FEEFO, maintained at 4.7 stars
-- Total new business lending volumes fell by 27.1% to GBP1,030.2m (2019: GBP1,413.0m)
-- Total Business Finance balances increased by 4.1% to
GBP1,293.0m (2019: GBP1,241.6m), with growth in Real Estate Finance
balances more than offsetting contraction in Commercial Finance
balances
-- Total Consumer Finance balances reduced by 11.6% to
GBP1,061.8m (2019: GBP1,200.9m), with contraction across all
businesses and Motor Finance particularly impacted by the temporary
ceasing of new business generation and tightened credit risk
appetite in 2020
-- Customer deposits of GBP1,992.5m (2019: GBP2,020.3m), with
management of the mix of the savings book contributing to an
improvement in cost of funding from 2.0% to 1.8% (net of interest
on swaps)
-- Investment in Motor Transformation Programme continued
throughout the pandemic, with new prime product offerings and
systems infrastructure ready for use
OUTLOOK AND STRATEGY
The Group has seen the robust performance of 2020 continue into
the early months of 2021. The pandemic has continued to impact on
business demand and lending volumes, and there remains uncertainty
on the impact once Government support comes to an end. However, the
Group's diversified business model and capital strength have proven
to be key strengths and the Group is well placed to navigate that
uncertainty.
We remain focused on our strategy of operating in segments
offering attractive returns, utilising our strong risk management
skills and optimising our capital and liquidity to create
shareholder value. We see potential to further grow our core
businesses by extending our product offerings and leveraging our
product platforms across the Group, by further developing our
digital and data capabilities, and by enhancing our processes to
improve efficiency. We are looking forward with confidence to
returning to lending growth.
We are providing the following medium-term performance targets
for the Group.
2020 Actual Medium Term
------------------------- ----------- -----------
Net Interest Margin 6.3% >6.0%
------------------------- ----------- -----------
Cost income ratio 55.1% 50% - 55%
------------------------- ----------- -----------
Return on Average Equity 6.1% 14% - 16%
------------------------- ----------- -----------
CET 1 14.2% >12.0%
------------------------- ----------- -----------
CAPITAL MARKETS DAY
The Group plans to host a Capital Markets Day during the second
half of 2021, at which more detail will be shared on its purpose
and rearticulated strategy, its businesses and markets, and its
long-term growth ambitions. More detail will be provided in the
coming months.
Lord Forsyth, Chairman, said:
"A profit before tax of GBP20.1 million in such a challenging
year is an excellent result and a tribute to our employees. Our
determination to preserve Capital and maintain a prudent approach
to lending has enabled us to pay a dividend of 44p. I am confident
we are now well placed to take advantage of recovery."
David McCreadie, Chief Executive, said:
"The Group has delivered a strong and resilient performance in
the face of extremely challenging conditions and is well placed to
flourish as the market recovers.
I would like to thank my colleagues for their own resilience and
commitment in adapting so positively to the ever-evolving
circumstances of the last year. This allowed us to achieve our
objective of delivering our usual high levels of service and
support to our existing customers.
Our performance last year demonstrated the many strengths of
STB. The experience of our team, our diversified portfolio and the
short duration of our balance sheet allowed us to navigate through
the uncertainty with agility and effectiveness.
I am excited about the journey ahead. We are well-positioned in
attractive, specialist lending markets and see a clear opportunity
to build on our strong foundations. STB will become simpler, more
efficient, and clearer in its growth ambitions. I am confident in
our ability to return to growth and create sustainable value for
our stakeholders."
RESULTS PRESENTATIONThis announcement together with the
associated investors' presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Secure Trust Bank will host a webcast for analysts and investors
today, 25 March 2021 at 10.00, which can be accessed by registering
at: results webcast. For those wishing to ask a question, please
dial in to the event by conference call: results webcast.
For those wishing to ask a question, please dial in to the event
by conference call:
Dial: +44 (0)330 336 9434
Confirmation code: 2766354
Enquiries:
Secure Trust Bank PLC
David McCreadie, Chief Executive Officer
Rachel Lawrence, 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)
Emma Gabriel
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.
Key performance indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group.
The Remuneration Report, starting on page 83 of the Annual
Report and Accounts, sets out how executive pay is linked to the
assessment of key financial and non-financial performance metrics.
Certain KPIs represent alternative performance measures that are
not defined or specified under IFRS. Definitions of the financial
KPIs, their calculation and an explanation of the reasons for their
use can be found in the Appendix. In the narrative of the financial
review, KPIs are identified by being in bold font. Further
explanation of the non-financial KPIs is provided in the Managing
our business responsibly section on page 52 of the Annual Report
and Accounts. Adjustments to profit have been removed for 2020, so
key performance indicators which were based on adjusted profit have
been removed. Return metrics for both 2020 and 2019 are now stated
on a statutory rather than adjusted basis.
2020 2019
----------------------------------------------- ------------------------- ------------------------
Margin ratios
----------------------------------------------- ------------------------- ------------------------
Net interest margin 6.3% 6.5%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Shows the interest margin earned on the Group's loan books, net of funding
costs
----------------------------------------------------------------------------------------------------
Net revenue margin 6.9% 7.3%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Shows the overall net margin earned on the Group's loan books, including
fees and commissions
----------------------------------------------------------------------------------------------------
Gross revenue margin 8.7% 9.4%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Shows the yield of the Group's loan books, including fee and commission
income
----------------------------------------------------------------------------------------------------
Cost ratios
----------------------------------------------- ------------------------- ------------------------
Cost of funds 1.7% 2.0%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures the cost of the Group's customer deposits and other funding
sources
----------------------------------------------------------------------------------------------------
Cost to income ratio 55.1% 56.9%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures how efficiently the Group utilises its cost base to produce
income
----------------------------------------------------------------------------------------------------
Cost of risk 2.3% 1.4%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures how effectively the Group manages the credit risk of its lending
portfolios
----------------------------------------------------------------------------------------------------
Loans
----------------------------------------------- ------------------------- ------------------------
Loans and advances to customers GBP2.358.9 million GBP2,450.1 million
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Shows the growth in the Group's lending balances, which generate income
----------------------------------------------------------------------------------------------------
Loan to deposit ratio 118.4% 121.3%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures the adequacy of liquidity by comparing loan balances to customer
deposits
----------------------------------------------------------------------------------------------------
Total funding ratio 109.7% 107.5%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures the adequacy of liquidity by comparing all funding held by the
Group to loan balances
----------------------------------------------------------------------------------------------------
EPS
----------------------------------------------- ------------------------- ------------------------
Basic earnings per share 87.0 pence 168.3 pence
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Demonstrates the earnings attributable to each shareholder
----------------------------------------------------------------------------------------------------
Capital
----------------------------------------------- ------------------------- ------------------------
CET1 ratio 14.2% 12.7%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: The Common Equity Tier 1 ('CET1') ratio demonstrates the Group's capital
strength
----------------------------------------------------------------------------------------------------
Return ratios
----------------------------------------------- ------------------------- ------------------------
Return on average equity 6.1% 12.8%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Measures the Group's ability to generate profit from the equity available
to it
----------------------------------------------------------------------------------------------------
Return on required equity 6.5% 13.3%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Relates profitability to the capital that the Group is required to hold
----------------------------------------------------------------------------------------------------
Return on average assets 0.6% 1.2%
----------------------------------------------- ------------------------- ------------------------
Why we measure this: Demonstrates how profitable the Group's assets are in generating revenue
----------------------------------------------------------------------------------------------------
Non-financial KPIs
----------------------------------------------- ------------------------- ------------------------
Customer FEEFO ratings 4.7 stars 4.7 stars
----------------------------------------------- ------------------------- ------------------------
(mark out of 5 based on star rating from 1,466 reviews. 2019: 1,754 reviews)
Why we measure this: Indicator of customer satisfaction with the Group's products and services
----------------------------------------------------------------------------------------------------
Employee survey trust index score 82% 79%
----------------------------------------------- ------------------------- ------------------------
(based on 2020 all staff survey)
Why we measure this: Indicator of employee engagement and satisfaction
----------------------------------------------------------------------------------------------------
Environmental intensity indicator 3.1 4.7
----------------------------------------------- ------------------------- ------------------------
(tonnes of carbon dioxide per GBP1 million Group income)
Why we measure this: Indicator of the Group's impact on the environment.
----------------------------------------------------------------------------------------------------
Chairman's statement
Profitable and resilient
None of us will ever forget 2020. At STB the year started well
with an excellent performance in the first quarter. The impact of
COVID-19 changed everything and our objectives have been to
preserve capital, keep our people safe, support our customers and
preserve employment. I am delighted to report that your company has
succeeded in meeting these challenges and achieved a positive
result with a profit before tax of GBP20.1 million (2019: GBP38.7
million). Given the year we have all faced, this is an excellent
result.
The short duration of our loan book enabled us to tighten credit
criteria quickly and we are well-placed to take advantage of
recovery. Our capital position is significantly ahead of last year,
with a CET 1 ratio of 14.2% compared with 12.7% at the end of 2019.
We have maintained our high customer satisfaction scores with Feefo
ratings averaging 4.7 stars, supported our Retail and Motor Finance
customers in difficulty with payment holidays free of additional
interest charges and minimised levels of impairment. Our savings
platform has won numerous awards over the past few years and
continues to do so.
All of this has only been possible because our employees have
gone that extra mile and I would like to thank every one of them
for their resilience, flexibility and commitment in this most
challenging of years. Employee satisfaction scores, despite
everything, rose from 79% to 82% and we continue to improve on our
already impressive position in the Great Place to Work(R) rankings.
This was enhanced by initiatives to maintain high levels of
internal communication, such as STB Group Radio, set up and hosted
by our staff whose talents as producers, interviewers and disc
jockeys had been undiscovered until now.
Lockdown did not prevent staff from continuing to raise money
for charities, including those supported by Alan Karter, our
General Counsel who sadly passed away at the end of 2020.
Dividends
The Board decided not to pay a final dividend in respect of 2019
or a 2020 interim dividend in order to conserve capital. I am
pleased to announce that the Board proposes a final dividend for
2020 of 44 pence, recognising both the performance for 2020 and the
absence of a final dividend in 2019. The dividend results in an
average payout ratio of 25% over the two years. If approved at the
AGM, this dividend will be paid on 21 May 2021 to shareholders on
the register as at 23 April 2021.
Changing of the guard
The year has also seen a changing of the guard, with Paul Lynam
moving on after more than a decade as Chief Executive Officer and
David McCreadie seamlessly taking up the reins in line with our
succession plan. The Board would like to record our thanks to Paul
for the tremendous contribution he has made to making STB the bank
that it is today and wish him well in his new role.
Rachel Lawrence joined the Board as our new Chief Financial
Officer and together with David will take forward the Group's
strategy as the economy rebounds from the impact of lockdown.
Finally I would like to thank the Board for their indefatigable
support. Managing the COVID-19 crisis has necessitated additional
involvement and commitment which has been very much
appreciated.
Looking forward
Although the immediate outlook for the UK economy remains
uncertain, the Group has shown its adaptability and resilience in
the face of extreme circumstances. The result for the year leaves
us in a good position to take advantage of improving economic
conditions as the recovery from the pandemic takes hold.
Given the resources at our disposal, the talents of our people,
the flexibility of our business model and our clear strategy, we
can embrace the future with optimism.
Lord Forsyth
Chairman
24 March 2021
Chief Executive's statement
Resilient performance
It is with great pleasure that I take up my position as Secure
Trust Bank's Chief Executive Officer. This comes at a time when the
Group has performed robustly in the face of extremely difficult
conditions, and is well-placed to take advantage of the
opportunities that we expect to arise in the coming years. I would
like to echo our Chairman's thanks to my predecessor, Paul Lynam,
whose long and successful stewardship of the Group has provided the
platform to grow and create value in the years ahead.
When I first joined STB as a Board Director in 2019 it quickly
became clear that STB is a business with many strengths. One of
these is the diversity and short duration of our balance sheet and
the advantages this brings. This flexibility has served the Group
well during the COVID-19 crisis, allowing us to manage both our
credit risk appetite and capital positions effectively as the
pandemic evolved. Another strength is our focus on customers and I
would like to thank all colleagues for the contribution they made
to supporting our customers, and each other, during the year. Our
teams responded superbly and our employee feedback shows high
levels of motivation and engagement throughout the Group.
As outlined in more detail in the Financial Review, our balance
sheet contracted as the government's response to the crisis took
hold, closing slightly below where we started the year. Customer
lending balances at the end of the year were GBP2,358.9 million,
down 3.7% on the 2019 closing position of GBP2,450.1 million. Our
mix has also been impacted, with the ratio of Business Finance
balances to Retail Finance balances now approximately 55:45,
compared to the broadly equal split of the past few years. This was
largely due to our decision to stop all new Motor lending during
the initial lockdown period.
Our customer lending balances had grown by 20.8% in 2019, and
this momentum had continued into the first quarter of 2020, prior
to the first lockdown taking hold. As a result, revenue in 2020 was
very similar to 2019 levels.
As with most UK banks and building societies who report using
IFRS 9, our results have been impacted by impairment provisions.
The assistance we have provided to our customers and the
considerable support offered by the government through the pandemic
has so far diminished the level of actual defaults experienced.
However, our provisions take account of the expected worsening of
the economy, with unemployment predicted to rise sharply prior to
starting to recover as the impact of the pandemic recedes.
The increase in provisions has reduced our profit before tax for
the year to GBP20.1 million, a fall of 48.1% from our 2019 result
of GBP38.7 million. Given the extreme impact of the pandemic, both
globally and in the UK, I consider this to be a very creditable
result.
Improved capital and liquidity positions
The initial contraction of our balance sheet provided
opportunities to manage our capital and liquidity positions. As
growth opportunities returned, we have been careful to flex our mix
of business so as to reduce overall levels of credit risk and focus
on asset classes with lower risk weightings. As set out in the
Financial Review, regulatory intervention has also assisted the
Group's capital position. The CET 1 ratio closed the year at 14.2%,
up significantly from the 31 December 2019 ratio of 12.7%. The
Total Capital ratio was likewise up to 16.4% from 15.0% at the end
of 2019. These ratios reflect the proposed 2020 final dividend.
We entered 2020 with healthy liquidity levels, far exceeding
regulatory limits. The reduced need to fund lending growth this
year has allowed us to manage down the more expensive sections of
our savings book. In this low interest rate environment, we have
reduced our interest rates without significant customer attrition
while continuing to offer our savings customers a fair return.
Our total funding ratio was 107.5% at the end of 2019, and we
have aimed to keep this ratio relatively steady as we allowed
savings balances to fall in line with customer lending. Liquidity
levels increased in the final month of the year, to fund expected
drawdowns in early 2021, pushing this ratio up to 109.7% as at 31
December 2020.
Customer service
We have risen to the challenge of maintaining our customer
service levels throughout this difficult period, as borne out by
our Feefo and Net Promoter Scores. As set out in the Managing our
business responsibly section, I am delighted we have maintained our
average Feefo score of 4.7. We also retained the government's
Customer Service Excellence standard for the eighth successive
year.
Keeping our operations running and maintaining lines of
communication with our customers has been paramount. For Business
Finance, this has involved working closely with borrowers
throughout the pandemic, to understand the impact on them and
provide support accordingly. This has included providing CBILS and
CLBILS (see page 17 of the Annual Report and Accounts for
definition) to a number of our existing Commercial Finance
customers.
A significant proportion of our customers, particularly in Motor
Finance, took advantage of government mandated payment holiday
schemes. The majority have now returned to making normal payments.
We took the decision to charge no additional interest to these
Motor and Retail Finance customers, despite this having a material
impact on our results for the year as shown in the Financial
Review. In our view, with our customers facing very difficult
circumstances, this was the right thing to do.
Customer numbers reduced slightly over the year. At the year-end
we had 1,536,602 customers (31 December 2019: 1,598,256).
Customer lending activities
Our divisions have had to adapt quickly to the new environment.
The emphasis this year has been on supporting our existing
customers rather than generating new business. As a result, new
business lending of GBP1,030.2 million in the year was 27.1% lower
than the GBP1,413.0 million delivered in 2019. Much of the new
lending was due to our Retail Finance division, which continued to
provide finance to support retail purchases throughout the
lockdowns, particularly via online channels.
The pandemic has impacted on each of our divisions differently,
as summarised below. The diverse nature of our balance sheet has
helped mitigate the risk brought by the pandemic, as demonstrated
by our results for the year.
Business Finance
While the Real Estate Finance balance sheet continued to grow
steadily over the year, closing at over GBP1 billion, more
significant movements were seen in Commercial Finance. This
business lends against our business customers' sales invoices, and
with activity put on hold during the first lockdown, the lending
that our customers could draw down reduced. This saw balances fall
from GBP251.7 million at 31 December 2019 to GBP191.6 million at
half-year. They fell further in the third quarter, before
recovering strongly to close at GBP230.7 million. The return to
growth was in part due to our provision of CBILS and CLBILS to our
existing customers.
New business was also significantly reduced in Real Estate
Finance. However, alongside supporting our customers through the
crisis, we continued to advance funding to existing Development
Finance customers once their projects were allowed to restart after
the first lockdown. Unsurprisingly, we also saw lower levels of
customer refinancing away from the Group at the conclusion of their
initial deal terms. Balances therefore grew by 9.3%, from GBP962.2
million to GBP1,051.9 million.
No credit losses crystallised on either of these portfolios
during the year. In line with the overall Group position, the
higher impairment charges borne this year reflect the
forward-looking factors built into IFRS 9 methodology.
Asset Finance balances continue to run-off and closed at GBP10.4
million (31 December 2019: GBP27.7 million). We have no current
plans to re-establish this business line. Over 2020 we worked
closely with our customers and joint venture partners to minimise
losses, including providing payment holidays to a number of
customers.
Consumer Finance
Our Consumer Finance businesses also experienced contrasting
conditions in their markets as the pandemic progressed. For each of
them, the lockdown shrank available markets, restricted collection
activity and required downward valuation of loan balances.
With its strong online presence, Retail Finance was well-placed
to adapt quickly to the crisis. We shifted our risk appetite
towards higher credit quality customers over 2020, and continued to
deliver strong levels of new business, though of course down from
2019. As in previous years, this division provided more than half
of the Group's overall new business.
Motor Finance entered 2020 with its Motor Transformation
Programme at an advanced stage and putting the finishing touches to
its prime lending proposition. The pandemic significantly affected
its market, however, with the UK used vehicle market being unable
to operate normally during the first lockdown. Given the uncertain
economic conditions, we decided to stop writing new Motor Finance
business for three months from March, reopening in July 2020 with
tightened lending criteria.
Given all of the hard work from many of our employees to bring
the Transformation Programme to a successful point, this was
disappointing, but we remain committed and ready to expand into the
prime market when conditions improve. We are monitoring the
position closely and will step up lending activity once the time is
right.
Both portfolios saw a number of customers requesting payment
holidays, though the majority returned to full payment once their
holiday ended. As noted earlier, we provided payment holidays
without penalising our customers by charging additional interest.
The Financial Review explains how this required us to revalue our
loan books downwards at the half-year, materially so for Motor
Finance. The majority of this modification adjustment should
reverse over the next few years.
After significant growth in 2019 and a strong start to 2020, our
debt management business DMS also switched its focus away from new
debt purchases to supporting existing customers. A number of our
normal debt collection strategies were not appropriate during 2020,
resulting in lower levels of cash collection versus expectation.
This required a downwards revaluation of the DMS loan book in the
second half, which contributed to an impairment charge of GBP8.9
million.
The Consumer Mortgages book continues to run-off, reducing from
GBP105.9 million at 31 December 2019 to GBP77.7 million at 31
December 2020. We also supported Mortgage customers with payment
holidays, with impairments remaining at a minimal level.
Savings
Our Savings team has done an excellent job in recent years,
raising the customer deposits that form the majority of our
funding. Given the growth in lending balances in prior years, this
has required hard work, innovation and exceptional customer
service. All of these have been delivered by the team.
This year has provided different challenges and opportunities.
With lending balance growth halted by the pandemic, deposit
balances remained at a similar level to 2019, closing at GBP1,992.5
million (31 December 2019: GBP2,020.3 million). We have been able
to use our expanded product set, developed over 2019, to reduce our
cost of funding while continuing to provide good value to our
savings customers.
We took the difficult decision in 2020 to close our OneBill
product. This household budgeting product was closed to new
business in 2009 and customer levels had reduced to 14,835 by the
end of 2020 (31 December 2019: 17,024 customers). We continue to
support our OneBill customers as we manage the closure of these
accounts.
Our strategic priorities remain unchanged
The Group's medium-term strategy remains unchanged. We will of
course continue to prioritise supporting colleagues, customers and
business partners as we manage the challenges presented by the
pandemic.
Tight control over credit risk, capital and liquidity positions
and costs remains in place while the pandemic continues to impact
on the economy. As the external environment improves we will
refocus on the Group's strategic priorities of:
-- Organic growth in responsible lending across a diverse
portfolio of attractive segments
-- Continued investment in broadening our product offerings to
customers
-- Pursuing M & A activity in line with our strategy
-- Optimising our capital and liquidity strategies
-- Continuing to target delivery of profit growth in the medium
term to create shareholder value
Outlook
This year has brought conditions that none of us ever thought we
would experience, either personally or professionally. There is
cause for optimism in respect of the rollout of COVID-19 vaccines,
but we will see further economic deterioration before the expected
recovery takes hold. The full extent of the damage caused by the
pandemic will likely not be known until we are well into 2022.
The uncertainty surrounding the UK's exit from the European
Union has in part abated, with the signing of a trade deal late in
2020. Businesses are still coming to terms with the new
arrangements and, as the long-term impact is not yet clear, we will
continue to monitor developments closely.
I am confident that the flexibility, agility and financial
strength that stood us in such good stead in 2020 will be
invaluable as we navigate the period ahead. We are also focused on
the long-term opportunity for the Group. We have assessed a wide
range of scenarios, to ensure the return to growth balances our
desire to meet customer needs, profitability targets, credit risk
appetite and capital requirements. We are ready to return to
controlled growth and all of our core products are expected to grow
in 2021.
There continues to be strong growth potential for all of our key
business units, and our diversity gives us a wide range of capital
allocation options as conditions start to improve. Our lending
portfolio is well-positioned to react both to continuing
difficulties and to more productive conditions when the time comes.
Our capital and liquidity positions leave us well-placed to return
to organic growth as well as supporting the consideration of
suitable acquisition opportunities that may arise.
In 2020 we showed that our expectations of how Secure Trust Bank
would be able to respond to stress were well founded, in more
difficult conditions than we could have imagined. Once the crisis
clears, we will demonstrate once again the benefits of controlled
growth across a range of diverse, well-managed businesses.
David McCreadie
Chief Executive Officer
24 March 2021
Business review - Business Finance
Real Estate Finance
Supports SMEs in providing finance principally for residential
development and residential investment.
Commercial Finance
Provision of invoice discounting and factoring to UK
businesses.
Supporting UK property development
The first UK lockdown brought a halt to construction activity in
the UK. Once this restriction was lifted, our property development
customers needed access to continued funding, to allow their
projects to continue.
We were pleased to be able to provide this support, with robust
credit management processes in place. This, plus reduced levels of
repayments due to slower market conditions, brought our Real Estate
Finance lending balances up to record levels, over GBP1
billion.
2020 Performance
Continued cautious growth in Real Estate Finance, offset by
reduced Commercial Finance lending balances driven by the first
lockdown's impact on our customers' activity levels.
Real Estate Finance
What we do: Residential Development
We lend to enable the development of new build property,
commercial to residential conversions (including those with
permitted development rights) and refurbishment projects.
Residential Investment
We lend on portfolios of residential property where the rental
income will repay the underlying borrowing over a fixed term
period. This excludes the regulated buy-to-let mortgage sector.
Other lending
We have limited appetite for other commercial lending (either
development or investment) and have limited exposure to mixed
development schemes.
How we do it
Financing is typically provided over a term of up to five years
with conservative loan-to-value ('LTV') criteria, with a 60% loan
to gross development value to residential house builders. More
restrictive policies are implemented from time to time as required.
Our loan to gross development value/LTV ratios continue to average
below 60% across all lending areas. We have no significant exposure
to any one property scheme or developer.
The Real Estate Finance team is staffed by experienced bankers
with proven property lending expertise. The team provides full
support to customers and introducers over the life of the
products.
2020 performance
The business showed good momentum in Q1 2020 which then slowed
following the impact of COVID-19 restrictions. This limited new
business activity, and we focused on supporting customers and
maintaining strong risk management over the portfolio.
Existing developments have continued to be funded, whilst the
slowdown in the market has limited repayments. Overall balances
grew by 9.3% in 2020, exceeding GBP1 billion and leading to overall
revenues being 10.4% higher than 2019.
The impact of changes in macroeconomic factors has seen an
increase in impairment charges in 2020. Low LTV ratios and close
management focus on our portfolio have helped mitigate these
charges. During the year ended 31 December 2020, 29 customers had
been provided with a payment holiday, either in relation to capital
or interest payments or both. These related to loans with exposures
of GBP191.9 million. By the end of the year, this had reduced to
two with exposure of GBP16.6 million.
Looking forward
The immediate focus of the business will remain on effective
risk management, and ensuring that we continue to support our
customers.
Our experienced team remains able to manage opportunities and
threats in a timely manner, reflecting the necessary caution
required by current conditions. We will manage our appetite in
respect of new lending opportunities which arise as the economic
conditions become clearer going forward.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014.
What we do
The division specialises in providing a full range of Asset
Based Lending solutions to UK businesses. This covers a range of
asset classes but our exposure remains predominantly against
receivables.
Invoice discounting services provide access to funding and
release typically up to 90% of the value of qualifying invoices, in
confidence and allowing clients to stay in control of sales ledger
management.
Factoring services, where the sales ledger management is passed
on to the Group, may also provide access to funding of typically up
to 90% of the value of qualifying invoices and often results in the
Group managing credit control, cash allocation, statement and
reminder letter distribution.
Other assets can also be funded either long- or short-term and
for a range of LTV ratios alongside these facilities.
The division has also provided unsecured lending to existing
customers since April 2020, through the government's Coronavirus
Business Interruption Loan Scheme ('CBILS') and Coronavirus Large
Business Interruption Loan Scheme ('CLBILS'). In both cases the UK
Government guarantees 80% of the facility.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The business
also provides SME commercial owner-occupiers with finance to buy
the property they trade from, in conjunction with other financing
facilities. This represents less than 3% of total exposure.
The division has built a strong team of proven business
development, credit and operational professionals who have
delivered a robust and compliant operating model.
2020 performance
The impact of COVID-19 on Commercial Finance clients resulted in
lower utilisation of funds in the immediate aftermath of the first
lockdown, whilst collections on the balances held up well. This
caused a decrease in total lending balances drawn, over the middle
part of the year, with both income and overall returns being lower
than expected as a consequence. These balances have since recovered
and there have been promising levels of new business, albeit
selectively given the economic environment.
We supported businesses through the COVID-19 pandemic by
supplementing lending to existing clients with CBILS and CLBILS
facilities. This, together with wider balance sheet recovery,
resulted in the year-end lending balance recovering to GBP230.7
million.
The close management and prudent approach to credit risk has
ensured that, despite these difficult trading conditions, actual
crystallised losses have been minimal.
Looking forward
Focus in 2021 will be on the continued protection of the balance
sheet, in particular where clients are impacted by the end of
government backed assistance such as HMRC payment forbearance,
furlough and business interruption payments.
We expect appetite in the market to return and are well-placed
to take advantage of new business opportunities.
Business review - Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
Motor Finance
Finance is arranged through motor dealerships, brokers and
internet introducers and involves fixed rate, fixed term hire
purchase arrangements on used cars.
Debt Management
Debt collection for the Group and external clients.
Supporting retailers
COVID-19 has made 2020 a very difficult year for retailers. The
financing offered through our V12 Retail Finance business has not
only aided consumers, but also our retail partners who have had to
adjust their business models.
2020 Performance
Markets were slowed by COVID-19, particularly so for Motor
Finance, resulting in balance sheet reduction over the year.
Retail Finance
What we do
The Retail Finance business, branded as 'V12', provides
unsecured, prime lending products to the UK customers of its retail
partners to facilitate the purchase of a wide range of consumer
products across in-store, mail order and online channels. This
business is driven by V12 Retail Finance, which was acquired in
2013 and has provided finance in cooperation with its retail
partners for more than 20 years. The V12 point of sale system is
used by the Group's retail partners and Retail Finance is
administered from the V12 offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed term
loans, to UK residents with a good credit history, of up to 84
months in duration with a standard maximum loan size of GBP25,000.
The average new loan is for GBP1,200 over a 26 month term.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing customers to
spread the cost of purchases into more affordable monthly
payments.
How we do it
We operate an online e-commerce service to retailers, providing
finance to customers of those retailers. The online processing
system allows customers to digitally sign their credit agreements,
thereby speeding up the pay-out process, and removing the need to
handle and copy sensitive personal documents through electronic
identity verification.
Retail Finance serves retailers across a broad range of sectors
including cycle, music, furniture, outdoor/leisure, electronics,
dental, jewellery, home improvements and football season
tickets.
We provide finance to customers of a large number of retailers
including household names such as Watches of Switzerland, DFS,
Sofology, Performance Cycles and Watchfinder.
2020 performance
The Retail Finance business delivered a performance that was
broadly in line with 2019, despite it being heavily impacted by
COVID-19 in 2020. Social distancing requirements led to its
retailer partners making significant changes including store
closures, leading to lower sales volumes, and the impact on supply
chains reduced the capability to fulfil goods delivered to
customers. Online sales performances were less impacted, with
sports and leisure sectors showing increased demand, particularly
in the early stages of the pandemic.
Consequently, new lending volumes reduced to GBP614.5 million (a
decrease of 14.2% on the prior year). This has led to a 4.4%
reduction in lending assets, which reduced to GBP658.4 million in
December 2020 (December 2019: GBP688.9 million). Lending revenue
decreased by 5.4% to GBP70.7 million (December 2019: GBP74.7
million) due to this reduction in lending balances and a move to
lower risk lending.
In terms of the three largest sub-markets, furniture and sports
and leisure saw an increase in lending year-on-year, with jewellery
seeing a decrease. Despite the decrease in volumes, market share
(based on Finance & Leasing Association new business values
within retail store and online credit) has remained relatively
stable.
Impairment charges decreased to GBP14.5 million (December 2019:
GBP19.8 million) linked to lower new business volumes and improved
credit quality, partially offset by increased provisioning under
IFRS 9 for forward looking macroeconomic factors. During the year,
we granted payment holidays to approximately 2.1% of our customers,
with only 0.5% remaining on a payment holiday at 31 December
2020.
Customer feedback, measured by Feefo, provided the business with
a consistent score of 4.8 out of 5 for the year, based on over
1,000 reviews (2019: 4.8 based on 1,000 reviews).
Looking forward
During 2021 we envisage an increase in volumes as the majority
of retail sectors expect to see a bounce back in customer footfall
as COVID-19 social distancing rules start to relax after the winter
lockdowns. Our online e-commerce service to retailers will continue
to mitigate the impact of COVID-19 in many sectors, especially
cycle, outdoor/leisure and electronics, as customers shop
online.
We will continue to invest in initiatives to further enhance
systems capabilities, to ensure that quality of service to both
retailers and customers is maintained or improved as well as
generating operational efficiencies. This includes the rollout of
improved telephony systems across customer-facing staff and
enhancements to the customer application process. This will provide
a slicker customer journey by recognising returning customers of
V12 Retail Finance in order to reduce customer time inputting their
details.
Motor Finance
What we do
The Group's Motor Finance business began lending in 2008 under
the Moneyway brand and provides hire purchase lending products to a
wide range of customers, including those who might otherwise be
declined by other finance companies. This helps the Group's
customers to gain the freedom and flexibility that motoring gives
to their lives as well as helping introducers to sell more
cars.
In 2019 we launched a new brand, V12 Vehicle Finance, and a new
used vehicle stocking product to allow dealers to finance vehicles
on their forecourt as part exchanges, from auction partners or from
other trade sources. In the last quarter of 2020 we initiated a
limited trial of hire purchase lending into the consumer prime
credit market under the V12 Vehicle Finance brand.
Both consumer and used vehicle stocking Motor Finance agreements
are secured against the vehicle being financed and are
predominantly lending to finance the purchase of volume franchise
used cars.
How we do it
The Group distributes its Motor Finance products via UK motor
dealers, brokers and internet introducers. New dealer relationships
are established and managed by the Group's UK-wide Motor Finance
sales team with all introducers subject to a strict vetting policy,
which is reviewed on a regular basis.
The technology platform used allows the Motor Finance business
to: receive applications online from its introducers; provide an
automated decision; facilitate document production through to
pay-out to dealer; and manage in-life loan accounts.
Motor lending is administered in Solihull, covering UK-wide
motor dealers and brokers.
2020 performance
The Motor Finance industry was significantly impacted by
COVID-19, with used cars bought on finance by consumers through the
point of sale down 14% in the twelve months to October 2020 over
the prior year (source: Finance and Leasing Association). We took
the decision to temporarily cease writing new business in March
2020 for three months as a result of COVID-19 to focus on
supporting existing customers. From July 2020 the Motor Finance
business recommenced trading with restricted lending criteria. As a
result, new business volumes from consumers dropped from GBP178.2
million in 2019 to GBP78.6 million for 2020.
In supporting our customers with the impact of COVID-19, we
granted either payment holidays or reduced payments to over 15.6%
of Motor Finance customers in 2020. By the end of 2020 this had
reduced to 1.2% remaining in such an arrangement.
Impairment charges for the period have increased from GBP13.8
million for 2019 to GBP20.7 million in 2020. This reflects the
expected future increase in customer defaults as a result of
forecast macroeconomic conditions arising from COVID-19
restrictions.
We also took the decision to temporarily cease writing new used
vehicle stocking loans in March 2020 and re-entered the market with
enhanced credit criteria from June 2020. There were GBP3.4 million
of used vehicle stocking lending balances at the end of 2020, up
from GBP1.5 million in 2019.
Looking forward
We expect to continue to apply restricted lending criteria to
near-prime lending over the initial part of 2021, with those
criteria being eased as the economic outlook becomes more
certain.
We remain committed to expanding into the prime credit market
under the V12 Vehicle Finance brand, to drive long-term receivables
growth and sustainable return outcomes. The requisite system and
business capabilities were delivered in 2019, allowing us to take
advantage of the opportunity to deliver prime and near-prime
products and services in the motor lending market as an innovative
and technology-led funding provider.
The Motor Transformation Programme, which has seen GBP9.5
million already invested since the programme started in 2018, will
now focus on further system enhancement and delivery of a PCP
product.
Motor Finance is now well-placed to improve the credit quality
of the portfolio, drive business growth and deliver stable
earnings.
Debt Management
What we do
Debt Managers (Services) Limited ('DMS') is the Group'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.
How we do it
DMS offers three services across credit management and in order
to meet the needs of its clients:
-- Business process outsourcing allows DMS to assist in the
performance of early arrears accounts on behalf of clients
-- Contingent collection allows a client to place accounts for
DMS to manage in its own name
-- Debt purchase allows DMS to acquire accounts and choose how
to liquidate those accounts over a period of 10 years
We aim to provide all customers with the best possible customer
service by recognising every customer is different. All
customer-facing staff receive training on how to effectively use
industry recognised techniques such as TEXAS and IDEA to help
identify signs of vulnerability and on how to use tailored
signposting relevant to customers' circumstances. Customers that
need additional support are managed by a specialist Customer Care
Team. We work closely with debt charities such as StepChange,
Payplan and Christians Against Poverty and a range of other third
parties including the Samaritans, MIND and Marie Curie to ensure
that customers receive an appropriate service.
2020 performance
The impact of COVID-19 has reduced collections levels below the
previous forecast and, as a result, an impairment charge of GBP8.9
million (2019: GBP2.1 million credit) has been recognised against
the value of purchased debt portfolios. Of this loss, GBP2.4
million is due to income being recognised by applying the original
credit-adjusted effective interest rate to the loan book.
Differences in cash flows are then recognised as an impairment
charge or credit.
The reduction is due to the customers' reduced ability to pay
and a delay in collections activity, including field reconnection
and litigation activity, during 2020. The purchase of new
portfolios slowed in the year as sellers paused portfolio sales due
to COVID-19. As a result, DMS purchased GBP20.5 million of debt
portfolios in 2020 compared with GBP61.9 million in 2019.
Looking forward
In the short-term, there is continued uncertainty brought by
COVID-19, on both underlying collections levels and the rate of
supply of new debt portfolios from UK financial institutions.
The longer-term outlook for the supply of debt portfolios
remains positive as we expect that UK financial institutions will
continue to sell and will do so at an earlier stage than
historically.
We will continue to invest in improving our digital offering to
customers to improve the customer experience and reduce our cost to
collect.
Non-core lending
Asset Finance
What we do
The Asset Finance business provides funding to support SME
businesses in acquiring commercial assets, such as building
equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a joint venture with
Haydock, a well-established asset finance company operating across
the UK. Following the change in ownership of Haydock in January
2018, we have ceased writing new business through the joint
venture, although Haydock continues to provide a full business
process outsourcing service to the Group in relation to the
portfolio we fund.
The current portfolio reflects hire purchase and finance lease
arrangements with terms of up to five years.
2020 performance
The portfolio has continued to reduce during 2020 and remains in
run-off. The level of reduction was lower than expected during the
first half of 2020, as a result of payment holidays granted to
customers, however the rate of portfolio liquidation has increased
during the second half of the financial year.
Lending balances have reduced by 62.5% during 2020, to GBP10.4
million (31 December 2019: GBP27.7 million) with consequent impact
on revenues. Impairments have increased reflecting the heightened
risk on parts of the portfolio from the changed economic
conditions.
Looking forward
We ceased originating Asset Finance business in 2018. We expect
the book to continue to reduce in 2021, and will be monitoring the
book carefully to limit where possible the impact of the changed
economic conditions.
Consumer Mortgages
What we do
Consumer mortgages represents fixed rate mortgages provided to
individuals, to purchase a property or remortgage their current
property. We ceased originating new consumer mortgages in the first
quarter of 2019.
2019 performance
The book has contracted as expected, with balances at the end of
the year of GBP77.7 million (31 December 2019: GBP105.9 million).
Revenue reduced accordingly, from GBP3.7 million in 2019 to GBP3.4
million.
The reduction in the size of the book has resulted in a small
release of impairment provision (2019: charge of GBP0.1million). A
significant proportion of customers took advantage of payment
holidays over the course of 2020. By the end of the year, the
majority of these had returned to payment, with just 3% of customer
remaining on a payment holiday as at 31 December 2020.
Looking forward
We will continue to support our mortgage customers, including
managing those who are still on a payment holiday returning to
making payments. There are no current plans to re-establish new
business in this portfolio.
Savings
The Group continues to attract funding primarily via retail
savings, offering competitive, simple products available online and
serviced through a highly commended internet banking service.
Savings includes personal and business customers depositing in
access, notice, fixed term bond and fixed term ISA products with
associated balances of around GBP2 billion.
Maintaining high levels of customer service
As it became clear that 2020 was not going to be a normal year,
it was essential that we established working practices and
communication lines to support both existing and new customers.
This was particularly the case for our savings operation. Our
online banking and supporting customer service team, working both
from home and in our offices, ensured that our savings customers
received great service and continued to be confident that their
money was secure. We also continued to attract new customers to
save with Secure Trust Bank.
2020 Performance
Balance levels remained stable in line with lending books, with
movement from long-term bonds to ISAs and Access Accounts.
What we do
We offer a range of savings accounts that are purposefully
simple in design. These provide customers with a choice of products
from same day withdrawal to 180-day notice, and one to seven year
fixed terms across both bonds and ISAs.
These products are all available to UK-based individuals saving
with a minimum deposit of GBP1,000. The Bank also has a small
historical book of non-personal accounts it is in the process of
closing in early 2021, representing less than GBP72 million (4%) of
deposits.
All personal deposits held with the Bank are covered under the
UK Financial Services Compensation Scheme in line with the terms of
the scheme. Accounts are made available and priced in line with our
ongoing funding needs, allowing each individual to hold a maximum
balance of GBP1 million.
In addition to savings, the Bank has historically offered a
budgeting account, OneBill. This was closed to new applications in
2009 and existing accounts will close in phases during 2021.
How we do it
The continued approach of not cross-subsidising loss-making
products with profitable ones, maintaining a stable funding and
customer base and utilising an operational model based on digital
application and self-service, enables us to offer competitive rates
and attract high volumes of deposits quickly, from a broad range of
personal customers.
Our range of savings products covers Access, 14 to 180-day
Notice, one to seven year Fixed Bonds and Fixed Rate ISA accounts.
This enables us to access the majority of the UK personal savings
markets and compete for significant liquidity pools, achieving a
lower marginal cost with the volume, mix and the rates offered
optimised to the demand of our funding needs.
Product terms and rates broadly match the term and tenor of
customer savings to the desired maturity profiles of the Group,
which are primarily determined by the interest rates and terms
offered on loans and advances to customers. This strategy aims to
help mitigate maturity transformation and interest rate risks.
All of the above provides us with a funding profile which gives
additional financial security, diversification and flexibility to
the Group.
As well as attracting and retaining customers with competitive
rates of interest, customers choose us based on our financial
standing, high level of independent customer review scores, easy to
use digital services and UK-based operation with high standards of
cyber and operational security.
2020 performance
Retail savings balances have been stable over the year, with
total balances just below GBP2 billion at the year-end.
During 2020 we have observed an atypical savings market in terms
of changes in customer demand, relative interest rates across
products and ongoing fluctuations in competition. Our wider range
of products has enabled us to maintain the Group's access to
liquidity in a changing environment.
Our ability to raise new funds is robust. Over 22,000 accounts
were opened across new fund raising and retention during 2020.
GBP868 million of new funds were raised or retained, equivalent to
GBP27 every second across 50,500 transactions, evidencing the
extent and scale of operations.
This includes the continued establishment of our ISA product,
with new funds of GBP96 million this year and total balance of over
GBP129 million raised since launch in 2019, up 238% in 2020. Access
deposits, including those where customers' original accounts mature
onto the product, reached a balance of over GBP69 million in 2020,
up 596% on 2019, evidencing a trend from 2019 of successful ongoing
product development.
Reductions in the Bank of England Base Rate to 0.1% in March and
further falls in market savings rates in second half of the year
have required us to regularly review and reprice our variable rate
book during 2020. We have sought to balance offering fair and
competitive rates of interest to existing customers, whilst
reflecting reductions in market-wide funding costs. This approach
has ensured funding continues to be stable and helped to reduce the
Group's cost of funds.
During 2020 we have continued to deliver significant change with
both short-term tactical advantage and long-term benefit. This
includes measures to keep our people safe in the Group's offices
and establish working from home practices in line with government
guidelines.
People engagement scores indicate high satisfaction with the
measures taken and leadership shown.
100% of new savings applications were online, and this year we
introduced a shortened application process for existing customers
to easily open further savings products with us. All customers
register for internet banking as part of the application process
and at year-end, nearly 43,500 customers were registered,
representing 90% of the customer base. We retained approximately
GBP333 million of maturing balances in 2020, moving quickly to move
our maturity process online at the start of the pandemic to enable
customers to easily retain their funds with us.
This continues to benefit the Group's resilience with customers
self-serving and, when raising queries, utilising secure messaging.
Compared to December 2019, use of the service by December 2020 had
increased by around 180%. This, plus the introduction of a new
telephony platform and remote working practices ensures our
operations have adapted accordingly.
We have continued to focus on our customers during 2020 and won
numerous independent awards, including being named 'Best Savings
Provider for Existing Customers' by Savings Champion. We were
highly commended for the 'Best Savings Provider' award by the
Savings Champion Awards and have been shortlisted for 'Online
Service Provider of the Year' in the Moneyfacts Consumer Awards
2021. Moneyfacts have also awarded a number of 'Excellent' product
ratings and positions in the Best Buy Charts for Notice Accounts
and Fixed Rate Bonds which we have launched during 2020.
Customer experience continues to be of great importance. We
actively refer our customers to Feefo and in the last 12 months
have averaged a rating of 4.5 out of 5 stars with a Net Promotor
Score of 42. The TrustPilot rating was 4.5 out of 5 stars over the
same period. These results compare extremely positively with peers
offering Savings accounts and evidence the Bank's focus and unique
selling point in customer service and experience, delivered through
our Grow, Sustain, Love strategy.
Looking forward
In 2021, we are focused on continuing to improve all aspects of
our digital savings experience for both new and existing Savings
customers, underpinning our long-term plan to grow balances,
customer numbers and transactions through an increasingly diverse
deposit book.
Key areas of focus will be enhancing the usability of our
services across multiple platforms, devices and browsers, increase
the conversion of our online application journey for both new and
existing customers, making it easier for customers to stay with us
when their product matures and introducing new functionality and
tools to make it easier for customers to self-serve online.
This investment, alongside continued digitisation of customer
communications, should improve customer experience, enhance
straight through processing and support a lower interest
expense.
We plan to continue to grow ISAs, Notice and Access balances in
2021, increasingly offering Access products to both existing and
new customers, and broadening our product offer to wider customers
of Secure Trust Bank Group. This will help support a lower interest
expense and increasing product holding to improve the stability of
funds through deeper customer relationships.
We look to continue the positive recognition we have generated
this year through the ongoing delivery of simple, competitive
products and focus on great customer experience throughout
2021.
Impact of COVID-19
Economic and regulatory environment
A new global environment
The macroeconomic environment has been adversely affected by the
pandemic and is changing the way banks need to operate.
Macroeconomic
Recent developments
In 2020, the performance of the UK economy has been dominated by
the COVID-19 crisis. The initial decision by the UK Government in
March to lockdown large sections of society in order to reduce the
risk of contagion had a profound impact on businesses and
consumers. In April 2020, UK GDP fell by a record 19.5%.
By October 2020 and prior to the second lockdown and the
implementation of the more restrictive three-tier system, UK GDP
had grown for six successive months. At that point, the UK economy
was 23.4% larger than the position in April, although it remained
7.9% smaller than the pre-COVID-19 position in February 2020.
Growth was evident across construction, manufacturing and services
and there was a 6.8% rise in motor vehicle production in
October.
The additional restrictions applied in Q4 2020, followed by the
further national lockdown announced at the end of 2020, are
expected to have had an adverse impact on economic activity.
Overall, the UK economy will have shrunk by a record amount in
2020. The latest forecast from the Monetary Policy Committee in
February 2021 anticipated a 10% decline in UK GDP for 2020 as a
whole.
The labour market, notwithstanding the very significant
government support provided via the furlough schemes, has weakened
since the summer. The ONS' Labour Force Survey for the three months
to November 2020 highlighted a marked increase in the unemployment
rate at 5.0% together with a record number of redundancies. The
same report estimated that there were 828,000 fewer people in
payrolled employment at the end of 2020, when compared to February
2020.
The weakening jobs environment has impacted demand for
borrowing. The Bank of England's latest Money and Credit report
highlighted that net consumer credit borrowing remained weak as at
end October, with households continuing to make significant net
repayments. More positively, however, the mortgage market continues
to show resilience, with high levels of mortgage approvals driving
continuing growth in net mortgage borrowing.
Outlook
Forecasts for the macroeconomy remain inherently uncertain and
depend critically on a range of public health assumptions such as
the continuation of restrictions, the availability and impact of
vaccines and the effectiveness of test and trace procedures. In
addition, the performance of the UK economy will be impacted by
UK-EU Brexit negotiations and the trading relationship in place
following the end of the transition period.
The UK vaccination programme is progressing well, and statistics
are currently showing a consistent decline in the number of cases
across the country. A roadmap, setting out the planned phased
withdrawal of lockdown restrictions concluding in June 2021, has
been announced by the UK Government.
On 3 March 2021, the Chancellor's Budget included a further
extension to support schemes, with furlough now continuing until
September 2021. This has resulted in the publication of more benign
unemployment forecasts. On 15 March 2021, the Governor of the Bank
of England stated that the Bank was likely to reduce its peak
unemployment forecast from 7.5%.
Government and regulatory response
Recent developments
The UK Government has responded to the COVID-19 crisis with a
range of different measures, including the placing of restrictions
on businesses and society, fiscal and monetary actions, initiatives
which provide direct support to personal borrowers and businesses,
as well as a series of regulatory measures, guidance and
reliefs.
To provide direct support for personal borrowers, the FCA issued
new rules including the offer by financial firms of a temporary
payment freeze on mortgages and consumer credit loans. In November,
they announced that lenders should extend the provision of mortgage
and consumer credit payment deferrals up to a maximum of six
months. Under the amendments, customers who have not yet had a
payment deferral can request one for up to six months and those who
already have a payment deferral for a period of less than six
months would be able to extend that deferral.
Additionally the FCA finalised forbearance guidance and
repossessions for Motor Finance customers. Under this guidance,
firms are not able to terminate an agreement or repossess vehicles
for Motor Finance customers who are experiencing payment
difficulties as a result of circumstances relating to COVID-19
before 31 January 2021, unless under certain specific, exceptional
circumstances.
The government announced the Coronavirus Job Retention Scheme,
known as 'furlough', which has now been extended to September 2021.
The Group has not placed any employees under furlough and has not
taken advantage of the Job Retention Scheme.
At the end of April, the government also launched schemes
designed to help businesses struggling with the impact of the
lockdown restrictions. These include the Coronavirus Business
Interruption Loan Scheme ('CBILS') and the Coronavirus Large
Business Interruption Loan Scheme ('CLBILS'). In both instances,
the government will provide a guarantee of up to 80% of the value
of each of the loans.
The Group is a provider of CBILS and CLBILS, and further detail
is provided in the Business Finance section on page 27 of the
Annual Report and Accounts.
The Bank of England has maintained the Base Rate at 0.1%, the
level that has been in place since the outset of the crisis. In
addition, in November, the Bank's Monetary Policy Committee ('MPC')
increased its government bond-buying programme by a further GBP150
billion, taking total government bond purchases to GBP875 billion
and total quantitative easing to GBP895 billion.
In December, the Bank of England announced that the UK's seven
largest banks can resume paying some dividends and bonuses. The BoE
made clear that any distributions for 2020 should be "prudent" and
fall within temporary "guardrails" published by the Bank of
England.
Outlook
On 12 November, in his Mansion House speech, PRA CEO Sam Woods
set out the merits of introducing a new "strong and simple" regime
of prudential regulation for small banks and building societies in
the wake of the UK's exit from the EU.
Mr Woods indicated that the PRA would produce a discussion paper
in early 2021 setting out some initial proposals on this regulatory
theme. The PRA has already published policy statement, PS25/20, on
simplified obligations for recovery planning for smaller and
non-systemic firms.
The government has confirmed that the new statutory Breathing
Space scheme will launch in May 2021. The scheme will mean that
people in problem debt will be able to access 60 days of protection
from interest, charges and creditor action while they seek debt
advice.
We continue to prepare for the final Basel III reforms which
will now apply from 1 January 2023, which we anticipate will go
some way to levelling the playing field between IRB institutions
and those on the Standardised Approach.
Financial review
Maintaining our financial integrity
2019 Total Movement
Income statement 2020 Total GBPmillion GBPmillion %
--------------------------------------------------------- ---------------------- ----------- --------
Interest income and similar income 192.5 191.4 0.6
--------------------------------------------------------- ---------------------- ----------- --------
Interest expense and similar charges (41.6) (46.0) (9.6)
--------------------------------------------------------- ---------------------- ----------- --------
Net interest income 150.9 145.4 3.8
--------------------------------------------------------- ---------------------- ----------- --------
Fee and commission income 16.0 20.9 (23.4)
--------------------------------------------------------- ---------------------- ----------- --------
Fee and commission expense (0.8) (0.8) -
--------------------------------------------------------- ---------------------- ----------- --------
Net fee and commission income 15.2 20.1 (24.4)
--------------------------------------------------------- ---------------------- ----------- --------
Operating income 166.1 165.5 0.4
--------------------------------------------------------- ---------------------- ----------- --------
Net impairment charge on loans and advances to customers (51.3) (32.6) (57.4)
--------------------------------------------------------- ---------------------- ----------- --------
Losses on modification of financial assets (3.1) - -
--------------------------------------------------------- ---------------------- ----------- --------
Operating expenses (91.6) (94.2) 2.8
--------------------------------------------------------- ---------------------- ----------- --------
Profit before income tax 20.1 38.7 (48.1)
--------------------------------------------------------- ---------------------- ----------- --------
Income tax expense (3.9) (7.6) 48.7
--------------------------------------------------------- ---------------------- ----------- --------
Profit for the year 16.2 31.1 (47.9)
--------------------------------------------------------- ---------------------- ----------- --------
Basic earnings per share (pence) 87.0 168.3 (48.3)
--------------------------------------------------------- ---------------------- ----------- --------
Selected Key Performance Indicators
--------------------------------------------------------- ---------------------- ----------- --------
Net interest margin 6.3% 6.5% (3.1)
--------------------------------------------------------- ---------------------- ----------- --------
Cost of funds 1.7% 2.0% (15.0)
--------------------------------------------------------- ---------------------- ----------- --------
Cost to income ratio 55.1% 56.9% (3.2)
--------------------------------------------------------- ---------------------- ----------- --------
Cost of risk 2.3% 1.4% 64.3
--------------------------------------------------------- ---------------------- ----------- --------
Return on average equity 6.1% 12.8% (52.3)
--------------------------------------------------------- ---------------------- ----------- --------
Return on average assets 0.6% 1.2% (50.0)
--------------------------------------------------------- ---------------------- ----------- --------
CET1 ratio 14.2% 12.7% 11.8
--------------------------------------------------------- ---------------------- ----------- --------
Total capital ratio 16.4% 15.0% 9.3
--------------------------------------------------------- ---------------------- ----------- --------
Certain KPIs represent alternative performance measures that are
not defined or specified under IFRS. Definitions of the financial
KPIs, their calculation and an explanation of the reasons for their
use can be found in the Appendix. In the narrative of this
financial review, KPIs are identified by being in bold font.
Further explanation of the non-financial KPIs is provided in the
Managing our business responsibility section on page 52 of the
Annual Report and Accounts.
The Remuneration Report, starting on page 83 of the Annual
Report and Accounts, sets out how executive pay is linked to the
assessment of key financial and non-financial performance
metrics.
Profit and earnings
Despite the pandemic the Group remained profitable. Preservation
of capital and liquidity was the core focus of management and the
full year performance reflects both the challenging economic
environment and the Group's response to it.
Profit was impacted by elevated impairment charges driven by the
future economic outlook as a result of the pandemic. However, with
the strong lending balance growth in 2019 continuing into the first
quarter of this year, and lending stabilising in the second half of
the year, revenues have held up strongly. We have also taken action
to hold down costs, which have ended the year lower than for
2019.
Statutory profit before tax fell by 48.1% to GBP20.1 million
(2019: GBP38.7 million). Consequently, earnings per share fell from
168.3p per share to 87.0p per share. Detailed disclosures of
earnings per ordinary share are shown in Note 10.
The components of the Group's profit are analysed in more detail
in the sections below.
Impact of payment holidays
Although not included as an option within customer contracts,
following regulatory guidance we have offered payment holidays to
our Consumer Finance and Asset Finance customers. This is
considered under IFRS 9 as a modification to contractual cash
flows, which requires the carrying value of these loans to be
adjusted to the revised net present value of future cash flows. The
initial impact of this adjustment was GBP3.6 million. New payment
holidays since 30 June 2020 and the amortisation of the initial
adjustment has reduced this impact to GBP3.1 million at the
year-end. The amortisation of this impact will materially be
complete by the end of 2023.
Net interest income
Net interest income of GBP150.9 million was 3.8% higher than the
prior year.
Despite the balance sheet contraction in the year, with loans
and advances to customers reducing from GBP2,450.1 million to
GBP2,358.9 million, average lending balances over 2020 were 6.8%
higher than the average over 2019. Interest income was impacted by
the change in the overall mix of lending brought about by the
pandemic, with our highest margin product, Motor Finance, being
particularly curtailed. As set out in more detail on page 21 of the
Annual Report and Accounts, this was due both to the partial
closure of the market during the first lockdown, and to our
tightening of risk appetite. These two factors broadly offset each
other, resulting in interest income broadly in line with the prior
year at GBP192.5 million (2019: GBP191.4 million).
The reduction in lending balances facilitated the managing down
of relatively high cost fixed rate funding as it matured, and to
reprice certain tranches of notice account funding. As a result of
this and of Bank of England Base Rate reductions, interest expense
was GBP41.6 million, a reduction of 9.6%. The cost of funds reduced
to 1.7% (2019: 2.0%).
The Group's net interest margin reduced slightly from 6.5% in
2019 to 6.3% in 2020, with the impact of lower levels of higher
margin Motor Finance lending being mostly offset by the lower
funding costs.
Net fee and commission income
Net fee and commission income fell by 24.4% to GBP15.2 million
(2019: GBP20.1 million). This was driven particularly by the
reduction in Commercial Finance new business in 2020 and in Retail
Finance where some fees were waived due to the pandemic, described
in more detail on page 20 of the Annual Report and Accounts.
The gross revenue margin reduced from 9.4% to 8.7%, due to both
interest income and the reduction in Commercial Finance fee income
set out above.
Impairment charge
The pandemic has had a significant impact on the levels of
impairment provisions required. Following several years of
reduction, driven by the improving quality of the balance sheet, in
2020 the cost of risk rose from 1.4% in 2019 to 2.3%. The
impairment charge for the year was GBP51.3 million (2019: GBP32.6
million). This cost of risk includes the impact of the modification
losses due to payment holidays; without this charge it is 2.1%. As
in previous years, the majority of our impairment charge arises
from the Consumer Finance businesses.
The actual levels of defaults experienced over 2020 have been
modest, most likely in part due to the take-up of payment holidays
and government schemes such as furlough. By 31 December 2020, the
majority of STB customers who had taken out such a payment holiday
had exited these arrangements, with most of them returning to
making full payments.
In total, 15.6% of Motor Finance customers and 2.1% of Retail
Finance customers took up the offer of a payment holiday in 2020.
By the end of 2020, only 1.2% of Motor Finance customers and 0.5%
of Retail Finance customers remained in a payment holiday
arrangement.
The increase in the impairment charge is predominantly driven by
the IFRS 9 requirement to account for forward-looking factors
rather than actual defaults experienced in the year. Our IFRS 9
models use the correlation between macroeconomic variables, such as
unemployment and house price indices, and historic credit losses to
derive estimated future losses given a range of forecast variables.
As described in more detail in Note 2, we expect these variables,
particularly unemployment, to worsen significantly in 2021 before a
recovery then commences.
A further material element of the impairment charge relates to
our debt management activity, managed by DMS. In normal conditions,
DMS will earn income by collecting more in respect of the loans it
purchases than it pays for them. However, the pandemic has
restricted DMS's ability to collect this debt, and it has revalued
its portfolios accordingly. The impact of this revaluation
contributed to an impairment charge of GBP8.9 million, to reflect
the estimated lower collection levels over the life of the loans.
In 2019, the annual revaluation of the DMS portfolios yielded an
impairment credit of GBP2.1 million.
The provision charge includes the impact of applying expert
credit judgement, resulting in overlays being added to provision
levels estimated using the Group's models. A breakdown of the
charge by product is shown in Note 3.
Further analysis of the Group's loan book and its credit risk
exposures is provided in Notes 14, 15, 16 and 35.
Operating expenses
Part of our response to COVID-19 was to substantially reduce
recruitment. Travel and similar costs also reduced, with the
majority of employees working from home for most of 2020. The
reduction in lending activity reduced volume related operational
and credit costs.
These reductions were partly offset by investments in our IT
infrastructure and Motor Transformation programme. These factors
have contributed to operating expenses decreasing slightly to
GBP91.6 million (2019: GBP94.2 million).
The Group's cost to income ratio improved from 56.9% in 2019 to
55.1%.
Distributions to shareholders
Given the significant uncertainty arising from COVID-19, the
Directors did not recommend a final dividend for 2019 or an interim
dividend for 2020. The last dividend payment made by the Group was
the 2019 interim dividend, of 20 pence per share, which was paid on
27 September 2019.
The Board recommend the payment of a final dividend for 2020 of
44 pence per share.
Taxation
The effective tax rate fell to 19.4% (2019: 19.6%), which is
slightly above the currently enacted rate of 19%.
The tax rate reflects Bank Corporation Tax Surcharge of 8% on
any taxable profits of Secure Trust Bank PLC in excess of GBP25.0
million in an accounting period. The government is proposing to
increase the main corporation tax rate to 25% from 1 April 2023,
however, also intends to review the bank surcharge in Autumn 2021,
to ensure the UK's banking tax regime remains competitive.
Future effective tax rates for the Group will be sensitive to
the timing of the legislative change and the approach adopted to
revise bank surcharge as well as the quantum of projected profits
in the Bank and other Group companies. Forecasts based on enacted
legislation had shown that the effective tax rate was expected to
increase by up to 5% over the forecast period, compared with the
2020 effective rate, as the effect of the banking surcharge had
been expected to become more significant.
Summarised balance sheet
2020 2019
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Assets
----------------------------------- ----------- -----------
Cash and balances at central banks 181.5 105.8
----------------------------------- ----------- -----------
Debt securities - 25.0
----------------------------------- ----------- -----------
Loans and advances to banks 63.3 48.4
----------------------------------- ----------- -----------
Loans and advances to customers 2,358.9 2,450.1
----------------------------------- ----------- -----------
Derivative financial instruments 4.8 0.9
----------------------------------- ----------- -----------
Other assets 55.6 52.6
----------------------------------- ----------- -----------
2,664.1 2,682.8
----------------------------------- ----------- -----------
Liabilities
----------------------------------- ----------- -----------
Due to banks 276.4 308.5
----------------------------------- ----------- -----------
Deposits from customers 1,992.5 2,020.3
----------------------------------- ----------- -----------
Tier 2 subordinated liabilities 50.8 50.6
----------------------------------- ----------- -----------
Derivative financial instruments 6.1 0.6
----------------------------------- ----------- -----------
Other liabilities 67.8 48.7
----------------------------------- ----------- -----------
2,393.6 2,428.7
----------------------------------- ----------- -----------
Balance sheet
The assets of the Group remained steady year-on-year at
GBP2,664.1 million (31 December 2019: GBP2,682.8 million).
The liabilities of the Group reduced by 1.4% to GBP2,393.6
million (31 December 2019: GBP2,428.7 million). Deposits from
customers decreased by GBP27.8 million and other funding reduced by
GBP35.4 million, the latter primarily due to the pay back of ILTR
borrowings, further details of which are provided on this page.
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. The impact of the pandemic on
consumer lending has shifted the composition of the loan book, with
the Consumer Finance book being approximately 45% of total lending
(2019: 49%), and the Business Finance book being approximately 55%
(2019: 51%).
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, decreased by
27.1% to GBP1,030.2 million (2019: GBP1,413.0 million). As in
previous years, over half of the new business volume (GBP614.5
million) was generated by the Retail Finance business, despite that
business being impacted by lockdowns that restricted access to
physical stores for large parts of the year.
Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is
provided in Notes 14, 15, 16 and 35.
Debt Securities
Debt Securities consist solely of sterling UK Government
Treasury Bills ('T-Bills'). The number of T-Bills held reduced to
zero over the year, from GBP25 million at 31 December 2019, with
the Group now able to utilise other assets more fully as collateral
against Term Funding Scheme drawings with the Bank of England.
Due to banks
At 31 December 2020, the amount due to banks consisted primarily
of drawings from the Bank of England Term Funding Scheme ('TFS'),
supplemented by GBP10 million of ILTR. Towards the end of 2019 and
at certain times throughout 2020, ILTR has been used as an
additional inexpensive funding buffer to fund new business. We are
a participant in the Term Funding Scheme with additional incentives
for SMEs ('TFSME'), which will provide four-year funding at rates
close to the Bank of England Base Rate. The first drawing of TFSME
was made in March 2021.
Deposits from customers
Customer deposits include Fixed Term Cash ISA, term, notice and
sight deposits, an Access Account and the OneBill product. Customer
deposits reduced by 1.4% during the year and closed at GBP1,992.5
million (2019: GBP2,020.3 million). This, combined with the
reduction in lending balances caused the total funding ratio to
increase to 109.7% (2019: 107.5%), in part to fund expected
Commercial Finance drawdowns in the first quarter of 2021. As set
out on page 37 of the Annual Report and Accounts, the mix of the
deposit book has changed, with a shift from long-term fixed rate
bonds into ISAs and sight/access accounts. This has brought about
the improvement in cost of funds referred to on page 31 of the
Annual Report and Accounts.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represent two GBP25 million
tranches of 6.75% Fixed Rate Callable Subordinated Notes, including
interest accrued. Further details of the note issuances are
provided in Note 29. The Notes qualify as Tier 2 capital.
Management of capital
Our 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.
Key factors influencing the management of capital include:
-- The level of buffers and the capital requirement set by the
PRA
-- Estimated credit losses calculated using IFRS 9 methodology,
and the applicable transitional rules
-- New business volumes
-- The product mix of new business.
All of these factors have been impacted by the pandemic. Our
ability to manage down volume growth and the short duration of
lending assets brought about a reduction in risk weighted assets,
and hence capital requirements, over 2020. The range of risk
weightings applied to the Group's key lending assets provides
flexibility in our management of capital. We have closely monitored
the product mix and adjusted it over 2020, and will continue to do
so as the balance sheet returns to growth, to provide the requisite
balance between profitability and capital conservation.
Changes made to the PRA buffer levels and to Pillar 2A
requirements, and to the IFRS 9 transitional rules, have also
reduced capital requirements over 2020. At the same time, we have
continued to be profitable, and have conserved capital by
withholding the final dividend for 2019 and interim dividend for
2020. As a result, as shown in the tables on the following page,
all of the Group's key capital ratios improved over the year. This
capital position will help us achieve our post-COVID-19 growth
ambitions. Further detail is provided in the following
sections.
Capital resources
Capital resources increased over 2020, from GBP318.0 million to
GBP337.0 million. The proposed 2020 dividend would reduce capital
resources to GBP328.8 million. The increase was wholly due to CET1
capital and was driven by retained earnings growth, plus the impact
of changes to the IFRS 9 adjustment as set out below.
The Basel Committee proposed a number of mitigation measures for
the capital regime in response to the pandemic. These were enacted
by the EU on 24 June 2020 as Directive EU/2020/873, and were
ratified by the PRA and became applicable later in June 2020. The
measure with the most significant impact on these results is the
increase in transitional capital relief in respect of impairment
provisions raised in 2020 and 2021, excluding those provisions
relating to defaulted accounts. For these provisions, 100% relief
is allowed in 2020 and 2021, with the relief then phased out over
the following three years on a straight-line basis (2022: 75%,
2023: 50%, 2024: 25%, 2025: 0%). This is in addition to the
original transitional relief outlined on page 36 of the Annual
Report and Accounts.
Capital requirements
The Total Capital Requirement, set by the PRA, includes both the
calculated requirement derived using the standardised approach and
the additional capital derived in conjunction with the ICAAP. In
addition, capital is held to cover generic buffers set at a
macroeconomic level by the PRA.
The reduction in lending balances brought about by the pandemic
caused a reduction in risk weighted assets over 2020, bringing the
Total Risk Exposure down from GBP2,118.1 million to GBP2,001.5
million.
The capital conservation buffer has been held at 2.5% of total
risk exposure since 1 January 2019. The countercyclical buffer was
reduced by the PRA to 0% as part of its response to COVID-19.
Capital
2020 2019
GBPmillion GBPmillion
-------------------------------------------- ----------- ----------------
Capital
-------------------------------------------- ----------- ----------------
CET1 capital 291.9 268.0
-------------------------------------------- ----------- ----------------
Total Tier 2 capital 45.1 50.0
-------------------------------------------- ----------- ----------------
Total capital 337.0 318.0
-------------------------------------------- ----------- ----------------
Proposed dividend 8.2 -
-------------------------------------------- ----------- ----------------
Total capital after proposed dividend 328.8 318.0
-------------------------------------------- ----------- ----------------
Total Risk Exposure 2,001.5 2,118.1
-------------------------------------------- ----------- ----------------
2020 2019
% %
-------------------------------------------- ----------- ----------------
CRD IV ratios - excluding proposed dividend
-------------------------------------------- ----------- ----------------
CET1 capital ratio 14.6 12.7
-------------------------------------------- ----------- ----------------
Total capital ratio 16.8 15.0
-------------------------------------------- ----------- ----------------
CRR Leverage ratio 10.7 9.8
-------------------------------------------- ----------- ----------------
CRD IV ratios - after proposed dividend
-------------------------------------------- ----------- ----------------
CET1 capital ratio 14.2 12.7
-------------------------------------------- ----------- ----------------
Total capital ratio 16.4 15.0
-------------------------------------------- ----------- ----------------
CRR Leverage ratio 10.4 9.8
-------------------------------------------- ----------- ----------------
Typical risk weighting
-------------------------------------------- ----------- ----------------
Risk weighting %
-------------------------------------------- ----------- ----------------
Standard on-balance sheet risk weighting
-------------------------------------------- ----------- ----------------
Real Estate Finance: residential investment 35
-------------------------------------------- ----------- ----------------
Real Estate Finance: commercial investment 100
-------------------------------------------- ----------- ----------------
Real Estate Finance: development* 150
-------------------------------------------- ----------- ----------------
Commercial Finance 100
-------------------------------------------- ----------- ----------------
Retail Finance 75
-------------------------------------------- ----------- ----------------
Motor Finance 75
-------------------------------------------- ----------- ----------------
Debt Management 100
-------------------------------------------- ----------- ----------------
Consumer Mortgages (up to 80% LTV) 35
-------------------------------------------- ----------- ----------------
* The Group has entered into an ENABLE Guarantee with the
British Business Bank, whereby the UK Government will take on a
portion of the risk on a portfolio of loans to smaller business in
return for a fee. When the Guarantee is triggered it will reduce
the net risk weighting applied to Real Estate Finance development
lending.
The Group has elected to adopt the IFRS 9 transitional rules.
For 2020, this allows 70% (2019: 85%) of the initial IFRS 9
transition adjustment, net of attributable deferred tax, to be
added back to eligible capital. The same relief is allowed in
respect of increases in provisions since 1 January 2018, except
where these provisions relate to defaulted accounts. Further
information is provided in Note 38.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after adding back
the IFRS 9 transition adjustment and deducting intangible assets,
both of which are net of attributable deferred tax
-- Tier 2 capital, which is solely subordinated debt net of
unamortised issue costs, capped at 25% of the capital
requirement.
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.
In addition, in October 2020 the PRA confirmed that, effective
from 16 December 2020, the Group's total capital requirement would
be reduced by 1%. This is in line with the PRA approach set out in
its policy statement PS15/20 'Pillar 2A: Reconciling capital
requirements and macroprudential buffers'. At the same time, a
temporary PRA buffer was added to requirements, to be retained
while the countercyclical buffer remains at 0%.
Although these two factors have increased the Group's capital
surplus, in our capital planning we take into account the potential
for the countercyclical buffer to return to its normal level (2%)
over time and the fact that the PRA's triennial review of our total
capital requirement is due in 2021.
Capital requirements
2020 2019
GBPmillion GBPmillion
------------------------------- ----------- -----------
Total Capital Requirement 191.5 212.0
------------------------------- ----------- -----------
Capital conservation buffer 50.0 52.9
------------------------------- ----------- -----------
Countercyclical capital buffer - 21.1
------------------------------- ----------- -----------
Total 241.5 286.0
------------------------------- ----------- -----------
Liquidity
We continued to hold significant surplus liquidity over the
minimum requirements throughout 2020, managing liquidity by holding
High Quality Liquid Assets ('HQLA') and utilising predominantly
retail funding from customer deposits. Total liquid assets
increased from GBP170.0 million at 31 December 2019 to GBP232.1
million, despite the decrease in our lending balances over 2020.
Some of the additional liquidity will be used to fund planned
Commercial Finance drawdowns in 2021.
We continued to attract customer deposits as required over 2020,
though our demand for this funding was lower given the reducing
lending book. This allowed us to focus on attracting ISA and notice
account funding, with less emphasis on retaining more expensive
fixed term bonds. The composition of customer deposits at the
year-end was as shown in the table to the right.
Secure Trust Bank is a participant in the Bank of England's
Sterling Money Market Operations under the Sterling Monetary
Framework and has drawn GBP263.0 million under the Term Funding
Scheme, this level being unchanged from that reported at 31
December 2019.
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
Liquid assets
2020 2019
GBPmillion GBPmillion
--------------------- ----------- -----------
Aaa - Aa3 180.5 130.8
--------------------- ----------- -----------
A1 - A3 46.5 34.1
--------------------- ----------- -----------
Unrated 5.1 5.1
--------------------- ----------- -----------
Liquidity exposures 232.1 170.0
--------------------- ----------- -----------
Customer deposits
--------------------- ----------- -----------
2020 2019
--------------------- ----------- -----------
Notice 35% 33%
--------------------- ----------- -----------
Fixed term 54% 64%
--------------------- ----------- -----------
Sight/instant access 4% 1%
--------------------- ----------- -----------
ISA 7% 2%
--------------------- ----------- -----------
The Group uses a number of measures to manage liquidity. These
include:
-- The Overall Liquidity Adequacy Requirement ('OLAR'), which is
the Board's 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 is a regulatory
measure that assesses net 30-day cash outflows as a proportion of
HQLA
-- Total funding ratio, as defined in the Appendix
High Quality Liquid Assets ('HQLA') are held in the Bank of
England Reserve Account and UK Treasury Bills. For LCR purposes the
HQLA excludes UK Treasury Bills which are encumbered to provide
collateral as part of the Group's Term Funding Scheme with the Bank
of England. On this basis, the HQLA at 31 December 2020 was
GBP172.8 million (31 December 2019: GBP96.4 million).
Principal risks and uncertainties
Risk Management within Secure Trust Bank
A fundamental element of the Group's strategy is the effective
management of risk in order to protect the Group's depositors,
borrowers and shareholders, and to ensure that the Group maintains
sufficient capital, liquidity and operational control at all times,
and acts in a reputable way. This is reflected in the Group's
strategy and values, in particular the 'Sustain' strategy and 'Risk
Aware' value, which demonstrate the Group's commitment to protect
the reputation, integrity and sustainability of the Group for all
of its customers and stakeholders through prudent balance sheet
management, investment for growth and robust risk and operational
control.
The Group's Chief Risk Officer is responsible for leading the
Group's Risk Function, which is independent from the Group's
operational and commercial functions. The Risk Function is
responsible for ensuring that appropriate risk management processes
and controls are in place, and that they are sufficiently robust,
so as to ensure that key risks are identified, assessed, monitored
and mitigated. The Chief Risk Officer is responsible for providing
assurance to the Board that the Group's principal risks are
appropriately managed and that it is operating within its risk
appetite.
Risk Appetite
The Group's Board approves the firm's risk appetite statement
that confirms the risk parameters within which the strategic aims
and vision of the Group are to be achieved. The Board has
identified risk themes, risk drivers and major risk categories
relevant to the business to enable it to produce a comprehensive
suite of risk appetite statements and metrics which underpin the
strategy of the Group.
Governance
The Group's risk management frameworks, policies and procedures
are regularly reviewed and updated to ensure that they accurately
identify the risks that the Group faces in its business activities
and are appropriate for the nature, scale and complexity of the
Group's business. The Group's risk management frameworks support
decision-making across the Group and are designed to ensure that
each risk is managed, monitored and overseen through a dedicated
risk--specific committee.
Effective Risk committees are operating at Board, Group and
individual business unit level to ensure there is clear
accountability for risk management and robust framework and risk
identification and mitigation strategies are in place across the
Group.
The Group operates a 'Three Lines of Defence' model for the
management of its risks in which each risk has a defined risk
appetite which is controlled and managed through documented
policies and frequent reporting, and is overseen by one or more
committees as part of the Group's governance process.
The Three Lines of Defence, when taken together, control and
manage risks in line with the Group's risk appetite. The three
lines are:
-- First Line: the Business Line Managers who own and manage
risk;
-- Second Line: functions that oversee or specialise in risk
management or compliance (Information Security, Operational Risk,
Credit Risk, Financial Crime and Compliance Teams); and
-- Third Line: Internal Audit.
Each line of defence effectively ensures a robust operational
risk framework within the Group. The Group ensures that each line
understands its respective responsibilities and those of the other
lines, and has the appropriate resource and expertise in order to
fulfil its responsibilities.
Further details of the Group's risk management framework,
including risk appetite, governance arrangements and key
committees, can be found on the Group's website:
www.securetrustbank.com
/our-corporate-information/risk-management
Summary of changes to risk profile
The COVID-19 pandemic has increased the inherent risk across a
number of risk categories, for financial services firms including
the Group. We have taken actions to mitigate these risks, and other
risk mitigation activity which is not related to the pandemic has
continued throughout the year. We have presented our movements in
risk status based on the net risk, after these mitigation
activities have been considered.
As a consequence, while some risks have worsened, we consider
others to have been held stable or, in the case of liquidity,
improved. This is shown in the table on this page and in the
sections that follow. Given the significant impact of credit risk
on the Group, in aggregate the risk position is considered to be
worse for the Group in 2020 than it was for 2019.
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:
Movement
Principal Risk in 2020
------------------------------------------------------------------------------------------- --------
Credit Risk
The risk that a counterparty will be unable to pay amounts in full when due. -
------------------------------------------------------------------------------------------- --------
Liquidity and Funding Risk
The risk that the Group is unable to meet its obligations as they fall due or can only do
so at excessive cost. --
------------------------------------------------------------------------------------------- --------
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. -- (R)
------------------------------------------------------------------------------------------- --------
Capital Risk
The risk that the Group will have insufficient capital resources to support the business. -- (R)
------------------------------------------------------------------------------------------- --------
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. -- (R)
------------------------------------------------------------------------------------------- --------
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. -- (R)
------------------------------------------------------------------------------------------- --------
Regulatory Risk
The risk that the Group fails to be compliant with all relevant regulatory requirements. -- (R)
------------------------------------------------------------------------------------------- --------
Notes 34 to 38 provide further analysis of certain financial
risks.
Further details of the principal risks, the changes in risk
profile during the 2020 financial year and the Group's risk
management framework are set out in the following section. This
section includes more information on how the Group has responded to
and mitigated the effects of the current COVID-19 pandemic. There
is also analysis of the key strategic and emerging risks which
impact the Group. These include the UK's withdrawal from the
European Union, the direct impacts of which are considered to be
limited given the Group's UK operation and focus, and how the Group
is managing Climate Change Risk.
Key to symbols
-- Improved
-- (R) Stable
- Worsened
Credit Risk - WORSENED -
-------------------------------------------------------------------------------------------- ----
Description
Credit risk is the risk that a counterparty will be unable to satisfy their debt servicing
commitments when due. Counterparties include the consumers to whom the Group lends on a secured
and unsecured basis and the SME to whom the Group lends on a secured basis as well as the
market counterparties with whom the Group deals.
--------------------------------------------------------------------------------------------------
Mitigation
The Group manages credit risk through internal controls and
through a 'three lines of defence' model. The first line is the
business operation team with the Credit Risk team being second line
and Internal Audit being the third line. The Consumer Credit Risk
Committee and SME Credit Committees, which are the monitoring
committees for credit risk, report to the Board Risk Committee. The
Board Risk Committee also approves lending authorities in respect
of SME lending. Each consumer lending product has a monthly
portfolio review which reviews business performance from new
application metrics through to loss performance by business type
and introducer. Policy and scorecard changes are approved at the
Consumer Credit Risk Committee.
For Real Estate Finance and Commercial Finance, lending
decisions are made by their respective Credit Committees, using
expert judgement and assessment against criteria set out in the
lending policies. Asset Finance lending is managed via a joint
venture with Haydock, who operate in line with the Group's credit
policies and risk appetite. Since the change in ownership of
Haydock in January 2018, the Group has allowed the Asset Finance
portfolio to reduce in line with contractual repayments from
customers.
Exposure to credit risk is also managed in part by obtaining
security. Motor Finance loans are secured against motor vehicles.
Mortgages are secured against land/property and Real Estate Finance
and Asset Finance loans are secured against property and tangible
assets respectively. Commercial Finance advances are secured
against a debtor book, inventory or property if a commercial
mortgage is provided.
Management monitors the ratings of the counterparties in
relation to the Group's loans and advances to banks. There is no
direct exposure to the Eurozone and peripheral Eurozone
countries.
Forbearance
The Group does not routinely reschedule contractual arrangements
where customers default on their repayments. It may offer the
customer the option to reduce or defer payments for a short period,
in which cases the loan will retain the normal contractual payment
due dates and will be treated the same as any other defaulting
cases for impairment purposes. In line with government guidelines,
payment holiday deferrals were offered to customers that requested
one following the COVID-19 outbreak.
Change
Consumer Finance Credit Risk
Application trends, arrears and loss trends for the Retail
Finance portfolio are monitored monthly by the Credit Risk Team.
Ahead of the COVID-19 lockdown, the Retail Finance business
tightened credit criteria to protect against the bad debt that
could result from the expected economic downturn, particularly from
unemployment as a result of business failures during the pandemic.
This has reduced the growth in the portfolio but ensured that the
loans written have improved the overall quality of the business.
Arrears cases are at historically low levels, however some of this
is expected to be due to payment holiday deferrals offered to those
customers impacted by the pandemic.
The Motor Finance business was temporarily closed to new
business between March and July due to motor dealerships being
closed during the COVID-19 lockdown. When the business re-opened,
the Group implemented significant tightening of credit policy, and
consequently the motor portfolio has contracted. The business that
has been written since July has been of a very high quality with
85% of business being written in the top three tiers of quality.
Early arrears are also looking low, however, as with the Retail
Finance business, some of the arrears are likely to be hidden by
payment holiday deferrals.
With arrears levels lower than expected, impairment provisions
are driven by the input of forward-looking macroeconomic inputs to
our IFRS 9 provision models. The expectation of higher unemployment
in 2021 has particularly driven up the level of expected credit
losses, and the Group has added further overlays to ensure that
provision cover is sufficient. Further detail is provided in Note
2.
Business Finance Credit Risk
As a result of the COVID-19 pandemic, new business origination
activities in the Business Finance portfolios were suppressed
during the year, as the group initially focused on maintaining
existing client relationships with a highly selective approach
taken on new business acquisition. As a result, aggregate balances
at year-end were moderately higher against the prior comparable
period, with no write-offs realised during the year in the
continuing businesses. Impairment provisions saw an increase
predominantly as a result of updates to the Group's macroeconomic
scenarios under IFRS 9.
In Real Estate Finance, a limited number of customers were
directly impacted by the COVID-19 pandemic, through reduced rental
income in the investment portfolio, or disruption to supply chains
and construction timescales in the development portfolio. Where
required, the group provided assistance to clients largely through
short-term forbearance measures, including payment holidays and
maturity extensions. At the year-end, a substantial proportion of
these measures had expired without any further assistance being
sought.
Our Commercial Finance business became an accredited provider of
loans under the Coronavirus Business Interruption Loan Scheme
('CBILS') and the Coronavirus Large Business Interruption Loan
Scheme ('CLBILS') during the year, and successfully provided circa
GBP50 million of loans to support clients' cash flow requirements.
At year-end, the provision of these loans helped to keep the total
portfolio relatively flat year-on-year, as clients exercised a
prudent approach to cash management by keeping higher than usual
unused headroom in their facilities.
In line with previous reports, the Asset Finance portfolio has
continued to run-off over the course of the year, following the
change in ownership of Haydock, in January 2018. The Group
continues to assess its options with regards to future
opportunities within the Asset Finance market.
The Group has not relaxed any of its key risk appetite
parameters during the year. Management continues to monitor each of
the portfolios closely and regularly reviews the external events
and changes to the wider environment that could have a material
impact on any of them.
Concentration Risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of its lending operations, the Group does
not consider there to be a material exposure arising from
concentration risk.
Model risk and the impact of IFRS 9
The Group's material or high-risk models are reviewed by the
Model Governance Committee on an annual basis. The Group Chief Risk
Officer chairs the Model Governance Committee, with the Committee
reporting to the Board Risk Committee.
The Group continues to derive the probability of default ('PD'),
loss given default ('LGD') and exposure at default ('EAD') of the
Group's lending portfolios, and therefore impairment provisions,
through a suite of IFRS 9 models. The operation of such models has
enabled the core components of the Expected Credit Loss ('ECL') to
be regularly reviewed and used to allow deeper analysis of credit
loss drivers. ECL is a function of the PD x ED x LGD and has
enabled the Bank to understand more granularly the elements that
contribute to ECL. The Group monitors the average PD by product
each month both looking at the back book and new business, as well
as analysing any reasons for increases and decreases in PD (such as
significant increase in credit risk). The recovery rates from debt
sales and repossessions are also validated on a regular basis and
presented to the Assumptions Committee.
The IFRS 9 models have been monitored throughout the year and
found to be working effectively. Minor enhancements have been made
where appropriate. However, the extreme economic conditions brought
about by COVID-19 have required particular focus on the
macroeconomic variables that drive the forward-looking elements of
the IFRS 9 models (the Economic Response Model). Unemployment rate
has the largest influence on the Economic Response Model element of
IFRS 9, with House Price Index also playing an influence in the
Real Estate Finance portfolio. Throughout the year the Group has
stressed the IFRS 9 models with a number of unemployment scenarios,
both to provide evidence of the Group's viability and going concern
status, and to assist with business planning and forecasting.
Payment holidays have kept the provision levels produced by the
IFRS 9 models artificially low in 2020, so where necessary overlays
have been used to maintain provision cover at appropriate
levels.
Overall assessment
Despite the low levels of default experienced throughout the
pandemic to date, and positive developments in respect of vaccines,
difficult economic conditions are expected in 2021. Unemployment is
expected to rise as furlough schemes come to an end, and as payment
holidays expire it is highly likely that arrears will increase. Our
IFRS 9 provisioning has taken account of these forward-looking
factors, and as a result, impairment charges have increased
significantly from last year.
Despite, the significant credit tightening undertaken by the
Group, and the fact that the significant majority of expected
impairments are already accounted for in provisions as at 31
December 2020, the overall assessment is that this risk has
worsened.
Liquidity and Funding Risk - IMPROVED --
---------------------------------------------------------------------------------------- ----
Description
Liquidity and funding risk is the risk that the Group is unable to meet its obligations as
they fall due or can only do so at excessive cost. The Group maintains adequate liquidity
resources and a prudent, stable funding profile at all times to cover liabilities as they
fall due in normal and stressed conditions.
The Group manages its liquidity in line with internal and regulatory requirements, and at
least annually assesses the robustness of the liquidity requirements as part of the Group's
ILAAP.
----------------------------------------------------------------------------------------------
Mitigation
Risk tolerance
In line with the PRA's self-sufficiency rule (the Overall
Liquidity Adequacy Rule ('OLAR')) the Group seeks to at all times
to maintain liquidity resources which are adequate, both as to
amount and quality, to ensure that there is no significant risk
that its liabilities cannot be met as they fall due under stressed
conditions. The Group defines liquidity adequacy as the:
-- Ongoing ability to accommodate the refinancing of liabilities
upon maturity and other means of withdrawal at acceptable cost;
-- Ability to fund asset growth; and
-- Capacity to otherwise meet contractual obligations through
unconstrained access to funding at reasonable market rates.
To meet its liquidity requirements the Group maintains a buffer
of unencumbered High Quality Liquid Assets ('HQLA').
The Group's Liquidity Risk Appetite and Funding Risk Appetite is
approved by the Board:
-- Liquidity Risk Appetite: is to ensure that adequate liquid
resources are held to meet its OLAR and to meet the minimum LCR at
all times such that there is no significant risk that its
liabilities cannot be met as they fall due, whether in business as
usual or in a stress.
-- Funding Risk Appetite: is to ensure that the Group has access
to stable funding markets and is not reliant on any single source
of funding. The Group places no material reliance on wholesale
funding markets. The Bank's primary source of funding is retail
deposits from individuals. In meeting its Funding Risk Appetite the
Group maintains a prudent funding profile and access to funding at
all times.
The Group assesses and formally demonstrates the adequacy of its
liquidity through the ILAAP. As part of the ILAAP, the Group
conducts regular and comprehensive liquidity stress-testing to
ensure compliance with its internal and regulatory
requirements.
Structure and responsibilities for liquidity risk management
The Group has a formal governance structure in place to manage
and mitigate Liquidity and Funding risk on a day-to-day basis. The
Board sets and approves the Group's liquidity and funding risk. The
Assets and Liabilities Committee ('ALCO'), comprising senior
management and executives of the Group, meets monthly to review
liquidity and funding risk against set thresholds and risk
indicators including early warning indicators. These metrics are
managed on a day-to-day basis by the Group's Treasury function. The
Risk Function is responsible for ensuring that appropriate risk
management processes and controls are in place, and that they are
sufficiently robust, so as to ensure that key risks are identified,
assessed, monitored and mitigated.
Internal liquidity reporting
Liquidity and funding metrics are monitored daily through daily
liquidity reporting and on an ongoing basis through monthly ALCO
meetings. Metrics are also included in the monthly information pack
tabled at the Group's Executive Committee ('ExCo'), Board Risk
Committee and the Board.
The Liquidity Working Group, a working group of ALCO, embeds the
identification, monitoring, measurement and management of liquidity
and funding risks in the day-to-day activities of the Group.
The aim is not to measure liquidity and funding with a single
metric but rather a range of principles and metrics which, when
taken together, helps ensure that the Group's liquidity and funding
risk is maintained at an acceptable level.
The primary measure used by management to assess the adequacy of
liquidity is the OLAR, which is the Board's own view of the Group's
liquidity needs as set out in the Board-approved ILAAP.
Communication of liquidity risk strategy, policies and practices
across business lines and with the Board
The Group's ALCO is responsible for implementing and controlling
the liquidity and funding risk appetite established by the Board.
ALCO monitors compliance with the Group's policies and oversees the
overall strategy, guidelines and limits so that the Group's future
plans and strategy can be achieved within risk appetite.
Liquidity and funding risk management framework
The Group maintains a comprehensive internal reporting framework
which seeks to mitigate liquidity and funding risk:
-- Risk identification: activities are embedded through
integration with key business processes to ensure the Group:
- Considers how existing activities may impact the current and
future liquidity and funding risk profile.
- Considers the implications of new products.
- Has an awareness of how external influences may affect the
liquidity position.
-- Risk management: focuses on the application of tools,
techniques and processes to quantify risks in order to effectively
measure the Group's liquidity and funding risk.
-- Risk monitoring: Board and senior management are provided
with timely identification of the Group's liquidity and funding
position, current emerging risks, material threats and
opportunities to enable appropriate management actions.
-- Risk reporting: the Board, Committees, and senior management
are informed of any changes in the Group's liquidity and funding
risk profile or position and necessary actions via regular
liquidity reporting. In addition, ad hoc reporting to address any
specific concerns affecting liquidity and funding risk management
or strategies is available.
Stress-testing
A comprehensive stress-testing framework is used to support
liquidity and funding risk measurement and takes into account all
known sources of liquidity and funding risks as documented within
the ILAAP (and as updated upon changes in material risks). The
stress-testing covers idiosyncratic, market-wide and combined
stress scenarios, with additional stress scenarios including
reverse stresses and combinations of sensitivity analysis across
individual items, tailored to the Group's business model and
operating environment.
Stress-testing is conducted to identify sources of potential
liquidity strain and to ensure that the Group's liquidity position
remains within the Board Risk Appetite and prudential regulatory
requirements and limits. Stress-testing and sensitivity analysis
are performed on a regular basis to assess the key business
vulnerabilities.
The Group uses various short and medium term forecasts to
monitor future liquidity requirements and these include
stress-testing assumptions to identify the required levels of
liquidity. Stress-testing is performed on a daily basis and levels
of liquidity under stress are forecast regularly and monitored by
ALCO and management.
Contingency funding plans
If, for reasons which may be beyond its control, the Group was
to encounter a significant and sustained outflow of deposits or
other stress on liquidity resource, the Recovery Plan incorporates
the Group's plans to ensure that it remains sufficiently liquid to
remain a viable independent financial institution during a severe
liquidity stress event. Recovery Plan Early Warning Indicators and
Invocation Trigger Points ('ITP') are regularly monitored and
reported against.
The Recovery Plan is applied consistently with the Group's ILAAP
as part of the overall liquidity risk management framework dealing
with contingent funding requirements as they arise. The Group also
retains access to the Bank of England liquidity schemes, including
the Discount Window Facility.
Change
The Group has maintained its liquidity ratios in excess of
regulatory requirements throughout the year and continues to hold
significant levels of HQLA. The fall in lending balances brought
about by COVID-19 has provided the Group with the opportunity to
reduce its funding requirements.
A number of enhancements were made to the liquidity and funding
risk management in 2020. These included a further review of the
quantum of liquidity the Bank holds to support its franchise in
business as usual and stressed conditions. A thorough review of the
Group's regulatory liquidity reporting has also been undertaken.
The stress tests performed as part of the ILAAP confirmed that the
Group has sufficient funds to satisfy the OLAR requirement and
there is no significant risk that liabilities cannot be met as they
fall due. The Group's LCR as at 31 December 2020 was significantly
higher than the regulatory requirement. The enhanced risk
management framework, and reduction in funding requirements brought
about by lower levels of lending balances, leads to our assessment
that the risk position has improved.
Operational Risk - STABLE -- (R)
--------------------------------------------------------------------------------- -------------------
Description
Operational risk is the risk that the Group may be exposed to direct or indirect loss arising
from inadequate or failed internal processes, personnel and succession, technology/ infrastructure,
or from external factors.
The scope of operational risk is broad and includes business process, business continuity,
third party, financial crime, change, Human Resources, Information Security and IT risk, including
cyber risk. The Group's customers, operations, processes, products and people are exposed
to these inherent risks so it has made significant investments to carefully manage and mitigate
these risks and ensure there is a robust and effective Operational Risk Framework in operation
across all areas of its business.
------------------------------------------------------------------------------------------------------
Mitigation
The Group has adopted an Operational Risk Policy and Framework
designed in accordance with the 'Principles for the Sound
Management of Operational Risk' issued by the Basel Committee on
Banking Supervision. The design and effectiveness of the Group's
Operational Risk Framework is regularly audited by the Group's
Internal Audit function. A recent review in 2020 concluded that the
Framework was well-designed and proportionate to the Group's scale
and complexity.
The approach ensures appropriate governance is in place to
provide adequate and effective oversight of the Group's operational
risk. The governance framework includes the Board Risk Committee
and Group Operational Risk Committee.
The Group has a defined set of qualitative and quantitative
operational risk appetite measures. Quantitative measures cover all
categories of operational risk and are reported and monitored on a
monthly basis.
Change
The Group continues to invest in resource, expertise and systems
to support the Operational Risk Framework and Policy. This
Framework defines and facilitates the following activities:
-- A Risk and Control Self-Assessment process to identify,
assess and mitigate risks across all business units through
improvements to the control environment.
-- The governance arrangements for managing and reporting these
risks
-- All risk appetite measures and associated thresholds and
metrics.
-- An incident management process that defines how incidents
should be managed and associated remediation, reporting and
root-cause analysis.
In 2018 the Group successfully transitioned to 'The Standardised
Approach' for assessing its operational risk capital, in
recognition of the enhancements made to its framework and embedding
this across the Group. In 2020 the Group has continued to enhance
these standards and has introduced a number of improvements to the
control frameworks in place across our principal operational
risks.
Key risk themes of operational risk focus in 2020 include:
-- COVID-19 (Business disruption) - The pandemic has materially
increased the inherent risks faced by our business across a number
of operational risk categories, and our prime focus over 2020 has
been managing these potential risks and ensuring the operational
effects of the pandemic are minimised. Our Crisis Management Team,
with representation from all key areas of the Business and our Risk
function, have successfully minimised the operational implications
through changes to our operating practices and the introduction of
a robust suite of additional controls. This will continue to be a
key area of focus whilst the pandemic remains active across the
UK.
-- 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 embedded a suite of standard controls for all its
material suppliers to reduce the risk of operational impacts on
these critical services. This has been particularly important
during the pandemic, so we have remained in regular contact with
our key suppliers and gained assurances over their ongoing ability
to support our operations. Further tools have been developed, and
are being rolled out, to help understand the quality of the
resilience controls in operation at our critical suppliers. We have
also enhanced our assurance capability with the recruitment of a
dedicate resource in this area. This will continue to be an area of
focus for 2021.
-- Operational and IT resilience - Many elements of the
Operational Risk Framework support the ongoing resilience of the
Group's operational and IT services, including business continuity
management, disaster recovery, incident management, process
management and the cyber strategy. The Group has defined a plan to
be able to respond to proposals put forward by the PRA and FCA in
their Operational Resilience consultation, and this remains a key
priority in 2021.
-- Information security and cyber risk -The Group has paid
considerable attention to risks arising from a failure or breach of
its IT systems that could result in customer exposure, business
disruption, financial losses, or reputational damage.
-- Employment practices and workplace safety - Given the
enhanced risks associated, this has been of paramount importance
during the pandemic. The Group quickly introduced all the required
new working practices and protocols to protect our people and
ensure the continued effective operations of our businesses. This
will continue to be a key priority whilst we manage the
implications of the pandemic.
-- Change management - The effective delivery of change
management programmes plays an important role in meeting the
Group's regulatory requirements, improving services and
implementing strategic decisions. Ineffective change management
processes could lead to poor customer outcomes, business
disruption, financial loss and regulatory breaches. Change
management processes and governance are defined and embedded within
the Group.
Overall assessment
The pandemic has brought a significant increase in inherent
operational risk, across a number of key themes. However, as the
Group has very successfully adapted to the new working conditions
brought about by COVID-19 and demonstrated its operational
resilience, the overall assessment is that the level of risk has
remained stable.
Capital Risk - STABLE -- (R)
----------------------------------------------------------------------------- ---------------------
Description
Capital risk is the risk that the Group will have insufficient capital resources to meet minimum
regulatory requirements and to support the business. The Group adopts a conservative approach
to managing its capital and at least annually assesses the robustness of the capital requirements
as part of the Group's Internal Capital Adequacy Assessment Process ('ICAAP').
----------------------------------------------------------------------------------------------------
Mitigation
Capital Management is defined as the operational and governance
processes by which capital requirements are established and capital
resources maintained and allocated, such that regulatory
requirements are met while maximising returns. These processes and
associated roles and responsibilities are set out in the Group's
Capital Management Policy, which is approved by the Risk Committee.
The Board regularly reviews the current and forecast capital
position to ensure capital resources are sufficient to support
planned levels of growth.
In accordance with the EU's Capital Requirements Directive IV
('CRD IV') and the required parameters set out in the EU's Capital
Requirement Regulation, the Group maintains an ICAAP which is
updated at least annually.
The ICAAP is a process that brings together the management
framework (i.e. the policies, procedures, strategies and systems
that the Group has implemented to identify, manage and mitigate its
risks) and the financial disciplines of business planning and
capital management.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted an approach to
determine the level of capital we need to hold. This method takes
the Pillar 1 capital formula calculations (standardised approach
for credit, market and operational risk) as a starting point, and
then considers whether each of the calculations delivers a
sufficient capital sum adequate to cover management's assessment of
anticipated risks. Where it is considered that the Pillar 1
calculations do not reflect the risk, an additional capital add-on
in Pillar 2 is applied, as per the Total Capital Requirement issued
by the PRA.
A complete assessment of the Group's capital requirement is
contained in its Pillar 3 disclosures. Pillar 3 disclosures for the
Group for the year ended 31 December 2020 are published as a
separate document on our website.
Change
As set out in the Financial Review, the Group's capital position
improved over 2020 due to continued profitability, a reduction in
risk weighted assets and changes to capital requirements prescribed
by the regulator. At December 2020, the CET1 ratio was 14.2% (2019:
12.7%), the total capital ratio was 16.4% (2019: 15.0%) and the
leverage ratio was 10.4% (2019: 9.8%) on a Group consolidated
basis. Capital resources increased over the year to GBP328.8
million as at 31 December 2020 (31 December 2019: GBP318.0 million)
while the total capital requirement including regulatory buffers
reduced from GBP286.0 million to GBP241.5 million over the same
period.
The 2020 ICAAP showed that the Group continues to be able to
meet its minimum capital requirements, even in extreme stress
scenarios. In addition to the ICAAP, a number of stressed scenarios
were reviewed over the course of 2020, looking over a five-year
time horizon and considering a range of growth rates over those
years. As well as forming part of the viability and going concern
assessments, these scenarios have been used to plan future lending
growth at a rate that both increases year-on-year profits and
maintains a healthy capital surplus. These scenarios take into
account the likely rebuilding of the countercyclical capital buffer
once the current crisis eases.
The pandemic has shown the benefit of the relatively short
duration of the Group's lending portfolios. As the crisis took
hold, the reduction in certain of our markets and our tightening of
credit risk appetite led to a swift reduction in our balance sheet,
thereby reducing pressure on capital levels. This feature of our
balance sheet will allow us to flex growth rates as the pandemic
eases and economic conditions become clearer.
We adopted transitional provisions in respect of the
implementation of IFRS 9, as set out by the European Banking
Authority ('EBA'). These provisions allow the capital impact of the
standard to be phases in over a five-year period. As a response to
the pandemic, further capital relief was made available and the
Group's reported capital position takes account of this relief.
Further details are provided in Note 38.
Market Risk - STABLE -- (R)
-------------------------------------------------------------------------- ----------------------
Description
For the Group, market risk is primarily limited to interest rate risk. Interest rate risk
refers to the exposure of the Bank's financial position to adverse movements in interest rates.
When interest rates change, the present value and timing of future cash flows change. This
in turn changes the underlying value of the Group's assets, liabilities and off-balance sheet
instruments and hence its economic value. Changes in interest rates also affect the Group's
earnings by altering interest-sensitive income and expenses, affecting its net interest income.
The principal currency in which the Group operates is Sterling, although a small number of
transactions are completed in US dollars, Euros and other currencies in the Commercial Finance
business. The Group has no significant exposures to foreign currencies and hedges any residual
currency risks to Sterling.
--------------------------------------------------------------------------------------------------
Mitigation
Risk tolerance and Stress Testing
Market risk is managed by the Group's Treasury function and is
overseen by ALCO. The Group does not take significant unmatched
positions and does not operate a trading book.
The Group's risk management framework, policies and procedures
are regularly reviewed and updated to ensure that they accurately
identify the risks that the Group faces in its business activities
and are appropriate for the nature, scale and complexity of the
Group's business.
The key measure the Group uses to monitor the risk is an
Interest Rate Sensitivity Gap analysis which informs the Group of
mismatched interest rate risk positions. The Group reports the
interest rate mismatch on a monthly basis to ALCO, considering
Market Value Sensitivity ('MVS') as a proportion of the overall
capital position of the Group and Earnings at Risk as a proportion
of forecast net interest income. These are mainly assessed against
200bps and 100bps parallel shifts in rates respectively. The Group
also monitors its risk against a potential negative interest rate
environment.
The Group also monitors its exposure to the Economic Value of
Equity ('EVE') as a proportion of own funds and CET1 against a
200bps parallel shift in rates, as well as the six standardised
shocks prescribed by the Basel Committee on Banking Supervision
('BCBS').
The Group also measures exposure to basis risk and
optionality.
All such exposures are maintained within the risk appetite set
by the Board and are monitored by ALCO.
Interest rate risk management framework
The Group maintains a comprehensive internal reporting framework
which seeks to mitigate interest rate risk:
-- Risk identification: activities are embedded through
integration with key business processes to ensure the Group:
- Considers how existing activities may impact the current and
future interest rate risk profile.
- Considers the implications of new products.
- Has an awareness of how external influences may affect the
market risk position.
-- Risk management: focuses on the application of tools,
techniques and processes to quantify risks in order to effectively
measure the Group's interest rate risk.
-- Risk monitoring: Board and senior management are provided
with timely identification of the Group's interest rate risk
position, current emerging risks, material threats and
opportunities to enable appropriate management actions.
-- Risk reporting: the Board, committees, and senior management
are informed of any changes in the Group's interest rate risk
profile or position and necessary actions via regular reporting. In
addition, ad hoc reporting to address any specific concerns
affecting interest rate risk management or strategies must be
available.
Change
The Group's exposure to market risk continues to be limited
primarily to interest rate risk, with only modest exposures to
foreign exchange risk. The Group remained within risk appetite in
respect of market risk throughout the year.
The Group further embedded BSCS and EBA guidelines on interest
rate risk in the banking book ('IRRBB') in 2020. This included
further detailed analysis and stress-testing of additional types of
interest rate risk not directly captured within the risk appetite
metrics. This improvement in control is considered to mitigate the
increase in inherent market risk brought about by the pandemic,
resulting in a stable risk profile.
Conduct Risk - STABLE -- (R)
------------------------------------------------------------------------ --------------------
Description
We define conduct risk as the risk that the Group's products and services, and the way they
are delivered, result in poor outcomes for customers, or harm to the Group. This could be
as a direct result of poor or inappropriate execution of the Group's business activities or
staff behaviour.
----------------------------------------------------------------------------------------------
Mitigation
The Group takes a principles-based approach and includes retail
and commercial customers in its definition of 'customer', which
covers all for business units and both regulated and unregulated
activities.
Monthly review and challenge of key risk indicators ('KRIs')
takes place in the business unit ExCo meetings. The KRIs vary
across the business units to reflect the relevant conduct
risks.
Aggregated reporting measuring against risk appetite is provided
to the Group ExCo. This is also reported to the Risk Committee and
the Board.
Change
Conduct Risk and control assessments are reviewed by the
business units for attestations by first line risk owners. In
addition, conduct risks are assessed as part of the risk assessment
protocols for proposed changes and projects.
Group ExCo has oversight of the first line activities providing
assurance to senior management that the first line are identifying
conduct risks and taking appropriate steps to manage them in line
with risk management principles.
Training on conduct risk continues to be delivered to new
starters, with an e-Learning module completed by all staff during
the year.
During the year, the Group has had to implement the regulatory
changes for payment holidays and other protections for customers
impacted by COVID-19.
Regulatory Risk - STABLE -- (R)
----------------------------------------------------------------------------- -------------------
Description
Regulatory risk is the risk that the Group fails to be compliant with all relevant regulatory
requirements. This could occur if the Group failed to interpret, implement and embed processes
and systems to address regulatory requirements, emerging risks, key focus areas and initiatives
or deal properly with new laws and regulations.
--------------------------------------------------------------------------------------------------
Mitigation
The Group seeks to manage regulatory risks through the
Enterprise-wide risk management framework. The Group Compliance and
Regulatory Risk Committee and Group Financial Crime Committee are
responsible for reviewing and monitoring regulatory changes and
operational incidents with a regulatory impact, and ensuring that
appropriate actions are taken, and also reviewing and approving the
relevant risk management framework.
Change
In the year ended 31 December 2020, we have delivered changes to
address new and revised regulations and legislation that have come
into force including additional support and measures to assist
customers who may be suffering financial difficulties due to
COVID-19 in Mortgages, Retail Finance, Motor Finance, and general
insurance via our OneBill product. The FCA Directory has been
implemented with Secure Trust Bank providing information on key
individuals working in financial services. This information will be
provided for the other entities in the Group before March 2021.
Projects and initiatives are in place for changes required in
2021 including the Breathing Space Scheme, regulatory returns,
operational resilience, the ongoing regulatory focus on vulnerable
customers and the impact of the mortgage market study on STB's
closed mortgage book. It is not anticipated that the FCA's ban on
discretionary commission models will require actions by the Group,
however, the additional disclosure requirements are being worked
through with Retail Finance and Motor Finance.
Strategic and emerging risks
In addition to the principal risks disclosed above, the Board
considers strategic and emerging risks, including key factors,
trends and uncertainties which can influence the results of the
Group. These risks include the following:
Macroeconomic environment and market conditions
The Group operates exclusively within the UK and its performance
is influenced by the macroeconomic environment in the UK. The
economy affects demand for the Group's products, margins that can
be earned on lending assets and the levels of loan impairment.
Political and economic uncertainty continued throughout 2020 due
to combination of the global ramifications of COVID-19 and a lack
of clarity regarding the UK's trading relationship with the EU when
the Brexit transition period ends. The imposition of a national
lockdown to curb the spread of COVID-19 during the spring and early
summer created the biggest recession in the UK in the last 300
years. Asset prices and the number of hours worked by employees
fell sharply before recovering as a wide range of government
measures and action by the Bank of England were implemented which
greatly reduced the economic impact of the recession, albeit at the
taxpayers' expense.
UK economic fundamentals improved strongly during the summer
months with GDP recovering sharply and asset prices rising. Later
in the year, boosted by a stamp duty holiday, house prices also
rose on average.
The autumn and early winter months saw a resurgence of the
COVID-19 virus in many parts of the UK culminating in various
lockdowns in the UK nations in October and November. A rise in
cases and new variant of the virus necessitated a significant
tightening of lockdown conditions across the UK, particularly after
the Christmas period. These lockdowns severely dampened UK economic
activity during the period. Unemployment levels across a range of
sectors, including hospitality, leisure and retail rose.
Despite the negative impacts, business and consumer confidence
levels were maintained, buoyed by the commencement of a national
COVID-19 vaccination programme.
It is clear that COVID-19 will continue to dampen economic
activity across the UK and the globe. It will take much of 2021 for
the UK population to be vaccinated and therefore risk levels will
remain elevated. The Group will continue to monitor developments
closely and will continue to be selective in respect of new lending
pending the economic recovery gaining traction as the vaccination
programme progresses.
UK withdrawal from European Union
Following the passing of the UK Withdrawal Agreement and the
withdrawal itself on 31 January 2020, the UK entered a transitional
arrangement with the European Union which ended on 31 December
2020. Throughout 2020 the EU and UK sought to negotiate a free
trade deal to avoid the default scenario of both sides moving to
trading on World Trade Organisation terms. The period of
uncertainty while negotiations were underway added further
pressure, beyond COVID-19, on the UK economy during the year.
On 24 December 2020 the EU and UK announced they had reached a
comprehensive free trade deal to take effect from 1 January 2021.
This has since been approved by the respective parliaments and is
now law. Inevitably there will be more process and bureaucracy
involved under the new arrangements compared to the old but these
are not expected to have the same adverse impact on the economy as
an exit without a deal would have had.
The Bank of England is no longer bound by the directions of the
EBA and could, if it wished, take a more proportionate approach to
the regulation of non-systemic firms which are not internationally
active. It is encouraging that the Bank of England is already
consulting with the industry in this respect.
The Group's core business planning assumption was that the exit
would be on an orderly basis and that the direct impact of a no
deal scenario was limited.
Therefore the actual outcome will drive no changes in the
Group's strategy or its risk appetite.
Climate change
Climate change, and society's response to it, presents financial
risks to the UK financial services sector. While these risks will
crystallise in full over the coming decades, they are already
becoming apparent. The Group is assessing its risk exposure in
relation to both the potential 'physical' effects of climate change
and the 'transitional' risks from the UK's adjustment towards a
carbon neutral economy.
In accordance with the requirements of the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change', the Group has allocated
responsibility for identifying and managing the risks from climate
change to the relevant Senior Management Function, the Chief Risk
Officer. The Group is developing its risk management frameworks and
practises in order to meet all of the PRA's associated regulatory
requirements, and to meet the disclosure requirements defined
within the Task Force on Climate related Financial Disclosures
('TCFD'), by the end of 2021.
The risk assessment processes have been integrated into existing
risk frameworks and is governed through existing risk governance
structures, including reporting to Group ExCo and the Board Risk
Committee.
The Group has identified and assessed four associated key risks
that are being actively managed. Whilst we don't consider any of
these risks to be material, associated mitigating actions are being
taken and embedded within our strategic planning, operating model,
and management reporting and associated operational processes. The
four risks and more detail on the Group's responses are detailed on
the following page:
1. Disruption to the Group's and third party operational sites
through climate change related impacts, such as severe weather.
The Group has undertaken a review of the risks associated with
the location of each of its internal operations sites. Similarly we
have consulted with our key suppliers in relation to their
contingency plans in the event of the increased risk of flooding
and severe weather. In both respects we do not consider there to be
any material risks currently.
2. Transitional impacts within the motor industry, as consumers
and the industry respond to the move towards non/low-carbon fuelled
vehicles.
The Group is undertaking a review, using external expertise, to
assess a range of scenarios in relation to the potential
implications of an accelerated transition to the use of 'non fossil
fuelled vehicles' on the residual values of our security of petrol
or diesel fuelled vehicles. This review will help model any
additional risk to the Group, evaluate whether these are material
and inform the development of our future strategy for this
business. It should be noted that the average behavioural term of
our Motor Finance lending is three to four years and therefore the
Group will be able to mitigate some of the modelled potential
impacts through adjustments to our lending strategy as the longer
term trend evolves.
3. Climate change related impacts on the valuations of property
securing our Real Estate Finance portfolio.
The Group is reviewing the geographic distribution and the
corresponding levels of flood risk to property assets across the
portfolio. Whilst this focused review will provide useful insight,
the level of risk is not currently considered to be material, as
our existing due diligence processes include a full valuation from
a RICS qualified surveyor, which includes an assessment of the
flood risk. Furthermore, following this assessment, appropriate
insurances will have been required and any impacts on the
valuations of the assets will have also been reflected in the
lending decisions.
4. The potential impacts on our Commercial Finance clients as
they respond to any changes to their business from the effects of
climate change and associated transitional impacts on their
clients.
To mitigate this, the Group will assess the climate risks
associated with each Commercial Finance client's business model to
understand any associated risks.
Whilst portfolio reviews provide useful insight, the level of
risk is not currently considered to be material, since the
Commercial Finance portfolio is primarily composed of revolving
credit facilities secured upon short-term debtor receivables and
inventory, and should there be any material concerns or risks
relating to the impact of climate change on the viability of the
client, these facilities can be reviewed or additional collateral
can be taken.
The Group will continue to develop and monitor our approach to
these associated risks over 2021 and beyond and enhance our
understanding and management of these risks. We are on track to
meet regulatory deadlines to embed the requirements of the PRA's
supervisory statement on 'Enhancing banks' and insurers' approach
to managing the financial risks from climate change'.
Risk Appetite
The Group has formally approved a Risk Appetite Statement in
relation to climate change risk and is the process of defining a
suite of risk appetite metrics that cover each of the key risk
areas above.
Strategic response to climate change risk
The Board and Executive management will be considering the risks
associated with climate change as part of its annual strategic
planning cycle in 2021 and these considerations will be included
within next year's report.
Viability and going concern
Going concern
In assessing the Group as a going concern, the Directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Strategic Report. The Group uses various short- and medium-term
forecasts to monitor future capital and liquidity requirements and
these include stress-testing assumptions to identify the headroom
on regulatory compliance measures. As set out in the assessment of
business viability and as in the prior year, for the 2020 Annual
Report and Accounts the Group has undertaken additional
stress-testing in consideration of the COVID-19 outbreak.
The Directors are satisfied that the Company and the Group have
adequate resources to continue to operate for the foreseeable
future as going concerns. For this reason they continue to adopt
the going concern basis in preparing the Annual Report and
Accounts.
Business viability
In accordance with provision 31 of the UK Corporate Governance
Code, the Directors confirm that there is a reasonable expectation
that the Company and the Group will be able to continue in
operation and meet their liabilities as they fall due, for the
period up to 31 December 2023. The assessment of ongoing viability
covers this period as it falls within the Group's planning horizon
and the period covered by the Group's stress-testing.
The Group continues to exhibit long-term growth potential, and
delivered continued profitability in 2020 despite the pandemic and
demonstrated the benefit of its flexible business model through a
period of significant stress. Given this, and the tightening of
credit risk appetite in the year leading to further improvements in
loan book quality, the directors are confident of the Group's
viability over the longer term. However, the continuing
uncertainties regarding the economic, regulatory and market
environment that the Group operates in, while the pandemic and the
impacts of the UK exit from the European Union run their course,
may compromise the reliability of longer range forecasts. The Board
has therefore decided to continue to use a three-year period for
its assessment of viability rather than extending this over a
longer planning horizon.
The Directors have based the assessment on the following:
-- The latest annual budget, which contains information on the
expected financial position and performance of the Group. The
budget focuses on the period to 31 December 2022, with certain key
metrics such as capital ratios considered over a five-year period,
and takes account of the expected impact of COVID-19 on future
earnings, capital and liquidity requirements.
-- The analysis of key sensitivities, undertaken as part of the
budget process and through forecasting activity undertaken over the
course of 2020, which could impact on profitability over the
planning horizon. Assumptions made to calculate risk weighted
assets and capital requirements were clearly stated and additional
scenarios modelled to demonstrate the potential impact of risks and
uncertainties on capital. This included consideration of the
potential restoration of the countercyclical capital buffer to its
expected normal level, which would increase the Group's capital
requirements.
-- The Group's ILAAP, which uses stress scenarios to assess the
adequacy of liquidity resources. The results of this scenario
analysis are used to set the Group's OLAR and are also the basis of
the liquidity requirements set by the PRA. The Group has maintained
liquidity levels in excess of regulatory requirements throughout
the year and is forecast to continue to do so over the ILAAP
planning horizon.
-- The Group's ICAAP, which considers macroeconomic stress and
severe shock scenarios in order to assess the adequacy of capital
resources. The results of the scenario analysis are used to set the
Group's internal and regulatory capital requirements. The Group has
maintained capital levels in excess of regulatory requirements
throughout the year and is forecast to continue to do so. As set
out further on this page, the macroeconomic stress scenarios used
in the ICAAP were based on the scenario analysis used for the 2019
going concern assessment.
-- Consideration of the other principal risks as set out on
pages 38 to 49 of the Annual Report and Accounts, to identify any
other severe but plausible scenarios that could threaten the
Group's business model, future performance, solvency or liquidity.
This includes consideration of specific risks in relation to
climate change.
-- Analysis of the operational impact of the COVID-19 outbreak
on the Group. Further details are provided on page 48 of the Annual
Report and Accounts.
Stress-testing
As the nature of the economic impact of COVID-19 is likely to be
different to the types of recession generally considered in
stress-testing scenarios, in early 2020 the Group undertook bespoke
stress-testing, covering capital and liquidity, to consider such
scenarios. A range of market and idiosyncratic variables were used
as scenario inputs, with unemployment levels being the variable to
which the Group's impairment charges are most sensitive. These
scenarios were used to inform the going concern and business
viability assessments set out in the 2019 Annual Report and
Accounts, and full details can be found on page 50 of those
Accounts.
The Group's annual budget for 2020 was prepared and approved
prior to the first global news coverage of the COVID-19 outbreak.
To remedy this, in the first half of the year, forecasts were
prepared which included a range of scenarios, based upon those used
for the 2019 going concern assessment. These forecasts were
adjusted over the course of the year, taking account of emerging
information and external forecasts regarding the economic impacts
of the pandemic, including those published by the Office of
Budgetary Responsibility and the Monetary Policy Committee. This
allowed the Group to keep a constant focus on the likely future
economic conditions and their impact on the Group's future
financial, capital and liquidity positions.
A number of factors have evolved since the 2019 going concern
and business viability assessments were made, many of which improve
the picture from the previous assessments:
-- The Group has delivered a profitable result for 2020, and
having made no dividend distributions in 2020, has increased
retained profits
-- The reduction in the Group's balance sheet has reduced
capital requirements, as have the regulatory interventions set out
on page 34 of the Annual Report and Accounts
-- The impact of lockdowns on the Group's markets is more
clearly understood, allowing planning of expected business volumes
to be undertaken in the context of more predictable conditions
-- The Group has successfully adapted its operations in response
to the pandemic, again making it easier to adopt more reliable
planning assumptions
-- The emergence of effective vaccines and the commencement of
their rollout makes the easing of the pandemic in 2021 more
likely
-- The UK has agreed a trade deal with the EU
-- The Group's provision models have been enhanced, allowing the
impact of more extreme economic scenarios to be modelled without
the need for significant manual overlays. As explained further in
Note 2, the use of forward-looking macroeconomic scenarios in these
models is expected to result in the majority of impairment charge
in respect of loans on the year-end balance sheet being already
included in the Group's 2020 results.
To confirm that the improvement in the Group's position since
the 2019 assessments and the activity set out on the previous page
were sufficient to satisfy those assessments for 2020, a further
stress test was undertaken as at 31 December 2020. This involved
running a plausible but extreme scenario, with UK unemployment
peaking at 12% in mid-2022. This scenario was input to the Group's
current growth forecasts with no assumed management actions and the
recommended 2020 final dividend of 44 pence.
At no point in this scenario, which was run to the end of 2025,
were capital requirements breached and there was only very limited
use of buffers required.
The Group also undertook a further stress test in order to
ascertain the point at which capital requirements would be
breached. In this scenario, the peak of UK unemployment was raised
to 15%, again with no assumed management actions and the
recommended 2020 final dividend of 44 pence.
In this scenario, the Group would need either to utilise buffers
or to initiate management actions, such as reducing levels of new
business. Even in this scenario, significant headroom exists over
the minimum capital requirement.
The Board considers that the circumstances required to cause the
Group to fail, as demonstrated by the stress-testing described
above, are sufficiently remote.
In undertaking this stress-testing analysis the Group has made
use of models. Models are imperfect representations of reality,
reliant on historical data, model inputs and assumptions. These
model risks are exacerbated when dealing with unprecedented
scenarios, such as the COVID-19 pandemic, due to the lack of
credible, reliable historical data to use as a reference point. The
Group has sought to reduce this risk by comparing different model
methodologies, applying expert judgement and senior management
review.
In making this statement, the Board has sought input from the
Audit Committee and the Risk Committee.
Directors' responsibility statement
The Directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the group financial statements in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and International
Financial Reporting Standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies in the European Union.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and of
their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them
consistently;
-- make judgements and estimates that are reasonable and
prudent;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- state whether they have been prepared in accordance with IFRS
as adopted by the EU;
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Group and parent company's financial position and
financial performance;
-- assess the Group and parent company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern;
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent company or to cease
operations or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent company's transactions and disclose with reasonable accuracy
at any time the financial position of the parent company and enable
them to ensure that its financial statements comply with the
Companies Act 2006. They are responsible for such internal control
as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility to
safeguard the assets of the Group and parent company and for taking
such steps as are reasonably open to them to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Group and parent company and the undertakings included in the
consolidation taken as a whole;
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Group and parent company and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face;
-- the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group and parent company's
performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 24 March 2021 and is signed on their behalf by:
Consolidated statement of comprehensive income
2020 2019
Note GBPmillion GBPmillion
-------------------------------------------------------------------------------------- ---- ----------- -----------
Income statement
-------------------------------------------------------------------------------------- ---- ----------- -----------
Interest income and similar income 4.1 192.5 191.4
-------------------------------------------------------------------------------------- ---- ----------- -----------
Interest expense and similar charges 4.1 (41.6) (46.0)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net interest income 4.1 150.9 145.4
-------------------------------------------------------------------------------------- ---- ----------- -----------
Fee and commission income 4.2 16.0 20.9
-------------------------------------------------------------------------------------- ---- ----------- -----------
Fee and commission expense 4.2 (0.8) (0.8)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net fee and commission income 4.2 15.2 20.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Operating income 166.1 165.5
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net impairment charge on loans and advances to customers 14 (51.3) (32.6)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Losses on modification of financial assets 6 (3.1) -
-------------------------------------------------------------------------------------- ---- ----------- -----------
Operating expenses 7 (91.6) (94.2)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit before income tax 20.1 38.7
-------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 9 (3.9) (7.6)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 16.2 31.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Other comprehensive income
-------------------------------------------------------------------------------------- ---- ----------- -----------
Items that will not be reclassified to the income statement
-------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation reserve (0.2) 0.2
-------------------------------------------------------------------------------------- ---- ----------- -----------
Taxation - (0.2)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Other comprehensive income for the year, net of income tax (0.2) -
-------------------------------------------------------------------------------------- ---- ----------- -----------
Total comprehensive income for the year 16.0 31.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit attributable to:
-------------------------------------------------------------------------------------- ---- ----------- -----------
Equity holders of the Company 16.2 31.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Total comprehensive income attributable to:
-------------------------------------------------------------------------------------- ---- ----------- -----------
Equity holders of the Company 16.0 31.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Earnings per share for profit attributable to the equity holders of the Company during
the
year (pence per share)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Basic earnings per share 10 87.0 168.3
-------------------------------------------------------------------------------------- ---- ----------- -----------
Diluted earnings per share 10 85.2 166.4
-------------------------------------------------------------------------------------- ---- ----------- -----------
All comprehensive income relates to continuing operations.
Consolidated statement of financial position
2020 2019
Note GBPmillion GBPmillion
------------------------------------------------ ---- ----------- -----------
ASSETS
------------------------------------------------ ---- ----------- -----------
Cash and balances at central banks 181.5 105.8
------------------------------------------------ ---- ----------- -----------
Loans and advances to banks 12 63.3 48.4
------------------------------------------------ ---- ----------- -----------
Debt securities 13 - 25.0
------------------------------------------------ ---- ----------- -----------
Loans and advances to customers 14 2,358.9 2,450.1
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk 5 5.7 (0.9)
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 5 4.8 0.9
------------------------------------------------ ---- ----------- -----------
Investment property 17 4.3 4.8
------------------------------------------------ ---- ----------- -----------
Property, plant and equipment 18 9.9 11.3
------------------------------------------------ ---- ----------- -----------
Right-of-use assets 19 2.9 3.6
------------------------------------------------ ---- ----------- -----------
Intangible assets 20 7.7 9.0
------------------------------------------------ ---- ----------- -----------
Deferred tax assets 22 5.9 7.5
------------------------------------------------ ---- ----------- -----------
Other assets 23 19.2 17.3
------------------------------------------------ ---- ----------- -----------
Total assets 2,664.1 2,682.8
------------------------------------------------ ---- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------ ---- ----------- -----------
Liabilities
------------------------------------------------ ---- ----------- -----------
Due to banks 24 276.4 308.5
------------------------------------------------ ---- ----------- -----------
Deposits from customers 25 1,992.5 2,020.3
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk 5 4.7 (0.7)
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 5 6.1 0.6
------------------------------------------------ ---- ----------- -----------
Current tax liabilities 1.0 3.3
------------------------------------------------ ---- ----------- -----------
Lease liabilities 26 3.9 4.5
------------------------------------------------ ---- ----------- -----------
Other liabilities 27 56.3 40.9
------------------------------------------------ ---- ----------- -----------
Provisions for liabilities and charges 28 1.9 0.7
------------------------------------------------ ---- ----------- -----------
Subordinated liabilities 29 50.8 50.6
------------------------------------------------ ---- ----------- -----------
Total liabilities 2,393.6 2,428.7
------------------------------------------------ ---- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------ ---- ----------- -----------
Share capital 31 7.5 7.4
------------------------------------------------ ---- ----------- -----------
Share premium 82.2 81.2
------------------------------------------------ ---- ----------- -----------
Revaluation reserve 0.9 1.1
------------------------------------------------ ---- ----------- -----------
Retained earnings 179.9 164.4
------------------------------------------------ ---- ----------- -----------
Total equity 270.5 254.1
------------------------------------------------ ---- ----------- -----------
Total liabilities and equity 2,664.1 2,682.8
------------------------------------------------ ---- ----------- -----------
Company statement of financial position
2020 2019
Note GBPmillion GBPmillion
------------------------------------------------ ---- ----------- -----------
ASSETS
------------------------------------------------ ---- ----------- -----------
Cash and balances at central banks 181.5 105.8
------------------------------------------------ ---- ----------- -----------
Loans and advances to banks 12 61.7 45.2
------------------------------------------------ ---- ----------- -----------
Debt securities 13 - 25.0
------------------------------------------------ ---- ----------- -----------
Loans and advances to customers 14 2,269.8 2,353.6
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk 5 5.7 (0.9)
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 5 4.8 0.9
------------------------------------------------ ---- ----------- -----------
Investment property 17 5.3 4.8
------------------------------------------------ ---- ----------- -----------
Property, plant and equipment 18 4.5 6.5
------------------------------------------------ ---- ----------- -----------
Right-of-use assets 19 2.0 2.5
------------------------------------------------ ---- ----------- -----------
Intangible assets 20 6.2 7.4
------------------------------------------------ ---- ----------- -----------
Investments in group undertakings 21 4.1 4.1
------------------------------------------------ ---- ----------- -----------
Deferred tax assets 22 6.4 8.1
------------------------------------------------ ---- ----------- -----------
Other assets 23 108.0 103.8
------------------------------------------------ ---- ----------- -----------
Total assets 2,660.0 2,666.8
------------------------------------------------ ---- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------ ---- ----------- -----------
Liabilities
------------------------------------------------ ---- ----------- -----------
Due to banks 24 276.4 308.5
------------------------------------------------ ---- ----------- -----------
Deposits from customers 25 1,992.5 2,020.3
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk 5 4.7 (0.7)
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 5 6.1 0.6
------------------------------------------------ ---- ----------- -----------
Current tax liabilities 0.4 2.2
------------------------------------------------ ---- ----------- -----------
Lease liabilities 26 2.9 3.3
------------------------------------------------ ---- ----------- -----------
Other liabilities 27 61.8 42.0
------------------------------------------------ ---- ----------- -----------
Provisions for liabilities and charges 28 1.9 0.7
------------------------------------------------ ---- ----------- -----------
Subordinated liabilities 29 50.8 50.6
------------------------------------------------ ---- ----------- -----------
Total liabilities 2,397.5 2,427.5
------------------------------------------------ ---- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------ ---- ----------- -----------
Share capital 31 7.5 7.4
------------------------------------------------ ---- ----------- -----------
Share premium 82.2 81.2
------------------------------------------------ ---- ----------- -----------
Revaluation reserve 0.7 0.7
------------------------------------------------ ---- ----------- -----------
Retained earnings 172.1 150.0
------------------------------------------------ ---- ----------- -----------
Total equity 262.5 239.3
------------------------------------------------ ---- ----------- -----------
Total liabilities and equity 2,660.0 2,666.8
------------------------------------------------ ---- ----------- -----------
The Company has elected to take the exemption under section 408
of the Companies Act 2006 not to present the parent company income
statement. The profit for the parent company for the year of
GBP22.8 million is presented in the Company statement of changes in
equity.
Consolidated statement of changes in equity
Share Share Revaluation Retained
capital premium reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2019 7.4 81.2 1.1 147.3 237.0
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for 2019 - - - 31.1 31.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income, net of income tax
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revaluation reserve - - 0.2 - 0.2
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - (0.2) - (0.2)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - - - -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - - 31.1 31.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividends - - - (15.5) (15.5)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - 1.2 1.2
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - 0.3 0.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners - - - (14.0) (14.0)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2020 7.4 81.2 1.1 164.4 254.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for 2020 - - - 16.2 16.2
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income, net of income tax
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revaluation reserve - - (0.4) - (0.4)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - 0.2 - 0.2
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - (0.2) - (0.2)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - (0.2) 16.2 16.0
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Issue of ordinary shares 0.1 1.0 - - 1.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - (0.3) (0.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - (0.4) (0.4)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners 0.1 1.0 - (0.7) 0.4
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2020 7.5 82.2 0.9 179.9 270.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Company statement of changes in equity
Share Share Revaluation Retained
capital premium reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2019 7.4 81.2 0.6 128.1 217.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for 2019 - - - 35.9 35.9
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income, net of income tax
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revaluation reserve - - 0.1 - 0.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - 0.1 - 0.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - 0.1 35.9 36.0
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividends - - - (15.5) (15.5)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - 1.2 1.2
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - 0.3 0.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners - - - (14.0) (14.0)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2020 7.4 81.2 0.7 150.0 239.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for 2020 - - - 22.8 22.8
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Other comprehensive income, net of income tax
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - - - -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - - - -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - - 22.8 22.8
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Issue of ordinary shares 0.1 1.0 - - 1.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - (0.3) (0.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - (0.4) (0.4)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners 0.1 1.0 - (0.7) 0.4
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2020 7.5 82.2 0.7 172.1 262.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Consolidated statement of cash flows
2019
2020 Restated
Note GBPmillion GBPmillion
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 16.2 31.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Adjustments for:
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 9 3.9 7.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of property, plant and equipment 18 1.4 1.2
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of right-of-use assets 19 0.7 0.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Loss on disposal of intangible assets 0.5 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of intangible assets 20 2.0 1.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Impairment charge on loans and advances to customers 51.3 32.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Losses on modification of financial assets 6 3.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Share-based compensation (0.3) 1.2
------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation loss and impairment 1.1 1.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Lease interest charged 26 0.1 0.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of subordinated liabilities issue costs 29 0.2 0.2
------------------------------------------------------------------------------------- ---- ----------- -----------
Provisions for liabilities and charges 28 1.2 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating profits before changes in operating assets and liabilities 81.4 77.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Changes in operating assets and liabilities:
------------------------------------------------------------------------------------- ---- ----------- -----------
- loans and advances to customers 37.5 (453.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
- loans and advances to banks and balances at central banks (3.5) (9.2)
------------------------------------------------------------------------------------- ---- ----------- -----------
- other assets (1.9) 4.6
------------------------------------------------------------------------------------- ---- ----------- -----------
- deposits from customers (27.8) 172.6
------------------------------------------------------------------------------------- ---- ----------- -----------
- provisions for liabilities and charges (0.7) -
------------------------------------------------------------------------------------- ---- ----------- -----------
- other liabilities 15.4 1.3
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax paid (4.8) (7.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash outflow from operating activities 95.6 (214.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from investing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption of debt securities 130.0 320.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of debt securities (105.0) (195.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of investment property 17 - (1.6)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of property, plant and equipment 18 (0.8) (5.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of intangible assets 20 (1.1) (1.1)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow from investing activities 23.1 116.5
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from financing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment/(drawdown) of amounts due to banks (31.7) 45.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Issue of ordinary shares 1.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Dividends paid 11 - (15.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment of lease liabilities 26 (1.0) (1.1)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash (outflow)/inflow from financing activities (31.6) 28.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 87.1 (69.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 1 January 145.0 214.5
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 31 December 33 232.1 145.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Company statement of cash flows
2019
2020 Restated
Note GBPmillion GBPmillion
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 22.8 35.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Adjustments for:
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 9 3.0 5.3
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of property, plant and equipment 18 1.0 0.7
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of right-of-use assets 19 0.5 0.5
------------------------------------------------------------------------------------- ---- ----------- -----------
Loss on disposal of intangible assets 0.5 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of intangible assets 20 1.6 1.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Impairment charge on loans and advances to customers 41.0 37.5
------------------------------------------------------------------------------------- ---- ----------- -----------
Losses on modification of financial assets 6 3.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Share-based compensation 32 (0.3) 1.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation loss and impairment 1.0 1.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Lease interest charged 26 0.1 0.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of subordinated liabilities issue costs 29 0.2 0.2
------------------------------------------------------------------------------------- ---- ----------- -----------
Provisions for liabilities and charges 28 1.2 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating profits before changes in operating assets and liabilities 75.7 83.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Changes in operating assets and liabilities:
------------------------------------------------------------------------------------- ---- ----------- -----------
- loans and advances to customers 40.4 (410.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
- loans and advances to banks and balances at central banks (3.5) (9.2)
------------------------------------------------------------------------------------- ---- ----------- -----------
- other assets (4.2) (38.7)
------------------------------------------------------------------------------------- ---- ----------- -----------
- deposits from customers (27.8) 172.6
------------------------------------------------------------------------------------- ---- ----------- -----------
- liabilities and charges (0.7) -
------------------------------------------------------------------------------------- ---- ----------- -----------
- other liabilities 19.8 (6.6)
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax paid (3.5) (6.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow/(outflow) from operating activities 96.2 (215.3)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from investing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption of debt securities 130.0 320.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of debt securities (105.0) (195.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of investment property 17 - (1.6)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of property, plant and equipment 18 (0.3) (5.3)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of intangible assets 20 (0.9) (1.0)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow from investing activities 23.8 116.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from financing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment/(drawdown) of amounts due to banks (31.7) 45.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Issue of ordinary shares 1.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Dividends paid 11 - (15.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment of lease liabilities 26 (0.7) (0.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash (outflow)/inflow from financing activities (31.3) 28.7
------------------------------------------------------------------------------------- ---- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 88.7 (69.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 1 January 141.8 211.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 31 December 33 230.5 141.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Notes to the annual report and accounts
1. Accounting policies
The principal accounting policies applied in the preparation of
the consolidated Annual Report and Accounts are set out below.
These policies have been consistently applied to all the years
presented, unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a public limited company incorporated
in England and Wales in the United Kingdom (referred to as 'the
Company') and is limited by shares. The Company is registered in
England and Wales and has the registered number 00541132. The
registered address of the Company is One Arleston Way, Shirley,
Solihull, West Midlands, B90 4LH. The consolidated financial
statements of the Company as at and for the year ended 31 December
2020 comprise Secure Trust Bank PLC and its subsidiaries (together
referred to as 'the Group' and individually as 'subsidiaries'). The
Group is primarily involved in banking and financial services.
1.2. Basis of presentation
The figures shown for the year ended 31 December 2020 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2020 on which the auditors have given an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006 will be delivered to the
Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2019 are not statutory
accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, contained an unqualified audit report
and did not contain an adverse statement under section 498(2) or
498(3) of the Companies Act 2006. This announcement has been agreed
with the Company's auditors for release.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity or areas where assumptions
and estimates are significant to the consolidated financial
statements are disclosed in Note 2.
The Directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The Directors confirm they are satisfied that the
Company and the Group have adequate resources to continue in
business for the foreseeable future. For this reason, they continue
to adopt the 'going concern' basis for preparing accounts, as set
out in the going concern and viability section of the Strategic
Report starting on page 50 of the Annual Report and Accounts.
The consolidated financial statements were authorised for issue
by the Board of Directors on 24 March 2021.
1.3. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition, excluding directly attributable
costs, over the fair value of the Group's share of the identifiable
net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognised directly in the
income statement.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment. At the
year-end, impairment indicators, including COVID-19 were
considered. The parent concluded that no impairment had occurred.
The fair value of the underlying business of the Company's only
material investment was significantly higher than carrying value,
and therefore no impairment was required.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
The parent company's expected credit loss on amounts due from
related companies, calculated by applying probability of default
and loss given default to the amount outstanding at the year-end,
was not material at 31 December 2020.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Discontinued operations are a component of an entity that
has been disposed of, and represents a major line of business and
is part of a single co-ordinated disposal plan.
1.4. 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), from the next reporting period onwards 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 1.8.
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. Collection activity costs are not included in the
amortised cost of the assets, but are included in fee and
commission expense in the income statement, and are recognised as
incurred, in common with other businesses in the sector. 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 1.8.
1.5. Net fee and commission income
Fees and commission income and expenses that are an integral
part of the effective interest rate of a financial instrument are
included in the effective interest rate and presented in the income
statement as interest income or expense.
Fees and commission income that is not considered an integral
part of the effective interest rate of a financial instrument are
recognised under IFRS 15 when the Group satisfies performance
obligations by transferring promised services to customers.
No significant judgements are made in evaluating when a customer
obtains control of promised goods or services.
1.6. Financial assets and financial liabilities
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of
ownership. There have not been any instances where assets have only
been partially derecognised. The Group derecognises a financial
liability when its contractual obligations are discharged,
cancelled or expire, including in the event of a substantial
modification as described in Note 1.8.
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a
financial instrument is not active the Group establishes a fair
value by using an appropriate valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
Financial assets (with the exception of derivative financial
instruments)
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
-- 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,
with the exception of derivative financial instruments, 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 financial assets are therefore currently classified as
amortised cost, except for derivative financial instruments. Loans
are recognised when funds are advanced to customers and are carried
at amortised cost using the effective interest method.
During the year, the Group introduced two new products
supporting the Coronavirus Business Interruption Loan Scheme
('CBILS') and Coronavirus Large Business Interruption Loan Scheme
('CLBILS'). These loans have been recognised at amortised cost.
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
-- 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.
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.
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 (with the exception of derivative
financial instruments)
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.
IFRS interest rate benchmark reform
During 2020, amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and
IFRS 16 were published, which require transition away from the
London InterBank Offered Rate ('LIBOR') to the Sterling OverNight
Index Average ('SONIA'). The Group has no material financial assets
or liabilities which have LIBOR as a contractual term, and
therefore these amendments had no impact on the Group.
1.7. Foreign currencies
Transactions in foreign currencies are initially recorded at the
rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are retranslated into the Company's functional currency at the
rates prevailing on the balance sheet date. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of monetary items, are included in the income
statement for the period.
1.8. Impairment of financial assets and loan commitments
The Group recognises loss allowances for Expected Credit Losses
('ECL') 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
-- 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 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, or have other specific unlikeliness to pay
indicators. 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
-- Initiation of repossession proceedings
-- A material covenant breach that has remained unremedied for
more than 90 days
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
-- unpaid debtor balances that are dated at least six 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.
During 2020, Consumer Finance customers were offered payment
holidays to manage the impact of COVID-19. The majority of
customers have recommenced regular payments, however those
remaining on a payment holiday as at 31 December 2020 were
classified as stage 2, due to the potential of the payment holiday
suppressing the worsening of the credit risk.
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 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.
The Group has determined stage 3 to be an absorbing state. Once
a loan is in default it is not therefore expected to cure back to
stage 1 or 2.
Calculation of expected credit loss
ECL 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.
ECL 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.
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
portfolios 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.
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 the 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
to improve the likelihood of full recovery of exposure from the
debtors. Alternative recovery routes mitigating ECL would include
refinancing 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 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.
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. To ensure material non-linear
relationships between economic factors and credit losses are
reflected in the calculation of ECL, a deeper stress scenario is
used as one of these scenarios. The outputs from each scenario are
combined using the estimated likelihood of each scenario occurring
to derive a probability weighted expected credit loss. The four
scenarios adopted and probability weighting applied are approved by
the Assumptions Committee, and ultimately the Audit Committee, and
are set out in Note 2.
The Group has considered which economic variables impact credit
risk and credit losses. The key drivers of credit risk and credit
losses included in the macroeconomic scenarios for all portfolios,
with the exception of Real Estate Finance, have been identified as
annual unemployment rate growth and annual house price index
growth. In addition, for Asset Finance and Commercial Finance,
changes to the consumer price index are also included in the
macroeconomic scenarios. For the Real Estate Finance portfolio the
key drivers have been identified as unemployment rate growth, the
annual house price index growth and Bank of England Base Rates.
Base case assumptions applied for each of these variables have been
sourced from external consensus or Bank of England forecasts.
Further details of the assumptions applied to other scenarios are
presented in Note 2.
Presentation of loss allowance
Loss allowances for ECL are presented in the statement of
financial position as follows with the loss recognised in the
income statement:
-- 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.
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.
Motor voluntary termination provision
In addition to recognising allowances for ECLs, the Group holds
a provision for voluntary terminations ('VT') for all Motor Finance
financial assets. VT is a legal right provided to customers who
take out hire purchase agreements. The provision is calculated by
multiplying the probability of VT of an asset by the expected
shortfall on VT discounted back at the original effective interest
rate of the asset. VT allowances are not held against loans in
default (stage 3 loans).
The VT provision is presented in the statement of financial
position as a deduction from the gross carrying amount of Motor
Finance assets with the loss recognised in the income
statement.
Write off
Loans and advances to customers are written off partially or in
full when the Group has exhausted all viable recovery options. The
majority of write-offs arise from Debt Relief Orders, insolvencies,
IVAs, deceased customers where there is no estate and vulnerable
customers in certain circumstances. Amounts subsequently recovered
on assets previously written off are recognised in the impairment
charge in the income statement.
Modification of loans
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Substantial loan
modifications result in the derecognition of the existing loan, and
the recognition of a new loan at the new origination effective
interest rate based on the expected future cash flows at
origination. Determination of the origination PD for the new loan
is required, based on the PD as at the date of the modification,
which is used for the calculation of the impairment provision
against the new loan. Any deferred fees or deferred interest, and
any difference between the fair value of the derecognised loan and
the new loan, is written off to the income statement on recognition
of the new loan.
Where the modification is not considered to be substantial,
neither the origination effective interest rate nor the origination
PD for the modified loan changes. The net present value of changes
to the future contractual cash flows adjusts the carrying amount of
the original asset with the difference immediately being recognised
in profit or loss. The adjusted carrying amount is then amortised
over the remaining term of the (modified) loan using the original
effective interest rate.
1.9. Derivative financial instruments
The Group enters into derivatives to manage exposures to
fluctuations in interest rates. Derivatives are not used for
speculative purposes. Derivatives are carried at fair value with
movements in fair value recognised in the income statement.
Derivatives are valued by discounted cash flow models using yield
curves based on overnight indexed swap ('OIS') rates. All
derivatives are carried as assets where fair value is positive and
as liabilities when fair value is negative. Derivatives are not
offset in the financial statements unless the Group has both a
legally enforceable right and intention to offset.
The Group does not hold contracts containing embedded
derivatives.
Where cash collateral is received, to mitigate the risk inherent
in the amounts due to the Group, it is included as a liability
within the due to banks line within the statement of financial
position. Where cash collateral is given, to mitigate the risk
inherent in amounts due from the Group, it is included as an asset
in the loans and advances to banks line within the statement of
financial position.
Hedge accounting
Following transition to IFRS 9, the Group has elected to apply
IAS 39 for all of its hedge accounting requirements. When
transactions meet specified criteria the Group can apply two types
of hedge accounting:
-- Hedges of the fair value of recognised assets or liabilities
or firm commitments (fair value hedges)
-- Hedges of highly probable future cash flows attributable to a
recognised asset or liability (cash flow hedges)
The Group does not have hedges of net investments.
At inception of a hedge, the Group formally documents the
relationship between the hedged items and hedging instruments, as
well as its risk management objective and strategy for undertaking
various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values of the hedged
items (i.e. the fair value offset between the hedged item and
hedging instrument is within the 80% -125% range).
When the European Union adopted IAS 39 in 2004, it removed
certain hedge accounting requirements, commonly referred to as the
EU carve-out. The relaxed requirements under the carve-out allow
the Group to apply the 'bottom up' method when calculating
macro-hedge ineffectiveness. This option is not allowed under full
IFRS. The Group has applied the EU carve-out accordingly.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the
hedged item being adjusted to reflect changes in fair value
attributable to the hedged risk, thereby offsetting the effect of
the related movement in the fair value of the derivative. Changes
in the fair value of derivatives and hedged items that are
designated and qualify as fair value hedges are recorded in the
income statement.
In a one-to-one hedging relationship in which a single
derivative hedges a single hedged item, the carrying value of the
underlying asset or liability (the hedged item) is adjusted for the
hedged risk to offset the fair value movement of the related
derivative. In the case of a portfolio hedge, an adjustment is
included in the fair value adjustments for portfolio hedged risk
line in the statement of financial position to offset the fair
value movements in the related derivative. The Group currently only
designates portfolio hedges.
If the hedge no longer meets the criteria for hedge accounting,
expires or is terminated, the cumulative fair value adjustment to
the carrying amount of a hedged item is amortised to the income
statement over the period to maturity of the previously designated
hedge relationship and recorded as net interest income. If the
underlying item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
Cash flow hedge accounting
The effective portion of changes in the fair value of
derivatives that are designated and qualify as cash flow hedges are
recognised in other comprehensive income and presented in the cash
flow hedge reserve in equity. Any ineffective portion of changes in
the fair value of the derivative is recognised immediately in the
income statement. Amounts recognised in the cash flow hedge reserve
are subsequently reclassified to the income statement when the
underlying asset or liability being hedged impacts the income
statement, for example when interest payments are recognised, and
are recorded in the same income statement line in which the income
or expense associated with the related hedged item is reported.
When a hedging instrument expires or is sold, or when a hedge no
longer meets the criteria for hedge accounting, any cumulative gain
or loss existing in equity at that time remains in equity and is
recognised in the periods when the hedged item affects the income
statement. When a forecast transaction is no longer expected to
occur (for example, the recognised hedged item is disposed of), the
cumulative gain or loss previously recognised in other
comprehensive income is immediately reclassified to the income
statement.
The cash flow hedge reserve represents the cumulative amount of
gains and losses on hedging instruments deemed effective in cash
flow hedges. The cumulative deferred gain or loss on the hedging
instrument is recognised in profit or loss only when the hedged
transaction impacts the profit or loss, or is included directly in
the initial cost or other carrying amount of the hedged
non-financial items (basis adjustment). As at 31 December 2020, the
reserve balance was insignificant, and therefore is not disclosed
in the statement of financial position.
1.10. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment charge and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. An impairment charge is recognised
in the income statement if the carrying amount exceeds the
recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software.
Costs associated with developing or maintaining computer
software programmes are recognised as an expense as incurred unless
the technical feasibility of the development has been demonstrated,
and it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance, in which case they are
capitalised.
These costs are amortised on a straight-line basis over their
expected useful lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance
with IFRS 3 'Business Combinations', which requires the recognition
of the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. As part of this process, it was
necessary to recognise certain intangible assets which are
separately identifiable and which are not included on the
acquiree's balance sheet, which are amortised over their expected
useful lives, as set out in Note 20.
The Group applies IAS 36 to determine whether an intangible
asset is impaired.
1.11. Investment property
Investment property, which is property held to earn rentals and
for capital appreciation, is measured initially at cost, including
transaction costs. Subsequent to initial recognition, investment
property is measured at fair value. Gains or losses arising from
changes in the fair value of investment property are included in
the income statement in the period in which they arise.
An investment property is derecognised upon disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected from the disposal. Any gain or loss
arising on derecognition of the property (calculated as the
difference between the net disposal proceeds and the carrying
amount of the asset) is included in the income statement in the
period in which the property is derecognised.
1.12. Property, plant and equipment
Property is held at its revalued amount, being its fair value at
the date of valuation less any subsequent accumulated depreciation.
Revaluations are carried out annually at the reporting date, and
movements are recognised in Other Comprehensive Income, net of any
applicable deferred tax.
Plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Pre-installed
computer software licences are capitalised as part of the computer
hardware it is installed on. Depreciation is calculated using the
straight-line method to allocate their cost to their residual
values over their estimated useful lives, which are subject to
regular review:
Land not depreciated
---------------------- ---------------------------------------
Freehold buildings 50 years
---------------------- ---------------------------------------
Leasehold improvements shorter of life of lease or seven years
---------------------- ---------------------------------------
Computer equipment three to five years
---------------------- ---------------------------------------
Other equipment five to ten years
---------------------- ---------------------------------------
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the income
statement.
The Group applies IAS 36 to determine whether property, plant
and equipment is impaired.
1.13. Leases
(a) As a lessee
The Group assesses whether a contract is or contains a lease at
inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term
leases (defined as leases with a lease term of 12 months or less)
and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a
straight-line basis over the term of the lease unless another
systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value
of the future lease payments, discounted by using the rate implicit
in the lease. If this rate cannot be readily determined, the Group
uses its incremental borrowing rate. It is subsequently measured by
increasing the carrying amount to reflect interest on the lease
liability (using the effective interest method) and by reducing the
carrying amount to reflect the lease payments made, and is
presented as a separate line in the consolidated statement of
financial position.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the
commencement day, less any lease incentives received and any
initial direct costs. They are subsequently measured at cost less
accumulated depreciation and impairment charges and are depreciated
over the shorter of the lease term and useful life of the
underlying asset. The depreciation starts at the commencement date
of the lease. The right-of-use assets are presented as a separate
line in the consolidated statement of financial position. The Group
applies IAS 36 to determine whether a right-of-use asset is
impaired and accounts for any identified impairment loss as
described in the 'Property, Plant and Equipment' policy.
Rentals made under operating leases for less than 12 months in
duration, and operating leases on low value items, are recognised
in the income statement on a straight-line basis over the term of
the lease.
(b) As a lessor
The present value of the lease payments on assets leased to
customers under agreements which transfer substantially all the
risks and rewards of ownership, with or without ultimate legal
title, are recognised as a receivable. The difference between the
gross receivable and the present value of the receivable is
recognised as unearned finance income. Lease income is recognised
over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.
1.14. Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents, being highly liquid investments which are convertible
into cash with an insignificant risk of changes in value with a
maturity of three months or less at the date of acquisition,
including certain loans and advances to banks and short-term highly
liquid debt securities.
1.15. Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium
account, net of direct issuance costs. Costs associated with the
listing of shares are expensed immediately.
1.16. Employee benefits
(a) Post-retirement obligations
The Group contributes to defined contribution schemes for the
benefit of certain employees. The schemes are funded through
payments to insurance companies or trustee-administered funds at
the contribution rates agreed with individual employees. The Group
has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit
expense when they are due. There are no post-retirement benefits
other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised as personnel expenses in
the income statement, with a corresponding increase in equity.
Further details of the valuation methodology is set out in Note
32.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the income statement with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
1.17. Taxation
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits
arise.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
tax is determined using tax rates and laws that have been enacted
or substantially enacted by the statement of financial position
date and are expected to apply when the related deferred tax asset
is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax assets and
liabilities, and they relate to taxes levied by the same tax
authority on the same taxable entity, or on different tax entities,
when they intend to settle current tax liabilities and assets on a
net basis or their tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
1.18. Dividends
Final dividends on ordinary shares are recognised in equity in
the period in which they are approved by shareholders. Interim
dividends on ordinary shares are recognised in equity in the period
in which they are paid.
2. Critical accounting judgements and key sources of estimation
uncertainty
2.1. Judgements
No critical judgements have been identified.
2.2. Key sources of estimation uncertainty
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. The potential impact of
COVID-19 has been considered in determining reasonably possible
changes in key sources of estimation uncertainty which may occur in
the next 12 months.
2.2.1. Impairment charge on loans and advances to customers
As discussed in Note 1.8 ECLs are calculated by multiplying
three main components: the PD, EAD and LGD. These variables are
derived from internally developed statistical models and historical
data, adjusted to reflect forward-looking information. The
determination of both the PD and LGD require estimation which is
discussed further below.
2.2.2. Probability of default ('PD')
As set out in Note 1.8 Exogenous, Maturity, Vintage ('EMV')
modelling is used in the production of forward-looking lifetime PDs
in the calculation of ECLs. 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.
With the exception of the Motor Finance and Retail Finance
portfolios, sensitivity to reasonably possible changes in PD is not
considered to result in material changes in the ECL allowance. A
10% change in the PD for Motor Finance would immediately impact the
ECL allowance by GBP2.2 million (2019: GBP2.0 million) and a 20%
change in the PD for Retail Finance would immediately impact the
ECL allowance by GBP5.0 million (2019: a 10% change would
immediately impact the ECL allowance by GBP2.3 million). During the
year, there was a 3% change in PD for Motor Finance, and a 20%
change in PD for Retail Finance.
The ECL allowance held for the Business Finance, Consumer
Mortgages and Other portfolios remains low. Reasonably possible
changes in the PD for these portfolios are not considered to result
in a material change in the ECL allowance.
2.2.3. Loss given default ('LGD')
The Group's policy for the determination of LGD is outlined in
Note 1.8.
With the exception of the Motor Finance portfolio, the
sensitivity of the ECL allowance to reasonably possible changes in
the LGD is not considered material. For the Motor Finance portfolio
a 20% change in the LGD is considered reasonably possible due to
potential difficulties in the vehicle collection process and
reduced asset values brought about by COVID-19. A 20% change in the
vehicle recovery rate assumption element of the LGD for Motor
Finance would impact the ECL allowance by GBP1.9 million (2019:
GBP2.6 million). During the year, there was a 16% change in the
vehicle recovery rate assumption.
2.2.4. 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 by developing a number of
potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided in
Note 1.8.
The macroeconomic scenarios used at 31 December 2020 were
internally developed, having regard to externally published
scenarios. The scenarios and weightings applied are summarised
below:
UK Unemployment Rate - Annual Average UK HPI - movement from Q420
------------------------------------------- ------------------------------------
2021 2022 2023 5 Yr Average 2021 2022 2023 5 Yr Average
Scenario Weightings % % % % % % % %
--------- ---------- ------- ------ ------ ------------------ ------ ------ ------ ------------
Low 20% 5.9 5.9 5.2 5.1 (2.2) (2.9) 1.9 3.7
--------- ---------- ------- ------ ------ ------------------ ------ ------ ------ ------------
Medium 45% 7.5 8.2 7.0 6.6 (4.1) (7.4) (2.8) (0.3)
--------- ---------- ------- ------ ------ ------------------ ------ ------ ------ ------------
Hard 25% 7.7 8.4 7.2 6.7 (4.4) (7.0) (2.2) (0.0)
--------- ---------- ------- ------ ------ ------------------ ------ ------ ------ ------------
Severe 10% 8.4 10.1 8.3 7.5 (16.4) (24.4) (20.4) (16.3)
--------- ---------- ------- ------ ------ ------------------ ------ ------ ------ ------------
Scenario Derivation 2019
-------------- --------------------------------------------------------------------------------------------- ----
Benign case Assumes macroeconomic variables will move with a more positive trajectory than the base case. 10%
-------------- ---------------------------------------------------------------------------------------------- ----
Derived from external consensus forecasts and used in the Group's strategic planning and
budgeting
Base case processes. 65%
-------------- ---------------------------------------------------------------------------------------------- ----
Management's assessment, based on historic data, of an adverse scenario that could occur once
Stressed case every seven to eight years. 20%
-------------- ---------------------------------------------------------------------------------------------- ----
Based on the scenario used by the PRA for the H1 2019 ICAAP. This can be found on the Bank
Deeper stress of England's website: www.bankofengland.co.uk 5%
-------------- ---------------------------------------------------------------------------------------------- ----
Weightings applied to the macroeconomic scenarios were confirmed
at the January 2021 Assumptions Committee and subsequently at the
Audit Committee.
The sensitivity of the ECL allowance to reasonably possible
changes in macroeconomic scenario weighting is presented below:
Increase in hard case Increase in severe stress case (2019: deeper
(2019: stressed case) weighting by 10% (2019: 5%) stress
and reduction in case) weighting by 5% and reduction in medium
low case (2019: base case) case (2019: base case)
-------------------------------------------------- -------------------------------------------------
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ------------------------ ------------------------ ----------------------- ------------------------
Motor Finance 0.4 0.1 0.2 0.4
--------------- ------------------------ ------------------------ ----------------------- ------------------------
Retail Finance 0.5 0.2 0.2 0.7
--------------- ------------------------ ------------------------ ----------------------- ------------------------
The sensitivity is immaterial for other lending products.
The Group recognised an ECL charge of GBP51.3 million (2019:
GBP32.6 million). Were each of the macroeconomic scenarios to be
applied 100%, rather than using the weightings set out above, the
impact on ECL for 2020 would be as follows:
Motor Finance Retail Finance Business Finance Total Group
2020 2020 2020 2020
Scenario GBPmillion GBPmillion GBPmillion GBPmillion
-------------- ------------- -------------- ---------------- -----------
Low case (3.0) (3.8) (2.1) (8.9)
-------------- ------------- -------------- ---------------- -----------
Medium case 0.1 0.1 0.4 0.6
-------------- ------------- -------------- ---------------- -----------
Hard case 1.0 1.2 - 2.2
-------------- ------------- -------------- ---------------- -----------
Severe stress 3.2 4.1 8.4 15.7
-------------- ------------- -------------- ---------------- -----------
For 2019, if the Base case or Deeper Stress case was applied at
100%, the impact on ECL would be a decrease of GBP2.3 million and
an increase of GBP18.6 million respectively.
2.2.5. Debt Management forecast collections on POCI debt
A +/-8.0% change in Debt Management forecast collections, which
the Directors consider to be a reasonable possible change, would
increase or decrease loans and advances to customers by GBP6.5
million (2019: 5%, GBP4.0 million) respectively, resulting in a
corresponding GBP6.5 million (2019: 5%, GBP4.0 million) increase or
decrease in profit or loss. During 2020, the Group experienced an
8% change in forecast cashflows.
3. Operating segments
The Group is organised into seven operating segments, which
consist of the different products available, disclosed below:
Business Finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate
2) Asset Finance: loans to small and medium sized enterprises to
acquire commercial assets
3) Commercial Finance: invoice discounting, invoice factoring
and Coronavirus Business Interruption Loan Scheme finance, for
existing Commercial Finance customers.
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
6) Debt Management: debt collection
7) Residential mortgages for the self-employed, contract
workers, those with complex income and those with a recently
restored credit history, sold via select mortgage
intermediaries
Other
The 'Other' segment 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 in the financial statements.
Other includes principally OneBill (the Group's consumer bill
management service, which has been closed to new customers since
2009 and is now in run-off) and RentSmart (principally the funding
and operation of finance leases through a disclosed agency
agreement with RentSmart Limited).
Currently, the Asset Finance, Debt Management and Consumer
Mortgages segments all fall below the quantitative threshold for
separate disclosure, but the Directors consider that they represent
sufficiently distinct types of business to merit separate
disclosure.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Net impairment
charge on loans
Interest income Fee and commission Revenue from and advances to Loans and advances
and similar income income external customers customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
31 December 2020
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Real Estate Finance 54.0 - 54.0 5.2 1,051.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Asset Finance 1.5 - 1.5 0.9 10.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Commercial Finance 7.3 7.9 15.2 1.1 230.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Business Finance 62.8 7.9 70.7 7.2 1,293.0
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Retail Finance 68.5 2.2 70.7 14.5 658.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Motor Finance 44.6 0.9 45.5 20.7 243.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Debt Management 14.2 0.6 14.8 8.9 81.8
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Mortgages 3.3 0.1 3.4 (0.1) 77.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Finance 130.6 3.8 134.4 44.0 1,061.8
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Other (0.9) 4.3 3.4 0.1 4.1
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
192.5 16.0 208.5 51.3 2,358.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Net impairment
charge on loans
Interest income Fee and commission Revenue from and advances to Loans and advances
and similar income income external customers customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
31 December 2019
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Real Estate Finance 47.9 1.0 48.9 0.1 962.2
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Asset Finance 3.2 - 3.2 0.7 27.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Commercial Finance 7.5 9.3 16.8 0.1 251.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Business Finance 58.6 10.3 68.9 0.9 1,241.6
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Retail Finance 71.1 3.6 74.7 19.8 688.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Motor Finance 48.7 1.0 49.7 13.8 323.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Debt Management 7.3 1.1 8.4 (2.1) 82.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Mortgages 3.6 0.1 3.7 0.1 105.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Finance 130.7 5.8 136.5 31.6 1,200.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Other 2.1 4.8 6.9 0.1 7.6
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
191.4 20.9 212.3 32.6 2,450.1
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Funding costs and operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis. Accordingly, profit
by operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the
United Kingdom and geographical information is therefore not
presented.
4. Operating income
All items below arise from financial instruments measured at
amortised cost unless otherwise stated.
4.1 Net interest income
2020 2019
GBPmillion GBPmillion
---------------------------------------------------- ----------- -----------
Loans and advances to customers 193.8 189.6
---------------------------------------------------- ----------- -----------
Cash and balances at central banks 0.4 1.0
---------------------------------------------------- ----------- -----------
Debt securities 0.1 0.7
---------------------------------------------------- ----------- -----------
194.3 191.3
---------------------------------------------------- ----------- -----------
Expense on financial instruments hedging assets (1.8) 0.1
---------------------------------------------------- ----------- -----------
Interest income and similar income 192.5 191.4
---------------------------------------------------- ----------- -----------
Deposits from customers (39.4) (40.4)
---------------------------------------------------- ----------- -----------
Due to banks (0.7) (2.1)
---------------------------------------------------- ----------- -----------
Subordinated liabilities (3.4) (3.4)
---------------------------------------------------- ----------- -----------
(43.5) (45.9)
---------------------------------------------------- ----------- -----------
Income on financial instruments hedging liabilities 1.9 (0.1)
---------------------------------------------------- ----------- -----------
Interest expense and similar charges (41.6) (46.0)
---------------------------------------------------- ----------- -----------
Net interest income 150.9 145.4
---------------------------------------------------- ----------- -----------
4.2 Net fee and commission income
2020 2019
GBPmillion GBPmillion
------------------------------ ----------- -----------
Fee and disbursement income 14.1 17.5
------------------------------ ----------- -----------
Commission income 1.3 1.9
------------------------------ ----------- -----------
Other income 0.6 1.5
------------------------------ ----------- -----------
Fee and commission income 16.0 20.9
------------------------------ ----------- -----------
Other expenses (0.8) (0.8)
------------------------------ ----------- -----------
Fee and commission expense (0.8) (0.8)
------------------------------ ----------- -----------
Net fee and commission income 15.2 20.1
------------------------------ ----------- -----------
Fees and commissions income consists principally of the
following:
-- weekly and monthly fees from the OneBill product
-- associated insurance commissions and commissions earned on
debt collection activities in DMS
-- discounting, service and arrangement fees in Commercial
Finance
-- account management and administration fees from retailers in
Retail Finance
Fee and commission expenses consist primarily of recovery fees
payable recognised as incurred in respect of Motor Finance and
collection activities in respect of Debt Management.
5. Derivatives and hedge accounting
Group and Company
The Group holds interest rate swaps for risk mitigation
purposes. For further information on the Group's risk management
strategy for market risk refer to the Principal risks and
uncertainties section of the Group's Strategic Report on page 38 of
the Annual Report and Accounts. Interest rate swaps are designated
on initial recognition as measured at fair value through profit and
loss. The tables below provide an analysis of the notional amount
and fair value of derivatives held:
Changes in fair value used for
calculating hedge ineffectiveness in
Notional Assets Liabilities the period
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- --------------------------------------
31 December 2020
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest rate swaps designated as fair
value hedges 1,093.5 4.8 (5.7) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest rate swaps designated as cash
flow hedges 4.7 - - -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest accruals on interest rate
swaps - - (0.4) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
1,098.2 4.8 (6.1) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Notional Assets Liabilities
GBPmillion GBPmillion GBPmillion
---------------------------------------------------- ----------- ----------- -----------
31 December 2020
---------------------------------------------------- ----------- ----------- -----------
Interest rate swaps designated as fair value hedges
---------------------------------------------------- ----------- ----------- -----------
In not more than one year 228.4 0.4 (0.6)
---------------------------------------------------- ----------- ----------- -----------
In more than one year 865.1 4.4 (5.5)
---------------------------------------------------- ----------- ----------- -----------
1,093.5 4.8 (6.1)
---------------------------------------------------- ----------- ----------- -----------
Interest rate swaps designated as cash flow hedges
---------------------------------------------------- ----------- ----------- -----------
In more than one year 4.7 - -
---------------------------------------------------- ----------- ----------- -----------
1,098.2 4.8 (6.1)
---------------------------------------------------- ----------- ----------- -----------
Changes in fair value used for
calculating hedge ineffectiveness in
Notional Assets Liabilities the period
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- --------------------------------------
31 December 2019
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest rate swaps designated as fair
value hedges 987.7 0.8 (0.6) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest rate swap designated as cash
flow hedge - - - -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest accruals on interest rate
swaps - 0.1 - -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
987.7 0.9 (0.6) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Notional Assets Liabilities
GBPmillion GBPmillion GBPmillion
---------------------------------------------------- ----------- ----------- -----------
31 December 2019
---------------------------------------------------- ----------- ----------- -----------
Interest rate swaps designated as fair value hedges
---------------------------------------------------- ----------- ----------- -----------
In not more than one year 214.5 - (0.1)
---------------------------------------------------- ----------- ----------- -----------
In more than one year 773.2 0.9 (0.5)
---------------------------------------------------- ----------- ----------- -----------
987.7 0.9 (0.6)
---------------------------------------------------- ----------- ----------- -----------
At December 2020, the Group also held foreign exchange swaps
with a notional value of GBP13.0 million and a fair value of
GBPnil, having a duration of not more than one year.
The notional amount represents the amount on which payment flows
are derived and does not represent amounts at risk.
In order to manage interest rate risk arising from fixed rate
financial instruments the Group reviews interest rate swaps
requirements on a monthly basis. The exposure from the portfolio
frequently changes due to the origination of new instruments,
contractual repayments and early prepayments made in each period.
As a result, the Group adopts a dynamic hedging strategy (sometimes
referred to as 'macro' or 'portfolio' hedge) to hedge its exposure
profile by closing and entering into new swap agreements on a
monthly basis. The Group establishes the hedging ratio by matching
the notional of the derivatives with the principal of the portfolio
being hedged.
The following table sets out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated amount
of fair value adjustments on
Carrying amount of hedged item the hedged item
------------------------------ ------------------------------
Change in fair
value of
hedged item for
ineffectiveness
assessment in
Assets Liabilities Assets Liabilities Balance Sheet the period
GBPmillion GBPmillion GBPmillion GBPmillion line item GBPmillion
--------------- -------------- -------------- -------------- -------------- -------------- ---------------
31 December
2020
--------------- -------------- -------------- -------------- -------------- -------------- ---------------
Interest rate fair
value hedges
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Fixed rate Real Loans and
Estate Finance advances to
loans 300.0 - 4.3 - customers -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Loans and
Fixed rate Motor advances to
Finance loans 97.2 - 0.7 - customers -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Loans and
Fixed rate Retail advances to
Finance loans 116.2 - 0.5 - customers -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Loans and
Fixed rate Consumer advances to
Mortgage loans 9.9 - 0.2 - customers -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Fixed rate customer Deposits from
deposits - (570.2) - (4.7) customers -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Interest rate fair
value hedges 523.3 (570.2) 5.7 (4.7) -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Interest rate cash Cash and
flow hedge - Bank balances at
of England deposits 4.7 - - - Central banks -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Total 528.0 (570.2) 5.7 (4.7) -
-------------------- -------------- -------------- -------------- -------------- -------------- ---------------
Accumulated amount
Carrying amount of
of fair value adjustments
hedged item on the hedged item
------------------------ -------------------------
Change in fair value
of
hedged item for
ineffectiveness
assessment in the
Assets Liabilities Assets Liabilities Balance Sheet period
GBPmillion GBPmillion GBPmillion GBPmillion line item GBPmillion
-------------------- ----------- ----------- ------------ ----------- --------------- --------------------
31 December 2019
-------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Interest rate fair value
hedges
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Loans and
Fixed rate Real Estate advances
Finance loans 296.8 - (0.6) - to customers -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Loans and
Fixed rate Motor Finance advances
loans 100.1 - (0.2) - to customers -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Loans and
Fixed rate Retail Finance advances
loans 66.0 - (0.1) - to customers -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Loans and
Fixed rate Consumer advances
Mortgage loans 9.2 - - - to customers -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Fixed rate customer Deposits
deposits - (515.6) - 0.7 from customers -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
Total 472.1 (515.6) (0.9) 0.7 -
------------------------- ----------- ----------- ------------ ----------- --------------- --------------------
The accumulated amount of fair value hedge adjustments remaining
in the statement of financial position for hedged items that have
ceased to be adjusted for hedging gains and losses is GBPnil (2019:
GBPnil).
Fair value gains and losses arising from derivatives and hedge
accounting recognised in the Group income statement was GBPnil
(2019: GBPnil).
Although the Group uses derivatives exclusively to hedge
interest rate risk exposures, income statement volatility can still
arise due to hedge accounting ineffectiveness or because hedge
accounting is not achievable. Where such volatility arises it will
trend back to zero over time.
All derivatives held by the Group have been highly effective in
the period resulting in minimal hedge accounting ineffectiveness
recognised in the income statement. Future ineffectiveness may
arise as a result of:
-- differences between the expected and actual volume of
prepayments, as the Group hedges to the expected repayment date
taking into account expected prepayments based on past
experience
-- hedging derivatives with a non-zero fair value at the date of
initial designation
-- differences in the timing of cash flows for the hedged item
and the hedging instrument
The following table shows the impact of financial assets and
financial liabilities relating to transactions where:
-- there is an enforceable master netting agreement in place but
the offset criteria are not otherwise satisfied, and
-- financial collateral is paid and received
Gross amount reported on Financial Net amounts
balance sheet Master netting arrangements collateral after offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- --------------------------- --------------------------- ----------- -----------------
31 December 2020
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial assets 4.8 (4.8) - -
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial
liabilities (6.1) 4.8 1.3 -
---------------------------- --------------------------- --------------------------- ----------- -----------------
Gross amount reported on Financial Net amounts
balance sheet Master netting arrangements collateral after offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- --------------------------- --------------------------- ----------- -----------------
31 December 2019
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial assets 0.9 (0.6) (0.3) -
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial
liabilities (0.6) 0.6 - -
---------------------------- --------------------------- --------------------------- ----------- -----------------
Master netting arrangements do not meet the criteria for
offsetting in the statement of financial position. This is because
the arrangement creates an agreement for a right of set-off of
recognised amounts which is enforceable only following an event of
default, insolvency or bankruptcy of the Group or counterparties.
Furthermore, the Group and its counterparties do not intend to
settle on a net basis or realise the assets and settle the
liabilities simultaneously.
Financial collateral consists of cash settled, typically daily
or weekly, to mitigate the credit risk on the fair value of
derivatives.
6. Losses on modification of financial assets
Although not included as an option within customer contracts,
following regulatory guidance the Group offered payment holidays to
its Consumer Finance and Asset Finance customers during the year.
This is considered under IFRS 9 as a modification to contractual
cash flows, which requires the carrying value of these loans to be
adjusted to the net present value of future cash flows. The impact
of this at 31 December 2020 was a GBP2.5 million reduction in the
net present value of Motor Finance loans and a further GBP0.6
million reduction in the net present value of Retail Finance loans
(2019: GBPnil).
Of the overall GBP3.1 million loan modification loss, GBP1.1
million relates to financial assets with a loss allowance based on
lifetime ECL.
Financial assets (with loss allowance based on lifetime ECL) modified during the period GBPmillion
---------------------------------------------------------------------------------------- ----------
Gross loans and advances before modification 527.2
----------------------------------------------------------------------------------------- ----------
Less: allowances for impairments on loans and advances (55.6)
----------------------------------------------------------------------------------------- ----------
471.6
---------------------------------------------------------------------------------------- ----------
Loan modification loss (0.9)
----------------------------------------------------------------------------------------- ----------
Net amortised cost after modification 470.7
----------------------------------------------------------------------------------------- ----------
7. Operating expenses
2020 2019
GBPmillion GBPmillion
-------------------------------------------------------- ----------- -----------
Staff costs, including those of Directors:
-------------------------------------------------------- ----------- -----------
Wages and salaries 44.9 43.1
-------------------------------------------------------- ----------- -----------
Social security costs 5.0 5.1
-------------------------------------------------------- ----------- -----------
Pension costs 1.9 1.7
-------------------------------------------------------- ----------- -----------
Share-based payment transactions - 1.2
-------------------------------------------------------- ----------- -----------
Depreciation of property, plant and equipment (Note 18) 1.4 1.2
-------------------------------------------------------- ----------- -----------
Depreciation of lease right-of-use assets (Note 19) 0.7 0.9
-------------------------------------------------------- ----------- -----------
Amortisation of intangible assets (Note 20) 2.0 1.9
-------------------------------------------------------- ----------- -----------
Operating lease rentals 0.5 0.8
-------------------------------------------------------- ----------- -----------
Other administrative expenses 35.2 38.3
-------------------------------------------------------- ----------- -----------
Total operating expenses 91.6 94.2
-------------------------------------------------------- ----------- -----------
As described in Note 3, operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis.
Remuneration of the auditor and its associates, excluding VAT,
was as follows:
2020 2019
GBP'000 GBP'000
------------------------------------------------------------------------------------- -------- --------
Fees payable to the Company's auditor for the audit of the Company's annual accounts 443 325
------------------------------------------------------------------------------------- -------- --------
Fees payable to the Company's auditor for other services:
------------------------------------------------------------------------------------- -------- --------
The audit of the Company's subsidiaries, pursuant to legislation 40 30
------------------------------------------------------------------------------------- -------- --------
Other assurance services 58 57
------------------------------------------------------------------------------------- -------- --------
All other non-audit services - 12
------------------------------------------------------------------------------------- -------- --------
541 424
------------------------------------------------------------------------------------- -------- --------
Other assurance services related to the half-year review and
profit certification.
In 2019, all other non-audit services related to the Financial
Services Compensation Scheme reporting health check.
8. Average number of employees
2020 2019
Number Number
----------- ------- -------
Directors 8 8
----------- ------- -------
Management 254 157
----------- ------- -------
Other 759 814
----------- ------- -------
1,021 979
----------- ------- -------
The basis of preparation of the average employee numbers has
changed during the year, hence the analysis of employees by grade
is not directly comparable with the prior year.
9. Income tax expense
2020 2019
GBPmillion GBPmillion
--------------------------------------------------------------- ----------- -----------
Current taxation
--------------------------------------------------------------- ----------- -----------
Corporation tax charge - current year 3.0 7.0
--------------------------------------------------------------- ----------- -----------
Corporation tax charge - adjustments in respect of prior years (0.5) (0.1)
--------------------------------------------------------------- ----------- -----------
2.5 6.9
--------------------------------------------------------------- ----------- -----------
Deferred taxation
--------------------------------------------------------------- ----------- -----------
Deferred tax charge - current year 0.9 0.7
--------------------------------------------------------------- ----------- -----------
Deferred tax charge - adjustments in respect of prior years 0.5 -
--------------------------------------------------------------- ----------- -----------
1.4 0.7
--------------------------------------------------------------- ----------- -----------
Income tax expense 3.9 7.6
--------------------------------------------------------------- ----------- -----------
Tax reconciliation
--------------------------------------------------------------- ----------- -----------
Profit before tax 20.1 38.7
--------------------------------------------------------------- ----------- -----------
Tax at 19.00% (2019: 19.00%) 3.8 7.4
--------------------------------------------------------------- ----------- -----------
Banking surcharge - 0.1
--------------------------------------------------------------- ----------- -----------
Rate change on deferred tax assets (0.1) 0.2
--------------------------------------------------------------- ----------- -----------
Prior period adjustments - (0.1)
--------------------------------------------------------------- ----------- -----------
Other 0.2 -
--------------------------------------------------------------- ----------- -----------
Income tax expense for the year 3.9 7.6
--------------------------------------------------------------- ----------- -----------
The tax charge for 2020 has been calculated at the current
effective corporation tax rate, which is 19%.
The 2019 accounts had assumed a reduction in the main rate of UK
corporation tax from 19% to 17% (effective 1 April 2020). However,
on 17 March 2020, the government legislated to retain the rate at
19%. The Group is also subject to an 8% surcharge on the profits of
banking companies in excess of GBP25 million. The government is
proposing to increase the main corporation tax rate to 25% from 1
April 2023. This was not substantively enacted at the balance sheet
date and therefore this change has not been reflected in these
financial statements. The government intends to review the bank
surcharge in Autumn 2021, to ensure the UK's banking tax regime
remains competitive. Deferred tax is based on the combined effect
of corporation tax and banking surcharge as enacted at the balance
sheet date, so we expect changes legislated in Finance Bill 2021-22
to partially offset the impact on corporation tax rate changes. The
impact of these changes is not expected to be material.
10. Earnings per ordinary share
10.1 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:
2020 2019
----------------------------------------------------------------- ---------- ----------
Profit attributable to equity holders of the parent (GBPmillion) 16.2 31.1
----------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares (number) 18,615,480 18,476,280
----------------------------------------------------------------- ---------- ----------
Earnings per share (pence) 87.0 168.3
----------------------------------------------------------------- ---------- ----------
10.2 Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
2020 2019
--------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares 18,615,480 18,476,280
--------------------------------------------------------- ---------- ----------
Number of dilutive shares in issue at the year-end 399,713 216,943
--------------------------------------------------------- ---------- ----------
Fully diluted weighted average number of ordinary shares 19,015,193 18,693,223
--------------------------------------------------------- ---------- ----------
Dilutive shares being based on:
--------------------------------------------------------- ---------- ----------
Number of options outstanding at the year-end 789,854 598,065
--------------------------------------------------------- ---------- ----------
Weighted average exercise price (pence) 477 528
--------------------------------------------------------- ---------- ----------
Average share price during the period (pence) 1,238 1,390
--------------------------------------------------------- ---------- ----------
Diluted earnings per share (pence) 85.2 166.4
--------------------------------------------------------- ---------- ----------
11. Dividends
2020 2019
GBP'000 GBP'000
----------------------------------------------------------------- -------- --------
2018 final dividend - 64 pence per share (paid May 2019) - 11.8
----------------------------------------------------------------- -------- --------
2019 interim dividend - 20 pence per share (paid September 2019) - 3.7
----------------------------------------------------------------- -------- --------
- 15.5
----------------------------------------------------------------- -------- --------
The Directors recommend the payment of a final dividend of 44
pence per share. The final dividend, if approved by members at the
Annual General Meeting, will be paid on 21 May 2021 to shareholders
on the register at the close of business on 23 April 2021.
No dividends were paid during 2020, in line with the guidance
given by the Prudential Regulation Authority.
12. Loans and advances to banks
Moody's long-term ratings are as follows:
Group Group Company Company
2020 2019 2020 2019
Restated Restated
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- ----------- -----------
A1 12.2 3.6 12.2 3.6
-------------------------------------------- ----------- ----------- ----------- -----------
A1*/A2 44.7 39.7 43.1 36.5
-------------------------------------------- ----------- ----------- ----------- -----------
A3 1.3 - 1.3 -
-------------------------------------------- ----------- ----------- ----------- -----------
Arbuthnot Latham & Co., Limited - No rating 5.1 5.1 5.1 5.1
-------------------------------------------- ----------- ----------- ----------- -----------
63.3 48.4 61.7 45.2
-------------------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or
impaired.
Loans and advances to banks includes GBP12.7 million (2019:
GBP9.2 million) in relation to collateral held under credit support
and similar agreements, with a corresponding payable included
within other liabilities. See Note 33 for a reconciliation to cash
and cash equivalents.
The comparatives as at December 2019 have been restated in order
to correctly reflect the credit rating for 2019.
13. Debt securities
Group and Company
Debt securities of GBPnil (2019: GBP25.0 million) represented UK
Treasury Bills. The Group's intention was to hold the asset to
collect its contractual cash flows of principal and interest and,
therefore, they were stated in the statement of financial position
at amortised cost. The decrease over the year is due to Bills
maturing.
All of the debt securities had a rating agency designation at 31
December 2019, based on Moody's long-term ratings of Aa2. None of
the debt securities were either past due or impaired.
14. Loans and advances to customers
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 2,441.6 2,510.7 2,349.7 2,422.3
---------------------------------------------------------------- ----------- ----------- ----------- -----------
Less: allowances for impairment on loans and advances (Note 16) (82.7) (60.6) (79.9) (68.7)
---------------------------------------------------------------- ----------- ----------- ----------- -----------
2,358.9 2,450.1 2,269.8 2,353.6
---------------------------------------------------------------- ----------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 39.
Group and Company
At 31 December 2020 loans and advances to customers of GBP498.4
million (2019: GBP433.4 million) were pre-positioned under the Bank
of England's liquidity support operations and Term Funding Scheme,
and were available for use as collateral within the schemes.
The following loans are secured upon real estate:
2020 2020 2019 2019
Loan balance Loan-to-value Loan balance Loan-to-value
GBPmillion % GBPmillion %
-------------------- ------------- -------------- ------------- --------------
Real Estate Finance 1,051.9 56% 962.2 59%
-------------------- ------------- -------------- ------------- --------------
Consumer Mortgages 77.7 51% 105.9 56%
-------------------- ------------- -------------- ------------- --------------
1,129.6 1,068.1
-------------------- ------------- -------------- ------------- --------------
Under its credit policy, the Real Estate Finance business lends
to a maximum loan-to-value of 70% for investment loans and 60% for
residential development loans and up to 65% for pre-let commercial
development loans (based on gross development value), and the
Consumer Mortgages business lent up to a maximum of 90%.
All property valuations at loan inception, and the majority of
development stage valuations, are performed by independent
Chartered Surveyors, who perform their work in accordance with the
Royal Institution of Chartered Surveyors Valuation - Professional
Standards.
Group
GBP6.6 million of cash collateral has been received as at 31
December 2020 in respect of certain loans and advances (2019:
GBP3.7 million).
15. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance lease receivables:
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- No later than one year 143.9 176.0 141.5 171.6
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five years 239.0 338.6 237.6 335.7
----------------------------------------------------------------- ----------- ----------- ----------- -----------
382.9 514.6 379.1 507.3
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Unearned future finance income on finance leases (103.3) (144.6) (102.6) (142.9)
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 279.6 370.0 276.5 364.4
----------------------------------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance leases may be analysed as follows:
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- No later than one year 93.2 110.2 91.3 107.0
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than one year and no later than five years 186.4 259.8 185.2 257.4
----------------------------------------------------------------- ----------- ----------- ----------- -----------
279.6 370.0 276.5 364.4
----------------------------------------------------------------- ----------- ----------- ----------- -----------
16. Allowances for impairment of loans and advances
Group
Not credit-impaired Credit-impaired
------------------------------- ----------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
31 December 2020
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Business
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Real Estate
Finance 1.4 2.7 1.3 5.4 1,057.3 0.5%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Asset Finance 0.6 0.1 1.3 2.0 12.4 16.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Commercial
Finance 0.7 0.5 0.1 1.3 232.0 0.6%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Retail Finance 13.2 7.9 3.5 24.6 683.0 3.6%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Motor Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Voluntary
termination
provision 4.8 - - 4.8
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other impairment 6.2 16.0 15.2 37.4
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
11.0 16.0 15.2 42.2 286.1 14.8%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Debt Management - - 7.0 7.0 88.8 7.9%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Mortgages 0.2 - - 0.2 77.9 0.3%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other - - - - 4.1 0.0%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
27.1 27.2 28.4 82.7 2,441.6 3.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Not credit-impaired Credit-impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
31 December 2019
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Business Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Real Estate
Finance 0.5 - 0.1 0.6 962.8 0.1%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Asset Finance - 0.1 1.7 1.8 29.5 6.1%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Commercial Finance 0.3 - 0.6 0.9 252.6 0.4%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Retail Finance 10.0 11.1 4.4 25.5 714.4 3.6%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Motor Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Voluntary
termination
provision 6.8 - - 6.8
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other impairment 3.7 12.9 10.2 26.8
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
10.5 12.9 10.2 33.6 357.3 9.4%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Debt Management - - (2.1) (2.1) 80.3 (2.6%)
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Mortgages 0.3 - - 0.3 106.2 0.3%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other - - - - 7.6 0.0%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
21.6 24.1 14.9 60.6 2,510.7 2.4%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
The impairment charge disclosed in the income statement can be
analysed as follows:
2020 2019
GBPmillion GBPmillion
-------------------------------------------------------- ----------- -----------
Incurred loss individual provision: impairment charge 50.3 28.1
-------------------------------------------------------- ----------- -----------
Charge in respect of off balance sheet loan commitments 0.7 -
-------------------------------------------------------- ----------- -----------
Loans written off, net of amounts utilised 0.6 5.3
-------------------------------------------------------- ----------- -----------
Recoveries of loans written off (0.3) (0.8)
-------------------------------------------------------- ----------- -----------
51.3 32.6
-------------------------------------------------------- ----------- -----------
Total provisions above include expert credit judgements as
follows:
2020 2019
GBPmillion GBPmillion
-------------------------------------------------------------------------------------------- ----------- -----------
Specific overlays held against credit-impaired secured assets held within the Business
Finance
portfolio (3.4) 0.5
-------------------------------------------------------------------------------------------- ----------- -----------
Planned enhancements to LGD elements of the IFRS 9 models - (0.8)
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of LGD elements of the IFRS 9 models 0.6 -
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of PD elements of the IFRS 9 models 2.8 (0.8)
-------------------------------------------------------------------------------------------- ----------- -----------
POCI adjustment (see below) 6.7 (2.1)
-------------------------------------------------------------------------------------------- ----------- -----------
Other 1.5 (0.1)
-------------------------------------------------------------------------------------------- ----------- -----------
Expert credit judgements over the IFRS 9 model results 8.2 (3.3)
-------------------------------------------------------------------------------------------- ----------- -----------
The specific overlays have been estimated on an individual basis
by assessing the recoverability and condition of the secured asset,
along with any other recoveries that may be made.
POCI adjustment
The Group's debt management business purchases credit-impaired
loans from the Company and other unrelated third parties. Under
IFRS 9, these are classified as Purchased and Originated
Credit-Impaired ('POCI') loans. As a practical expedient, income on
POCI loans is initially recognised by applying the original
credit-adjusted EIR to the expected future cash flows arising from
the POCI assets. The Group's accounting policy is to recognise POCI
income by applying the original credit-adjusted EIR to the
amortised cost of the assets. Expected changes in cash flows since
the date of purchase are recognised as an impairment gain or loss
in the income statement. At December 2020, reductions in credit
quality resulted in a GBP6.7 million impairment provision (2019:
improvements in credit quality resulted in a GBP2.1 million
impairment credit).
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP3.9 million (2019:
GBP7.2 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.
Reconciliations of the opening to closing allowance for
impairment of loans and advances are presented below:
Not credit-impaired Credit-impaired
--------------------------------------- ------------------------
Stage 1:
Subject to Stage 2: Stage 3:
12-month ECL Subject to lifetime ECL Subject to lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ------------- ------------------------ ------------------------ -----------
At 1 January 2020 21.6 24.1 14.9 60.6
-------------------------------------- ------------- ------------------------ ------------------------ -----------
(Decrease)/increase due to change in
credit risk
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 2 (5.4) 33.8 - 28.4
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 3 - (20.7) 28.3 7.6
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 1 3.1 (6.6) - (3.5)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Passage of time (10.9) (10.5) 3.7 (17.7)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
New loans originated 11.9 - - 11.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Matured and derecognised loans (2.5) (2.9) - (5.4)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to credit risk parameters 11.4 10.1 7.4 28.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Other adjustments 0.1 - - 0.1
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Charge to income statement 7.7 3.2 39.4 50.3
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Allowance utilised in respect of
write-offs (2.2) - (26.0) (28.2)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
31 December 2020 27.1 27.3 28.3 82.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Not credit-impaired Credit-impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to
12-month ECL lifetime ECL lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ------------- ------------- --------------- -----------
At 1 January 2019 20.3 23.9 22.9 67.1
------------------------------------------------- ------------- ------------- --------------- -----------
(Decrease)/increase due to change in credit risk
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 2 (5.9) 36.9 - 31.0
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 3 - (23.5) 30.3 6.8
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 1 1.5 (3.5) - (2.0)
------------------------------------------------- ------------- ------------- --------------- -----------
Passage of time (10.1) (6.8) (6.3) (23.2)
------------------------------------------------- ------------- ------------- --------------- -----------
New loans originated 17.2 - - 17.2
------------------------------------------------- ------------- ------------- --------------- -----------
Matured and derecognised loans (1.9) (4.7) (0.1) (6.7)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to model methodology 0.7 1.2 (0.2) 1.7
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to credit risk parameters (1.1) 0.6 (0.1) (0.6)
------------------------------------------------- ------------- ------------- --------------- -----------
Other adjustments 3.9 - - 3.9
------------------------------------------------- ------------- ------------- --------------- -----------
Charge to income statement 4.3 0.2 23.6 28.1
------------------------------------------------- ------------- ------------- --------------- -----------
Allowance utilised in respect of write-offs (3.0) - (31.6) (34.6)
------------------------------------------------- ------------- ------------- --------------- -----------
31 December 2019 21.6 24.1 14.9 60.6
------------------------------------------------- ------------- ------------- --------------- -----------
The table above has been prepared based on monthly movements in
the ECL.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represented movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macroeconomic scenarios
applied to the models.
Other adjustments represents the movement in the Motor Finance
voluntary termination provision.
Stage 1 write-offs arise on Motor Finance accounts where
borrowers have exercised their right to voluntarily terminate their
agreements.
A breakdown of the gross receivable by internal credit risk
rating is shown below:
Stage 1 Stage 2 Stage 3 Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------ ----------- ----------- ----------- -----------
31 December 2020
------------------ ----------- ----------- ----------- -----------
Business Finance:
------------------ ----------- ----------- ----------- -----------
Strong 521.8 26.9 10.4 559.1
-------------------- ----------- ----------- ----------- -----------
Good 156.2 138.3 - 294.5
-------------------- ----------- ----------- ----------- -----------
Satisfactory 391.0 14.4 0.1 405.5
-------------------- ----------- ----------- ----------- -----------
Weak 4.5 22.8 15.3 42.6
-------------------- ----------- ----------- ----------- -----------
1,073.5 202.4 25.8 1,301.7
------------------ ----------- ----------- ----------- -----------
Consumer Finance:
------------------- ----- ----- ------ --------
Good 288.2 76.8 5.5 370.5
--------------------- ----- ----- ------ --------
Satisfactory 302.0 55.4 7.4 364.8
--------------------- ----- ----- ------ --------
Weak 172.6 47.7 13.5 233.8
--------------------- ----- ----- ------ --------
Consumer mortgages 77.9 - - 77.9
--------------------- ----- ----- ------ --------
Debt management - - 88.8 88.8
--------------------- ----- ----- ------ --------
840.7 179.9 115.2 1,135.8
------------------- ----- ----- ------ --------
Stage 1 Stage 2 Stage 3 Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------ ----------- ----------- ----------- -----------
31 December 2019
------------------ ----------- ----------- ----------- -----------
Business Finance:
------------------ ----------- ----------- ----------- -----------
Strong 272.1 4.1 - 276.2
-------------------- ----------- ----------- ----------- -----------
Good 770.4 4.7 10.1 785.2
-------------------- ----------- ----------- ----------- -----------
Satisfactory 126.3 23.5 0.3 150.1
-------------------- ----------- ----------- ----------- -----------
Weak 10.2 15.1 8.1 33.4
-------------------- ----------- ----------- ----------- -----------
1,179.0 47.4 18.5 1,244.9
------------------ ----------- ----------- ----------- -----------
Consumer Finance:
------------------- ----- ----- ----- -------
Good 317.1 58.3 3.1 378.5
--------------------- ----- ----- ----- -------
Satisfactory 317.7 54.8 5.9 378.4
--------------------- ----- ----- ----- -------
Weak 229.8 71.3 13.3 314.4
--------------------- ----- ----- ----- -------
Consumer mortgages 105.6 0.3 0.3 106.2
--------------------- ----- ----- ----- -------
Debt management - - 80.7 80.7
--------------------- ----- ----- ----- -------
970.2 184.7 103.3 1,258.2
------------------- ----- ----- ----- -------
Internal credit risk rating is based on the most recent credit
risk score of a customer.
Company
Not credit-impaired Credit-impaired
------------------------------- ----------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
31 December 2020
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Business
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Real Estate
Finance 1.4 2.7 1.3 5.4 1,057.3 0.5%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Asset Finance 0.6 0.1 1.3 2.0 12.4 16.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Commercial
Finance 0.7 0.5 0.1 1.3 232.0 0.6%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Retail Finance 13.8 8.2 3.6 25.6 683.0 3.7%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Motor Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Voluntary
termination
provision 4.8 - - 4.8
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other impairment 6.6 17.4 16.6 40.6
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
11.4 17.4 16.6 45.4 286.6 15.8%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Mortgages 0.2 - - 0.2 77.9 0.3%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other - - - - 0.5 0.0%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
28.1 28.9 22.9 79.9 2,349.7 3.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Not credit-impaired Credit-impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
31 December 2019
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Business Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Real Estate
Finance 0.5 - 0.1 0.6 962.8 0.1%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Asset Finance - 0.1 1.7 1.8 29.5 6.1%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Commercial Finance 0.3 - 0.6 0.9 251.6 0.4%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Retail Finance 10.5 11.6 4.5 26.6 714.4 3.7%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Motor Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Voluntary
termination
provision 6.8 - - 6.8
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other impairment 4.4 15.2 12.0 31.6
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
11.2 15.2 12.0 38.4 357.3 10.7%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Mortgages 0.3 - - 0.3 106.2 0.3%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other - - 0.1 0.1 0.5 20.0%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
22.8 26.9 19.0 68.7 2,422.3 2.8%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Total provisions above include expert credit judgements as
follows:
2020 2019
GBPmillion GBPmillion
-------------------------------------------------------------------------------------------- ----------- -----------
Specific overlays held against credit-impaired secured assets held within the Business
Finance
portfolio (3.4) 0.5
-------------------------------------------------------------------------------------------- ----------- -----------
Planned enhancements to LGD elements of the IFRS 9 models - (0.8)
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of LGD elements of the IFRS 9 models 0.6 -
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of PD elements of the IFRS 9 models 2.8 (0.8)
-------------------------------------------------------------------------------------------- ----------- -----------
Other 1.2 (0.1)
-------------------------------------------------------------------------------------------- ----------- -----------
Expert credit judgements over the IFRS 9 model results 1.2 (1.2)
-------------------------------------------------------------------------------------------- ----------- -----------
The specific overlays have been estimated on an individual basis
by assessing the recoverability and condition of the secured asset,
along with any other recoveries that may be made.
Reconciliations of the opening to closing allowance for
impairment of loans and advances are presented below:
Not credit-impaired Credit-impaired
--------------------------------------- ------------------------
Stage 1:
Subject to Stage 2: Stage 3:
12-month ECL Subject to lifetime ECL Subject to lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ------------- ------------------------ ------------------------ -----------
At 1 January 2020 22.8 26.9 19.0 68.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
(Decrease)/increase due to change in
credit risk
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 2 (5.7) 36.2 - 30.5
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 3 - (22.5) 30.5 8.0
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 1 3.2 (6.5) - (3.3)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Passage of time (11.3) (12.0) 1.2 (22.1)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
New loans originated 12.6 - - 12.6
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Mature and derecognised loans (2.7) (3.2) - (5.9)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to model methodology - - - -
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to credit risk parameters 11.4 10.1 (1.7) 19.8
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Other adjustments 0.1 - - 0.1
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Charge to income statement 7.6 2.1 30.0 39.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Allowance utilised in respect of
write-offs (2.2) - (26.3) (28.5)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
31 December 2020 28.2 29.0 22.7 79.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Not credit-impaired Credit-impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to
12-month ECL lifetime ECL lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ------------- ------------- --------------- -----------
At 1 January 2019 20.7 24.3 23.6 68.6
------------------------------------------------- ------------- ------------- --------------- -----------
(Decrease)/increase due to change in credit risk
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 2 (6.2) 39.1 - 32.9
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 3 - (24.6) 31.7 7.1
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 1 1.6 (3.6) - (2.0)
------------------------------------------------- ------------- ------------- --------------- -----------
Passage of time (10.3) (5.2) (4.0) (19.5)
------------------------------------------------- ------------- ------------- --------------- -----------
New loans originated 18.4 - - 18.4
------------------------------------------------- ------------- ------------- --------------- -----------
Matured and derecognised loans (1.9) (4.9) (0.1) (6.9)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to model methodology 0.7 1.2 (0.2) 1.7
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to credit risk parameters (1.1) 0.6 (0.1) (0.6)
------------------------------------------------- ------------- ------------- --------------- -----------
Other adjustments 3.9 - - 3.9
------------------------------------------------- ------------- ------------- --------------- -----------
Charge to income statement 5.1 2.6 27.3 35.0
------------------------------------------------- ------------- ------------- --------------- -----------
Allowance utilised in respect of write-offs (3.0) - (31.9) (34.9)
------------------------------------------------- ------------- ------------- --------------- -----------
31 December 2019 22.8 26.9 19.0 68.7
------------------------------------------------- ------------- ------------- --------------- -----------
The table above has been prepared based on monthly movements in
the ECL. Stage 1 write-offs arise on Motor accounts that have
exercised their right to voluntarily terminate their
agreements.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represents movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macroeconomic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
Stage 1 write-offs arise on Motor accounts that have exercised
their right to voluntarily terminate their agreements.
17. Investment property
Group Company
GBPmillion GBPmillion
-------------------------------------------- ----------- -----------
Fair value
-------------------------------------------- ----------- -----------
At 1 January 2019 - -
-------------------------------------------- ----------- -----------
Additions 1.6 1.6
-------------------------------------------- ----------- -----------
Transfer from property, plant and equipment 3.2 3.2
-------------------------------------------- ----------- -----------
At 31 December 2019 4.8 4.8
-------------------------------------------- ----------- -----------
Transfer from property, plant and equipment - 1.1
-------------------------------------------- ----------- -----------
Revaluation (0.5) (0.6)
-------------------------------------------- ----------- -----------
At 31 December 2020 4.3 5.3
-------------------------------------------- ----------- -----------
During the year, the Company transferred 25 and 26 Neptune
Court, Vanguard Way, Cardiff CF24 5PJ from property, plant and
equipment to investment properties at its fair value as it was
being utilised by a subsidiary of the Company. The Directors
assessed the fair value as being the same as the valuation at
December 2020.
During 2019, the Group acquired Yorke House, Arleston Way,
Shirley, Solihull, B90 4LH, half of which was let to third party
occupiers. Accordingly, 50% of this property, excluding land, was
classified as an investment property at its fair value. The
Directors assessed the fair value as being 50% of the original
purchase price excluding land and VAT and stamp duty.
Also during 2019, the Group vacated its portion of Secure Trust
House, Boston Drive, Bourne End, SL8 5YS, and let the space to one
of its existing third party occupiers. Accordingly, this property
was transferred from property, plant and equipment to investment
properties at its fair value. The Directors assessed the fair value
as being the same as the valuation at December 2018 performed by
Knight Frank LLP.
Investment properties are stated at fair value at December 2020.
The Directors have assessed the value of the freehold property at
the year-end through comparison to current rental yields on similar
properties in the same area.
18. Property, plant and equipment
Group
Freehold land Computer
and buildings and other equipment Total
GBPmillion Leasehold property GBPmillion GBPmillion
-------------------------------- -------------- ------------------ -------------------- -----------
Cost or valuation
-------------------------------- -------------- ------------------ -------------------- -----------
At 1 January 2019 8.2 0.1 10.7 19.0
-------------------------------- -------------- ------------------ -------------------- -----------
Additions 3.5 - 2.0 5.5
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - (4.5) (4.5)
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation (1.1) - - (1.1)
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer from intangible assets - - 0.2 0.2
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer to investment property (3.2) - - (3.2)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 7.4 0.1 8.4 15.9
-------------------------------- -------------- ------------------ -------------------- -----------
Additions - - 0.8 0.8
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation (0.8) - - (0.8)
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer to intangible assets - - (0.1) (0.1)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2020 6.6 0.1 9.1 15.8
-------------------------------- -------------- ------------------ -------------------- -----------
Accumulated depreciation
-------------------------------- -------------- ------------------ -------------------- -----------
At 1 January 2019 - - (8.0) (8.0)
-------------------------------- -------------- ------------------ -------------------- -----------
Depreciation charge (0.2) - (1.0) (1.2)
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - 4.5 4.5
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation 0.2 - - 0.2
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer from intangible assets - - (0.1) (0.1)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 - - (4.6) (4.6)
-------------------------------- -------------- ------------------ -------------------- -----------
Depreciation charge (0.1) - (1.3) (1.4)
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation 0.1 - - 0.1
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2020 - - (5.9) (5.9)
-------------------------------- -------------- ------------------ -------------------- -----------
Net book amount
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 7.4 0.1 3.8 11.3
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2020 6.6 0.1 3.2 9.9
-------------------------------- -------------- ------------------ -------------------- -----------
Company
Freehold Computer
property and other equipment Total
GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- -------------------- -----------
Cost or valuation
---------------------------------- ----------- -------------------- -----------
At 1 January 2019 4.6 8.6 13.2
---------------------------------- ----------- -------------------- -----------
Additions 3.5 1.8 5.3
---------------------------------- ----------- -------------------- -----------
Disposals - (4.5) (4.5)
---------------------------------- ----------- -------------------- -----------
Revaluation (1.4) - (1.4)
---------------------------------- ----------- -------------------- -----------
Transfer from intangible assets - 0.2 0.2
---------------------------------- ----------- -------------------- -----------
Transfer to investment properties (3.2) - (3.2)
---------------------------------- ----------- -------------------- -----------
At 31 December 2019 3.5 6.1 9.6
---------------------------------- ----------- -------------------- -----------
Additions - 0.3 0.3
---------------------------------- ----------- -------------------- -----------
Transfer to investment property (1.1) - (1.1)
---------------------------------- ----------- -------------------- -----------
Revaluation (0.3) - (0.3)
---------------------------------- ----------- -------------------- -----------
At 31 December 2020 2.1 6.4 8.5
---------------------------------- ----------- -------------------- -----------
Accumulated depreciation
---------------------------------- ----------- -------------------- -----------
At 1 January 2019 (0.3) (6.9) (7.2)
---------------------------------- ----------- -------------------- -----------
Depreciation charge (0.1) (0.6) (0.7)
---------------------------------- ----------- -------------------- -----------
Disposals - 4.5 4.5
---------------------------------- ----------- -------------------- -----------
Transfer from intangible assets - (0.1) (0.1)
---------------------------------- ----------- -------------------- -----------
Revaluation 0.4 - 0.4
---------------------------------- ----------- -------------------- -----------
At 31 December 2019 - (3.1) (3.1)
---------------------------------- ----------- -------------------- -----------
Depreciation charge (0.1) (0.9) (1.0)
---------------------------------- ----------- -------------------- -----------
Revaluation 0.1 - 0.1
---------------------------------- ----------- -------------------- -----------
At 31 December 2020 - (4.0) (4.0)
---------------------------------- ----------- -------------------- -----------
Net book amount
---------------------------------- ----------- -------------------- -----------
At 31 December 2019 3.5 3.0 6.5
---------------------------------- ----------- -------------------- -----------
At 31 December 2020 2.1 2.4 4.5
---------------------------------- ----------- -------------------- -----------
The Company's freehold properties comprise:
-- the Registered Office of the Company, which is fully utilised
for the Company's and Group's own purposes
-- Yorke House, Arleston Way, Shirley B90 4LH, 50% of which is
used for the Company's and Group's own purposes
The Group's freehold properties comprise the above properties,
and:
-- 25 and 26 Neptune Court, Vanguard Way, Cardiff CF24 5PJ,
which is fully utilised for the Group's own purposes
Freehold properties are stated at fair value as at December
2020. The Directors have assessed the value of the freehold
property at the year-end through comparison to current rental
yields on similar properties in the same area, which resulted in
the following revaluation movements:
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------------------- ------------ ----------- ----------- -----------
Revaluation (deficit)/surpluses recognised in other comprehensive
income (0.4) 0.2 - 0.1
----------------------------------------------------------------- ------------ ----------- ----------- -----------
Revaluation deficit recognised in the income statement (0.3) (1.1) (0.2) -
----------------------------------------------------------------- ------------ ----------- ----------- -----------
The revaluation deficit in 2019 arose from stamp duty and
irrecoverable VAT incurred on the acquisition of a freehold
property during the year.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings and which is
not depreciated is GBP1.3 million (2019: GBP1.5 million).
The historical cost of freehold property included at fair value
is as follows:
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- -----------
Cost 5.4 6.8 1.6 3.0
--------------- ----------- ----------- ----------- -----------
Depreciation (1.6) (1.6) - (0.1)
--------------- ----------- ----------- ----------- -----------
Net book value 3.8 5.2 1.6 2.9
--------------- ----------- ----------- ----------- -----------
The Company historical cost at December 2019 has been restated,
in order to correctly reflect the valuation.
19. Leasing right-of-use assets
Group
Leasehold property Leased motor vehicles Total
GBPmillion GBPmillion GBPmillion
-------------------------------- ------------------ --------------------- -----------
Cost
-------------------------------- ------------------ --------------------- -----------
On transition at 1 January 2019 4.2 0.3 4.5
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 4.2 0.3 4.5
-------------------------------- ------------------ --------------------- -----------
Additions 0.2 0.1 0.3
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 4.4 0.4 4.8
-------------------------------- ------------------ --------------------- -----------
Accumulated depreciation
-------------------------------- ------------------ --------------------- -----------
Depreciation charge (0.7) (0.2) (0.9)
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 (0.7) (0.2) (0.9)
-------------------------------- ------------------ --------------------- -----------
Depreciation charge (0.6) (0.1) (0.7)
-------------------------------- ------------------ --------------------- -----------
Impairment (0.3) - (0.3)
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 (1.6) (0.3) (1.9)
-------------------------------- ------------------ --------------------- -----------
Net book amount
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 3.5 0.1 3.6
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 2.8 0.1 2.9
-------------------------------- ------------------ --------------------- -----------
Company
Leasehold property Leased motor vehicles Total
GBPmillion GBPmillion GBPmillion
-------------------------------- ------------------ --------------------- -----------
Cost
-------------------------------- ------------------ --------------------- -----------
On transition at 1 January 2019 2.9 0.2 3.1
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 2.9 0.2 3.1
-------------------------------- ------------------ --------------------- -----------
Additions 0.2 - 0.2
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 3.1 0.2 3.3
-------------------------------- ------------------ --------------------- -----------
Accumulated depreciation
-------------------------------- ------------------ --------------------- -----------
Depreciation charge (0.5) (0.1) (0.6)
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 (0.5) (0.1) (0.6)
-------------------------------- ------------------ --------------------- -----------
Depreciation charge (0.4) (0.1) (0.5)
-------------------------------- ------------------ --------------------- -----------
Impairment (0.2) - (0.2)
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 (1.1) (0.2) (1.3)
-------------------------------- ------------------ --------------------- -----------
Net book amount
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 2.4 0.1 2.5
-------------------------------- ------------------ --------------------- -----------
At 31 December 2020 2.0 - 2.0
-------------------------------- ------------------ --------------------- -----------
20. Intangible assets
Group
Other
Goodwill Computer software intangible assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------------- ------------------ -----------
Cost or valuation
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 1 January 2019 1.0 17.0 2.2 20.2
--------------------------------------------- ----------- ----------------- ------------------ -----------
Additions - 1.1 - 1.1
--------------------------------------------- ----------- ----------------- ------------------ -----------
Transfers to property, plant and equipment - (0.2) - (0.2)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - (1.2) - (1.2)
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 1.0 16.7 2.2 19.9
--------------------------------------------- ----------- ----------------- ------------------ -----------
Additions - 1.1 - 1.1
--------------------------------------------- ----------- ----------------- ------------------ -----------
Transfers from property, plant and equipment - 0.1 - 0.1
--------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - (1.3) - (1.3)
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2020 1.0 16.6 2.2 19.8
--------------------------------------------- ----------- ----------------- ------------------ -----------
Accumulated amortisation
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 1 January 2019 - (8.9) (1.4) (10.3)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Amortisation charge - (1.7) (0.2) (1.9)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Transfers to property, plant and equipment - 0.1 - 0.1
--------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - 1.2 - 1.2
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 - (9.3) (1.6) (10.9)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Amortisation charge - (1.8) (0.2) (2.0)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - 0.8 - 0.8
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2020 - (10.3) (1.8) (12.1)
--------------------------------------------- ----------- ----------------- ------------------ -----------
Net book amount
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 1.0 7.4 0.6 9.0
--------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2020 1.0 6.3 0.4 7.7
--------------------------------------------- ----------- ----------------- ------------------ -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2020 2019
GBPmillion GBPmillion
--------------- ----------- -----------
Music business 0.3 0.3
--------------- ----------- -----------
V12 0.7 0.7
--------------- ----------- -----------
Total 1.0 1.0
--------------- ----------- -----------
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three-year
period, and a discount rate of 8% (2019: 8%). Cash flow projections
during the forecast period are based on the expected rate of new
business. A zero growth based scenario is also considered. The
Directors believe that any reasonably possible change in the key
assumptions on which recoverable amount is based would not cause
the aggregate carrying amount to exceed the aggregate recoverable
amount of the cash generating unit.
Other intangible assets were recognised as part of the V12
Finance Group acquisition. These were recorded at fair value, and
are being amortised on a straight-line basis as follows:
Years
--------------------- -----
Distribution channel 10
--------------------- -----
Company
Goodwill Computer software Total
GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------------- -----------
Cost or valuation
------------------------------------------- ----------- ----------------- -----------
At 1 January 2019 0.3 12.9 13.2
------------------------------------------- ----------- ----------------- -----------
Additions - 1.0 1.0
------------------------------------------- ----------- ----------------- -----------
Transfers to property, plant and equipment - (0.2) (0.2)
------------------------------------------- ----------- ----------------- -----------
Disposals - (1.3) (1.3)
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 0.3 12.4 12.7
------------------------------------------- ----------- ----------------- -----------
Additions - 0.9 0.9
------------------------------------------- ----------- ----------------- -----------
Disposals - (1.3) (1.3)
------------------------------------------- ----------- ----------------- -----------
At 31 December 2020 0.3 12.0 12.3
------------------------------------------- ----------- ----------------- -----------
Accumulated amortisation
------------------------------------------- ----------- ----------------- -----------
At 1 January 2019 - (5.1) (5.1)
------------------------------------------- ----------- ----------------- -----------
Amortisation charge - (1.6) (1.6)
------------------------------------------- ----------- ----------------- -----------
Transfer to property, plant and equipment - 0.1 0.1
------------------------------------------- ----------- ----------------- -----------
Disposals - 1.3 1.3
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 - (5.3) (5.3)
------------------------------------------- ----------- ----------------- -----------
Amortisation charge - (1.6) (1.6)
------------------------------------------- ----------- ----------------- -----------
Disposals - 0.8 0.8
------------------------------------------- ----------- ----------------- -----------
At 31 December 2020 - (6.1) (6.1)
------------------------------------------- ----------- ----------------- -----------
Net book amount
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 0.3 7.1 7.4
------------------------------------------- ----------- ----------------- -----------
At 31 December 2020 0.3 5.9 6.2
------------------------------------------- ----------- ----------------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the
Group.
21. Investments in group undertakings
Company
GBPmillion
----------------------------------------------------------------- ----------
Cost and net book value
----------------------------------------------------------------- ----------
At 1 January 2019 3.9
----------------------------------------------------------------- ----------
Equity contributions to subsidiaries in respect of share options 0.2
----------------------------------------------------------------- ----------
At 31 December 2019 and 31 December 2020 4.1
----------------------------------------------------------------- ----------
Shares in subsidiary undertakings of Secure Trust Bank PLC are
stated at cost less any provision for impairment. All subsidiary
undertakings are unlisted and none are banking institutions. All
are 100% owned by the Company. The subsidiary undertakings were all
incorporated in the UK and wholly owned via ordinary shares. All
subsidiary undertakings are included in the consolidated financial
statements and have an accounting reference date of 31
December.
Details are as follows:
Principal activity
--------------------------------------------------- -----------------------------------------
Owned directly
--------------------------------------------------- -----------------------------------------
Debt Managers (Services) Limited Debt management
--------------------------------------------------- -----------------------------------------
Secure Homes Services Limited Property rental
--------------------------------------------------- -----------------------------------------
STB Leasing Limited Leasing
--------------------------------------------------- -----------------------------------------
V12 Finance Group Limited Holding company
--------------------------------------------------- -----------------------------------------
Owned indirectly via intermediate holding companies
--------------------------------------------------- -----------------------------------------
V12 Personal Finance Limited Dormant
--------------------------------------------------- -----------------------------------------
V12 Retail Finance Limited Sourcing and servicing of unsecured loans
--------------------------------------------------- -----------------------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West Midlands
B90 4LH.
Secure Homes Services Limited, STB Leasing Limited and V12
Personal Finance Limited are exempt from the requirements of the
Companies Act 2006 relating to the audit of individual accounts by
virtue of s479A, and the Company has given guarantees accordingly
under s479C in respect of the years ended 31 December 2020 and 31
December 2019.
22. Deferred taxation
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------- ----------- ----------- ----------- -----------
Other short-term timing differences 5.9 7.5 6.4 8.1
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets 5.9 7.5 6.4 8.1
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------- ----------- ----------- ----------- -----------
Prior period closing 7.5 7.9 8.1 7.8
------------------------------------- ----------- ----------- ----------- -----------
Tax on IFRS 16 transition adjustment - 0.2 - 0.2
------------------------------------- ----------- ----------- ----------- -----------
At 1 January 7.5 8.1 8.1 8.0
------------------------------------- ----------- ----------- ----------- -----------
Income statement (1.4) (0.7) (1.3) (0.2)
------------------------------------- ----------- ----------- ----------- -----------
Other comprehensive income (0.2) 0.1 (0.4) 0.3
------------------------------------- ----------- ----------- ----------- -----------
At 31 December 5.9 7.5 6.4 8.1
------------------------------------- ----------- ----------- ----------- -----------
23. Other assets
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
Other receivables 3.3 5.2 2.3 4.5
-------------------------------------- ----------- ----------- ----------- -----------
Amounts due from related companies - - 90.9 88.5
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development prepayment 8.2 6.4 8.2 6.4
-------------------------------------- ----------- ----------- ----------- -----------
Other prepayments and accrued income 7.7 5.7 6.6 4.4
-------------------------------------- ----------- ----------- ----------- -----------
19.2 17.3 108.0 103.8
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development costs of GBP8.2 million (2019: GBP6.4
million) that do not meet the intangible asset recognition criteria
are included within other prepayments and accrued income. The costs
principally relate to the Group's Motor Transformation Programme,
and once the software comes into use will be expensed to the income
statement over the useful economic life of the software.
24. Due to banks
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------ ----------- ----------- ----------- -----------
Amounts due under the Bank of England's liquidity support
operations and Term Funding Scheme 273.0 308.0 273.0 308.0
------------------------------------------------------------------ ----------- ----------- ----------- -----------
Amounts due to other credit institutions 3.3 - 3.3 -
------------------------------------------------------------------ ----------- ----------- ----------- -----------
Accrued interest 0.1 0.5 0.1 0.5
------------------------------------------------------------------ ----------- ----------- ----------- -----------
276.4 308.5 276.4 308.5
------------------------------------------------------------------ ----------- ----------- ----------- -----------
25. Deposits from customers
Group and Company
2020 2019
GBPmillion GBPmillion
---------------------------------- ----------- -----------
Instant access accounts 81.4 22.6
---------------------------------- ----------- -----------
Term deposits and notice accounts 1,781.5 1,959.3
---------------------------------- ----------- -----------
Individual Savings Accounts 129.6 38.4
---------------------------------- ----------- -----------
1,992.5 2,020.3
---------------------------------- ----------- -----------
26. Lease liabilities
Group
2020 2019
GBPmillion GBPmillion
--------------------------------------------------- ----------- -----------
At 1 January 4.5 -
--------------------------------------------------- ----------- -----------
On transition - 5.5
--------------------------------------------------- ----------- -----------
New leases 0.3 -
--------------------------------------------------- ----------- -----------
Payments (1.0) (1.1)
--------------------------------------------------- ----------- -----------
Interest expense 0.1 0.1
--------------------------------------------------- ----------- -----------
At 31 December 3.9 4.5
--------------------------------------------------- ----------- -----------
Lease liabilities - Gross
--------------------------------------------------- ----------- -----------
- No later than one year 0.9 1.0
--------------------------------------------------- ----------- -----------
- Later than one year and no later than five years 3.0 3.0
--------------------------------------------------- ----------- -----------
- More than five years 0.3 0.9
--------------------------------------------------- ----------- -----------
4.2 4.9
--------------------------------------------------- ----------- -----------
Less: Future finance expense (0.3) (0.4)
--------------------------------------------------- ----------- -----------
3.9 4.5
--------------------------------------------------- ----------- -----------
Lease liabilities - Net
--------------------------------------------------- ----------- -----------
- No later than one year 0.9 0.9
--------------------------------------------------- ----------- -----------
- Later than one year and no later than five years 2.7 2.8
--------------------------------------------------- ----------- -----------
- More than five years 0.3 0.8
--------------------------------------------------- ----------- -----------
3.9 4.5
--------------------------------------------------- ----------- -----------
Company
2020 2019
GBPmillion GBPmillion
--------------------------------------------------- ----------- -----------
At 1 January 3.3 -
--------------------------------------------------- ----------- -----------
On transition - 4.0
--------------------------------------------------- ----------- -----------
New leases 0.2 -
--------------------------------------------------- ----------- -----------
Payments (0.7) (0.8)
--------------------------------------------------- ----------- -----------
Interest expense 0.1 0.1
--------------------------------------------------- ----------- -----------
At 31 December 2.9 3.3
--------------------------------------------------- ----------- -----------
Lease liabilities - Gross
--------------------------------------------------- ----------- -----------
- No later than one year 0.7 0.7
--------------------------------------------------- ----------- -----------
- Later than one year and no later than five years 2.4 2.9
--------------------------------------------------- ----------- -----------
3.1 3.6
--------------------------------------------------- ----------- -----------
Less: Future finance expense (0.2) (0.3)
--------------------------------------------------- ----------- -----------
Lease liabilities - Net 2.9 3.3
--------------------------------------------------- ----------- -----------
Lease liabilities - Gross
--------------------------------------------------- ----------- -----------
- No later than one year 0.6 0.7
--------------------------------------------------- ----------- -----------
- Later than one year and no later than five years 2.3 2.6
--------------------------------------------------- ----------- -----------
2.9 3.3
--------------------------------------------------- ----------- -----------
27. Other liabilities
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Other payables 46.2 27.2 41.1 25.5
--------------------------------- ----------- ----------- ----------- -----------
Amounts due to related companies - - 12.6 5.5
--------------------------------- ----------- ----------- ----------- -----------
Accruals and deferred income 10.1 13.7 8.1 11.0
--------------------------------- ----------- ----------- ----------- -----------
56.3 40.9 61.8 42.0
--------------------------------- ----------- ----------- ----------- -----------
28. Provisions for liabilities and charges
Group and Company
Customer
redress ECL allowance on loan commitments Other Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 1 January 2019 0.8 0.4 0.1 1.3
------------------------------------- ----------- --------------------------------- ----------- -----------
Release to income statement (0.6) - - (0.6)
------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 31 December 2019 0.2 0.4 0.1 0.7
------------------------------------- ----------- --------------------------------- ----------- -----------
(Release)/charge to income statement (0.2) 0.7 1.4 1.9
------------------------------------- ----------- --------------------------------- ----------- -----------
Utilised - - (0.7) (0.7)
------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 31 December 2020 - 1.1 0.8 1.9
------------------------------------- ----------- --------------------------------- ----------- -----------
Customer redress provision
The Group provided for its best estimate of redress payable in
respect of outstanding claims relating to 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 Financial Conduct Authority announced a deadline for making
these customer redress claims, which gave consumers until 29 August
2019 to make a claim, so no further claims were accepted after this
date. At 31 December 2020, all such claims had been settled and
therefore no further customer redress provision was required.
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. 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 31 December 2020 no provision was held
for losses in excess of drawn amounts.
Other
Other includes provision for fraud, which 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, restructuring provision and s75 Consumer Credit Act
1974 provision.
The Directors expect all provisions to be fully utilised within
the next 12 months.
29. Subordinated liabilities
Group and Company
2020 2019
GBPmillion GBPmillion
------------------------ ----------- -----------
Notes at par value 50.0 50.0
------------------------ ----------- -----------
Unamortised issue costs (0.4) (0.6)
------------------------ ----------- -----------
Accrued interest 1.2 1.2
------------------------ ----------- -----------
50.8 50.6
------------------------ ----------- -----------
Subordinated liabilities comprises two tranches of 6.75% Fixed
Rate Reset Callable Subordinated Notes due 2028 ('the Notes')
issued in 2018. The Notes mature in 2028 but the issuer may at its
discretion redeem the Notes in 2023. The Notes are listed on the
Global Exchange Market of the Irish Stock Exchange plc trading as
Euronext Dublin.
-- The Notes are redeemable for cash at their principal amount
on a fixed date
-- The Company has a call option to redeem the securities early
in the event of a 'tax event' or a 'capital disqualification
event', which is at the full discretion of the Company
-- Interest payments are paid at six monthly intervals and are
mandatory
-- The Notes give the holders rights to the principal amount on
the Notes, plus any unpaid interest, on liquidation. Any such
claims are subordinated to senior creditors, but rank pari passu
with holders of other subordinated obligations and in priority to
holders of share capital
The above features provide the issuer with a contractual
obligation to deliver cash or another financial asset to the
holders, and therefore the Notes are classified as financial
liabilities.
Transaction costs that are directly attributable to the issue of
the Notes and are incremental costs that would not have been
incurred if the Notes had not been issued are deducted from the
financial liability and expensed to the income statement on an
effective interest rate basis over the expected life of the
notes.
The Notes are treated as Tier 2 regulatory capital which is 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 ongoing programme to diversify and expand the
capital base of the Group.
30. Contingent liabilities and commitments
30.1 Contingent liabilities
As a financial services business, the Group must comply with
numerous laws and regulations, which significantly affect the way
it does business. Whilst the Group believes there are no material
unidentified areas of failure to comply with these laws and
regulations, there can be no guarantee that all issues have been
identified.
30.2 Capital commitments
At 31 December 2020, the Group and Company had no capital
commitments (2019: GBPnil).
30.3 Credit commitments
Group and Company
Commitments to extend credit to customers were as follows:
2020 2019
GBPmillion GBPmillion
-------------------- ----------- -----------
Business Finance
-------------------- ----------- -----------
Real Estate Finance 63.5 120.9
---------------------- ----------- -----------
Commercial Finance 128.5 48.7
---------------------- ----------- -----------
Consumer Finance
-------------------- ----------- -----------
Retail Finance 69.3 33.2
---------------------- ----------- -----------
Motor Finance 0.2 0.5
---------------------- ----------- -----------
261.5 203.3
-------------------- ----------- -----------
31. Share capital
Number GBPmillion
--------------------------------------- ---------- ----------
At 1 January 2019 and 31 December 2019 18,477,500 7.4
--------------------------------------- ---------- ----------
Issued during 2020 156,162 0.1
--------------------------------------- ---------- ----------
At 31 December 2020 18,633,662 7.5
--------------------------------------- ---------- ----------
Share capital comprises ordinary shares with a par value of 40
pence each.
32. Share-based payments
At 31 December 2020 and 31 December 2019, 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 movements in share options during the year is
set out below:
Weighted Weighted
average average
exercise exercise
Forfeited Vested price of price of
lapsed and options options
Outstanding and Outstanding exercisable outstanding outstanding
at Granted cancelled Exercised at at at at
1 January during during during 31 December 31 December 31 December 31 December
2020 the year the year the year 2020 2020 Vesting 2019 2020
Number Number Number Number Number Number dates GBP GBP
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Equity
settled
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Share
option
scheme 141,667 - - (141,667) - - 2016 - 7.20
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017 long
term
incentive
plan 263,094 267,602 (54,951) (2,649) 473,096 6,128 2021-2023 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
sharesave
plan 163,642 486,254 (77,432) - 572,464 57,724 2021-2023 6.42 12.28
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
deferred
bonus
plan 29,662 35,040 - (13,383) 51,319 - 2021-2023 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
598,065 788,896 (132,283) (157,699) 1,096,879 63,852 4.22 5.26
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Cash
settled
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
'Phantom'
share
option
scheme 281,667 - - - 281,667 281,667 2019 25.00 25.00
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Group Group Company Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- ----------- -----------
Expense incurred in relation to share-based
payments - 1.2 - 1.0
-------------------------------------------- ----------- ----------- ----------- -----------
32.1. Share option scheme
The remaining 141,667 outstanding share options under this
scheme were exercised during the year.
The intrinsic value of the unexercised options at 31 December
2019 was GBP1.2 million.
32.2. Long term incentive plan
The long term incentive plan was established on 3 May 2017.
2020 awards under this plan granted during the year are subject
to four performance conditions, which are based on:
-- rank of the total shareholder return ('TSR') over the
performance period against the TSR of the comparator group of peer
group companies
-- rank of the TSR over the performance period against the TSR
of the FTSE Small Cap Index
-- growth of the TSR in absolute terms
-- maintaining appropriate risk practices over the performance
period reflecting the longer-term strategic risk management of the
Group
2019 awards under this plan were subject to three performance
conditions, which are based on:
-- annual compound growth in earnings per share ('EPS') over the
performance period
-- rank of the TSR over the performance period against the TSR
of the comparator group of peer group companies
-- maintaining appropriate risk practices over the performance
period reflecting the longer-term strategic risk management of the
Group
The awards will vest on the date on which the Board determines
that these conditions have been met.
The awards have a performance term of three years, and will be
released to the participants on the vesting date. In 2019, those
awards granted to the Executive Directors were subject to a holding
period of two years following the vesting date, and those awards
not subject to a holding period will be released to the
participants on the vesting date. Vested options are exercisable
for a period of 10 years from the date of grant.
The following awards have been granted under the plan, entitling
a former Executive Director and certain other key senior employees
to purchase shares in the Company:
Subject to a holding period Subject to no holding period Total
Number Number Number
-------------------------------- --------------------------- ---------------------------- --------
At 1 January 2019 63,896 97,701 161,597
-------------------------------- --------------------------- ---------------------------- --------
Granted 54,312 79,734 134,046
-------------------------------- --------------------------- ---------------------------- --------
Forfeited, lapsed and cancelled (32,549) - (32,549)
-------------------------------- --------------------------- ---------------------------- --------
At 31 December 2019 85,659 177,435 263,094
-------------------------------- --------------------------- ---------------------------- --------
Granted - 267,602 267,602
-------------------------------- --------------------------- ---------------------------- --------
Forfeited, lapsed and cancelled (22,385) (32,566) (54,951)
-------------------------------- --------------------------- ---------------------------- --------
Exercised - (2,649) (2,649)
-------------------------------- --------------------------- ---------------------------- --------
At 31 December 2020 63,274 409,822 473,096
-------------------------------- --------------------------- ---------------------------- --------
Of the share options exercised during the year, 1,112 were
exercised for shares, and 1,537 were exercised for a cash
alternative at a deemed market price of GBP9.11.
The original grant date valuation was determined using a
Black-Scholes model for the EPS and risk management tranches, and a
Monte Carlo model for the TSR tranche. Measurement inputs and
assumptions used for the grant date valuation were as follows:
Granted 2020 Granted 2019
Subject to no holding Granted 2019 Subject to no holding
period Subject to a holding period period
---------------------------- --------------------------- --------------------------- ---------------------------
Share price at grant date GBP7.32 GBP15.20 GBP15.20
---------------------------- --------------------------- --------------------------- ---------------------------
Exercise price GBP0.40 GBP0.40 GBP0.40
---------------------------- --------------------------- --------------------------- ---------------------------
Expected dividend yield 4.18% 6.18% 6.18%
----------------------------- --------------------------- --------------------------- ---------------------------
Expected stock price
volatility 43.87% 25.9% 29.1%
----------------------------- --------------------------- --------------------------- ---------------------------
Risk free interest rate -0.07% 0.86% 0.72%
----------------------------- --------------------------- --------------------------- ---------------------------
Average expected life (years) 3.00 5.00 3.00
----------------------------- --------------------------- --------------------------- ---------------------------
Discount for lack of
marketability during holding
period N/A 10.0% N/A
----------------------------- --------------------------- --------------------------- ---------------------------
Original grant date valuation GBP4.08 GBP9.02 GBP10.48
----------------------------- --------------------------- --------------------------- ---------------------------
32.3. Sharesave plan
The sharesave plan was established on 3 May 2017.
This plan allows all employees to save for three years, subject
to a maximum monthly amount of GBP500, with the option to buy
shares in Secure Trust Bank PLC when the plan matures. Participants
cannot change the amount that they have agreed to save each month
but they can suspend payments for up to six months. Participants
can withdraw their savings at any time but, if they do this before
the completion date, they lose the option to buy shares at the
Option Price, and if participants cease to hold plan-related
employment before the third anniversary of the grant date, then the
options are also lost. The options ordinarily vest approximately
three years after grant date, and are exercisable for a period of
six months following vesting.
The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used were
as follows:
Awarded during 2020 Awarded during 2019
-------------------------------- ------------------- -------------------
Share price at grant date GBP6.32 GBP13.00
-------------------------------- ------------------- -------------------
Exercise price GBP5.31 GBP10.64
-------------------------------- ------------------- -------------------
Expected stock price volatility 44.97% 28.34%
-------------------------------- ------------------- -------------------
Expected dividend yield 13.92% 6.77%
-------------------------------- ------------------- -------------------
Risk free interest rate 0.00% 0.46%
-------------------------------- ------------------- -------------------
Average expected life (years) 3.00 3.00
-------------------------------- ------------------- -------------------
Original grant date valuation GBP0.93 GBP2.10
-------------------------------- ------------------- -------------------
32.4. Deferred bonus plan
The deferred bonus plan was established on 3 May 2017.
Since 2017, 50% of the bonus earned by the Executive Directors,
amounting to GBP270,000 (2019: GBP450,000), is deferred into shares
under the deferred bonus plan. In 2020, awards were also granted to
certain other Senior Managers of the Group. The awards vest in
three equal tranches after one, two and three years following
deferral. Accordingly, the following awards remain outstanding
under the plan, entitling the members of the scheme to purchase
shares in the Company:
Awards granted Awards granted Awards granted
Vesting after Vesting after Vesting after
one year two years three years Awards granted
Number Number Number Total
----------------------- -------------- -------------- -------------- --------------
At 1 January 2019 4,896 4,896 4,898 14,690
----------------------- -------------- -------------- -------------- --------------
Granted 9,591 9,591 9,593 28,775
----------------------- -------------- -------------- -------------- --------------
Exercised (1,399) - - (1,399)
----------------------- -------------- -------------- -------------- --------------
Cancelled (3,202) (4,601) (4,601) (12,404)
----------------------- -------------- -------------- -------------- --------------
At 31 December 2019 9,886 9,886 9,890 29,662
----------------------- -------------- -------------- -------------- --------------
Granted 11,679 11,679 11,682 35,040
----------------------- -------------- -------------- -------------- --------------
Exercised (9,886) (3,497) - (13,383)
----------------------- -------------- -------------- -------------- --------------
At 1 December 2020 11,679 18,068 21,572 51,319
----------------------- -------------- -------------- -------------- --------------
Vested and exercisable - - - -
----------------------- -------------- -------------- -------------- --------------
The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used were
as follows:
Granted 2020 Granted 2019
Granted 2020 Granted 2020 Awards vesting Granted 2019 Granted 2019 Awards vesting
Awards vesting Awards vesting after three Awards vesting Awards vesting after three
after one year after two years years after one year after two years years
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Share price at
grant date GBP7.32 GBP7.32 GBP7.32 GBP11.90 GBP11.90 GBP11.90
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Exercise price GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Expected
dividend yield 12.02% 12.02% 12.02% 7.06% 7.06% 7.06%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Expected stock
price
volatility 66.54% 53.01% 45.76% 27.34% 24.79% 28.82%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Risk free
interest rate 0.00% 0.00% 0.00% 0.74% 0.74% 0.76%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Average expected
life (years) 1.00 2.00 3.00 1.00 2.00 3.00
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Original grant
date valuation GBP6.09 GBP5.36 GBP4,70 GBP10.69 GBP9.94 GBP9.59
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
32.5. Cash settled share-based payments
On 16 March 2015, a four-year 'phantom' share option scheme was
established in order to provide effective long term incentive to
senior management of the Group. Under the scheme, no actual shares
would be issued by the Company, but those granted awards under the
scheme would be entitled to a cash payment. The amount of the award
is calculated by reference to the increase in the value of an
ordinary share in the Company over an initial value set at GBP25
per ordinary share, being the price at which the shares resulting
from the exercise of the first tranche of share options under the
share option scheme were sold in November 2014.
As at 31 December 2020, 281,667 (2019: 281,667) share options
remained outstanding. The options vested during 2019 and are
exercisable for a period of 10 years after grant date.
As at 31 December 2020, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2020 2019
-------------------------------- ------- --------
Share price at reporting date GBP8.75 GBP16.00
-------------------------------- ------- --------
Expected stock price volatility 45.89% 30.34%
-------------------------------- ------- --------
Expected dividend yield 10.06% 5.5%
-------------------------------- ------- --------
Risk free interest rate 0.00% 0.60%
-------------------------------- ------- --------
Average expected life (years) 4.92 2.60
-------------------------------- ------- --------
Fair value GBP0.30 GBP0.53
-------------------------------- ------- --------
This resulted in the following being recognised in the financial
statements:
2020 2019
GBPmillion GBPmillion
---------- ----------- -----------
Liability 0.2 0.2
---------- ----------- -----------
The fair value at December 2020 and December 2019 was not used
to calculate the liability, as management concluded that it was
appropriate to hold the accrual at the same level as 2018 because
the options can be exercised at any point during the seven years
after vesting, and given high levels of share price volatility at
that date.
For each award granted during the year, expected volatility was
determined by calculating the historical volatility of the Group's
share price over the period equivalent to the expected term of the
options being granted. The expected life used in the model has been
adjusted, based on management's best estimate, for the effects of
non-transferability, exercise restrictions, and behavioural
considerations.
33. Cash flow statement
33.1. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Restated
Group Group Company Restated Company
2020 2019 2020 2019
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- ----------------
Cash and balances at central banks 181.5 105.8 181.5 105.8
-------------------------------------- ----------- ----------- ----------- ----------------
Loans and advances to banks (Note 12) 63.3 48.4 61.7 45.2
-------------------------------------- ----------- ----------- ----------- ----------------
Less restricted cash (Note 12) (12.7) (9.2) (12.7) (9.2)
-------------------------------------- ----------- ----------- ----------- ----------------
232.1 145.0 230.5 141.8
-------------------------------------- ----------- ----------- ----------- ----------------
In 2019, GBP9.2 million was presented as cash and cash
equivalents, which was restricted. The table and the cash flow
statements have been restated to reflect this.
33.2. Changes in liabilities arising from financing
activities
All changes in liabilities arising from financing activities
arise from changes in cash flows, apart from GBP0.1 million (2019:
GBP0.1 million) of lease liabilities interest expense, as shown in
Note 26, and GBP0.2 million (2019: GBP0.2 million) amortisation of
issue costs on subordinated liabilities, as shown in Note 29.
34. Financial risk management strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group risk appetite
statement which sets out the Board's attitude to risk and internal
controls. Key risks identified by the Directors are formally
reviewed and assessed at least once a year by the Board, in
addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
A more detailed description of the risk governance structure is
contained in the Strategic Report beginning on page 38 of the
Annual Report and Accounts.
The principal financial risks inherent in the Group's business
are credit risk (Note 35), market risk (Note 36), liquidity risk
(Note 37), and capital risk (Note 38).
35. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. A formal Credit Risk Policy has been agreed by the Board
whilst credit risk is monitored on a monthly basis by the Credit
Risk Committees which review performance of key portfolios
including new business volumes, collections performance,
provisioning levels and provisioning methodology. A credit risk
department within the Group monitors adherence to the Credit Risk
Policy, implements risk tools to manage credit risk and evaluates
business opportunities and the risks and opportunities they present
to the Group whilst ensuring the performance of the Group's
existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. Actual exposures are monitored on a daily basis,
and the limits on the level of credit risk are approved
periodically by the Board of Directors.
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 the Group's exposures to
credit risk as it considers 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 lending limits where appropriate. Exposure to credit risk
for these portfolios is also managed in part by obtaining
collateral, principally motor vehicles on Motor Finance loans,
residential property on Consumer Mortgages and a credit support
balance provided by RentSmart. Customers undergo a scoring process
to mitigate risk, and policy rules around the assets 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,
and is currently closed to new business. The loans are secured
against the assets lent against (real estate, trade receivables and
commercial plant and equipment. Disclosures relating to collateral
on loans and advances to customers are disclosed in Note 14.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year-end are contained in Note 12. There is no direct exposure
to the Eurozone and peripheral Eurozone countries.
Group
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 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- ---------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit--impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
31 December
2020
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Real Estate
Finance 858.9 136.5 37.9 174.4 24.0 - 24.0 1,057.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Asset
Finance 9.5 1.4 - 1.4 1.5 - 1.5 12.4
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Commercial
Finance 205.1 26.6 - 26.6 0.3 - 0.3 232.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Retail
Finance 589.1 86.8 3.3 90.1 3.8 - 3.8 683.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Motor
Finance 173.7 87.2 2.6 89.8 22.6 - 22.6 286.1
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Debt
Management - - - - 11.7 77.1 88.8 88.8
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Mortgages 74.9 - 1.8 1.8 1.2 - 1.2 77.9
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Other 4.1 - - - - - - 4.1
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total drawn
exposure 1,915.3 338.5 45.6 384.1 65.1 77.1 142.2 2,441.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Loan
commitments 261.5 - - - - - - 261.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total gross
exposure 2,176.8 338.5 45.6 384.1 65.1 77.1 142.2 2,703.1
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Impairment
allowance (27.1) (22.7) (4.5) (27.2) (21.7) (6.7) (28.4) (82.7)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Provision
for loan
commitments (1.1) - - - - - - (1.1)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total net
exposure 2,148.6 315.8 41.1 356.9 43.4 70.4 113.8 2,619.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
GBP35.4 million of collateral in the form pf property has been
pledged as security for Real Estate Finance Stage 3 balances of
GBP24.0 million. GBP9.9 million of collateral in the form of motor
vehicles has been pledged as security for Motor Finance Stage 3
balances of GBP22.5 million.
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- ---------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit--impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
31 December
2019
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Real Estate
Finance 910.2 33.7 2.8 36.5 16.1 - 16.1 962.8
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Asset
Finance 23.8 3.6 0.3 3.9 1.8 - 1.8 29.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Commercial
Finance 245.0 7.0 - 7.0 0.6 - 0.6 252.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Retail
Finance 624.1 80.3 4.5 84.8 5.5 - 5.5 714.4
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Motor
Finance 240.5 96.9 2.7 99.6 17.2 - 17.2 357.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Debt
Management - - - - 10.3 70.0 80.3 80.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Mortgages 105.6 - 0.3 0.3 0.3 - 0.3 106.2
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Other 7.6 - - - - - - 7.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total drawn
exposure 2,156.8 221.5 10.6 232.1 51.8 70.0 121.8 2,510.7
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Loan
commitments 203.3 - - - - - - 203.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total gross
exposure 2,360.1 221.5 10.6 232.1 51.8 70.0 121.8 2,714.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Impairment
allowance (21.6) (19.8) (4.3) (24.1) (17.0) 2.1 (14.9) (60.6)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total net
exposure 2,338.1 201.7 6.3 208.0 34.8 72.1 106.9 2,653.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
A reconciliation of opening to closing allowance for impairment
of loans and advances to customers is presented in Note 16.
Company
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 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- ---------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit--impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
31 December
2020
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Real Estate
Finance 858.9 136.5 37.9 174.4 24.0 - 24.0 1,057.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Asset
Finance 9.5 1.4 - 1.4 1.5 - 1.5 12.4
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Commercial
Finance 205.1 26.6 - 26.6 0.3 - 0.3 232.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Retail
Finance 589.1 86.8 3.3 90.1 3.8 - 3.8 683.0
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Motor
Finance 174.0 87.5 2.6 90.1 22.5 - 22.5 286.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Mortgages 74.9 - 1.8 1.8 1.2 - 1.2 77.9
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Other 0.5 - - - - - - 0.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total drawn
exposure 1,912.0 338.8 45.6 384.4 53.3 - 53.3 2,349.7
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Loan
commitments 261.5 - - - - - - 261.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total gross
exposure 2,173.5 338.8 45.6 384.4 53.3 - 53.3 2,611.2
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Impairment
allowance (28.1) (24.2) (4.7) (28.9) (22.9) - (22.9) (79.9)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Provision
for loan
commitments (1.1) - - - - - - (1.1)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total net
exposure 2,144.3 314.6 40.9 355.5 30.4 - 30.4 2,530.2
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- ---------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit--impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
31 December
2019
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Real Estate
Finance 910.2 33.7 2.8 36.5 16.1 - 16.1 962.8
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Asset
Finance 23.8 3.6 0.3 3.9 1.8 - 1.8 29.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Commercial
Finance 244.0 7.0 - 7.0 0.6 - 0.6 251.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Retail
Finance 624.1 80.3 4.5 84.8 5.5 - 5.5 714.4
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Motor
Finance 240.5 96.9 2.7 99.6 17.2 - 17.2 357.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Consumer
Mortgages 105.6 - 0.3 0.3 0.3 - 0.3 106.2
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Other 0.5 - - - - - 0.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total drawn
exposure 2,148.7 221.5 10.6 232.1 41.5 - 41.5 2,422.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Loan
commitments 203.3 - - - - - - 203.3
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total gross
exposure 2,352.0 221.5 10.6 232.1 41.5 - 41.5 2,625.6
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Impairment
allowance (22.8) (22.1) (4.8) (26.9) (19.0) - (19.0) (68.7)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
Total net
exposure 2,328.8 199.4 5.8 205.2 22.5 - 22.5 2,556.5
------------ ---------- ---------- ---------- ---------- --------------- ---------------- ----------- ----------
35.1. 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 loans and advances to customers and loan
commitments by product is provided in Notes 3 and 30
respectively.
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 customers, by location of the
security is as follows:
Group and Company
Real Estate Finance Consumer Mortgages
GBPmillion GBPmillion
------------------------------------------ ------------------- ------------------
31 December 2020
------------------------------------------ ------------------- ------------------
Central England 139.7 14.6
------------------------------------------ ------------------- ------------------
Greater London 638.4 10.2
------------------------------------------ ------------------- ------------------
Northern England 65.8 16.2
------------------------------------------ ------------------- ------------------
South East England (excl. Greater London) 171.3 25.6
------------------------------------------ ------------------- ------------------
South West England 18.1 7.3
------------------------------------------ ------------------- ------------------
Scotland, Wales and Northern Ireland 24.0 4.0
------------------------------------------ ------------------- ------------------
Gross loans and receivables 1,057.3 77.9
------------------------------------------ ------------------- ------------------
Allowance for impairment (5.4) (0.2)
------------------------------------------ ------------------- ------------------
Total 1,051.9 77.7
------------------------------------------ ------------------- ------------------
Real Estate Finance Consumer Mortgages
GBPmillion GBPmillion
------------------------------------------ ------------------- ------------------
31 December 2019
------------------------------------------ ------------------- ------------------
Central England 127.1 19.9
------------------------------------------ ------------------- ------------------
Greater London 601.8 13.5
------------------------------------------ ------------------- ------------------
Northern England 48.5 21.2
------------------------------------------ ------------------- ------------------
South East England (excl. Greater London) 160.8 35.3
------------------------------------------ ------------------- ------------------
South West England 12.8 11.0
------------------------------------------ ------------------- ------------------
Scotland, Wales and Northern Ireland 11.8 5.3
------------------------------------------ ------------------- ------------------
Gross loans and receivables 962.8 106.2
------------------------------------------ ------------------- ------------------
Allowance for impairment (0.6) (0.3)
------------------------------------------ ------------------- ------------------
Total 962.2 105.9
------------------------------------------ ------------------- ------------------
35.2. Forbearance
During the year Business Finance and Consumer Finance offered
payment holidays to customers to manage the impact of COVID-19.
Business Finance
-- Real Estate Finance: Where clients provided evidence of
payment difficulties, the business supported clients by providing
one, or both of extensions to maturity dates and altered payment
profiles to provide short-term payment holidays for all or part of
rentals due. In total, 15% of customers by volume had been granted
a form of payment holiday during the year. As at 31 December 2020
this fell to 1%, falling to nil shortly after year end.
-- Asset Finance: The Group agreed to support its customers with
short-term payment reductions and/or payment holidays where
requested. During the year, the volume of customers who were
granted payment holidays was around 65%, falling to 2% as at 31
December 2020.
Consumer Finance
-- Retail Finance: Approximately 2.1% of customers were granted
payment holidays, with only 0.5% remaining on a payment holiday as
at 31 December 2020
-- Motor Finance: Approximately 15.6% of customers were granted
payment holidays, with only 1.2% remaining on a payment holiday as
at 31 December 2020
-- Consumer Mortgages A significant proportion of customers were
granted payment holidays during 2020. The majority of these had
returned to regular payments, with just 3% of customers remaining
on a payment holiday as at 31 December 2020
Where consumer customers have come to the end of their payment
holiday, under COVID-19 arrangements, and have been unable to
return to regular payments, they have been provided with a reduced
payment arrangement. In addition, a limited number of mortgage
customers have been provided with a temporary switch to interest
only (5 accounts).
Other than Consumer Mortgages, throughout 2020 the Group did not
routinely reschedule contractual arrangements where customers
default on their repayments. In cases where it offered the customer
the option to reduce or defer payments for a short period, the
loans retained the normal contractual payment due dates and were
treated the same as any other defaulting cases for impairment
purposes. Arrears tracking would continue on the account with any
impairment charge being based on the original contractual due dates
for all products.
For mortgage customers, should they face financial difficulties,
the Group may, depending on individual circumstances, offer
customers one of a number of forbearance options. The types of
forbearance the Group was prepared to offer included the
following:
-- Temporary interest-only concessions are offered to customers
in financial difficulty on a temporary basis with formal periodic
review. Where payments are made, the arrears status will not
increase
-- Arrangement payment plans are agreed to enable customers to
reduce their arrears balances by an agreed amount per month which
is paid in addition to their standard monthly repayment
-- Payment concessions can be agreed on a temporary basis
whereby the customer may pay less than the contractual monthly
payment, in line with their individual affordability. If a customer
is within this type of concession, their arrears position will
increase
-- In exceptional circumstances, capitalisations of arrears may
occur or an interest rate adjustment may be applied. These are used
under strict controls, explicitly where the customer circumstances
offer no other option
All forbearance arrangements are formally discussed and agreed
with the customer. By offering customers in financial difficulty
the option of forbearance the Group potentially exposes itself to
an increased level of risk through prolonging the period of
noncontractual payment and/or potentially placing the customer into
a detrimental position at the end of the forbearance period. All
forbearance arrangements are reviewed and monitored regularly to
assess the ongoing potential risk, suitability and sustainability
to the Group.
Where forbearance measures are not possible or are considered
not to be in the customer's best interests, or where such measures
have been tried and the customer has not adhered to the forbearance
terms that have been agreed, the Group will consider realising its
security and taking possession of the property in order to sell it
and clear the outstanding debt.
36. Market risk
Market risks arise from open positions in interest rate and
currency products, all of which are exposed to general and specific
market movements. There are no significant exposures to foreign
currencies and therefore there is no significant currency risk. The
Group does not operate a trading book.
Interest rate risk
Group and Company
Interest rate risk is the risk of potential loss through
unhedged or mismatched asset and liability positions, which are
sensitive to changes in interest rates. When interest rates change,
the present value and timing of future cash flows change. This in
turn changes the underlying value of the Group's assets,
liabilities and off-balance sheet instruments and hence its
economic value. Changes in interest rates also affect the Group's
earnings by altering interest sensitive income and expenses,
affecting its net interest income.
The Group seeks to 'match' interest rate risk on either side of
the statement of financial position. However, this is not a perfect
match and interest rate risk is present on the mismatch between
fixed rate loans and savings products and variable rate assets and
liabilities.
The Group monitors the interest rate mismatch on at least a
monthly basis using market value sensitivity and earnings at risk,
which were as follows at 31 December:
2020 2019
GBPmillion GBPmillion
-------------------------------------- ----------- -----------
Market value sensitivity
-------------------------------------- ----------- -----------
+200bps parallel shift in yield curve 2.2 2.6
-------------------------------------- ----------- -----------
-200bps parallel shift in yield curve 0.1 (1.0)
-------------------------------------- ----------- -----------
Earnings at risk sensitivity
-------------------------------------- ----------- -----------
+100bps parallel shift in yield curve 1.0 0.6
-------------------------------------- ----------- -----------
-100bps parallel shift in yield curve (0.1) N/A
-------------------------------------- ----------- -----------
The Directors consider that 200bps in the case of Market value
sensitivity and 100bps in the case of Earnings at risk are a
reasonable approximation of possible changes.
A zero percent interest rate floor is applied to the above
metrics. In addition to these floored metrics, the senior
management team also monitors the Group's exposure to a possible
negative rate environment.
The Group maintained such exposures within the risk appetite set
by the Board throughout the year.
Interest rate risks inherent in new products or through changes
to the terms and conditions of existing products were assessed over
the course of the year.
This potential exposure is managed by the Group Treasury
function and overseen by ALCO. The policy is not to take
significant unmatched positions.
37. Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and longer-term
funding to address any structural liquidity requirements.
The Group has a formal governance structure in place to manage
and mitigate liquidity risk on a day-to-day basis. The Board sets
and approves the Group's liquidity risk management strategy. The
ALCO, comprising senior executives of the Company, monitors
liquidity risk. Key liquidity risk management information is
reported by the Treasury function and monitored by the Chief
Executive Officer and Chief Financial Officer on a daily basis. The
ALCO meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity
risk tolerance levels and ILAAP metrics.
The PRA requires a firm to maintain at all times liquidity
resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities
cannot be met as they fall due. There is also a requirement that a
firm ensures its liquidity resources contain an adequate buffer of
high quality, unencumbered assets (i.e. government securities in
the liquidity asset buffer), and it maintains a conservative
funding profile. The liquidity assets buffer is a pool of highly
liquid assets that can be called upon to create sufficient
liquidity to meet liabilities as they fall due, particularly in a
period of liquidity stress. The liquidity resources outside the
buffer must either be marketable assets with a demonstrable
secondary market that the firm can access, or a credit facility
that can be activated in times of stress.
The Group operates a Board approved ILAAP, which requires the
Group to identify, measure, manage and monitor liquidity and
funding risks across different time horizons and stress scenarios,
consistent with the risk appetite as established by the Board. The
ILAAP seeks to document the Group's approach to liquidity and
funding, and demonstrate that it complies with the Overall
Liquidity Adequacy Rule ('OLAR'). The PRA's approach to liquidity
supervision is based on the principle that a firm must have
adequate levels of liquidity resources and a conservative funding
profile, and that it comprehensively manages and controls liquidity
and funding risks. The liquidity buffer required by the ILAAP has
been put in place and maintained since that time. Liquidity
resources outside of the buffer are made up of deposits placed at
the Bank of England. The ILAAP is updated annually.
The primary measure used by management to assess the adequacy of
liquidity is the OLAR, which is the Board's own view of the Group's
liquidity needs as set out in the Board approved ILAAP. The Group
maintained liquidity in excess of the OLAR throughout the year
ended 31 December 2020.
The LCR regime has applied to the Group from 1 October 2016,
requiring management of net 30-day cash outflows as a proportion of
High Quality Liquid Assets. The Group has set a more conservative
internal limit. The actual LCR has significantly exceeded both
limits throughout the year.
The Group is subject to daily calls on its available cash
resources from maturing deposits and loan draw-downs and maintains
significant resources to meet all of these needs as they fall
due.
The matching and controlled mismatching of the maturities and
interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely
matched, as transacted business is often of uncertain term and of
different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows
for financial liabilities into relevant maturity groupings:
More than
Not more More than three one year but
Gross nominal than three months but less less than five More than
Carrying amount outflow months than one year years five years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
At 31 December
2020
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Due to banks 276.4 276.7 13.4 113.3 150.0 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Deposits from
customers 1,992.5 2,029.3 919.4 496.5 609.7 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Subordinated
liabilities 50.8 59.2 0.8 2.5 55.9 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Other financial
liabilities 46.2 46.2 46.2 - - -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,365.9 2,411.4 979.8 612.3 815.6 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
instruments 6.1 4.6 0.5 1.5 2.6 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,372.0 2,416.0 980.3 613.8 818.2 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
More than
More than three one year but
Gross nominal Not more than months but less less than five More than
Carrying amount outflow three months than one year years five years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
At 31 December
2019
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Due to banks 308.5 312.1 0.5 46.7 264.9 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Deposits from
customers 2,020.3 2,086.4 292.3 1,055.0 706.8 32.3
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Subordinated
liabilities 50.6 61.8 0.9 2.5 58.4 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Other financial
liabilities 27.2 27.2 27.2 - - -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,406.6 2,487.5 320.9 1,104.2 1,030.1 32.3
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
instruments 0.6 0.7 0.1 0.2 0.4 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,407.2 2,488.2 321.0 1,104.4 1,030.5 32.3
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Company
More than
Not more More than three one year but
Gross nominal than three months but less less than five More than
Carrying amount outflow months than one year years five years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
At 31 December
2020
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Due to banks 276.4 276.7 13.4 113.3 150.0 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Deposits from
customers 1,992.5 2,029.3 919.4 496.5 609.7 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Subordinated
liabilities 50.8 59.2 0.8 2.5 55.9 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Other financial
liabilities 41.1 41.1 41.1 - - -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,360.8 2,406.3 974.7 612.3 815.6 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
liabilities
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
Derivative
financial
instruments 6.1 4.6 0.5 1.5 2.6 -
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
2,366.9 2,410.9 975.2 613.8 818.2 3.7
----------------- --------------- ---------------- ---------------- --------------- ---------------- -----------
More than
three More than
months one year
Gross Not more but less but less More than
Carrying nominal than three than one than five five
amount outflow months year years years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2019
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial liabilities
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Due to banks 308.5 312.1 0.5 46.7 264.9 -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,020.3 2,086.4 292.3 1,055.0 706.8 32.3
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 50.6 61.8 0.9 2.5 58.4 -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities 31.0 31.0 31.0 - - -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
2,410.4 2,491.3 324.7 1,104.2 1,030.1 32.3
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Derivative financial liabilities
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 0.6 0.7 0.1 0.2 0.4 -
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
2,411.0 2,492.0 324.8 1,104.4 1,030.5 32.3
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Other financial liabilities, as shown above, do not include
non-interest accruals as these are not classed as financial
liabilities.
38. Capital risk
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in
the Capital Requirements Regulation, the Group's ICAAP is embedded
in the risk management framework of the Group and is subject to
ongoing updates and revisions when necessary. However, as a
minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies,
and systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business
planning and capital management.
The PRA sets a Total Capital Requirement ('TCR') for each UK
bank, consisting of Pillar 1 and Pillar 2. Pillar 1 capital is
calculated using standardised risk weights for credit, market and
operational risk. Where it is considered that the Pillar 1
calculations do not reflect the risk, an additional capital add-on,
Pillar 2, is added.
The Group ICAAP includes a summary of the capital required to
mitigate the identified risks and the amount of capital that the
Group has available. The ICAAP is a key input into the PRA's
supervisory review which addresses the additional capital
requirements of Pillar 2 of the Basel II framework. The PRA's
approach is to monitor the available capital resources in relation
to the TCR.
The Group maintains an extra internal buffer and capital ratios
are reviewed on a monthly basis to ensure that external and
internal requirements are adhered to. The PRA reviewed the Group's
ICAAP in 2018 and issued its updated TCR in March 2019.
Further information on capital is included within our Pillar 3
disclosures, which can be found on the Group's website.
The following table, which is unaudited and therefore not in
scope of the independent auditor's report, shows the regulatory
capital resources for the Group. The Group has adopted the IFRS 9
transitional rules. As a response to COVID-19 the Basel Committee
proposed a number of mitigation measures for the capital regime in
response to the pandemic. These were enacted by the EU on 24 June
2020 as Directive EU/2020/873. This allows for any increase in IFRS
9 provisions recognised in 2020 (net of attributable deferred tax)
to be added back to eligible Tier 1 capital, in addition to 70%
(2018: 85%) of the initial IFRS 9 transition adjustment, and
movements since IFRS 9 adoption and 31 December 2019 (net of
attributable deferred tax) to be added back to eligible Tier 1
capital.
Tier 2 capital comprises solely subordinated debt, excluding
accrued interest, capped at 25% of the capital requirement.
2020 2019
GBPmillion GBPmillion
(unaudited) (unaudited)
---------------------------------------------------------------------- ------------ ------------
Tier 1
---------------------------------------------------------------------- ------------ ------------
Share capital 7.5 7.4
---------------------------------------------------------------------- ------------ ------------
Share premium 82.2 81.2
---------------------------------------------------------------------- ------------ ------------
Retained earnings 179.9 164.4
---------------------------------------------------------------------- ------------ ------------
Revaluation reserve 0.9 1.1
---------------------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustment 26.9 22.8
---------------------------------------------------------------------- ------------ ------------
Goodwill (1.0) (1.0)
---------------------------------------------------------------------- ------------ ------------
Intangible assets net of attributable deferred tax (4.5) (7.9)
---------------------------------------------------------------------- ------------ ------------
CET1 capital before foreseen dividend 291.9 268.0
---------------------------------------------------------------------- ------------ ------------
Proposed dividend (8.2) -
---------------------------------------------------------------------- ------------ ------------
CET1 capital 283.7 268.0
---------------------------------------------------------------------- ------------ ------------
Tier 2
---------------------------------------------------------------------- ------------ ------------
Subordinated liabilities 50.8 50.6
---------------------------------------------------------------------- ------------ ------------
Less ineligible portion (5.7) (0.6)
---------------------------------------------------------------------- ------------ ------------
Total Tier 2 capital 45.1 50.0
---------------------------------------------------------------------- ------------ ------------
Own Funds 328.8 318.0
---------------------------------------------------------------------- ------------ ------------
Reconciliation to total equity:
---------------------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustment (26.9) (22.8)
---------------------------------------------------------------------- ------------ ------------
Eligible subordinated liabilities (45.1) (50.0)
---------------------------------------------------------------------- ------------ ------------
Goodwill and other intangible assets net of attributable deferred tax 5.5 8.9
---------------------------------------------------------------------- ------------ ------------
Proposed dividend 8.2 -
---------------------------------------------------------------------- ------------ ------------
Total equity 270.5 254.1
---------------------------------------------------------------------- ------------ ------------
The Group is subject to capital requirements imposed by the PRA
on all financial services firms. During the periods, the Group
complied with these requirements.
The Group raised Tier 2 capital in 2018. Further details of the
capital issuance are given in Note 29.
39. Classification of financial assets and liabilities
Group
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2020
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 181.5 181.5 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 63.3 63.3 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities - - -
------------------------------------------------ --------------------- ----------- --------------------------
Loans and advances to customers 2,358.9 2,420.6 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk 5.7 5.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 4.8 4.8 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 3.3 3.3 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,617.5 2,679.2
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 276.4 276.4 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 1,992.5 2,010.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk 4.7 4.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 6.1 6.1 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 46.2 46.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.8 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,376.7 2,394.2
------------------------------------------------ --------------------- ----------- --------------------------
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2019
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 105.8 105.8 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 48.4 48.4 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities 25.0 25.0 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 2,450.1 2,416.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.9) (0.9) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.9 0.9 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 5.2 5.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,634.5 2,600.6
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 308.5 308.5 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 2,020.3 2,016.9 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.7) (0.7) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.6 0.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 27.2 27.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.6 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,406.5 2,403.1
------------------------------------------------ --------------------- ----------- --------------------------
All financial assets and liabilities at 31 December 2020 and 31
December 2019 were carried at amortised cost, except for derivative
financial instruments which are value at fair value through profit
and loss. Therefore, for these assets and liabilities, the fair
value hierarchy noted above relates to the disclosure in this note
only.
Company
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2020
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 181.5 181.5 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 61.7 61.7 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities - - -
------------------------------------------------ --------------------- ----------- --------------------------
Loans and advances to customers 2,269.8 2,331.3 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk 5.7 5.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 4.8 4.8 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 2.3 2.3 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,525.8 2,587.3
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 276.4 276.4 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 1,992.5 2,010.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk 4.7 4.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 6.1 6.1 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 41.1 41.1 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.8 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,371.6 2,389.1
------------------------------------------------ --------------------- ----------- --------------------------
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2019
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 105.8 105.8 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 45.2 45.2 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities 25.0 25.0 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 2,353.6 2,319.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.9) (0.9) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.9 0.9 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 93.0 93.0 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,622.6 2,588.7
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 308.5 308.5 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 2,020.3 2,016.9 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.7) (0.7) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.6 0.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 31.0 31.0 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.6 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,410.3 2,406.9
------------------------------------------------ --------------------- ----------- --------------------------
All financial assets and liabilities at 31 December 2020 and 31
December 2019 were carried at amortised cost except for derivative
financial instruments which are valued at fair value through profit
and loss. Therefore, for these assets, the fair value hierarchy
noted above relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities. The Group measures fair value using the following fair
value hierarchy that reflects the significance of the inputs used
in making measurements:
-- Level 1: Quoted prices in active markets for identical assets
or liabilities
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly
(i.e. as prices) or indirectly (i.e. derived from prices)
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs)
Loans and advances to customers and Deposits from customers
The fair value of the financial assets and liabilities, is
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date. For loans and advances to customers, the same assumptions
regarding the risk of default were applied as those used to derive
the carrying value.
Debt securities
The fair value of debt securities is based on the quoted price
where available.
Derivative financial instruments
The fair value of derivative financial instruments is calculated
based on the present value of the expected future cash flows of the
instruments. The rate used to discount the cash flows was the
market rate of interest at the balance sheet date.
Subordinated liabilities
The fair value subordinated liabilities is calculated based on
quoted market prices where available, or where an active market
quote is not available, a proxy is used from similar issuances.
For all remaining financial assets and liabilities, the fair
value of financial assets and liabilities is calculated to be
equivalent to their carrying value, due to their short maturity
dates.
40. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits as set out below. The
tables that follow relate to Key Management Personnel, members of
their close family and related entities as described above:
2020 2019
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
------------------------------------------ ----------- -----------
Loans outstanding at 1 January 4.4 4.2
------------------------------------------ ----------- -----------
Loans advanced - 1.3
------------------------------------------ ----------- -----------
Loan repayments - (1.3)
------------------------------------------ ----------- -----------
Interest applied - 0.2
------------------------------------------ ----------- -----------
Change in related parties during the year (4.0) -
------------------------------------------ ----------- -----------
Loans outstanding at 31 December 0.4 4.4
------------------------------------------ ----------- -----------
Deposits
------------------------------------------ ----------- -----------
Deposits outstanding at 1 January 0.2 0.4
------------------------------------------ ----------- -----------
Change in related parties during the year - (0.2)
------------------------------------------ ----------- -----------
Deposits outstanding at 31 December 0.2 0.2
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4 million advance (2019: GBP0.4 million) as part of a
refinanced GBP0.4 million facility agreed with a company in which a
member of the Key Management Personnel of the Company holds 50% of
the voting shares, which is secured by property and personal
guarantees
-- In the prior year, a GBP4.0 million advance as part of a
revised GBP4.1 million facility agreed with a member of the Key
Management Personnel of the Company, who left the Group during the
current year, which is secured by property and certain other
undertakings
Both of these transactions were agreed by the Group's Real
Estate Finance business and arose during the normal course of
business. Both loans were subject to the usual Board governance and
Credit Committee approval procedures and are on substantially the
same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2020 2019
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Interest income and similar income (18.8) (22.2)
----------------------------------- ----------- -----------
Gain on sale of defaulted debt 0.2 0.2
----------------------------------- ----------- -----------
Operating expenses (0.8) (1.0)
----------------------------------- ----------- -----------
Investment income 5.7 15.1
----------------------------------- ----------- -----------
(13.7) (7.9)
----------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Company Company
2020 2019
GBPmillion GBPmillion
------------------------------------------------ ----------- -----------
Amounts receivable from subsidiary undertakings 86.7 88.5
------------------------------------------------ ----------- -----------
Amounts due to subsidiary undertakings (12.6) (5.5)
------------------------------------------------ ----------- -----------
74.1 83.0
------------------------------------------------ ----------- -----------
All amounts above are repayable on demand and the Company
charged interest at a variable rate on amounts outstanding.
Directors' remuneration
The Directors' emoluments (including pension contributions and
benefits in kind) for the year are disclosed in the Directors'
Remuneration Report beginning on page 83 of the Annual Report and
Accounts.
At the year-end the ordinary shares held by the Directors are
disclosed in the Directors' report beginning on page 98 of the
Annual Report and Accounts. Details of the Directors' holdings of
share options, as well as details of those share options exercised
during the year, are also disclosed in the Directors' report.
41. Immediate parent company and ultimate controlling party
The Company has had no immediate parent company or ultimate
controlling party.
42. Country-by-Country reporting
The Capital Requirements (Country-by-Country Reporting)
Regulations 2013 introduced reporting obligations for institutions
within the scope of CRD IV. The requirements aim to give increased
transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
Number Tax paid
Nature Turnover of FTE Profit before tax on profit
Name of activity Location GBPmillion employees GBPmillion GBPmillion
---------------------- ----------------- --------- ----------- ---------- ----------------- -----------
31 December 2020
---------------------- ----------------- --------- ----------- ---------- ----------------- -----------
Secure Trust Bank PLC Banking services UK 208.5 1,021 20.1 4.8
---------------------- ----------------- --------- ----------- ---------- ----------------- -----------
Tax paid
Nature Turnover Number of FTE Profit before tax on profit
Name of activity Location GBPmillion employees GBPmillion GBPmillion
---------------------- ----------------- --------- ----------- ------------- ----------------- -----------
31 December 2019
---------------------- ----------------- --------- ----------- ------------- ----------------- -----------
Secure Trust Bank PLC Banking services UK 212.3 979 38.7 7.6
---------------------- ----------------- --------- ----------- ------------- ----------------- -----------
43. Post balance sheet events
Since 31 December 2020, in response to the COVID-19 pandemic,
the government has announced an extension of the furlough scheme
until September 2021. This intervention is likely to impact UK
unemployment and other economic variables. A further lockdown
period was also put into place in 2021. The Group has concluded
that neither of these events impacted the Group's results as at 31
December 2020, and both therefore are non-adjusting events.
Further information on expected Corporation Tax changes
announced in the Budget in March 2021 are included in Note 9.
Five year summary (unaudited)
2020 2019 2018 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Interest and similar income 192.5 191.4 169.2 149.3 141.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Interest expense and similar charges (41.6) (46.0) (35.5) (26.7) (26.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 150.9 145.4 133.7 122.6 114.8
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission income 15.2 20.1 17.9 14.9 14.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 166.1 165.5 151.6 137.5 129.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment charge on loans and advances to customers (51.3) (32.6) (32.4) (36.9) (30.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Losses on modification of financial assets (3.1) - - - -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Operating expenses (91.6) (94.2) (84.5) (71.6) (71.5)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit on sale of equity instruments
available-for-sale - - - 0.3 -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income tax 20.1 38.7 34.7 29.3 27.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
2020 2019 2018 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable to the
equity holders of the Group during the year
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(expressed in pence per share) - basic 87.0 168.3 153.2 128.8 754.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
2020 2019 2018 2017 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Financial position
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Cash and balances at central banks 181.5 105.8 169.7 226.1 112.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Loans and advances to banks 63.3 48.4 44.8 34.3 18.2
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Debt securities - 25.0 149.7 5.0 20.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Loans and advances to customers 2,358.9 2,450.1 2,028.9 1,598.3 1,321.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio hedged risk 5.7 (0.9) - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 4.8 0.9 - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Other assets 49.9 53.5 51.2 27.9 38.8
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total assets 2,664.1 2,682.8 2,444.3 1,891.6 1,510.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Due to banks 276.4 308.5 263.5 113.0 70.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Deposits from customers 1,992.5 2,020.3 1,847.7 1,483.2 1,151.8
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio hedged risk 4.7 (0.7) - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 6.1 0.6 - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 50.8 50.6 50.4 - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Other liabilities 63.1 49.4 45.6 46.3 52.2
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 270.5 254.1 237.1 249.1 236.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity 2,664.1 2,682.8 2,444.3 1,891.6 1,510.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Appendix to the Annual Report (unaudited)
Key performance indicators
(i) Margin ratios
Net interest margin is calculated as interest income 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 income 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, over 13 months:
2020 2019
GBPmillion GBPmillion
------------------------------------- ----------- -----------
Net interest margin
------------------------------------- ----------- -----------
Interest income and similar income 192.5 191.4
------------------------------------- ----------- -----------
Interest expense and similar charges (41.6) (46.0)
------------------------------------- ----------- -----------
Net interest income 150.9 145.4
------------------------------------- ----------- -----------
Net revenue margin
------------------------------------- ----------- -----------
Net interest income 150.9 145.4
------------------------------------- ----------- -----------
Net fee and commission income 15.2 20.1
------------------------------------- ----------- -----------
Operating income 166.1 165.5
------------------------------------- ----------- -----------
Gross revenue margin
------------------------------------- ----------- -----------
Interest income and similar income 192.5 191.4
------------------------------------- ----------- -----------
Fee and commission income 16.0 20.9
------------------------------------- ----------- -----------
Gross revenue 208.5 212.3
------------------------------------- ----------- -----------
Opening loan book 2,450.1 2,028.9
------------------------------------- ----------- -----------
Closing loan book 2,358.9 2,450.1
------------------------------------- ----------- -----------
Average loan book 2,406.0 2,252.4
------------------------------------- ----------- -----------
Net interest margin 6.3% 6.5%
------------------------------------- ----------- -----------
Net revenue margin 6.9% 7.3%
------------------------------------- ----------- -----------
Gross revenue margin 8.7% 9.4%
------------------------------------- ----------- -----------
The margin ratios all measure the yield of the loan book.
(ii) Cost ratios
Cost of risk is calculated as the impairment charge 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:
2020 2019
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Net impairment charge on loans and advances to customers 51.3 32.6
--------------------------------------------------------- ----------- -----------
Losses on modification of financial assets 3.1 -
--------------------------------------------------------- ----------- -----------
Total loan impairment charges 54.4 32.6
--------------------------------------------------------- ----------- -----------
Average loan book 2,406.0 2,252.4
--------------------------------------------------------- ----------- -----------
Cost of risk 2.3% 1.4%
--------------------------------------------------------- ----------- -----------
Interest expense 41.6 46.0
--------------------------------------------------------- ----------- -----------
Average loan book 2,406.0 2,252.4
--------------------------------------------------------- ----------- -----------
Cost of funds 1.7% 2.0%
--------------------------------------------------------- ----------- -----------
Operating expenses 91.6 94.2
--------------------------------------------------------- ----------- -----------
Operating income 166.1 165.5
--------------------------------------------------------- ----------- -----------
Cost to income ratio 55.1% 56.9%
--------------------------------------------------------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment charge. 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
Adjustments to profit have been removed for 2020. Return metrics
for both 2020 and 2019 are now stated on a statutory rather than
adjusted basis.
Annualised return on average assets is calculated as the profit
after tax for the previous 12 months as a percentage of average
assets, annualised return on average equity is calculated as the
profit after tax for the previous 12 months as a percentage of
average equity and annualised return on required equity is
calculated as the profit after tax for the previous 12 months as a
percentage of average required equity.
Average assets is calculated as the average of the monthly
assets balances, average equity is calculated as the average of the
monthly equity balances and average required equity is calculated
as the average of the monthly balances of total required equity.
Total required equity is calculated as the equity required to
achieve a CET1 ratio of 12%.
2020 2019
GBPmillion GBPmillion
-------------------------- ----------- -----------
Profit after tax 16.2 33.0
-------------------------- ----------- -----------
Opening assets 2,682.8 2,448.6
-------------------------- ----------- -----------
Closing assets 2,664.1 2,682.8
-------------------------- ----------- -----------
Average assets 2,692.5 2,554.9
-------------------------- ----------- -----------
Opening equity 254.1 237.0
-------------------------- ----------- -----------
Closing equity 270.5 254.1
-------------------------- ----------- -----------
Average equity 263.6 243.6
-------------------------- ----------- -----------
Opening required equity 251.8 217.8
-------------------------- ----------- -----------
Closing required equity 240.2 251.8
-------------------------- ----------- -----------
Average required equity 250.2 234.5
-------------------------- ----------- -----------
Return on average assets 0.6% 1.3%
-------------------------- ----------- -----------
Return on average equity 6.1% 13.5%
-------------------------- ----------- -----------
Return on required equity 6.5% 14.1%
-------------------------- ----------- -----------
Return on average assets demonstrates how profitable the Group's
assets are in generating revenue. Return on average equity is a
measure of the Group's ability to generate profit from the equity
available to it. Return on required equity relates profitability to
the capital that the Group is required to hold.
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book at the
year-end, divided by deposits from customers at the year-end, and
the total funding ratio is calculated as the total funding at the
year-end, being the sum of deposits from customers, borrowings
under liquidity support operations and the Term Funding Scheme, and
equity, divided by the loan book at the year-end:
2020 2019
GBPmillion GBPmillion
-------------------------------------------------------------------------- ----------- -----------
Loan book 2,358.9 2,450.1
-------------------------------------------------------------------------- ----------- -----------
Deposits from customers 1,992.5 2,020.3
-------------------------------------------------------------------------- ----------- -----------
Borrowings under liquidity support operations and the Term Funding Scheme 273.1 308.5
-------------------------------------------------------------------------- ----------- -----------
Tier 2 capital (including accrued interest) 50.8 50.6
-------------------------------------------------------------------------- ----------- -----------
Equity 270.5 254.1
-------------------------------------------------------------------------- ----------- -----------
Total funding 2,586.9 2,633.5
-------------------------------------------------------------------------- ----------- -----------
Loan to deposit ratio 118.4% 121.3%
-------------------------------------------------------------------------- ----------- -----------
Total funding ratio 109.7% 107.5%
-------------------------------------------------------------------------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Adjusted earnings per share
Adjustments to profit have been removed for 2020, however
information on the 2019 adjusted earnings per share has been
provided below for the purposes of Director's Remuneration.
Adjusted earnings per ordinary share are calculated by dividing
the adjusted profit attributable to equity holders of the parent by
the weighted average number of ordinary shares as follows:
2020 2019
-------------------------------------------------------------------------- ---------- ----------
Adjusted profit attributable to equity holders of the parent (GBPmillion) 16.2 33.0
-------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares (number) 18,615,480 18,476,280
-------------------------------------------------------------------------- ---------- ----------
Adjusted earnings per share (pence) 87.0 178.6
-------------------------------------------------------------------------- ---------- ----------
(vi) Adjusted profit and effective adjusted tax rate
Adjustments to profit have been removed for 2020, however
information on the 2019 adjusted earnings per share has been
provided below for the purposes of Director's Remuneration.
Adjusted profit before tax was GBP20.1 million (2019: GBP41.1
million). Adjusted profit after tax was GBP16.2 million (2019:
GBP33.0 million).
2020 2019
GBPmillion GBPmillion
-------------------------------------------- ----------- -----------
Statutory profit before tax 20.1 38.7
-------------------------------------------- ----------- -----------
Adjustments to profit before tax
-------------------------------------------- ----------- -----------
Fair value amortisation - 0.2
-------------------------------------------- ----------- -----------
Transformation costs - 1.0
-------------------------------------------- ----------- -----------
Bonus payments - 0.1
-------------------------------------------- ----------- -----------
Revaluation deficit - 1.1
-------------------------------------------- ----------- -----------
Adjustments to profit before tax - 2.4
-------------------------------------------- ----------- -----------
Adjusted profit before tax 20.1 41.1
-------------------------------------------- ----------- -----------
Statutory income tax expense (3.9) (7.6)
-------------------------------------------- ----------- -----------
Income tax expense on adjustments to profit - (0.5)
-------------------------------------------- ----------- -----------
Adjusted income tax expense (3.9) (8.1)
-------------------------------------------- ----------- -----------
Adjusted profit after tax 16.2 33.0
-------------------------------------------- ----------- -----------
Statutory profit after tax 16.2 31.1
-------------------------------------------- ----------- -----------
The Group uses adjusted profit for planning and reporting
purposes, as it improves the comparability of information between
reporting periods. The adjustments to profit relate to
non-controllable items or other items that fall outside of the
Group's core business activities.
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 comprised principally costs of the Motor
Transformation Programme and treasury development.
Bonus payments related to a long-term incentive plan that was
set up for a small number of employees on the creation of the
Commercial Finance business. The scheme is based on profits earned
by that business up to the end of 2019, and was payable in
2020.
The revaluation deficit related to stamp duty and irrecoverable
VAT incurred on the acquisition of a freehold property during the
year.
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