TIDMSTB
RNS Number : 2451U
Secure Trust Bank PLC
28 March 2019
PRESS RELEASE
Thursday 28 March 2019
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year to 31 December 2018
Strategic Repositioning Yielding Significant Benefits
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a 38.8% increase in Group profit before tax to
GBP34.7m for the year to 31 December 2018.
Repositioning of the business model towards lower risk lending
in attractive market segments, and continued growth in both
Business Finance and Consumer Finance, has driven earnings and
reduced impairment losses.
The Group has entered 2019 with positive business momentum,
healthy capital positions and strong liquidity and remains well
placed to pursue its strategic objectives. The successful
repositioning of the balance sheet will also enable the Group to
navigate the current heightened levels of political and economic
uncertainty.
FINANCIAL HIGHLIGHTS
-- Adjusted profit before tax up 35.9% to GBP36.7m (2017*:
GBP27.0m) and is in line with market expectations
-- Reported profit before tax is up 38.8% to GBP34.7m (2017*: GBP25.0m)
-- Higher quality book has significantly reduced cost of risk
-- Healthy common equity tier 1 ratio of 13.8% (2017: 16.5%)
supporting the strong growth in the loan portfolios
-- Total capital ratio of 16.3% (2017: 16.8%)
-- GBP50m of Tier 2 capital was raised at an annual coupon of 6.75%
-- Operating income GBP151.6m (2017*: GBP129.5m) up 17.1%
-- Basic earnings per share 153.2p (2017*: 107.7p) up 42.2%
-- Adjusted earnings per share 161.8p (2017*: 116.4p) up 39.0%
-- Adjusted return on average equity of 13.1% (2017*: 8.9%)
-- Proposed final dividend of 64p per share (2017: 61p per
share), to be paid in May 2019, representing a total dividend of
83p per share (2017: 79p per share)
-- Total assets GBP2.44bn (2017*: GBP1.89bn) up 29.1%
Note: Adjusted profit and adjusted earnings per share relates to
the Group's normal recurring business activities
* 2017 is reported on a continuing operations basis, which
excludes the Personal Lending Division that was sold during that
year, and on an IAS 39 basis
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased by 29.3% to 1,279,783
-- Customer deposits increased to GBP1,847.7m (2017: GBP1,483.2m) up 24.6%
-- New digital deposits platform successfully operational with
new products to be launched in 2019
-- Overall loan book increased to GBP2,028.9m (2017*: GBP1,598.3m) up 26.9%
-- Total annual new business lending volumes grew 17.2% to GBP1,261.9m (2017*: GBP1,077.1m)
-- Real Estate Finance lending balances up 33%** year-on-year to GBP769.8m
-- Invoice Finance expanded its regional footprint, opening
offices in Birmingham, Leeds and London, resulting in lending
balances up more than 50%** year-on-year to GBP194.7m
-- Retail Finance lending balances up 35%** year-on-year to GBP597.0m
-- Significant progress made in Motor Finance. Legacy sub-prime
loans have been successfully replaced with higher quality lending
and plans underway to expand into Prime Credit market and dealer
stocking finance
-- Continuing high levels of customer satisfaction as measured by FEEFO
* 2017 is reported on a continuing operations basis, which
excludes the Personal Lending Division that was sold during that
year
** 31 December 2017 loan book balances adjusted for the
transition impact of adopting IFRS 9 as at 1 January 2018
Lord Forsyth, Chairman, said:
"2018 has been a successful year for the Group in unsettling
economic circumstances. Reducing our exposure to higher risk,
higher margin consumer lending activities whilst focusing on lower
risk lending has delivered a good set of financial results. Despite
the uncertain economic environment that the Group continues to
monitor carefully, the Group enters 2019 well positioned to deliver
further substantial progress in the periods ahead."
Paul Lynam, Chief Executive, said:
"2018 has seen strong Group performance when viewed across a
broad range of customer, staff and financial metrics. Secure Trust
Bank increased its profit before tax by 38.8%, its customer lending
by 26.9% and its customer numbers by 29.3%. With the benefits of
the repositioning of the business model now apparent, the Group
entered 2019 with positive business momentum, healthy capital
positions and very strong liquidity. Our lending portfolio is
appropriately positioned for current economic conditions and the
short duration nature of the asset portfolio means we can react
quickly to both market opportunities and threats."
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Sunil Duggal
David Tyrrell
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
David Ison
Tel: 020 7353 4200
Forward looking statements
This document contains forward looking statements with respect
to the business, strategy and plans of Secure Trust Bank PLC and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Secure Trust Bank PLC's or
management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. Secure Trust Bank
PLC's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a
result of a variety of factors. These include UK domestic and
global economic and business conditions, risks concerning borrower
credit quality, market related risks including interest rate risk,
inherent risks regarding market conditions and similar
contingencies outside Secure Trust Bank PLC's control, any adverse
experience in inherent operational risks, any unexpected
developments in regulation or regulatory and other factors. The
forward looking statements contained in this document are made as
of the date hereof, and Secure Trust Bank PLC undertakes no
obligation to update any of its forward looking statements.
Strategic report
Chairman's statement
2018 has been a successful year for the Group in unsettling
economic circumstances. Reducing our exposure to higher risk,
higher margin consumer lending activities whilst focusing on lower
risk lending has delivered a good set of financial results.
Notable highlights include exceeding more than one million
customers; lending balances over GBP2 billion; growth in statutory
profit of 38.8%; growth in basic earnings per share of 42.2%; and
the strengthening of our capital base. Our Real Estate Finance,
Commercial Finance and Retail Finance businesses have shown strong
growth. The Group is now benefiting from the digital savings
platform launched in 2017 and won a number of awards including Best
Savings Provider, Best Fixed Rate Bond and Best Notice Account
Provider from Savings Champion.
An uncertain economic environment creates risks that require
careful navigation and this has influenced our risk appetite
throughout 2018 and into 2019. We continue to monitor economic
indicators and assess the potential impact on our business.
During the year there were a number of changes to the Board. In
August Sir Henry Angest and Andrew Salmon stepped down as
directors, having contributed significantly to the business over
many years including steering the business from wholly owned
subsidiary to the Main Market of the London Stock Exchange. On
behalf of all my colleagues I would like to record our appreciation
and thanks to them. In November I was delighted to welcome Lucy
Neville-Rolfe and Paul Myers to the Board following a rigorous
search in which the Board was assisted by headhunters Korn Ferry.
They bring significant relevant experience to our Board. The
introduction of the latest version of the Corporate Governance Code
with effect from 1 January 2019 also caused us to review the
composition of our Board and Committees and in January I stepped
down as a member of the Audit Committee and Paul Lynam stepped down
from the Risk Committee. We are now fully compliant with the
requirements of the new Corporate Governance Code and intend to
continue to be so. The Board comprises two Executive Directors,
five independent Non-Executive Directors and myself as Chairman. I
am immensely grateful to Ann Berresford, Paul Marrow and Victoria
Stewart for the work they have done during the year in chairing the
Audit, Risk and Remuneration Committees in what has been a very
busy year.
We fully recognise the importance of engaging with all our
stakeholders. A new Group-wide Employee Council was established
during 2018. We have established direct lines of communication from
the Employee Council to the Executive Committee (via the Chief
Executive Officer) and to the Board (via the Senior Independent
Director and the Chief Executive Officer) both of whom sit on the
Employee Council. The results of our employee survey conducted in
2018 were encouraging.
Once again I want to highlight and commend the fantastic
charitable and community work being carried out by our employees. I
had the opportunity during the year to visit the Birmingham St
Mary's Hospice and see first-hand the impact of what our team can
do. This year we were able to enhance our matched giving scheme to
support our employees' fundraising activities. This forms part of
our commitment to be a responsible business and make a positive
contribution to the community in which we operate.
The Board is proposing a final dividend for 2018 of 64 pence per
share. This, when added to the interim dividend for 2018 of 19
pence, would mean a full year dividend for 2018 of 83 pence per
share. The full year dividend paid in 2017 was 79 pence per share,
being made up of an interim dividend of 18 pence plus a final
dividend of 61 pence. If approved at the AGM, the 2018 final
dividend will be paid on 24 May 2019 to shareholders on the
register as at 26 April 2019.
Finally, on behalf of the Board I would like to express my
thanks to our CEO, Paul Lynam, and all of our colleagues across the
Group for another year of progress and for their continued
dedication and commitment. Given the resources at our disposal, the
talents of our people, the flexibility of our business model and
our clear strategy we can face the future, however uncertain, with
optimism and confidence.
Lord Forsyth
Chairman
27 March 2019
Chief Executive' statement
I am delighted to report a strong year's performance for 2018
when viewed across a broad range of customer, staff and financial
metrics. I would like to thank the entire STB team for their
commitment and professionalism last year and for the way they have
continued delivering good outcomes for our all-important customers.
As expected, the repositioning of the business model towards lower
risk lending, and continued growth in both Business Finance and
Consumer Finance, has seen income grow and impairment losses
reduce. These factors have driven the strong growth in reported and
adjusted earnings.
The financial results for 2018 show the Group statutory profit
before tax increasing by 38.8% to GBP34.7 million compared to the
GBP25.0 million of profit before tax generated from continuing
operations during 2017. Adjusted profit before tax on the same
basis has increased by 35.9% to GBP36.7 million. Adjusted earnings
per share increased by 39.0% over the same period with basic
earnings per share increasing by 42.2%. As shown on page 21, the
Group's adjusted return metrics have also improved.
With the benefits of the repositioning of the business model now
apparent, the Group entered 2019 with healthy capital and liquidity
positions. We have positioned the balance sheet to enable us to
navigate the heightened levels of political and economic
uncertainty arising from Brexit. The fundamentals of the UK economy
are sound and we have seen no discernible change in the behaviour
of our consumer customers. The financial sector is resilient.
Corporate balance sheets are strong, and the labour market is tight
as evidenced by record levels of employment.
Assuming an orderly exit from the EU we expect the UK economic
outlook to improve which the Group will seek to leverage as it
continues to execute its clearly defined growth strategy. We are
well placed to support an increase in demand for working capital
funding from businesses and residential development finance from
house builders. The latter is aided by a regulatory capital
efficient Enable Guarantee we have agreed with the British Business
Bank. We are developing new products in our Retail Finance business
and are progressing significant investment in our Motor Finance
business which will see this portfolio grow considerably over the
next 5 years via the provision of dealer stocking finance and a
prime motor proposition for consumers. In overall terms we are well
positioned in a number of attractive lending classes and have
started 2019 strongly. We therefore expect good progress to be made
in meeting our goals over the coming period.
Further growth in customer base and satisfaction levels remain
very positive
Across our consumer and SME business products we are serving
well over 1 million customers. This is a key milestone achievement
in 2018. Total customer numbers are a record 1,279,783 customers
which is an increase of 29.3% on the total customer base of 989,528
as at 31 December 2017.
We continue to focus on consistently delivering good outcomes
for customers and ensuring that the design of our products is
appropriate for their needs. From a conduct and behaviour
perspective we do not cross subsidise losses or low profits on some
products with super profits on others. Nor do we discriminate
between customers by, for example, paying very low deposit interest
rates to existing loyal customers whilst offering much higher rates
to new ones. We believe that our approach is the appropriate way to
interact with our customers for the long term benefit of all
parties.
Customer satisfaction is measured in a number of ways. It is
reassuring that 2018 has once again seen us consistently achieve
customer satisfaction ratings in excess of 90% across all of our
products as measured by FEEFO. We also use Net Promoter Scores to
assess our customer service and these scores exhibit similar
positive trends to those derived from FEEFO.
I am delighted to confirm that for the sixth year running we
have retained the Customer Service Excellence standard. This
standard was introduced by the Cabinet Office in 2010 to replace
the Kite Mark. This indicates our customer service has been judged
to meet Government standards of excellence which are benchmarked
against high-performing organisations.
Whilst being pleased with external accolades and ongoing high
customer satisfaction scores we are in no way complacent. We are
focused on improving our existing service and products and
diversifying our customer proposition via targeted investment in
people, systems, processes and products.
Healthy Capital position
Our ongoing priority is to safeguard the reputation and
sustainability of the Group through prudent balance sheet
management, investment for long-term sustainable growth and robust
risk and operational controls.
Our year end CET1 capital levels are healthy with a CET1 ratio
of 13.8% compared to the 2017 year end position of 16.5%. The Total
Capital Ratio was 16.3% (2017: 16.8%) and STB's leverage ratio was
10.0% (2017: 12.3%) as at 31 December 2018. The year on year
movement in CET1 is a function of the investment of capital to
support the strong growth in the loan portfolios. The Total Capital
Requirement ratio includes the impact of the issuance of Tier 2
capital, discussed below. The ratios are comfortably ahead of
minimum requirements and demonstrate capacity to continue growing
customer lending balances in 2019.
As previously disclosed, the Board reviewed the Group's capital
structure during the first half of 2018 and determined that an
issuance of Tier 2 capital, at the rates available at the time, was
advantageous. As a result an issuance of GBP25 million was made in
July and a further issuance of GBP25 million in October. The annual
coupon is 6.75% per annum. This is an annual post-tax cost of 5.4%
and represents attractively priced funding which helps the group to
reduce its overall weighted average cost of capital.
We will continue to seek to optimise the composition and cost of
the Group's capital base particularly given our ongoing growth and
ambition albeit barring major developments there are no plans to
issue further capital in the forthcoming period.
Prudent liquidity management
Our year end loan to deposit ratio was 109.8% (2017: 107.8%).
Customer demand for our deposit products remains very strong, and I
am pleased to continue to note that the majority of customers with
maturing medium term savings bonds chose to reinvest their funds
into deposit products with us. The retention rate reached a new
high of 80% for the December 2018 maturities.
The Bank has continued broadly to match-fund its customer
lending with customer deposits. This strategy seeks to mitigate
maturity transformation and interest basis risks. As the balance
sheet grows we have continued to invest in our Treasury function
which includes developing the capabilities to utilise hedging
instruments should we determine that would be advantageous.
The new deposit platform which went live in the final quarter of
2017 performed well during its first full year of operation in
2018. This is now beginning to deliver benefits for the Group,
enhancing the offering, providing internet banking, and improving
efficiency and risk controls while providing flexibility to
introduce new products. The new technology is also enhancing our
customer service proposition whilst providing much greater
scalability than the previous platform. This will allow us to fund
our very short term lending activities, such as Invoice Finance and
some Retail Finance, with lower cost shorter duration deposit
products. This year we also plan to launch cash ISA products which
typically offer lower rates than non ISA savings. The planned
product diversification will enhance our competitive positioning
and continue to support our approach of broadly matching assets and
liabilities.
Usage of the Term Funding Scheme ('TFS') was increased prior to
the closure of the scheme in February 2018 in order to lock in some
of the unutilised capacity. This remains a modest part of the
Bank's funding. I flagged in my equivalent statement last year that
I expected the closure of the schemes to alter competitive dynamics
in the deposit market and this has been the case. Deposit costs
have risen modestly and this has been a factor in the compression
of Net Interest Margins particularly in the mortgage market. STB's
matched funding strategy and short duration loan book has allowed
us to protect NIMs by passing through increases in our funding
costs to new borrowers and those whose loans are priced on a
variable basis. This key area will require ongoing proactive
management whilst TFS continues to unwind.
Income grew and cost of risk reduced
The Group's operating income grew by 17.1% to a record level of
GBP151.6 million compared to the GBP129.5 million from continuing
operations during 2017. Operating costs rose 18.5% to GBP84.5
million from GBP71.3 million in 2017, reflecting continued
investment in the business. The cost to income ratio has remained
stable at 55.7% (2017: 55.1%).
During 2017 the Group reduced its risk appetite and evolved the
business model away from higher risk unsecured consumer credit and
towards lower risk secured lending across a focused group of
attractive asset classes. This repositioning has driven the
expected substantial reduction in cost of risk.
On 1 January 2018, IFRS 9 became effective. IFRS 9 is a more
volatile methodology compared to the previous IAS 39. Changes in
the performance of underlying loan balances are more immediately
reflected in the required IFRS 9 impairment charge as this operates
on a forward looking basis whereas under IAS 39 provisions are
raised as losses are incurred. The impairment requirement
differential is most pronounced in rapidly growing or shrinking and
rapidly improving or deteriorating portfolios. The improvement in
the quality of the Motor Finance book over 2018, as described in
more detail below, has consequently led to a much improved
impairment charge for the year using IFRS 9 when compared to the
previous year's result using IAS 39. A future deterioration in
performance or economic factors could lead to the reverse impact.
Ultimately the profit arising from a particular loan and the
associated cash flows are unchanged.
The introduction of IFRS 9 serves to complicate prior year
comparisons. On a continuing basis the IAS 39 impairments for 2017
were GBP33.5 million representing a cost of risk of 2.4% based on
average customer lending balances. On a reported basis the IFRS 9
impairment charge for 2018 is GBP32.4 million representing a cost
of risk of 1.8% based on average customer lending balances.
We have carefully monitored lending markets throughout 2018 and
note that lenders operating in the sub prime market reported a
trend of increasing impairments. These trends would appear to
vindicate our decisions to exit sub prime motor finance and near
prime medium term personal loans after we identified warning signs
in this part of the market in late 2016.
Customer lending activities
Once again strong double digit percentage growth was achieved
across the Group's loan portfolio in 2018 notwithstanding the run
off of the legacy subprime motor portfolio. Total annual new
business lending volumes grew 17.2% to GBP1,261.9 million (2017:
GBP1,077.1 million) which translated to an increase of 26.9% in
overall balance sheet customer lending assets to GBP2,028.9 million
(2017: GBP1,598.3 million for continuing operations).
Consumer Finance
In 2018 total consumer lending, excluding mortgages, increased
22.0% to GBP905.7 million (2017: GBP742.5 million). Our Consumer
Finance lending strategy during 2018 centred on running off the sub
prime motor portfolio and allocating capital to support the
continued growth in Retail Finance, which is shorter term in
duration and prime in nature, and higher quality new business in
Motor Finance.
The Retail Finance point of sale business, net of provisions,
grew strongly as intended, with customer lending balances at 31
December 2018 increasing 32.1% to GBP597.0 million (2017: GBP452.3
million). Our Retail Finance business has continued to evolve as we
have grown into one of the largest participants in this market. We
are writing a broader spectrum of business including increased
levels of interest bearing lending. This lending has higher levels
of impairments compared to interest free finance and this is
factored into our pricing to ensure we achieve our targeted risk
adjusted return. The impairments and risk adjusted returns in 2018
have been in line with our expectations. However, the volatility of
the IFRS 9 methodology compared to IAS 39, coupled with the rapid
balance sheet growth has an impact on the V12 reported results.
During the year we made significant progress in repositioning
the motor book. The legacy sub prime loans have been run down to an
immaterial level and we have successfully replaced these assets
with new originations of a much higher quality. As a result
customer lending balances, net of provisions, have been held flat
year on year with GBP276.4 million at 31 December 2018 compared to
GBP274.6 million in the prior year. As expected the repositioning
has driven lower like-for-like impairments in the motor portfolio
and profitability margins improved as the drag effect of the run
off of the sub prime part of the book abated.
The markets for those debt collection agencies fully authorised
by the Financial Conduct Authority improved as more operators
exited the market or were consolidated within larger entities.
These attributes translated into more opportunities for Debt
Managers (Services) Limited ('DMS') in the third party debt
collection and portfolio acquisition spaces during 2018. The Group
has taken advantage of these opportunities, with DMS generating an
excellent financial result. Overall, the profit before tax of
GBP1.6 million in 2018 for this business was well above the GBP0.6
million recorded for the prior year.
Consumer Mortgage lending balances have increased from GBP16.5
million as at 31 December 2017 to GBP84.7 million as at 31 December
2018 being growth of 413%. During 2018 the residential mortgage
market showed increasingly aggressive competitive pressures, with
lenders increasingly competing on price and risk appetite to drive
new business volumes. It is no surprise that in the early part of
2019 lenders including Metro Bank, Santander UK and Nationwide
Building Society have all reported Net Interest Margin contraction.
My expectation is that the trend of increasing loan-to-value
metrics and lower new net lending margin is likely to be sustained
throughout 2019 before subsequently being tempered or reversed by
factors detailed below under the 'evolving regulatory and
competitive environment' heading. Given we have the options to
profitably deploy capital elsewhere that would otherwise be used to
support residential mortgage lending, as previously disclosed we
have decided to cease origination of new residential mortgage
business until conditions become more favourable. This change is
not expected to have a material impact on 2019 earnings.
Business Finance
The Group's SME lending operations have grown strongly, as
targeted, and I expect further positive progress in 2019 given we
started the year with a strong new business pipeline. Total
business customer lending balances in 2018 increased 24.7% to
GBP1,027.3 million (2017: GBP824.0 million). Real Estate Finance
lending balances increased by 32.5% to GBP769.8 million as at 31
December 2018 (2017: GBP580.8 million).The loan book is performing
well and remains biased in favour of modestly leveraged residential
investment lending. This is reflected in the portfolio composition,
which in round terms is split 70% / 30% in favour of investment
lending versus development lending. We have continued to adopt a
cautious stance towards Central London house building finance.
Outside of Central London demand for property development finance
has remained robust and the units we have financed have continued
to sell well, in a number of cases faster and for higher values
than originally expected. The average LTV across the whole Real
Estate Finance portfolio remains less than 60%.
In previous statements I noted that some lenders were offering
loans up to or exceeding 100% of open market value on asset finance
at extremely low margins, by historical standards. 2018 saw a 10%
increase in company insolvencies in England and Wales to the
highest level since 2014. As such it is not surprising to note that
the Asset Finance market has seen an increase in customer defaults
and in impairments during the year. We are not prepared to
compromise on risk or price simply to achieve short term net
balance sheet growth, and as matters stand expect this part of the
lending portfolio to continue to contract as we are not writing new
business. Asset Finance lending balances contracted to GBP62.8
million as at 31 December 2018 compared to GBP116.7 million a year
ago. We will revisit our appetite for recommencing new lending in
light of market developments in this scale part of the UK SME
lending market.
Secure Trust Bank Commercial Finance, the invoice finance
division of the Bank, had another excellent year and has now funded
over GBP2.5 billion of customers' invoices since launch. Excluding
the systemic banks, based on customer lending balances we are now
the 5th largest operator in the invoice finance market but given
the fragmented nature of the market we have substantial
opportunities to continue to grow very strongly in this sector.
This is evidenced by customer lending balances, which net of
provisions grew 53.9% to GBP194.7 million at 31 December 2018
(2017: GBP126.5 million). I continue to believe we have one of the
most capable teams of invoice financiers in the UK, supported by a
scalable modern IT platform. This, coupled with Group management's
experience in SME and corporate lending, gives STB a distinct
advantage when it comes to structuring transactions and responding
rapidly to opportunities. Impairments levels here have been
immaterial reflecting very robust credit management
disciplines.
Fee based accounts
As expected, the legacy OneBill product, which closed for new
business in 2009, continues to see customer numbers decline over
time. Customer numbers fell to 18,032 by 31 December 2018 compared
to 18,963 a year earlier.
Evolving regulatory and competitive environment
From a Prudential Regulation perspective it is apparent that the
regulatory direction of travel with the introduction of the MREL
regime and the reforms to the Basel Capital requirements is to
reduce the capital differentials between the systemic and
non-systemic firms which should ultimately bode well for smaller
banks.
I have noticed a change in regulatory tone particularly by the
Financial Conduct Authority ('FCA') during 2018. In my opinion the
FCA increasingly acknowledges that when it comes to many financial
products, not just in banking, loyalty does not pay, it costs. On
average, long term savers are paid considerably lower interest
rates than newer customers and mortgage borrowers moving from
initial fixed rates to standard variable rates ('SVR') typically
pay the highest interest rates. This is the thrust of the Super
Complaint lodged by the Citizens Advice Bureau in 2018 which I
believe is intended to tap into the changing public and political
mood, especially with the ongoing drive by regulators and
politicians to be seen to protect what they describe as vulnerable
customers. In late December 2018 the FCA provided the following
update: 'The treatment of long-standing customers remains a
priority for the FCA. We have worked closely with the CMA since
they received the super-complaint. We will continue to do this. It
is important that this issue is tackled and harmful practices are
stopped. We expect firms to look after the interests of all
customers and treat them fairly, whether they are new or
longstanding. Where we have concerns about conduct by firms, we
will explore all options to address this using the full range of
our powers'.
In banking, millions of inert savers are paid extremely low
interest rates with this extremely cheap funding helping those
banks concerned to use price to dominate large parts of the lending
market. This is especially so in mortgages where the additional
profit subsidisation effects of high SVRs on back books allows the
biggest banks and building societies to charge extremely low
margins on front books. These dynamics and the current capital
differentials (the latter being addressed over time by the incoming
Basel capital floors) are key reasons why the 10 biggest firms
control 90% of that market.
The FCA has thus far followed a 'sunlight' strategy in the hope
that by raising consumer awareness of the costs of inertia they
would drive changes in behaviours which would give better outcomes
for consumers. This has not been as successful as desired which I
believe is a key reason why the FCA is now seriously considering
more direct intervention. One manifestation of this is their
proposed Basic Variable Minimum Savings Rate which would greatly
benefit inert long term savers. This will impact the cost of the
deposit back book for the larger banks and some building societies
and means they would need to accept lower profits or more likely
seek to maintain NIM by increasing lending margins and / or pay
less for front book deposits. By definition the challenger banks do
not attract inert savings customers. So if the dominant banks need
to increase lending margins it should logically increase the
proportion of the market that can be economically served by the
smaller challengers and specialist banks.
It is worth noting that the last Competition and Markets
Authority banking market investigation highlighted that residential
mortgage lending was by far the most profitable thing banks do and
that the systemic firms were more profitable than the smaller ones.
It is entirely possible that the FCA will consider intervention in
the SVR market (the huge differences between new lending margins
and SVR cannot be objectively justified in my view). This has a
range of ramifications not least of which is the impact on
Effective Interest Rate ('EIR') accounting. EIR allows lenders to
recognise mortgage profits now based on assumed customer behaviours
in the future. If SVR intervention arises then there will likely be
EIR and profit ramifications. Should such a situation come to pass
then the likely winners will be those who do not rely on inert
savers and those who do not rely on high cost SVR customers
providing super profit margins on the mortgage side.
During 2018 a number of stakeholders have recognised that post
Brexit HM Government could choose to adopt a much more
proportionate approach to the regulation of smaller
non-internationally active banks than is possible today. Certainly
one of the implications of the UK's exit from the European Union is
that it can address the shortcomings of the 'one size fits all'
Capital Requirements Regulation implementing the Capital
Requirements Directive IV, if the appetite exists.
In summary whilst the situations above remain somewhat fluid, I
am increasingly optimistic that cumulative actual and potential
action by regulators could help to materially improve the
competitive positioning of smaller banks in the UK.
Strategic priorities
The Group's three strategic priorities of: (i) organic growth,
(ii) diversification and (iii) M&A activity are unchanged.
The benefits of a diversified business model have been evident
during 2018 when we have been able to reallocate capital from
higher risk higher margin to lower risk lower margin lending
activities whilst continuing to scale the Group's balance sheet and
grow our profitability.
The focus for 2019 is on:
(i) Organic growth in responsible lending across a diverse portfolio of attractive segments.
(ii) Continued investment in broadening our product offerings to customers.
(iii) Pursuing M&A activity on an opportunistic basis.
(iv) Optimising our capital and liquidity strategies.
(v) Continuing to target delivering profit growth in the medium term to create shareholder value.
Our long-term ambition remains to grow a broad based portfolio,
balanced across consumer finance, SME finance and residential
mortgage lending.
We will continue to grow our Retail Point of Sale (V12) and
Motor propositions in the Consumer Finance sector. V12 has
delivered six years of balance sheet and profit growth since being
acquired in January 2013. Whilst now a top five player it has a
modest market share and considerable potential to continue growing
our lending balances which are relatively short term in duration
and prime in nature.
The market for Motor Finance in the UK is nearly GBP60 billion.
This is a highly fragmented and competitive space where we have a
GBP0.25 billion share predominantly in non-prime lending. This is
an important and profitable line of business for us. We see
opportunities to continue to grow our near-prime lending and have
now initiated a transformation programme which will see us offering
a whole of market solution to dealers and brokers. This will
include dealer stocking and prime / near-prime consumer lending
products. The existing lenders in this space enjoy attractive
returns on equity and we believe that the combination of the
competitive funding costs provided via our banking licence and
brand new technology will allow us to gain market share and grow a
sizable business in this space over the next 3-5 years.
Economic and political related uncertainties have influenced UK
residential house prices during 2018 with these having barely
appreciated in value over the period. This has informed our risk
appetite for new lending to house builders in the year with our
Loan to Gross Development Value limits remaining modest to ensure
that the borrower has hard equity in any deal and to provide a
buffer lest market values fall. Strategically we remain committed
to supporting the Government policy of building more new homes and
believe an orderly exit from the EU will be positive for the UK
housing market. With this in mind the Group has entered into, but
not yet triggered, an ENABLE Guarantee with the British Business
Bank. This is designed to enable banks to increase their lending to
SMEs by reducing the amount of capital required to be held against
such lending. Under an ENABLE Guarantee, the UK Government takes on
a portion of the counterparty's risk on a portfolio of loans to
smaller businesses in return for a fee. Assuming an orderly Brexit
and positive reaction in the UK housing market the Group will
allocate this additional capital to increase its funding to new
build and redevelopment projects undertaken by SME housebuilders
and developers.
The UK Invoice Finance and Asset Finance markets are large,
fragmented and growing markets of around GBP20 billion each. We are
very pleased with the progress made by STB Commercial Finance. We
see significant future growth potential and would be interested in
acquiring businesses in these spaces if the risk profile and
economics of any transaction are attractive.
Residential mortgage lending is the biggest single part of the
UK lending market. As previously disclosed the Group has ceased
originating new residential mortgage loans due to concerns about
current market practices in respect of risk and price. The capital
that would otherwise have been used to support mortgages lending
growth is being deployed for more optimal short-term returns. We
remain interested in inorganic opportunities that would get us to
the critical mass necessary to be profitable, if the economics of
such a transaction were compelling. I believe the factors that will
serve to make market conditions more attractive over time will be
the introduction of the MREL regime, the significant Basel capital
reforms, the unwinding of the Term Funding Scheme, a tightening in
the securitisation market which is already impacting some non-bank
lenders and the potential for FCA price intervention in the inert
savings market. We will closely monitor these evolving situations
which will inform our strategic thinking.
In support of our strategy, we have engaged in a number of
discussions relating to inorganic business opportunities during
2018 but none progressed to a conclusion that was acceptable to us.
Our previous M&A activities have generated considerable
shareholder value due in part to the discipline that we apply. We
will continue to be disciplined in our approach to opportunities,
prioritising the creation of sustainable, long-term shareholder
value. We are continuing to work on a diverse pipeline of external
business opportunities.
Current trading and outlook
Notwithstanding the slowing in UK economic activity in the
latter part of 2018 and into the New Year we are pleased with our
performance in the early part of 2019 which is in line with
management expectations.
Management and the Board are very carefully monitoring the
highly fluid political situation. We have a range of early warning
indicators and contingency plans in place in the event a no deal
Brexit leads to an economic downturn. We have seen no discernible
change in our consumer businesses. We have deliberately
repositioned the Group's balance sheet away from higher risk
consumer lending to mitigate the potential of a disorderly Brexit
and ensured the overall loan book is of a short duration. To
provide some context the Group's Retail Finance lending balances
now exceed GBP600 million. On average we are lending over GBP50
million per month in this area. It follows that in a stressed
economy we could reduce these credit exposures in a rapid and
orderly fashion. This sort of option does not exist in the medium
term unsecured personal loan or credit card market. This was a
factor in us exiting the former in December 2017.
Economic and political related uncertainties are weighing on the
UK economy albeit this has impacted businesses much more than
consumers. Concerns about the potential for a no deal exit from the
EU to cause a change in consumer behaviour and an increase in loan
impairments due to a squeeze on the cost of living caused by a
weaker pound have negatively impacted the values of UK financial
assets and bank share prices. Our SME businesses have performed
well and have substantial new business pipelines, some of which is
due to planned transactions being delayed whilst business owners
wait to see on what basis and over what timescale the UK exits the
EU. Given this, the fact that current UK economic fundamentals are
solid with record employment levels, the lowest unemployment since
1975 and real take home pay rising provides grounds for optimism.
My belief is that an orderly Brexit will trigger an increase in
business investment which will be good for employment and pay. An
abating of political and economic uncertainty should be positive
for the value of financial assets and business and consumer
confidence generally.
In summary, the Group's lending portfolio is appropriately
positioned for the current conditions and the short duration nature
of the asset portfolio means the Group can react quickly to both
opportunities and threats.
The Group entered 2019 with positive business momentum, healthy
capital positions and very strong liquidity and remains well placed
to pursue its strategic priorities.
Paul Lynam
Chief Executive Officer
27 March 2019
Financial review
2018 2017 2017 2017
Continuing Discontinued
Total operations operations Total
Adjusted profit reconciliation GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ------------ ------------- -----------
Interest, fee and commission
income 188.6 157.3 8.0 165.3
Interest, fee and commission
expense (37.0) (27.8) - (27.8)
------------------------------------ ----------- ------------ ------------- -----------
Operating income 151.6 129.5 8.0 137.5
Impairment losses (32.4) (33.5) (3.4) (36.9)
Operating expenses (84.5) (71.3) (0.3) (71.6)
Profit on sale of Non-Standard
Finance plc shares - 0.3 - 0.3
------------------------------------ ----------- ------------ ------------- -----------
Profit before tax 34.7 25.0 4.3 29.3
Adjustments to profit before
tax (see below) 2.0 2.0 (4.3) (2.3)
------------------------------------ ----------- ------------ ------------- -----------
Adjusted profit before tax 36.7 27.0 - 27.0
Adjusted tax (6.8) (5.5) - (5.5)
------------------------------------ ----------- ------------ ------------- -----------
Adjusted profit after tax 29.9 21.5 - 21.5
------------------------------------ ----------- ------------ ------------- -----------
Adjusted basic earnings per
share (pence) 161.8 116.4 - 116.4
------------------------------------ ----------- ------------ ------------- -----------
Statutory results
Profit before tax 34.7 25.0 4.3 29.3
Tax (6.4) (5.1) (0.8) (5.9)
------------------------------------ ----------- ------------ ------------- -----------
Profit after tax 28.3 19.9 3.5 23.4
Gain recognised on disposal
after tax - - 0.4 0.4
------------------------------------ ----------- ------------ ------------- -----------
Profit for the year 28.3 19.9 3.9 23.8
------------------------------------ ----------- ------------ ------------- -----------
Basic earnings per share (pence) 153.2 107.7 21.1 128.8
------------------------------------ ----------- ------------ ------------- -----------
Adjustments to profit before
tax
Fair value amortisation 0.3 0.9 - 0.9
Transformation costs 0.4 0.8 - 0.8
Bonus payments 1.3 0.6 - 0.6
Profit on sale of Non-Standard
Finance plc shares - (0.3) - (0.3)
Discontinued operations - - (4.3) (4.3)
------------------------------------ ----------- ------------ ------------- -----------
Adjustments to profit before
tax 2.0 2.0 (4.3) (2.3)
------------------------------------ ----------- ------------ ------------- -----------
Key performance indicators
The following key performance indicators, stated for continuing
operations, are the primary measures used by management to assess
the performance of the Group:
Financial KPIs
Adjusted profit Earnings per share Return ratios
----------------------- -------------------- -----------------------------------
Adjusted profit Basic earnings Adjusted return on average assets
before tax per share
GBP36.7 million 153.2 pence 1.4%
2017: GBP27.0 million 2017: 107.7 pence 2017: 1.3%
Adjusted profit Adjusted basic Adjusted return on average equity
after tax earnings per share 13.1%
GBP29.9 million 161.8 pence 2017: 8.9%
2017: GBP21.5 million 2017: 116.4 pence
Adjusted return on required equity
14.8%
2017: 13.5%
----------------------- -------------------- -----------------------------------
Growth Margin ratios Cost ratios Funding ratios
-------------------- --------------------- --------------------- --------------------
Loans and advances Net interest margin Cost of risk Loan to deposit
to customers ratio
GBP2,028.9 million 7.4% 1.8% on an IFRS 109.8%
9 basis
2017: GBP1,598.3 2017: 8.1% 2017: 2.4% (on an 2017: 107.8%
million IAS 39 basis)
Net revenue margin Cost of funds Total funding ratio
8.3% 2.0% 118.2%
2017: 9.1% 2017: 1.9% 2017: 115.5%
Gross revenue margin Cost to income ratio
10.4% 55.7%
2017: 11.1% 2017: 55.1%
-------------------- --------------------- --------------------- --------------------
Non - financial KPIs
-----------------------------------------------------------------------------------------
Customer FEEFO ratings Employee survey Environmental intensity indicator
4.7 stars trust index score 3.5
2017: 4.7 stars 77% 2017: 4.2
(mark out of 5 based (new measure, based (tonnes carbon dioxide per GBP1 million
on star rating from on 2018 all staff Group income)
1,175 reviews (2017: survey
608 reviews)) 2018 engagement
score 76% 2017:
78%)
----------------------- --------------------- -----------------------------------------
The Remuneration Report, starting on page 97, sets out how
executive pay is linked to the assessment of key financial and
non-financial performance metrics.
These 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 to the Annual Report on page 218.
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 corporate responsibility section on page 54.
Unless otherwise stated, the analyses within the Strategic
Report relate to continuing operations, which represents all of the
Group's divisions, excluding PLD.
Interest, fee and commission income
Interest, fee and commission income is made up of interest
income, which is predominantly earned on loans and advances to
customers, and fee and commission income, which consists
principally of fees from the OneBill, Commercial Finance, Retail
Finance and Motor Finance products and commissions earned on debt
collection activities in DMS.
Interest income was GBP169.2 million for 2018, increasing by
GBP27.9 million (19.7%) on 2017, which was driven by the growth of
the Group's loan books over the year. Loans and advances to
customers increased from GBP1,598.3 million to GBP2,028.9 million
over the year.
Fee and commission income was GBP19.4 million for 2018,
increasing by GBP3.4 million (21.3%) on 2017. The growth relates to
increasing levels of fees earned on Commercial Finance and Retail
Finance lending, with fee income relating to OneBill continuing to
decrease year on year, as this product is closed to new
business.
The gross revenue margin reduced from 11.1% to 10.4%. This
reflects the continued repositioning of the balance sheet to lower
risk lower return lending. In particular, growth in Motor Finance
lending which yields relatively high margins was modest in 2018,
compared with more significant growth in Retail Finance and the low
risk Business Finance portfolios.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest
expense, which is incurred in respect of deposits from customers,
subordinated liabilities and TFS borrowings, and fee and commission
expense, comprising mainly fees and commissions on the Motor
product, and commissions paid on debt collection activities in
DMS.
Interest expense was GBP35.5 million for 2018, increasing by
GBP8.8 million (33.0%) on 2017. The cost of funds increased from
1.9% for 2017 to 2.0% for 2018. The impact on the Group of the rise
in the Bank of England base rate during the year was limited in
2018, given the predominantly fixed rate deposit funding. The
interest expense for 2018 includes the cost of subordinated debt
raised during the year, as explained further in Note 24.
The Group's net interest margin reduced from 8.1% in 2017 to
7.4% in 2018, primarily due to the mix of business referred to
above.
Fee and commission expense has increased by GBP0.4 million
(36.4%), mainly arising from the increase in activity in DMS, as
set out in the business review on page 36.
Operating income
Operating income increased by 17.1% to GBP151.6 million (2017:
GBP129.5 million).
The net revenue margin for 2018 was 8.3% compared with 9.1% for
2017. The reduction in this margin is due to the factors referred
to above.
Impairment losses
Impairment losses during the year were GBP32.4 million (2017:
GBP33.5 million). The impairment losses for 2018 are calculated
using the expected credit loss methodology required by IFRS 9,
whereas the comparative impairment losses for 2017 were calculated
using the incurred loss methodology set out in IAS 39. The expected
increase in charge brought about by the change in methodology to
IFRS 9, which accelerates the recognition of losses particularly
for growing books, has been offset by improvement in performance,
particularly in respect of Motor Finance lending.
The provision charge includes the impact of applying expert
credit judgement, resulting in overlays being added to provision
levels estimated using the Group's models. A breakdown of the
charge by product is shown in Note 3.
The cost of risk for 2018 on an IFRS 9 basis was 1.8%. The cost
of risk on an IAS 39 basis was 2.4% for 2017. Further analysis of
the Group's loan book and its credit risk exposures is provided in
Notes 11, 12, 13 and 30.
Operating expenses
Operating expenses have increased, reflecting the investments
made in the infrastructure and staff resources of the Group to
achieve growth targets, from GBP71.3 million in 2017 to GBP84.5
million in 2018. The Group's cost to income ratio increased to
55.7% from 55.1% for 2017. The infrastructure growth has been
focused on motor transformation, Treasury and risk management
enhancements.
Taxation
The effective adjusted tax rate has fallen to 18.5%:
2018 2018 2017 2017
Effective Effective Effective Effective
adjusted statutory adjusted statutory
tax rate tax rate tax rate tax rate
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- ----------- -----------
Tax 6.8 6.4 5.5 5.1
Profit before tax 36.7 34.7 27.0 25.0
Effective rate (%) 18.5% 18.4% 20.4% 20.4%
-------------------- ----------- ----------- ----------- -----------
The effective rate in the year was reduced by a deferred tax
credit of GBP0.5 million arising from a reassessment of the rates
that the deferred tax asset on the IFRS 9 transition adjustment
will reverse out at over the next nine years. The tax charge
reflects Bank Corporation Tax Surcharge of 8% on taxable profits of
Secure Trust Bank PLC in excess of GBP25.0 million. Future
effective tax rates for the Group will be sensitive to the quantum
of projected profits in the Bank and other Group companies as well
as the level of corporation tax which is due to reduce to 17% with
effect from 1 April 2020. Current forecasts show that the effective
tax rate is expected to increase by up to 4% over the forecast
period, as the effect of the banking surcharge becomes more
significant.
Distributions to shareholders
The directors recommend the payment of a final dividend of 64
pence per share which, together with the interim dividend of 19
pence per share paid on 28 September 2018, represents a total
dividend for the year of 83 pence per share (2017: 79 pence per
share).
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in
Note 8 to the Annual Report. Basic earnings per share increased by
42.2% to 153.2 pence per share (2017: 107.7 pence), as a result of
the increase in profit after tax. The adjusted basic earnings per
share increased by 39.0% to 161.8 pence per share (2017: 116.4
pence per share).
Adjusted returns
The Group measures adjusted returns on average assets, average
equity and required equity as set out in the KPIs table on page 18.
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.
These ratios have all improved in comparison to 2017, driven by
a combination of the improving profitability and the impact of the
IFRS 9 transition adjustment reducing assets and equity at 1
January 2018.
Summarised balance sheet
2018 2017
GBPmillion GBPmillion
------------------------------------ ----------- -----------
Assets
Cash and balances at central banks 169.7 226.1
Debt securities 149.7 5.0
Loans and advances to banks 44.8 34.3
Loans and advances to customers 2,028.9 1,598.3
Other assets 51.2 27.9
-------------------------------------- ----------- -----------
2,444.3 1,891.6
------------------------------------ ----------- -----------
Liabilities
Due to banks 263.5 113.0
Deposits from customers 1,847.7 1,483.2
Tier 2 subordinated liabilities 50.4 -
Other liabilities 45.6 46.3
-------------------------------------- ----------- -----------
2,207.2 1,642.5
------------------------------------ ----------- -----------
The assets of the Group increased by 29.2% to GBP2,444.3
million, primarily driven by the growth in the Group's loan
portfolios.
The liabilities of the Group increased by 34.4% to GBP2,207.2
million, primarily driven by the increase in deposits from
customers, providing funding for the Group's lending activities,
the use of the Term Funding Scheme as shown in amounts due to
banks, and the issue of GBP50 million of Tier 2 regulatory
capital.
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. The composition of the loan
book remains broadly consistent with 2017, with the Consumer
Finance book being approximately 45% of total lending, and the
Business Finance book being approximately 51%. The Consumer
Mortgage business currently accounts for 4% of total lending.
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, increased by
17.2% to GBP1,261.9 million (2017: GBP1,077.1 million). Over half
of the new business volume (GBP651.5 million) was generated by the
Retail Finance business.
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 11, 13 and 30.
Debt Securities
Debt Securities consist solely of sterling UK Government
treasury bills. The increase in the year to GBP149.7 million from
GBP5 million in 2017 was for the purpose of providing collateral
against Term Funding Scheme drawings with the Bank of England.
Due to Banks
The amount due to banks consists solely of drawings from the
Bank of England Term Funding Scheme. The Group has drawn modest
levels of this low cost source of funding to supplement customer
deposit funding.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the Group's current account and OneBill products. Customer
deposits grew by 24.6% during the year to close at GBP1,847.7
million, to fund the increased lending balances.
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 24. The notes qualify as Tier 2 capital. In the
previous year, the Group's Tier 2 capital consisted solely of the
collective impairment allowance.
New accounting standards
IFRS 9 'Financial Instruments', effective for the period
beginning on 1 January 2018, has replaced IAS 39 'Financial
Instruments: Recognition and Measurement'. Adoption of the standard
has resulted in new accounting policies for interest income and
expense, the classification and measurement of financial
instruments and the impairment of financial assets and loan
commitments which are set out in Note 1. Changes in accounting
policies resulting from the adoption of IFRS 9 have been applied
retrospectively, except that comparatives for the year ended 31
December 2017 are stated on an IAS 39 basis, and therefore have not
been restated.
IFRS 15 'Revenue from contracts with customers', which is also
effective for the period beginning on 1 January 2018, replaces a
number of existing standards and interpretations. Following
consideration of the Group's operating model, it has been concluded
that this standard does not have a material impact on the
Group.
Discontinued operations
On 21 December 2017 the Group sold a portfolio of legacy
unsecured personal loans ('PLD') to Alpha Credit Solutions 8
S.Ã .r.l., a company owned by AnaCap Credit Opportunities III LP.
Results relating to the portfolio of unsecured personal loans have
therefore been classified as discontinued operations for the year
ended 31 December 2017 throughout this Annual Report. The profit
before tax relating to the unsecured personal loan portfolio
announced shortly after its sale for the year ended 31 December
2017 has been adjusted for statutory purposes as follows:
Internal Internal
Profit cost of attributable Statutory Statutory
before funds costs profit profit
tax as added added before after
announced back back tax Tax tax
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- -------------- ----------- ----------- -----------
Year ended 31 December
2017 2.4 1.5 0.4 4.3 (0.8) 3.5
------------------------- ----------- ----------- -------------- ----------- ----------- -----------
Capital' leverage and liquidity
Capital
The Group's capital management policy is focused on optimising
shareholder value over the long-term. Capital is allocated to
achieve targeted risk adjusted returns whilst ensuring appropriate
surpluses are held above the minimum regulatory requirements. The
Board reviews the capital position at every Board meeting.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after 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 issued
during the year net of unamortised issue costs, capped at 25% of
the capital requirement. At 31 December 2017, Tier 2 capital
represented the collective allowance for impairment. Under IFRS 9,
there is no longer a collective allowance.
In July 2018 the Group issued GBP25.0 million of Tier 2 capital
and a further GBP25.0 million was issued in October 2018. Further
information on these issuances is contained in Note 24.
The Group has elected to adopt the IFRS 9 transitional rules.
For 2018 this allowed 95% of the initial IFRS 9 transition
adjustment, net of attributable deferred tax, to be added back to
eligible capital. Further information is provided in the Group's
Pillar 3 report available at
www.securetrustbank.com/investor-information.
Strategic and capital allocation decisions are therefore made
with reference to estimated credit losses calculated using IFRS 9
methodology.
The Group's Individual Capital Adequacy Assessment Process
('ICAAP') includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated entities within
the Group have complied during the year with all of the externally
imposed capital requirements to which they are subject.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group's on and off
balance sheet exposures. The weightings applied are those
stipulated in the Capital Requirements Regulation.
2018
(IFRS
9 transitional
rules
basis) 2017
GBPmillion GBPmillion
---------------------- ----------------- -----------
Capital
CET1 capital 251.8 238.9
Total Tier 2 capital 45.7 4.4
---------------------- ----------------- -----------
Total capital 297.5 243.3
---------------------- ----------------- -----------
Total Risk Exposure 1,824.6 1,446.1
---------------------- ----------------- -----------
2018
(IFRS
9 transitional
rules
basis 2017
% %
---------------------- ----------------- -----------
CRD IV ratios
CET1 capital ratio 13.8 16.5
Total capital ratio 16.3 16.8
Leverage ratio 10.0 12.3
---------------------- ----------------- -----------
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. The total capital ratio is total capital
divided by Total Risk Exposure. The Group has maintained a healthy
CET1 capital ratio and total capital ratio and these provide a
capital buffer for continued growth.
Leverage
The Basel III framework introduced a relatively simple,
transparent, non-risk based leverage ratio to act as a
supplementary measure to the risk-based capital requirements. The
leverage ratio is intended to restrict the build-up of leverage in
the banking sector to avoid destabilising deleveraging processes
that can damage the broader financial system and the economy,
whilst reinforcing the risk-based requirements with a complementary
simple, non-risk based 'backstop' measure.
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on and off
balance sheet asset exposure values, expressed as a percentage. The
UK leverage ratio framework sets a minimum ratio of 3.0%, which
increased to 3.25% on 1 January 2018. As shown in the table above,
the Group's leverage ratio remains comfortably ahead of the minimum
requirement.
Liquidity
The Group continues to manage its liquidity on a conservative
basis by holding High Quality Liquid Assets and utilising
predominantly retail funding from customer deposits. Secure Trust
Bank is a participant in the Bank of England's Sterling Money
Market Operations under the Sterling Monetary Framework. As such,
from July 2013, the Group was permitted to draw down facilities
under the Funding for Lending Scheme and subsequently its
replacement, the Term Funding Scheme.
At the year end and throughout the year, the Group had
significant surplus liquidity over the minimum requirements due to
its stock of High Quality Liquid Assets ('HQLA'), in the form of
the Bank of England Reserve Account and UK Treasury Bills. As shown
in the table below, total liquid assets increased by 37.2% from
GBP265.4 million to GBP364.2 million, with the High Quality Liquid
Assets balance being GBP319.4 million.
2018 2017
GBPmillion GBPmillion
--------------------- ----------- -----------
Liquid assets
Aaa - Aa3 319.4 231.1
A1 - A3 39.7 29.3
Unrated 5.1 5.0
--------------------- ----------- -----------
Liquidity exposures 364.2 265.4
--------------------- ----------- -----------
For Liquidity Coverage Ratio ('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.
The total of unencumbered HQLA for LCR purposes is GBP240.8 million
(2017: GBP231.1 million).
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
The Group's LCR, and other measures used by management to manage
liquidity risk, are described in the Principal Risks and
Uncertainties section of the Strategic Report.
Business review - Business Finance
Real Estate Finance
Real Estate Finance was formed as a division within the Group in
2013. The division supports SMEs in providing finance principally
for residential development and residential investment.
What we do
Residential Development
The Group lends to enable the development of new build property,
commercial to residential conversions (including those with
permitted development rights) and refurbishment projects.
Residential Investment
The Group lends on portfolios of residential property where the
rental income will repay the underlying borrowing over a fixed term
period. This excludes the regulated buy-to-let mortgage sector.
Other lending
The Group has limited appetite for other commercial lending
(either development or investment) and has limited exposure to
mixed development schemes.
How we do it
Financing is typically provided over a term of up to five years
with prudent loan-to-value criteria, with a 60% Loan to Gross
Development Value to residential house builders. More restrictive
policies are implemented from time to time as required: for
instance the Group reduced its financing of residential
developments in Central London in 2015. The Group's Loan to Gross
Development Value / loan-to-value ratios continue to average below
60% across all lending areas. The Group has 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.
Revenue and lending performance vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ------------- -----------
Revenue 41.2 32.3 28.4
Lending balance 769.8 580.8 451.0
(GBP581.0
million on
an IFRS 9
basis*)
Impairment charge/(credit) 0.5 (0.2) 0.1
---------------------------- ----------- ------------- -----------
*See Appendix for reconciliation
2018 performance
The business has continued to grow its Real Estate Finance
business, with balances up 33% in 2018, which generated a 28%
increase in revenue. The rate of growth in the first half of 2018
slowed due to an increase in repayments. The mix of the book
between development and investment has remained stable, with
development lending representing 30% of the book at end of
2018.
The credit quality of the book has remained strong, with no
crystallised impairments and a low level of watch list cases. The
impairment charge reflects an increase to loss given default due to
the estimated impact of a change in the level of property sales in
the event of repossession.
Looking forward
The business further added to its origination team in 2018 and
expects to continue to grow balances, with an intent to focus on
diversifying the mix of business, both in terms of introduction
source and geographic location. The business does however continue
to remain cautious around credit policy in the light of more
uncertain market conditions, and can react quickly to any threats
which may emerge. Growth will be managed carefully to ensure that
returns are maximised whilst maintaining credit quality.
"We wanted to express our appreciation of the way Secure Trust
Bank have assisted us and joined us in progressing this complicated
and exciting project. From the outset the bank has shown real
enthusiasm and have committed a lot of time to absorb and assist
with the best way forward. You have readjusted the facility to
ensure that our progress is both enjoyable and comfortable. We are
impressed by the way you are very approachable which has ensured
that any complications that have arisen have been resolved without
holding up progress.
We are very pleased that we made the decision to go with Secure
Trust Bank on this venture and a big thank you from our team to the
bank."
Neobrand No. 2 Limited
Asset Finance
Asset Finance was formed as a division within the Group in
December 2014.
What we do
The Asset Finance business provides funding to support SME
businesses in acquiring commercial assets, such as building
equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a joint venture with
Haydock, a well-established asset finance company operating across
the UK. Following the change in ownership of Haydock in January
2018, the Group has 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 funded by the Group.
The current portfolio reflects hire purchase and finance lease
arrangements with terms of up to five years.
Revenue and lending performance vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -----------
Revenue 6.6 8.5 7.8
Lending balance 62.8 116.7 117.2
(GBP116.5
million on
an IFRS 9
basis*)
Impairment charge 2.2 1.0 0.6
------------------- ----------- ------------- -----------
*See Appendix for reconciliation
2018 performance
Following the decision to cease writing new business in February
2018, the portfolio is in run-off. The lending balances and income
have reduced during 2018, with balances reducing by GBP54 million
(46%) in 2018. As a consequence of this run-off, lending revenue
has also reduced in 2018.
Impairment losses have increased in 2018 by GBP1.2 million
compared to 2017, reflecting an increase in the value of cases
taken into collections.
Looking forward
The Asset Finance division has operated through a joint venture
with Haydock Finance to date. With the change in ownership of
Haydock in January 2018, the business has ceased originating new
business, and continues to assess options within the Asset Finance
market. The portfolio is expected to reduce in line with
contractual repayments from customers.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014.
What we do
The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
Invoice discounting services provide access to funding and
release typically up to 90% of the value of qualifying invoices, in
confidence and allowing clients to stay in control of sales ledger
management.
Factoring services, where the sales ledger management is passed
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 loan-to-value ratios alongside these facilities.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The business
also provides SME commercial owner occupiers with finance to buy
the property they trade from in conjunction with other financing
facilities.
The division has built a strong team of proven business
development, credit and operational professionals who have
delivered a robust and compliant operational model.
Revenue and lending performance vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -----------
Revenue 13.4 7.2 4.6
Lending balance 194.7 126.5 62.8
(GBP126.3
million on
an IFRS 9
basis*)
Impairment charge - 0.1 0.2
------------------- ----------- ------------- -----------
*See Appendix for reconciliation
2018 performance
The Commercial Finance business saw further strong growth in
2018, with lending balances increasing by more than 50%. Income
consequently saw strong growth while the cost base increase was
marginal. Impairment losses continue to be minimal. In the year
Commercial Finance opened offices in Birmingham, Leeds and London
and recruited high calibre people from the industry, building on
its focus on growth from a strong platform.
Looking forward
The team has built a reputation for high quality service,
particularly within its chosen markets, and as a result the
prospects for future growth are encouraging. Further national
expansion through development of its regional footprint will
provide the Group with a more scalable business model on which to
achieve this growth.
Secure Trust Bank Commercial Finance provided a GBP15 million
asset based lending facility to Carpet & Flooring (Trading)
Limited, one of the UK's leading distributors of floor covering
products. The company supplies to a wide range of sectors,
including healthcare, leisure and education. With turnover of
GBP100 million, Carpet & Flooring employs more than 380 people
across the country.
"We are delighted to have secured this additional funding from
Secure Trust Bank which will support us as we deliver organic
growth and pursue targeted acquisitions. The business is now in an
excellent position and we're pleased to be working with Secure
Trust Bank on the next phase of our plan."
Lisa Tomlin, Chief Executive Officer at Carpet &
Flooring
Secure Trust Bank Commercial Finance provided a GBP2.3 million
finance facility to Twisted Automotive to support its purchase of
240 vehicles from the iconic Land Rover Defender's last ever
production run.
"With time running out on production, in 2015 we spotted a
unique opportunity to increase our inventory and introduce
pre-built versions of our vehicles, which helped us tackle the long
waiting list and boost our revenues. With this new financial
strength, we can look at expanding overseas and ready ourselves for
a potential launch of a new Defender model in 2020."
Charles Fawcett, Founder of Twisted Automotive
Business review - Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
What we do
The 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 of up to 84 months in duration with a standard maximum loan
size of GBP25,000. The average new loan is for GBP1,000 over a 24
month term. Lending is restricted to UK residents who have a good
credit history and can demonstrate that they can afford to repay
the loan.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing customers to
spread the cost of purchases into more affordable monthly
payments.
How we do it
The Group operates an online 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.
The Group serves retailers across a broad range of retail
sectors including cycle, music, furniture, outdoor/leisure,
electronics, dental, jewellery, home improvements and football
season tickets.
The Group provides finance to customers of a large number of
retailers including household names such as Jessops, Halfords, DFS,
Sofology and Watchfinder.
Revenue and lending performance vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -----------
Revenue 62.8 50.7 36.7
Lending balance 597.0 452.3 325.9
(GBP442.1
million on
an IFRS 9
basis*)
Impairment charge 19.3 13.8 9.5
------------------- ----------- ------------- -----------
*See Appendix for reconciliation
2018 performance
The Retail Finance business has continued to grow strongly, with
new gross lending volumes increasing to GBP651.5 million (an
increase of 25% on the previous year). This has driven a further
significant increase in lending assets, which during the year rose
to GBP597.0 million (December 2017: GBP452.3 million). Market share
increased from 5.6% in 2017 to 6.8% in 2018 (based on Finance &
Leasing Association new business values within retail store and
online credit).
Each of the three largest sub-markets for the business (sports
and leisure, furniture and jewellery) have contributed to this
growth, which as in previous years has been achieved through a
combination of gaining increased market share and sector
growth.
Revenue increased by 24% to GBP62.8 million (2017: GBP50.7
million). Impairment losses were well controlled at GBP19.3 million
(2017: GBP13.8 million) and reflect accelerated provisioning under
IRFS 9 aligned to a growing book.
Customer feedback, measured by FEEFO, provided the business with
a score of 4.8 out of 5 for the year based on 400 reviews.
Looking forward
The Group plans further growth in Retail Finance during 2019
with the focus on acquiring increased market share across its
target markets.
To underpin the continued growth, the Group continues to invest
in initiatives to further enhance its systems capabilities, to
ensure that quality of service to both retailers and customers is
maintained or improved. This includes the online account management
service, which allows customers to view their statement online and
make routine self-serve changes to their account such as change of
payment date and settlement.
"Great service, reasonable interest rates and fast service,
thanks."
"The service we received was brilliant, was really quick to do
everything on my phone with no complicated steps. I would
absolutely recommend."
"Very good service with quick application and reliable credit
check. Have used V12 three times and it's always been quick and
easy process."
"Service was efficient and quick. Would highly recommend and
currently have other accounts in place - therefore I would use the
service again."
"Easy to apply all information required supplied quickly and
easily. Would recommend as a hassle free route to fund your
purchase at a great rate."
Motor Finance
Finance is arranged through motor dealerships, brokers and
internet introducers and involves fixed rate, fixed term hire
purchase arrangements, predominantly on used cars.
What we do
The Group's Motor Finance business began lending in 2008 under
the Moneyway brand and provides hire purchase lending products to a
wide range of customers including those who might otherwise be
declined by other finance companies. This helps the Group's
customers to gain the freedom and flexibility that motoring gives
to their lives as well as helping introducers to sell more
cars.
Motor Finance agreements are secured against the vehicle being
financed.
The Group has ceased writing new business in the sub prime
market and is predominantly lending to finance the purchase of
volume franchise used cars in the near-prime market.
How we do it
The Bank distributes its Motor Finance products via UK motor
dealers, brokers and internet introducers. New dealer relationships
are established and managed by 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 Moneyway 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; however the UK motor
dealers and brokers are UK-wide.
Lending performance v prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- ----------- ---
Revenue 48.5 47.1 40.5
Lending balance 276.4 274.6 236.2
(GBP253.0
million on
an IFRS 9
basis*)
Impairment charge 11.3 20.8 14.6
------------------- ----------- ------------- ----------- ---
*See Appendix for reconciliation
2018 performance
The Motor Finance business narrowed its credit parameters during
2017 in order to reduce potential future impairment losses. New
business volumes in 2018 reflect a higher credit quality. There was
a consequent decrease in new business volumes from GBP142.8 million
in 2017 to GBP141.3 million for 2018.
Impairment losses for the period have improved from GBP20.8
million to GBP11.3 million. The improvement in the quality of the
book, reflecting both the shift away from sub prime motor lending
discontinued during 2017, and improved collections performance have
driven the reduction in losses. These improvements are amplified by
the change to IFRS 9, because the expected credit loss approach
required by that standard accelerates the recognition of improved
performance. The improvement has been supported by the Motor
Finance leadership increasing levels of resource and delivering
process improvement within the Collections and Recoveries
teams.
Revenue improved modestly, by 3.0%, reflecting the reduction in
margin for higher credit quality business. This shift in business
alongside improved collections performance has driven the
improvement in impairments.
Looking Forward
The Motor Finance business plans to expand operations into the
prime credit market, to drive long-term receivables growth and
sustainable return outcomes. A clear opportunity exists to deliver
prime and near-prime products and services in the Motor lending
market for an innovative and technology led funding provider.
A programme of work is underway to deliver a new platform and
business transformation through 2019/2020 with GBP1.4 million
already invested in 2018. As part of this programme the Motor
Finance business is aiming to enhance system capabilities and to
deliver a broader range of products.
This is expected to improve the credit quality of the portfolio,
drive business growth and deliver stable earnings. Alongside these
initiatives, the business will continue to focus on the near-prime
market sector through its existing introducer channel.
Over the year the business has made some key appointments to
support the transformation of the business and drive growth in the
prime and near-prime motor business with the new Motor leadership
team all now on board.
"Moneyway have been great to deal with in 2018. The Regional
support team have been very helpful and we get lots of good
feedback from the sites. The improvements made in pay-out times and
ease of use have certainly helped lift their reputation."
Evans Halshaw
"Since UK Car Finance began its working relationship with
Moneyway, we have seen many changes, innovations and improvements.
The entire culture of the business seems geared up to making
everything easy, straightforward and above all else, sensible. From
the systems, account management team to their processes, Moneyway
are without doubt a business we enjoy working with and look forward
to working in partnership with them for many years to come."
UK Car Finance Limited
Debt Managers (Services) Limited
Debt Managers (Services) Limited ('DMS') was purchased by the
Group in January 2013.
What we do
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
Debt Managers (Services) 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 with
Debt Managers (Services) for DMS to manage those accounts in its
own name
-- Debt purchase allows DMS to acquire accounts and choose how
to liquidate those accounts over a period of 10 years.
DMS aims 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
models 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. DMS works 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.
Lending performance v prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -----------
Revenue 7.0 4.9 3.7
Lending balance 32.3 15.6 13.5
(GBP15.6
million on
an IFRS 9
basis*)
Impairment charge N/A N/A N/A
------------------- ----------- ------------- -----------
*See Appendix for reconciliation
As DMS purchases assets which are credit impaired, impairment
charges are unlikely to materialise.
2018 performance
In 2018 DMS performed well with revenue increasing by 43% from
GBP4.9 million to GBP7.0 million and profit before tax increasing
significantly from GBP0.6 million to GBP1.6 million. This was
achieved through the development of relationships with new and
existing clients and a broadening of service offerings.
Looking forward
The positive momentum in the year is expected to continue into
2019 having established strong relationships and forward flow
contracts with existing clients. This is expected to result in
continued growth of both revenue and profit. Leveraging new
technologies will enhance customer engagement and will facilitate
penetration of new sectors. The ownership of DMS by the Bank means
it is well placed to identify and take advantage of growth
opportunities in the coming year.
Business review - Consumer Mortgages
Consumer Mortgages was launched on 20 March 2017. The division
supports residential customers who are underserved by the
traditional high street lenders.
What we do
The division lends to individuals who wish to purchase a
property or remortgage their current property.
How we do it
Consumer Mortgages provides, through intermediaries, competitive
fixed rate mortgage products to people whose personal circumstances
do not fit the norm but are still credit worthy individuals with
good affordability.
Financing is typically provided over a term of up to 35 years
with fixed interest rate periods of 2, 3 and 5 years. The Group's
purchase and remortgage products have a maximum loan to value of
90% and a maximum loan size of GBP2 million.
The Consumer Mortgage team is staffed by experienced mortgage
and banking individuals with proven property lending expertise and
underwriting skills. The team provides full support to customers
and introducers over the life of the products.
Revenue and lending performance vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
------------------- ----------- ------------- -----------
Revenue 1.5 0.1 -
16.5
(GBP16.5
on an IFRS
Lending balance 84.7 9 basis*) -
Impairment charge 0.2 - -
------------------- ----------- ------------- -----------
*See Appendix for reconciliation
2018 performance
The Mortgage business has steadily grown since its launch. In
2018 Mortgages originated GBP70 million of lending and finished the
year with a book of GBP84.7 million. As a result of market
conditions, with lenders competing aggressively on price and
loan-to-value metrics across the sector increasing alongside
falling margins, the Group tempered its mortgage lending.
Looking forward
In the first quarter of 2019 due to the difficult economic
climate, increased competition and the continued uncertain outlook,
the Group announced the decision to cease new mortgage originations
until market conditions improve.
Business review - Savings
The Group attracts funding primarily via retail savings,
offering individuals competitive, simple products, applied for
online and serviced through a highly commended online proposition,
backed by UK based customer service.
What we do
The Group offers simple, straightforward notice and fixed term
accounts, promoted via best buy tables and with the endorsement of
national press and market commentators, available to UK based
individuals saving from GBP1,000. Historically, the Bank has also
offered business accounts priced to reflect the different
associated costs and risks.
Covered by the UK Financial Services Compensation Scheme up to
the specified limits, the Group offers accounts in line with its
ongoing funding needs, including 14 to 180 day notice and 1 to 7
year fixed terms with a maximum balance of GBP1 million for sole
account holders and GBP2 million for business and joint
accounts.
Customers can choose to capitalise or pay away their interest,
with annual interest on bonds and quarterly on notice accounts. The
Group this year also introduced the option on limited bond products
to receive a monthly income.
Alongside Savings, the Group continues to service OneBill, in
operation for many years and closed in 2009 to new customers,
designed to aid with household budgeting. Customers provide details
of their annual bills which are aggregated and calculated into a
fixed weekly or monthly schedule so customers can spread the cost
of their bills through the year, receiving direct debit discounts
and support liaising with providers. A monthly fee is charged.
How we do it
By virtue of the absence of a branch network, a policy of not
cross-subsidising loss making products with profitable ones, a
stable funding base and an operational model based on digital
self-service, the Group is able to offer competitive rates and has
been successful in attracting high volumes of deposits in short
timescales from a wide range of customers. This provides a funding
profile which gives additional financial security to the
business.
The Group enters the market for deposits as and when it is
necessary and maintains a funding strategy of broadly matching the
term and tenor of its customer savings to the desired maturity
profiles of the Group which are primarily determined by the
interest rates and terms offered on loans and advances to
customers. This strategy seeks to help mitigate maturity
transformation and interest basis risks.
The Group is able to adjust the mix of interest rate offered and
term or notice period in a manner that allows it to raise funding
quickly. As part of this funding strategy, the Group may only offer
savings accounts for limited periods of time and, from time to
time, may not offer new products to customers at all. The Group
will cease offering products when the need for funding at that time
has been satisfied.
The marketing methods employed include providing information
about the savings accounts offered on price comparison websites,
newspaper best buy tables and articles and via online endorsement
(for example Money Saving Expert). In addition to attraction based
on interest rate, customers choose Secure Trust Bank based on its
financial standing, UK based operation and high standards of cyber
and operational security.
Savings balances vs prior years
2018 2017 2016
GBPmillion GBPmillion GBPmillion
---------------------- ----------- ----------- -----------
Notice deposits 516.4 455.3 373.8
Fixed Term Savings 1,316.8 1,013.4 762.8
Sight/Instant Access 14.5 14.5 15.2
---------------------- ----------- ----------- -----------
Total Balances 1,847.7 1,483.2 1,151.8
---------------------- ----------- ----------- -----------
2018 performance
2018 represented the first year the Group operated on a new
digital platform following on from a successful migration in late
2017. In the year, the Bank grew its retail savings by GBP364.5
million, an increase of 24.6% - equivalent to almost GBP12 every
second. This represents nearly 26,000 new accounts and 17,000 new
savings customers joining the Group this year.
In the year the Bank won a number of awards, including Best
Savings Provider from Savings Champion, as well as Best Fixed Rate
Bond and Best Notice Account Provider. The Group was also highly
commended by The Money Pages as Best Online Savings Provider, with
all of these awards independently judged and customer focused.
Throughout the year the Group has offered competitive savings
products featuring in a best buy table every week. At the last
point of reporting in October 2018, the Group achieved 7.5% of
fixed rate bond sales online according to eBenchmarkers - a
considerable achievement of many times its natural market share of
non-ISA savings balances.
The introduction and adoption of online servicing has been a
focus in 2018. At the start of the year, the Group had a handful of
trial customers registered. At the end of December, over 30,000
customers are now registered, 70% of the overall deposit customer
base, with 58% having signed in at least once. For new customers,
99.9% register and over 74% sign in at least once.
It is worth noting that 2018 marks a number of considerable
milestones for the Group's savings business over the past five
years, having grown balances by 323% or GBP1.4 billion from the
start of 2014, increased the number of accounts by 115% or 26,000
and opened almost 70,000 new accounts and attracting over 37,000
customers. The Group now has customers across the majority of
counties in England, Wales and Scotland, and from Shetland to
Cornwall and from Norfolk to Belfast.
Looking forward
The Group plans continued savings growth through 2019 and to
underpin this is investing in product diversification to attract a
broader pool of customers. Development is underway to launch a
Fixed Rate Cash ISA as well as shorter-dated notice and instant
access products, the latter being the largest savings market in the
UK by value. These new markets represent a clear opportunity to
bring material benefit to the Group in its cost of retail
funds.
Furthermore, the Group intends to start to invest in significant
enhancements to its digital proposition and take advantage of the
opportunities arising from a growing customer base. It will also
consider the potential to offer savings accounts to businesses in
the UK.
Principal risks and uncertainties
Risk overview
On an ongoing basis, the Directors carry out a robust assessment
of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity. The following are considered to be the principal risks
facing the Group:
Risk Description
Credit Risk The risk that a counterparty will
be unable to pay amounts in full
when due.
-------------------------------------------
Liquidity Risk The risk that the Group will encounter
difficulty in meeting obligations
associated with its financial liabilities
that are settled by delivering cash
or another financial asset.
-------------------------------------------
Operational Risk The risk of direct or indirect loss
arising from a wide variety of causes
associated with the Group's processes,
personnel, technology and infrastructure,
and from external factors other than
the risks identified above.
-------------------------------------------
Capital Risk The risk that the Group will have
insufficient capital resources to
support the business.
-------------------------------------------
Market Risk The risk that the value of, or revenue
generated from, the Group's assets
and liabilities is impacted as a
result of market movements, predominantly
interest rates.
-------------------------------------------
Conduct Risk The potential for customers (and
the business) to suffer financial
loss or other detriment through the
actions and decisions made by the
business and its staff.
-------------------------------------------
Regulatory Risk The risk that the Group fails to
be compliant with all relevant regulatory
requirements.
----------------- -------------------------------------------
Notes 30 to 33 to the financial statements provide further
analysis of certain financial risks.
Further details of the principal risks, the changes in risk
profile during the 2018 financial year and the Group's risk
management framework are set out in the following section. 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. The main indirect impact
of the withdrawal on the Group, if disorderly, is most likely to be
to credit risk and on demand for the Group's products.
Credit risk
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 small and medium size enterprises ('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 credit risk committee which reviews business performance
from new application metrics through to loss performance by business
type and introducer. Policy and scorecard changes are approved at this
committee.
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 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.
Implementation of IFRS 9 on 1 January 2018 has resulted in changes to
the timing of reporting credit losses. These changes have been built
into Group forecasts and are considered in setting the Group's appetite
for volume by sector.
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.
Forbearance arrangements in respect of Consumer Mortgages customers
are described in Note 30.2.
Change - IMPROVED
Consumer Finance credit risk
Application trends, arrears and loss trends for the Retail Finance Portfolio
are monitored monthly by the Credit Risk Team. Losses remain within
risk appetite.
The Group's Motor Finance business has continued to grow despite a very
competitive landscape. The Group has repositioned the motor finance
business away from those customers that are most susceptible to an economic
downturn. During the course of 2018 the "rate for risk" proposition
was extended. The Group has embarked on a motor transformation plan
which will see the implementation of a new application and servicing
system. Linked to this, it is looking to expand the product range to
include a unit stocking product, to provide short term finance to motor
dealers so that they can buy stock together with a prime Hire Purchase
('HP') and Personal Contract Purchase ('PCP') product offering. The
PCP offering will introduce a new risk for the Group, with potential
for losses should the residual value of the vehicles at the end of the
agreement be less than expected at inception of the contract.
Secure Trust Bank entered the Consumer Mortgage market in 2017, offering
basic fixed term mortgage and re-mortgage products for those good quality
customers with non-straightforward circumstances that struggle to meet
the requirements of high street lenders. All loans are secured on the
applicant's property. The Bank extended the range of products in 2018
to include interest only and part and part mortgages. In the first quarter
of 2019 due to the difficult economic climate, increased competition
and continued uncertainties the Group announced the decision to cease
new mortgage originations until market conditions improve.
The move to IFRS 9 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 Probability of Default
('PD') x Exposure at Default x Loss Given Default 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.
Furthermore, the ECL has been used for the stress testing that was used
in the ICAAP in 2018.
Business Finance credit risk
Lending balances within the Real Estate Finance and Commercial Finance
portfolios have continued to grow, with both portfolios remaining well
within all risk appetite parameters. The continued focus on high quality,
secured lending with strong counterparties has served the Group well
to date. This has been particularly evident in the high value central
London residential real estate market, where risk appetite remains substantially
reduced and lending has been pared back.
Following the change in ownership of Haydock, in January 2018, the Asset
Finance portfolio has continued to run-off over the course of the year.
The Group continues to assess its options with regards to future opportunities
within the Asset Finance market.
Thanks to the Group's continued adherence to its robust lending policies
and credit appetite, alongside the significant experience within the
lending teams, impairments and arrears within the Business Finance portfolios
have remained minimal to date. Management continues to closely monitor
the portfolios and the external events and environment that could impact
on each of them.
Concentration risk
Management assesses the potential concentration risk from geographic,
product and individual loan concentration. Due to the well diversified
nature of its lending operations, the Group does not consider there
to be a material exposure arising from concentration risk.
Liquidity risk
Description
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
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 Internal Liquidity Adequacy Assessment Process
('ILAAP').
The Group is required to meet daily cash flow requirements arising from
maturing deposits and loan draw-downs, and maintains significant cash
resources to meet all of these needs as they fall due. The liquidity
requirements of the Group are mainly met by maintaining funds in liquid
assets including the Bank of England reserve account to cover any short-term
net outflow requirements. Longer term funding is also in place for structural
liquidity and funding requirements.
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, and can fund its
assets at reasonable cost and without incurring unacceptable losses
or risking damage to the Group's reputation through a failure to meet
its obligations.
Mitigation
Risk tolerance
The Group maintains 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. The Group
maintains a buffer of unencumbered High Quality Liquid Assets ('HQLA')
that is available to meet its liquidity requirements.
The Group's Board has agreed a liquidity risk appetite to ensure that
adequate liquidity resources are held to meet its Overall Liquidity
Adequacy Rule ('OLAR') and the minimum Liquidity Coverage Ratio ('LCR').
This appetite ensures that adequate liquidity resources are held to
withstand all known reasonable combinations of idiosyncratic and market
risks for up to 90 days.
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 risk on a day to day basis. The Board sets and approves the
Group's liquidity risk management strategy. The Assets and Liabilities
Committee ('ALCO'), comprising senior management and executives of the
Group, meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity risk
tolerance levels and ILAAP metrics. These metrics are managed on a day-to-day
basis by the Group's Treasury function. 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 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 aim is not
to measure liquidity with a single metric but rather a range of principles
and metrics which, when taken together, helps ensure that the Group's
liquidity 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 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.
Funding strategy
The Group's 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 is mainly funded by stable customer deposits and
capital (including Tier 2 capital issued in 2018 that is non-callable
for five years). The Group also has limited borrowings under Bank of
England funding schemes but does not have other direct exposures to
wholesale markets. Funding strategy is managed centrally.
Liquidity risk mitigation techniques
The Group seeks to mitigate liquidity risk through a number of strategies
and processes:
* The diversification of its deposit and loan products
* Offering depositors competitive interest rates
* A stable funding profile
* Acquiring funding primarily through depositors
subject to Financial Services Compensation Scheme
protection
* Regular forecasting of liquidity and funding metrics
* Regular ALCO meetings reviewing risk metrics and
upcoming risks
* Access to Bank of England liquidity schemes
* Holding adequate levels of High Quality Liquid Assets
with a high proportion of cash in the Group's Bank of
England Reserve Account.
Stress testing
An integral component of the approach to liquidity risk management is
stress testing, some of which is prescriptive using detailed rules and
guidance issued within prudential regulations and reported within regulatory
returns. In addition to the regulatory prescribed stress testing, the
Group undertakes its own stress tests. 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 typically performed on a daily basis
and levels of liquidity under stress are forecast regularly and monitored
by ALCO and management. The Board approves limits against both regulatory
and internal stress testing requirements.
Contingency funding plans
If for reasons which may be beyond the business' 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 insurance schemes, including
the Discount Window Facility.
Change - IMPROVED
The Group has maintained its liquidity ratios in excess of regulatory
requirements throughout the year and continues to hold significant levels
of high quality liquid assets.
A number of enhancements were made to the liquidity management framework
in 2018. These include approval of a revised standards and policy framework
by ALCO, additional analysis of liquidity requirements and increased
MI reporting frequencies, and the locking-in of an appropriate level
of Term Funding Scheme funding. An experienced Liquidity Manager joined
the Treasury team in July 2018 and towards the end of 2018, Risk appointed
a Senior Manager, Prudential Risk. This role will provide additional
scrutiny and oversight in respect of prudential matters including liquidity.
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 at 31 December 2018 was significantly higher than the regulatory
requirement.
Operational risk
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.
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 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 operational losses,
complaints, key operational risks, systems availability and information
security. The appetite measures are reported and monitored on a monthly
basis.
Change - IMPROVED
The improvement of the status of this risk is driven by the Group's
continued investment in resource, expertise and systems to support the
Operational Risk Framework and Policy. This Framework defines and facilitates
the following activities:
* A biannual Risk and Control Self 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.
Key Risk themes of Operational Risk focus in 2018 include:
* Supplier management - The Group uses a number of
third parties to support its IT and operational
processes. The Group recognises that it is important
to effectively manage these suppliers and has
throughout 2018 embedded a suite of standard controls
for all its material suppliers to reduce the risk of
operational impacts on these critical services. This
will continue to be an area of focus for 2019,
particularly in relation to the Operational
Resilience of the service provided by the most
critical suppliers.
* 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. However this will continue to be
a key area of focus for 2019 as the Group continues
to enhance its defences to any disruption to its most
critical services.
* Information security and cyber risk - The Group has
paid considerable attention to ensuring the effective
management of risks arising from a failure or breach
of its information technology systems that could
result in customer exposure, business disruption,
financial losses, or reputational damage.
* 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. Significant
changes are planned in 2019, particularly in respect
of the Motor Finance transformation, and these will
be a key area of focus to ensure the Group maintains
its customer and operational service standards and
delivers its strategic objectives.
Capital risk
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
The Group's capital management policy is focused on delivering shareholder
value, in a safe and sustainable manner. 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 the Group needs to hold. This method takes the Pillar 1 capital
formula calculations (standardised approach for credit, market and operational
risk) as a starting point, and then considers whether each of the calculations
delivers a sufficient capital sum adequate to cover management's 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 2018 are published as a separate document
on the Group's website.
Change - STABLE
The Group maintained its capital ratios in excess of regulatory requirements
throughout the year. At 31 December 2018, the CET1 ratio was 13.8% (2017:
16.5%), the total capital ratio was 16.3% (2017: 16.8%) and the leverage
ratio was 10.0% (2017: 12.3%) on a Group consolidated basis. The CET
1 ratio has decreased due to the investment of capital to support strong
lending growth.
The 2018 ICAAP incorporated IFRS 9 provisioning methodology, which accelerates
the impact of losses in adverse economic conditions. The ICAAP demonstrated
the Group's continued ability to meet its minimum capital requirements,
even in severe stress scenarios. The Group's forecasting capability
has been enhanced to cover a five year time horizon, with modelling
of capital resources and requirements provided over that period, and
future ICAAPs will also cover a five year period. Additional early warning
indicators have been developed as part of the Recovery Plan process.
In July 2018 the Group raised its first Tier 2 capital: GBP25 million
at 6.75%. A further GBP25 million was raised in October 2018 at the
same price and the mechanisms have been developed to allow raising of
Alternative Tier 1 capital, should such be needed. This provides the
Group with additional flexibility in terms of capital options, and demonstrates
the Group's ability to raise capital to fund planned growth. Capital
resources increased during the year to GBP297.5 million as at 31 December
2018 (31 December 2017: GBP243.3 million) on a Group consolidated basis.
The improvements in the Group's range and size of capital resources,
and to its capital management processes, leave it well positioned to
continue to fund balance sheet growth while meeting increasing levels
of regulatory capital buffers.
The Group has elected to adopt transitional provisions in respect of
the implementation of IFRS 9, as set out by the European Banking Authority.
These provisions allow the capital impact of the standard to be phased
in over a five year period. Further details are provided in Note 33.
Market risk
Description
For the Group, market risk is primarily limited to interest rate risk,
being the potential adverse impact on the Group's future cash flows
from changes in interest rates arising from the differing interest rate
risk characteristics of the Group's assets and liabilities. 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 significant
currency risks to Sterling.
Mitigation
Market risk is managed by the Company's Treasury function and is overseen
by the 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 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 assessed against
200bps and 100bps parallel shifts in rates respectively. The Group also
measures exposure to basis risk and the economic value of equity. All
such exposures are maintained within the risk appetite set by the Board
and are monitored by ALCO.
Change - STABLE
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 interest
rate risk throughout the year.
The increasing size of the Group's balance sheet increases the inherent
level of interest rate risk, and the Group has responded by enhancing
its Treasury capabilities and risk framework, with a wider range of
risk measures developed and monitored by ALCO. The Group has developed
its capability to use interest rate swaps to further mitigate this risk,
if required, in 2019.
Conduct risk
Description
The Group defines 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
business units and both regulated and unregulated activities.
Across the Group, conduct risk exposure is managed via monthly review
and challenge of key risk indicators ('KRIs') at the Customer Focus
Committee, which oversees complaints, FEEFO and Customer Service Excellence
as well as conduct risk. Conduct risk management information is also
reviewed at product level executive committee meetings.
The Key Risk Indicators vary across the business units to reflect the
relevant conduct risks; the business units' key risk indicators are
aggregated for measurement against the Group's risk appetite, which
is reported to the Group Executive Committee, Risk Committee and the
Board.
Change - STABLE
Review of conduct risk and controls within the business units is managed
through the regular cycle of risk and control self-assessments, in line
with other operational risk categories.
Members of the Customer Focus Committee review monthly key risk indicators
across all business units, and meet on a quarterly basis for oversight
and challenge of the first line activities to assure senior management
that the first line is identifying conduct risks when they arise and
taking appropriate actions to mitigate them.
Training on conduct risk continues to be delivered to new starters,
with an eLearning module completed by all staff during the year.
-----------------------------------------------------------------------------
Regulatory risk
Description
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 Group-wide risk
management framework. The Group Compliance and Regulatory Risk Committee
is responsible for reviewing and monitoring regulatory changes, and
ensuring that appropriate actions are taken, and also reviewing and
approving the compliance risk management framework. Further details
can be found on the Group's website:
www.securetrustbank.com/our-corporate-information/risk-management
Change - STABLE
In the year ended 31 December 2018, the Group has delivered changes
to address new and revised regulations and legislation that have come
into force, including: Payment Services Directive 2 ('PSD2'), which
impacts the Deposits business and came into force on 13 January 2018;
changes to the Senior Managers and Certification Regime framework; the
General Data Protection Regulation; rules on staff incentives, remuneration
and performance management in consumer credit; rules relating to the
assessment of creditworthiness and affordability in consumer credit;
and the enhanced product disclosures required in the Insurance Distribution
Directive.
A number of formal projects and initiatives are in place to address
forthcoming regulatory changes in 2019 including extending the Senior
Managers and Certification Regime to the Group's regulated subsidiaries;
European Banking Authority guidelines on security measures for operational
and security risks and fraud reporting under PSD2; and improvements
to operational resilience.
-----------------------------------------------------------------------------
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.
Although political and economic uncertainty has been prevalent
throughout the year, the fundamental elements of the UK economy
remain strong. Employment rates are at a record high and real take
home pay is rising. Once current levels of uncertainty have abated,
the Group expects levels of business investment, which have been
held back, to increase and provide a boost to the economy.
UK withdrawal from European Union
The UK economy continued to grow in 2018. However, this growth
was tempered by the uncertainty regarding the nature of the UK's
exit from the European Union. Political developments led to a
position where, at the end of 2018, it was unclear whether the UK
would be leaving the EU with a deal in place regarding the terms of
its withdrawal, leaving with no deal in place, leaving at a later
date or potentially, if a second referendum were called, not
leaving in March 2019 or at all. The decision to extend the
deadline and the scheduled indicative votes in the House of Commons
on the preferred outcome leaves all of these options open.
The direct impact to the Group of the UK leaving the EU is
limited, even in a no deal scenario. The "Partnership Pack"
published by the government in December 2018 provides information
in respect of cross border processes and procedures, including
customs, excise and taxation arrangements, in the event of no deal.
This document, and further publications issued in 2019, have not
highlighted any additional direct risks to the Group. All
continuing trade is within the UK, and the lending sectors that the
Group operates in are not significantly reliant on cross border
arrangements.
However, the indirect consequences of a no deal scenario could
be more significant. If a customs border were established between
the UK and the EU, then this could present a significant cost for
many UK businesses. A knock on impact to consumer confidence and
economic growth could dampen demand for the Group's products,
and/or result in deteriorating bad debt performance and hence
higher impairment charges.
In particular, for the Group's most significant business
units:
Business Unit Potential indirect impact of no deal exit
Real Estate Finance Direct consequences on the procedures for the transfer,
renting and mortgaging of property are considered unlikely.
If there is a reduction in UK Finance providers, then
contraction of supply could affect the choice and terms
of funding available for investment or development projects.
The timing or cost of development projects could be
affected by price increases and/or shipping delays.
Developers on some, particularly larger projects, may
be more cautious about committing to dates and costs
without scope for adjustment for the effect of a no
deal withdrawal. These factors could reduce demand for
the Group's products.
----------------------------------------------------------------
Business Unit Potential indirect impact of no deal exit
----------------------------------------------------------------
Commercial Finance No direct consequence is expected due to this division's
UK customer base. Invoice financing has some countercyclical
characteristics, though its medium term performance
is directly linked to macroeconomic conditions, given
lending balances are secured against the customer's
sales ledger.
----------------------------------------------------------------
Retail Finance The key market sectors funded by Retail Finance could
be impacted by rising raw material or finished goods
input prices. Retailers would need to decide whether
to pass on costs or absorb them into margins.
Rising consumer prices would likely lead to reduced
consumer confidence and demand and reduced retailer
margins would likely lead to retailers halting or slowing
UK expansion. These factors could reduce demand for
the Group's products.
Consumer affordability issues could also impact on the
Group's profitability through increased impairment provisions.
----------------------------------------------------------------
Motor Finance This division serves the UK used car market, which unlike
the supply of new vehicles (often originating from other
EU markets and attracting increased tariffs), is largely
self-contained. However, subdued economic conditions
and lower consumer confidence or spending power may
have a potential adverse impact on used car demand,
and associated demand for the Group's financing.
Affordability issues may also adversely impact the Group's
profitability through increased bad debts.
-------------------- ----------------------------------------------------------------
The Group considers the most significant potential impact of a
no deal exit to be that on credit risk. In response to the
uncertainty regarding the exit from the EU, the Group worked with
external consultants to assess the likely impact of a no deal
scenario on its Consumer Finance portfolios.
This assessment included stress test modelling of a no deal
departure, using the Group's ICAAP models. Assumptions used in the
models were based on seven published economic models, developed by:
Organisation for Economic Co-operation and Development ('OECD'),
London School of Economics ('LSE'), Economists for Brexit ('EfB'),
HM Treasury ('HMT'), National Institute for Economic and Social
Research ('NIESR'), Oxford Economics ('OE') and PwC. Review of
these assumptions led to four summary scenarios: long, sharp
recession; long, shallow recession; short, shallow recession; no
recession. Each of these four scenarios was modelled to identify
the expected impact on impairment provisions in respect of the
Group's consumer lending portfolios.
A range of outcomes was provided and reviewed by management.
While the outcomes derived from the recession scenarios resulted in
higher impairment provisions than those set out in the Group's
central plan, these were not at a level that were considered to
compromise the Group's viability. It was concluded that the Group
did not need to change strategy in the anticipation of a potential
no deal exit from the EU.
Following this work, the Group has developed additional early
warning indicators that could indicate the need to change strategy,
and the activities required in this eventuality to bring impairment
losses back to base level. As well as existing measures relating to
loan book performance, economic variables were selected which would
act as lead indicators of potential issues. These include the
Sterling to Euro exchange rate, movements in the FTSE 250 and
government bond yields.
Model Risk and the impact of IFRS 9
As reported last year, the Group's modelling capability was
significantly enhanced with the introduction of IFRS 9. The suite
of models used 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,
has been monitored throughout the year and found to be working
effectively. Modest enhancements have been made which have reduced
the need for expert credit judgement overlays to be used in
addition to model output.
The Model Governance Committee was established in 2018 and now
reports to Risk Committee. In addition to the IFRS 9 models, this
committee has also reviewed and approved the models used to derive
the effective interest rate and drive income release in respect of
the Group's consumer lending portfolios, the IFRS 9 forecasting
model and the models used in the Group's ICAAP.
The use of expected loss models for IFRS 9 accelerates
impairment provisions and also accelerates the impact of changes,
arising from loan performance or macroeconomic factors. This can
introduce more volatility into reported earnings, albeit over time
the underlying profit on a loan is unchanged. The improvement in
the quality of the Group's Motor Finance lending and collections
performance delivered a reduction in impairment losses for this
portfolio in this accounting period, greater than would have been
reported under the previous IAS 39 standard. A future deterioration
in performance or in the UK economy more generally could have the
opposite effect.
Risk management
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
Going concern and viability
Going concern
In assessing the Group as a going concern, the directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Strategic Report. The Group uses various short and medium term
forecasts to monitor future capital and liquidity requirements and
these include stress testing assumptions to identify the headroom
on regulatory compliance measures.
The directors are satisfied that the Company and the Group have
adequate resources to continue to operate for the foreseeable
future as going concerns. For this reason they continue to adopt
the going concern basis in preparing this preliminary
announcement.
Business viability
In accordance with provision C2.2 of the UK Corporate Governance
Code, the directors confirm that there is a reasonable expectation
that the Company and the Group will be able to continue in
operation and meet their liabilities as they fall due, for the
period up to 31 December 2021. The assessment of ongoing viability
covers this period as it falls within the Group's five year
planning horizon and is the period covered by the Group's stress
testing.
Given the Group's healthy capital and liquidity position,
reduction in exposure to higher risk lending, continuing growth in
profit and positive trading outlook, the directors are confident of
the Group's viability over the longer term. However, the inherent
uncertainties regarding the economic, regulatory and market
environment that the Group operates in may compromise the
reliability of longer range forecasts. Given current economic
uncertainties, and this being the first year in which the Group has
extended its planning horizon to five years, the Board has decided
to continue to use a three year period for its assessment of
viability rather than extending this over the full planning
horizon.
The directors have based the assessment on:
-- The latest annual budget, which contains information on the
expected financial position and performance for the period to 31
December 2023 and by considering the potential impact of the
principal risks facing the Group, as set out on pages 40 to 51.
-- The analysis of key sensitivities, undertaken as part of the
budget process, which could impact on profitability over the period
covered by the budget. Assumptions made to calculate risk weighted
assets and capital requirements are clearly stated and additional
scenarios are modelled to demonstrate the potential impact of risks
and uncertainties on capital.
-- The Group's ILAAP, which uses stress scenarios to assess the
adequacy of liquidity resources. The 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.
-- The Group's ICAAP, which considers a macroeconomic stress and
a severe shock scenario 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.
-- Consideration of the other principal risks as set out on
pages 40 to 51, to identify any other severe but plausible
scenarios that could threaten the Group's business model, future
performance, solvency or liquidity.
-- Analysis of further scenarios related to the UK's withdrawal
from the European Union. Further details of this analysis are
provided on page 49.
In making this statement, the Board has sought input from the
Audit Committee and the Risk Committee.
Directors' responsibility statement
The responsibility statement below has been prepared in
connection with the full annual accounts of the Company for the
year ended 31 December 2018. Certain parts of these accounts are
not presented within this announcement.
The Directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
company financial statements for each financial year. As required
by the Listing Rules they are required to prepare the Group
financial statements in accordance with IFRS as adopted by the EU
and applicable law and have elected to prepare the parent company
financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and of
their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent;
-- 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; and
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the 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; and
-- The annual report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group and parent company's
performance, business model and strategy.
This responsibility statement was approved by the Board of
Directors on 27 March 2019 and is signed on their behalf by:
Paul Lynam Neeraj Kapur
Chief Executive Officer Chief Financial Officer
Consolidated statement of comprehensive income
2018 2017 2017 2017
Total Continuing Discontinued Total
Note GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----- ----------- ----------- ------------- -----------
Income statement
Interest income and similar income 4.1 169.2 141.3 8.0 149.3
Interest expense and similar
charges 4.1 (35.5) (26.7) - (26.7)
------------------------------------------ ----- ----------- ----------- ------------- -----------
Net interest income 4.1 133.7 114.6 8.0 122.6
------------------------------------------ ----- ----------- ----------- ------------- -----------
Fee and commission income 4.2 19.4 16.0 - 16.0
Fee and commission expense 4.2 (1.5) (1.1) - (1.1)
------------------------------------------ ----- ----------- ----------- ------------- -----------
Net fee and commission income 4.2 17.9 14.9 - 14.9
------------------------------------------ ----- ----------- ----------- ------------- -----------
Operating income 151.6 129.5 8.0 137.5
------------------------------------------ ----- ----------- ----------- ------------- -----------
Net impairment losses on loans
and advances to customers (32.4) (33.5) (3.4) (36.9)
Operating expenses 5 (84.5) (71.3) (0.3) (71.6)
Profit on sale of equity instruments
available-for-sale - 0.3 - 0.3
Profit before income tax 34.7 25.0 4.3 29.3
Income tax expense 7 (6.4) (5.1) (0.8) (5.9)
------------------------------------------ ----- ----------- ----------- ------------- -----------
Profit after income tax 28.3 19.9 3.5 23.4
Gain recognised on disposal after
tax - - 0.4 0.4
------------------------------------------ ----- ----------- ----------- ------------- -----------
Profit for the period 28.3 19.9 3.9 23.8
------------------------------------------ ----- ----------- ----------- ------------- -----------
Other comprehensive income
Items that will not be reclassified
to the income statement
Revaluation reserve (0.3) 0.1 - 0.1
Taxation 0.1 - - -
----------------------------------------- ----- ----------- ----------- ------------- -----------
(0.2) 0.1 - 0.1
----------------------------------------- ----- ----------- ----------- ------------- -----------
Items that may subsequently be
reclassified to the income statement
Available-for-sale reserve - 2.8 - 2.8
Taxation - - - -
----------------------------------------- ----- ----------- ----------- ------------- -----------
- 2.8 - 2.8
----------------------------------------- ----- ----------- ----------- ------------- -----------
Other comprehensive income for
the period, net of income tax (0.2) 2.9 - 2.9
------------------------------------------ ----- ----------- ----------- ------------- -----------
Total comprehensive income for
the period 28.1 22.8 3.9 26.7
------------------------------------------ ----- ----------- ----------- ------------- -----------
Profit attributable to:
----------------------------------------- ----- ----------- ----------- ------------- -----------
Equity holders of the Company 28.3 19.9 3.9 23.8
------------------------------------------ ----- ----------- ----------- ------------- -----------
Total comprehensive income attributable
to:
----------------------------------------- ----- ----------- ----------- ------------- -----------
Equity holders of the Company 28.1 22.8 3.9 26.7
------------------------------------------ ----- ----------- ----------- ------------- -----------
Earnings per share for profit
attributable to the equity holders
of the Company during the period
(pence per share)
Basic earnings per share 8.1 153.2 107.7 21.1 128.8
------------------------------------------ ----- ----------- ----------- ------------- -----------
Diluted earnings per share 8.2 150.9 106.4 20.9 127.3
------------------------------------------ ----- ----------- ----------- ------------- -----------
Consolidated statement of financial position
At 31 December
2018 2017
Note GBPmillion GBPmillion
--------------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 169.7 226.1
Loans and advances to banks 10 44.8 34.3
Loans and advances to customers 11 2,028.9 1,598.3
Debt securities 14 149.7 5.0
Property, plant and equipment 15 11.0 11.5
Intangible assets 16 9.9 10.4
Deferred tax assets 18 7.9 0.6
Other assets 19 22.4 5.4
Total assets 2,444.3 1,891.6
--------------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 263.5 113.0
Deposits from customers 21 1,847.7 1,483.2
Current tax liabilities 4.2 3.0
Other liabilities 22 40.1 41.9
Provisions for liabilities and charges 23 1.3 1.4
Subordinated liabilities 24 50.4 -
Total liabilities 2,207.2 1,642.5
--------------------------------------------- ----- ----------- -----------
Equity attributable to owners of the parent
Share capital 26 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 1.1 1.3
Retained earnings 147.4 159.2
--------------------------------------------- ----- ----------- -----------
Total equity 237.1 249.1
--------------------------------------------- ----- ----------- -----------
Total liabilities and equity 2,444.3 1,891.6
--------------------------------------------- ----- ----------- -----------
The financial statements on pages 134 to 216 were approved by the Board
of Directors on 27 March 2019 and were signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Company statement of financial position
At 31 December
2018 2017
Note GBPmillion GBPmillion
--------------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 169.7 226.1
Loans and advances to banks 10 41.9 32.3
Loans and advances to customers 11 1,980.3 1,565.5
Debt securities 14 149.7 5.0
Property, plant and equipment 15 6.0 6.1
Intangible assets 16 8.1 8.5
Investments 17 3.9 3.7
Deferred tax assets 18 7.8 0.6
Other assets 19 65.6 33.2
--------------------------------------------- ----- ----------- -----------
Total assets 2,433.0 1,881.0
--------------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 263.5 113.0
Deposits from customers 21 1,847.7 1,483.2
Current tax liabilities 3.6 1.9
Other liabilities 22 49.1 44.4
Provisions for liabilities and charges 23 1.3 1.4
Subordinated liabilities 24 50.4 -
--------------------------------------------- ----- ----------- -----------
Total liabilities 2,215.6 1,643.9
--------------------------------------------- ----- ----------- -----------
Equity attributable to owners of the parent
Share capital 26 7.4 7.4
Share premium 81.2 81.2
Revaluation reserve 0.6 0.5
Retained earnings 128.2 148.0
Total equity 217.4 237.1
--------------------------------------------- ----- ----------- -----------
Total liabilities and equity 2,433.0 1,881.0
--------------------------------------------- ----- ----------- -----------
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 GBP20.8 million is
presented in the Company statement of changes in equity.
The financial statements on pages 134 to 216 were approved by the Board
of Directors on 27 March 2019 and were signed on its behalf by:
Paul Lynam
Chief Executive Officer
Neeraj Kapur
Chief Financial Officer
Registered number: 00541132
Consolidated statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2017 7.4 81.2 1.2 (2.8) 149.0 236.0
Total comprehensive income
for the period
Profit for 2017 - - - - 23.8 23.8
Other comprehensive income,
net of income tax
Revaluation reserve - - 0.1 - - 0.1
Available-for-sale reserve - - - 2.8 - 2.8
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 0.1 2.8 - 2.9
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period - - 0.1 2.8 23.8 26.7
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (14.0) (14.0)
Tax on share-based payments - - - - 0.4 0.4
Total contributions by
and distributions to
owners - - - - (13.6) (13.6)
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2017 (as previously stated) 7.4 81.2 1.3 - 159.2 249.1
IFRS 9 transition adjustment - - - - (25.8) (25.8)
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2018 7.4 81.2 1.3 - 133.4 223.3
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period
Profit for 2018 - - - - 28.3 28.3
Other comprehensive income,
net of income tax
Revaluation reserve - - (0.3) - - (0.3)
Tax on revaluation reserve - - 0.1 - - 0.1
Total other comprehensive
income - - (0.2) - - (0.2)
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period - - (0.2) - 28.3 28.1
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (14.8) (14.8)
Share-based payments - - - - 0.8 0.8
Tax on share-based payments - - - - (0.3) (0.3)
Total contributions by
and distributions to
owners - - - - (14.3) (14.3)
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2018 7.4 81.2 1.1 - 147.4 237.1
----------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Company statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2017 7.4 81.2 0.5 (2.8) 135.5 221.8
Total comprehensive income
for the period
Profit for 2017 - - - - 26.1 26.1
Other comprehensive
income,
net of income tax
Available-for-sale reserve - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - - 2.8 - 2.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period - - - 2.8 26.1 28.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (14.0) (14.0)
Tax on share-based
payments - - - - 0.4 0.4
Total contributions by
and distributions to
owners - - - - (13.6) (13.6)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2017 (as previously
stated) 7.4 81.2 0.5 - 148.0 237.1
IFRS 9 transition
adjustment - - - - (26.3) (26.3)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2018 7.4 81.2 0.5 - 121.7 210.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period
Profit for 2018 - - - - 20.8 20.8
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 - 20.8 20.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (14.8) (14.8)
Share-based payments - - - - 0.8 0.8
Tax on share-based
payments - - - - (0.3) (0.3)
Total contributions by
and distributions to
owners - - - - (14.3) (14.3)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2018 7.4 81.2 0.6 - 128.2 217.4
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Year ended Year ended
31 December 31 December
2018 2017
Note GBPmillion GBPmillion
------------------------------------------------------------- ----- ------------- -------------
Cash flows from operating activities - Continuing
operations
Profit for the year 28.3 19.9
Adjustments for:
Income tax expense 7 6.4 5.1
Depreciation of property, plant and equipment 15 1.3 0.8
Loss on disposal of computer software 0.1 -
Amortisation of intangible assets 16 1.8 2.0
Impairment losses on loans and advances to customers 32.4 33.5
Share based compensation 27 0.8 -
Profit on sale of equity instruments available-for-sale - (0.3)
------------------------------------------------------------- ----- ------------- -------------
Cash flows from operating profits before changes
in operating assets and liabilities 71.1 61.0
Changes in operating assets and liabilities:
- net (increase)/decrease in debt securities (144.7) 15.0
- net increase in loans and advances to customers (494.8) (378.3)
- net increase in other assets (17.0) (1.0)
- net increase in deposits from customers 364.5 331.4
- net decrease in other liabilities (0.5) (7.0)
Income tax paid (6.4) (5.1)
Net cash (outflow)/inflow from operating activities
- Continuing operations (227.8) 16.0
------------------------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of discontinued operation - 37.1
Proceeds from sale of equity instruments available-for-sale - 16.6
Purchase of property, plant and equipment 15 (1.1) (0.8)
Purchase of computer software 16 (1.4) (3.4)
Net cash (outflow)/inflow from investing activities
- Continuing operations (2.5) 49.5
------------------------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Increase in amounts due to banks 150.0 43.0
Issue of subordinated liabilities 24 50.0 -
Subordinated liabilities issue costs 24 (0.8) -
Dividends paid 9 (14.8) (14.0)
------------------------------------------------------------- ----- ------------- -------------
Net cash inflow from financing activities -
Continuing operations 184.4 29.0
------------------------------------------------------------- ----- ------------- -------------
Net (decrease)/increase in cash and cash equivalents
- Continuing operations (45.9) 94.5
Net increase in cash and cash equivalents -
Discontinued operations - 35.7
Cash and cash equivalents at 1 January 260.4 130.2
------------------------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 214.5 260.4
------------------------------------------------------------- ----- ------------- -------------
Proceeds from sale of equity instruments available-for-sale and
net increase in amounts due to banks have been moved from operating
activities to investing activities and financing activities
respectively, as this better represents the nature of the
underlying activity.
Company statement of cash flows
Year ended Year ended
31 December 31 December
2018 2017
Note GBPmillion GBPmillion
------------------------------------------------------------- ----- ------------- -------------
Cash flows from operating activities - Continuing
operations
Profit for the year 20.8 22.2
Adjustments for:
Income tax expense 4.9 2.7
Depreciation of property, plant and equipment 15 0.7 0.4
Loss on disposal of computer software 0.1 -
Amortisation of intangible assets 16 1.6 1.0
Impairment losses on loans and advances to customers 33.1 35.1
Share based compensation 27 0.6 -
Profit on sale of equity instruments available-for-sale - (0.3)
------------------------------------------------------------- ----- ------------- -------------
Cash flows from operating profits before changes
in operating assets and liabilities 61.8 61.1
Changes in operating assets and liabilities:
- net (increase)/decrease in debt securities (144.7) 15.0
- net increase in loans and advances to customers (480.3) (378.9)
- net (increase)/decrease in other assets (32.4) 0.6
- net increase in deposits from customers 364.5 331.4
- net increase/(decrease) in other liabilities 6.0 (11.5)
Income tax paid (4.3) (2.6)
Net cash (outflow)/inflow from operating activities
- Continuing operations (229.4) 58.1
------------------------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of discontinued operation - 37.1
Proceeds from sale of equity instruments available-for-sale - 16.6
Purchase of property, plant and equipment 15 (0.5) (0.3)
Purchase of computer software 16 (1.3) (3.3)
Net cash (outflow)/inflow from investing activities
- Continuing operations (1.8) 50.1
------------------------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Increase in amounts due to banks 150.0 43.0
Issue of subordinated liabilities 24 50.0 -
Subordinated liabilities issue costs 24 (0.8) -
Dividends paid 9 (14.8) (14.0)
------------------------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from financing activities
- Continuing operations 184.4 (14.0)
------------------------------------------------------------- ----- ------------- -------------
Net (decrease)/increase in cash and cash equivalents (46.8) 94.2
Net increase in cash and cash equivalents -
Discontinued operations - 35.7
Cash and cash equivalents at 1 January 258.4 128.5
------------------------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 211.6 258.4
------------------------------------------------------------- ----- ------------- -------------
Proceeds from sale of equity instruments available-for-sale and
net increase in amounts due to banks have been moved from operating
activities to investing activities and financing activities
respectively, as this better represents the nature of the
underlying activity.
Notes to the preliminary statements
1. Accounting policies
The principal accounting policies applied in the preparation of
this preliminary announcement 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, Solihull,
West Midlands, B90 4LH. The consolidated financial statements of
the Company as at and for the year ended 31 December 2018 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 2018 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2018 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 2017 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 directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The directors confirm they are satisfied that the
Company and the Group have adequate resources to continue in
business for the foreseeable future. For this reason, they continue
to adopt the 'going concern' basis for preparing accounts, as set
out in the going concern and viability section of the Strategic
Report starting on page 2.
The consolidated financial statements were authorised for issue
by the Board of Directors on 27 March 2019.
1.3. IFRS 16 'Leases'
IFRS 16 'Leases' has been issued, and endorsed by the EU, but is
not yet effective. It is effective for annual periods beginning on
or after 1 January 2019, and has not been adopted early.
The new standard sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties
to a contract i.e. the customer ('lessee') and the supplier
('lessor'). It replaces the previous leases standard, IAS 17
'Leases', and related interpretations.
IFRS 16 uses a new single model that applies to all leases, thus
eliminating the classification of leases as either operating leases
or finance leases for a lessee. Applying that model, on
commencement of a lease, the lessee recognises a liability to make
lease payments ('the lease liability'), an asset representing the
right to use the underlying asset during the lease term ('the
right-of-use asset'), and depreciation of right-of-use assets is
shown separately from interest on lease liabilities in the income
statement.
The lease liability is initially measured based on the net
present value of the lease payments to be made over the remaining
lease term, using the lessee's incremental borrowing rate as the
discount rate. After commencement of the lease, the lease liability
is measured on an amortised cost basis, with interest being
calculated on an effective interest rate basis on the remaining
balance of the liability, and lease payments reducing the lease
liability when paid.
The right-of-use asset is initially measured at cost, being the
amount of the initial measurement of the lease liability, adjusted
for any prepaid rentals less any lease incentives plus any initial
direct costs incurred by the lessee and dismantling or restoration
costs. Subsequently, the right-of-use asset is amortised on a
straight-line basis over the remaining term of the lease.
Transition choices
The Group has elected to recognise the cumulative effect of
implementing IFRS 16 as an adjustment to the opening balance of
retained earnings at 1 January 2019. Accordingly, prior year
comparatives shall not be restated. As a practical expedient, the
Group will apply the new standard only to contracts that had
previously been identified as leases. Therefore, the new standard
will not be applied to contracts that had not previously been
identified as leases.
The Group has also elected not to apply IFRS 16 to the
following:
-- Short term leases of 12 months or less.
-- Leases for which the underlying asset is of low value.
This has resulted in the new standard only being applicable to a
number of property leases and motor vehicle leases.
The Group has chosen to measure the initial right of use asset
for property leases at its carrying amount as if the standard has
been applied since the commencement date, but discounted using the
incremental borrowing rate as at 1 January 2019. The initial right
of use asset for all other leases is measured at an amount equal to
the lease liability.
The Group's IFRS 16 implementation project is substantially
complete, and based on assessments undertaken to date, the
estimated adjustments (net of tax) arising from the adoption of
IFRS 16 on 1 January 2019 are expected to be an increase in assets
and liabilities of approximately GBP6 million, and there will be no
material impact on shareholders' equity at 1 January 2019.
Additionally, it is not expected that implementation of IFRS 16
will have any material impact on profit before tax for the year
ended 31 December 2019.
Lessor accounting
Lessor accounting remains unchanged from IAS 17.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition over the fair value of the
Group's share of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly in the income statement.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment in
value.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Discontinued operations are a component of an entity that
has been disposed of, and represents a major line of business and
is part of a single co-ordinated disposal plan.
1.5. IFRS 9 'Financial instruments'
The new standard, effective for the period beginning 1 January
2018, has replaced IAS 39 'Financial Instruments: Recognition and
Measurement'. Adoption of the standard has resulted in new
accounting policies for interest income and expense, the
classification and measurement of financial instruments and the
impairment of financial assets and loan commitments which are
presented below.
Changes in accounting policies resulting from the adoption of
IFRS 9 have been applied retrospectively, except as noted
below:
-- The comparatives for the year ended 31 December 2017 have not
been restated. Information presented for 2017 will not therefore be
comparable. Differences in the carrying amounts of financial
instruments resulting from adoption of IFRS 9 are recognised in
retained earnings at 1 January 2018
-- The determination of the business model within which a
financial asset is held has been assessed based on facts that
existed at the date of initial application and
-- If a debt security had low credit risk at the date of initial
application of IFRS 9, then the Group has assumed that the credit
risk of the asset had not increased significantly since initial
recognition. A financial asset is considered to have low credit
risk when its credit risk rating is equivalent to the widely
understood definition of investment grade.
Additionally, the Group has adopted the consequential amendments
to IFRS 7 'Financial Instruments: Disclosures'. These disclosures
have been applied to information presented for the year ended 31
December 2018 and have not been applied to comparative
information.
Implementation of IFRS 9 resulted in a GBP25.8 million reduction
in the Group's opening equity at 1 January 2018, being GBP32.1
million net of GBP6.3 million related to associated deferred tax
impacts. There has been no change in the carrying amount of
financial instruments on the basis of their measurement categories.
All adjustments have arisen solely due to a replacement of the IAS
39 incurred loss impairment approach with an expected credit loss
('ECL') approach. Further details are provided in Note 38.
1.6. Interest income and expense
Applicable from 1 January 2018 - IFRS 9 basis
For all financial instruments measured at amortised cost, the
effective interest rate method is used to measure the carrying
value and allocate interest income or expense. The effective
interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the
financial instrument to:
-- the gross carrying amount of the financial asset or
-- the amortised cost of the financial liability.
In calculating the effective interest rate for financial
instruments, other than assets that were credit impaired on initial
recognition, the Group estimates cash flows considering all
contractual terms of the financial instrument (for example, early
redemption penalty charges and broker commissions) and anticipated
customer behaviour but does not consider future credit losses. For
financial assets that were impaired on initial recognition (also
referred to as purchased or originated credit impaired assets -
'POCI'), a credit adjusted effective interest rate is calculated
using estimated future cash flows, including expected credit
losses.
The calculation of the effective interest rate includes all fees
received and paid that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts. Transaction costs include incremental costs that are
directly attributable to the acquisition or issue of a financial
instrument.
For financial assets that are not considered to be credit
impaired ('stage 1' and 'stage 2' assets), interest income is
recognised by applying the effective interest rate to the gross
carrying amount of the financial asset. For financial assets that
become credit impaired subsequent to initial recognition ('stage 3'
assets), interest income is recognised by applying the effective
interest rate to the amortised cost of the financial asset. The
credit risk of financial assets that become credit impaired are not
expected to improve such that they are no longer considered credit
impaired, however, if this were to occur the calculation of
interest income would revert back to the gross basis. The Group's
definition of stage 1, stage 2 and stage 3 assets is set out in
Note 1.10.
For financial assets that were credit impaired on initial
recognition (POCI assets), income is calculated by applying the
credit adjusted effective interest rate to the amortised cost of
the asset. For such financial assets the calculation of interest
income will never revert to a gross basis, even if the credit risk
of the asset improves.
Further details regarding when an asset becomes credit impaired
subsequent to initial recognition is provided within Note 1.10.
Applicable prior to 1 January 2018 - IAS 39 basis
Interest income and expense was recognised in the income
statement for all instruments measured at amortised cost using the
effective interest method.
The effective interest method calculates the amortised cost of a
financial asset or a financial liability and allocates the interest
income or interest expense over the relevant period. The effective
interest rate is the rate that discounts estimated future cash
payments or receipts through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability. When
calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument but does
not consider future credit losses. The calculation includes all
fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and
all other premiums or discounts.
Once a financial asset or a group of similar financial assets
has been written down as a result of an impairment loss, interest
income is recognised using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment
loss.
1.7. 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
Statement of Comprehensive Income as interest income or
expense.
Fees and commission income that are not considered an integral
part of the effective interest rate of a financial instrument are
recognised when the Group satisfies performance obligations by
transferring promised services to customers.
1.8. 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.
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.
Applicable from 1 January 2018 - IFRS 9 basis
Financial Assets
The Group classifies its financial assets at inception into
three measurement categories; 'amortised cost', 'fair value through
other comprehensive income' ('FVOCI') and 'fair value through
profit and loss' ('FVTPL'). A financial asset is measured at
amortised cost if both the following conditions are met and it has
not been designated as at FVTPL:
-- the asset is held within a business model whose objective is
to hold the asset to collect its contractual cash flows; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
The Group's current business model for all financial assets is
to hold to collect contractual cash flows and all assets held give
rise to cash flows on specified dates that represent solely
payments of principal and interest on the outstanding principal
amount. All the Group's assets are therefore currently classified
as amortised cost. Loans are recognised when funds are advanced to
customers and are carried at amortised cost using the effective
interest method.
The amortised cost of an instrument is the amount at which it is
measured at initial recognition, less principal repayments, plus or
minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, less any expected credit loss allowance. The
gross carrying amount of a financial asset is the amortised cost of
a financial asset before adjusting for any expected credit loss
allowance.
A debt instrument would be measured at FVOCI only if both the
below conditions are met and it has not been designated as
FVTPL:
-- the asset is held within a business model whose objective is
achieved by both collecting its contractual cash flows and selling
the financial asset; and
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount.
The Group currently has no financial instruments classified as
FVOCI.
On initial recognition of an equity investment that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election would be made on an
investment by investment basis. The Group currently holds no such
investments.
All other assets are classified as FVTPL. The Group currently
has no financial assets classified as FVTPL.
Financial assets are not reclassified subsequent to their
initial recognition, except in the period after the Group changes
its business model for managing financial assets. The Group has not
reclassified any financial assets during the reporting period.
Deposits from customers
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.
Other financial liabilities
The subordinated liabilities comprise of 6.75% Fixed Rate Reset
Callable Subordinated Notes due 2028 (the 'Notes'):
-- 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 obligation 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. Further information in respect of the Notes is
provided in Note 24.
Transactions 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 fair value of other liabilities repayable on demand is
assumed to be the amount payable on demand at the statement of
financial position date.
The Group has not elected to measure any financial liabilities
at fair value.
Applicable prior to 1 January 2018 - IAS 39 basis
The Group classified its financial assets as fair value through
profit or loss, loans and receivables, held-to-maturity or
available-for-sale and classifies its financial liabilities as
other financial liabilities. Management determines the
classification of its investments at initial recognition. A
financial asset or financial liability is measured initially at
fair value plus, for an item not at fair value through profit or
loss, transaction costs that are directly attributable to its
acquisition or issue.
(a) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable.
Loans are recognised when the funds are advanced to customers.
Loans and receivables are carried at amortised cost using the
effective interest method (see below).
(b) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the
Group's management has the positive intention and ability to hold
to maturity. Held-to-maturity investments are carried at amortised
cost using the effective interest method.
(c) Available-for-sale
Available-for-sale ('AFS') investments are those not classified
as another category of financial assets. These comprised equity
investments in a quoted company. They may be sold in response to
liquidity requirements or equity price movements. AFS investments
are initially recognised at cost, which is considered as the fair
value of the investment including any acquisition costs. AFS
investments are subsequently measured at fair value in the
statement of financial position. Fair value changes on the AFS
securities are recognised in the statement of other comprehensive
income and in equity (AFS reserve), until the investment is sold or
impaired. Once sold or impaired, the cumulative gains or losses
previously recognised in the AFS reserve are recycled to the income
statement.
(d) Other financial liabilities
Other financial liabilities are non-derivative financial
liabilities with fixed or determinable payments. Other financial
liabilities are recognised when cash is received from the
depositors. Other financial liabilities are carried at amortised
cost using the effective interest method. The fair value of other
liabilities repayable on demand is assumed to be the amount payable
on demand at the statement of financial position date.
1.9. 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.
1.10. Impairment of financial assets and loan commitments
Applicable from 1 January 2018 - IFRS 9 basis
The Group recognises loss allowances for ECLs on all financial
assets carried at amortised cost, including lease receivables and
loan commitments.
Credit loss allowances are measured as an amount equal to
lifetime ECL, except for the following assets, for which they are
measured as 12 month ECL:
-- Financial assets determined to have low credit risk at the reporting date
-- Financial assets which have not experienced a significant
increase in credit risk since their initial recognition; and
-- Financial assets which have experienced a significant
increase in credit risk since their initial recognition but have
subsequently met the Group's cure policy, as set out below.
Such assets are classified as stage 1 assets.
Assets which have experienced a significant increase in credit
risk since their initial recognition and have not subsequently met
the Group's cure policy are classified as stage 2 assets. The
Group's definitions of a significant increase in credit risk and
default are set out below.
A financial asset is considered to have low credit risk when its
credit risk rating is equivalent to the widely understood
definition of 'investment grade' assets. The Group has assessed all
its debt securities, which represents UK Treasury bills, and loans
held in STB Leasing Limited, for which credit risk is retained by
its partner RentSmart, to be low credit risk.
Definition of default/credit impaired financial assets (Stage 3
loans)
At each reporting date, the Group assesses whether financial
assets carried at amortised cost are credit impaired (stage 3). A
financial asset is considered to be credit impaired when an event
or events that have a detrimental impact on estimated future cash
flows have occurred. Evidence that a financial asset is credit
impaired includes the following observable data:
-- Initiation of bankruptcy proceedings
-- Notification of bereavement
-- Identification of loan meeting debt sale criteria or
-- Initiation of repossession proceedings.
In addition, a loan that is 90 days or more past due is
considered credit impaired for all portfolios. The credit risk of
financial assets that become credit impaired are not expected to
improve such that they are no longer considered credit
impaired.
For Commercial Finance facilities that do not have a fixed term
or repayment structure, evidence that a financial asset is credit
impaired includes:
-- The client ceasing to trade; and
-- Unpaid debtor balances that are dated at least 6 months past their normal recourse period.
Significant increase in credit risk (Stage 2 loans)
For Consumer Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk since initial recognition where there has been a significant
increase in the remaining lifetime probability of default of the
asset. The Group may also use its expert credit judgement and where
possible relevant historical and current performance data,
including bureau data, to determine that an exposure has undergone
a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk where certain early warning indicators apply. These indicators
may include notification of county court judgements or,
specifically for the Real Estate Finance portfolio, cost over-runs
and timing delays experienced by borrowers.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due for all portfolios.
Performing assets which have experienced a significant increase
in credit risk since initial recognition are reclassified from
stage 1, for which loss allowances are measured at an amount equal
to 12 month ECL, to stage 2, for which ECL is measured as lifetime
ECL.
Cure policy
The credit risk of a financial asset may improve such that it is
no longer considered to have experienced a significant increase in
credit risk if it meets the Group's cure policy. The Group's cure
policy for all portfolios 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
ECLs are probability weighted estimates of credit losses which
are measured as the present value of all cash shortfalls.
Specifically, this is the difference between the contractual cash
flows due and the cash flows expected to be received, discounted at
the original effective interest rate or, for portfolios purchased
outside of the Group by Debt Managers (Services) Limited, the
credit adjusted effective interest rate. For undrawn loan
commitments ECL is measured as the difference between the
contractual cash flows due if the commitment is drawn and the cash
flows expected to be received.
Lifetime ECL is the ECL that results from all possible default
events over the expected life of a financial asset.
12 month ECL is the portion of lifetime ECL that results from
default events on a financial asset that are possible within 12
months after the reporting date.
ECLs are calculated by multiplying three main components; the
probability of default ('PD'), exposure at default ('EAD') and loss
given default ('LGD') discounted at the original effective interest
rate of an asset. These variables are derived from internally
developed statistical models and historical data, adjusted to
reflect forward looking information and are discussed in turn
further below. Management adjustments are made to modelled output
to account for situations where known or expected risk factors have
not been considered in the modelling process.
Probability of default (PD) and credit risk grades
Credit risk grades are a primary input into the determination of
the PD for exposures. The Group allocates each exposure to a credit
risk grade at origination and at each reporting period to predict
the risk of default. Credit risk grades are determined using
qualitative and quantitative factors that are indicative of the
risk of default e.g. arrears status and loan applications scores.
These factors vary for each loan portfolio. Exposures are subject
to ongoing monitoring, which may result in an exposure being moved
to a different credit risk grade. In monitoring exposures
information such as payment records, request for forbearance
strategies and forecast changes in economic conditions are
considered for Consumer Finance. Additionally, for Business Finance
information obtained during periodic client reviews, for example
audited financial statements, management accounts, budgets and
projections are considered, with particular focus on key ratios,
compliance with covenants and changes in senior management
teams.
Exogenous, Maturity, Vintage ('EMV') modelling is used in the
production of forward looking lifetime PDs. This method entails
modelling the effects of external (exogenous) factors against
cohorts of lending and their time on the books creating a clean
relationship to best demonstrate the movement in default rates as
macroeconomic variables are changed. These models are extrapolated
to provide PD estimates for the future, based on forecasted
economic scenarios.
Exposure at default (EAD)
EAD represents the expected exposure in the event of a default.
EAD is derived from the current exposure and potential changes to
the current amount allowed under the terms of the contract,
including amortisation overpayments and early terminations. The EAD
of a financial asset is its gross carrying amount. For loan
commitments the EAD includes the amount drawn as well as potential
future amounts that may be drawn under the terms of the contract,
estimated based on historical observations and forward looking
forecasts.
For Commercial Finance facilities that have no specific term, an
assumption is made that accounts close 36 months after the
reporting date for the purposes of measuring lifetime ECL. This
assumption is based on industry experience of average client life.
These facilities do not have a fixed term or repayment structure
but are revolving and increase or decrease to reflect the value of
the collateral i.e. receivables or inventory. The Group can cancel
the facilities with immediate effect, although this contractual
right is not enforced in the normal day to day management of the
facility. Typically, demand would only be made on failure of a
client business or in the event of a material event of default,
such as a fraud. In the normal course of events, the Group's
exposure is recovered through receipt of remittances from the
client's debtors rather than from the client itself.
The ECL for such facilities is estimated taking into account the
credit risk management actions that the Group expects to take to
mitigate against losses. These include a reduction in advance rate
and facility limits or application of reserves against a facility
so as to improve the likelihood of full recovery of exposure from
the debtors. Alternative recovery routes mitigating ECL would
include refinance by another funding provider, taking security over
other asset classes or secured personal guarantees from the
client's principals.
Loss given default (LGD)
LGD is the magnitude of the likely loss in the event of default.
This takes into account recoveries either through curing or, where
applicable, through auction sale of repossessed collateral and debt
sale of the residual shortfall amount. For loans secured by retail
property, loan-to-value 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 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 macro
economic scenarios. For the Real Estate Finance portfolio the key
drivers have been identified as unemployment rate growth and Bank
of England base rates. Base case assumptions applied for each of
these variables, with the exception of the annual house price index
growth, have been sourced from external consensus forecasts. The
annual house price index is assumed to increase 2% per annum until
December 2021 and 4% thereafter. Further details of the assumptions
applied to other scenarios is 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
statement of comprehensive income:
-- Financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets.
-- Other loan commitments: generally, as a provision.
For the Real Estate Finance and Commercial Finance portfolios,
where a loan facility is agreed that includes both drawn and
undrawn elements and the Group cannot identify the ECL on the loan
commitment separately, a combined loss allowance for both drawn and
undrawn components of the loan is presented as a deduction from the
gross carrying amount of the drawn component, with any excess of
the loss allowance over the gross drawn amount presented as a
provision.
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Where the terms of a
financial asset have been modified and the modification has not
resulted in derecognition, the expected cash flows arising from the
modified financial asset are included in calculating any cash
shortfalls from the existing asset. Any change in the carrying
value of the modified asset would be recognised immediately in the
income statement.
When a loan is uncollectible, it is written off against the
related ECL allowance. Such loans are written off after all
necessary procedures have been completed and the amount of the loss
has been determined.
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 statement of
comprehensive income.
Applicable prior to 1 January 2018 - IAS 39 basis
Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is
objective evidence that a financial asset or group of financial
assets is impaired. Objective evidence is the occurrence of a loss
event, after the initial recognition of the asset, that impacts on
the estimated future cash flows of the financial asset or group of
financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is
objective evidence of an impairment loss include, but are not
limited to, the following:
-- Delinquency in contractual payments of principal or interest;
-- Breach of financial covenants or contractual obligations;
-- Cash flow difficulties experienced by the borrower; and
-- Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on loans
and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset's carrying amount and
the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate. The carrying
amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the income
statement. If a loan or held-to-maturity investment has a variable
interest rate, the discount rate for measuring any impairment loss
is the current effective interest rate determined under the
contract.
The Group considers evidence of impairment for loans and
advances at both an individual asset and collective level. All
individually significant loans and advances are assessed for
specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been
incurred but not yet identified. In assessing collective impairment
the Group uses historical trends of the probability of default,
emergence period, the timing of recoveries and the amount of loss
incurred, adjusted for management's judgement as to whether current
economic and credit conditions are such that the actual losses are
likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the
related provision for loan impairment. Such loans are written off
after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of
amounts previously written off decrease the amount of the provision
for loan impairment in the income statement.
Business Finance
In assessing objective evidence of a loss event for business
loans, the following factors are considered:
-- If any contractual repayment date has been missed;
-- Covenant breaches; and
-- In Commercial Finance, a loan may be considered for potential
impairment if the financial prospects of the borrower's customers
deteriorates.
Consumer Finance
For Consumer loans, cash flows are estimated based on past
experience combined with the Group's view of the future considering
the following factors:
-- The Group's exposure to the customer;
-- Based on the number of days in arrears at the statement of
financial position date, the likelihood that a loan will progress
through the various stages of delinquency and ultimately be written
off; and
-- The amount and timing of expected receipts and recoveries.
Modification of loans
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Loans that have renegotiated
or deferred terms, resulting in a substantial modification to the
cash flows, are no longer considered to be past due but are treated
as new loans recognised at fair value, provided the customers
comply with the renegotiated or deferred terms.
1.11. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment losses and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. Impairment losses are recognised
in the income statement if the carrying amount exceeds the
recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software.
Costs associated with developing or maintaining computer
software programs are recognised as an expense as incurred unless
the technical feasibility of the development has been demonstrated,
and it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance, in which case they are
capitalised.
These costs are amortised on the basis of the expected useful
lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance
with IFRS 3 'Business Combinations', which requires the recognition
of the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. As part of this process, it was
necessary to recognise certain intangible assets which are
separately identifiable and which are not included on the
acquiree's balance sheet, which are amortised over their expected
useful lives, as set out in Note 16.
1.12. 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 7 years
Computer equipment 3 to 5 years
Other equipment 5 to 10 years
----------------------- ------------------------------------
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the income
statement.
1.13. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases.
When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference
between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income
is recognised over the term of the lease using the net investment
method, which reflects a constant periodic rate of return.
(b) As a lessee
Rentals made under operating leases are recognised in the income
statement on a straight-line basis over the term of the lease.
1.14. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents comprise highly liquid investments which are
convertible into cash with an insignificant risk of changes in
value with a maturity of three months or less at the date of
acquisition, including certain loans and advances to banks and
short-term highly liquid debt securities.
1.15. 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
27.
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.
2.2.1 Impairment losses on loans and advances to customers
As discussed in Note 1.10 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 1.10 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.
The portfolios for which external benchmark information
represents a significant input into the measurement of ECL are Real
Estate Finance, Asset Finance and Commercial Finance. The
benchmarks used for all three portfolios are Standard & Poor's
Ratings and Bank of England UK Possessions as proxy data for
ERM.
With the exception of the Motor Finance portfolio, sensitivity
to reasonably possible changes in PD is not considered to result in
material changes in the ECL allowance. The Motor Finance portfolio
has seen improvements in PD since implementation of IFRS 9 due to
the Group's move away from writing subprime Motor loans in January
2017 and improvements in the collections process. During the year
the Motor Finance PD reduced by 9.6% resulting in an GBP2.3 million
reduction in ECL. A 10% change in the PD for Motor Finance would
impact the ECL allowance by GBP1.8 million.
The composition of the Retail Finance portfolio remains stable
with minimal movement in PDs and 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 1.10.
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 10% change in the LGD is considered reasonably possible due to
historic data showing movements in vehicle collection rates once a
loan is in repossession stage. A 10% change in the vehicle recovery
rate assumption element of the LGD for Motor Finance would impact
the ECL allowance by GBP1.6 million. Vehicle collection rates and
proceeds received on sale of vehicles at auction remained broadly
stable over 2018, and therefore there was no material change to ECL
as a result of LGD changes.
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 1.10. Whilst not material and therefore not required by IAS 1,
the Group has included the disclosure below as it is considered
useful to readers of the Annual Report and Accounts.
The macro economic scenarios and weightings applied on adoption
of IFRS 9 on 1 January 2018 and at 31 December 2018 are summarised
below:
Weighting Weighting
31 December 1 January
Scenario Derivation 2018 2018
--------------- ---------------------------------------- ------------- -----------
Derived from external consensus
forecasts and used in the Group's
strategic planning and budgeting
Base case processes. 65% 80%
Assumes macroeconomic variables
will move with a more positive
Benign case trajectory than the base case. 10% 5%
Management's assessment, based
on historic data, of an adverse
scenario that could occur once
Stressed case every 7 to 8 years. 20% 10%
Based on the scenario used by the
PRA for the H1 2018 ICAAP. This
can be found on the Bank of England's
Deeper stress website: www.bankofengland.co.uk 5% 5%
--------------- ---------------------------------------- ------------- -----------
Weightings applied to the macro economic scenarios were reviewed
at the October 2018 Assumptions Committee and reconfirmed at the
January 2019 Assumptions Committee. After taking into consideration
current economic conditions and emerging industry practice it was
agreed to revise the weightings applied. The impact of this change
was GBP0.4 million increase to the Group's ECL.
The sensitivity of the ECL allowance to reasonably possible
changes in macro-economic scenario weighting is presented
below:
Increase in stressed case Increase in deeper stress case
weighting by 5% and weighting by 5% and reduction
reduction in base case in base case
GBPmillion GBPmillion
---------------- -------------------------- -------------------------------
Motor Finance 0.1 0.3
Retail Finance 0.1 0.8
---------------- -------------------------- -------------------------------
The sensitivity of other portfolios to reasonably possible
changes in macro-economic scenario weightings is not considered
material.
3. Operating segments
The Group is organised into seven operating segments, which
consist of the different products available, disclosed below:
Business Finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to
acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice
factoring.
Consumer Finance
4) 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.
Consumer Mortgages
7) Residential mortgages for the self-employed, contract
workers, those with complex income and those with a recently
restored credit history, sold via select mortgage
intermediaries.
Other
Other includes principally OneBill and RentSmart. OneBill has
been closed to new customers since 2009.
Discontinued operations
Personal Lending: Unsecured consumer loans sold to customers via
broker aggregators and business partners.
Currently, the Debt Management and Consumer Mortgages segments
both fall below the quantitative threshold for separate disclosure,
but the directors consider that they represent sufficiently
distinct types of business to merit separate disclosure. The prior
year figures have been restated accordingly, in order to separately
disclose Debt Management.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Net impairment
Interest losses
income Fee and Revenue on loans Loans
and similar commission from external and advances and advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------- ------------- ------------ --------------- --------------- --------------
31 December 2018
Business Finance
Real Estate Finance 41.1 0.1 41.2 0.5 769.8
Asset Finance 6.6 - 6.6 2.2 62.8
Commercial Finance 5.5 7.9 13.4 - 194.7
Consumer Finance
Retail Finance 58.7 4.1 62.8 19.3 597.0
Motor Finance 47.4 1.1 48.5 11.3 276.4
Debt Management 6.1 0.9 7.0 - 32.3
Consumer Mortgages 1.5 - 1.5 0.2 84.7
Other 2.3 5.3 7.6 (1.1) 11.2
----------------------- ------------- ------------ --------------- --------------- --------------
169.2 19.4 188.6 32.4 2,028.9
----------------------- ------------- ------------ --------------- --------------- --------------
Net impairment
Interest losses
income Fee and Revenue on loans Loans
and similar commission from external and advances and advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------- ------------ --------------- --------------- --------------
31 December 2017
Business Finance
Real Estate Finance 32.1 0.2 32.3 (0.2) 580.8
Asset Finance 8.5 - 8.5 1.0 116.7
Commercial Finance 2.5 4.7 7.2 0.1 126.5
Consumer Finance
Retail Finance 47.5 3.2 50.7 13.8 452.3
Motor Finance 46.2 0.9 47.1 20.8 274.6
Debt Management 3.3 1.6 4.9 - 15.6
Consumer Mortgages 0.1 - 0.1 - 16.5
Other 1.1 5.4 6.5 (2.0) 15.3
------------------------- ------------- ------------ --------------- --------------- --------------
Continuing operations 141.3 16.0 157.3 33.5 1,598.3
Discontinued operations
Personal Lending 8.0 - 8.0 3.4 -
------------------------- ------------- ------------ --------------- --------------- --------------
149.3 16.0 165.3 36.9 1,598.3
------------------------- ------------- ------------ --------------- --------------- --------------
The 'other' segment above includes products which are
individually below the quantitative threshold for separate
disclosure and fulfils the requirement of IFRS 8.28 by reconciling
operating segments to the amounts reported in the financial
statements.
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
4.1 Net interest income
2018 2017
GBPmillion GBPmillion
-------------------------------------- ----------- -----------
Loans and advances to customers 167.4 140.7
Cash and balances at central banks 1.0 0.4
Debt securities 0.8 -
Loans and advances to banks - 0.2
Interest income and similar income 169.2 141.3
-------------------------------------- ----------- -----------
Deposits from customers (32.8) (26.7)
Due to banks (1.5) -
Subordinated liabilities (1.2) -
-------------------------------------- ----------- -----------
Interest expense and similar charges (35.5) (26.7)
-------------------------------------- ----------- -----------
Net interest income 133.7 114.6
-------------------------------------- ----------- -----------
The net interest income shown above excludes GBP8.0 million in
2017 of interest on loans and advances to customers in respect of
discontinued operations, as shown in the income statement as set
out on page 134.
4.2 Net fee and commission income
2018 2017
GBPmillion GBPmillion
------------------------------- ----------- -----------
Fee and disbursement income 16.3 12.4
Commission income 2.0 2.7
Other income 1.1 0.9
Fee and commission income 19.4 16.0
------------------------------- ----------- -----------
Other expenses (1.5) (1.1)
------------------------------- ----------- -----------
Fee and commission expense (1.5) (1.1)
------------------------------- ----------- -----------
Net fee and commission income 17.9 14.9
------------------------------- ----------- -----------
Fees and commissions income consists principally of the
following:
-- weekly and monthly fees from the OneBill product
-- associated insurance commissions and commissions earned on debt collection activities in DMS
-- discounting, service and arrangement fees in Commercial Finance, and
-- account management and administration fees from retailers in Retail Finance.
Fee and commission expenses consist primarily of fees payable in
respect of Motor Finance.
5. Operating expenses
Total Continuing Discontinued Total
2018 2017 2017 2017
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ------------- -----------
Staff costs, including
those of directors:
Wages and salaries 39.1 33.8 0.3 34.1
Social security costs 6.0 4.2 - 4.2
Pension costs 1.4 1.2 - 1.2
Share based payment
transactions 0.8 (0.2) - (0.2)
Depreciation of property,
plant and equipment (Note
15) 1.3 0.8 - 0.8
Amortisation of intangible
assets (Note 16) 1.8 2.0 - 2.0
Operating lease rentals 1.7 1.5 - 1.5
Other administrative
expenses 32.4 28.0 - 28.0
------------------------------ ----------- ----------- ------------- -----------
Total operating expenses 84.5 71.3 0.3 71.6
------------------------------ ----------- ----------- ------------- -----------
As described in Note 3, operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis. Accordingly,
discontinued operating expenses above relates only to those costs
that are directly attributable to the discontinued business.
Remuneration of the auditor and its associates, excluding VAT,
was as follows:
2018 2017
GBP'000 GBP'000
----------------------------------------------------------- -------- --------
Fees payable to the Company's auditor for the audit
of the Company's annual accounts 233 270
Fees payable to the Company's auditor for other services:
The audit of the Company's subsidiaries, pursuant to
legislation 37 68
Audit related assurance services - 100
Other assurance services 95 62
All other non-audit services 140 39
----------------------------------------------------------- -------- --------
505 539
----------------------------------------------------------- -------- --------
Other assurance services related to the half year review.
All other non-audit services related to profit certification,
accounting opinion relating to the issue of the subordinated
liabilities, recovery plan support, review of share scheme
documentation and Financial Services Compensation Scheme reporting
health check (2017: profit certification, work relating to entry
into the Term Funding Scheme and advice on a potential corporate
acquisition).
6. Average number of employees
2018 2017
Number Number
---------------- ------- -------
Directors 7 8
Management 88 116
Administration 766 610
---------------- ------- -------
861 734
---------------- ------- -------
During the year, the Group updated its grading and pay
structure. The analysis above is therefore not directly comparable
between 2017 and 2018.
7. Income tax expense
Continuing Discontinued
Total operations operations Total
2018 2017 2017 2017
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------- ----------- ------------ ------------- -----------
Current taxation
Corporation tax charge
- current year 7.3 5.5 0.8 6.3
Corporation tax charge
- adjustments in respect
of prior years 0.3 - - -
----------------------------------- ----------- ------------ ------------- -----------
7.6 5.5 0.8 6.3
----------------------------------- ----------- ------------ ------------- -----------
Deferred taxation
Deferred tax charge - current
year (1.0) (0.5) - (0.5)
Deferred tax charge - adjustments
in respect of prior years (0.2) 0.1 - 0.1
------------------------------------- ----------- ------------ ------------- -----------
(1.2) (0.4) - (0.4)
----------------------------------- ----------- ------------ ------------- -----------
Income tax expense 6.4 5.1 0.8 5.9
------------------------------------- ----------- ------------ ------------- -----------
Tax reconciliation
Profit before tax 34.7 25.0 4.3 29.3
------------------------------------- ----------- ------------ ------------- -----------
Tax at 19.00% (2017: 19.25%) 6.6 4.8 0.8 5.6
Permanent differences - 0.2 - 0.2
Banking surcharge 0.3 - - -
Rate change on deferred
tax assets (0.6) - - -
Prior period adjustments 0.1 0.1 - 0.1
------------------------------------- ----------- ------------ ------------- -----------
Income tax expense for
the year 6.4 5.1 0.8 5.9
------------------------------------- ----------- ------------ ------------- -----------
The Government substantively enacted a reduction in the main
rate of UK corporation tax from 20% to 19% (effective from 1 April
2017) and a further reduction to 17% (effective 1 April 2020). The
Government also introduced an 8% surcharge on the profits of
banking companies in excess of GBP25 million effective from 1
January 2016 that is reflected in the 2018 tax charge and
reconciliation.
8. Earnings per ordinary share
8.1 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:
2018 2017
Profit attributable to equity holders
of the parent (GBP millions)
Continuing operations 28.3 19.9
Discontinued operations - 3.9
---------------------------------------------- ----------- -----------
28.3 23.8
-------------------------------------------- ----------- -----------
Weighted average number of ordinary shares
(number) 18,475,229 18,475,229
---------------------------------------------- ----------- -----------
Earnings per share (pence)
Continuing operations 153.2 107.7
Discontinued operations - 21.1
---------------------------------------------- ----------- -----------
153.2 128.8
-------------------------------------------- ----------- -----------
8.2 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:
2018 2017
-------------------------------------------- ----------- -----------
Weighted average number of ordinary shares 18,475,229 18,475,229
Number of dilutive shares in issue at
the year end 277,234 219,007
---------------------------------------------- ----------- -----------
Fully diluted weighted average number
of ordinary shares 18,752,463 18,694,236
---------------------------------------------- ----------- -----------
Dilutive shares being based on:
Number of options outstanding at the
year end 511,706 368,063
Weighted average exercise price (pence) 678 799
Average share price during the period
(pence) 1,489 1,974
---------------------------------------------- ----------- -----------
Diluted earnings per share (pence)
Continuing operations 150.9 106.4
Discontinued operations - 20.9
---------------------------------------------- ----------- -----------
150.9 127.3
-------------------------------------------- ----------- -----------
9. Dividends
2018 2017
GBP'000 GBP'000
------------------------------------------------------------ -------- --------
2016 final dividend - 58 pence per share (paid May
2017) - 10.7
2017 interim dividend - 18 pence per share (paid September
2017) - 3.3
2017 final dividend - 61 pence per share (paid May
2018) 11.3 -
2018 interim dividend - 19 pence per share (paid September
2018) 3.5 -
14.8 14.0
------------------------------------------------------------ -------- --------
The directors recommend the payment of a final dividend of 64
pence per share which, together with the interim dividend of 19
pence per share paid on 28 September 2018, represents total
dividends for the year of 83 pence per share (2017: 79 pence per
share). The final dividend, if approved by members at the Annual
General Meeting, will be paid on 24 May 2019 to shareholders on the
register at the close of business on 26 April 2019.
10. Loans and advances to banks
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------- ----------- ----------- ----------- -----------
Placements with banks included in cash
and cash equivalents (Note 28) 44.8 34.3 41.9 32.3
---------------------------------------- ----------- ----------- ----------- -----------
Moody's long-term ratings are as follows:
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
A1 11.2 6.1 11.1 6.0
A1*/A2 28.6 - 25.8 -
A3 - 23.2 - 21.3
Arbuthnot Latham & Co., Limited - No
rating 5.0 5.0 5.0 5.0
-------------------------------------- ----------- ----------- ----------- -----------
44.8 34.3 41.9 32.3
-------------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or
impaired.
11. Loans and advances to customers
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- ----------- -----------
Gross loans and advances 2,096.0 1,638.2 2,048.9 1,605.4
Less: allowances for impairment on loans
and advances (Note 13) (67.1) (39.9) (68.6) (39.9)
------------------------------------------ ----------- ----------- ----------- -----------
2,028.9 1,598.3 1,980.3 1,565.5
------------------------------------------ ----------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 35. For a maturity profile of loans and advances to customers,
refer to Note 34.
Group and Company
At 31 December 2018 loans and advances to customers of GBP326.5
million (2017: GBP200.7 million) were pre-positioned under the Bank
of England's Term Funding Scheme, and were available for use as
collateral within the scheme.
The following loans are secured upon real estate:
2018 2018 2017 2017
Loan balance Loan-to-value Loan balance Loan-to-value
GBPmillion % GBPmillion %
--------------------- ------------- -------------- ------------- --------------
Real Estate Finance 769.8 57% 580.8 57%
Consumer Mortgages 84.7 59% 16.5 59%
854.5 597.3
--------------------- ------------- -------------- ------------- --------------
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 lends to a maximum of 90%.
None of these loans are impaired. 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
GBP1.9 million (2017: GBP2.5 million) of collateral is held from
RentSmart, against loans of GBP10.8 million (2017: GBP14.9
million). This collateral is included in trade payables at 31
December 2018. This is based upon the balance of customer
receivables and expected new agreements during the following
month.
12. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ----------- -----------
Gross investment in finance lease receivables:
- No later than 1 year 175.3 189.9 168.7 180.7
- Later than 1 year and no later than
5 years 326.9 374.2 322.0 367.7
- Later than 5 years 0.2 1.2 0.2 1.2
------------------------------------------------ ----------- ----------- ----------- -----------
502.4 565.3 490.9 549.6
Unearned future finance income on finance
leases (135.8) (162.5) (132.8) (158.4)
------------------------------------------------ ----------- ----------- ----------- -----------
Net investment in finance leases 366.6 402.8 358.1 391.2
------------------------------------------------ ----------- ----------- ----------- -----------
The net investment in finance leases
may be analysed as follows:
- No later than 1 year 112.0 117.5 107.6 111.3
- Later than 1 year and no later than
5 years 254.4 284.2 250.3 278.8
- Later than 5 years 0.2 1.1 0.2 1.1
------------------------------------------------ ----------- ----------- ----------- -----------
366.6 402.8 358.1 391.2
------------------------------------------------ ----------- ----------- ----------- -----------
13. Allowances for impairment of loans and advances
Group
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject Gross
month to lifetime to lifetime Total loans Provision
ECL ECL ECL provision and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
31 December 2018
Business Finance:
Real Estate Finance 0.6 - - 0.6 770.4 0.1%
Asset Finance 0.2 0.1 2.7 3.0 65.8 4.6%
Commercial Finance 0.2 0.2 0.4 0.8 195.5 0.4%
Consumer Finance:
Retail Finance 8.9 9.8 4.3 23.0 620.0 3.7%
Motor Finance:
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Voluntary termination
provision 6.0 - - 6.0
Other impairment 4.2 13.8 15.4 33.4
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
10.2 13.8 15.4 39.4 315.8 12.5%
Debt Management - - - - 32.3 0.0%
Consumer Mortgages 0.2 - - 0.2 84.9 0.2%
Other - - 0.1 0.1 11.3 0.9%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
20.3 23.9 22.9 67.1 2,096.0 3.2%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Total provisions above include expert credit judgements over the
Group's IFRS 9 model results of GBP2.0 million, of which GBP1.4
million are specific overlays held against credit impaired secured
assets held within the Business Finance portfolio. These 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. The remaining GBP0.6 million
primarily relates to the estimated impact of planned enhancements
to LGD elements of the models of GBP0.8 million, offset by a net
decrease in the ECL due to management judgements in respect of the
PD elements of the models.
Within this Note, provision charges and balances in respect of
2018 are prepared on an IFRS 9 basis. In accordance with the
transitional provisions of the standard comparatives set out in the
tables below have not been restated. Refer to Notes 1 and 38 for
further information.
Gross
Individual Collective Total loans Provision
provision provision provision and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
31 December 2017 (IAS 39 basis)
Business Finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 127.1 0.5%
Consumer finance
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Motor Finance
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Voluntary termination provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
24.3 2.6 26.9 301.5 8.9%
Debt Management - - - 15.6 0.0%
Consumer Mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 18.6 17.7%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
35.5 4.4 39.9 1,638.2 2.4%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP10.8 million
(2017: GBP14.9 million) held in STB Leasing Limited. The credit
risk associated with those loans is retained by its partner,
RentSmart. Accordingly, no provision is held against the RentSmart
loans.
The impairment losses disclosed in the income statement, for
continuing operations, can be analysed as follows:
2018 2017
(IFRS
9) (IAS 39)
GBPmillion GBPmillion
--------------------------------------------- --- --- ----------- -----------
IFRS 9 ECL/ IAS 39 incurred loss individual
provision: charge for impairment losses 30.4 36.4
IAS 39 incurred loss collective provision:
charge for impairment losses - (0.4)
Loans written off, net of amounts utilised 4.3 1.4
Recoveries of loans written off (2.3) (0.5)
------------------------------------------------------- ----------- -----------
32.4 36.9
Less Personal Lending - (3.4)
32.4 33.5
----------------------------------------------------- ----------- -----------
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject
month to lifetime to lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ------------ ------------- ------------- -----------
At 1 January 2018 18.9 24.9 27.9 71.7
------------ ------------- ------------- -----------
Increase/(decrease)due to change in credit
risk
- Transfer to stage 2 (6.3) 33.0 - 26.7
- Transfer to stage 3 (0.1) (23.4) 30.8 7.3
- Transfer to stage 1 1.5 (3.2) - (1.7)
Passage of time (6.7) (1.7) (3.9) (12.3)
New loans originated 17.4 - - 17.4
Derecognised loans (1.8) (4.0) - (5.8)
Changes to model methodology (1.3) (0.2) - (1.5)
Changes to credit risk parameters (1.2) (1.5) 0.6 (2.1)
Other adjustments 2.4 - - 2.4
------------ ------------- ------------- -----------
Charge to income statement 3.9 (1.0) 27.5 30.4
Allowance utilised in respect of write
offs (2.5) - (32.5) (35.0)
------------ ------------- ------------- -----------
31 December 2018 20.3 23.9 22.9 67.1
-------------------------------------------- ------------ ------------- ------------- -----------
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 macro economic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
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.
GBPmillion
-------------------------------------------------- -----------
31 December 2017 (IAS 39 basis)
Individual allowances for impairment
At 1 January 23.1
Charge for impairment losses 36.4
Amounts utilised (13.5)
Changes to presentation in respect of debt sales (3.6)
Sale of personal lending (6.9)
At 31 December 35.5
--------------------------------------------------- -----------
Collective allowances for impairment
At 1 January 5.3
Charge for impairment losses (0.4)
Sale of personal lending (0.5)
At 31 December 4.4
--------------------------------------------------- -----------
Total allowances for impairment 39.9
--------------------------------------------------- -----------
Interest income on loans classified as impaired totalled GBP2.0
million (2017: GBP2.6 million).
Company
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject Gross
month to lifetime to lifetime Total loans Provision
ECL ECL ECL provision and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
31 December 2018
Business Finance:
Real Estate Finance 0.6 - - 0.6 770.4 0.1%
Asset Finance 0.2 0.1 2.7 3.0 65.8 4.6%
Commercial Finance 0.2 0.2 0.4 0.8 191.4 0.4%
Consumer Finance:
Retail Finance 9.2 9.8 4.4 23.4 620.0 3.8%
Motor Finance:
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Voluntary termination
provision 6.0 - - 6.0
Other impairment 4.3 14.2 16.0 34.5
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
10.3 14.2 16.0 40.5 315.8 12.8%
Consumer Mortgages 0.2 - - 0.2 84.9 0.2%
Other - - 0.1 0.1 0.6 16.7%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
20.7 24.3 23.6 68.6 2,048.9 3.3%
---------------------------- ------------ ------------- ------------- ----------- ----------------- ----------
Total provisions above include expert credit judgements over the
Group's IFRS 9 model results of GBP2.0 million, of which GBP1.4
million are specific overlays held against credit impaired secured
assets held within the Business Finance portfolio. These 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. The remaining GBP0.6 million
primarily relates to the estimated impact of planned enhancements
to LGD elements of the models of GBP0.8 million, offset by a net
decrease in the ECL due to management judgements in respect of the
PD elements of the models.
Gross
Individual Collective Total loans Provision
provision provision provision and receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
31 December 2017 (IAS 39 basis)
Business Finance
Real Estate Finance - 0.3 0.3 581.1 0.1%
Asset Finance 1.0 0.2 1.2 117.9 1.0%
Commercial Finance 0.4 0.2 0.6 124.8 0.5%
Consumer Finance
Retail Finance 6.5 1.1 7.6 459.9 1.7%
Motor Finance
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
Voluntary termination provision 1.0 - 1.0
Other impairment 23.3 2.6 25.9
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
24.3 2.6 26.9 301.5 8.9%
Consumer Mortgages - - - 16.5 0.0%
Other 3.3 - 3.3 3.7 89.2%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
35.5 4.4 39.9 1,605.4 2.5%
-------------------------------------- ----------- ----------- ----------- ----------------- ----------
The impairment losses disclosed in the income statement, for
continuing operations, can be analysed as follows:
2018 2017
(IFRS
9) (IAS 39)
GBPmillion GBPmillion
--------------------------------------------- --- --- ----------- -----------
IFRS 9 ECL/ IAS 39 incurred loss individual
provision: charge for impairment losses 33.9 38.8
IFRS 9 impairment losses in respect of
off balance sheet loan commitments 0.1 -
IAS 39 incurred loss collective provision:
charge for impairment losses - (0.4)
Loans written off, net of amounts utilised 1.7 1.4
Recoveries of loans written off (2.4) (0.5)
Profit on sale of debt (0.2) (0.3)
------------------------------------------------------- ----------- -----------
33.1 39.0
Less Personal Lending - (3.4)
33.1 35.6
----------------------------------------------------- ----------- -----------
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Credit
Not credit impaired impaired
Stage
1: Subject Stage Stage
to 12 2: Subject 3: Subject
month to lifetime to lifetime
ECL ECL ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ------------ ------------- ------------- -----------
At 1 January 2018 19.0 25.1 28.2 72.3
------------ ------------- ------------- -----------
Increase/(decrease)due to change in credit
risk
- Transfer to stage 2 (6.5) 33.9 - 27.4
- Transfer to stage 3 (0.1) (24.0) 31.6 7.5
- Transfer to stage 1 1.5 (3.2) - (1.7)
Passage of time (6.7) (1.6) (4.6) (12.9)
New loans originated 17.9 - - 17.9
Derecognised loans (1.8) (4.1) 2.8 (3.1)
Changes to model methodology (1.3) (0.2) - (1.5)
Changes to credit risk parameters (1.2) (1.5) 0.6 (2.1)
Other adjustments 2.4 - - 2.4
------------ ------------- ------------- -----------
Charge to income statement 4.2 (0.7) 30.4 33.9
Allowance utilised in respect of write
offs (2.5) (0.1) (35.0) (37.6)
------------ ------------- ------------- -----------
31 December 2018 20.7 24.3 23.6 68.6
-------------------------------------------- ------------ ------------- ------------- -----------
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 macro economic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
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.
GBPmillion
--------------------------------------------------------- -----------
31 December 2017 (IAS 39 basis)
Individual allowances for impairment
At 1 January 22.4
Charge for impairment losses 38.8
Utilised (13.5)
Release of allowance for impairment on the sale of debt (5.3)
Sale of personal lending (6.9)
At 31 December 35.5
---------------------------------------------------------- -----------
Collective allowances for impairment
At 1 January 5.3
Charge for impairment losses (0.4)
Sale of personal lending (0.5)
At 31 December 4.4
---------------------------------------------------------- -----------
Total allowances for impairment 39.9
---------------------------------------------------------- -----------
Interest income on loans classified as impaired totalled GBP1.1
million (2017: GBP2.6 million).
14. Debt securities
Debt securities of GBP149.7 million (2017: GBP5.0 million)
represent UK Treasury Bills. The Company's intention is to hold
them to maturity and, therefore, they are stated in the statement
of financial position at amortised cost.
All of the debt securities had a rating agency designation at 31
December 2018, based on Moody's long-term ratings of Aa2 (2017:
Aa2). None of the debt securities are either past due or
impaired.
15. Property, plant and equipment
Group
Freehold Computer
land and Leasehold and other
buildings property equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ---------- ----------- -----------
Cost or valuation
At 1 January 2017 9.0 - 10.9 19.9
Additions - - 0.8 0.8
At 31 December 2017 9.0 - 11.7 20.7
-------------------------- ----------- ---------- ----------- -----------
Additions - 0.1 1.0 1.1
Disposals - - (2.0) (2.0)
Revaluation (0.8) - - (0.8)
At 31 December 2018 8.2 0.1 10.7 19.0
-------------------------- ----------- ---------- ----------- -----------
Accumulated depreciation
At 1 January 2017 - - (8.5) (8.5)
Depreciation charge (0.1) - (0.7) (0.8)
Revaluation 0.1 - - 0.1
-------------------------- ----------- ---------- ----------- -----------
At 31 December 2017 - - (9.2) (9.2)
-------------------------- ----------- ---------- ----------- -----------
Depreciation charge (0.5) - (0.8) (1.3)
Disposals - - 2.0 2.0
Revaluation 0.5 - - 0.5
-------------------------- ----------- ---------- ----------- -----------
At 31 December 2018 - - (8.0) (8.0)
-------------------------- ----------- ---------- ----------- -----------
Net book amount
-------------------------- ----------- ---------- ----------- -----------
At 31 December 2017 9.0 - 2.5 11.5
-------------------------- ----------- ---------- ----------- -----------
At 31 December 2018 8.2 0.1 2.7 11.0
-------------------------- ----------- ---------- ----------- -----------
Company
Computer
Freehold and other
property equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 31 December 2017 4.6 9.8 14.4
Additions - 0.3 0.3
At 31 December 2017 4.6 10.1 14.7
-------------------------- ----------- ----------- -----------
Additions - 0.5 0.5
Disposals - (2.0) (2.0)
At 31 December 2018 4.6 8.6 13.2
-------------------------- ----------- ----------- -----------
Accumulated depreciation
At 1 January 2017 - (8.2) (8.2)
Depreciation charge - (0.4) (0.4)
At 31 December 2017 - (8.6) (8.6)
-------------------------- ----------- ----------- -----------
Depreciation charge (0.4) (0.3) (0.7)
Disposals - 2.0 2.0
Revaluation 0.1 - 0.1
At 31 December 2018 (0.3) (6.9) (7.2)
-------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2017 4.6 1.5 6.1
-------------------------- ----------- ----------- -----------
At 31 December 2018 4.3 1.7 6.0
-------------------------- ----------- ----------- -----------
The Group's freehold properties comprise:
-- the Registered Office of the Company, which is fully utilised for the Group's own purposes.
-- Secure Trust House, Boston Drive, Bourne End, SL8 5YS, which
is only partially used for the Group's own purposes.
-- 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 31 December
2018 based on external valuations performed by professionally
qualified valuers Knight Frank LLP. These valuations have been
undertaken in accordance with International Valuations Standards,
and were arrived at by reference to market evidence of the
transaction prices paid for similar properties. In estimating the
fair value of the properties, the valuers consider the highest and
best use of the properties. Knight Frank LLP were paid a fixed fee
for the valuations. Knight Frank LLP also undertakes some
professional work in respect of the Group's Real Estate Finance
business, although this is limited in relation to the activities of
the Group as a whole. A decrease in the fair value of freehold
property has been recognised and its carrying value has been
adjusted accordingly. Movements in the fair value of freehold
property are recognized in other comprehensive income, to the
extent that any reductions do not exceed the initial increase.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings and which is
not depreciated is GBP1.9 million (2017: GBP1.9 million).
The historical cost of freehold property included at valuation
is as follows:
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- -----------
Cost 7.9 7.9 4.1 4.1
Accumulated depreciation (1.6) (1.5) (0.2) (0.1)
6.3 6.4 3.9 4.0
-------------------------- ----------- ----------- ----------- -----------
16. Intangible assets
Group
Other
Computer intangible
Goodwill software assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ------------ -----------
Cost or valuation
At 1 January 2017 1.0 12.9 2.2 16.1
Additions - 3.3 0.1 3.4
At 31 December 2017 1.0 16.2 2.3 19.5
-------------------------- ----------- ----------- ------------ -----------
Additions - 1.4 - 1.4
Disposals - (0.6) (0.1) (0.7)
At 31 December 2018 1.0 17.0 2.2 20.2
-------------------------- ----------- ----------- ------------ -----------
Accumulated amortisation
At 1 January 2017 - (6.1) (1.0) (7.1)
Amortisation charge - (1.8) (0.2) (2.0)
At 31 December 2017 - (7.9) (1.2) (9.1)
-------------------------- ----------- ----------- ------------ -----------
Amortisation charge - (1.6) (0.2) (1.8)
Disposals - 0.6 - 0.6
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2018 - (8.9) (1.4) (10.3)
-------------------------- ----------- ----------- ------------ -----------
Net book amount
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2017 1.0 8.3 1.1 10.4
-------------------------- ----------- ----------- ------------ -----------
At 31 December 2018 1.0 8.1 0.8 9.9
-------------------------- ----------- ----------- ------------ -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2018 2017
GBPmillion GBPmillion
---------------- ----------- -----------
Music business 0.3 0.3
V12 0.7 0.7
----------------- ----------- -----------
Total 1.0 1.0
----------------- ----------- -----------
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three year
period, and a discount rate of 8%. Cash flow projections during the
forecast period are based on the expected rate of new business. A
zero growth based scenario is also considered. The directors
believe that any reasonably possible change in the key assumptions
on which recoverable amount is based would not cause the aggregate
carrying amount to exceed the aggregate recoverable amount of the
cash-generating unit.
Other intangible assets were recognised as part of the V12
Finance Group acquisition. These were recorded at fair value, and
are being amortised on a straight line basis as follows:
Years
---------------------- ------
IT system 5
Distribution channel 10
Brand name 5
------------------------ ------
Company
Computer
Goodwill software Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2017 0.3 9.0 9.3
Additions - 3.3 3.3
At 31 December 2017 0.3 12.3 12.6
--------------------------- ----------- ----------- -----------
Additions - 1.3 1.3
Disposals - (0.7) (0.7)
At 31 December 2018 0.3 12.9 13.2
--------------------------- ----------- ----------- -----------
Accumulated amortisation
At 1 January 2017 - (3.1) (3.1)
Amortisation charge - (1.0) (1.0)
At 31 December 2017 - (4.1) (4.1)
--------------------------- ----------- ----------- -----------
Amortisation charge - (1.6) (1.6)
Disposals - 0.6 0.6
--------------------------- ----------- ----------- -----------
At 31 December 2018 - (5.1) (5.1)
--------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2017 0.3 8.2 8.5
--------------------------- ----------- ----------- -----------
At 31 December 2018 0.3 7.8 8.1
--------------------------- ----------- ----------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the
Group.
17. Investments
Company
GBPmillion
------------------------------------------------- -----------
Cost and net book value
At 31 December 2017 and 1 January 2018 3.7
Equity contributions to subsidiaries in respect
of share options 0.2
--------------------------------------------------- -----------
At 31 December 2018 3.9
--------------------------------------------------- -----------
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31
December 2018 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 collection company
Secure Homes Services Limited Property rental
STB Leasing Limited Leasing
V12 Finance Group Limited Holding company
Owned indirectly via intermediate
holding companies
V12 Personal Finance Limited Dormant
Sourcing and servicing of unsecured
V12 Retail Finance Limited loans
----------------------------------- ------------------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West
Midlands, B90 4LH.
18. Deferred taxation
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Unrealised surplus on revaluation of
freehold property - (0.2) - -
Other short term timing differences - 0.2 - -
-------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities - - - -
-------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
Other short term timing differences 7.9 0.6 7.8 0.6
Deferred tax assets 7.9 0.6 7.8 0.6
-------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
At 1 January - (0.2) - -
Income statement - 0.2 - -
Other comprehensive income - - - -
-------------------------------------- ----------- ----------- ----------- -----------
At 31 December - - - -
-------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
Prior period closing (IAS 39 basis) 0.6 - 0.6 0.1
Tax on IFRS 9 transition adjustment 6.3 - 6.4 -
-------------------------------------- ----------- ----------- ----------- -----------
At 1 January 6.9 - 7.0 0.1
Income statement 1.2 0.2 1.1 0.1
Other comprehensive income (0.2) 0.4 (0.3) 0.4
At 31 December 7.9 0.6 7.8 0.6
-------------------------------------- ----------- ----------- ----------- -----------
The Government substantively enacted a reduction in the main
rate of UK corporation tax from 20% to 19% (effective from 1 April
2017) and a further reduction to 17% (effective 1 April 2020). The
Government also introduced an 8% surcharge on the profits of
banking companies in excess of GBP25 million effective from 1
January 2016. Deferred tax has been calculated based on the enacted
rates to the extent that the related temporary differences are
expected to reverse in future periods. A deferred tax asset was
recognised on the IFRS 9 transition adjustment on 1 January 2018
and the current year credit includes a reassessment of the rates at
which it is projected to reverse over the period to 31 December
2027.
19. Other assets
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ----------- -----------
Other receivables 16.2 1.2 16.1 1.0
Amounts due from related companies - - 44.5 29.7
Prepayments and accrued income 6.2 4.2 5.0 2.5
22.4 5.4 65.6 33.2
------------------------------------ ----------- ----------- ----------- -----------
20. Due to banks
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- ----------- -----------
Amounts due to other credit institutions 263.0 113.0 263.0 113.0
Accrued interest 0.5 - 0.5 -
------------------------------------------ ----------- ----------- ----------- -----------
263.5 113.0 263.5 113.0
------------------------------------------ ----------- ----------- ----------- -----------
Amounts due to banks for the current year represent monies
arising from drawings under the Term Funding Scheme. These are due
for repayment between May 2021 and February 2022 (2017: May 2021
and November 2021).
21. Deposits from customers
Group and Company
2018 2017
GBPmillion GBPmillion
------------------------- ----------- -----------
Current/demand accounts 14.5 14.5
Term deposits 1,833.2 1,468.7
------------------------- ----------- -----------
1,847.7 1,483.2
------------------------- ----------- -----------
For a maturity profile of deposits from customers, refer to
Notes 31, 32 and 34.
22. Other liabilities
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Other payables 25.8 29.5 22.8 24.5
Amounts due to related companies - - 14.1 9.7
Accruals and deferred income 14.3 12.4 12.2 10.2
40.1 41.9 49.1 44.4
---------------------------------- ----------- ----------- ----------- -----------
Financial Services Compensation Scheme Levy
The Financial Services Compensation Scheme has confirmed that it
has repaid the remaining GBP4.68 billion it owed to HM Treasury
relating to the Bradford and Bingley failure in 2008. Accordingly,
no accrual was held for this item as at 31 December 2018.
In the prior year, the liability for the Financial Services
Compensation Scheme levy was included in accruals and deferred
income of both Group and Company.
In common with all regulated UK deposit takers, the Company paid
a levy to the Financial Services Compensation Scheme to enable it
to meet claims against it. The levy consists of a compensation levy
which covers the amount of compensation and a management expenses
levy, which covers the costs of running the scheme and interest
associated with compensation which the scheme pays.
The Company's Financial Services Compensation Scheme accrual at
31 December 2017 of GBP0.2 million reflected market participation
up to the date of the last payment to the scheme in September 2018.
This amount was calculated on the basis of the Company's share of
protected deposits and the Financial Services Compensation Scheme's
estimate of total interest levies payable for the last scheme
year.
23. Provisions for liabilities and charges
Group and Company
ECL allowance
Customer on loan
redress commitments Fraud Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------ ----------- -------------- ----------- -----------
Balance at 1 January 2017 1.3 - - 1.3
Charged to income statement 0.4 - 0.2 0.6
Utilised (0.5) - - (0.5)
-------------------------------- ----------- -------------- ----------- -----------
Balance at 31 December
2017 1.2 - 0.2 1.4
IFRS 9 transition adjustment - 0.3 - 0.3
-------------------------------- ----------- -------------- ----------- -----------
Balance at 1 January 2018 1.2 0.3 0.2 1.7
(Credited)/charged to
income statement (0.4) 0.1 (0.1) (0.4)
Balance at 31 December
2018 0.8 0.4 0.1 1.3
-------------------------------- ----------- -------------- ----------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in
respect of historical sales of accident, sickness and unemployment
insurance, by considering the likely future uphold rate for claims,
in the context of confirmed issues and historical experience. The
likelihood of potential new claims is projected forward to 2019, as
management believe this to be an appropriate time horizon,
recognising the significant decline in recent claims experience and
the increasing subjectivity beyond that. The accuracy of these
estimates would be affected, were there to be a significant change
in either the number of future claims or the incidence of claims
upheld by the Financial Ombudsman Service.
The Financial Conduct Authority has announced a deadline for
making these customer redress claims, which would give consumers
until 29 August 2019 to make a claim.
Fraud
The fraud provision relates to cases where the Bank has
reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
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 2018 no provision was held
for losses in excess of drawn amounts.
24. Subordinated liabilities
GBPmillion
------------------------- -----------
At 1 January 2018 -
Issued during the year 50.0
Unamortised issue costs (0.8)
Accrued interest 1.2
At 31 December 2018 50.4
---------------------------- -----------
During the year, Secure Trust Bank PLC issued two tranches of
6.75% Fixed Rate Reset Callable Subordinated Notes due 2028 (the
Notes):
-- GBP25 million on 17 July 2018
-- GBP25 million on 2 October 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 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 on-going programme to diversify and expand the
capital base of the Bank.
25. Contingent liabilities and commitments
25.1 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.
25.2 Capital commitments
At 31 December 2018, the Group had no capital commitments (2017:
GBPnil).
The Company had no capital commitments (2017: GBPnil).
25.3 Credit commitments
Commitments to extend credit to customers were as follows:
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------- ----------- ----------- ----------- -----------
Business Finance
Real Estate Finance 173.4 98.6 173.4 98.6
Asset Finance - 15.5 - 15.5
Commercial Finance 45.6 35.5 45.6 35.5
Consumer Finance
Retail Finance 28.3 20.1 28.3 20.1
Motor Finance 0.5 0.6 0.5 0.6
Consumer Mortgages 15.3 7.7 15.3 7.7
Other - 0.6 - 0.5
----------------------- ----------- ----------- ----------- -----------
263.1 178.6 263.1 178.5
----------------------- ----------- ----------- ----------- -----------
25.4 Operating lease commitments
The future aggregate lease payments for non-cancellable
operating leases are as follows:
2018 2017
Land and Land and
buildings Other buildings Other
Group GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 1.1 0.2 0.3 0.1
Between 1 year and 5 years 3.9 0.2 0.8 0.1
Over 5 years 2.0 - - -
---------------------------- ----------- ----------- ----------- -----------
7.0 0.4 1.1 0.2
---------------------------- ----------- ----------- ----------- -----------
2018 2017
Land and Land and
buildings Other buildings Other
Company GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.8 0.1 0.1 0.1
Between 1 year and 5 years 3.0 0.1 0.4 -
Over 5 years 1.4 - - -
---------------------------- ----------- ----------- ----------- -----------
5.2 0.2 0.5 0.1
---------------------------- ----------- ----------- ----------- -----------
There are seven leases classified as land and buildings in the
Group (2017: 3). Other leases include motor vehicles and computer
hardware.
26. Share capital
2018 2018 2017 2017
Number GBP million Number GBP million
-------------------------- ----------- ------------ ----------- ------------
At start and end of year 18,475,229 7.4 18,475,229 7.4
-------------------------- ----------- ------------ ----------- ------------
Share capital comprises ordinary shares with a par value of 40
pence each.
27. Share based payments
At 31 December 2018, the Group had five share based payment
schemes in operation:
-- Share option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave plan
-- 2017 deferred bonus plan
-- 'Phantom' share option scheme.
A summary of the key details of each scheme is set out
below:
Outstanding Leavers
at the during Outstanding
start Granted the year at the
of the during end of Vested Exercise
year the year the year and exercisable Vesting price
Number Number Number Number Number Date GBP
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
Equity settled
2 November
Share option scheme 177,084 - - 177,084 177,084 2016 7.20
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
1 June
2020 0.40
----------- ---------
2017 long term
incentive 20 April
plan 67,992 94,504 (899) 161,597 - 2021 0.40
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
1 November
2020 13.19
----------- ---------
1 November
2017 sharesave plan 125,947 34,449 (15,387) 145,009 - 2021 14.03
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
20 April
2019 0.40
----------- ---------
20 April
2020 0.40
----------- ---------
2017 deferred bonus 20 April
plan - 14,690 - 14,690 - 2021 0.40
371,023 143,643 (16,286) 498,380 177,084
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
Cash settled
'Phantom' share 16 March
option scheme 312,917 - - 312,917 - 2019 25.00
----------------------- ------------ ---------- ---------- ------------ ----------------- ----------- ---------
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- ----------- -----------
Expense incurred in relation to share-based
payments 0.8 - 0.6 -
--------------------------------------------- ----------- ----------- ----------- -----------
27.1 Share option scheme
The share option scheme was established on 17 October 2011.
On 2 November 2011, 934,998 share options were granted at an
exercise price of GBP7.20 per share, entitling three directors and
certain senior employees to purchase shares in the Company.
Approximately half of the share options vested and were exercised
on 2 November 2014, with the remainder vesting and becoming
exercisable on 2 November 2016. The bulk of the remainder were
exercised on 7 November 2016, leaving 177,084 share options of 2
directors unexercised. Vested options are exercisable for a period
of 10 years from the date of grant.
The intrinsic value of unexercised options is GBP0.8 million
(2017: GBP1.8 million).
27.2 Long term incentive plan
The long term incentive plan was established on 3 May 2017.
Awards under this plan are subject to three performance
conditions, which are based on:
-- Annual compound growth in earnings per share ('EPS') over the performance period
-- Rank of the total shareholder return ('TSR') over the
performance period against the TSR of the comparator group of peer
group companies
-- Maintaining appropriate risk practices over the performance
period reflecting the longer term strategic risk management of the
Group.
The awards will vest on the date on which the board determines
that these conditions have been met.
The awards have a performance term of 3 years. Those awards
granted to the Executive Directors are subject to a holding period
of 2 years following the vesting date. Those awards not subject to
a holding period will be released to the participants on the
vesting date. Vested options are exercisable for a period of 10
years from the date of grant.
The following awards have been granted under the plan, entitling
two Executive Directors and certain other key senior employees to
purchase shares in the Company. The exercise price is GBP0.40 per
share. 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:
Subject Subject
to a holding to a holding Subject Subject
period period to no to no
of two of two holding holding
years years period period Total
Awards Grant Awards Grant Awards
granted date valuation granted date valuation granted
Number GBP Number GBP Number
-------------------------- -------------- ---------------- --------- ---------------- ---------
Granted on 1 June 2017 33,467 12.19 34,525 14.82 67,992
-------------------------- -------------- ---------------- --------- ---------------- ---------
At 31 December 2017 33,467 34,525 67,992
-------------------------- -------------- ---------------- --------- ---------------- ---------
Granted on 20 April 2018 30,429 14.26 64,075 15.47 94,504
Leavers - (899) (899)
-------------------------- -------------- ---------------- --------- ---------------- ---------
At 31 December 2018 63,896 97,701 161,597
-------------------------- -------------- ---------------- --------- ---------------- ---------
Measurement inputs and assumptions used for the grant date
valuation were as follows:
Awards Awards
granted granted
on 20 on
April 1 June
2018 2017
------------------------------------------- ---------- -------- ---------- ---------
Share price at grant date GBP20.85 GBP22.45
Expected dividend yield 4.05% 3.80%
Awards subject to a holding period
Expected stock price volatility 25.2% 24.6%
Risk free interest rate 1.15% 0.42%
Average expected life (years) 5.00 5.00
Discount for lack of marketability during
holding period nil 10.00%
Awards not subject to a holding period
Expected stock price volatility 26.9% 25.1%
Risk free interest rate 0.89% 0.19%
Average expected life (years) 3.00 3.00
Assumptions applicable to TSR tranche
only
Expected stock price volatility 27.1% 25.50%
Grant date TSR performance of the Company Upper Below
compared to comparator group quartile median
Correlation 22% 37%
----------------------------------------------------------------- ---------- ---------
In calculating the charge to the income statement, an expected
leaver rate has been assumed of nil% for the Executive Directors
and 10% for other employees.
27.3 Sharesave plan
The sharesave plan was established on 3 May 2017.
This plan allows all employees with more than 12 months service
to save for three years, subject to a maximum monthly amount of
GBP500, with the option to buy shares in Secure Trust Bank PLC when
the plan matures. Participants 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 following awards have been granted under the plan, entitling
all eligible employees to purchase shares in the Company. The
original grant date valuation was determined using a Black-Scholes
model:
Awards Grant Exercise
granted date valuation price
Number GBP GBP
------------------------------ --------- ---------------- ---------
Granted on 20 September 2017 125,987 3.53 13.19
Leavers (40)
-------------------------------- --------- ---------------- ---------
At 31 December 2017 125,947
-------------------------------- --------- ---------------- ---------
Granted on 18 September 2018 34,449 3.67 14.03
Leavers (15,387)
-------------------------------- --------- ---------------- ---------
At 31 December 2018 145,009
-------------------------------- --------- ---------------- ---------
Measurement inputs and assumptions used were as follows:
Awards Awards
granted granted
on 18 on 20
September September
2018 2017
--------------------------------- ----------- -----------
Share price at grant date GBP17.53 GBP17.51
Expected stock price volatility 28.14% 25.55%
Expected dividend yield 4.57% 4.34%
Risk free interest rate 0.89% 0.58%
Average expected life (years) 3.36 3.36
----------------------------------- ----------- -----------
In calculating the charge to the income statement, an expected
leaver rate of 10% has been assumed.
27.4 Deferred bonus plan
The deferred bonus plan was established on 3 May 2017.
As disclosed in the 2017 annual report and accounts, 50% of the
bonus earned by two Executive Directors, amounting to GBP280,000,
was deferred into shares under the deferred bonus plan. The award
will vest in three equal tranches after one, two and three years
following deferral.
Accordingly, the following awards have been granted under the
plan, entitling the two Executive Directors to purchase shares in
the Company. The exercise price is GBP0.40 per share. The original
grant date valuation was determined using a Black-Scholes
model:
Awards Grant Awards Grant Awards Grant Awards
granted date valuation granted date valuation granted date valuation granted
Vesting Vesting Vesting Vesting Vesting Vesting
after after after after after after
1 year 1 year 2 years 2 years 3 year 3 years Total
Number GBP Number GBP Number GBP
---------------- --------- ---------------- --------- ---------------- --------- ---------------- ---------
Granted on 20
April 2018 4,896 19.64 4,896 18.87 4,898 18.12 14,690
---------------- --------- ---------------- --------- ---------------- --------- ---------------- ---------
At 31 December
2018 4,896 4,896 4,898 14,690
---------------- --------- ---------------- --------- ---------------- --------- ---------------- ---------
Measurement inputs and assumptions used were as follows:
Awards
Awards Awards vesting
vesting vesting after
after after three
one year two years years
--------------------------------- ----------- ----------- ---------
Share price at grant date GBP20.85 GBP20.85 GBP20.85
Expected dividend yield 3.96% 3.96% 3.96%
Expected stock price volatility 25.25% 30.90% 27.68%
Risk free interest rate 0.69% 0.77% 0.82%
Average expected life (years) 1.00 2.00 3.00
---------------------------------- ----------- ----------- ---------
27.5 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 2018, 312,917 (2017: 312,917) share options
remained outstanding. The options will vest on 16 March 2019, and
be exercisable for a period of 10 years after grant date.
As at 31 December 2018, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2018 2017
--------------------------------- --------- ---------
Share price at reporting date GBP11.80 GBP17.97
Expected stock price volatility 24.76% 24.49%
Expected dividend yield 7.12% 4.45%
Risk free interest rate 0.76% 0.59%
Average expected life (years) 3.71 4.03
Fair value GBP0.05 GBP0.79
----------------------------------- --------- ---------
As the options can be exercised at any point during the seven
years after vesting, and given high levels of share price
volatility, management has concluded that it is appropriate to hold
the accrual at the same level as 2017. This resulted in the
following being recognised in the financial statements:
2018 2017
GBPmillion GBPmillion
-------------------------- ----------- -----------
Liability at 1 January 0.2 0.6
Credit for the year - (0.4)
---------------------------- ----------- -----------
Liability at 31 December 0.2 0.2
---------------------------- ----------- -----------
28. Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Group Group Company Company
2018 2017 2018 2017
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central banks 169.7 226.1 169.7 226.1
Loans and advances to banks (Note 10) 44.8 34.3 41.9 32.3
--------------------------------------- ----------- ----------- ----------- -----------
214.5 260.4 211.6 258.4
--------------------------------------- ----------- ----------- ----------- -----------
29. 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 40.
The principal financial risks inherent in the Group's business
are credit risk (Note 30), market risk (Note 31), liquidity risk
(Note 32), and capital risk (Note 33).
30. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. A formal Credit Risk Policy has been agreed by the Board
whilst credit risk is monitored on a monthly basis by the Credit
Risk Committees which review performance of key portfolios
including new business volumes, collections performance,
provisioning levels and provisioning methodology. A credit risk
department within the Group monitors adherence to the Credit Risk
Policy, implements risk tools to manage credit risk and evaluates
business opportunities and the risks and opportunities they present
to the Group whilst ensuring the performance of the Group's
existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are
approved periodically by the Board of Directors and actual
exposures against limits monitored daily.
Impairment provisions are provided for 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 and Consumer Mortgages 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. The assets undergo a
scoring process to mitigate risk and are monitored by the
Board.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group's credit policies and risk appetite,
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, respectively). Disclosures relating
to collateral and arrears on loans and advances to customers are
disclosed in Notes 11 and 13 respectively.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year end are contained in Note 10. 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 > 30 Excl.
days days purchased Purchased
past past credit credit
due due Total impaired impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
31 December
2018
Business
Finance
Real Estate
Finance 723.3 47.1 - 47.1 - - - 770.4
Asset Finance 55.6 6.5 0.5 7.0 3.2 - 3.2 65.8
Commercial
Finance 186.1 8.8 - 8.8 0.6 - 0.6 195.5
Consumer
Finance
Retail 537.1 74.1 3.9 78.0 4.9 - 4.9 620.0
Motor 200.2 92.7 2.4 95.1 20.5 - 20.5 315.8
Debt
Management - - - - 9.3 23.0 32.3 32.3
Consumer
Mortgages 84.9 - - - - - - 84.9
Other 11.3 - - - - - - 11.3
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total drawn
exposure 1,798.5 229.2 6.8 236.0 38.5 23.0 61.5 2,096.0
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Off balance
sheet
Loan
commitments 263.1 - - - - - - 263.1
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total gross
exposure 2,061.6 229.2 6.8 236.0 38.5 23.0 61.5 2,359.1
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Less:
Impairment
allowance (20.3) (19.9) (4.0) (23.9) (22.9) - (22.9) (67.1)
Provision for
loan
commitments (0.4) - - - - - - (0.4)
----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total net
exposure 2,040.9 209.3 2.8 212.1 15.6 23.0 38.6 2,291.6
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives have
not been restated. Refer to Notes 1 and 13 for further information.
An analysis of the Group's opening loans and advances to customers
by IFRS 9 stage and portfolio is presented in Note 38. The Group
has not disclosed exposures and impairment allowance split by risk
rating as this split is not used internally by the Group to monitor
loan book performance.
A reconciliation of opening to closing impairment allowance for
losses on loans and advances to customers is presented in Note
13.
The tables below summarise the December 2017 loans and advances
to customers on an IAS 39 basis:
GBPmillion %
------------------------------------- ----------- -------
31 December 2017 (IAS 39 basis)
Neither past due nor impaired 1,545.6 94.3%
Not past due but impaired 5.4 0.3%
Past due but not impaired 0.3 0.0%
Past due up to 90 days and impaired 37.8 2.3%
Past due after 90 days and impaired 49.1 3.0%
--------------------------------------- ----------- -------
Gross 1,638.2 100.0%
Less: allowance for impairment (39.9)
--------------------------------------- ----------- -------
Net 1,598.3
--------------------------------------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
GBPmillion
--------------------------------- -----------
31 December 2017 (IAS 39 basis)
Past due up to 30 days 24.5
Past due 30 - 60 days 8.6
Past due 60 - 90 days 4.7
Total 37.8
------------------------------------ -----------
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
GBPmillion
--------------------------------- -----------
31 December 2017 (IAS 39 basis)
Past due up to 30 days 0.2
Past due 30 - 60 days 0.1
Total 0.3
------------------------------------ -----------
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 > 30 Excl.
days days purchased Purchased
past past credit credit
due due Total impaired impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
31 December
2018
Business
Finance
Real Estate
Finance 723.3 47.1 - 47.1 - - - 770.4
Asset Finance 55.6 6.5 0.5 7.0 3.2 - 3.2 65.8
Commercial
Finance 182.0 8.8 - 8.8 0.6 - 0.6 191.4
Consumer
Finance
Retail 537.1 74.1 3.9 78.0 4.9 - 4.9 620.0
Motor 200.2 92.7 2.4 95.1 20.5 - 20.5 315.8
Consumer
Mortgages 84.9 - - - - - - 84.9
Other 0.6 - - - - - - 0.6
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total drawn
exposure 1,783.7 229.2 6.8 236.0 29.2 - 29.2 2,048.9
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Off balance
sheet
Loan
commitments 263.1 - - - - - - 263.1
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total gross
exposure 2,046.8 229.2 6.8 236.0 29.2 - 29.2 2,312.0
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Less:
Impairment
allowance (20.7) (20.2) (4.1) (24.3) (23.6) - (23.6) (68.6)
Provision for
loan
commitments (0.4) - - - - - - (0.4)
----------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total net
exposure 2,025.7 209.0 2.7 211.7 5.6 - 5.6 2,243.0
---------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The above table is prepared on an IFRS 9 basis. In accordance
with the transitional provisions of the standard comparatives have
not been restated. Refer to Notes 1 and 13 for further information.
The average IFRS 9 probability of default (PD) is based on 12 month
PDs at the reporting date.
The tables below summarise the December 2017 loans and advances
to customers on an IAS 39 basis:
GBPmillion %
------------------------------------- ----------- -------
31 December 2017 (IAS 39 basis)
Neither past due nor impaired 1,529.0 95.3%
Not past due but impaired 5.4 0.3%
Past due but not impaired - 0.0%
Past due up to 90 days and impaired 37.5 2.3%
Past due after 90 days and impaired 33.5 2.1%
--------------------------------------- ----------- -------
Gross 1,605.4 100.0%
Less: allowance for impairment (39.9)
--------------------------------------- ----------- -------
Net 1,565.5
--------------------------------------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
GBPmillion
--------------------------------- -----------
31 December 2017 (IAS 39 basis)
Past due up to 30 days 24.4
Past due 30 - 60 days 8.5
Past due 60 - 90 days 4.6
Total 37.5
------------------------------------ -----------
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
GBPmillion
-------------------------------- -----------
31 December 2017 (IAS 39 basis)
Past due up to 30 days -
Past due 30 - 60 days -
Total -
-------------------------------- -----------
30.1 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 loan and advances to customers and loan
commitments by product is provided in Note 3.
Geographical concentration
The Group's Real Estate Finance and Consumer Mortgages are
secured against UK property only. The Directors consider that the
key risk is the location of the security, rather than location of
the borrower. Accordingly, the geographical concentration of these
business loans and advances to customer, for 2018, has been
presented by location of the security as follows:
Group and Company
Real Estate Consumer
Finance Mortgages
GBPmillion GBPmillion
------------------------------ ------------ -----------
31 December 2018
Central England 35.1 16.2
Greater London 451.5 12.2
Northern England 37.6 16.6
South East England (excl.
Greater London) 209.0 26.3
South West England 9.6 9.3
Scotland, Wales and Northern
Ireland 27.6 4.3
---------------------------------- ------------ -----------
Gross loans and receivables 770.4 84.9
Allowance for impairment (0.1) (0.2)
---------------------------------- ------------ -----------
Total 770.3 84.7
---------------------------------- ------------ -----------
The geographical concentration of these business loans and
advances to customer at 31 December 2017, by location of the
borrower, is set out below:
Real Estate Consumer
Finance Mortgages
GBPmillion GBPmillion
----------------------------- ------------ -----------
31 December 2017
Central England 6.8 2.1
Greater London 384.2 4.1
Northern England 12.1 2.1
Scotland - -
South East England (excl.
Greater London) 154.9 5.2
South West England 3.3 1.9
Wales and Northern Ireland - 1.1
Other 19.8 -
----------------------------- ------------ -----------
Gross loans and receivables 581.1 16.5
Allowance for impairment (0.3) -
----------------------------- ------------ -----------
Total 580.8 16.5
--------------------------------- ------------ -----------
30.2 Forbearance
At year end, all customers within the Group's Consumer Mortgage
business were up to date with their monthly payments. Should
customers face financial difficulties, the Group may, depending on
individual circumstances, offer customers one of a number of
forbearance options. The types of forbearance the Group may be
prepared to offer include the following:
-- Temporary interest only concessions are offered to customers
in financial difficulty on a temporary basis with formal periodic
review. The concession allows the customer to reduce monthly
payments to cover interest only, and if made, the arrears status
will not increase.
-- Arrangement payment plans are agreed to enable customers to
reduce their arrears balances by an agreed amount per month which
is paid in addition to their standard monthly repayment.
-- Payment concessions can be agreed on a temporary basis
whereby the customer may pay less than the contractual monthly
payment, in line with their individual affordability. If a customer
is within this type of concession, their arrears position will
increase.
-- In exceptional circumstances, capitalisations of arrears may
occur or an interest rate adjustment may be applied. These are used
under strict controls, explicitly where the customer circumstances
offer no other option.
All forbearance arrangements are formally discussed and agreed
with the customer. By offering customers in financial difficulty
the option of forbearance the Group potentially exposes itself to
an increased level of risk through prolonging the period of
non-contractual payment and/or potentially placing the customer
into a detrimental position at the end of the forbearance
period.
All forbearance arrangements are reviewed and monitored
regularly to assess the ongoing potential risk, suitability and
sustainability to the Group.
Where forbearance measures are not possible or are considered
not to be in the customer's best interests, or where such measures
have been tried and the customer has not adhered to the forbearance
terms that have been agreed, the Bank will consider realising its
security and taking possession of the property in order to sell it
and clear the outstanding debt.
Other than Consumer Mortgages, the Group does not routinely
reschedule contractual arrangements where customers default on
their repayments. It may offer the customer the option to reduce or
defer payments for a short period, in which cases the loan will
retain the normal contractual payment due dates and will be treated
the same as any other defaulting cases for impairment purposes.
Arrears tracking will continue on the account with any impairment
charge being based on the original contractual due dates for all
products.
31. 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.
31.1 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. The main test employed is a 200bps interest rate
shock across all interest indices on a parallel basis. The Group
maintained such exposures within the risk appetite set by the Board
throughout the year.
The Group measures primarily Earnings at Risk, Market Rate
Sensitivity and Economic Value of Equity, through monitoring an
interest rate sensitivity gap. Interest rate risks inherent in new
products or through changes to the terms and conditions of existing
products were assessed over the course of the year.
This potential exposure is managed by the Group Treasury
function and overseen by ALCO. The policy is not to take
significant unmatched positions.
31.2 Interest rate sensitivity gap
The following tables summarise the re-pricing periods for the
assets and liabilities in the Company and Group. Items are
allocated to time bands by reference to the earlier of the next
contractual interest rate re-price and the maturity date.
Group
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
As at 31 December 2018
ASSETS
Cash and balances at
central banks 169.7 - - - - - 169.7
Loans and advances to
banks 44.8 - - - - - 44.8
Debt securities - 149.7 - - - - 149.7
Loans and advances to
customers 719.6 119.4 196.1 954.8 5.4 33.6 2,028.9
Other assets - - - - - 51.2 51.2
Total assets 934.1 269.1 196.1 954.8 5.4 84.8 2,444.3
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
LIABILITIES AND EQUITY
Due to banks 263.0 - - - - 0.5 263.5
Deposits from customers 640.2 94.9 281.5 820.1 11.0 - 1,847.7
Subordinated liabilities - - - 50.0 - 0.4 50.4
Other liabilities - - - - - 45.6 45.6
Equity - - - - - 237.1 237.1
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Total liabilities and
equity 903.2 94.9 281.5 870.1 11.0 283.6 2,444.3
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Interest rate
sensitivity
gap 30.9 174.2 (85.4) 84.7 (5.6) (198.8)
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
Cumulative gap 30.9 205.1 119.7 204.4 198.8 -
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
As at 31 December 2017
ASSETS
Cash and balances at
central banks 226.1 - - - - - 226.1
Loans and advances to
banks 34.3 - - - - - 34.3
Debt securities 5.0 - - - - - 5.0
Loans and advances to
customers 581.2 121.3 181.9 696.0 2.3 15.6 1,598.3
Other assets - - - - - 27.9 27.9
Total assets 846.6 121.3 181.9 696.0 2.3 43.5 1,891.6
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
LIABILITIES AND EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 46.3 46.3
Equity - - - - - 249.1 249.1
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Total liabilities and
equity 690.2 28.2 269.9 581.4 6.5 315.4 1,891.6
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Interest rate
sensitivity
gap 156.4 93.1 (88.0) 114.6 (4.2) (271.9)
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
Cumulative gap 156.4 249.5 161.5 276.1 271.9 -
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
Company
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
As at 31 December 2018
ASSETS
Cash and balances at
central banks 169.7 - - - - - 169.7
Loans and advances to
banks 41.9 - - - - - 41.9
Debt securities - 149.7 - - - - 149.7
Loans and advances to
customers 714.1 118.3 194.1 948.4 5.4 - 1,980.3
Other assets - - - - - 91.4 91.4
Total assets 925.7 268.0 194.1 948.4 5.4 91.4 2,433.0
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
LIABILITIES AND EQUITY
Due to banks 263.0 - - - - 0.5 263.5
Deposits from customers 640.2 94.9 281.5 820.1 11.0 - 1,847.7
Subordinated liabilities - - - 50.0 - 0.4 50.4
Other liabilities - - - - - 54.0 54.0
Equity - - - - - 217.4 217.4
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Total liabilities and
equity 903.2 94.9 281.5 870.1 11.0 272.3 2,433.0
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Interest rate
sensitivity
gap 22.5 173.1 (87.4) 178.3 (5.6) (180.9)
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
Cumulative gap 22.5 195.6 108.2 186.5 180.9 -
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
As at 31 December 2017
ASSETS
Cash and balances at
central banks 226.1 - - - - - 226.1
Loans and advances to
banks 32.3 - - - - - 32.3
Debt securities 5.0 - - - - - 5.0
Loans and advances to
customers 576.6 119.2 178.3 689.1 2.3 - 1,565.5
Other assets - - - - - 52.1 52.1
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Total assets 840.0 119.2 178.3 689.1 2.3 52.1 1,881.0
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
LIABILITIES AND EQUITY
Due to banks 113.0 - - - - - 113.0
Deposits from customers 577.2 28.2 269.9 581.4 6.5 20.0 1,483.2
Other liabilities - - - - - 47.7 47.7
Equity - - - - - 237.1 237.1
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Total liabilities and
equity 690.2 28.2 269.9 581.4 6.5 304.8 1,881.0
------------------------- ----------- ----------- ----------- ----------- ----------- ------------- -----------
Interest rate
sensitivity
gap 149.8 91.0 (91.6) 107.7 (4.2) (252.7)
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
Cumulative gap 149.8 240.8 149.2 256.9 252.7 -
------------------------- ----------- ----------- ----------- ----------- ----------- -------------
32. Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and longer term
funding to address any structural liquidity requirements.
The Company has a formal governance structure in place to manage
and mitigate liquidity risk on a day to day basis. The Board sets
and approves the Company's liquidity risk management strategy. The
ALCO, comprising senior executives of the Company, monitors
liquidity risk. Key liquidity risk management information is
reported by the Treasury function and monitored by the Chief
Executive Officer and Chief Financial Officer on a daily basis. The
ALCO meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity
risk tolerance levels and ILAAP metrics.
The Company raised fixed rate deposit bonds during the year as
set out below:
2018 2017
------- --------- ---------
GBP448.4 GBP347.9
Amount million million
1 to 7 1 to 5
Term years years
------- --------- ---------
These were issued to broadly match the term lending by the
Company.
The PRA requires a firm to maintain at all times liquidity
resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities
cannot be met as they fall due. There is also a requirement that a
firm ensures its liquidity resources contain an adequate buffer of
high quality, unencumbered assets (i.e. Government Securities in
the liquidity asset buffer); and it maintains a prudent funding
profile. The liquidity assets buffer is a pool of highly liquid
assets that can be called upon to create sufficient liquidity to
meet liabilities on demand, particularly in a period of liquidity
stress. The liquidity resources outside the buffer must either be
marketable assets with a demonstrable secondary market that the
firm can access, or a credit facility that can be activated in
times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require
the Group to identify, measure, manage and monitor liquidity and
funding risks across different time horizons and stress scenarios,
consistent with the Group's 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. The PRA's approach to liquidity
supervision is based on the principle that a firm must have
adequate levels of liquidity resources and a prudent funding
profile, and that it comprehensively manages and controls liquidity
and funding risks. The liquidity buffer required by the ILAAP has
been put in place and maintained since that time. Liquidity
resources outside of the buffer are made up of deposits placed at
the Bank of England. The ILAAP is updated annually.
The primary measures used by management to assess the adequacy
of liquidity is the Overall Liquidity Adequacy Rule, which is the
Board's own view of the Group's liquidity needs as set out in the
Board approved ILAAP. The Group maintained liquidity in excess of
the Overall Liquidity Adequacy Rule throughout the year ended 31
December 2018.
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 prudent
internal limit. The actual LCR has significantly exceeded both
limits throughout the year.
The Group is exposed to daily calls on its available cash
resources from maturing deposits and loan draw-downs. The Group
maintains significant cash resources to meet all of these needs as
they fall due.
The matching and controlled mismatching of the maturities and
interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely
matched, as transacted business is often of uncertain term and of
different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows
for the financial liabilities and assets into relevant maturity
groupings:
Group
More than More than
Gross 3 months 1 year
nominal Not more but less but less
Carrying inflow/ than 3 than 1 than 5 More than
amount (outflow) months year years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2018
Non-derivative financial
liabilities
Due to banks (263.5) (263.5) (263.5) - - -
Deposits from customers (1,847.7) (1,916.3) (644.3) (404.7) (855.8) (11.5)
Other financial liabilities (26.3) (26.3) (26.3) - - -
Subordinated liabilities (50.4) (66.9) (0.8) (2.5) (63.6) -
(2,187.9) (2,273.0) (934.9) (407.2) (919.4) (11.5)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances at
central banks 169.7 169.7 169.7 - - -
Loans and advances to
banks 44.8 44.8 44.8 - - -
Debt securities 149.7 149.7 149.7 - - -
Loans and advances to
customers 2,028.9 2,476.4 841.1 523.8 1,110.1 1.4
Other financial assets 16.1 16.1 16.1 - - -
2,409.2 2,856.7 1,221.4 523.8 1,110.1 1.4
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 221.3 583.7 286.5 116.6 190.7 (10.1)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than More than
Gross 3 months 1 year
nominal Not more but less but less
Carrying inflow/ than 3 than 1 than 5 More than
amount (outflow) months year years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks (113.0) (115.1) (0.1) (0.4) (114.6) -
Deposits from customers (1,483.2) (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial liabilities (29.5) (29.5) (29.5) - - -
(1,625.7) (1,661.8) (610.4) (319.0) (725.7) (6.7)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances at
central banks 226.1 226.1 226.1 - - -
Loans and advances to
banks 34.3 34.3 34.3 - - -
Debt securities 5.0 5.0 5.0 - - -
Loans and advances to
customers 1,598.3 2,054.4 667.8 420.8 965.3 0.5
Other financial assets 1.2 1.2 1.2 - - -
1,864.9 2,321.0 934.4 420.8 965.3 0.5
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 239.2 659.2 324.0 101.8 239.6 (6.2)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More than More than
Gross 3 months 1 year
nominal Not more but less but less
Carrying inflow/ than 3 than 1 than 5 More than
amount (outflow) months year years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2018
Non-derivative financial
liabilities
Due to banks (263.5) (263.5) (263.5) - - -
Deposits from customers (1,847.7) (1,916.3) (644.3) (404.7) (855.8) (11.5)
Other financial liabilities (37.4) (37.4) (37.4) - - -
Subordinated liabilities (50.4) (66.9) (0.8) (2.5) (63.6) -
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(2,199.0) (2,284.1) (946.0) (407.2) (919.4) (11.5)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances at
central banks 169.7 169.7 169.7 - - -
Loans and advances to
banks 41.9 41.9 41.9 - - -
Debt securities 149.7 149.7 149.7 - - -
Loans and advances to
customers 1,980.3 2,427.1 801.3 519.2 1,105.2 1.4
Other financial assets 60.6 16.1 16.1 - - -
2,402.2 2,804.5 1,178.7 519.2 1,105.2 1.4
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 203.2 520.4 232.7 112.0 185.8 (10.1)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More than More than
Gross 3 months 1 year
nominal Not more but less but less
Carrying inflow/ than 3 than 1 than 5 More than
amount (outflow) months year years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2017
Non-derivative financial
liabilities
Due to banks (113.0) (115.1) (0.1) (0.4) (114.6) -
Deposits from customers (1,483.2) (1,517.2) (580.8) (318.6) (611.1) (6.7)
Other financial liabilities (34.2) (34.2) (34.2) - - -
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(1,630.4) (1,666.5) (615.1) (319.0) (725.7) (6.7)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances at
central banks 226.1 226.1 226.1 - - -
Loans and advances to
banks 32.3 32.3 32.3 - - -
Debt securities 5.0 5.0 5.0 - - -
Loans and advances to
customers 1,565.5 2,017.5 646.6 413.1 957.3 0.5
Other financial assets 30.7 30.7 30.7 - - -
1,859.6 2,311.6 940.7 413.1 957.3 0.5
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 229.2 645.1 325.6 94.1 231.6 (6.2)
----------------------------- ----------- ----------- ----------- ----------- ----------- -----------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing financial
liabilities as they mature are important factors in assessing the
liquidity of the Company and Group and its exposure to changes in
interest rates and exchange rates.
Other financial liabilities, as shown above, do not include
non-interest accruals as these are not classed as financial
liabilities.
33. 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.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a 'Pillar 1 plus'
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequate to cover
management's view 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 should be applied, in line with the
Total Capital Requirement issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1)
and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which would allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Pillar 3 disclosures for the Group for the
year ended 31 December 2018 are published as a separate document on
the Group's website.
The following table, which is unaudited, shows the regulatory
capital resources for the Group. The Group has elected to adopt the
IFRS 9 transitional rules. For 2018 this allowed 95% of the initial
IFRS 9 transition adjustment, net of attributable deferred tax, to
be added back to eligible Tier 1 capital. Tier 2 capital comprises
solely subordinated debt issued during the year net of unamortised
issue costs and excluding accrued interest, capped at 25% of the
capital requirement. At 31 December 2017, Tier 2 capital comprised
the collective allowance for loan impairment. Under IFRS 9, there
is no longer a collective allowance.
2018 2017
GBPmillion GBPmillion
(unaudited) (unaudited)
----------------------------------------------------------- ------------- -------------
Tier 1
Share capital 7.4 7.4
Share premium 81.2 81.2
Retained earnings 147.4 159.2
Revaluation reserve 1.1 1.3
IFRS 9 transition adjustment 24.5 -
Goodwill (1.0) (1.0)
Intangible assets net of attributable deferred tax (8.8) (9.2)
CET1 capital 251.8 238.9
----------------------------------------------------------- ------------- -------------
Tier 2
Subordinated liabilities 50.4 -
Less ineligible portion (4.7) -
Collective allowance for impairment of loans and advances - 4.4
----------------------------------------------------------- ------------- -------------
Total Tier 2 capital 45.7 4.4
----------------------------------------------------------- ------------- -------------
Own Funds 297.5 243.3
----------------------------------------------------------- ------------- -------------
Reconciliation to total equity:
IFRS 9 transition adjustment (24.5) -
Eligible subordinated liabilities (45.7) -
Goodwill and other intangible assets net of attributable
deferred tax 9.8 10.2
Collective allowance for impairment of loans and advances - (4.4)
Total equity 237.1 249.1
----------------------------------------------------------- ------------- -------------
The Group ICAAP includes a summary of the capital required to
mitigate the identified risks in its regulated entities and the
amount of capital that the Group has available. The PRA sets a
Total Capital Requirement ('TCR') for each UK bank calibrated by
reference to its Capital Resources Requirement, which is broadly
equivalent to 8% of risk weighted assets and thus representing the
capital required under Pillar 1 of the Basel III framework. The
ICAAP is a key input into the PRA's TCR setting process, which
addresses the requirements of Pillar 2 of the Basel II framework.
The PRA's approach is to monitor the available capital resources in
relation to the 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 2017 and issued its updated TCR in March
2018.
The Group is also subject to further capital requirements
imposed by the PRA on all financial services firms. During the
periods, the Group complied with these requirements.
The Group raised Tier 2 capital in 2018. Further details of the
capital issuance are given in Note 24.
34. Maturity analysis of consolidated assets and liabilities
Group
Due after
Due within more than No contractual
one year one year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis at 31 December
2018
ASSETS
Cash and balances at central banks 169.7 - - 169.7
Loans and advances to banks 44.8 - - 44.8
Loans and advances to customers 1,035.1 960.2 33.6 2,028.9
Debt securities 149.7 - - 149.7
Property, plant and equipment - - 11.0 11.0
Intangible assets - - 9.9 9.9
Deferred tax assets - - 7.9 7.9
Other assets - - 22.4 22.4
Total assets 1,399.3 960.2 84.8 2,444.3
---------------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 263.5 - - 263.5
Deposits from customers 1,016.6 831.1 - 1,847.7
Current tax liabilities 4.2 - - 4.2
Other liabilities - - 40.1 40.1
Provisions for liabilities and charges - - 1.3 1.3
Subordinated liabilities 1.2 50.0 (0.8) 50.4
Total liabilities 1,285.5 881.1 40.6 2,207.2
---------------------------------------------- ----------- ----------- --------------- -----------
Due after
Due within more than No contractual
one year one year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis at 31 December
2017
ASSETS
Cash and balances at central banks 226.1 - - 226.1
Loans and advances to banks 34.3 - - 34.3
Loans and advances to customers 884.4 698.3 15.6 1,598.3
Debt securities 5.0 - - 5.0
Property, plant and equipment - - 11.5 11.5
Intangible assets - - 10.4 10.4
Deferred tax assets - - 0.6 0.6
Other assets - - 5.4 5.4
---------------------------------------------- ----------- ----------- --------------- -----------
Total assets 1,149.8 698.3 43.5 1,891.6
---------------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 3.0 - - 3.0
Other liabilities - - 41.9 41.9
Provisions for liabilities and charges - - 1.4 1.4
---------------------------------------------- ----------- ----------- --------------- -----------
Total liabilities 991.3 587.9 63.3 1,642.5
---------------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
Company
Due after
Due within more than No contractual
one year one year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis at 31 December
2018
ASSETS
Cash and balances at central banks 169.7 - - 169.7
Loans and advances to banks 41.9 - - 41.9
Loans and advances to customers 1,026.5 953.8 - 1,980.3
Debt securities 149.7 - - 149.7
Property, plant and equipment - - 6.0 6.0
Intangible assets - - 8.1 8.1
Investments - - 3.9 3.9
Deferred tax assets - - 7.8 7.8
Other assets - - 65.6 65.6
---------------------------------------------- ----------- ----------- --------------- -----------
Total assets 1,387.8 953.8 91.4 2,433.0
---------------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 263.5 - - 263.5
Deposits from customers 1,016.6 831.1 - 1,847.7
Current tax liabilities 3.6 - - 3.6
Other liabilities - - 49.1 49.1
Provisions for liabilities and charges - - 1.3 1.3
Subordinated liabilities 1.2 50.0 (0.8) 50.4
Total liabilities 1,284.9 881.1 49.6 2,215.6
---------------------------------------------- ----------- ----------- --------------- -----------
Due after
Due within more than No contractual
one year one year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis at 31 December
2017
ASSETS
Cash and balances at central banks 226.1 - - 226.1
Loans and advances to banks 32.3 - - 32.3
Loans and advances to customers 874.1 691.4 - 1,565.5
Debt securities 5.0 - - 5.0
Property, plant and equipment - - 6.1 6.1
Intangible assets - - 8.5 8.5
Investments - - 3.7 3.7
Deferred tax assets - - 0.6 0.6
Other assets - - 33.2 33.2
---------------------------------------------- ----------- ----------- --------------- -----------
Total assets 1,137.5 691.4 52.1 1,881.0
---------------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 113.0 - - 113.0
Deposits from customers 875.3 587.9 20.0 1,483.2
Current tax liabilities 1.9 - - 1.9
Other liabilities - - 44.4 44.4
Provisions for liabilities and charges - - 1.4 1.4
Total liabilities 990.2 587.9 65.8 1,643.9
---------------------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
35. Classification of financial assets and liabilities
Group
Total
carrying
amount Fair value
-----------
Fair value
hierarchy
GBPmillion GBPmillion level
------------------------------ ----------- ----------- -----------
At 31 December 2018 (IFRS
9 basis)
Cash and balances at central Level
banks 169.7 169.7 1
Loans and advances to Level
banks 44.8 44.8 2
Loans and advances to Level
customers 2,028.9 2,032.5 3
Level
Debt securities 149.7 149.7 1
Level
Other financial assets 16.2 16.2 3
2,409.3 2,412.9
------------------------------ ----------- -----------
Level
Due to banks 263.5 263.5 2
Level
Deposits from customers 1,847.7 1,859.7 3
Level
Other financial liabilities 26.3 26.3 3
Level
Subordinated liabilities 50.4 50.4 2
2,187.9 2,199.9
------------------------------ ----------- -----------
Other
financial Total
Loans assets carrying
Debt securities and receivables and liabilities amount Fair value
-----------
Fair value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
----------------------- ---------------- ----------------- ----------------- ----------- ----------- -----------
At 31 December 2017
(IAS
39 basis)
Cash and balances at Level
central banks - 226.1 - 226.1 226.1 1
Loans and advances to Level
banks - 34.3 - 34.3 34.3 2
Loans and advances to Level
customers - 1,598.3 - 1,598.3 1,641.1 3
Level
Debt securities 5.0 - - 5.0 5.0 1
Level
Other financial assets - - 1.2 1.2 1.2 3
5.0 1,858.7 1.2 1,864.9 1,907.7
----------------------- ---------------- ----------------- ----------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Deposits from Level
customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 29.5 29.5 29.5 3
- - 1,625.7 1,625.7 1,624.1
----------------------- ---------------- ----------------- ----------------- ----------- -----------
All assets and liabilities are carried at amortised cost.
Therefore for these assets and liabilities, the fair value
hierarchy noted above relates to the disclosure in this note
only.
Company
Total
carrying
amount Fair value
-----------
Fair value
hierarchy
GBPmillion GBPmillion level
------------------------------ ----------- ----------- -----------
At 31 December 2018 (IFRS
9 basis)
Cash and balances at central Level
banks 169.7 169.7 1
Loans and advances to Level
banks 41.9 41.9 2
Loans and advances to Level
customers 1,980.3 1,983.9 3
Level
Debt securities 149.7 149.7 1
Level
Other financial assets 60.6 60.6 3
--------------------------------- ----------- -----------
2,402.2 2,405.8
------------------------------ ----------- -----------
Level
Due to banks 263.5 263.5 2
Level
Deposits from customers 1,847.7 1,859.7 3
Level
Other financial liabilities 37.4 37.4 3
Level
Subordinated liabilities 50.4 50.4 2
--------------------------------- ----------- -----------
2,199.0 2,211.0
------------------------------ ----------- -----------
Other
financial Total
Loans assets carrying
Debt securities and receivables and liabilities amount Fair value
-----------
Fair value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
----------------------- ---------------- ----------------- ----------------- ----------- ----------- -----------
At 31 December 2017
(IAS
39 basis)
Cash and balances at Level
central banks - 226.1 - 226.1 226.1 1
Loans and advances to Level
banks - 32.3 - 32.3 32.3 2
Loans and advances to Level
customers - 1,565.5 - 1,565.5 1,608.3 3
Level
Debt securities 5.0 - - 5.0 5.0 1
Level
Other financial assets - - 30.7 30.7 30.7 3
----------------------- ---------------- ----------------- ----------------- ----------- -----------
5.0 1,823.9 30.7 1,859.6 1,902.4
----------------------- ---------------- ----------------- ----------------- ----------- -----------
Level
Due to banks - - 113.0 113.0 113.0 2
Deposits from Level
customers - - 1,483.2 1,483.2 1,481.6 3
Other financial Level
liabilities - - 34.2 34.2 34.2 3
----------------------- ---------------- ----------------- ----------------- ----------- -----------
- - 1,630.4 1,630.4 1,628.8
----------------------- ---------------- ----------------- ----------------- ----------- -----------
All assets and liabilities are carried at amortised cost.
Therefore for these assets, the fair value hierarchy noted above
relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities. The Group measures fair value using the following fair
value hierarchy that reflects the significance of the inputs used
in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from
prices).
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Cash and balances at central banks
The fair value of cash and balances at central banks was
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date.
At the end of each year, the fair value of cash and balances at
central banks was calculated to be equivalent to their carrying
value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date, and the same
assumptions regarding the risk of default were applied as those
used to derive the carrying value.
Debt securities
The fair value of debt securities is based on the quoted
mid-market share price.
At the end of December 2018 the fair value of debt securities
was calculated to be equivalent to their carrying value.
Due to banks
The fair value of amounts due to banks was calculated based upon
the present value of the expected future principal and interest
cash flows. The rate used to discount the cash flows was the market
rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks
was calculated to be equivalent to their carrying value due to the
short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based
upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access
deposits is equal to book value as they are repayable on
demand.
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was
calculated based upon the present value of the expected future
principal cash flows.
At the end of each year, the fair value of dividends and other
financial liabilities was calculated to be equivalent to their
carrying value due to their short maturity. The other financial
liabilities include all other liabilities other than non-interest
accruals.
Subordinated liabilities
The fair value of subordinated liabilities was calculated based
upon the present value of the expected future principal cash
flows.
36. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits as set out below. Except
for the directors' disclosures, there were no other Key Management
Personnel disclosures, therefore the tables below relate to
directors and close members of their family only.
Directors
2018 2017
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
Loans outstanding at 1 January 3.7 3.2
Loans advanced 0.4 0.4
Interest applied 0.1 0.1
Loans outstanding at 31 December 4.2 3.7
------------------------------------------ ----------- -----------
Deposits
Deposits outstanding at 1 January 0.4 0.3
Additional deposits made during the year - 0.1
Deposits outstanding at 31 December 0.4 0.4
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4 million advance (2017: GBP0.4 million) as part of a
GBP2.5 million facility agreed with a company in which a director
holds 50% of the voting shares, which is secured by property and
personal guarantees.
-- A GBP3.8 million advance (2017: GBP3.3 million) as part of a
revised GBP4.4 million facility agreed with a director, which is
secured by property and certain other undertakings.
Both of these transactions were agreed by the Group's Real
Estate Finance business and arose during the normal course of
business. Both loans were subject to the usual Board governance and
Credit Committee approval procedures and are on substantially the
same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2018 2017
GBPmillion GBPmillion
------------------------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - income from sale
of debt portfolio (0.2) (0.3)
Debt Managers (Services) Limited - debt collection services 1.0 0.2
Secure Homes Services Limited - building rental paid 0.4 0.4
V12 Finance Group Limited - dividend received - (13.9)
V12 Retail Finance Limited - fees and commission 21.4 20.8
22.6 7.2
------------------------------------------------------------- ----------- -----------
During the year, the basis of the fees and commission charged by
V12 Retail Finance Limited was changed. A breakdown of the charges
is set out below:
2018 2017
GBPmillion GBPmillion
----------------------------------------- ----------- -----------
Fees and commission
Loan management services 14.9 -
Sales commission 6.5 -
Financial intermediary charges
Applications proposed - 5.1
Applications accepted - 2.3
Loan set-up and processing - 4.5
Loan book management and servicing fees - 8.9
----------------------------------------- ----------- -----------
21.4 20.8
----------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Company Company
2018 2017
GBPmillion GBPmillion
------------------------------------------------- ----------- -----------
Amounts receivable from subsidiary undertakings 44.5 29.7
Amounts due to subsidiary undertakings (14.1) (9.7)
30.4 20.0
------------------------------------------------- ----------- -----------
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 97.
At the year end the ordinary shares held by the directors are
disclosed in the Directors' Report beginning on page 114. 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.
37. Immediate parent company and ultimate controlling party
The Company has had no immediate parent company or ultimate
controlling party.
38. Implementation of IFRS 9
Group
The table below summarises the adjustments arising on adoption
of IFRS 9 on the Group's balance sheet at 1 January 2018. There has
been no change in the carrying amount of financial instruments on
the basis of their measurement categories. All adjustments have
arisen solely due to a replacement of the IAS 39 incurred loss
impairment approach with an expected credit loss approach. The
Group's classification and measurement and loss impairment
accounting policies are provided in Note 1.
IAS 39 IFRS 9
IAS 39 measurement IFRS 9 measurement carrying carrying
category category amount ECL adjustment amount
GBPmillion GBPmillion GBPmillion
------------------------- ------------------------- -------------------- ----------- --------------- -----------
At 1 January
2018
ASSETS
Cash and balances
at central banks Loans and receivables Amortised cost 226.1 - 226.1
Loans and advances
to banks Loans and receivables Amortised cost 34.3 - 34.3
Loans and advances
to customers Loans and receivables Amortised cost 1,598.3 (31.8) 1,566.5
Debt securities Held to maturity Amortised cost 5.0 - 5.0
Property, plant
and equipment N/A N/A 11.5 - 11.5
Intangible assets N/A N/A 10.4 - 10.4
Deferred tax
asset N/A N/A 0.6 6.3 6.9
Other assets N/A N/A 5.4 - 5.4
------------------------- ------------------------- --------------------
Total assets 1,891.6 (25.5) 1,866.1
-------------------------------------------------------------------------- ----------- --------------- -----------
LIABILITIES AND EQUITY
Other financial
Due to banks assets and liabilities Amortised cost 113.0 - 113.0
Deposits from Other financial
customers assets and liabilities Amortised cost 1,483.2 - 1,483.2
Current tax liabilities N/A N/A 3.0 - 3.0
Other liabilities N/A N/A 41.9 - 41.9
Provisions for
liabilities and
charges N/A N/A 1.4 0.3 1.7
------------------------- ------------------------- -------------------- ----------- --------------- -----------
Total liabilities 1,642.5 0.3 1,642.8
-------------------------------------------------------------------------- ----------- --------------- -----------
Equity attributable to owners
of the parent
Share capital N/A N/A 7.4 - 7.4
Share premium N/A N/A 81.2 - 81.2
Revaluation Reserve N/A N/A 1.3 - 1.3
Retained earnings N/A N/A 159.2 (25.8) 133.4
------------------------- ------------------------- -------------------- ----------- --------------- -----------
Total equity 249.1 (25.8) 223.3
-------------------------------------------------------------------------- ----------- --------------- -----------
Total liabilities and equity 1,891.6 (25.5) 1,866.1
---------------------------------------------------- -------------------- ----------- --------------- -----------
The following table reconciles the Group's closing IAS 39
impairment allowance to the opening IFRS 9 allowance as at 1
January 2018:
Closing
IAS 39 Opening
balance IFRS 9
at 31 balance
December at 1 January
2017 ECL adjustment 2018
GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- --------------- --------------
Specific allowances for impairment 35.5 36.2 71.7
Collective allowances for impairment 4.4 (4.4) -
-------------------------------------------- ----------- --------------- --------------
Impairment against on balance sheet assets 39.9 31.8 71.7
-------------------------------------------- ----------- --------------- --------------
Provision for loan commitments - 0.3 0.3
-------------------------------------------- ----------- --------------- --------------
Total impairment and provision 39.9 32.1 72.0
-------------------------------------------- ----------- --------------- --------------
Total provisions above include expert credit judgements over the
Group's IFRS 9 model results of GBP2.5 million, of which GBP1.2
million are specific overlays for the Business Finance
portfolio.
An analysis of the Group's opening gross loans and advances to
customers and ECL impairment allowance by IFRS 9 stage is provided
below:
Not credit impaired Credit impaired
Stage
Stage 3:
1: Subject Stage Excl. Stage
to 12 2: Subject purchased 3: Purchased
month to lifetime credit credit Provision
ECL ECL impaired impaired Total cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
1 January 2018
Gross loans and advances
Business Finance
Real Estate Finance 516.5 64.6 - - 581.1
Asset Finance 103.1 11.3 3.5 - 117.9
Commercial Finance 125.4 1.2 0.5 - 127.1
Consumer Finance
Retail Finance 398.4 57.4 3.6 - 459.4
Motor Finance 182.0 94.0 25.5 - 301.5
Debt Management - - 7.8 7.8 15.6
Consumer Mortgages 16.5 - - - 16.5
Other 15.8 0.2 3.1 - 19.1
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Total on balance sheet 1,357.7 228.7 44.0 7.8 1,638.2
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Loan commitments 178.6 - - - 178.6
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
ECL Impairment allowance
Business Finance
Real Estate Finance 0.1 - - - 0.1 0.0%
Asset Finance 0.3 0.1 1.0 - 1.4 1.2%
Commercial Finance 0.2 0.2 0.4 - 0.8 0.6%
Consumer Finance
Retail Finance 6.8 7.4 3.1 - 17.3 3.8%
Motor Finance:
------------ ------------- ----------- -------------- ----------- ----------
ECL allowance 5.9 16.9 20.1 - 42.9
Voluntary termination
provision 5.6 - - - 5.6
------------ ------------- ----------- -------------- ----------- ----------
11.5 16.9 20.1 - 48.5 16.1%
Debt Management - - - - - 0.0%
Consumer Mortgages - - - - - 0.0%
Other - 0.3 3.3 - 3.6 18.8%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Impairment allowance against
on balance sheet assets 18.9 24.9 27.9 - 71.7 4.4%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Provision for loan commitments 0.3 - - - 0.3 0.2%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Company
The table below summarises the adjustments arising on adoption
of IFRS 9 on the Company's balance sheet at 1 January 2018. There
has been no change in the carrying amount of financial instruments
on the basis of their measurement categories. All adjustments have
arisen solely due to a replacement of the IAS 39 incurred loss
impairment approach with an expected credit loss approach.
IAS 39 IFRS 9
IAS 39 measurement IFRS 9 measurement carrying carrying
category category amount ECL adjustment amount
GBPmillion GBPmillion GBPmillion
------------------------- ------------------------- -------------------- ----------- --------------- -----------
At 1 January
2018
ASSETS
Cash and balances
at central banks Loans and receivables Amortised cost 226.1 - 226.1
Loans and advances
to banks Loans and receivables Amortised cost 32.3 - 32.3
Loans and advances
to customers Loans and receivables Amortised cost 1,565.5 (32.4) 1,533.1
Debt securities Held to maturity Amortised cost 5.0 - 5.0
Property, plant
and equipment N/A N/A 6.1 - 6.1
Intangible assets N/A N/A 8.5 - 8.5
Investments N/A N/A 3.7 - 3.7
Deferred tax
asset N/A N/A 0.6 6.4 7.0
Other assets N/A N/A 33.2 - 33.2
------------------------- ------------------------- --------------------
Total assets 1,881.0 (26.0) 1,855.0
-------------------------------------------------------------------------- ----------- --------------- -----------
LIABILITIES AND EQUITY
Other financial
Due to banks assets and liabilities Amortised cost 113.0 - 113.0
Deposits from Other financial
customers assets and liabilities Amortised cost 1,483.2 - 1,483.2
Current tax liabilities N/A N/A 1.9 - 1.9
Other liabilities N/A N/A 44.4 - 44.4
Provisions for
liabilities and
charges N/A N/A 1.4 0.3 1.7
------------------------- ------------------------- -------------------- ----------- --------------- -----------
Total liabilities 1,643.9 0.3 1,644.2
-------------------------------------------------------------------------- ----------- --------------- -----------
Equity attributable to owners
of the parent
Share capital N/A N/A 7.4 - 7.4
Share premium N/A N/A 81.2 - 81.2
Revaluation Reserve N/A N/A 0.5 - 0.5
Retained earnings N/A N/A 148.0 (26.3) 121.7
------------------------- ------------------------- -------------------- ----------- --------------- -----------
Total equity 237.1 (26.3) 210.8
-------------------------------------------------------------------------- ----------- --------------- -----------
Total liabilities and equity 1,881.0 (26.0) 1,855.0
---------------------------------------------------- -------------------- ----------- --------------- -----------
The following table reconciles the Company's closing IAS 39
impairment allowance to the opening IFRS 9 allowance as at 1
January 2018:
Closing
IAS 39 Opening
balance IFRS 9
at 31 balance
December at 1 January
2017 ECL adjustment 2018
GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- --------------- --------------
Specific allowances for impairment 35.5 36.8 72.3
Collective allowances for impairment 4.4 (4.4) -
-------------------------------------------- ----------- --------------- --------------
Impairment against on balance sheet assets 39.9 32.4 72.3
-------------------------------------------- ----------- --------------- --------------
Provision for loan commitments - 0.3 0.3
-------------------------------------------- ----------- --------------- --------------
Total impairment and provision 39.9 32.7 72.6
-------------------------------------------- ----------- --------------- --------------
Total provisions above include expert credit judgements over the
Company's IFRS 9 model results of GBP2.5 million, of which GBP1.2
million are specific overlays for the Business Finance
portfolio.
An analysis of the Company's opening gross loans and advances to
customers and ECL impairment allowance by IFRS 9 stage is provided
below:
Not credit impaired Credit impaired
Stage
Stage 3:
1: Subject Stage Excl. Stage
to 12 2: Subject purchased 3: Purchased
month to lifetime credit credit Provision
ECL ECL impaired impaired Total cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
1 January 2018
Gross loans and advances
Business Finance
Real Estate Finance 516.5 64.6 - - 581.1
Asset Finance 103.1 11.3 3.5 - 117.9
Commercial Finance 123.1 1.2 0.5 - 124.8
Consumer Finance
Retail Finance 398.4 57.4 3.6 - 459.4
Motor Finance 182.0 94.0 25.5 - 301.5
Consumer Mortgages 16.5 - - - 16.5
Other 0.8 0.2 3.2 - 4.2
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Total on balance sheet 1,340.4 228.7 36.3 1,605.4
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Loan commitments 178.5 - - - 178.5
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
ECL Impairment allowance
Business Finance
Real Estate Finance 0.1 - - - 0.1 0.0%
Asset Finance 0.3 0.1 1.0 - 1.4 1.2%
Commercial Finance 0.2 0.2 0.4 - 0.8 0.6%
Consumer Finance
Retail Finance 6.8 7.5 3.2 - 17.5 3.8%
Motor Finance:
------------ ------------- ----------- -------------- ----------- ----------
ECL allowance 6.0 17.0 20.3 - 43.3
Voluntary termination
provision 5.6 - - - 5.6
------------ ------------- ----------- -------------- ----------- ----------
11.6 17.0 20.3 - 48.9 16.2%
Consumer Mortgages - - - - - 0.0%
Other - 0.3 3.3 - 3.6 85.7%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Impairment allowance against
on balance sheet assets 19.0 25.1 28.2 - 72.3 4.5%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Provision for loan commitments 0.3 - - - 0.3 0.2%
-------------------------------- ------------ ------------- ----------- -------------- ----------- ----------
Group and Company
As set out in Note 1 for the Real Estate Finance and Commercial
Finance portfolios, where a loan facility is agreed that includes
both a drawn and undrawn element and the Group cannot identify the
ECL on the loan commitment separately, a combined loss allowance
for both the drawn and undrawn component of the loan is recognised
as an impairment allowance and deducted from the gross carrying
amount of the drawn component. At 1 January 2018 loan commitments
held for the Real Estate Finance and Commercial Finance portfolios
were GBP98.6 million and GBP35.5 million respectively.
39. Discontinued operations
On 21 December 2017, the Bank agreed to sell its remaining
portfolio of unsecured personal loans to Alpha Credit Solutions 8
S.Ã .r.l., a company owned by AnaCap Credit Opportunities III LP. As
previously highlighted, the Group made the decision to withdraw
from the unsecured personal loan market in 2016, and the sale of
this portfolio represents a full exit by the Group from this
market.
The net proceeds of sale, after transaction costs, amounted to
GBP36.6 million, which was used for general corporate purposes
including other forms of lending. The cash purchase consideration
for the portfolio was calculated based on an agreed price for the
portfolio as at 30 June 2017, adjusted for cash receipts the Group
had already received from the portfolio during the period up to the
date of completion.
The effect of the transaction is to accelerate capital
realisation to reinvest into the Group's core business while
removing any future credit risk associated with the portfolio. The
profit arising on sale of the portfolio was GBP0.5 million before
tax. The Group continued to administer the portfolio until the
completion of a migration of the portfolio to a third party
administrator appointed by the purchaser, which was completed in
the first half of 2018.
Details of the income statement, net assets disposed of and
consequential gain recognised on disposal, and cash flow of the
discontinued operation are set out below:
2017
Income statement GBPmillion
----------------------------------- -----------
Interest income and similar
income 8.0
Interest expense and
similar charges -
----------------------------------- -----------
Net interest income 8.0
----------------------------------------- -----------
Fee and commission income -
Fee and commission expense -
----------------------------------- -----------
Net fee and commission
income -
----------------------------------- -----------
Operating income 8.0
----------------------------------------- -----------
Net impairment losses on loans
and advances to customers (3.4)
Operating expenses (0.3)
----------------------------------------- -----------
Profit before income
tax 4.3
Income tax expense (0.8)
----------------------------------------- -----------
Profit after income tax 3.5
Gain recognized on disposal after
tax (see below) 0.4
------------------------------------- -----------
Profit for the period 3.9
------------------------------------- -----------
As described in Note 3, funding costs and operating expenses are
not aligned to operating segments for day to day management of the
business, so they cannot be allocated on a reliable basis.
Accordingly, funding costs are not included above, and operating
expenses above relates only to those costs that are directly
attributable to the discontinued business.
Assets
sold on
21 December
2017
GBPmillion
---------------------------------------- --------------
Net assets disposed of:
Loans and advances to customers 36.1
Consideration
Cash 37.1
Less selling costs (0.5)
----------------------------------------- --------------
36.6
---------------------------------------- --------------
Gain recognised on disposal before tax 0.5
Tax (0.1)
----------------------------------------- --------------
Gain recognised on disposal after tax 0.4
----------------------------------------- --------------
Year ended
31 December
2017
Cash flow statement GBPmillion
------------------------------------------------------------ -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year 3.5
Adjustments for:
Income tax expense 0.8
Impairment losses on loans and advances to customers 3.4
------------------------------------------------------------- -------------
Cash flows from operating profits before changes in
operating assets and liabilities 7.7
Changes in operating assets and liabilities:
- net decrease in loans and advances to customers 28.0
Net cash inflow from operating activities and net increase
in cash and cash equivalents 35.7
------------------------------------------------------------- -------------
Five year summary
2018 2017 2016 2015 2014
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
Interest and similar income 169.2 149.3 141.1 139.7 93.6
Interest expense and similar
charges (35.5) (26.7) (26.3) (21.6) (14.2)
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 133.7 122.6 114.8 118.1 79.4
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission income 17.9 14.9 14.5 14.4 18.5
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 151.6 137.5 129.3 132.5 97.9
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment losses on loans and
advances (32.4) (36.9) (30.3) (24.3) (15.3)
Arbuthnot Banking Group recharges - - - (0.8) (0.2)
Operating expenses (84.5) (71.6) (71.5) (70.9) (56.3)
Profit on sale of equity instruments
available-for-sale - 0.3 - - -
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income tax 34.7 29.3 27.5 36.5 26.1
-------------------------------------- ----------- ----------- ----------- ----------- -----------
2018 2017 2016 2015 2014
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 153.2 128.8 754.1 157.8 122.3
-------------------------------------- ----------- ----------- ----------- ----------- -----------
2018 2017 2016 2015 2014
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Financial position
Cash and balances at central
banks 169.7 226.1 112.0 131.8 81.2
Loans and advances to banks 44.8 34.3 18.2 11.5 39.8
Loans and advances to customers 2,028.9 1,598.3 1,321.0 1,074.9 622.5
Debt securities 149.7 5.0 20.0 3.8 16.3
Other assets 51.2 27.9 38.8 25.4 22.5
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Total assets 2,444.3 1,891.6 1,510.0 1,247.4 782.3
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Due to banks 263.5 113.0 70.0 35.0 15.9
Deposits from customers 1,847.7 1,483.2 1,151.8 1,033.1 608.4
Subordinated liabilities 50.4 - - - -
Other liabilities 45.6 46.3 52.2 38.1 33.1
Total shareholders' equity 237.1 249.1 236.0 141.2 124.9
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders'
equity 2,444.3 1,891.6 1,510.0 1,247.4 782.3
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Appendix (unaudited)
Key performance indicators
All revenue, income, impairments, and expenses used in the
calculations below are stated on a continuing operations basis.
(i) Margin ratios
Net interest margin is calculated as interest 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 and discontinued operations, over thirteen
months:
2018 2017
GBPmillion GBPmillion
------------------------------------------------------- ----------- -----------
Net interest margin
Interest income and similar income 169.2 141.3
Interest expense and similar charges (35.5) (26.7)
------------------------------------------------------- ----------- -----------
Net interest income 133.7 114.6
------------------------------------------------------- ----------- -----------
Net revenue margin
Net interest income 133.7 114.6
Net fee and commission income 17.9 14.9
------------------------------------------------------- ----------- -----------
Operating income 151.6 129.5
------------------------------------------------------- ----------- -----------
Gross revenue margin
Interest income and similar income 169.2 141.3
Fee and commission income 19.4 16.0
------------------------------------------------------- ----------- -----------
Gross revenue 188.6 157.3
------------------------------------------------------- ----------- -----------
Opening loan book (after IFRS 9 transition adjustment
see Note (vi)) 1,566.5 1,255.5
Closing loan book 2,028.9 1,598.3
------------------------------------------------------- ----------- -----------
Average loan book 1,818.2 1,418.1
------------------------------------------------------- ----------- -----------
Net interest margin 7.4% 8.1%
------------------------------------------------------- ----------- -----------
Net revenue margin 8.3% 9.1%
------------------------------------------------------- ----------- -----------
Gross revenue margin 10.4% 11.1%
------------------------------------------------------- ----------- -----------
A reconciliation of the loan book figures used above to the
statement of financial position is as follows:
2016
GBPmillion
------------------------- -----------
Balance sheet loan book 1,321.0
PLD loans (65.5)
--------------------------- -----------
1,255.5
------------------------- -----------
The margin ratios all measure the yield of the loan book.
(ii) Cost ratios
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book, cost of funds is calculated at interest
expense for the financial period as a percentage of average loan
book and cost to income ratio is calculated as operating expenses
for the financial period as a percentage of operating income for
the financial period:
2018 2017
GBPmillion GBPmillion
---------------------------------------------------------- ----------- -----------
Net impairment losses on loans and advances to customers 32.4 33.5
Average loan book 1,818.2 1,418.2
---------------------------------------------------------- ----------- -----------
Cost of risk 1.8% 2.4%
---------------------------------------------------------- ----------- -----------
Interest expense 35.5 26.7
Average loan book 1,818.2 1,418.2
---------------------------------------------------------- ----------- -----------
Cost of funds 2.0% 1.9%
---------------------------------------------------------- ----------- -----------
Operating expenses 84.5 71.3
Operating income 151.6 129.5
---------------------------------------------------------- ----------- -----------
Cost to income ratio 55.7% 55.1%
---------------------------------------------------------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment losses. The cost of funds measures the cost
of money being lent to customers. The cost to income ratio measures
how efficiently the Group is utilising its cost base in producing
income.
(iii) Return ratios
Annualised adjusted return on average assets is calculated as
the adjusted profit after tax for the previous 12 months as a
percentage of average assets, annualised adjusted return on average
equity is calculated as the adjusted profit after tax for the
previous 12 months as a percentage of average equity and annualised
adjusted return on required equity is calculated as the adjusted
profit after tax for the previous 12 months as a percentage of
average required equity.
Adjusted profit after tax is profit after tax attributable to
continuing operations, adjusted for items that are non-controllable
items or other items that fall outside of the Group's core business
activities. A reconciliation of adjusted profit after tax to
statutory profit after tax is provided on page 17.
Average assets is calculated as the average of the monthly
assets balances, net of discontinued operations, 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%,
excluding equity required against discontinued operations:
2018 2017
GBPmillion GBPmillion
---------------------------------------------------- ----------- -----------
Adjusted profit after tax 29.9 21.5
---------------------------------------------------- ----------- -----------
Opening assets (after IFRS 9 transition adjustment
- see below) 1,866.1 1,444.5
Closing assets 2,444.3 1,891.6
---------------------------------------------------- ----------- -----------
Average assets 2,182.4 1,639.9
---------------------------------------------------- ----------- -----------
Opening equity 223.3 236.0
Closing equity 237.1 249.1
---------------------------------------------------- ----------- -----------
Average equity 228.9 242.0
---------------------------------------------------- ----------- -----------
Opening required equity 173.3 146.1
Closing required equity 220.9 173.3
---------------------------------------------------- ----------- -----------
Average required equity 201.7 159.8
---------------------------------------------------- ----------- -----------
Annualised adjusted return on average assets 1.4% 1.3%
---------------------------------------------------- ----------- -----------
Annualised adjusted return on average equity 13.1% 8.9%
---------------------------------------------------- ----------- -----------
Annualised adjusted return on required equity 14.8% 13.5%
---------------------------------------------------- ----------- -----------
A reconciliation of assets to the balance sheet is as
follows:
2018
(opening
balance) 2016
GBPmillion GBPmillion
------------------------------ --- ----------- -----------
Balance sheet assets 1,891.6 1,510.0
PLD assets - (65.5)
IFRS 9 transition adjustment (25.5) -
------------------------------ --- ----------- -----------
1,866.1 1,444.5
---------------------------------- ----------- -----------
A reconciliation of equity to the balance sheet is as
follows:
2018
(opening
balance)
GBPmillion
------------------------------ --- --- -----------
Equity 249.1
IFRS 9 transition adjustment (25.8)
---------------------------------------- -----------
223.3
-------------------------------------- -----------
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, net of
discontinued operations, 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 the Term Funding Scheme,
and equity, divided by the loan book, net of discontinued
operations, at the year end:
2018 2017
GBPmillion GBPmillion
--------------------------------------------- ----------- -----------
Loan book 2,028.9 1,598.3
--------------------------------------------- ----------- -----------
Deposits from customers 1,847.7 1,483.2
Borrowings under the Term Funding Scheme 263.5 113.0
Tier 2 capital (including accrued interest) 50.4 -
Equity 237.1 249.1
--------------------------------------------- ----------- -----------
Total funding 2,398.7 1,845.3
--------------------------------------------- ----------- -----------
Loan to deposit ratio 109.8% 107.8%
--------------------------------------------- ----------- -----------
Total funding ratio 118.2% 115.5%
--------------------------------------------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Adjusted earnings per share
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:
2018 2017
-------------------------------------------- ----------- -----------
Adjusted profit attributable to equity
holders of the parent (GBP millions) 29.9 21.5
---------------------------------------------- ----------- -----------
Weighted average number of ordinary shares
(number) 18,475,229 18,475,229
---------------------------------------------- ----------- -----------
Adjusted earnings per share (pence) 161.8 116.4
---------------------------------------------- ----------- -----------
(vi) Loans to customers
The impact of the IFRS 9 transition adjustments on the opening
balances by segment are set out in the table below:
31 December 1 January
2017 2018
(on an IFRS 9 (on an
IAS 39 transition IFRS 9
basis) adjustment basis)
GBPmillion GBPmillion GBPmillion
----------------------- --- ------------ ------------ -----------
Business Finance
Real Estate Finance 580.8 0.2 581.0
Asset Finance 116.7 (0.2) 116.5
Commercial Finance 126.5 (0.2) 126.3
Consumer Finance
Retail Finance 452.3 (9.7) 442.6
Motor Finance 274.6 (21.6) 253.0
Debt Management 15.6 - 15.6
Consumer Mortgages 16.5 - 16.5
Other 15.3 (0.3) 15.0
---------------------------- ------------ ------------ -----------
1,598.3 (31.8) 1,566.5
--------------------------- ------------ ------------ -----------
(vii) Adjusted profit and effective adjusted tax rate
Adjusted profit before tax was GBP36.7 million (2017: GBP27.0
million). Adjusted profit after tax was GBP29.9 million (2017:
GBP21.5 million).
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 comprise principally costs of closing the
unsecured personal lending product, the cost of potential corporate
acquisition work and treasury development (31 December 2017:
comprised the costs of setting up the Group's Consumer Mortgage
operation and of closing the current account and unsecured personal
lending products).
Bonus payments of GBP1.3 million (2017: GBP0.6 million) relate
to a long term incentive plan that was set up for a small number of
employees on the creation of the Commercial Finance business. The
scheme is based on profits earned by that business up to the end of
2019, and is payable in 2020.
Profit on sale of Non-Standard Finance plc shares and
discontinued activities represented non-core activities.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LLFFTVAIDFIA
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