TIDMCVBP
RNS Number : 5181R
Coventry Building Society
01 March 2019
1 March 2019
COVENTRY BUILDING SOCIETY REPORTS ROBUST FINANCIAL RESULTS
Coventry Building Society has today announced its results for
the year ended 31 December 2018. Highlights include:
-- Strong growth in mortgages: Mortgage assets increased by
GBP3.4 billion to GBP39.3 billion, representing growth of 9%, three
times faster than the market(1) .
-- Strong growth in savings: Savings deposit balances grew by
GBP2.3 billion to GBP33.3 billion, representing growth of 7%, more
than two and a half times the rate of the market(1) .
-- Giving value to members: Our average savings rate in 2018 was
1.50% compared with a market average of 0.78%. This represents
value returned to members of GBP227 million (2017: GBP210
million)(2) .
-- Delivering the right member outcomes: The Society works hard
to sustain and improve the service it provides to members. It
measures this using the common metric of Net Promoter Score(3) and
in 2018 achieved a very high and increased score of +75,
representing a strong endorsement from our members.
-- Leading cost-efficiency: At 0.50% the Society continues to
report the lowest cost to mean asset ratio of any UK building
society(4) , whilst investing significantly in its technology
infrastructure and branch network. Without the significant increase
in investment spend, cost to mean asset ratio was maintained at
0.41%(5) .
-- Low risk: The Society is a low risk lender, which protects
individual borrowers and the Society alike. During the year,
mortgage arrears fell and were only a seventh of the industry
average(6) .
-- Maintained capital strength: Common Equity Tier 1 ratio was
maintained at 35%, the highest reported by any top 20 lender(7) and
Leverage ratio was over 4%.
-- Leading colleague engagement: Excellent service is delivered
by our colleagues, who are proud to Put Members First. In 2018, the
Society was again rated one of the 100 Best Companies to Work For
in the UK.
-- Supporting local communities: In 2018, 79% of colleagues were
actively involved in volunteering, fundraising or raising awareness
for local charities and community groups.
Commenting, Mark Parsons, Coventry Building Society Chief
Executive said:
Coventry Building Society has a simple purpose. We exist to meet
the needs of our saving and borrowing members. Our performance is
equally simple to articulate. In 2018, we delivered strong growth
in both savings and mortgages, continuing a long record of
outperforming the market.
We delivered profit that maintains our capital position whilst
providing superior returns to our members and investing in our
future. In doing this, we provided an exemplary level of service to
members and intermediary partners. This only happens because we
have a highly engaged, enthusiastic workforce who deliver great
results for members as well as making a positive and tangible
difference in their local communities.
In the mortgage market we grew balances by 9%, over three times
the growth in the market(1) . This, in a very price competitive
environment which has seen sustained pressure on mortgage pricing
despite increases in the Bank of England Base Rate.
The price competitive mortgage environment has led to noticeable
changes in consumer behaviour, with the re-mortgage sector being
particularly active both for owner-occupier and buy to let
mortgages. We are also seeing further movement away from Standard
Variable Rate mortgages to fixed rate loans as borrowers seek to
lock in to attractive rates.
Despite the pressure on mortgage pricing, we have maintained the
low risk approach to lending that is right for our members and that
has been our hallmark for many years. The Society's arrears fell
again in 2018, and are only one seventh of the industry average(6)
, meaning that members benefit from low credit losses. The weighted
average loan to value of our mortgage book of 55%(8) (2017: 54%)
reflects this low risk position and protects our business model
from potential market or house price disruption.
Central to our mortgage growth is the strength of our
intermediary partnerships. We believe borrowers should have the
opportunity to receive independent advice when they take out a
mortgage and we are an advocate of mortgage brokers who provide
this. In turn, we work tirelessly to improve our service to brokers
and their clients. In 2018, we received the Financial Adviser Five
Stars award, the highest accolade for mortgage servicing, for the
third year running, and we were ranked first for broker
satisfaction in the wide-ranging Charterhouse annual research. We
were also ranked first by Fairer Finance for mortgages, on the
basis of trust, customer happiness, transparency and complaint
handling.
Intrinsically we need to balance the needs of our savings and
mortgage members. Interest rates in the savings market have been
stubborn and moved little following two increases in the Bank of
England Base Rate. We have continued to pay significantly higher
savings rates to our members than the market average, which
demonstrates both the strength of our business and our clear focus
on Putting Members First.
In 2018, the average savings rate we paid was 1.50%, nearly
double the market average of 0.78%(2) . In simple terms this means
we paid an additional GBP227 million in interest than if we had
simply matched the market average(2) . This is a further increase
on the premium we have provided over many years. This consistently
good value has helped us to grow savings balances by 7% in 2018,
over two and a half times the market growth(1) .
In addition, we have delivered award-winning service to savers.
In 2018, this combination of superior long-term value and great
service resulted in the Society being awarded the status of Which?
Recommended Provider for Savings accounts once again, one of only
five providers to receive this endorsement. Fairer Finance also
ranked us first amongst savings providers, for the third year
running.
This independent recognition is matched by research which shows
that more than 8 out of 10 members are happy to recommend us to
others(9) , and our overall Net Promoter Score, already
exceptionally high in the industry, increased further from +72 to
+75(3) .
At the heart of our great service delivery is our people. They
share our mission of Putting Members First. I believe it is our
record of consistently putting this into practice that explains the
trust and engagement of colleagues at the Society. In 2018, 92% of
colleagues said they were proud to work for the Society and we were
again rated one of the 100 Best Companies to Work For in the UK.
Whilst we work extremely hard to recruit, retain, develop and
support people who want to do the right things for our members,
they repay this investment many times over to the benefit of our
members.
Our employees are also the driving force behind our support for
communities; it is no surprise that people who are motivated to do
the right things for members and demonstrate the Coventry CARES
values also want to use their enthusiasm and skills to benefit
charities, schools and community groups. Last year, amongst many
highlights, we were awarded the Business in the Community
Responsible Business Award for Educational Partnership, for our
programme helping Coventry school students prepare for the world of
work.
Nearly 80% of Society employees actively supported our
commitment to our communities during the year, helping over 250
local and national organisations.
To sustain our great service record in the future, we have
stepped up investment in our distribution, technology and
infrastructure to meet the changing expectations of our
members.
Our members tell us that they are already seeing the benefit of
our branch redesign programme, with seven branches completed during
2018. This is a major investment for us and one which confirms both
our commitment to the branch network and our understanding that
what members want from their branch above all is a reassuringly
human place to talk to our people. We will continue the roll out of
the redesign in 2019.
We recognise and anticipate an evolving savings marketplace with
new service providers emerging. We have taken an important step in
this area by partnering with Hargreaves Lansdown, which offers a
new way for customers to open and service our products. In 2018, we
offered fixed rate bonds on their Active Savings platform and in
2019, became the first provider to offer easy access savings
accounts.
We are progressing projects enhancing our technology to improve
resilience, service flexibility and functionality. The work to
update our data centres is progressing well with the first
migrations taking place during 2018 in line with our plans. During
2018, we also completed upgrades to our telephony and credit
assessment systems. However, the detailed design work on upgrading
our core technology platform has indicated that this programme will
be more technically complex than originally envisaged. As a result,
we are replanning this activity in order to reduce the risk and
future cost of the programme whilst still meeting our objectives.
We are committed to doing the right thing for our members, taking
stock at this early stage rather than ploughing ahead with the
original plan.
We have a strong track record of being the most cost-efficient
building society in the UK and aim to maintain this during this
period of strategic investment. In 2018 our overall management
expense ratio was 0.50% (2017: 0.42%)(4) . Excluding the
significant increase in strategic investment, the ratio has
remained consistent at 0.41%(5) , demonstrating our continued focus
on running an efficient business which allows us to return superior
value to members.
In 2018, profit before tax was GBP202 million (2017: GBP243
million) maintaining our risk based capital measure at 35.5% (2017:
34.9%), the highest reported of any top 20 lender(7) .
Looking forward we will need to continue to deliver despite
market uncertainties, balancing the ongoing pressure on mortgage
margins with continued rising member expectations and our own
investment agenda. However, I am confident that the Society's
financial strength, flexibility and low risk, low cost business
model will continue to support our success in the short and long
term.
Central to this is our clarity of purpose. I have mentioned the
importance of Putting Members First on many occasions. It will
continue to guide our progress going forward.
1. Source: Bank of England.
2. Based on the Society's average month end savings rate
compared to the Bank of England average rate for household
interest-bearing deposits on the Society's mix of products.
3. A measure of customer advocacy that ranges between -100 and
+100 which represents how likely a customer is to recommend our
products and services.
4. Administrative expenses, depreciation and
amortisation/Average total assets.
5. Administrative expenses, depreciation and amortisation less
increase in strategic investment costs compared to 2017/Average
total assets.
6. Source: Percentage of mortgages in arrears by 2.5% or more -
Prudential Regulation Authority latest available information at 30
September 2018.
7. Common Equity Tier 1 ratio for the UK Finance 2017 top 20
mortgage lenders (balance outstanding) - latest published CET 1
data as at 28 February 2019.
8. Indexed loan to value weighted by balance.
9. Source: Average number of members scoring 9 or 10/10 across 6
surveys totalling 48,922 responses.
Financial Review
During 2018, the Society has delivered a robust financial
performance whilst continuing to grow both mortgages and savings
balances. We delivered in line with our commitment to retain only
the profit we need to maintain capital ratios, whilst investing to
improve services and providing favourable pricing for members. In
2018, this meant we returned GBP227(1) million of value to savings
members, compared to GBP210 million in 2017.
Income Statement
Overview
In 2018, statutory profit before tax has decreased by 17% to
GBP202 million (2017: GBP243 million). The decrease is primarily
driven by a GBP41 million increase in costs relating to the
Society's strategic investment programmes. Without this additional
cost, profit before tax is broadly in line with 2017, reflecting
growth in net interest income which covers the 8% increase in
business as usual run costs(2) . We have continued to pay above
market savings rates, increasing value returned to members to
GBP227 million1 (2017: GBP210 million).
Net interest income has increased to GBP426 million (2017:
GBP411 million), reflecting growth in both mortgages and savings
balances despite an increasingly price competitive mortgage market.
The continued pressure on mortgage margins, combined with our
commitment to paying superior interest rates to savings members,
has resulted in a decline in the net interest margin(3) during the
year.
The substantial increase in strategic investment spend has
resulted in an increased cost to mean asset ratio of 0.50%(4)
(2017: 0.42%). Without this additional investment, the 'run cost'
ratio would have been 0.41%(5) (2017: 0.42%), reflecting the
continued efficiency of our core operations and our focus on
maintaining our low cost advantage.
Each year we retain sufficient profit to maintain our capital
position. Our risk adjusted capital ratio (Common Equity Tier 1)
has been broadly maintained during 2018 at 35.5% (2017: 34.9%). A
summarised Income Statement is set out below.
2018 2017
GBPm GBPm
=========================== ======= =======
Net interest income 425.8 411.0
=========================== ======= =======
Other income (1.2) 5.1
=========================== ======= =======
Losses on derivatives
and hedge accounting (0.3) (0.3)
=========================== ======= =======
Total income 424.3 415.8
=========================== ======= =======
Management expenses (221.7) (167.9)
=========================== ======= =======
Impairment credit/(charge) 0.4 (0.2)
=========================== ======= =======
Provisions - (3.5)
=========================== ======= =======
Charitable donation
to Poppy Appeal (1.4) (1.5)
=========================== ======= =======
Profit before tax 201.6 242.7
=========================== ======= =======
In previous years underlying profit, representing management's
view of underlying performance, was also presented to aid
comparability across reporting periods. As the adjustments to
statutory profit to calculate underlying profit are no longer
material, underlying profit has not been reported.
Net interest income
Net interest income in 2018 was GBP426 million, GBP15 million
higher than in 2017 as a result of growth in the Balance Sheet,
partly offset by a decrease in the net interest margin.
Net interest margin has decreased by six basis points to 0.96%
in the year to 31 December 2018 as we continued to pay above market
rates to savers despite market pressures on mortgage pricing. This
margin has been sufficient to fund expenditure and support
capital.
2018 2017
GBPm GBPm
===================== ====== ======
Net interest income 426 411
===================== ====== ======
Average total assets 44,322 40,434
===================== ====== ======
%%
===================== ====== =====
Net interest margin 0.96 1.02
===================== ====== ======
In 2018, net interest income included a gain of GBP15 million
relating to the sale of a GBP351 million buy to let loan portfolio
which improved net interest margin by three basis points in the
year.
In 2017, net interest margin included a GBP13 million gain
relating to the release of fair value adjustments which arose on
the merger with the Stroud & Swindon Building Society. This
improved net interest margin in 2017 by three basis points.
Our comparatively low net interest margin demonstrates that we
are able to realise value from our strategy to be both low risk and
cost efficient, whilst paying above market rates to members.
We believe it is likely that that there will be a further modest
decrease in the net interest margin in 2019 as a consequence of
continuing pricing pressure in the mortgage market and our
commitment to protect savings rates as far as possible.
Other income
Other income relates to fees and commissions paid and received
by the Society in addition to income from its small number of
investments in equity shares. In 2018, other income was a charge of
GBP1 million, GBP6 million lower than in 2017, as a result of lower
general insurance fee income and the inclusion in 2017 of a GBP5
million gain on the sale of the Society's equity investment in
Vocalink Holdings Limited.
Other income is not a strategic priority for the Society and is
likely to remain immaterial to our results.
Derivatives and hedge accounting
The Society uses derivative financial instruments solely for
risk management.
Income statement volatility arises as a result of the hedge
accounting rules. This volatility is largely timing and does not
reflect the economic reality of the hedge.
Management expenses
Management expenses increased to GBP222 million (2017: GBP168
million) reflecting a GBP41 million increase in strategic
investment spend compared to 2017 which we consider to be a
reasonable benchmark year. In addition to this there has been a
GBP13 million increase in business as usual run costs to support
growth.
During the year we have invested in change programmes such as
upgrading digital, print and telephony capabilities and
implementing new regulation such as the Payment Services Directive
requirements. The increase in strategic spend over 2017 reflects
three key investments:
-- Branch redesign: seven branches, or 10% of our total estate,
have been remodeled as planned during the year. The redesign is
proving popular with members and branch colleagues alike. In 2019
we will continue to roll out the new design to further
branches.
-- Enhanced data infrastructure: good progress has been made on
the project to enhance the Society's data centres capability, with
the first migrations taking place during 2018 in line with
plans.
-- Core technology platform upgrade: during 2018, we progressed
detailed design and analysis for the work to upgrade our core
technology platform. The analysis has identified that if we want to
maintain and increase service flexibility this programme is likely
to be a bigger endeavour for the Society than originally indicated
and we are currently reviewing options to deliver on our objectives
whilst reducing the cost and risk of the upgrade. The replanning
has been recorded as an operational risk event and we have shown
our performance against the investment programme delivery measure
as below target for variable pay purposes, underlining the
conservative risk tolerance and prudence of the Society.
Taken together, these programmes represent a substantial
investment in ensuring we remain able to meet members' future needs
and we expect investment costs to remain significant in 2019.
The increase in business as usual run costs of GBP13 million
largely related to employee wage inflation, a 7% increase in
headcount to support business growth and the increased cost of
running the Society's IT systems reflecting both rising regulatory
requirements and customer expectations.
As a result of the substantial strategic investment spend, the
Society's cost to mean asset ratio has increased to 0.50%(4) (2017:
0.42%). The business as usual ratio (without the increase in
strategic investment) was stable at 0.41%(5) (2017: 0.42%).
For over 10 years the Society has achieved the lowest reported
cost to mean asset ratio in the UK building society sector,
reflecting a consistent focus on spending members' money wisely. We
expect to maintain our low cost position even with the planned
additional investment activity. Our ability to manage costs
effectively as we grow continues to represent a significant
competitive advantage.
Arrears and impairment charge
2018 saw continued low impairments and a reduction in arrears.
This reflects our low risk lending which has never included
commercial or second charge lending(6) , and a negligible exposure
to unsecured lending (0.06% of total loan book in 2018).
There was an impairment credit of GBP0.4 million in 2018 (2017:
GBP0.2 million charge). This impairment credit reflects an
improving arrears position and continuing favourable economic
conditions. The UK economy has seen continued moderate house price
growth overall, falling unemployment and prolonged low interest
rates. IFRS 9, which we implemented on 1 January 2018, requires us
to factor forward looking assumptions into impairment provisions.
In light of uncertainty over Brexit and the wider global economy,
we have moderated our views of forward looking economic scenarios
and increased the weighting of our downside IFRS 9 scenario. This
increased our impairment provision by GBP1 million, which is
included in the GBP0.4 million credit.
Impairment losses before recoveries in the year were GBP2.1
million (2017: GBP1.9 million) and total impairment provisions at
31 December 2018 of GBP11.6 million represent 5.5 years loss
coverage. In 2017, impairment provisions included GBP2.5 million
relating to a very small number of specific cases which have been
positively resolved in the year. Provisions at 31 December 2017,
excluding these cases, represented 5.8 years loss coverage.
The impact of implementing IFRS 9 has not been significant for
the Society, as a result of our high credit quality, low risk
mortgage lending and the favourable economic conditions. The IFRS 9
impairment provision on loans and advances to customers on 1
January 2018 was GBP0.1 million less than the reported IAS 39
impairment provision at 31 December 2017. In addition, the impact
of IFRS 9 transition on regulatory capital is negligible.
IFRS 9 requires the loan book to be split into 'stages' which
identify whether the loan quality is performing (stage 1),
deteriorating (stage 2) or in default (stage 3). At 31 December
2018, over 96% of our loans were performing and 2.9% of loans were
classified as stage 2 (deteriorating). Of the loans in stage 2,
which broadly represent loans that do not meet our current very
prudent underwriting standards, all but GBP86 million (or just 0.2%
of all loans) were paid up to date at the year end. Only 0.5% or
GBP209 million of loans were classified as stage 3 (default). The
definition of default under IFRS 9 is much wider than the
definition of impaired loans under IAS 39 and only GBP68 million,
less than 0.2% of loans would have been identified as impaired
under IAS 39 (2017: GBP79 million, 0.2%).
Provisions
Provisions for liabilities and charges have reduced to GBPnil
(2017: GBP3.5 million) as a result of a GBP1.0 million credit for
Financial Services Compensation Scheme (FSCS) fees and a further
GBP0.5 million credit for other regulatory provisions offset by a
GBP1.5 million increase in the provision for Payment Protection
Insurance (PPI) ahead of the claims deadline in 2019.
Charitable donation to the Poppy Appeal
The Society donated over GBP1 million to The Royal British
Legion's Poppy Appeal during the year, which is consistent with
2017, bringing the total donated over the Society's 10 year
relationship with the Legion to over GBP16 million.
Taxation
In 2018, the corporation tax charge was GBP46 million (2017:
GBP58 million), an effective tax rate of 22.6% (2017: 23.9%). This
is significantly above the statutory corporation tax rate of 19.0%
(2017: 19.25%) due to a charge of GBP8 million (2017: GBP11
million) in respect of the 8% surcharge on the profits of banking
companies.
Balance sheet
Overview
Mortgage balances and liquidity have grown during the year by
GBP3.4 billion and GBP0.2 billion respectively. This was funded by
increases in retail and wholesale funding of GBP2.3 billion and
GBP1.2 billion respectively.
2018 2017
GBPm GBPm
========================= ======== ========
Assets
========================= ======== ========
Loans and advances
to customers 39,264.6 35,930.9
========================= ======== ========
Liquidity 6,401.9 6,209.5
========================= ======== ========
Other 404.4 432.1
========================= ======== ========
Total assets 46,070.9 42,572.5
========================= ======== ========
Liabilities
========================= ======== ========
Retail funding 33,281.6 31,035.7
========================= ======== ========
Wholesale funding 10,313.7 9,127.3
========================= ======== ========
Subordinated liabilities
and
subscribed capital 67.1 67.1
========================= ======== ========
Other 288.1 366.4
========================= ======== ========
Total liabilities 43,950.5 40,596.5
========================= ======== ========
Equity
========================= ======== ========
General reserve 1,693.5 1,553.1
========================= ======== ========
Other equity instruments 396.9 396.9
========================= ======== ========
Other 30.0 26.0
========================= ======== ========
Total equity 2,120.4 1,976.0
========================= ======== ========
Total liabilities
and equity 46,070.9 42,572.5
========================= ======== ========
Loans and advances to customers
Our lending strategy remains focused on high quality, low loan
to value loans within the prime residential market. These loans are
primarily distributed through third party intermediaries, giving
the Society a regionally diverse mortgage portfolio in a
cost-effective manner.
In 2018, we advanced GBP8.9 billion of mortgages, (2017: GBP8.6
billion) and mortgage balances grew by GBP3.4 billion (2017: GBP3.0
billion) increasing our market share of stock to 2.8%7 (2017:
2.6%). The year-on-year growth in mortgages of 9.3% was
significantly above mortgage market growth of 3.0%(7) .
New lending continued to be supported by strong remortgage
levels overall, with buy to let remortgages at 77% (2017: 79%) of
new buy to let lending. New lending for owner-occupier house
purchases was resilient at 55% of owner-occupier lending (2017:
53%).
The balance weighted indexed loan to value of the mortgage book
at 31 December 2018 was broadly unchanged at 54.6% (2017: 53.9%).
Arrears continued to improve, remaining significantly better than
the industry as a whole. As at 31 December 2018, 0.10% of mortgage
balances were 2.5% or more in arrears (2017: 0.13%) compared to the
latest available industry average of 0.74%(8) .
Our performance in 2018 continued our strategy of sustainable
growth without increasing our very low risk lending profile. We
continue to support members in owning their homes; a robust
performance despite the price competitive mortgage market
throughout the year.
Liquidity
On-balance sheet liquid assets have remained broadly stable at
GBP6.4 billion (2017: GBP6.2 billion). The Liquidity Coverage Ratio
(LCR) at 31 December 2018 was 202% (2017: 208%), considerably above
the minimum regulatory requirement.
Liquid assets are held in deposits at the Bank of England and UK
Government investment securities. This means that asset quality
remains very high with 95% of the portfolio rated Aaa-Aa3 (2017:
96%). 98% of liquid assets are held in UK sovereign or UK financial
institutions (2017: 99%).
Included in liquid assets are GBP0.9 billion of assets held at
Fair value through other comprehensive income (FVOCI) as they are
held to collect cash flows and to sell as appropriate. FVOCI assets
are marked to market with any changes in fair value recorded
through other comprehensive income. As at 31 December 2018, the
balance on the FVOCI reserve was a GBP6 million gain, net of tax
(2017: GBP6 million gain, net of tax(9) ).
Retail funding
Retail savings increased in the year by GBP2.3 billion to
GBP33.3 billion (2017: GBP31.0 billion), representing growth of
7.2%, compared to market growth of 2.8%(7) . The Society's savings
market share increased to 2.5%7 (2017: 2.4%).
The Society has continued to support the cash ISA market with
competitive rates of interest, increasing our share of this market
to 5.4%7 (2017: 5.1%).
We opened over 176,000 new savings accounts in the year (2017:
145,000), with over 84% of mortgage loans funded by retail savings
(2017: 86%).
The growth in savings reflects the quality of our products and
service and the superior interest rates we pay compared to the
market average. We are focused on providing superior returns to
savers as far as we can despite the availability of cheaper funding
from wholesale markets. In 2018, our interest rates meant that we
returned GBP227(1) million of value to savings members compared to
market average rates, an increase of 8% on 2017 (GBP210
million).
Wholesale funding
We use wholesale funding to make our funding more diverse. This
reduces risk and also lowers the overall cost of funding, both of
which benefit members.
In 2018, we issued the first five year covered bond in the UK
which was linked to SONIA(10) , raising GBP500 million of funding.
This, combined with Term Funding Scheme (TFS) drawdowns of GBP1.3
billion, increased on-balance sheet wholesale funding to GBP10.3
billion (2017: GBP9.1 billion) net of a GBP750 million covered bond
maturity in April 2018.
Equity
It is important for us to grow equity to provide the capital we
need to support growth.
The Society's equity is predominantly made up of its general
reserve and Additional Tier 1 capital. The Society's total equity
increased by GBP0.1 billion to GBP2.1 billion, reflecting retained
profits generated during the year.
Regulatory capital
We hold capital to protect members against future losses. As we
grow our mortgage book the amount of capital we need to hold to
meet the Capital Requirements Directive (CRD) IV increases.
The Society's CRD IV capital position(11) as at 31 December 2018
is summarised below. During the year capital available for CET 1 or
'capital resources' increased by GBP143 million, primarily driven
by profit after tax of GBP156 million.
Despite mortgage growth of 9.3%, our risk based capital
requirements, or risk weighted assets, have only increased by 8.0%
as a result of book quality improvements reflecting an increase in
house prices and lower arrears.
The net impact is that our Common Equity Tier 1 (CET 1) ratio
has been maintained at 35.5% (2017: 34.9%).
We are not currently bound by regulatory leverage ratios but we
monitor leverage ratios on both a CRR(12) and UK basis. The UK
ratio differs from the CRR basis in that it includes a restriction
on the amount of Additional Tier 1 capital that can be included in
leverage capital and excludes central bank reserves from leverage
exposure.
Both the CRR and UK leverage ratios have been maintained at 4.2%
and 4.6% respectively (2017: 4.3% and 4.6% respectively). This is
because the increase in available capital was matched by the
increase in leverage ratio exposures (non-risk based) largely
driven by growth in the mortgage book.
End-point End-point
31 Dec 31 Dec
2018 2017
GBPm GBPm
======================= ========== ==========
Capital resources:
======================= ========== ==========
Common Equity Tier
1
(CET 1) capital 1,614.8 1,471.6
======================= ========== ==========
Total Tier 1 capital 2,011.7 1,868.5
======================= ========== ==========
Total capital 2,011.7 1,910.0
======================= ========== ==========
Risk weighted assets 4,548.5 4,213.1
======================= ========== ==========
Capital and leverage
ratios: % %
======================= ========== ==========
Common Equity Tier
1
(CET 1) ratio 35.5 34.9
======================= ========== ==========
CRR leverage ratio(1) 4.2 4.3
======================= ========== ==========
UK leverage ratio(2) 4.6 4.6
======================= ========== ==========
1. The CRR leverage ratio is calculated in accordance with the
definitions of CRD IV as amended by the European Commission
delegated regulation.
2. The UK leverage ratio includes a restriction on the amount of
Additional Tier 1 capital and excludes central bank reserves from
the calculation of leverage exposures.
The PRA provides the Society with a Total Capital Requirement
(TCR). In 2018, the Society was issued with a TCR, equating to
11.2% of risk weighted assets, or GBP511 million. This sets the
minimum capital which the Society must hold under Pillar 1 and
Pillar 2A requirements and is driven by both Balance Sheet growth
and risk factors determined by the PRA. The Society comfortably
meets this requirement using CET 1 capital alone.
Change of auditor
During 2018, we have completed a tender process for our external
audit. This is in line with the regulatory requirement to change
our current auditor, Ernst & Young LLP, no later than 2020. We
propose to appoint PricewaterhouseCoopers LLP as auditor for the
2019 year end, subject to member approval at our AGM.
Outlook
This section considers the top and emerging risks which could
impact the Society's financial outlook.
The Society significantly increased its spend on strategic
investment programmes in 2018. These programmes are more far
reaching than any that the Society has undertaken previously and
increase execution and cost risks. We are strengthening our risk
management processes for change management programmes which will
ensure change is both delivered safely, without disruption to core
operations, and within expectations. These control processes
include detailed feasibility work and testing before change is made
and a focus on looking for options which reduce execution and cost
risk. We are satisfied that we have set appropriate investment
budgets within our Strategic Plan.
During 2018, we saw continued political and economic uncertainty
coupled with modest economic growth. Against this backdrop, the
Society has delivered a robust financial performance - continuing
to grow mortgages and savings balances at a rate that exceeds the
market.
Brexit, along with concerns about the global economy, has a
limited direct impact on us outside of wholesale funding. However,
the wider economic consequences will impact the Society. These
impacts may result in a decline in consumer confidence and the
extension of the low interest rate environment.
A persistent low interest rate can make it difficult to deliver
attractive rates to savers whilst providing sufficient margin.
During 2018, the Society has again delivered above market interest
rates to savers whilst maintaining capital strength and providing
good value mortgages. Our funding plans are kept under review and
our track record of attracting both retail savings and well-priced
wholesale funding means that we are well positioned to manage
potential risks in this area.
We are expecting to enter a period of lower house price
inflation and have already seen house price falls in parts of the
London market. The Society's mortgage book is geographically spread
which helps mitigate risk from a fall in London house prices. More
importantly, the low risk lending policy and low loan to value of
the mortgage book means that we expect to remain resilient to house
price reductions. Our IFRS 9 analysis indicates that even if we
calculated future expected credit losses on the basis of our most
severe downside economic scenario, in line with the Bank of England
stress tests, the impact on year end provisions would only be an
incremental charge of GBP14 million.
The competitive mortgage market, coupled with potential for
increased wholesale funding costs, means that we believe it is
likely that there will be a further modest decrease in net interest
margin.
Whilst the level of uncertainty and range of potential near-term
economic outcomes has significantly increased, as a building
society, without share price considerations to respond to, we can
and do take a long-term view. We believe the fundamentals of the UK
mortgage and savings market remain strong in the medium and
long-term and we expect a continued demand for the good value,
straightforward mortgages and savings products that the Society
provides.
Our track record, together with cost-effective nationwide
distribution and robust underwriting, gives us confidence that we
can continue to grow without increasing the risk profile of our
lending. This allows us to invest in building future service
capability and resilience whilst delivering long-term value to
members.
1. Based on the Society's average month end savings rate
compared to the Bank of England average rate for household
interest-bearing deposits on the Society's mix of products.
2. Costs excluding the increase in strategic investment costs
compared to 2017.
3. Net interest income/Average total assets.
4. Administrative expenses, depreciation and
amortisation/Average total assets.
5. Administrative expenses, depreciation and amortisation less
increase in strategic investment costs compared to 2017/Average
total assets.
6. Other than as a result of small books acquired as part of the
merger with Stroud & Swindon Building Society in 2010.
7. Source: Bank of England
8. Source: Prudential Regulation Authority - latest available
information at 30 September 2018.
9. Previous reporting periods this represented the
Available-for-sale reserve.
10. Sterling Overnight Index Average.
11. Excluding any IFRS 9 transitional provisions which were
negligible.
12. Capital Requirements Regulations.
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 SEIEFAFUSEIE
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