TIDMCVBP
RNS Number : 4248E
Coventry Building Society
28 February 2020
28 February 2020
COVENTRY BUILDING SOCIETY REPORTS 2019 RESULTS
Coventry Building Society has today announced its results for
the year ended 31 December 2019. Highlights include:
-- Providing value to members: Our average savings rate in 2019
was 1.49% compared with a market average of 0.84%. This represents
value returned to members of GBP228 million(1) (2018: GBP227
million).
-- Delivering growth in mortgages: Mortgage assets increased by
GBP3.0 billion to GBP42.2 billion, representing growth of 8%, more
than twice the rate of the market (2) .
-- Delivering growth in savings: Savings deposit balances grew
by GBP2.9 billion to GBP36.2 billion, representing growth of 9%,
more than twice the rate of the market (2) .
-- Providing excellent service: We work hard to sustain and
improve the service we provide to members. We measure this using
the common metric of Net Promoter Score(3) and in 2019 we
maintained a very high score of +74 (2018: +75), representing a
strong endorsement from our members.
-- Being safe and secure: We are a low risk lender, which
protects both individual borrowers and the Society. During the
year, mortgage arrears fell and were only an eighth of the industry
average(4) .
-- Maintaining capital strength: Common Equity Tier 1 ratio
remained strong at 32% which is amongst the highest in the sector.
Leverage ratio was also maintained at over 4%.
-- Spending money carefully: Our cost to mean assets ratio of
0.48%(5) (2018: 0.50%) remains one of the lowest in the sector.
During 2019 we have continued our strategic investment programmes
which improve our technology infrastructure and branch network. Our
operational cost to mean assets ratio, which does not include
change and depreciation, was 0.31%(6) (2018: 0.32%).
-- Leading colleague engagement: Excellent service is delivered
by our colleagues, who are proud to Put Members First. We have
recently been ranked second in The Sunday Times 25 Best Big
Companies to Work For list.
-- Supporting local communities: In 2019, 82% 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:
This is my last review before retiring as Chief Executive of the
Society. I feel privileged and proud to have led an organisation
that is different, and that makes a difference.
Throughout the last five years, we have maintained our mission
of Putting Members First and pursued this through a consistent
strategy. We have assessed our performance against that strategy
through a balanced scorecard with no single component more
important than another, and we have set ourselves ambitious
goals.
It is against this scorecard that I am pleased to report further
good results for 2019. We are a growing business, with more members
joining us than leaving. In 2019, we grew well above the market as
a whole again. We grew our mortgage balances by 8% (2018: 9%),
compared with market growth of 3%(2) , and our savings balances by
9% (2018: 7%) against market growth of 4%(2) .
Growth in mortgages was achieved in a highly competitive market,
with borrowers actively switching at the end of fixed rate deals.
Across the market this has led to borrowers moving from higher
margin deals written two or more years ago to lower rates. In
addition, there continues to be a move from higher margin Standard
Variable Rates (SVR). These factors result in a continuation of the
squeeze in overall margin seen in recent years. We benefit from
high levels of retention, reflecting our proposition which includes
making all products available to all customers, high levels of
borrower and broker satisfaction, and the fact that we have a low
proportion of borrowers on SVR.
This mortgage margin squeeze and low base rate have seen savings
providers lowering rates still further through 2019. Against this
background our average savings rate was 1.49% (2018: 1.50%),
significantly above the market average rate of 0.84%(1) (2018:
0.78%). As a result our savings members received GBP228 millon(1)
(2018: GBP227 million) more interest than they would have received
at average market rates.
Delivering superior value is only part of our commitment of
Putting Members First. We believe it has to be underpinned by
excellent service and simple, transparent products that deliver
good outcomes for all our members.
In 2019, we continued to receive external recognition for both
our mortgages and savings products, with Fairer Finance ranking us
number one for savings for the fourth year running, being rated
highest for transparency as part of this. We were also one of only
three providers to be recognised by Which? as a Recommended
Provider for Mortgages.
Our overall Experience Net Promoter Score(3) at +74 remained
very high. At the same time, our Relationship Net Promoter Score,
which reflects wider perception of our brand and propositions,
reached its highest ever level and is among the very best of our
peers. Furthermore, in 2019, fewer complaints were referred to the
Financial Ombudsman Service and 97% of these cases were found in
our favour, indicating that we had treated our member's complaints
fairly. This position is among the very best in the sector(7) .
A key part of our strategy is investing in our future to deliver
the savings and mortgage products our members will need. In 2019,
we saw further growth in savings on the Hargreaves Lansdown
platform after launching the first easy access product on the
platform.
Reflecting both member feedback and our belief in promoting a
savings habit, we launched a Regular Saver product this year with
account openings exceeding expectations. We took an important
strategic step in simplifying our product range by streamlining our
MoneyManager offering and withdrawing overdrafts and debit cards,
removing the substantial cost and regulatory overhead associated
with the current account market.
We have a number of significant investment programmes in place
to upgrade our core technology platform, enhance our infrastructure
resilience and redesign our branch network. These are complex
programmes which have to be managed well to deliver them safely. I
am delighted that we are successfully delivering our branch
redesign programme in line with expectations, refurbishing 27% of
our branch network in 2019 to excellent feedback from members and
colleagues alike. We have delivered a number of upgrades that
enhance our security and IT resilience and we expect to
substantially complete our data centre programme next year.
However, progress on this and some other IT investment initiatives
has been slower than we planned and we are continuing to enhance
our delivery capability, balancing speed, risk and cost.
Reflecting this investment, our total management expense ratio
was 0.48%(5) , slightly below the 2018 ratio of 0.50%. Our
operational run cost ratio(6) , which excludes both change costs
and depreciation, was 0.31%, also lower than in 2018 (0.32%). These
ratios demonstrate both the scale of the investment we are making
in the future of the business and our commitment to spend our
members' money carefully, which in turn enables us to provide the
superior rates to members I described earlier.
Our financial strategy is focused on being low risk, with strong
capital and low costs, while paying the best rates to members that
we can afford. The average indexed loan to value(8) of our
mortgages of 55% continues to be well below the market average and
our mortgage arrears at 0.08% of total balances are one eighth of
the industry average(4) .
Our liquidity has remained strong throughout the year with a
Liquidity Coverage Ratio of 214% at the 2019 year end (2018: 202%).
In 2019, we delivered profit before tax of GBP147 million which was
27% down on 2018 (GBP202 million). This reflected a one-off gain on
sale of some mortgage assets in 2018, the squeeze on net interest
margin and the impact of volatility in the financial markets on the
fair value of financial instruments used to manage interest risk
exposures.
Despite this fall we have maintained our capital ratios in line
with our financial strategy.
In December 2019, we announced that we needed to correct a part
of our capital calculation. This was disappointing and we are
taking steps to improve our internal controls and systems to
prevent something like this happening again. Despite this, our core
risk based capital ratio (CET 1) remains amongst the highest
reported in the UK at 32.0% (2018: 33.9%)(9) . Our capital strength
is a fundamental part of being safe and secure and we are one of
the most highly capitalised financial institutions in the UK.
As I said at the start, this is my last review as Chief
Executive and I would like to finish by reflecting on the last five
years.
Over this time, the Society has repeatedly grown two to three
times faster than the market, becoming the second largest building
society along the way. This has happened because we have a track
record of providing good pricing to members, supported by a low
cost of operating which is consistently the best in the sector, and
very high and increasing customer satisfaction.
This in turn has been underpinned by our principles of being
simple and transparent. We have remained a low risk lender with
strong risk weighted capital. This approach stands us in good stead
whatever happens in our markets. Finally, we have consistently
supported our wider society, with four out of five of my colleagues
actively engaged with charitable and community causes. All of these
have been strategically deliberate outcomes.
Critically, these outcomes have been delivered by my colleagues
across the Society, who now number over 2,600. It is their passion,
their commitment, their energy and their belief in Putting Members
First that makes us different and makes the difference. We are a
people business and I am delighted to announce we have recently
been ranked second in The Sunday Times 25 Best Big Companies to
Work For list. With this level of colleague engagement I know the
Society is in very good hands for the future.
I am delighted to be passing on the reins of this special
organisation to Steve Hughes and wish him the very best. I thank
our strong Board for the support they have provided me. Above all,
I thank each and every one of my colleagues for their continued
commitment to Putting our Members First.
1. The Society's average month end savings rate compared with
the Bank of England average rate for household interest-bearing
deposits on the Society's mix of products.
2. Source: Bank of England.
3. Net Promoter Score (NPS) is 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. Source: PRA - latest available information September 2019.
Percentage of mortgages in arrears by 2.5% or more.
5. Administrative expenses, depreciation and
amortisation/Average total assets.
6. Administrative expenses less change costs, depreciation and
amortisation/Average total assets.
7. Source: Financial Ombudsman Service latest available
information 1 January 2019 to 30 June 2019.
8. Indexed loan to value weighted by balance.
9. 2018 RWA numbers and CET 1 ratio have been restated. More
information is in the Financial Review below.
Financial Review
We seek to retain only the profit the Society needs to maintain
our capital ratios, whilst investing to improve services and
providing favourable pricing for members. In 2019, we delivered on
this goal, growing mortgage and savings balances ahead of the
overall UK market and investing in the future of the business.
Although, profit before tax has fallen to GBP147 million (2018:
GBP202 million), reflecting two one-off items(1) and a continuation
of falling mortgage market prices, we have maintained a strong
capital position. Despite tighter mortgage margins we returned
GBP228 million of value to savings members(2) , in line with the
GBP227 million we returned in 2018, with average member savings
rates 65 basis points above the market average.
We continued to invest in the business, spending GBP52 million
on strategic change initiatives during the year (2018: GBP54
million). This kept our cost to mean assets ratio elevated at
0.48%(3) (2018: 0.50%), whilst our operational run cost ratio
(excluding change, depreciation and amortisation costs) of 0.31%(4)
(2018: 0.32%) demonstrates our commitment to maintaining a cost
operating model amongst the lowest in the industry.
Income statement
Overview
This year, profits have fallen as a result of two one-off
items(1) , a reduction in margin as a result of a continued drop in
mortgage market pricing, combined with our strategy of paying the
best possible interest rates to members. As a result, we have seen
a decline in net interest income and an increase in costs as we
continued to invest to improve our services.
After taxation and costs related to refinancing and servicing
our AT 1 capital instrument, we added GBP85 million (2018: GBP138
million) to the general reserve. This was sufficient to allow us to
maintain our strong capital position and we expect our risk
adjusted capital ratio (Common Equity Tier 1) to be one of the
strongest in the industry at 32.0% (2018: 33.9%(5) ).
2019 2018
GBPm GBPm
=========================== ======= =======
Interest receivable 1,010.5 976.3
=========================== ======= =======
Interest payable (613.8) (550.5)
=========================== ======= =======
Net interest income 396.7 425.8
=========================== ======= =======
Other income 0.1 (1.2)
=========================== ======= =======
Losses on derivatives
and hedge accounting (17.2) (0.3)
=========================== ======= =======
Total income 379.6 424.3
=========================== ======= =======
Management expenses (229.1) (221.7)
=========================== ======= =======
Impairment (charge)/credit (2.1) 0.4
=========================== ======= =======
Provisions - -
=========================== ======= =======
Charitable donation
to Poppy Appeal (1.2) (1.4)
=========================== ======= =======
Profit before tax 147.2 201.6
=========================== ======= =======
Tax(1) (25.5) (38.6)
=========================== ======= =======
Profit for the year(1) 121.7 163.0
=========================== ======= =======
1. 2018 Tax and Profit for the year have been restated following
changes to IAS 12.
Net interest income
Net interest income has decreased to GBP397 million (2018:
GBP426 million). Interest received in 2018 included a one-off gain
of
GBP15 million relating to the sale of a GBP351 million buy to
let loan portfolio. Excluding this, interest receivable on assets
grew more slowly than asset balances reflecting higher margin
mortgages transferring onto lower margin fixed rate deals as market
pricing continues to fall and as members continue to move away from
Standard Variable Rate (SVR) mortgages. The Society's exposure to
future reductions in SVR income is limited as only 2.0% of its
mortgage book is currently on SVR (2018: 3.0%). In addition, the
liquidity book was increased to protect against Brexit uncertainty
and these assets earn comparatively low levels of interest.
Interest payable increased by more than the growth in the retail
and wholesale funding balances reflecting the Society's commitment
to pay the highest rates it can afford together with a move in the
wholesale funding mix towards more stable, but more expensive, long
term funding.
Net interest margin
Net interest margin has decreased by 13 basis points to 0.83%
with three basis points of the reduction relating to the portfolio
sale in 2018. The remaining reduction reflects the impacts of
market pricing and holding additional liquidity ahead of Brexit
uncertainty as discussed above. This margin has been sufficient to
fund expenditure and support capital.
2019 2018
GBPm GBPm
==================== ====== ======
Net interest income 397 426
==================== ====== ======
Average total
assets 47,801 44,322
==================== ====== ======
%%
==================== ====== =====
Net interest margin 0.83 0.96
==================== ====== ======
Our comparatively low net interest margin demonstrates our
ability to realise value from our strategy to be both low risk and
low cost, whilst paying above market rates to members. We do not
believe that our net interest margin will reduce significantly in
2020.
Derivatives and hedge accounting
The Society uses derivative financial instruments solely for
risk management purposes to manage interest rate and currency risk
arising from its mortgage and savings activity and from
non-sterling, fixed rate wholesale funding. During 2019, there has
been considerable market volatility impacting swap valuations.
Whilst the Society's derivative financial instruments have remained
effective in economically hedging risks as they were designed to
do, hedge accounting relief has not been fully obtained, creating
accounting volatility. As a result, losses of GBP17 million have
been recognised in the year (2018: GBP0.3 million loss).
These losses represent timing differences and are expected to
reverse over the remaining life of the derivatives and do not
reflect the economic reality of the hedge.
Management expenses
Our strategic investment programmes continued to progress during
2019 and overall management expenses have increased by
GBP7 million or 3%, well below the 8% growth in the Society's
assets, resulting in a reduction in our cost to mean assets ratio
to 0.48%(3) (2018: 0.50%).
Our day to day operating cost ratio, excluding both the costs of
change and depreciation, was 0.31%(4) (2018: 0.32%), demonstrating
our continued focus on maintaining a low cost operating model.
Day to day operating costs increased by 2%, or GBP3 million, to
GBP149 million (2018: GBP146 million), principally the result of
salary and cost inflation and higher IT costs as change programmes
deliver. GBP3.9 million of cost previously recognised in property
costs have been reclassified as depreciation from 1 January 2019 as
a result of the adoption of IFRS 16 Leases, partially offsetting
cost inflation.
Spending on our strategic investment programmes continued in
2019, with costs largely in line with 2018. Investment activity has
focused on four principal areas:
-- Branch redesign: 19 branches, or 27% of our total estate,
have been remodelled as planned during the year, bringing the total
number of branches refurbished to 26 (37%). This programme will
continue through 2020 and 2021.
-- Enhanced technology infrastructure: this programme continues
to progress, with migrations to both cloud and co-located data
centres taking place. The remaining migrations are expected to
complete during 2020, ahead of the project closing in 2021.
-- Core technology platform upgrade: the re-plan activity
reported at the end of 2018 progressed during the first half of
2019, resulting in a more modular and lower risk programme of
activity which will see this programme of works continue over a
number of years.
-- Regulatory change: these programmes are focused on ensuring
the Society continues to comply with new regulatory obligations.
This includes the development of new online authentication
solutions required by the Payment Services Regulations 2017.
The Society's major change programmes extend over our five year
strategic planning horizon and we expect to maintain an elevated
level of investment over this period. The action we have taken to
ensure that change execution risks are appropriately mitigated
means that activity in some areas has been rescheduled, resulting
in broadly stable change costs compared to 2018.
Remaining a low cost operation is key to the Society's strategy,
enabling us to provide better value to our members. For some time,
we have enjoyed one of the lowest cost to mean asset ratios in the
UK building society sector and the competitive advantage it
provides. We expect to maintain this position despite our ongoing
investment in change delivery.
Arrears and impairment charge
The strong credit performance of the Society's loan books was
maintained in 2019. Impairments continued to be low and arrears
reduced further from historically very low levels. This is a
consequence of our low risk lending which has never included
commercial or second charge lending(6) , and a negligible exposure
to unsecured lending (less than 0.1% of total loan book in
2019).
There was an impairment charge of GBP2.1 million in 2019 (2018:
GBP0.4 million credit). This charge reflects an improvement in
underlying performance offset by the impact of updated expectations
of forward looking performance (required under IFRS 9) and the
application of management prudence to provision levels.
As a result of continued economic and political uncertainty, and
the more subdued HPI profile seen in 2019, we have increased the
weighting given to our most severe economic scenario, and updated
our other forward looking scenarios. We have also raised additional
post model adjustments in relation to potential future losses. The
impact of these overlays has increased our impairment provision by
GBP2.8 million compared to 2018, which is included in the GBP2.1
million charge. In future years we will look to reflect these in
models where possible.
Impairment losses before recoveries in the year were GBP2.7
million (2018: GBP2.1 million) and include an unusually large
single loss of GBP0.4 million. As a result total impairment
provisions at 31 December 2019 of GBP12 million represent 4.4
years' loss coverage (2018: 5.5 years) based on current year
losses. Excluding the unusual loss case, impairment provisions
represent 5.2 years' loss coverage.
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). The split of the
Society's loan book by stage has been maintained during the year,
with 97% of our loans assessed as performing at 31 December 2019
(2018: 97%).
Loans which are in stage 2 are those loans which do not meet our
current, very prudent, underwriting standards. 3% of the loan book
was in this stage at the year end (2018: 3%), although all but
GBP94 million were fully paid up to date.
A further 0.5% of loans were classified as in default. This
includes loans which are three months or more in arrears, or have
other risk factors associated with them. A total of GBP80 million
of these loans were up to date at the year end. Provision coverage
as a percentage of stage 3 loans rose to 6.1% in the year (2018:
5.6%).
Provisions
There is no charge for provisions for liabilities in line with
2018. We received an increase in PPI claims ahead of the August
deadline, but have not needed to raise any additional provisions to
cover PPI settlements.
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
2018, bringing the total donated over the Society's relationship
with the Legion to almost GBP18 million.
Taxation
In 2019, the corporation tax charge was GBP26 million (2018:
GBP39 million(7) ), an effective tax rate of 17% (2018:19%).
This is below the statutory corporation tax rate of 19% (2018:
19%) due to changes to IAS 12 in respect of tax deductions for
distributions to holders of the Society's AT 1 instruments of GBP7
million (2018: GBP7 million) previously shown within Members
interests and equity(7) . This is partly offset by a charge of GBP3
million (2018: GBP8 million) for the 8% surcharge on the profits of
banking companies.
Balance Sheet
Overview
Mortgage balances and liquidity have grown during the year by
GBP3.0 billion and GBP0.5 billion respectively. Mortgage growth was
funded by growth in savings balances.
A summarised Balance Sheet is set out below:
2019 2018
GBPm GBPm
========================= ======== ========
Assets
========================= ======== ========
Loans and advances to
customers 42,234.7 39,264.6
========================= ======== ========
Liquidity 6,854.7 6,401.9
========================= ======== ========
Other 441.4 404.4
========================= ======== ========
Total assets 49,530.8 46,070.9
========================= ======== ========
Liabilities
========================= ======== ========
Retail funding 36,238.1 33,281.6
========================= ======== ========
Wholesale funding 10,605.4 10,313.7
========================= ======== ========
Subordinated liabilities
and
subscribed capital 67.1 67.1
========================= ======== ========
Other 417.4 288.1
========================= ======== ========
Total liabilities 47,328.0 43,950.5
========================= ======== ========
Equity
========================= ======== ========
General reserve 1,773.3 1,693.5
========================= ======== ========
Other equity instruments 415.0 396.9
========================= ======== ========
Other 14.5 30.0
========================= ======== ========
Total equity 2,202.8 2,120.4
========================= ======== ========
Total liabilities and
equity 49,530.8 46,070.9
========================= ======== ========
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 2019, we advanced GBP8.6 billion of mortgages (2018: GBP8.9
billion) and mortgage balances grew by GBP3.0 billion (2018: GBP3.4
billion) increasing our market share of stock to 2.9%(8) (2018:
2.8%). The year on year growth in mortgages of 7.6% was
significantly above mortgage market growth of 3.1%(8) .
New lending continued to be supported by strong remortgage
levels overall. 75% of new buy to let loans (2018: 77%) and 46% of
new owner occupier loans were remortgages (2018: 42%). Owner
occupier loan growth increased relative to buy to let with 67% of
total new lending being in the owner occupier market (2018:
57%).
The balance weighted indexed loan to value of the mortgage book
at 31 December 2019 increased marginally to 55.4% (2018: 54.6%).
Arrears continued to improve, remaining significantly better than
the industry as a whole. As at 31 December 2019, 0.08% of mortgage
balances were 2.5% or more in arrears (2018: 0.10%) compared with
the latest available industry average of 0.67%(9) . Possessions and
forbearance both remained low with 33 cases in possession at the
year end (2018: 34) and forbearance levels down by 18% year on year
in value terms and 20% in number of cases.
In 2019 we continued our strategy of sustainable growth without
extending our very low risk lending profile, and this delivered a
robust performance despite the competitive mortgage market
throughout the year.
Liquidity
On-balance sheet liquid assets have increased to GBP6.9 billion
(2018: GBP6.4 billion) as we maintained a prudent buffer given the
uncertain economic backdrop. The Liquidity Coverage Ratio (LCR)
continued to be very strong at 214% (2018: 202%), considerably
above the minimum regulatory requirement.
Liquid assets are principally held in deposits at the Bank of
England and UK Government investment securities. This means that
asset quality remains very high with 96% of the portfolio rated
Aaa-Aa3 (2018: 95%). 99% of liquid assets are held in UK sovereign
or UK financial institutions (2018: 98%).
Included in liquid assets are GBP1.3 billion of assets held at
fair value through other comprehensive income (FVOCI). As at
31 December 2019, the balance on the FVOCI reserve was a GBP4
million gain, net of tax (2018: GBP6 million gain, net of tax).
Retail funding
Retail savings increased in the year by GBP2.9 billion to
GBP36.2 billion (2018: GBP33.3 billion), representing growth of
8.9%, compared with market growth of 4.1%(2) . The Society's
savings market share increased to 2.6% (2018: 2.5%).
The Society has continued to support the cash ISA market
increasing our share of this market to 6.3% (2018: 5.4%).
In 2019 we supported our growth in savings by partnering with
Hargreaves Lansdown to be the first provider of an easy access
savings account on its Active Savings platform and increased our
own savings product range to include a regular saver product.
We opened over 330,000 new savings accounts in the year (2018:
176,000), with over 86% of mortgage loans now funded by retail
savings (2018: 84%).
The growth in savings reflects the quality of our products and
service and the superior interest rates we pay compared with the
market average. We are focused on providing superior returns to
savers for as long as we can despite market back book rates
remaining suppressed. In 2019, this meant that we returned
GBP228(2) million of value to savings members compared with market
average rates, broadly in line with 2018 (GBP227 million), the
equivalent of 0.48% of net interest margin returned to members
(2018: 0.51%).
Wholesale funding
We use wholesale funding to make our funding more diverse. This
reduces risk and lowers the overall cost of funding, both of which
benefit members.
In 2019, we issued total wholesale funding of GBP1.65 billion
including a EUR500 million covered bond, GBP525 million bilateral
funding arrangements and a GBP400 million unsecured funding which,
net of maturities and a reduction in short term funding, resulted
in an increase in wholesale funding of GBP0.3 billion to GBP10.6
billion (2018: GBP10.3 billion). Included in wholesale funding
balances is
GBP4.25 billion of funding under the Term Funding Scheme (2018:
GBP4.25 billion). These funds are repayable over 2021 and 2022 and
our plans to refinance these amounts are well advanced and include
further diversification of funding sources and instruments.
Equity
It is important to increase equity in order to provide the
capital we need to support future investment and growth.
The Society's equity is predominantly made up of its general
reserve and AT 1 capital. The Society's total equity increased
by
GBP0.1 billion to GBP2.2 billion, reflecting retained profits
generated during the year and a modest increase in AT 1
capital.
In March, the tender for the 2014 AT 1 resulted in the
repurchase of GBP385 million of the GBP400 million AT 1 capital
instruments. At the same time, we issued a further GBP415 million
of new instruments, with a first call date of 2024, and in
November, the remaining
GBP15 million of the 2014 AT 1 was called bringing total AT 1 to
GBP415 million (2018: GBP397 million).
Pension fund
In 2019 we took steps to transfer the defined benefit pension
fund to a Master Trust operated by TPT Retirement Solutions. This
secures ongoing professional trustees and provides the fund with
access to enhanced buying power and investment management
capability. The Society's aim for the pension fund is for it to
reach self sufficiency in the medium term which benefits members of
the pension fund whilst reducing risk for the Society and improving
capital efficiency.
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(10) as at 31 December 2019
is summarised below. During the year capital available for CET 1 or
'capital resources' increased by GBP76 million, primarily driven by
profit after tax of GBP122 million.
In December the Society announced a correction to its
calculation of risk weighted assets (RWAs) caused by the 6% scalar
not being applied to the core IRB model outputs. This resulted in a
GBP212 million increase in risk weighted assets and a corresponding
reduction in the CET 1 ratio of 1.6% to 33.9% as at 31 December
2018. We have presented the 2018 CET 1 ratio and RWAs at the
corrected amount throughout this review.
During 2019, the underlying RWAs increased by 11% which was
driven by mortgage growth of 8% and a marginal increase in the loan
to value of mortgages.
The net impact of this is that our CET 1 ratio reduced slightly
to 32.0% (2018: 33.9%). We expect this to continue to be among the
highest reported in the UK.
We are not currently bound by regulatory leverage ratios but we
monitor leverage ratios on both a CRR(11) and UK basis. The UK
ratio differs from the CRR basis in that it includes a restriction
on the amount of AT 1 capital that can be included in leverage
capital and excludes central bank claims with a maturity less than
three months from leverage exposure.
Both the CRR and UK leverage ratios have been broadly maintained
at 4.1% and 4.4% respectively (2018: 4.2% 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
2019 2018
GBPm GBPm
====================== ========== ==========
Capital resources:
====================== ========== ==========
Common Equity
Tier 1 1,691.0 1,614.8
(CET 1) capital
====================== ========== ==========
Total Tier 1
capital 2,106.0 2,011.7
====================== ========== ==========
Total capital 2,106.0 2,011.7
====================== ========== ==========
Risk weighted
assets(1) 5,283.6 4,760.7
====================== ========== ==========
Capital and leverage
ratios: % %
====================== ========== ==========
Common Equity
Tier 1
(CET 1) ratio(1) 32.0 33.9
====================== ========== ==========
CRR leverage
ratio(2) 4.1 4.2
====================== ========== ==========
UK leverage ratio(3) 4.4 4.6
====================== ========== ==========
1. CET 1 ratio in 2018 is restated following a correction to the
risk weighted asset calculation during 2019.
2. The CRR leverage ratio is calculated in accordance with the
definitions of CRD IV as amended by the European Commission
delegated regulation.
3. 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 Prudential Regulation Authority (PRA) provides the Society
with a Total Capital Requirement (TCR). In 2019, the Society's TCR
equated to 11.2% of RWAs, or GBP590 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.
We are in the process of updating our IRB models used to
calculate RWAs following regulatory changes. Once the Society has
received permission from the PRA these models will be used to
assess RWAs and therefore the CET 1 ratio. We expect the impact of
their adoption to be a very modest decrease in the CET 1 ratio as
our current model is already a hybrid model which reflects a degree
of 'through the cycle' assessment.
In addition, from 2022, Basel IV RWA floors are being phased in
and will reduce the Society's reported CET 1 ratio further, as they
do not give full credit for our very low risk mortgage book. We
currently expect the end point CET 1 ratio on full transition in
2027 to be approximately 17%.
1. One off items were a GBP15 million gain on sale of a mortgage
portfolio in 2018 and significant hedge accounting volatility
(GBP17.2 million) in 2019.
2. The Society's average month end savings rate compared with
the Bank of England average rate for household interest bearing
deposits on the Society's mix of products.
3. Administrative expenses, depreciation and
amortisation/Average total assets.
4. Administrative expenses less change costs, depreciation and
amortisation/Average total assets.
5. CET 1 ratio in 2018 is restated following a correction to the
risk weighted asset calculation during 2019.
6. Other than as a result of small books acquired as part of the
merger with Stroud & Swindon Building Society in 2010.
7. 2018 corporation tax charge has been restated following
amendments to IAS 12 changing the location of recognition of tax
credits from Equity to Income Statement.
8. Source: Bank of England, household sector.
9. Source: Prudential Regulation Authority - latest available
information at 30 September 2019.
10. Excluding any IFRS 9 transitional provisions which were
negligible.
11. Capital Requirements Regulation.
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 SEUEDWESSESE
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