TIDMCVBP
RNS Number : 7847C
Coventry Building Society
25 February 2022
25 February 2022
Coventry Building Society delivers a strong performance, growing
its mortgage market share, whilst maintaining excellent service to
customers and investing for the future.
Commenting on these results, Steve Hughes, Chief Executive of
Coventry Building Society, said:
We delivered a strong financial performance and made good
progress against our strategic goals. This performance reflects an
exceptional commitment to members and customers by my colleagues
across the Society and I am so proud of what they have delivered.
We continue to focus on running the Society in the long-term
interest of our members and ensuring that we are set up for
long-term success.
Strong growth in savings and mortgages
-- Mortgage balances grew by GBP3.1bn (7.2%) to GBP46.6bn ,
significantly above the level of market growth(1) and doubling the
number of first time buyers to 7,100.
-- Savings balances grew by GBP1.7bn (4.6%) to GBP39.9bn with
the average savings rate of 0.83%, 0.56% higher than the market
average(2) , and the equivalent of an additional GBP201m interest
for savers.
Sustainable profitability and resilient capital and liquidity
position
-- Profit before tax of GBP233m (2020: GBP124m). Profitability
recovered from 2020 levels driven by balance sheet growth, improved
margin and supported by the release of GBP29m of pandemic related
provisions held to cover potential future credit losses.
-- Net Interest Margin of 0.90% (2020: 0.81%). 1.03% excluding
an adjustment of GBP69m relating to updated assumptions for future
SVR income.
-- Common Equity Tier 1 (CET 1) ratio remains well above
statutory requirements at 36.2% whilst the Society's Leverage Ratio
on a UK modified basis increased to 4.8%. The Liquidity Coverage
Ratio of 187% is also considerably above the regulatory minimum
requirement.
Excellent service while investing to meet the changing needs of
members and stakeholders
-- Excellent customer service with Experience Net Promoter
Score(3) of +76 and average call waiting times of 49 seconds during
a period of exceptional demand. The Society continues to report one
of the lowest complaint overturn rates by the Financial Ombudsman
Service at below 5%.
-- Leading cost efficiency with a cost to mean asset ratio of
0.50%(4) amongst the lowest of any UK building society and a cost
to income ratio of 56%(5) , whilst investing GBP96 million in 2021
in technology infrastructure, digital services and transforming our
branch network.
-- Strong community investment of GBP1.6m(6) tackling three
priority issues around homelessness, helping young people acquire
the financial skills and knowledge on which to base good careers,
and social isolation.
-- Responding to climate change. The Society signed up to the UN
Global Compact, transitioned to 100% renewable sources of energy,
and achieved net zero for its Scope 2 emissions and carbon
neutrality for Scope 1.
Chief Executive's review
Adapting to change
2021 has again been a year of significant change and continued
uncertainty. The early predictions that suggested a global pandemic
may take some years to work through look increasingly accurate, and
we have continued to adjust to new ways of working. It has been a
catalyst for change in many ways as people have altered their
aspirations and expectations for the way they want to live and
work.
Change brings challenge and opportunity, of course. The first
six months of 2021 saw a buoyant mortgage market as the impact of
the stamp duty holiday aligned with people's desire for homes with
more indoor and outdoor space, which didn't need to be close to
work. I am very proud of the way my colleagues, the majority
working remotely, stepped up and delivered fantastic service to
brokers and members during these months. Together we delivered
record volumes of mortgage applications and completions.
We also felt the challenge of the low interest rate environment.
With more uncertainty and fewer opportunities to spend on
entertainment and socialising, many households accumulated higher
savings in non-interest earning current accounts. This excess
funding, concentrated in the high street banks, resulted in
significant competitive pressure in the mortgage market in the
latter half of the year and I expect this to continue into 2022. It
is clearly a tough time for savers and we continue to pay the best
rates we can whilst maintaining the Society's financial resilience
and balancing the long-term needs of all our members.
The change caused by the pandemic extends to our own ways of
working. Our priority has been people's safety and wellbeing, and I
would like to thank everyone - colleagues and members alike - who
helped keep each other safe with no interruption to our excellent
service throughout this year.
We have adapted to 'hybrid working', learning how to balance the
benefits of increased working from home with those of working
collaboratively in the office. This will continue to evolve as the
pandemic declines. However, I believe that the progress we're
making on our digital journey, the developments to our brand, our
accreditation as a 'Great Place to Work' and the stride forward on
our Environment, Social and Governance (ESG) strategy all point to
a business that is adapting successfully to new ways of working and
the changing demands of consumers and society as a whole.
Our purpose and strategy
Our purpose and strategy underpin this progress. The pandemic
may be a catalyst for change but a broader transformation is
happening as businesses, governments and the public recognise the
need for sustainable solutions to the big issues - whether climate
change, equality of opportunity, the housing market or how we
support savers.
We are a simple business, with an absolute focus on savings and
mortgages. It is a business model that has stood the test of time
with an emphasis on resilience and stability that is as relevant
today as it has ever been. Sustainability is part of our DNA, and
at the heart of our long-term approach to delivering value to
members.
But I believe we can do more, and 18 months into this fantastic
role I can see how our ambition is starting to transform what we
do.
We describe our purpose as 'Giving people the power to be better
off through life'. This is represented externally by our brand
promise to be 'All together, better'. These statements reflect both
our commitment to mutuality and the importance of all our
stakeholders in delivering a sustainable and successful future.
A strong performance
In 2021, we grew our mortgage and savings balances, took the
opportunities presented by a growing market to improve our
profitability to a more sustainable level, invested in our brand,
channels and technology and maintained a strong focus on costs,
whilst delivering excellent service and continued value to our
members.
Profit before tax of GBP233 million was significantly higher
than in 2020 (GBP124 million) reflecting the strong demand for
mortgages, improved margins and lower credit losses throughout the
year. To some extent, this was a game of two halves and we took
decisions to slow growth in the latter months in the face of an
increasingly competitive market and the sharp contraction of
margins - a clear example of both our long-term perspective and
member-focused purpose. Our aim is always to optimise profitability
rather than maximise it, to underpin our long-term financial
resilience, fund investment in future services and keep members'
money and data safe and secure.
During the year we also updated our accounting estimate for
future Standard Variable Rate (SVR) mortgage income, reflecting our
view that customers will switch products at the end of their fixed
rate periods more quickly in future based on planned improvements
to our mortgage systems and market trends. This adjustment reduced
our profits by GBP69 million in the year and as a result has
importantly reduced the risk of volatility in our profit in future
periods as consumers interact with their mortgage providers in a
more automated, digital way.
Our mortgage growth of 7.2% (2020: 3.0%) was not only higher
than the previous year but higher than the market overall(1) . The
end of the temporary reduction in Stamp duty led to record purchase
and redemption activity, followed by rise in remortgage and product
transfer transactions towards the end of the year as interest rate
expectations increased. Equally important was the strength of the
labour market as the furlough scheme ended, which helped support
both demand for new mortgages and the continued repayment of our
existing loans. At just 0.10%(7) (2020: 0.09%) we continue to
record very low levels of arrears and have released GBP29 million
of provisions that were set aside for potential credit losses in
2021 that may have resulted from the economic impact of the
pandemic. Although uncertainty remains, these more worrying
economic outcomes for our customers did not emerge.
We extended our participation in the first time buyer sector,
helping more people move into their first home, as well as
launching an incentive for existing or new borrowers to increase
the energy efficiency of their property. By designing the Green
Together Reward as an addition to any new mortgage or change to
existing borrowing, our aim was to encourage the take-up of this
environmental incentive. The modest demand to date, however, shows
that industry, government and homeowners collectively have more to
do to address the energy inefficiencies of UK housing stock. We see
our support for this in the coming years as an intrinsic part of
our purpose and strategy.
It's not just the design of our mortgages that makes a
difference but the exceptional service we provide too. I want to
thank colleagues who supported our mortgage delivery and maintained
an exemplary level of service throughout the year despite the
increased volume of transactions. I know that their efforts were
hugely appreciated by our broker partners and customers aiming to
complete moves before stamp duty deadlines, and they thoroughly
deserve the independent accolades they have received from Which?
and Fairer Finance.
Our savings balances increased by 4.6% (2020: 5.3%) during a
year in which we had to balance the returns we offer savings
members with our long-term sustainability. However, we continued to
pay above market pricing with our average savings rate of 0.83%
comparing favourably with a UK average savings rate of 0.27%(2) .
This meant we paid additional interest of GBP201 million to our
savings members(2) in 2021 (2020: GBP196 million) when compared
with the market average, and this long-term value is something we
are very proud of.
We also launched purposeful savings propositions, which
encourage the savings habit and strengthen the relationship between
members and the Society. Our First Home Saver is a clear example of
this, incentivising and supporting people aiming to take their
first step on the housing ladder, and our Regular Saver was singled
out as the best in the market. We also ran a successful pilot
looking at member loyalty as a means of demonstrating the benefits
of mutuality and will do more on this in the future. Our commitment
to savings was recognised by Savings Champion, which awarded us
'Best Building Society for Savings'.
It is great to receive external recognition for the fantastic
service we provide as well as the quality of our products. Overall,
the service my colleagues delivered in 2021, as measured by Net
Promoter Score(3) (NPS), improved from +73 in 2020 to +76 in 2021 -
an incredible achievement given the volume of activity we
experienced at times though the year and the challenges of the
pandemic.
Our aim is to support the investment we're making in our future
whilst maintaining a cost advantage to compete in today's market.
Our continued growth in 2021 helped ensure that our cost to mean
asset ratio remained broadly stable at 0.50%(4) (2020: 0.49%),
despite total management expenses increasing to GBP264 million
(2020: GBP246 million). Our investment of GBP96 million in
technology and change programmes shows the importance we attach to
enhancing our digital infrastructure and the Society's IT
resilience as well as developing new services. Cost, however,
remains a key focus for the Society, which benefits from the
simplicity of our business model and focused strategy.
Our profit in the year enabled us to maintain our strong capital
ratios. Our Common Equity Tier 1 ratio was 36.2% (2020: 33.0%),
well above the regulatory minimum requirements. Our Leverage Ratio
was 4.8% (2020: 4.6%) and our Liquidity Coverage Ratio was 187%
(2020: 179%).
Known for a better service today and investing for tomorrow
Financial services are changing fast, and at times it feels as
if you have to run to stand still. However, in 2021 we took
significant strides in delivering our change agenda, and can now
demonstrate a track record of progress which is essential to our
future success.
Central to this is building the strong technology infrastructure
and operational resilience that underpin the services we provide
today and the services we'll introduce over the coming months and
years. We completed the Infrastructure Transformation Programme so
that our new data centres are up and running, and upgraded our
databases and testing capability to enable future changes to be
introduced more quickly and efficiently.
We made big progress on our digital journey. Our multi-year
programme to make our mortgage offer more tailored to individuals,
as well as easier and quicker service for borrowers and brokers
alike, is delivering tangible results. Borrowers can now complete
product transfers online using a new self-service capability that
extends to owner-occupier and buy to let products. It is a better
service for borrowers, adds scale to our business, reduces risk and
is more operationally efficient. Brokers love the new webchat
support we launched this year, which complements the intermediary
support teams in delivering our leading service. We redesigned our
website and upgraded our online services, making them simpler and
more accessible and incorporating many changes that members have
asked for. The progress can be clearly seen in our online service
users NPS(3) which rose from +20% to +46% during the year. This
underpins our ability to grow the Society in future years and meet
the changing expectations of our members.
We aim to provide a brilliant integrated experience whatever
channel our members choose to use and have made great progress with
our branch investment too. We have now redesigned and refurbished
50 branches to fantastic feedback from members and colleagues,
including relocating a number to better locations and opening our
first new branch for many years. The programme is on schedule to
complete the refurbishment of all remaining branches during
2022.
We are matching our investment in services with an increased
focus on brand. We launched a new 'look and feel' that helps us
stand out in the crowded financial marketplace. And in May we
announced our naming rights sponsorship of the Coventry Building
Society Arena, in partnership with Wasps Rugby. The Arena is a
sporting hub, hosting elite rugby, netball and football as well as
being part of the Commonwealth Games and Rugby League World Cup. It
is also a unique entertainment, business conference and exhibition
centre that makes it a nationally important venue. We want to be
locally loved and nationally famous and with over 1.6 million
visitors every year, and in a prime location in the heart of the
country, the sponsorship will ensure that more people know about
the Society as well as enable many purposeful opportunities to
support our ambition, our community partners and other
stakeholders.
Making a difference
I mention purpose deliberately. As I said earlier, a
transformation is starting to take place in people's attitudes and
behaviours which is also reflected in government policy and
regulations. Collectively the Environment, Social and Governance
(ESG) agenda is challenging businesses to deliver financial and
operational success in new and sustainable ways.
Our environmental commitments are set out in our Climate Action
Plan which sets out tangible measures covering our use of resources
and performance on emissions, as we investigate the wider impact of
our lending. In addition to the Green Together proposition I
mentioned earlier, we have transitioned to 100% renewable sources
of energy, including the installation of solar panels at our head
office site. We have achieved net zero merits for our Scope 2
emissions and carbon neutrality for Scope 1. Collectively, these
actions show that this is not something we are talking about but
doing.
We have transformed our Social agenda helping young people
acquire the skills and knowledge on which to base good careers,
tackling isolation and homelessness amongst the more vulnerable
members of society.
These are tough problems, made worse by the pandemic, and we
have had to adapt and change the way we help. For example, we moved
all our work with schools online, including a curriculum-based
numeracy package called Coventry Counts, developed in conjunction
with local educationalists, which was taken up by 50 schools in its
first week of operation. We also extended our online employability
support to include webinars for all sixth form students in
Coventry.
The key is forming long-term partnerships with charities that
share our goals, and concentrating our resources on issues and in
places where we can make most difference. We now work with six
charities across Coventry and in 2021 began to use dormant account
funding to support the long-term delivery of programmes across the
city. We've also been proud to support Coventry's UK City of
Culture year which brought together our commitment to the city and
our community goals.
One of our successes over many years has been using the strength
of our savings brand to generate funding for charities through
affinity products. In particular we have enjoyed a tremendous
relationship with The Royal British Legion, which has resulted in
donating GBP19.4 million since 2008, including GBP0.6 million in
2021, its centenary year. Over the same period, we have also
donated over GBP1 million through affinity accounts to smaller,
local charities, primarily in the South-West region. As we look
forward, we plan to align our financial and organisational
strengths more closely to our new community strategy.
Flexible and engaged colleagues
None of this would have been possible without the hard work and
dedication of my colleagues. I strongly believe that our people are
our greatest asset and, in what continues to be a very challenging
time for them personally and their families, I have been hugely
impressed by the way they have stepped up and delivered for our
members.
Although 2021 ended in similar fashion to 2020, with concerns
about tighter restrictions and an uncertain start to the year
ahead, it felt very different overall. Whilst our priority remains
the safety of colleagues and members, we are also seeing how
working from home for an extended period of time is leading to a
fundamental shift in the way many people view their relationship
with work.
We have adapted accordingly and moved towards a 'hybrid' way of
working that blends home working and time in the office for nearly
2,000 colleagues. This is not 'one size fits all' but varies
according to the type of work undertaken and the individuals
themselves. In many ways, it meets our ambition to empower
colleagues and to offer careers at the Society that challenge and
develop our people.
I am proud of the fact that around 200 colleagues per year move
into a new role at the Society, meaning 40% of our vacancies are
filled through internal moves. We are committed to at least 40% of
our senior management roles and above being held by women compared
to 37% at the end of 2021. We have also set a target of 25% of all
management roles to be held by people from ethnically diverse
backgrounds compared to 12% now. Our commitment to making progress
is demonstrated by signing the Race at Work Charter, our
sponsorship of the MOBO awards and the creation of inclusion and
diversity groups. I believe passionately in inclusion, not just as
'the right thing to do' but something with enormous value to us as
a firm and to wider society.
Our approach to inclusion and diversity, the support we give
colleagues to develop and progress, the flexibility we show in our
ways of working, our commitment to a rewarding career and the help
that's there when colleagues experience tough times were all tested
against the benchmark of the Great Place to Work survey. I was
delighted that the Society was accredited as a Great Place to Work
at our first go, a benchmark that I am committed to building on in
coming years.
There is no doubt that expectations of work are changing fast,
and to succeed we must embrace the opportunities that this
presents. We will continue to attach great importance to listening
to our colleagues, whether virtually, or through My Society, our
colleague forum attended by Jo Kenrick, our Deputy Chair. It is a
strength of the Society and hugely helpful in informing our
decision making.
Looking forward
I started by saying that the pandemic is proving a catalyst for
change.
I have no doubt that future success will depend on taking a
long-term view. This is a strength of the mutual business model. We
will continue to run the Society prudently and in the interests of
our members by providing excellent service and propositions that
offer great value. We are investing to deliver this integrated
service across our branches, contact centres and digital channels,
and developing new propositions to help people save and buy their
own homes.
At the same time these will be increasingly aligned to our
sustainability agenda, and highlight the positive impact we can
have on wider society and the environment. We can be 'All together,
better' through taking account of our responsibilities to all our
stakeholders.
I am confident about the year ahead. We have shown, despite the
challenges of the pandemic, that we can meet the needs of today's
members whilst laying the foundations for the future. We will
continue to change and adapt to new ways of working, and enhance
our resilience in the face of any future economic and competitive
headwinds. I would like to thank our members, colleagues, customers
and partners for their support and loyalty. The pandemic has
challenged all of us over the last two years, and I hope that 2022
will see us emerge from the uncertainties and worries it has
presented. I look forward to working with colleagues to deliver our
exciting and ambitious plans on behalf of our members.
1. Source: Bank of England.
2. Based on the Society's average month end savings rate
compared to the CACI market average rate for savings accounts,
excluding current accounts and offset savings, for the first 11
months of the year. This measure and comparative have been updated
in the year to use CACI source data for the market rate; previous
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. Administrative expenses, depreciation and
amortisation/Average total assets.
5. Administrative expenses, depreciation and amortisation/Total
income.
6. Total community investment made by the Society including
donations from the Society and fundraising activities.
7. Percentage of mortgages where arrears are more than 2.5% of
the balance.
Chief Financial Officer's review
Income Statement
Overview
In 2021, the Society improved its financial performance after
the challenges in 2020 as a result of the Covid-19 pandemic. The
following significant factors impacted the 2021 financial
results:
-- Net interest income increased by GBP67 million, supported by
improved mortgage margins in the first half of 2021, lower funding
costs and after a GBP69 million reduction to our expectations for
future Standard Variable Rate (SVR) income. The increase in the
Bank of England Bank Rate in December 2021 did not have a material
impact on our result for the year.
-- Expected credit losses (ECLs) did not emerge at the level
assessed at the end of 2020 with those mortgage customers who took
payment holidays having returned to making full mortgage payments
in the vast majority of cases and house price growth remaining
strong. As a result GBP29 million of ECL provisions were released
during the year, compared to a charge of GBP36 million in 2020.
As a result, profit before tax increased to GBP233 million
(2020: GBP124 million) which is a more normal level of profit
relative to our size and high level of growth in the period.
2021 2020
GBPm GBPm
============================ ================= ==================
Interest receivable 833.9 859.9
============================ ================= ==================
Interest payable (357.7) (451.4)
============================ ================= ==================
Net interest income 476.2 408.5
============================ ================= ==================
Other income (1.4) (0.1)
============================ ================= ==================
Losses on derivatives
and hedge accounting (6.6) (0.7)
============================ ================= ==================
Total income 468.2 407.7
============================ ================= ==================
Management expenses (263.5) (245.6)
============================ ================= ==================
Impairment release/(charge) 28.7 (36.4)
============================ ================= ==================
Provisions - (0.5)
============================ ================= ==================
Charitable donation to
Poppy Appeal (0.6) (0.8)
============================ ================= ==================
Profit before tax 232.8 124.4
============================ ================= ==================
Tax (42.0) (23.0)
============================ ================= ==================
Profit after tax 190.8 101.4
---------------------------- ----------------- ------------------
Net interest income
Net interest income increased to GBP476 million (2020: GBP409
million).
Before the adjustment to future SVR income, interest receivable
on mortgages increased by GBP33 million as a result of the growth
in balances, although the average interest rate paid by our
mortgage customers fell slightly in the year. The remaining GBP10
million increase related to interest receivable on treasury
assets.
Interest payable on retail savings reduced by GBP86 million as
savings rates continued to fall across the market. The Society
continued to pay favourable savings rates, returning GBP201 million
(2020: GBP196 million) in member value compared to market average
rates(8) , whilst continuing to invest in the Society and maintain
its long-term resilience.
The remaining GBP7 million movement related to lower interest
payable on other borrowings and hedging instruments.
The Bank of England Bank Rate remained at 0.10% for most of
2021, and the increase to 0.25% in December 2021 had no material
impact on 2021 results.
The increase in net interest income was partly offset by an
accounting adjustment of GBP69 million as a result of an update to
the Society's estimate of future SVR income on mortgages.
This estimate was revised lower in 2021 as a result of the
change in future assumptions relating to mortgage redemptions with
expectations that customers will spend less time paying SVR at the
end of their fixed rate period. This flows from our investment in
digital mortgage switching being implemented from 2021 to 2023, and
similar investment by other firms, making more cautious income
recognition assumptions appropriate.
This adjustment has removed the majority of our 'Effective
Interest Rate' asset for future SVR income which is now GBP17.3
million (2020: GBP71.1 million), reducing the risk of future income
volatility.
Net interest margin
At 0.90%, our net interest margin improved significantly from
the 0.81% reported in 2020 as a result of the movements in net
interest income outlined above relative to our average total
assets. Excluding the impact of the accounting adjustment for SVR
the net interest margin for the year would have been 1.03%.
As a result of a more competitive market, new mortgage margins
fell in the second half of 2021. This is expected to reduce net
interest margin beyond 2022.
2021 2020
GBPm GBPm
===================== ============== ==============
Net interest income 476 409
===================== ============== ==============
Average total assets 53,014 50,515
===================== ============== ==============
%%
===================== ============== =============
Net interest margin 0.90 0.81
===================== ============== ==============
Derivatives and hedge accounting
The Society uses derivative financial instruments (swaps) solely
for risk management purposes to manage interest rate and currency
risk arising from its fixed mortgage and savings activity and from
non-sterling and fixed rate wholesale funding.
The Society applies hedge accounting where possible and its
approach continued to be effective throughout the period. The
overall impact in the Income Statement is significantly reduced
compared with the underlying movements in swap valuations seen in
the market. The loss of GBP7 million for the year represents hedge
ineffectiveness and fair value movements on derivatives where hedge
accounting has not been obtained (2020: GBP1 million).
Management expenses
Overall management expenses increased by GBP18 million or 7%.
The majority of the increase was due to the impact of higher
variable pay in recognition of the strong performance against our
targets, salary and cost inflation, continued investment to improve
the resilience of services to members, enhancements to online
services and investment in our new mortgage platform. We also
continued our refurbishment of branches.
Ensuring that we spend our members money wisely and maintain our
cost efficiency advantage is a key part of the Society's strategy.
The cost to mean total assets ratio of 0.50%(9) (2020: 0.49%) is
expected to remain among the lowest in the UK building society
sector. The cost to income ratio improved to 56%(10) (2020: 60%).
Excluding the impact of the accounting adjustment for SVR income,
the ratio for the year would have been 49%.
Expected credit losses
The performance of our mortgage book improved compared with our
expectations following the emergence of the Covid-19 pandemic. In
2020, the Society granted 40,000 mortgage Covid-19 payment
holidays, none of which were active at 31 December 2021. The vast
majority of customers returned to making full mortgage payments and
only 0.10% of all of our mortgage customers were in arrears of
greater than 2.5% of the balance at the year end (2020: 0.09%).
Despite a continued cautious approach to estimating expected
credit losses (ECLs), our improving credit performance together
with an improved economic outlook resulted in a reduction to our
provision for ECLs and a release of GBP29 million (2020: charge of
GBP36 million) has been recognised in the accounts.
Notwithstanding this improved performance, uncertainty remains
and judgement has been required in order to calculate the provision
required at 31 December 2021. We have continued to consider a range
of potential scenarios including a severe downside where house
prices fall by around a third and unemployment more than
doubles.
At the year end, total provisions were GBP19 million, of which
GBP9 million related to post model adjustments (PMAs) where the
risks were not assessed as adequately captured in the Society's
modelling. This has reduced from 2020 where a total provision of
GBP48 million was recognised, of which GBP38 million was PMAs.
The adjustments cover the following risk areas:
-- The potential for losses as a result of cladding remediation
on flats where fire safety standards have not been met.
-- Risks relating to Covid-19 payment holidays for accounts with
extended payment holidays or additional risk flags.
-- A more granular assessment of house price information which
provides a more accurate view of indexed loan to values (LTVs) and
risks associated with pockets of negative equity.
-- Risks which cannot easily be modelled such as for fraud within the portfolio.
In 2020 there were adjustments which covered risks relating to
all Covid-19 mortgage payment holiday accounts and for the
potential of a house price index (HPI) fall once support measures
such as the stamp duty holiday and furlough were removed.
Following the continued good performance of the mortgage book
and sustained house price performance, these adjustments are no
longer required.
The remaining GBP9.6 million of ECL provision relates to the
modelled losses, including the impact of alternative economic
scenarios. The alternative scenarios reflect a range of possible
outcomes as the economy recovers from the pandemic.
IFRS 9 requires loans to be assessed as 'stage 2' where there
has been a significant increase in credit risk. Loans are held in
stage 2 until such a time when they are considered to have 'cured'
by performing for a sustained period of time, typically 12 months
from the stage 2 trigger event. In 2021 stage 2 accounts reduced to
6.9% (2020: 8.2%). 92.7% of the book remains in stage 1 (2020:
91.3%).
As a result of these changes the ECL provision now equates to
0.04% of the overall mortgage book (2020: 0.11%).
Charitable donation to the Poppy Appeal
The Society continued to support The Royal British Legion's
Poppy Appeal with GBP0.6 million donated during the year (2020:
GBP0.8 million), bringing the total donated over the Society's
relationship with the Legion to GBP19.4 million.
Taxation
In 2021, the corporation tax charge was GBP42 million (2020:
GBP23 million), reflecting an effective tax rate of 18.0% (2020:
18.5%). In 2021 it was announced that from 2023 the Corporation Tax
rate is set to increase to 25% and the banking surcharge is set to
decrease to 3%. Due to the timing of the royal assents, the
corporation tax increase is reflected in the deferred tax liability
at the balance sheet date. However, the banking surcharge decrease
had not been substantively enacted at the balance sheet date and
therefore is not reflected in these financial statements. The
changes in rates are not expected to have a significant impact on
the effective tax rate in future.
Balance Sheet
Overview
Mortgage balances grew by GBP3.1 billion and liquidity increased
by GBP0.3 billion. Retail savings balances grew by GBP1.7 billion
and wholesale funding increased by GBP1.5 billion.
Mortgage growth was funded by a mix of growth in retail savings
and wholesale funding.
A summarised Balance Sheet is set out below:
2021 2020
GBPm GBPm
================================ ============= ===============
Assets
================================ ============= ===============
Loans and advances to customers 46,620.6 43,482.8
================================ ============= ===============
Liquidity 7,622.0 7,314.5
================================ ============= ===============
Other 287.1 701.0
================================ ============= ===============
Total assets 54,529.7 51,498.3
================================ ============= ===============
Liabilities
================================ ============= ===============
Retail savings 39,890.2 38,151.1
================================ ============= ===============
Wholesale funding 11,907.3 10,367.9
================================ ============= ===============
Subordinated liabilities
and subscribed capital 56.9 67.2
================================ ============= ===============
Other 215.7 706.0
================================ ============= ===============
Total liabilities 52,070.1 49,292.2
================================ ============= ===============
Equity
================================ ============= ===============
General reserve 2,012.6 1,835.1
================================ ============= ===============
Other equity instruments 415.0 415.0
================================ ============= ===============
Other 32.0 (44.0)
================================ ============= ===============
Total equity 2,459.6 2,206.1
================================ ============= ===============
Total liabilities and equity 54,529.7 51,498.3
================================ ============= ===============
Loans and advances to customers
Our lending strategy remains focused on high quality, low loan
to value first charge mortgages 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 way.
In 2021, we advanced a record GBP9.6 billion of mortgages (2020:
GBP6.7 billion) and mortgage balances grew by GBP3.1 billion (2020:
GBP1.2 billion). The year on year growth in mortgages of 7.2% was
above mortgage market growth of 4.6%(11) resulting in our market
share increasing to 3.0% (2020: 2.9%).
We also repurchased two buy to let loan portfolios totalling
GBP0.5 billion. The loans were previously originated by the Society
and have been recognised within loans and advances to customers
from the point of repurchase.
The Society seeks to adjust growth in response to market pricing
and funding conditions; as a result of this growth was moderated in
the second half of the year with balance growth of GBP0.7 billion
compared with GBP2.4 billion in the first six months of the
year.
New lending on owner-occupier homes accounted for 65% of total
new lending in 2021 (2020: 60%) at an average LTV of 65.7% (2020:
65.5%). During the year the Society introduced a range of 95% LTV
loans to support first time buyers entering the market. The number
of first time buyer loans advanced was 7,100, an increase from
3,200 in 2020.
Total mortgage assets at 31 December 2021 stood at GBP46.6
billion (2020: GBP43.4 billion) which comprised GBP27.4 billion of
owner-occupier loans (2020: GBP25.7 billion) and GBP19.2 billion
buy to let loans (2020: GBP17.7 billion). The balance weighted
indexed LTV of the mortgage book at 31 December 2021 reduced to
50.9%(12) (2020: 52.8%).
Possessions and forbearance have remained low with 27 cases in
possession at the year end (2020: 22), with forbearance levels
having increased by 27.1% year on year in value terms and 13.9% in
number of cases as the Society continues to support its customers
following the Covid-19 pandemic. Despite these increases, the
Society continues to have very low arrears with only 0.10% of
mortgage balances where arrears are more than 2.5% of the balance
(2020: 0.09%) at 31 December 2021 compared with the latest
available industry average of 0.67%(13) .
Liquidity
Liquidity assets increased to GBP7.6 billion (2020: GBP7.3
billion) as we maintained a prudent liquidity buffer, demonstrated
by our Liquidity Coverage Ratio (LCR) remaining high at 187% (2020:
179%), significantly 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 98% of the portfolio rated
Aaa-Aa3 (2020: 93%). 99% of liquid assets are held in UK sovereign
or UK financial institutions (2020: 98%).
Included in liquid assets are GBP0.7 billion of assets held at
fair value through other comprehensive income (FVOCI). As at 31
December 2021, the balance on the FVOCI reserve was a GBP5 million
gain, net of tax (2020: GBP2 million gain, net of tax).
Retail funding
Retail savings increased in the year by GBP1.7 billion to
GBP39.9 billion (2020: GBP38.2 billion), representing growth of
4.6%, compared with market growth of 7.8%(11) . As a result, the
Society's savings market share reduced slightly to 2.4%(11) (2020:
2.5%).
The Society continued to support the cash ISA market, increasing
our market share to 6.5%(11) (2020: 6.3%).
Our lower growth relative to the household savings market
followed a particularly strong savings performance at the end of
2020. Market growth was also strong in current accounts, products
that are not offered by the Society.
Our mortgage book continues to be predominantly funded by retail
savings with 86% of mortgage loans funded in this way (2020:
88%).
Wholesale funding
We use wholesale funding to diversify our sources of funding,
enabling growth and lowering risk, which then benefits savings
members through better savings rates and mortgage customers through
enabling us to offer more competitive long-term rates.
Wholesale funding increased by GBP1.5 billion in the year to
GBP11.9 billion (2020: GBP10.4 billion) with further drawdowns from
the Term Funding Scheme with additional incentives for Small and
Medium Sized Enterprises (TFSME).
Wholesale issuances during the year included GBP0.3 billion from
an inaugural issuance in senior non-preferred debt and GBP0.4
billion issued through the Economic Master Issuer Retail Mortgage
Backed Securities (RMBS) programme which was recognised in the year
with two industry awards. A further EURO EUR0.8 billion covered
bond was issued in July 2021. There was GBP5.25 billion of Central
Bank Term Funding (TFSME) outstanding as at 31 December 2021 (2020:
GBP4.55 billion).
Equity
The Society's equity is predominantly made up of 137 years of
retained profits in the general reserve and Additional Tier 1 (AT
1) capital. The Society made post-tax profits of GBP191 million in
the year and total equity increased GBP0.3 billion to GBP2.5
billion, reflecting a GBP29 million distribution to AT 1 capital
holders and movements in the cash flow hedge reserve.
Pension fund
The pension scheme assets and liabilities are recorded in the
Society's accounts and the overall position was a surplus of GBP29
million at the end of 2021 (2020: GBP10 million). These assets and
liabilities are impacted by market movements and the increase in
the year was driven by the growth in UK corporate bond yields and
the updated valuation of the pension scheme assets. The Society
continues to monitor the pension scheme to ensure that there is no
scheme deficit over the medium term.
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(14) as at 31 December 2021
is summarised below. During the year, the capital resources
increased to GBP2,337 million, primarily through the increase in
Common Equity Tier 1 (CET 1) driven by profit after tax of GBP191
million.
The increase in capital, together with a 2% decrease in risk
weighted assets (RWAs), has increased our CET 1 ratio to 36.2%
(2020: 33.0%).
The Society submitted an updated Internal Ratings Based (IRB)
model to the PRA to comply with required regulatory changes due in
January 2022. The update addresses changes in the loss given
default and the cyclicality of the probability of default model.
Initial feedback has been received and further work is being
undertaken prior to adopting the model updates in 2022.
Until the updated models are fully approved, the Society has
agreed to hold additional risk weighted assets (RWAs) from 1
January 2022, if this was applied at 31 December 2021 it would lead
to an increase in RWAs of 43% and a reduction in the CET 1 ratio
for the Society to 26.4%. The final model output may vary from this
initial assessment, which may further adjust the CET 1 ratio,
effectively bringing forward changes of increasing RWAs envisaged
in Basel IV. The Society expects that from 2024, Basel IV RWA
floors will be phased in and as transition develops will reduce the
Society's reported CET 1 ratio, as they will not reflect our low
risk mortgage book and long run loss experience. Applying the Basel
IV RWA floors to the year end figures on a full transition basis
would result in a CET 1 ratio of approximately 18%. It is important
to note that whilst we do not have a regulatory leverage
requirement today (see below) we do expect leverage will be our
binding capital constraint in the future.
The Society's Total Capital Requirement (TCR) at December 2021
was GBP565 million, equating to 10.7% of RWAs (2020: GBP574
million; 10.6%). We exceed this requirement using CET 1 capital
alone. The setting of the Society's Pillar 2 requirements will be
updated in 2022 as it changes from an absolute amount to a
percentage of RWAs as set out in recent regulatory guidance.
We are not currently bound by regulatory leverage ratios which
measure Tier 1 capital against total exposures, including
off-balance sheet items. The PRA confirmed in policy statement
PS21/21 that the UK leverage ratio framework only applies to banks
and building societies with either retail deposits of GBP50 billion
or more or non-UK assets equal to or greater than GBP10 billion;
neither of these measures currently applies to the Society. The UK
leverage ratio has increased slightly to 4.8% (2020: 4.6%) driven
by the increase in capital resources in the year.
End-point End-point
31 Dec 31 Dec
2021 2020
GBPm GBPm
======================== ============== ==================
Capital resources:
======================== ============== ==================
Common Equity Tier
1 (CET 1) capital 1,921.8 1,783.3
======================== ============== ==================
Total Tier 1 capital 2,336.8 2,198.3
======================== ============== ==================
Total capital 2,336.8 2,198.3
======================== ============== ==================
Risk weighted assets 5,303.6 5,410.6
======================== ============== ==================
Capital and leverage %%
ratios:
======================== ============== =================
Common Equity Tier
1 (CET 1) ratio 36.2 33.0
======================== ============== ==================
CRR leverage ratio(15) 4.3 4.3
======================== ============== ==================
UK leverage ratio(16) 4.8 4.6
======================== ============== ==================
8. Based on the Society's average month end savings rate
compared to the CACI market average rate for savings accounts,
excluding current accounts and offset savings, for the first 11
months of the year. This measure and comparative have been updated
in the year to use CACI source data for the market rate; previous
source Bank of England.
9. Administrative expenses, depreciation and
amortisation/Average total assets.
10. Administrative expenses, depreciation and amortisation/Total
income.
11. Source: Bank of England.
12. LTV is calculated using the Nationwide Building Society
quarterly regional House Price Index (HPI).
13. Source: Prudential Regulation Authority - latest available
information at 30 September 2021.
14. Excluding any IFRS 9 transitional provisions which were
negligible.
15. The Capital Requirements Regulation (CRR) leverage ratio is
calculated in accordance with the definitions of CRD IV as amended
by the European Commission delegated regulation.
16. 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.
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