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OneSavings Bank plc - 2020 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and 6.3.5(1) of the
Disclosure Guidance and Transparency Rules, OneSavings Bank plc (the
"Company") hereby releases the unedited full text of its 2020 Annual
Report and Accounts for the year ended 31 December 2020.
The document is now available on the Company's website at:
www.osb.co.uk
A copy of the above document has been submitted to the National Storage
Mechanism and will shortly be available for inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
OneSavings Bank plc
Annual Report and Financial Statements
For the year ended 31 December 2020
Company number: 07312896
Strategic Report 3
Directors' Report 70
Directors' responsibilities statement 75
Independent auditor's report to the members of One Savings
Bank plc 76
Statement of Comprehensive Income 94
Statement of Financial Position 95
Statement of Changes in Equity 96
Statement of Cash Flows 98
Notes to the Financial Statements 99
DIRECTORS Graham Allatt
Andrew Golding
Elizabeth Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
David Weymouth
SECRETARY Jason Elphick
REGISTERED OFFICE Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
REGISTERED NUMBER 07312896 (England and Wales)
AUDITOR Deloitte LLP
Statutory Auditor
London
United Kingdom
The Directors present their Annual Report, together with the audited
Financial Statements and Auditors Report for the year ended 31 December
2020.
Insertion of a new ultimate holding company
A new ultimate holding company, OSB GROUP PLC (OSBG), was inserted in
November 2020 as part of the Group's integration strategy following the
Combination with Charter Court Financial Services Group (CCFS).
OSBG became the new ultimate holding company and listed entity of the
OSB Group. The OSB Group comprises OSBG and its subsidiaries, which
include One Savings Bank plc (the Company or OSB) and its subsidiaries.
OSB is a wholly-owned subsidiary of OSBG. The Onesavings Bank plc Group
(the Group) comprises OSB and its subsidiaries.
Upon insertion of OSBG, each OSB share was cancelled and replaced with
one OSBG share with no change to voting rights or ranking.
Our business model
The Group is a leading specialist mortgage lender, primarily focused on
carefully selected sub-segments of the mortgage market. Our specialist
lending is supported by our Kent Reliance and Charter Savings Bank
retail savings franchises. Our purpose is to help our customers,
colleagues and communities prosper.
Resources and relationships
Brands and heritage
We have a family of specialist lending brands targeting selected
segments of the mortgage market which are underserved by large UK
banking institutions. We have well-established savings franchises
through Kent Reliance, with its 150-year heritage, and the Charter
Savings Bank brand.
Employees
Our team of highly skilled employees possesses expertise and in-depth
knowledge of the property, capital and savings markets, risk assessment
and customer management.
Infrastructure
We benefit from cost and efficiency advantages provided by our
whollyowned subsidiary, OSB India, as well as credit expertise and
mortgage administration services provided by CCFS.
Relationships with intermediaries and customers
Our strong and deep relationships with the mortgage intermediaries that
distribute our products continue to win us industry recognition.
Capital strength
We have a strong CET1 ratio and the management capability to add capital
through significant profitable loan book growth.
Our business model explained
Following the Combination, the Group segmented its lending business into
two segments: OSB and CCFS.
OneSavings Bank
Buy-to-let/SME sub-segments
Buy-to-Let
We provide loans to limited companies and individuals, secured on
residential property held for investment purposes. We target experienced
and professional landlords or high net worth individuals with
established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured on
commercial and semi-commercial properties held for investment purposes
or for owner-occupation.
Residential development
We provide development loans to small and medium sized developers of
residential property.
Funding lines
We provide funding lines to non-bank lenders who operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
Asset finance
We provide loans under hire purchase, leasing and refinancing
arrangements to UK SMEs and small corporates to finance
business-critical assets.
Residential sub-segments
First charge
We provide loans to individuals, secured by a first charge against their
residential home. Our target customers include those with a high net
worth and complex income streams. We are also experts in shared
ownership, lending to first-time buyers and key workers buying a
property in conjunction with a housing association.
Funding lines
We provide funding lines to non-bank lenders who operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
Charter Court Financial Services
Specialist lending business
Buy-to-Let
We provide products to professional and non-professional landlords with
good quality credit history, through a wide product offering, including
personal and limited company ownership.
Our business model explained (continued)
Residential
We provide a range of competitive products to prime borrowers, complex
prime borrowers (including self-employed, Help to Buy, Right to Buy and
new-build) and near-prime borrowers.
Bridging
We offer products with flexible features, focusing on lending to prime
borrowers only, for customers who need to fund short-term cash flow
needs, for example, to cover light and heavy refurbishments, home
improvements, auction purchases and also to 'bridge' delays in obtaining
mortgages and 'chain breaks'.
Second charge
We offer loans to prime residential and Buy-to-Let customers, with low
loan-to-value ratios, who require additional capital and who wish to
secure a loan with a charge against a property which is already charged
to another lender.
Retail savings
Online
Kent Reliance is our award winning retail savings franchise with over
150 years of heritage, attracting retail savings deposits via the
internet. Charter Savings Bank is a multi-award-winning online bank
providing a range of competitive savings products.
Direct
The direct channel sources savings products via telephone (Kent
Reliance) and post (Kent Reliance and Charter Savings Bank).
Kent Reliance and Charter Savings Bank offer accounts to SMEs and
Charter Savings Bank is also present in the pooled deposits market.
High street branches
Our Kent Reliance branded network operates in the South East of England
and offers a variety of fixed, notice, easy access and regular savings
products, including ISAs.
Our securitisation platforms
CCFS has been a programmatic issuer of high-quality residential
mortgage-backed securities through the Precise Mortgage Funding (PMF)
and Charter Mortgage Funding (CMF) franchises, completing 14
securitisations worth more than GBP4.5bn since 2013 to 31 December 2020.
OSB issued two additional securitisations under Canterbury Finance in
2020, the majority of which have been fully retained, completing three
transactions in total under this programme worth more than GBP2.6bn to
31 December 2020.
Our business model explained (continued)
Unique operating model
Customer service
The Group operates customer service functions in multiple locations
across the UK in Wolverhampton, Fareham, London, Fleet and including its
head office in Chatham. These, together with our wholly-owned subsidiary
OSB India, help us deliver on our aim of putting customers first.
We deliver cost efficiencies through excellent process design and
management. We have efficient, scalable and resilient infrastructure
supported by strong IT security.
OSB India
OSB India (OSBI) is a wholly-owned subsidiary based in Bangalore, India.
OSBI puts customer service at the heart of everything it does,
demonstrated by our excellent customer Net Promoter Score. Various
functions are also supported by OSBI, including support services,
operations, IT, finance and human resources. We have a one team approach
between the UK and India. OSBI operates a fully paperless office -- all
data and processing are in the UK.
Relationships with our key stakeholders
Our purpose is to help our customers, colleagues and communities
prosper.
Strong relationships, built on regular engagement and open dialogue with
all our stakeholders, are fundamental to achieving this purpose. These
relationships are central to the Group's strategy and culture; and are
embedded in the Board's responsibilities.
We outline below how OSB Group and its Directors engaged with key
stakeholders and in doing so, discharged their duties under section 172.
Customers
We pride ourselves on building long-term, strong relationships with our
customers. In 2020, we demonstrated our dedication to providing
excellent service by supporting our borrowers and savers
throughout the pandemic. This included responding to customers
requesting mortgage payment deferrals, continuing to help those looking
to finance their projects and supporting our savers safely
in branches or via telephone, post and the internet.
When our savers call or interact with us, we offer them an opportunity
to let us know how we did. We listen to them and act upon what they tell
us. Throughout the year, we have been collecting customer feedback and
despite the difficulties of the pandemic, increased volume of calls and
savers' activity, we are incredibly proud of achieving strong
satisfaction metrics for both Kent Reliance and Charter Savings Bank. We
consistently achieve high satisfaction scores and in 2020 the Kent
Reliance customer Net Promoter Score increased to +67 (2019: +66),
Charter Savings Bank +72 in 2020 and 2019.
The needs of our customers are at the heart of our business and the
Board believes that the long-term success of the Group is dependent on
the strength of our relationships with our customers. The Board's
engagement with customers is indirect and Directors are kept informed of
customer-related matters through regular reports, feedback and research.
Satisfaction scores and retention rates, together with the number of
complaints and resolution times, form part of the management and Board
monthly reporting packs, ensuring the visibility of customer experience
to management and the Board. Customer satisfaction scores are also used
as part of the executive remuneration assessment and form the basis of
new initiatives and actions which continually improve customer
experience.
Relationships with our key stakeholders (continued)
The following matters, which were identified as affecting our
stakeholders, were of particular interest to the Board in 2020:
-- the impact of COVID-19 on customers in terms of their savings behaviours,
mortgage payment deferral requests and signs of repayment distress;
-- industry-related conduct risk issues and the potential impact on
customers; and
-- management information in relation to customer complaints and complaints
data from the Financial Ombudsman Service, engagement scores,
satisfaction scores and retention rates.
In addition, management and the Board engaged with customers through the
Kent Reliance Provident Society (KRPS) which conducts customer
engagement activity studies for OSB. During 2020, KRPS
conducted five such studies.
Intermediaries
Our lending products, with the exception of funding lines and
residential development loans, are distributed via mortgage brokers.
Mortgage brokers are vital to our success and we adapted the way in
which we assist them to provide even better service in 2020.
We pride ourselves in providing unique and consistent lending
propositions across all lending brands which fulfil our goal of making
it easier for intermediaries to serve our borrowers. Our efforts extend
beyond our proposition, as we continuously enhance the service we
provide and regularly engage with the broker community. Our business
development managers listen and work with intermediaries, making
themselves available to discuss cases and helping to obtain swift and
reliable decisions.
The Board and management track broker and borrower satisfaction scores;
and the details of complaints in monthly Board reporting packs.
Intermediary events were reduced during 2020, but the Group's sales
teams participated in 416 physical and virtual intermediary events,
interacting with brokers and keeping abreast of industry developments
and intermediary requirements.
The broker Net Promoter Score increased to +49 (2019: +27) for OSB, and
to +54 (2019: +18) for Charter Savings Bank.
Colleagues
Our nearly 1,800 colleagues are our key asset and our success depends on
the talented individuals we employ. We have always favoured two-way
communication between management and our employees through regular town
hall meetings, informal sessions with management and opportunities to
ask questions anonymously. Even though these events were held virtually
in 2020, with the majority of employees working from home, they proved
popular and contributed to many initiatives that were undertaken by the
business.
Engagement also took place via Group-wide surveys and the results were
presented to the Board. We are proud that the Group retained its 'Two
Star' rating in The Sunday Times 100 Best Companies to Work For and for
the fourth consecutive year, OSB India was officially certified as a
'Great Place to Work' in 2020. The Group also participated in the
Banking Standards Board Survey in 2020.
The interests of the Group's employees were considered by the Board and
its Committees during the year via regular updates provided by senior
management, the Group's HR function and the feedback from meetings of
working groups. One of the key topics at the forefront of the Board's
mind in 2020 was the impact of the pandemic on our employees' lives,
both professionally and personally, their well-being and mental health.
Relationships with our key stakeholders (continued)
Mary McNamara is the Non-Executive Director appointed by the Board with
responsibility for employee engagement and is a permanent member of the
Workforce Advisory Forum (known internally as OneVoice). Members of the
Board and senior management are also encouraged to attend OneVoice
meetings in order to understand and discuss employee-related issues
directly from representatives across the entire business. Employee
feedback from each meeting is shared and discussed with members of the
Board and it forms the basis of new policies, benefits and any other
employee-related projects.
Another key area of Director engagement was their oversight of the
decision to harmonise grades, benefits and terms and conditions across
the Group as part of the integration programme.
Members of the Board also have standing invitations to attend meetings
of the newly-formed Diversity and Inclusion Working Group and Health and
Safety Working Group, with its members consisting of employee
representatives from across the business. Updates from both working
groups are submitted to the Board or its Committees on an annual basis.
Members of the Board oversee the Group's talent management initiatives
and senior executive succession planning.
Finally, the Board has oversight of the Group's whistleblowing activity
and reviews and approves the Group's gender pay gap reporting and its
commitment to the Women in Finance Charter.
Shareholders
In 2020, the Board took the decision to cancel the 2019 final dividend
in order to help serve the needs of businesses and households through
the extraordinary challenges presented by Coronavirus (COVID-19). More
information about this key strategic decision is presented on page 10.
Suppliers
Our business is supported by a large number of suppliers, which in turn
allows us, as a Group, to provide high standards of service to our
customers. The members of the Board do not interact directly
with the Group's suppliers; however, they are involved in overseeing the
Group's supplier relationships and are regularly kept up to date by
senior management on supplier considerations and
developments.
In 2020, the Board was also involved with the following aspects of
supplier relationships:
-- consideration of potential supplier challenges as a result of the
integration and the impact of COVID-19;
-- consideration of the risks associated with suppliers and the framework
for assurance;
-- oversight of key supplier relationships including the engagement between
the Group Audit Committee and the external auditor; and
-- oversight of all levels of insurance in place for the Group.
The Board reviews and approves the Group's Modern Slavery and Human
Trafficking Statement on an annual basis, which can be found on our
website at www.osb.co.uk.
Relationships with our key stakeholders (continued)
Communities
Each year, OSB engages with charitable causes in Kent and supports a
national charity chosen by employees by taking part in a variety of
charitable events and partnerships. CCFS is involved in the West
Midlands community and every year supports a chosen local charity. OSB
India is also active in the community local to the office in Bangalore,
as well as in areas where there are critical needs.
Employees and the business donated c.GBP516,000 to its charity partners
in the year and our employees also dedicated time in a variety of
volunteering activities
Engagement with our local communities is actively encouraged by the
Board and senior management who believe that the fostering of such
relationships is part of contributing to the communities in which we
operate to make a positive impact.
In 2020, the Board endorsed the initiative of the Group Executive
Committee to forgo their potential 2020 cash bonuses. The Board decided
to use some of the savings to help support charities focused on
homelessness. In this vein, the Group committed to a minimum of
GBP250,000, with GBP100,000 donated to Shelter, which offers support and
advice to those facing housing issues or homelessness across the UK. The
remainder was donated to local charities that serve homeless people and
to finance the purchase of dialysis machines for the HBS Dialysis Unit
in India, which provides dialysis for underprivileged patients.
Regulators
The Board recognises the importance of open and continuous dialogue with
all of our regulators, as well as other government bodies and trade
associations. The Group maintains proactive dialogue with the Prudential
Regulation Authority and Financial Conduct Authority. Engagement
typically takes the form of regular and ad hoc meetings attended by both
members of the Board and executives, as well as subject matter experts.
The number of meetings held with regulators increased in 2020 and
included, among other topics, operational resilience, the ability to
respond to a financial stress, business continuity review and incident
management. There was also significant interaction with our regulators
with regard to the insertion and approval of the new holding company and
the complexities of maintaining two banking licences within the Group.
Even though the Directors do not participate in all meetings, the senior
management including the CFO and Chief Risk Officers provide the Board
and its Committees with feedback and regular updates in respect of the
broader regulatory developments and compliance considerations.
The Group also regularly interacts and has constructive relationships
with the Bank of England and HM Revenue & Customs, among others, which
helps to ensure that the Group is aligned with the relevant regulatory
frameworks and that the business is engaged with issues impacting the
financial services industry.
Environment
The Group is committed to operating sustainably and to continually
reducing our environmental impact by not only promoting awareness of
environmental issues among our employees, but also by adhering to our
plan to become a greener organisation.
The Board is responsible for encouraging and overseeing an
environmentally-friendly culture and ensuring that the business is ready
to respond to the growing impact of climate change on the Group's
activities and enhanced regulation.
Section 172 statement
The Directors are bound by their duties under section 172(1)(a) to (f)
of the Companies Act 2006 and the manner in which these have been
discharged; in particular their duty to act in the way they consider, in
good faith, promotes the success of the Company for the benefit of its
members as a whole.
The stakeholders which the Directors considered in this regard are
customers, intermediaries, employees, shareholders, suppliers,
regulators and the local communities in which we are located. These
stakeholders are considered to be those the most likely to be impacted
by decisions taken by the Board. The disclosures on pages 6 to 9 and
those that follow, set out how Directors complied with the requirements
of section 172 during the year.
Decision making
The Board recognises that considering our stakeholders in key business
decisions is fundamental to our ability to deliver the Group's strategy
in line with our long-term values and operating the business in a
sustainable way. Balancing the needs and expectations of our key
stakeholders has been at the forefront of the Board's mind and has been
more important than ever during 2020, as a result of the global
pandemic; whilst acknowledging that some decisions will result in
different outcomes for each stakeholder.
Key strategic decision in the year
Cancellation of the 2019 final dividend
In April 2020, given the unprecedented and rapidly developing situation
due to the outbreak of COVID-19 and the associated uncertainties, the
Board took the difficult decision to cancel the 2019 final dividend.
The Board spent an extensive amount of time in discussions, not only
internally, but also obtained advice from the Group's external advisers
and communicated with the regulator. The Board also closely monitored
the situation among the Group's peers and the larger systemic banks. The
Board discussed the impact that a non-payment of dividend would have on
investors who had become accustomed to receiving a regular dividend. The
Board also considered other stakeholders and how paying a dividend may
negatively impact them. The Board was aware that COVID-19 was
unprecedented and that the extent of its impact remained uncertain at
the time the decision was made. The Board decided that in order to help
to serve the needs of businesses and households through the
extraordinary challenges presented by COVID-19, the dividend would be
cancelled. The decision-making process of the Board demonstrated that
the best outcome for all stakeholders concerned was to preserve the
Group's capital, even though the Group's regulator did not specifically
disallow the payment of the Group's dividend. The Group's strong capital
position also provided certainty for our employees and their jobs; to
our suppliers; and demonstrated our prudent management in times of
crisis.
The Group's response to COVID-19
The COVID-19 pandemic dominated 2020 and had a material impact on
society, businesses and the economy. Despite the unprecedented nature of
the events in the year and the challenges that arose, the Group proved
its ability to successfully manage through its adaptability, operational
resilience and prudent management and continued to create value for all
stakeholders in the year.
Resilient business
The Group's business model, based on a secured balance sheet, prudent
and diligent risk management and strong capital and liquidity positions,
withstood the test of 2020.
Management and the Board took early decisions about the Group's risk
appetite and chose to further protect the business by withdrawing most
products in late March 2020. Once the situation improved, the Group
returned to the market with a limited set of products with tighter
underwriting criteria and higher pricing. The Group also controlled the
volume of new business by pausing lending in more cyclical segments of
the market, including commercial, development finance and funding lines.
To strengthen its capital position, in April 2020, the Group took the
difficult but prudent decision not to pay the 2019 final dividend.
Previous crises have shown that maintaining strong levels of liquidity
has been critical for banks and the Group increased liquidity at the
outbreak of the pandemic in March 2020 by drawing additional,
attractively-priced funds, under the Bank of England's Indexed Long-Term
Repo scheme, which were later replaced by the Term Funding Scheme with
additional incentives for SMEs. Throughout the remainder of the year,
the Group managed its capital and liquidity positions conservatively in
order to maintain a suitable excess in the face of an uncertain and
rapidly changing environment. A major modelling and benchmarking
exercise for extreme stresses was also completed by the Group's Risk
function to ensure that the Group is well positioned to withstand a
severe crisis with appropriate contingency plans in place.
None of this would have been possible without the operational
flexibility the Group has demonstrated both in the UK and in India.
Mortgage payment deferrals meant redeployment of resources at short
notice, our call centres in India had to be rapidly adapted for
employees working from home and our UK offices and Kent Reliance
branches were made compliant with social distancing requirements to keep
our employees and customers safe.
2020 was also a time when we were able to reflect and learn from the
pandemic. The Board is taking the opportunity to review some of the
existing plans for the business to create an even more operationally
resilient organisation, taking into account challenges presented by the
crisis, not relying on single suppliers or geographical locations, but
rather diversifying to protect the business.
The Group's response to COVID-19 (continued)
For our customers
The Group's priority throughout the year was to offer assistance to our
customers who might have been experiencing financial difficulty as a
result of the pandemic, both those borrowing with the Group and those
saving with Kent Reliance or Charter Savings Bank.
Within days of the mortgage payment deferral scheme being announced by
the government, the Group had acted quickly and assertively, redeploying
resources to respond to the spike in calls from mortgage customers. By
the end of June 2020, the Group had granted payment deferrals to
c.26,000 accounts, with a value equivalent to 28% of the Group's
mortgage book. Research amongst customers suggested that the significant
majority of requests for payment deferrals were to conserve cash and not
as a result of customers facing financial difficulty. As at 31 December
2020, active payment deferrals represented only 1.3% of the Group's loan
book by value.
The Group continued to process existing mortgage applications on a
limited range of products and, at the same time, successfully assisted
borrowers requesting mortgage payment deferrals. Due to restrictions
placed on physical valuations during the first lockdown, the Group
enhanced its risk assessment processes to accept alternative valuation
methods for certain products from mid-April 2020, to assist borrowers
further.
In October 2020, InterBay Asset Finance launched the Coronavirus
Business Interruption Loan Scheme product, enabling us to finance new
deals for SME customers affected by COVID-19.
To assist our savers, we kept Kent Reliance branches open throughout the
pandemic with appropriate safety protocols in place. Both Kent Reliance
and Charter Savings Bank encouraged the use of online access to accounts
with an additional channel of contact via secure messaging and
maintained postal and telephone channels. Our savings customers also
received emails notifying them of alternative ways they could transact
and we regularly placed COVID-specific updates as well as information
about our service levels on our website.
For our intermediaries
As a result of the pandemic, we became not only more proactive in our
engagement with brokers, but we also provided additional virtual ways of
interaction and allowed more flexible working hours for our sales teams
to accommodate brokers' changing hours.
At the outset of the pandemic in March 2020, the Group stopped accepting
new applications for a short period of time, however, we continued to
process all applications already in place where
we had physical valuations.
The Group's response to COVID-19 (continued)
For our employees
It has been of paramount importance for the Group to ensure the physical
safety and well-being of its employees throughout the pandemic. From the
end of March 2020, the majority of the Group's employees in the UK and
India have been working from home. For those whose roles could not be
performed adequately from home, the Group offered safe working
conditions in our offices. In India, the Group prepared ahead of
lockdown, which enabled the majority of employees to work from home with
safe and secure technology in place. In addition, we instigated business
continuity plans and were granted a number of government licences for
critical employees to attend offices in two additional locations as well
as in the main Bangalore site. The Group took actions to ensure that
flexible working arrangements were available for our employees, across
its different locations, as well as additional equipment and reliable
technology. Communication between colleagues continued via online forums,
team and Executive updates, virtual town halls and informal quizzes. The
Group cascaded mindfulness guidance, published mental health support
information and held training workshops, amongst other measures, to aid
employees to better manage their new working conditions.
The Group did not place any of its employees on the UK Government's
furlough scheme and welcomed 222 new colleagues in 2020.
Rising to the challenge
The COVID-19 global pandemic presented the Group with the unprecedented
challenge of balancing the needs and safety of our customers with the
welfare of our colleagues.
The combination of a dramatic increase in volumes for some of our
services, such as mortgage payment deferral requests, coupled with the
need to transition the majority of our colleagues to homeworking, was
undoubtedly challenging. Throughout the year, we continued to meet the
demands of both our savings and borrowing customers, not least by
ensuring that our branch network remained open for those unable to
interact with us through alternative channels.
Whilst the effectiveness of the Group's response is a result of many
contributing factors, the roll-out of a Group video communication
platform, together with the very high levels of reliability and
stability of the Group's IT systems, were crucial factors, as was the
flexibility, resilience and professionalism of our colleagues.
During 2020, approximately 80% of the Group's employees in the UK and
India were working from home, at times operating outside core business
hours in order to protect the bandwidth and capacity of IT systems and
to meet business demands. For those that were in the offices or branches,
a range of additional safety measures were introduced in order to
provide a COVID-secure operating environment.
Market review
The UK housing and mortgage market
According to the Bank of England, gross mortgage lending reached
GBP243.1bn in 2020, down 9% compared to GBP267.9bn in 2019(1) .
Mortgage transaction volumes in 2020 decreased to the lowest level since
2016(1) due to the impact of the COVID-19 pandemic and the measures
introduced by the UK Government in order to limit the spread of the
virus. In addition, lingering uncertainty remained for much of the year
over the UK's future relationship with the European Union, as
negotiations appeared to hit an impasse until a breakthrough was made
and a trade deal was agreed in December.
Market review (continued)
The first national lockdown, which began in March 2020, introduced a
number of significant challenges for the housing and mortgage market:
-- social distancing measures required staff across the industry to adapt to
working from home, while conducting business remotely
-- physical property valuations were suspended by many large surveying firms
as house visits were not possible due to social distancing requirements
-- furlough of staff across many industries raised concerns about job
security and the potential for the unemployment rate to rise
-- the government, with support from UK lenders, announced the ability for
individuals to take a mortgage payment deferral. This required the
prioritisation of mortgage payment deferral requests and meant that
mortgage lenders had to scale back new lending activity to ensure that
service levels could be maintained.
Lockdown measures remained in place throughout the second quarter of the
year and continued to cause delays in property transactions, easing from
April onwards. In particular, there was a large reduction in the number
of products available at high loan to value (LTV) as lenders sought to
limit exposure to the higher-risk segments of the market.
In May 2020, the UK Government published guidance on how to work safely
in other people's homes during COVID-19. This announcement enabled
physical valuations to resume which meant that lenders could begin to
reduce the backlog of cases that had built up throughout the lockdown
and gradually expand lending criteria.
New lending activity steadily recovered in the second half of the year
as pent-up demand was released and the Stamp Duty Land Tax (SDLT)
holiday led to a rebound in purchase transactions towards the end of the
year. This surge in demand, combined with continued low mortgage
interest rates, led to upwards pressure on house prices during the year.
Increasing infection rates throughout October and growing concerns
regarding a second wave, led to a second national lockdown during
November. The new processes and procedures put in place by mortgage
professionals during the first lockdown ensured that the impact of these
measures was largely mitigated.
The Bank of England noted in its Monetary Policy Report in February 2021
that markets had reacted positively to the news of successful vaccines
and the delivery of the vaccine programme, which should support the
removal of restrictions and a bounce back in economic activity.
The UK savings market
The UK savings market was also impacted by the COVID-19 pandemic as
customers stopped spending and started saving at the highest rate in
nearly 30 years. The percentage of disposable income saved rose from
9.6% to 29.1%, which was more than double the previous record of 14.4%
set in 1993(2) .
While some of the increased savings will have come from prudence in an
uncertain world, the majority came as a result of enforced saving as
national lockdowns prevented discretionary spending on everything from
houses and cars, to holidays and entertainment. Over GBP150bn was
deposited with banks and building societies in 2020 and c. GBP56bn was
deposited in the three months between April and June alone, during the
first national lockdown, compared to c. GBP6bn the month before(3) . The
NS&I increased their deposit requirement from GBP6bn to GBP35bn(4) and
competed strongly to obtain it.
Market review (continued)
Savings rates fell to historically low levels following the decision by
the Bank of England to cut its base rate by 65 basis points to a record
low of 0.1% by mid-March, although there was a delay in banks and other
deposit takers passing the base rate cuts on to savers in full, as they
prudently managed liquidity at the start of the pandemic. Between the
start of March and the start of July, the average rate paid on an easy
access savings account more than halved from 0.50% to 0.23%, while the
average rate on a one year fixed rate bond dropped from 1.15% to
0.66%(5) . Many providers chose to simply exit the market altogether,
with the number of savings accounts on offer reducing from 1,906 in
November 2019 to 1,517 in November 2020(5) .
Rates were forced down further in the second half of the year as banks
and building societies had to control savings inflows to avoid amassing
unnecessary liquidity, as lending volumes reduced and NS&I announced
significant rate cuts(6) .
The Group's lending segments
Buy-to-Let
In the Buy-to-Let segment of the mortgage market, the March lockdown was
the main driver behind the annual decrease in volumes. According to UK
Finance, Buy-to-Let gross advances reached 37bn in 2020, a 13% decrease
from GBP42.5bn in 2019.7
Purchase activity was more significantly affected in the early months of
the pandemic, with fewer landlords entering the market; however, this
was mitigated to a degree by the SDLT holiday which supported a recovery
in house purchase activity during the fourth quarter of the year.
Buy-to-Let purchases reached GBP9.8bn during the year, down 8% compared
to 2019, while remortgage originations reached GBP26.3bn, down 13%
year-on-year(7) . The professionalisation of the Buy-to-Let market that
has been driven by increased tax liability for private landlords and
sustained regulatory change over a number of years continued. On 6 April
2020, the final phase of the Buy-to-Let tax relief changes were
introduced, meaning that private landlords would no longer be able to
deduct any mortgage interest payments from their rental income when
calculating their tax liability. Instead, this has been replaced by a
tax credit calculated at 20% of the mortgage interest payment. For some
landlords, especially those that are higher rate or additional rate
taxpayers, this would result in a larger tax bill.
In addition, changes to Capital Gains Tax (CGT) rules that come into
force from the 2020-21 tax year, mean that landlords must now declare
and pay any CGT liabilities within 30 days of selling an investment
property, whereas in the past any CGT liability did not need to be
declared until the next annual tax return. This provides a much shorter
window for paying the tax bill and in combination with more restrictive
rules around Private Residence Relief and Letting Relief could further
increase the tax liability for certain landlords.
Research conducted by BVA BDRC in its Landlords Panel survey(8) reported
that in the fourth quarter of 2020, 66% of landlords believed that their
lettings business will be negatively affected by the coronavirus
pandemic; however, this proportion decreased compared to the first half
of the year (Q1 2020: 81%) signalling negative, but improving, sentiment
among landlords. This is also reflected in the landlords confidence
measure, which initially saw a sharp decline as the pandemic started
then showed signs of a rebound and a greater sense of optimism towards
the end of the year.
The proportion of landlords seeking to reduce the size of their
portfolio (20%) remains higher than the proportion intending to buy new
properties (16%); however, the gap has closed from this point last year
(22% and 14% respectively)(8) . Of those landlords looking to buy new
properties, a majority now intend to do so within a limited company
structure, with the most desirable attribute for new properties being
potential rental yield. The market is becoming increasingly dominated by
professional landlords whose primary source of income is from their
property portfolio.
Market review (continued)
The fundamentals underpinning the private rented sector remain strong,
with continued increases in house prices stretching affordability
further and the reduced availability of high LTV mortgages generating
high demand for rental properties.
Residential
The UK residential mortgage market was equally affected by the outbreak
of coronavirus and the measures that were introduced subsequently. The
national lockdown in March was the primary driver of the reduced lending
volumes in 2020 as lenders faced significant service pressures as they
adapted to working from home and prioritised processing of mortgage
payment deferral requests. Many of them reduced new business activity by
tightening criteria and withdrawing products as they focused on low LTV,
prime lending.
The purchase market was more impacted than the remortgage market, where
it is easier to transact without face-to-face contact, with strong
product transfer activity continuing. Purchase activity accelerated in
the second half of 2020, stimulated by pent-up demand, the SDLT holiday
and upcoming changes to the Help-to-Buy scheme.
House prices continued to rise, potentially increasing affordability
challenges, with many buyers seeking to complete their purchases before
the government incentives are withdrawn.
Commercial
The commercial property market, which was largely shut in the second
quarter of 2020, due to the pandemic, experienced contrasting dynamics
stemming directly from the social measures introduced to contain the
virus and dividing it into sectors that were thriving or struggling.
The hospitality and leisure sectors of the commercial market were
severely impacted by coronavirus restrictions, which have also further
exacerbated the difficult situation shopping centres and the High Street
were already experiencing pre-pandemic. As consumers moved online,
traditional retailers struggled to pay rents and therefore shut shops.
Many pubs, bars and restaurants also remaining closed, contributing to
retail tenant demand and rents on the High Street falling in all but the
most prime locations, with CBRE Group reporting an annual decline of
8.3% in rent for 'all retail'(9) . However, convenience retail showed
growth in 2020, as shopping for essentials became even more local(10) .
In addition, mixed use asset classes such as semi-commercial property,
which offers a diverse income stream underpinned by the residential
lettings, continued to be attractive to investors.
In contrast, the industrial sector, especially warehouse and
distribution, saw greater occupier and investor demand, resulting in an
increase in rents and capital values, with CBRE reporting annual rental
value and capital value growth of 2.8% and 4.7% respectively for 'all
industrial'(9) . Finally, office space was impacted by lower occupancy
rates as office workers were working from home for the majority of 2020.
This trend has also created some uncertainty around future occupier
requirements for office space, as many businesses may not be renewing
their leases or may be choosing smaller office spaces and adopting
flexible and agile working post pandemic(10) .
Overall, in 2020, there was GBP41.8bn invested into UK commercial
property, a fall of 22% from 2019(11) .
Market review (continued)
Residential development
The UK has experienced a long period of house price growth, creating
affordability problems, as demand for housing outstripped both supply
and real wage growth. Transaction volumes for new build sales were
affected by the national lockdown in March, as they were for the second
hand market.
However, the furlough scheme, mortgage payment deferrals and, to a
lesser extent, the suspension on lenders and landlords taking
possessions, as well as other government schemes supporting lending and
house purchases, protected both housing markets from the effects of the
pandemic and boosted the demand for housing throughout 2020.
The strongest demand experienced by Heritable's customers was for houses
that were affordable to local populations in the regions, which the
business has concentrated on funding. It was notable that sales rates
for the few apartment schemes funded in London were also high, seemingly
bucking the trend of that particular market. These have resulted in high
levels of repayments for the Heritable business through 2020.
It appears that some regions remain structurally reliant on the
government's Help to Buy scheme and therefore these areas tend to be
avoided by Heritable. When government intervention into the housing
markets, both directly and indirectly, is withdrawn there is a risk that
these transaction volumes will fall and the support required by small
and medium sized developers, which forms OSB Group's core audience for
development finance, will therefore increase.
Second charge lending
Second charge lending was severely disrupted by the measures introduced
to slow the spread of coronavirus, as lenders scaled back their appetite
for new business with lower maximum LTVs and stricter lending criteria.
According to the FLA, second charge mortgage lending reached GBP728m in
2020, down 42% compared to 2019(12) .
Funding lines
There are a number of successful non-bank or alternative providers of
finance to retail and SME customers in the UK. These businesses are
funded through a variety of means, including wholesale finance provided
by banks, investment funds and securitisation/bond markets, high net
worth investors and market-based peer-to-peer platforms.
OSB Group is an active provider of secured funding lines to these
specialty finance providers, primarily focusing on short-term real
estate finance and development finance. Through these activities, the
Group has achieved senior secured exposure at attractive returns to
asset classes that it knows well, primarily secured against
property-related mortgages. OSB Group sees a regular flow of
opportunities; however, given the COVID-19 pandemic and economic
uncertainty, in 2020 the Group did not consider any new client
facilities, choosing to focus on servicing the existing borrowers and
applying amended, restricted lending criteria.
1. UK Finance, New mortgage lending by purpose of loan, UK (BOE), Feb
2021
2. House of Commons Library, Research Briefing, Coronavirus: Impact on
Household Saving and
Debt, Jan 2021
3. Bank of England Database, LPMVVHS, Dec 2020
4. NS&I press release 16 July 2020
5. Moneyfacts Treasury Reports 2020
6. NS&I press release 21 Sept 2020
7. UK Finance, New and outstanding Buy-to-Let mortgages, Feb 2021.
8. BVA BDRC Landlords Panel, Q4 2020, Jan 2021
9. CBRE UK Monthly Index, Dec 2020
10. Commercial Auction 2020 Annual review, Allsops
11. https://www.savills.co.uk/research_articles/229130/310162-0
12. FLA, Feb 2021
Key performance indicators
Throughout the Strategic report the KPIs are presented on a statutory
and an underlying basis for 2020, and a statutory and pro forma
underlying basis for 2019.
Management believe these provide a more consistent basis for comparing
the Group's performance between financial periods. Underlying results
for 2020 exclude exceptional items, integration costs and other
acquisition-related items.
Pro forma underlying results for 2019 assume that the Combination
occurred on 1 January 2019 and include 12 months of results from CCFS.
They also exclude exceptional items, integration costs and other
acquisition-related items. For a reconciliation of statutory results to
underlying and pro forma underlying results, see page 31.
1. Gross new lending
Statutory GBP3.8bn (2019: GBP4.1bn)
Underlying GBP3.8bn (2019: pro forma underlying GBP6.5bn)
Definition - Gross new lending is defined as gross new organic lending
before redemptions.
2020 performance
The reduction in gross new lending in the year reflects the impact of
the coronavirus pandemic on the Group's lending activities.
2. Net interest margin (NIM)
Statutory 216bps (2019: 243bps)
Underlying 247bps (2019: pro forma underlying 266bps)
Definition - NIM is defined as net interest income as a percentage of a
13 point average of interest earning assets (cash, investment securities,
loans and advances to customers and credit institutions). It represents
the margin earned on loans and advances and liquid assets after swap
expense/income and cost of funds.
2020 performance
Both statutory and underlying NIM were lower in 2020 primarily due to a
delay in passing on the base rate cuts in full to retail savers.
Statutory NIM was also impacted by the dilutive effect of including
CCFS' results post Combination.
3. Cost to income ratio
Statutory 31% (2019: 32%)
Underlying 27% (2019: pro forma underlying 29%)
Definition - Cost to income ratio is defined as administrative expenses
as a percentage of total income. It is a measure of operational
efficiency.
2020 performance
Statutory and underlying cost to income ratios improved in 2020 as the
Group benefitted from the delivery of synergies and lower discretionary
spend during lockdowns. The statutory cost to income ratio was also
impacted by a full year of amortisation of the fair value uplift on
CCFS' net assets which reduced total income on a statutory basis.
Key performance indicators (continued)
4. Management expense ratio
Statutory 71bps (2019: 76bps)
Underlying 70bps (2019: pro forma underlying 84bps)
Definition
Management expense ratio is defined as administrative expenses as a
percentage of a 13 point average of total assets. It is a measure of
operational efficiency.
2020 performance
Statutory and underlying management expense ratios improved in 2020 as
the Group benefitted from the delivery of synergies and lower
discretionary spend during lockdowns.
5. Loan loss ratio
Statutory 38bps (2019: 13bps)
Underlying 38bps (2019: pro forma underlying 10bps)
Definition - Loan loss ratio is defined as impairment losses expressed
as a percentage of a 13 point average of gross loans and advances. It is
a measure of the credit performance of the loan book.
2020 performance
Statutory and underlying loan loss ratios increased, despite the stable
credit profile of the Group and positive house price movements in the
year, primarily as a result of adopting more adverse forward-looking
macroeconomic scenarios due to the pandemic, changes to the Group's
staging criteria in line with PRA guidance, COVID-19 related
enhancements to the Group's models and recognising an impairment
provision in relation to potentially fraudulent activity by a
third-party on a secured funding line provided by the Group.
6. Return on equity
Statutory 13% (2019: 18%)
Underlying 19% (2019: pro forma underlying 25%)
Definition
Return on equity is defined as profit attributable to ordinary
shareholders, which is profit after tax and after deducting coupons on
Additional Tier 1 securities (AT1 securities), gross of tax, as a
percentage of a 13 point average of shareholders' equity (excluding
GBP60m of AT1 securities).
2020 performance
Statutory and underlying return on equity reduced in 2020 due to higher
impairment losses and a strengthened equity position, which benefitted
from the cancellation of the 2019 final dividend and strong capital
generation from profitability. The statutory return on equity was also
adversely impacted by a full year of amortisation of the net fair value
uplift to CCFS' net assets on Combination.
Key performance indicators (continued)
7. OSB solo CRD IV fully-loaded Common Equity Tier 1 capital ratio
The PRA has granted the Company a waiver to comply with the Capital
Requirements Regulation (CRR) as an individual consolidation which
includes the Company and subsidiaries except for the offshore servicing
entity OSB India, Special Purpose Vehicles relating to securisations and
the CCFS entities acquired in October 2019.
OSB solo 17.2% (2019: 14.1%)
Definition
This is defined as Common Equity Tier 1 (CET1) capital as a percentage
of risk-weighted assets (calculated on a standardised basis) and is a
measure of the capital strength of the Company.
2020 performance
The CET1 ratio strengthened in the year supported by the cancellation of
the final dividend for 2019, the application of the Capital Requirements
Regulation 'Quick Fix' package and strong capital generation from
profitability.
8. Savings customer satisfaction -- Net Promoter Score (NPS)
OSB +67 (2019: +66)
CCFS +72 (2019: +72)
Definition
The NPS measures our customers' satisfaction with our service and
products. It is based on customer responses to the question of whether
they would recommend us to a friend. The question scale is 0 for
absolutely not to 10 for definitely yes. Based on the score, a customer
is defined as a detractor between 0 and 6, a passive between 7 and 8 and
a promoter between 9 and 10. Subtracting the percentage of detractors
from the percentage of promoters gives an NPS of between -100 and +100.
2020 performance
OSB's savings customer NPS improved to +67 and CCFS' remained an
outstanding +72.
Financial review
Summary statutory results for 2020 and 2019
For the year ended For the year ended
31 December 31 December
2020 2019
Summary Profit or Loss GBPm GBPm
Net interest income 472.2 344.7
Net fair value gain/(loss) on financial
instruments 7.4 (3.3)
Gain/(loss) on sale of financial
instruments 20.0 (0.1)
Other operating income 9.0 2.1
Administrative expenses (157.0) (108.7)
Provisions (0.1) -
Impairment of financial assets (71.0) (15.6)
Impairment of intangible assets (7.0) -
Gain on Combination with CCFS - 10.8
Integration costs (9.8) (5.2)
Exceptional items (3.3) (15.6)
Profit before taxation 260.4 209.1
Profit after taxation 196.3 158.8
Key ratios
Net interest margin 216bps 243bps
Cost to income ratio 31% 32%
Management expense ratio 0.71% 0.76%
Loan loss ratio 0.38% 0.13%
Return on equity 13% 18%
As at As at
31 December 31 December
2020 2019
Extracts from the Statement of Financial
Position GBPm GBPm
Loans and advances to customers 19,230.7 18,446.8
Retail deposits 16,603.1 16,255.0
Total assets 22,654.5 21,417.1
Financial review (continued)
Strong profit growth
The Group reported 25% growth in statutory profit before taxation to
GBP260.4m (2019: GBP209.1m) after exceptional items, integration costs
and other acquisition-related items of GBP85.8m(1) (2019: GBP33.2m(2) )
primarily due to the inclusion of a full year of profits from CCFS
following the Combination in October 2019, which more than offset the
impact of higher impairment charges as the Group adopted more adverse
COVID-19 related forward-looking assumptions in its IFRS 9 models and
recognised an impairment provision in relation to potentially fraudulent
activity by a third-party on a secured funding line provided by the
Group.
Statutory profit after taxation in 2020 increased by 24% to GBP196.3m
(2019: GBP158.8m) including the after tax exceptional items, integration
costs and other acquisition-related items of GBP68.6m(1) (2019:
GBP27.4m(2) ), broadly in line with the increase in profit before tax.
The Group's effective tax rate increased to 23.1%(3) in 2020 (2019:
22.8%), primarily due to the impact of the government's cancellation of
planned corporation tax rate reductions on 19 March 2020 on the deferred
tax liability in relation to the Combination and a larger portion of the
profit being subject to the Bank Corporation Tax Surcharge from the
inclusion of a full year of profits from CCFS.
Statutory return on equity for 2020 fell to 13% (2019: 18%), primarily
due to a full year of amortisation of the net fair value uplift to CCFS'
net assets on Combination, higher impairment charges and a strengthened
equity position, which benefitted from the cancellation of the 2019
final dividend and strong capital generation from profitability.
Net interest margin (NIM)
The Group reported an increase in statutory net interest income of 37%
to GBP472.2m in 2020 (2019: GBP344.7m), reflecting the inclusion of a
full year of net interest income from CCFS, which more than offset the
impact of higher amortisation of the net fair value uplift to CCFS' net
assets on Combination.
Statutory NIM for 2020 reduced to 216bps (2019: 243bps), primarily due
to the dilutive impact of including CCFS' results post Combination as
well as the dilutive impact of a delay in passing on the base rate cuts
in full to retail savers.
The CCFS business has a lower NIM than the OSB business and statutory
NIM in 2020 was also adversely impacted by a full year of amortisation
of the fair value uplift on acquisition of CCFS' net assets.
Net fair value gain/(loss) on financial instruments
The statutory net fair value gain on financial instruments of GBP7.4m in
2020 (2019: GBP3.3m loss) includes a GBP13.0m gain (2019: GBPnil) from
the amortisation of hedge accounting inception adjustments, a GBP17.0m
gain from the unwind of acquisition-related inception adjustments (2019:
GBP3.3m) and a GBP2.2m gain (2019: GBP5.3m loss) from other items
including the amortisation of the fair value relating to de-designated
hedge relationships due to ineffectiveness, offset by a net loss of
GBP6.8m (2019: GBP4.8m loss) in respect of the ineffective portion of
hedges and an GBP18.0m net loss on unmatched swaps (2019: GBP3.5m net
gain).
The net loss on unmatched swaps primarily related to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and was caused by a fall in outlook on the
LIBOR and SONIA yield curves. The Group economically hedges its
committed pipeline of mortgages and this unrealised loss unwinds over
the life of the swaps through hedge accounting inception adjustments.
Financial review (continued)
The amortisation of fair value relating to de-designated hedge
relationships occurs when hedge relationships are cancelled due to
ineffectiveness.
Gain on sale of financial instruments
The gain on sale of financial instruments of GBP20.0m in 2020 on a
statutory basis, comprised a gain of GBP19.9m on disposal of the
remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January and a gain of GBP0.1m on the sale of
GBP150.0m of AAA notes from the Canterbury No. 3 securitisation in
September.
In 2019 the Group identified that an additional GBP0.1m of customer
receipts was due to the purchaser of the personal loan portfolio,
recognising an additional loss on sale of GBP0.1m.
Other operating income
Statutory other operating income of GBP9.0m (2019: GBP2.1m) largely
related to fees and commissions receivable, and the increase was due to
the inclusion of a full year of CCFS fees and commissions and servicing
fees, including those relating to securitised loans which have been
deconsolidated from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased 44% to GBP157.0m in 2020
(2019: GBP108.7m) primarily due to the inclusion of CCFS' administrative
expenses for the full year, which more than offset the impact of the
delivery of synergies and lower discretionary spending during lockdowns.
The Group's statutory cost to income ratio of 31% (2019: 32%) improved
with the delivery of synergies and the benefit of lower discretionary
spending during lockdowns, which more than offset the impact of lower
income due to a full year of acquisition-related adjustments (including
the amortisation of the fair value uplift on CCFS' net assets),
partially offset by gains on structured asset sales in the year.
The statutory management expense ratio improved to 71bps (2019: 76bps)
reflecting the delivery of synergies and lower discretionary spend
during lockdown.
Impairment of financial assets
Statutory impairment losses increased to GBP71.0m in 2020 (2019:
GBP15.6m) representing 38bps on average gross loans and advances (2019:
13bps).
Impairment losses in 2020 increased primarily due to the impact of
adopting more adverse forward looking macroeconomic scenarios as the
coronavirus pandemic changed the outlook for the UK economy, changes to
the Group's staging criteria in line with PRA guidance, which moved
certain higher risk accounts with payment deferrals to stage 2, and
COVID-related enhancements to the Group's models. For more detail see
the Risk review. The Group also recognised an impairment provision of
GBP20.0m in relation to potential fraudulent activity by a third party
on a funding line provided by the Group, secured against lease
receivables and the underlying hard assets.
Financial review (continued)
Impairment of intangible assets
The impairment of intangible assets of GBP7.0m related to the intangible
assets recognised on the acquisition of CCFS and the impact of lower
actual and expected lending volumes in CCFS due to COVID-19 on the
recoverable amount of the broker relationship intangible.
Integration
Progress towards achieving the synergies from the Combination has been
strong. By the first anniversary of the Combination, we had delivered
run rate savings of over GBP15m, well ahead of our GBP6.6m target and
representing more than 65% of our end of year three target run rate.
This was achieved primarily by streamlining the Board and senior
management team earlier than planned and through efficiencies from
combining various central and support functions. The synergies realised
during 2020 from these efficiencies were equivalent to a c.2% points
improvement in the Group's underlying cost to income ratio. We continue
to find additional synergies and are ahead of schedule towards realising
the planned run rate savings for the end of year two, with a projected
end of year three run rate marginally in excess of the GBP22m target.
The Board is taking the opportunity to review whether some planned
consolidation of locations and suppliers should take place, based on a
heightened focus on operational resilience. In light of additional
opportunities found, any decision is not expected to have a material
impact on the overall quantum of run-rate synergies targeted by the end
of year three. No material dis-synergies have been identified to date.
In the first year following the Combination, costs to achieve the
synergies were GBP10m against an expectation of GBP13m. However, some
costs were delayed into the second year meaning that we anticipate being
closer to plan at the end of year two. Final costs are expected to be
marginally below the target of GBP39m by the end of year three.
Financial review (continued)
Integration costs
The Group recorded GBP9.8m (2019: GBP5.2m) of integration costs largely
related to staff costs for key personnel retained to assist in the
integration for a fixed period and fees incurred for external advice on
the Group's future operating structure.
Exceptional items
Statutory exceptional items of GBP3.3m in 2020 related to the insertion
of OSB GROUP PLC as the new holding company and listed entity of the
Group.
The exceptional items of GBP15.6m in 2019 comprised transaction costs
incurred by OSB in relation to the Combination with CCFS.
Balance sheet growth
Net loans and advances to customers increased by 4% in 2020 to
GBP19,230.7m (31 December 2019: GBP18,446.8m) on a statutory basis,
reflecting subdued originations due to the pandemic as well as
structured asset sales in the year. Excluding the impact of structured
asset sales, the statutory net loan book increased by 9%.
On a statutory basis, retail deposits increased by 2% to GBP16,603.1m
from GBP16,255.0m, which the Group supplemented by participating in the
Bank of England's funding schemes.
As at 31 December 2020, the Group's drawings under the Term Funding
Scheme (TFS) remained at GBP2.6bn (2019: GBP2.6bn) with a repayment of
GBP60.0m during the year. In the first half of 2020, the Group was
accepted to participate in the Term Funding Scheme for SMEs (TFSME) with
drawings of GBP1.0bn as at the end of 2020, which were used to replace
Indexed Long-Term Repo (ILTR) funding and support net loan book growth.
All of the Group's borrowings under the ILTR scheme were repaid during
the year (2019: GBP290m).
The TFS drawdowns are offered in the form of collateralised cash loans.
The scheme closed to new drawings at the end of February 2018 and the
Group has four years from the date of drawing to repay the existing
loans. TFSME drawdowns are also offered in the form of collateralised
cash loans. The scheme commenced in March 2020 and offers four-year
funding of at least 10% of participants' stock of real economy lending
at interest rates at, or very close to, Bank Base Rate. Additional
funding is available for banks that increase lending, especially to
small and medium-sized enterprises. The TFSME is available for new
funding until 31 October 2021.
The Group had up to GBP350m (2019: GBP600m) of contingent wholesale
funding capacity available to it through the CCFS warehouse facilities,
none of which was utilised at the year end.
The Group also utilises sophisticated securitisation platforms to
complement its retail funding requirements and to optimise its
collateral for commercial and central bank funding. For further details
of securitisation activity in 2020, see the Wholesale funding overview.
Total assets grew by 6% to GBP22,654.5m (31 December 2019: GBP21,417.1m)
primarily reflecting the growth in loans and advances and liquid assets.
Financial review (continued)
Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk. Both
Banks hold their own significant liquidity buffer of liquidity coverage
ratio (LCR) eligible high-quality liquid assets (HQLA).
As at 31 December 2020, OSB had GBP1,366.7m (2019: GBP1,231.8m) and CCFS
had GBP1,069.1m (2019: GBP1,077.3m) of HQLA LCR eligible assets. Both
Banks also held a significant portfolio of unencumbered prepositioned
Bank of England level C eligible collateral in the Bank of England
Single Collateral Pool.
Both Banks operate within a target liquidity runway in excess of the
minimum LCR regulatory requirement, which is based on internal stress
testing. Both Banks have a range of contingent liquidity and funding
options available for possible stress periods.
As at 31 December 2020, OSB had a liquidity coverage ratio of 254%
(2019: 199%) and CCFS 146% (2019: 145%), significantly in excess of the
2020 regulatory minimum of 100%.
The Group maintained prudent levels of liquidity as at 31 December 2020
in light of the continued uncertainty due to COVID-19.
Capital
The OSB solo capital position remained strong with a fully-loaded CET1
capital ratio of 17.2% as at 31 December 2020 (31 December 2019: 14.1%).
The OSB solo CET1 capital ratio as at 31 December 2020 benefitted from
the cancelled final dividend for 2019, the application of the Capital
Requirements Regulation 'Quick Fix' package and strong capital
generation from profitability.
Summary cash flow statement
For the year For the year
ended ended
31 December 31 December
2020 2019
------------------------------------------- ------------ ------------
Profit before tax 260.4 209.1
Net cash generated/(used in):
Operating activities (1,326.3) (536.1)
Investing activities 755.8 826.6
Financing activities 838.3 488.1
Net increase/(decrease) in cash and cash
equivalents 267.8 778.6
Cash and cash equivalents at the beginning 2,102.8 1,324.2
of the period 2,370.6 2,102.8
Cash and cash equivalents at the end of
the period
------------------------------------------- ------------ ------------
Cash flow statement
The Group's cash and cash equivalents increased by GBP267.8m during the
year to GBP2,370.6m as at 31 December 2020.
Financial review (continued)
Loans and advances to customers increased by GBP1,705.0m during the year,
partially funded by GBP348.1m of deposits from retail customers offset
by an increase in loans and advances to credit institutions (primarily
the Bank of England call account) of GBP154.0m. Additional funding was
provided by cash generated from financing activities of GBP838.3m and
included GBP935.9m of net drawings under the Bank of England's TFS and
TFSME schemes and GBP381.6m of net proceeds from securitisation of
mortgages, partially offset by the repayment of warehouse funding, ILTR
and commercial repos during the year. Cash generated from investing
activities was GBP755.8m, mainly from the sale of RMBS securities and
derecognition of securitisations.
In 2019, the increase in the Group's loans and advances to customers of
GBP2,230.8m was partially funded by GBP1,637.8m of deposits from retail
customers. Additional funding was provided by cash generated from
financing activities of GBP488.1m and included GBP170.0m of net drawings
under the Indexed Long-Term Repo scheme, GBP220.4m of proceeds from
securitisation of mortgages, warehouse funding of GBP93.5m and GBP41.3m
from commercial repos offset by a dividend payment of GBP37.3m. Cash
generated from investing activities was GBP826.6m, largely as a result
of GBP870.4m of cash and cash equivalents acquired on the Combination
with CCFS.
1. As shown in the reconciliation of statutory to underlying results in
Financial review.
2. In 2019, this comprised GBP48.9m (GBP42.9m after tax) of
acquisition-related items as shown in the reconciliation of statutory to
pro forma underlying results in Financial review, less CCFS'
pre-acquisition transaction costs of GBP15.7m (GBP15.5m after tax).
3. Effective tax rate excludes a GBP4.4m charge for the impact of the
deferred tax rate change and a benefit of GBP0.4m in respect of earlier
years.
Financial review (continued)
Summary of underlying results for 2020 and results on a pro forma
underlying basis for 2019
For the year ended For the year ended
31 December 31 December
2020 2019
Summary Profit or Loss GBPm GBPm
Net interest income 534.0 518.4
Net fair value loss on financial
instruments (5.9) (20.3)
Gain on sale of financial instruments 33.1 58.6
Other operating income 9.0 5.8
Administrative expenses (152.7) (165.1)
Provisions (0.1) -
Impairment of financial assets (71.2) (16.3)
Profit before taxation 346.2 381.1
Profit after taxation 264.9 294.2
Key ratios
Net interest margin 247bps 266bps
Cost to income ratio 27% 29%
Management expense ratio 0.70% 0.84%
Loan loss ratio 0.38% 0.10%
Return on equity 19% 25%
As at As at
31 December 31 December
2020 2019
Extracts from the Statement of
Financial Position GBPm GBPm
Loans and advances 19,020.8 18,151.4
Retail deposits 16,600.0 16,248.6
Total assets 22,472.2 21,166.5
Alternative performance measures
The Group presents alternative performance measures (APMs) in this
Strategic report as Management believe they provide a more consistent
basis for comparing the Group's performance between financial periods.
Underlying results for 2020 exclude exceptional items, integration costs
and other acquisition-related items. Pro forma underlying results for
2019 assume that the Combination occurred on 1 January 2019 and include
12 months of results from CCFS. They also exclude exceptional items,
integration costs and other acquisition-related items.
APMs reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, any APMs
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well.
Financial review (continued)
Underlying profit before and after tax
Underlying profit before taxation was GBP346.2m for the year, down 9%
from pro forma underlying profit before taxation of GBP381.1m in 2019,
primarily due to higher impairment losses as the Group adopted more
adverse COVID-19 related forward-looking assumptions in its IFRS 9
models, and recognised an impairment provision of GBP20.0m in relation
to potential fraudulent activity by a third party on a funding line
provided by the Group, secured against lease receivables and the
underlying hard assets, which more than offset the benefit from balance
sheet growth.
Underlying profit after taxation was GBP264.9m in 2020, down 10% from
pro forma underlying profit after taxation of GBP294.2m in 2019, in line
with the decrease in profit before tax and a higher effective tax rate.
On an underlying basis, the Group's effective tax rate was 23.5% in 2020
(2019: 22.8%) as a larger portion of the Group's profit was subject to
the Bank Corporation Tax Surcharge.
Underlying return on equity for 2020 remained strong at 19%, although it
was lower than 25% in 2019, due primarily to the higher impairment
charges and a strengthened equity position, which benefitted from the
cancellation of the 2019 final dividend and strong capital generation
from profitability.
Net interest margin
On an underlying basis, net interest income increased 3% in 2020 to
GBP534.0m from GBP518.4m in 2019 and underlying net interest margin
(NIM) was 247bps (2019: 266bps).
The reduction in underlying NIM to 247bps from 266bps in 2019, primarily
reflects the dilutive impact of a delay in passing on the base rate cuts
in full to retail savers. The full impact of the base rate cuts was
passed on to savers by the end of the third quarter of 2020.
Net fair value loss on financial instruments
The underlying net fair value loss on financial instruments decreased to
GBP5.9m from a pro forma underlying loss of GBP20.3m in 2019.
The loss for 2020 included a net loss of GBP6.8m (2019: GBP5.1m loss)
from hedge ineffectiveness, a net loss on unmatched swaps of GBP18.0m
(2019: GBP13.3m loss) and a GBP16.7m gain (2019: GBP1.7m gain) relating
to the amortisation of hedging adjustments arising when hedge accounting
commences on derivative instruments previously taken out against the
mortgage pipeline. Other hedging and fair value movements amounted to a
gain of GBP2.2m (2019: GBP3.9m loss).
The net loss on unmatched swaps primarily relates to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and due to a fall in outlook on the LIBOR
and SONIA yield curves. The Group economically hedges its committed
pipeline of mortgages and this unrealised loss unwinds over the life of
the swaps through hedge accounting inception adjustments.
Gain on sale of financial instruments
The underlying gain on structured asset sales of GBP33.1m in the year
(2019: GBP58.6m) related to a gain of GBP33.0m on disposal of the
remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January 2020. In September, the Group sold GBP150.0m
of notes from the Canterbury No. 3 securitisation generating a gain of
GBP0.1m.
In 2019, the gain on sale of loans consisted of a gain of GBP58.7m from
sales of residual interests in three CCFS securitisations to third party
investors prior to the Combination and a GBP0.1m loss from customer
receipts due to the purchaser of the personal loan portfolio.
Financial review (continued)
Other operating income
Other operating income of GBP9.0m (2019: GBP5.8m) primarily related to
CCFS' fees for servicing third party mortgage portfolios and servicing
fees for derecognised securitised mortgages, where the Group continued
to service the loans.
Administrative expenses
Underlying administrative expenses were GBP152.7m in 2020, a decrease of
8% from GBP165.1m in 2019, as the synergies from the integration of OSB
and CCFS continued to be delivered and the Group benefitted from lower
discretionary spend in lockdowns, including those relating to travel,
accommodation and marketing, as employees continued to follow COVID-19
restrictions in the UK and India.
The underlying cost to income and underlying management expense ratios
improved to 27% and 70bps respectively (2019: 29% and 84bps
respectively) reflecting the delivery of synergies and lower
discretionary spend during lockdowns.
Impairment of financial assets
Impairment losses on an underlying basis increased to GBP71.2m in 2020
(2019: GBP16.3m) representing 38bps on average gross loans and advances
(2019: pro forma underlying 10bps).
Impairment losses in 2020 increased primarily due to the impact of
adopting more adverse forward-looking macroeconomic scenarios as the
onset of the coronavirus pandemic changed the outlook for the UK economy,
changes to the Group's staging criteria in line with PRA guidance, which
moved certain higher risk accounts with payment deferrals to stage 2,
and COVID-related enhancements to the Group's models. For more detail,
see the Risk review. The Group also recognised an impairment provision
of GBP20.0m in relation to potential fraudulent activity by a third
party on a funding line provided by the Group, secured against lease
receivables and the underlying hard assets.
Balance sheet
On an underlying basis, the loan book increased 5% to GBP19,020.8m
(2019: GBP18,151.4m) reflecting reduced originations due to the pandemic
as well as structured asset sales at the start of the year. Excluding
the impact of the structured asset sales, the underlying net loan book
growth would have been 9%.
Underlying retail deposits increased by 2% during 2020 to GBP16,600.0m
(2019: GBP16,248.6m) as both Banks continued to attract new savers by
offering attractively priced savings products and outstanding customer
service. The balance of the Group's funding requirement was provided by
the Bank of England's funding schemes and RMBS which provided GBP935.9m
and GBP381.6m of net new funding respectively. For further details of
the Group's securitisation activity in 2020, see the Wholesale funding
overview.
The Group's total underlying assets increased in the year by 6% to
GBP22,472.2m from GBP21,166.5m in 2019, primarily reflecting the growth
in loans and advances and liquid assets.
Financial review (continued)
Reconciliation of statutory to underlying and pro forma underlying
results
2020 2019
Statutory Reverse CCFS Reverse
results acquisition- related and exceptional items Underlying results Statutory results pre-acquisition acquisition-related items Pro forma underlying results
GBPm GBPm GBPm GBPm results GBPm GBPm GBPm
------------------
Net interest
income 472.2 61.8(1) 534.0 344.7 152.1 21.6 518.4
Net fair value
gain/(loss) on
financial
instruments 7.4 (13.3)(2) (5.9) (3.3) (13.7) (3.3) (20.3)
Gain/(loss) on
sale of loans 20.0 13.1(3) 33.1 (0.1) 58.7 - 58.6
Other operating
income 9.0 - 9.0 2.1 3.7 -- 5.8
Total income 508.6 61.6 570.2 343.4 200.8 18.3 562.5
Administrative
expenses (157.0) 4.3(4) (152.7) (108.7) (57.7) 1.3 (165.1)
Provisions (0.1) - (0.1) - -- -- -
Impairment of
financial
assets (71.0) (0.2)(5) (71.2) (15.6) (4.3) 3.6 (16.3)
Impairment of
intangible
assets (7.0) 7.0(6) - - - - -
Gain on
Combination
with CCFS - - - 10.8 - (10.8) --
Integration
costs (9.8) 9.8(7) - (5.2) -- 5.2 --
Exceptional
costs (3.3) 3.3(8) - (15.6) (15.7) 31.3 --
------------------ ------------------
Profit before
tax 260.4 85.8 346.2 209.1 123.1 48.9 381.1
Profit after tax 196.3 68.6 264.9 158.8 92.5 42.9 294.2
Summary Balance Sheet
Loans and
advances to
customers 19,230.7 (209.9)(9) 19,020.8 18,446.8 - (295.4) 18,151.4
Other financial
assets 3,341.8 36.8(10) 3,378.6 2,878.2 - 63.2 2,941.4
Other
non-financial
assets 82.0 (9.2)(11) 72.8 92.1 - (18.4) 73.7
------------------ ------------------
Total assets 22,654.5 (182.3) 22,472.2 21,417.1 - (250.6) 21,166.5
Amounts owed to
retail
depositors 16,603.1 (3.1)(12) 16,600.0 16,255.0 - (6.4) 16,248.6
Other financial
liabilities 4,296.6 4.4(13) 4,301.0 3,544.0 - 10.0 3,554.0
Other
non-financial
liabilities 77.9 (61.4)(14) 16.5 141.1 - (63.1) 78.0
------------------ ------------------
Total
liabilities 20,977.6 (60.1) 20,917.5 19,940.1 - (59.5) 19,880.6
Net assets 1,676.9 (122.2) 1,554.7 1,477.0 - (191.1) 1,285.9
------------------ --------- ------------------------------------------- ------------------ ----------------- ------ ---------------- --------------------------
1. Amortisation of the net fair value uplift to CCFS' mortgage loans and
retail deposits on Combination.
2. Reversal of GBP17.0m of acquisition-related inception adjustments and
recognition of GBP3.7m of inception adjustments under CCFS' entity level
hedge accounting.
3. Recognition of additional gain on sale of securitised loans.
4. Amortisation of intangible assets recognised on Combination.
5. Adjustment to expected credit losses on CCFS loans on Combination.
6. Impairment of intangible asset post Combination.
7. Costs of integration of the two Banks post Combination.
8. Reversal of exceptional costs incurred during the year.
9. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions.
10. Fair value adjustment to hedged assets.
11. Adjustment to current tax asset and recognition of acquired
intangibles on Combination.
12. Fair value adjustment to CCFS' retail deposits less accumulated
amortisation.
13. Fair value adjustment to hedged liabilities.
14. Adjustment to deferred tax liability and other acquisition-related
adjustments.
Risk review
Executive summary
During the year, the Group primarily focused on developing a considered
and measured response to the global pandemic based on its strategic
objectives, risk appetite and risk management capabilities. In
particular, the Board and senior management ensured that the Group
continued to operate with sufficient financial buffers and operational
capacity to withstand any future extreme but plausible economic shocks.
The Group leveraged the underlying risk management frameworks to assess,
monitor and respond to the emerging economic, business and operational
challenges arising from the pandemic. The Group's response was subject
to extensive planning, coordination and implementation oversight by the
Board and senior management through both formal Committee meetings and
ad hoc engagement sessions. The Group benefitted greatly from the
extensive and diverse risk management experience of the Board and senior
management during all phases of the pandemic.
The Group's response to the pandemic has been centrally coordinated
whilst being cognisant of the specific business and operational
characteristics of the individual banking entities. The Board and senior
management responded quickly to assess the potential implications and
impacts of the emerging pandemic across all identified principal risks,
with a particular focus on credit, capital, liquidity and operational
risks.
Well established stress testing and analytical capabilities were
leveraged to identify the risks and vulnerabilities to the business, and
economic and operational drivers which may be impacted by the pandemic.
This analysis highlighted the potential implications of the pandemic on
the Group's assets, liabilities, funding and solvency positions,
operational capacity and customers. Continued and progressive
enhancements were made to the risk assessment approaches to ensure that
the Group's response was aligned to the evolving nature of the pandemic.
The Board and senior management maintained an open and active dialogue
with primary stakeholders including employees, customers and regulatory
authorities throughout 2020.
At the onset of the pandemic, the Group took appropriate actions to
ensure full compliance with social distancing and lockdown guidelines,
utilising its business continuity and operational resilience frameworks.
As the majority of the Group's workforce transitioned to working from
home, the Group took appropriate actions to ensure operational risks
were subject to active identification, assessment and monitoring.
As payment deferral guidelines were introduced, the Group took timely
actions to ensure effective compliance with the emerging regulatory
guidelines, swiftly updating its risk modelling and provisioning
approaches, whilst modifying its operational procedures to ensure an
effective response to customers requesting payment deferrals.
The Group updated its IFRS 9 provisioning approach to reflect the
emerging pandemic-based economic scenarios, including the varied
permutations of how the UK economy may be impacted. Appropriate
adjustments were also applied to the underlying model-based judgements
and estimates. The Group continuously monitored and updated its credit
provisioning approach. The Group remains mindful of the potential for
future risks which may manifest themselves post the removal of the
government support schemes, particularly the furlough scheme, and is
confident that its provisioning approach is sufficiently agile and
responsive to emerging trends and issues.
Risk review (continued)
To ensure that the quantum of model-based provisions remained
appropriate, a top-down triangulation exercise was commissioned by the
Board. The top-down assessment benchmarked IFRS 9 provisions to
historical stresses, peer assessment and look through assessments of
Buy-to-Let (BLT), residential and commercial portfolios, to underlying
borrower and tenant characteristics. The IFRS 9 based provisions were
supported by the independent top-down triangulation exercise.
The Group also adjusted its risk appetite, primarily through tightening
its lending criteria to effectively manage the risk of lending in a
highly disrupted and economically uncertain market. The actions taken
were framed to ensure that the Group maintained its asset quality
profile whilst sustaining its core lending brands and delivering
appropriate levels of balance sheet growth.
Following extensive review, the Board approved actions to strengthen the
liquidity positions across both banking entities through drawdowns under
the Bank of England Indexed Long-Term Repo facility, which were later
replaced with drawings from the new Term Funding Scheme for SMEs
(TFSME). Both bank entities continued to retain prudent levels of
liquidity, considering the uncertain economic outlook. The Group's
capital position strengthened throughout the year, supported by actions
taken such as the cancellation of the 2019 final dividend, tightened
lending criteria and the impact of regulatory capital preservation rule
changes as outlined within the PRA's 'Quick Fix' package, which included
revisions to the IFRS 9 transitional arrangements for the capital impact
of IFRS 9 expected credit losses and revisions to the small and
medium-sized enterprises support factor.
The Risk and Compliance function provided extensive oversight and
advisory support to customer-facing functions enabling the Group to
respond effectively to customer expectations, regulatory guidelines and
the conduct and compliance-based risk appetite. The Group ensured that
customers' account performance was reported to credit reference agencies,
in accordance with regulatory guidance.
To enable the Board and senior management to remain fully abreast of the
evolving impact of the pandemic, the level and frequency of risk-based
analysis and management information were increased. Information provided
was used to monitor customer behaviours and outcomes, whilst also
detailing sensitivity and stress test analysis on capital, IFRS 9
provision levels and funding metrics. Reverse stress test and recovery
option analysis was also performed to inform the going concern
assessment of the Group and its banking entities. Operational capacity
thresholds were actively monitored and reported to ensure timely action
was taken to enable continuity of all key services.
Despite the highly disruptive and uncertain business, economic and
operating environment, the Group continued to operate within the defined
risk appetite levels. Some risk metrics have operated outside acceptable
thresholds, such as expected credit losses, however, the underlying
performance of the loan portfolios remained broadly stable with respect
to borrower credit profiles, arrears and loan to value (LTV) levels,
notwithstanding the potential fraud by a third party on a funding line
provided by the Group, secured against lease receivables and the
underlying hard assets. The number of customers who requested payment
deferrals reduced progressively throughout 2020 to only 1.3% of the
Group's loan book by value as at year end.
We continued to make good progress towards IRB during the year, albeit
some elements of the project were inevitably delayed by the impact of
COVID-19, which created the need to deploy significant resources to
support additional stress testing and expected credit loss modelling and
also restricted the ability of external advisers to access our premises
and systems. Nevertheless, we are still aiming to submit our module 1
application by the end of 2021. In the meantime, the Group continues to
benefit from the enhanced risk models and assessment in its decision
making.
Risk review (continued)
The Group maintained prudent levels of contingent financial resources to
sustain its business operations and to withstand an extreme but
plausible stress. Operational resilience was also demonstrated by the
fact that, during lockdowns, a fundamental change to the Group's
operating model did not result in a material operational risk incident
or an increase in realised operational risk losses.
The Board and senior management remain mindful of the continuously
evolving nature of the pandemic and are fully engaged to ensure that
appropriate and timely actions continue to be taken, such that the Group
continues to operate within its specific risk appetite levels and
delivers against its stated strategic objectives.
Key achievements in 2020
During the year, the Group sustained momentum on strategically important
risk and compliance initiatives. In particular, the Board and senior
management were mindful of ensuring that the pandemic did not impact
continued progress and investment in the following initiatives:
-- Design and implementation of a comprehensive framework to assess and
report on pandemic-based risks, leveraging enhanced risk data and
analytical capabilities.
-- The development and implementation of key Group level frameworks and
policies. In particular, a transitional overarching Group Risk Management
Framework was developed, including Group risk appetite statements and
limits.
-- Though the Group continues to maintain two independently regulated
banking entities, the Risk and Compliance functions have been
transitioned to a shared service operating model, whereby the individual
functions and teams are Group based, providing necessary supporting
services to the entity specific Boards and wider business functions.
-- Completion of Group and banking entity Internal Capital Adequacy
Assessment Processes (ICAAPs), including risk and capital-based
assessments which were consistent in approach but reflect the individual
banking entity risk profiles. Climate change risks, including physical
risks and transitional risks, associated with transitioning to a low
carbon economy, were also assessed as part of the ICAAP development
process.
-- Delivery of aligned liquidity and funding risk assessment and monitoring
capabilities, which will support the Group and solo banks' Internal
Liquidity Adequacy Assessment Processes (ILAAPs).
-- Continued progress against the Group IRB programme agenda, including
development of next generation models, enhanced model performance
monitoring, governance and integration of IRB-based outputs within wider
business and decision-making processes.
-- Integration risk was also identified as a principal risk and is subject
to the necessary disciplines as articulated in the Group Risk Management
Framework. Integration risk is identified as a risk to and from the
integration programme which is subject to review, monitoring and
reporting against an integration risk appetite. Key integration
activities are subject to second and third line oversight and assurance
activity.
-- Operational resilience assessment and management has progressively been
aligned across the two banking entities, and was subject to a review
against emerging regulatory expectations. The Group's operational
resilience capabilities helped to guide the response to the operational
disruptions resulting from the pandemic.
-- Continued improvement and alignment of vulnerable customer identification
and management procedures. During the period, the Group performed a
number of internal thematic reviews to ensure that account management
procedures resulted in fair customer outcomes and any learning from these
reviews were used to further enhance customer management strategies.
Risk review (continued)
Priority areas for 2021
The ongoing COVID-19 pandemic continues to contribute to significant
uncertainty around the macroeconomic outlook and operating environment
for 2021. Therefore, continued close monitoring of the Group's risk
profile and operating effectiveness remains a key priority.
Further development and embedding of the overarching Group risk
management framework also remains a key priority, including:
-- Continued integration of the Risk and Compliance functions in accordance
with the target end state, reflecting industry best practice and
regulatory expectations.
-- Development and embedding of Group-level recovery and resolution plans.
The Risk function is also committed to ensuring effective and timely
compliance with the requirements of the Resolution Assessment Framework
over the coming two years, whilst providing oversight and advisory
support with respect to the Group's minimum requirement for own funds and
eligible liabilities (MREL) strategy and planning.
-- Delivering further enhancements to the Group and individual entity ILAAPs
and related liquidity risk management arrangements.
-- Further embedding of the Group's IRB risk measurement capabilities
including the monitoring and management of the credit risk profile
utilising enhanced analytics, to ensure improved credit decisioning,
pricing and risk management. Continued progression of the Group's IRB
programme in accordance with defined timelines also remains a key area of
focus.
-- Alignment of operational risk management systems and operational risk
frameworks across the Group.
-- Continued close monitoring, scenario analysis and stress testing of the
Group's capital and liquidity projections.
-- Delivery of a climate change risk management framework covering both
physical and transitional risks.
The Board and senior management are fully committed to achieving the
objectives above through continued investment in people, systems, data
and processes.
Risk review (continued)
Risk management
Approach to risk management
The Group views its capabilities to effectively identify, assess and
manage its risk profile as critical to its growth strategy. The Group
has developed a transitional overarching Risk Management Framework (RMF)
to drive a consistent approach to risk identification and assessment
across both licensed bank entities. This framework will continue to
evolve and be updated as integration activity continues prior to the
Group reaching its target end state.
The RMF is the overarching framework which enables the Board and senior
management to actively manage and optimise the risk profile within the
constraints of the risk appetite. The RMF also enables informed
risk-based decisions to be taken in a timely manner, ensuring the
interests and expectations of key stakeholders can be met.
The RMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The RMF links
overarching risk principles to day-to-day risk monitoring and management
activities.
The modular construct of the RMF provides an agile approach to keeping
pace with the evolving nature of the risk profile and underlying
drivers. The RMF and its core modular components are subject to periodic
review and approval by the Board and its relevant Committees. The key
modules of the RMF structure are as follows:
1. Risk principles and culture - the Group has established a set of
risk principles which inform and guide all risk management activities
and it has a strong, proactive and transparent 'risk culture' where all
employees across the Group are aware of their responsibilities in
relation to risk management.
2. Risk strategy and appetite -- the Group has a clear business
purpose, vision and values strategy which is supported by an articulated
risk vision and underlying principles. The Group calibrates its risk
appetite to reflect the Group's strategic objectives and business
operating plans, as well as external economic, business and regulatory
constraints.
3. Risk assessment and control -- the Group's business model and
strategy exposes it to a defined risk profile and the risk governance
structure is informed by this risk profile such that the Group can
identify and manage its risks in an effective and efficient manner.
4. Risk definitions and categorisation -- the Group sets out its
principal risks which represent the primary risks to which the Group is
exposed.
5. Risk analytics (including stress testing and scenario analysis) --
the Group uses quantitative analysis and statistical modelling to help
improve its business decisions.
6. Risk data and Information Technology -- the maintenance of high
quality risk information, along with the Group's data enrichment and
aggregation capabilities, are central to the Risk function's objectives
being achieved.
7. Risk frameworks, policies and procedures -- risk frameworks,
policies and supporting documentation outline the process by which risk
is effectively managed and governed within the Group.
8. Risk management information (MI) and reporting -- the Group has
established a comprehensive suite of risk MI and reports covering all
principal risk types.
Risk review (continued)
9. Risk governance and function organisation -- risk governance refers
to the processes and structures established by the Board to ensure that
risks are assumed and managed within the Board-approved risk appetite,
with clear delineation between risk taking, oversight and assurance
responsibilities. The Group's risk governance framework is structured to
adhere to the 'three lines of defence' model.
Risk appetite
The Group aligns its strategic and business objectives with its risk
appetite, enabling the Board and senior management to monitor the risk
profile relative to its strategic and business performance objectives.
Risk appetite is a critical mechanism through which the Board and senior
management are able to identify adverse trends and respond to unexpected
developments in a timely and considered manner.
The Group risk appetite is articulated by means of a series of
statements which outline the level and nature of risks that the Group is
able and willing to assume in pursuit of its strategic and business
objectives. These statements are further supported by a suite of risk
thresholds which ensure that the Group's risk profile is monitored and
controlled within defined parameters and that appetite breaches are
subject to appropriate management and Board oversight. The Risk Appetite
Framework also helps to outline roles and responsibilities relating to
all aspects of the risk appetite, based on a defined structure,
processes, procedures and governance.
Risk appetite is calibrated to reflect the Group's strategic objectives,
business operating plans, as well as external economic, business and
regulatory constraints. In particular, risk appetite is calibrated to
ensure that the Group continues to deliver against its strategic and
business objectives and maintains sufficient financial resource buffers
to withstand plausible but extreme stresses. The primary objective of
the risk appetite is to ensure that the Group's strategy and business
operating model is sufficiently resilient.
The Group's risk appetite is calibrated using statistical analysis and
stress testing to inform the process for setting management triggers and
limits against key risk indicators. The calibration process is designed
to ensure that timely and appropriate actions are taken to maintain the
risk profile within approved thresholds. The Board and senior management
actively monitor actual performance against approved management triggers
and limits. Currently, whilst there are two regulated banking entities
within the Group, risk appetite metrics and thresholds are set at both
individual entity and Group levels.
The Group's risk appetite is subject to a full refresh annually across
all principal risk types and an additional mid-year review where any
metrics can be assessed and updated as appropriate. The assessment of
the Group's risk profile against its strategy and risk appetite has been
enhanced to ensure early detection and response to adverse trends.
Risk review (continued)
Approach to managing climate change risk
Climate change and society's response to it, may result in a number of
financial risks materialising. Supervisory statement 3/19 was published
in April 2019 and it sets out the PRA's expectations concerning
financial services firms developing their approaches to identifying,
monitoring and controlling climate change risk relevant to their
specific business.
The PRA published a 'Dear CEO' letter in July 2020 emphasising its
expectations for firms to have fully embedded their approaches to
managing climate-related financial risk by the end of 2021.
The Group is exposed to physical, transitional and reputational risks
relating to climate change:
-- Physical risks and the risks associated with a transition to a low carbon
economy, arise from a number of factors, and relate to specific weather
events (such as heatwaves, floods, wildfires and storms) and longer-term
shifts in the climate (such as changes in precipitation, extreme weather
variability, rising sea level risk and rising mean temperatures). These
risks could include adverse movements in the value of certain properties
that are in coastal or low lying areas, or located in areas prone to
increased subsidence and heave such as clay soils.
-- Transitional risks may arise from the process of adjustment towards a
low-carbon economy which may lead to changes in policy, regulation, the
emergence of disruptive technology or business models shifting sentiment,
and societal preferences, or evolving evidence, frameworks and legal
interpretations. These risks include a potential adverse impact in the
value of properties that require substantial updating to meet future
energy performance requirements.
-- Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
How the Group identifies and assesses climate change risk
Within the Group's 2020 ICAAP, a number of financial and transitional
climate change risks were identified, and a series of detailed financial
risk assessments (IFRS 9 impairment and capital) were conducted over a
range of scenarios to quantify the potential impact on the Group, should
any of the scenarios materialise. This process was supported by the
acquisition of data from an external third party.
The key conclusion from this analysis was that the Group is currently
exposed to a low level of climate change risk, when assessing the
potential impairment and capital impacts over a range of physical perils
such as flooding, subsidence and coastal erosion across the Group's loan
book. The Risk function also analysed the energy performance certificate
(EPC) profile of the Buy-to-Let loan book and the risks relating to
landlords having extensive remediation activity to ensure an appropriate
EPC rating is in place. Again, this analysis indicated that the Group's
EPC profile is strong and the modelled impact of remediation remains
low.
The ongoing provision of this data will allow the Group to monitor how
its climate change risk profile evolves over time, and consequently take
action if required to ensure that the risk of climate change remains at
an acceptable level.
Processes in place to manage climate change risk
Climate change risk impacts a number of the Group's other principal risk
types, therefore work is ongoing to assess the wider consequences across
the Group. This will involve the management of climate change risk being
overseen by a number of the Group's Risk Committees.
Risk review (continued)
How the management of climate change risk is integrated within the
Group's wider risk management approaches
The Board has overseen the Group's plans to comply with the PRA's
expectations and emerging industry best practice around climate change
risk management, with progress made across the following areas during
2020:
-- The overarching Risk Management Framework was updated to articulate the
Group's approach to climate change risk management.
-- A dedicated working group was established to oversee and manage the
Group's response to climate change risk.
-- A detailed financial risk assessment of the Group's exposure to climate
change risk was conducted as part of the 2020 ICAAP.
-- The Chief Risk Officers of the two banks have designated senior
management function (SMF) responsibility for the management of climate
change risk.
During 2021 the Group plans to further enhance and embed its approaches
to identifying, monitoring and managing climate change risk, including
the development of a dedicated Climate Change Risk Management Framework,
coupled with further enhancements to climate change risk profile
monitoring, whilst conducting further sensitivity analysis. The
development of formal climate change risk appetite statements and limits,
together with a full suite of key risk and performance indicators, is
also planned. Plans will be developed in the first half of 2021 to
ensure that the Group complies with the recommendations set out by the
Task Force on Climate-related Financial Disclosures, which have been
introduced into UK listing requirements on or after 1 January 2021.
Principal risks and uncertainties
The Board carried out an assessment of the principal risks and
uncertainties which may threaten the Group's operating model, strategic
objectives, financial performance and regulatory compliance commitments.
The outcome of that assessment is summarised in each principal risk
section below.
Strategic and business risk
Definition
The risk to the Group's earnings and profitability arising from its
strategic decisions, change in business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Risk appetite statement
The Group's strategic and business risk appetite states that the Group
does not intend to undertake any medium to long-term strategic actions
that would put at risk its vision of being a leading specialist lender,
backed by a strong and dependable saving franchise. The Group adopts a
long-term sustainable business model which, while focused on niche
sub-sectors, is capable of adapting to growth objectives and external
developments.
Principal risks and uncertainties (continued)
Risk Mitigation Direction
----------------------------------- ----------------------------- -------------------------
Performance against targets Regular monitoring Increased
Performance against strategic by the Board and the The COVID-19 pandemic
and business targets does Group Executive Committee has adversely impacted
not meet stakeholder expectations. of business and financial the Group in meeting
This has the potential performance against its strategic and
to damage the Group's strategic agenda and business targets.
franchise value and reputation. risk appetite. The Opportunities remain,
financial plan is including the Group
subject to regular realising integration
reforecasts. The balanced benefits as planned,
business scorecard which will support
is the primary mechanism the Group in any
to support the Board future macroeconomic
and assesses management stress, whilst managing
performance against challenges posed
key targets. Use of by increasing levels
stress testing to of competition in
flex core business our key market segments.
planning assumptions
to assess potential
performance under
stressed operating
conditions.
Economic environment The Group continued Increased
The economic environment to utilise and enhance Economic risks remain
in the UK is an important its stress testing elevated due to
factor impacting the strategic capabilities to assess the ongoing COVID-19
and business risk profile. and minimise potential pandemic and risks
A macroeconomic downturn areas of macroeconomic surrounding the
may impact the credit vulnerability. removal of government
quality of the Group's support measures.
existing loan portfolio The risk relating
and may influence future to a no trade deal
business strategy as the Brexit subsided
Group's new business proposition following an agreement
becomes less attractive being reached, however
due to lower returns. the full implications
of the deal arrangements
being operationalised
are yet to be observed.
Regulatory requirements The Group continues Increased
The potential for emerging to invest in its IT Increased levels
regulatory requirements and data management of regulatory scrutiny
to increase the demands capabilities to increase and greater regulatory
on the Group's operational the ability to respond expectations are
capacity and increase to regulatory change. driven by the increased
the cost of compliance. A structured approach size of the Group
to change management post Combination.
and fully leveraging
internal and external
expertise allows the
Group to respond effectively
to regulatory change.
Competition risk The Group continues Unchanged
The risk that new bank to develop products The Group responded
entrants and existing and services which well to all competition
peer banks shift focus meet the requirements and market changes
to the Group's market of the markets in throughout 2020
segments, which increases which it operates. and is well positioned
the level of competition. Post the Combination, to respond to changes
the Group has an enlarged in competition
suite of products in 2021.
and capabilities to
utilise, along with
increased scale and
financial resources
to support a response
to changes in competition.
Reputational risk
Definition
The potential risk of adverse effects that can arise from the Group's
reputation being affected due to factors such as unethical practices,
adverse regulatory actions, customer dissatisfaction and complaints or
negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
Principal risks and uncertainties (continued)
Risk appetite statement
The Group does not knowingly conduct business or organise its operations
to put its reputation and franchise value at risk.
Risk Mitigation Direction
--------------------------- ------------------------ ----------------------
Deterioration of reputation Culture and commitment Unchanged
Potential loss of trust to treating customers Expectations remain
and confidence that our fairly and being open high to deliver
stakeholders place in and transparent in the integration
us as a responsible and communication with in a timely and
fair provider of financial key stakeholders. effective manner
services. Established processes while achieving
to proactively identify strategic objectives.
and manage potential Expectations have
sources of been raised across
reputational risk. all stakeholders,
including employees,
customers, regulators
and shareholders.
Credit risk
Definition
Potential for loss due to the failure of a counterparty to meet its
contractual obligation to repay a debt in accordance with the agreed
terms.
Risk appetite statement
The Group seeks to maintain a high quality lending portfolio that
generates adequate returns, under normal and stressed conditions. The
portfolio is actively managed to operate within set criteria and limits
based on profit volatility, focusing on key sectors, recoverable values,
and affordability and exposure levels. The Group aims to continue to
generate sufficient income and control credit losses to a level such
that it remains profitable even when subjected to a credit portfolio
stress of a 1 in 20 intensity stress scenario.
Principal risks and uncertainties (continued)
Risk Mitigation Direction
-------------------------------- ----------------------------- --------------------------
Individual borrower defaults Across both OSB and Increased
Borrowers may encounter CCFS, a robust underwriting The impact of COVID-19
idiosyncratic problems assessment is undertaken on the UK economy
in repaying their loans, to ensure that a customer is uncertain and
for example loss of a has the ability and could result in
job or execution problems propensity to repay a material increase
with a development project. and sufficient in unemployment
While in most cases of security is available levels and decreases
default the Group's lending to support the new in property prices,
is secured, some borrowers loan requested. At which could drive
may fail to maintain the CCFS, an automated higher impairment
value of the security. scorecard approach levels.
is taken, whilst OSB The impact of the
utilises a bespoke government support
manual underwriting measures ending
approach. remains unknown
Should there be problems and the knock-on
with a loan, the Collections impact into borrower
and Recoveries team defaults thereafter.
works with customers
who are unable to
meet their loan service
obligations to reach
a satisfactory conclusion
while adhering to
the principle of treating
customers fairly.
Our strategic focus
on lending to professional
landlords means that
properties are likely
to be well-managed,
with income from a
diversified portfolio
mitigating the impact
of rental voids or
maintenance costs.
Lending to owner-occupiers
is subject to a detailed
affordability assessment,
including the borrower's
ability to continue
payments if interest
rates increase. Lending
on commercial property
is based more on security,
and is scrutinised
by the Group's independent
Real Estate team as
well as by external
valuers.
Development lending
is extended only after
a deep investigation
of the borrower's
track record and stress
testing the economics
of the specific project.
Macroeconomic downturn The Group works within Increased
A broad deterioration portfolio limits on The economic outlook
in the UK economy would LTV, affordability, is uncertain, driven
adversely impact both name, sector and geographic by the potential
the ability of borrowers concentration that range of outcomes
to repay loans and the are approved by the resulting from COVID-19
value of the Group's security. Group Risk Committee and the end of government
Credit losses would impact and the Board. These support measures.
the Group's lending portfolios, are reviewed on a
even if individual impacts semi-annual basis.
were to be small, the In addition, stress
aggregate impact on the testing is performed
Group could be significant. to ensure that the
Group maintains sufficient
capital to absorb
losses in an economic
downturn and continues
to meet its regulatory
requirements.
Wholesale credit risk The Group transacts Unchanged
The Group has wholesale only with high quality The Group's wholesale
exposures both through wholesale counterparties. credit risk exposure
call accounts used for Derivative exposures remains limited
transactional and liquidity include collateral to high quality
purposes and through derivative agreements to mitigate counterparties,
exposures used for hedging. credit exposures. overnight exposures
to clearing banks
and swap counterparties.
Principal risks and uncertainties (continued)
Market risk
Definition
Potential loss due to changes in market prices or values.
Risk appetite statement
The Group actively manages market risk arising from structural interest
rate positions. The Group does not seek to take a significant interest
rate position or a directional view on interest rates and it limits its
mismatched and basis risk exposures.
Risk Mitigation Direction
------------------------------- ----------------------------- ------------------------
Interest rate risk The Group's Treasury Unchanged
The risk of loss from function actively The Group continues
adverse movement in the hedges to match the to assess interest
overall level of interest timing of cash flows rate risk on a regular
rates. It arises from from assets and liabilities. basis ensuring that
mismatches in the timing risk exposure is
of repricing of assets limited.
and liabilities, both
on and off balance sheet.
It includes the risks
arising from imperfect
hedging of exposures and
the risk of customer behaviour
driven by interest rates,
e.g. early redemption.
Basis risk Due to the Group balance Unchanged
The risk of loss from sheet structure, no Product design,
an adverse divergence active management balance sheet structure
in interest rates. It of basis risk was and replacing LIBOR
arises where assets and required by the Group swaps with SONIA
liabilities reprice from during 2020. swaps enabled the
different variable rate Key mitigants include Group to maintain
indices. These indices new swaps being linked the overall level
may be market rates (e.g. to SONIA and existing of basis risk across
Bank Base Rate, Sterling LIBOR linked swaps both Banks throughout
Overnight Index Average being transitioned the year.
(SONIA), or the London to SONIA. LIBOR linked The basis risk position
Interbank Offered Rate mortgages will also will reduce over
(LIBOR)) or administered be transitioned to 2021 as CCFS and
(e.g. the Bank's Standard referencing either OSB fully transition
Variable Rate (SVR), other the Bank of England from LIBOR.
discretionary variable base rate or SONIA.
rates, or that received
on call accounts with
other banks).
Liquidity and funding risk
Definition
The risk that the Group, although solvent, does not have sufficient
financial resources to enable it to meet its obligations as they fall
due.
Risk appetite statement
The Group will maintain sufficient liquidity to meet its liabilities as
they fall due under normal and stressed business conditions; this will
be achieved by maintaining a strong retail savings franchise, supported
by a high quality liquid asset portfolio comprised of cash and
readily-monetisable assets, and through access to pre-arranged secured
funding facilities. The Board requirement to maintain balance sheet
resources sufficient to survive a range of severe but plausible stress
scenarios is interpreted in terms of the liquidity coverage ratio and
the ILAAP stress scenarios.
Principal risks and uncertainties (continued)
Risk Mitigation Direction
----------------------------- ---------------------------- ------------------------
Retail funding stress The Group's funding Unchanged
As the Group is primarily strategy is focused The Group's funding
funded by retail deposits, on a highly stable levels and mix remained
a retail run could put retail deposit franchise. strong throughout
it in a position where The Group's large the year.
it could not meet its number of depositors During the year,
financial obligations. provides diversification, OSB and CCFS were
Increased competition where a high proportion both able to attract
for retail savings driving of balances are covered significant flows
up funding costs, adversely by the FSCS protection of new deposits
impacting retention levels scheme, thus there and depositors when
and profitability. is no material risk required.
of a retail run.
In addition, the Group
performs in-depth
liquidity stress testing
and maintains a liquid
asset portfolio sufficient
to meet obligations
under stress. The
Group holds prudential
liquidity buffers
to manage funding
requirements under
normal and stressed
conditions.
The Group has further
diversified its retail
channels bycexpanding
the range of pooled
deposit providers
used.
The Group proactively
manages its savings
proposition through
both the Liquidity
Working Group and
the Group Assets and
Liabilities Committee.
Finally, the Group
has prepositioned
mortgage collateral
and securitised notes
with the Bank of England
which allows it to
consider alternative
funding sources to
ensure it is not solely
reliant on retail
savings. The Group
also has a mature
RMBS programme and
access to warehouse
facilities.
Wholesale funding stress The Group continuously Unchanged
A market-wide stress could monitors wholesale The Group's range
close securitisation markets funding markets and of wholesale funding
or make issuance costs is experienced in options available,
unattractive for the Group. taking proactive management including repo or
actions where required. sale of retained
The Group issued a notes, collateral
number of securitisations upgrade trades and
during 2020 where warehouse
both CCFS and OSB facilities, remains
saw strong market broadly unchanged.
demand for secured
wholesale issuance.
Refinancing of Term Funding The Group has fully Decreased
Scheme (TFS) and TFSME factored in repayment The TFSME scheme
The Group has drawn a of TFS into the funding will allow the Group
total of GBP2.6bn funding plans of both Banks, to significantly
under the TFS and GBP1.0bn with planned repayment extend the maturities
under the TFSME creating prior to the contractual of its Bank
a refinancing concentration date to minimise timing of England based
around the maturity of and concentration funding.
the schemes. risk. The Group has
a wider range of funding
options to manage
this process.
The Group has a TFSME
allowance significantly
above its wholesale
funding requirements
which allows the TFS
scheme to be fully
refinanced by TFSME.
Principal risks and uncertainties (continued)
Solvency risk
Definition
The potential inability of the Group to ensure that it maintains
sufficient capital levels for its business strategy and risk profile
under both the base and stress case financial forecasts.
Risk appetite statement
The Group and each regulated bank seeks to ensure that it is able to
meet its Board-level capital buffer requirements under a severe but
plausible stress scenario. The solvency risk appetite is informed by the
Group's and each regulated bank's prudential requirements and strategic
and financial objectives. We manage our capital resources in a manner
which avoids excessive leverage and allows us flexibility in raising
capital.
Risk Mitigation Direction
----------------------------- --------------------------- ----------------------------
Deterioration of capital Currently the Group Unchanged
ratios operates from a strong Proactive management
Key risks to solvency capital position and of the Group's balance
arise from balance sheet has a consistent record sheet and support
growth and unexpected of strong profitability. measures provided
losses which can result The Group actively by the PRA via the
in the Group's capital monitors its capital CRR 'Quick Fix'
requirements increasing, requirements and resources package which included
or capital resources being against financial a reset of the IFRS
depleted, such that it forecasts and plans 9 capital transitional
no longer meets the solvency and undertakes stress relief and the extension
ratios as mandated by testing analysis to of the SME support
the PRA and Board risk subject its solvency factor, together
appetite. ratios to extreme with ongoing profitability,
The regulatory capital but plausible scenarios. resulted in the
regime is subject to change The Group also holds Group's capital
and could lead to increases prudent levels of ratios strengthening.
in the level and quality capital buffers based Risks remain around
of capital that the Group on CRD IV requirements adverse credit profile
needs to hold to meet and expected balance performance, resulting
regulatory sheet growth. from the ongoing
requirements. The Group engages COVID-19 pandemic
actively with regulators, and the removal
industry bodies, and of government support
advisers to keep abreast measures.
of potential changes
and provides feedback
through the consultation
process.
Operational risk
Definition
The risk of loss or a negative impact on the Group resulting from
inadequate or failed internal processes, people or systems, or from
external events.
Risk appetite statement
The Group's operational processes, systems and controls are designed to
minimise disruption to customers, damage to the Group's reputation and
any detrimental impact on financial performance. The Group actively
promotes the continual evolution of its operating environment through
the identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is not
possible.
Principal risks and uncertainties (continued)
Risk Mitigation Direction
------------------------------------ -------------------------------- ----------------------------
IT security (including The Group invested Increased
cyber risk) significantly in enhancing Due to the COVID-19
The risks resulting from its protection against pandemic and the
a failure to protect the IT security threats, resulting high number
Group's systems and the deploying a series of employees working
data within them. This of tools designed and accessing systems
includes both internal to identify and prevent from home, the risk
and external threats. network/system intrusions. of a cyber-attack
This is further supported was heightened.
by documented and Whilst IT security
tested procedures risks continue to
intended to ensurethe evolve, the level
effective response of maturity of the
to a security breach. Group's controls
and defences has
significantly increased,
supported by dedicated
IT security experts.
The Group's ongoing
penetration testing
continues to drive
enhancements by identifying
potential areas of
risk.
Data quality and completeness The Group established Unchanged
The risks resulting from a dedicated Data Strategy Further progress
data being either inaccurate Programme, designed was made during 2020
or incomplete. to ensure a consistent in embedding Group-wide
approach to the maintenance governance frameworks,
and use of data. This standards and controls.
includes both documented Further work is planned
procedures and frameworks in 2021, to move
and also tools intended closer to the Group's
to improve the consistency target
of data use. end state.
Change management The Group recognises Increased
The risks resulting from that implementing The Group continues
unsuccessful change management change introduces to adopt an ambitious
implementations, including significant operational change agenda, driven
the failure to respond risk and has by the integration
effectively to release-related therefore implemented programme. During
incidents. a series of control 2020 this risk was
gateways designed monitored and managed
to ensure that each well, however further
stage of the change change is planned
management process in 2021, against
has the necessary the backdrop of the
level of oversight. ongoing COVID-19
pandemic and likely
periods of employees
working from home.
IT failure The Group continues Unchanged
The risks resulting from to invest in improving Whilst progress was
a major IT application the resilience of made in reducing
or infrastructure failure its core infrastructure. both the likelihood
impacting access to the It has identified and impact of an
Group's IT systems. its prioritised business IT failure, the risks
services and the infrastructure remain, in particular
that is required to due to the new operating
support them. Tests environment. Further
are performed work is planned during
regularly to validate 2021.
its ability to recover
from an incident.
Organisational change There is a low risk Unchanged
and integration integration project To date, organisational
The risks resulting from plan (e.g. no large-scale change resulting
the Group's ongoing integration integration-related from the integration
activities, including IT project change project has been
systems, people and infrastructure. planned). The Group managed well, with
has an experienced no material risks
and capable project emerging during 2020.
management office, Further work is required
with close oversight to reach the target
and direction provided end state and carefully
by the Group Executive considered plans,
and Board Integration strong risk identification
Committees. and monitoring and
management capabilities
remain in place.
Principal risks and uncertainties (continued)
Conduct risk
Definition
The risk that the Group's behaviours or actions result in customer
detriment or negatively impact the integrity of the markets in which it
operates.
Risk appetite statement
The Group aims to operate and conduct its business to the highest
standards which ensure integrity and trust with respect to how the Group
operates and manages its relationships with key stakeholders. In this
regard, the Group has no appetite to knowingly assume risks which may
result in an unfair outcome for customers and/or cause disruptions in
the market segments in which it operates. However, where the Group
identifies potential conduct risks it will proactively intervene by
managing, escalating and mitigating them promptly to ensure a fair
outcome is achieved.
Risk Mitigation Direction
---------------------------------- --------------------------- ---------------------------
Product suitability The Group has a strategic Unchanged
Whilst the Group originates commitment to provide Whilst this risk
relatively simple products, simple, customer-focused remained low as
there remains a risk that products. In addition, a result of increased
products (primarily legacy) a Product Governance awareness and dedicated
may be deemed to be unfit framework is established oversight, the Group
for their original purpose to oversee both the remains aware of
in line with current regulatory origination of new the changes to the
definitions. products and to revisit regulatory environment
the ongoing suitability and their possible
of the existing impact on product
product suite. suitability.
Data protection In addition to a series Unchanged
The risk that customer of network/system Despite a number
data is accessed inappropriately, controls, the Group of additional controls
either as a consequence performs extensive introduced in 2020,
of network/ system intrusion root cause analysis the network/system
or through operational of any data leaks threats continue
errors in the management in order to ensure to evolve in both
of the data. that the appropriate volume and sophistication.
mitigating actions
are taken.
Integration risk During the integration Unchanged
The risk that the integration process, the Group No material issues
programme directly or is committed to adopting have been identified
indirectly causes poor a low-risk approach to date and controls
outcomes for customers with a view to taking are in place to
and the market. reasonable steps to ensure that the
avoid causing poor integration programme
outcomes for its customers does not result
and the market. The in poor customer
Group will conduct outcomes.
detailed analysis
of potential customer
harm associated with
particular integration
steps.
Compliance / regulatory risk
Definition
The risk that a change in legislation or regulation, or an
interpretation that differs from the Group's, will adversely impact the
Group.
Risk appetite statement
The Group views ongoing conformity with regulatory rules and standards
across all the jurisdictions in which it operates as a critical
component of its risk culture. The Group does not knowingly accept
compliance risk which could result in regulatory sanctions, financial
loss or damage to its reputation. The Group will not tolerate any
systemic failure to comply with applicable laws, regulations or codes of
conduct relevant given its business operating model.
Principal risks and uncertainties (continued)
Risk Mitigation Direction
-------------------------------- ----------------------------- ---------------------------
Prudential regulatory The Group has an effective Unchanged
changes horizon scanning process The Group continues
The Group continues to to identify regulatory to have a high level
see a high volume of key change. of interaction with
compliance regulatory All significant regulatory the UK regulators
changes that impact its initiatives are managed and continues to
business activities. These by structured programmes respond effectively
include: change in Standardised overseen by the Project to all regulatory
Approach capital rules Management team and changes.
and implementation of sponsored at Executive
an IRB floor, implementation level.
of the European Standardised The Group has proactively
Information Sheet, extending sought external expert
the Senior Managers and opinions to support
Certification Regime to interpretation of
all FCA regulated firms the requirements and
and introduction of Strong validation of its
Customer Authentication response, where required.
requirements. The Group has initiated
The focus on external a study into external
wall cladding for high-rise wall cladding and
buildings was extended is reviewing its own
to smaller buildings in property portfolio
February 2021, and the along with the collateral
value of properties supporting supporting lending
the Group's loan portfolios portfolios. The Group
could be impacted, or also notes the recent
customer behaviour could support measures
change if significant announced by the Government
remediation activity is to help individuals
required to ensure building to ensure compliance
safety regulations are with building safety
met. standards, including
the removal of defective
cladding.
Conduct regulation The Group has a programme Unchanged
Regulatory changes focused of regulatory horizon The level of regulatory
on the conductof business scanning linking into change continues
could force changes in a formal regulatory to be high, but
the way the Group carries change management the Group has sufficient
out business and impose programme. In addition, resources and capabilities
substantial compliance the focus on simple to respond to any
costs. products and customer changes in an effective
Product design, underwriting, oriented culture means and efficient manner.
arrears and forbearance that current practice During the year,
policies are misaligned may not have to change the Group took part
to regulatory expectations significantly to meet in a numberof FCA
which result in customers new conduct regulations. thematic reviews,
not being treated fairly, All Group entities including reviews
particularly those experiencing utilise underwriting, on long-term forbearance
financial hardship or arrears, repossession, in the second charge
vulnerable customers, forbearance and vulnerable market and a Business
with the potential for customer policies model drivers and
reputational damage, redress which are designed unaffordable lending
and other regulatory actions. to comply with regulatory review.
rules and expectations.
These policies articulate
the Group's commitment
to ensuring that all
customers, including
those who are vulnerable
or experiencing financial
hardship, are treated
fairly, consistently
and in a way that
considers their individual
needs and circumstances.
The Group does not
tolerate any systematic
failure to deliver
fair customer outcomes.
On an isolated basis,
incidents can result
in detriment due to
human and/or operational
failures. Where such
incidents occur, they
are thoroughly investigated,
and the appropriate
remedial actions are
taken to address any
customer detriment
and prevent recurrence.
Principal risks and uncertainties (continued)
Integration risk appetite statement
Definition
The risks resulting from the Group's ongoing integration activities,
including business, operational and financial performance, systems,
people and infrastructure.
Risk appetite statement
The Combination of OSB and CCFS is intended to enhance scale, bringing
together resources and capabilities, and to explore further growth
opportunities which deliver attractive long-term returns. The delivery
against the integration strategy is framed within the Group's purpose,
vision and values and the broader risk appetite. The integration is
deemed to be inherently low risk owing to the retention of core
operating brands, similarities of business models, no large-scale IT
integration or substantial migration of customer accounts. Accordingly,
the Board has a low risk appetite for adverse integration activity
outcomes, which put the strategic rationale of the merger, the Group's
purpose, vision and values or broader risk appetite at risk. In the
event that integration workstreams are subject to delay or
reprioritisation, the Board expects the rationale to be clearly
understood and justified, with defined mitigation actions implemented,
overseen by robust levels of governance.
Risk Mitigation Direction
--------------------------------- ----------------------------- ---------------------------
A reduction in the oversight The Board is maintaining Unchanged
of business as usual operational oversight of the integration To date the integration
performance, increased process through the project has progressed
risk to operational resilience Board Integration as planned, and
via the change process, Committee. A dedicated the governance,
unintended staff attrition Integration Management project management
or infrastructure failure, Office has been established and control structures
which in turn adversely to drive the integration have operated effectively,
impact operating and financial process forward. with no material
performance. Independent assessment, risks crystallising.
monitoring and reporting
is being undertaken
by the Risk and Internal
Audit functions.
Principal risks and uncertainties (continued)
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risks to be:
Emerging risk Description Mitigating action
--------------------------- ----------------------------- --------------------------
Political and macroeconomic The impact of COVID-19 The Group implemented
uncertainty and the removal of robust monitoring
government support processes and via
measures remains uncertain. various stress testing
The Group's lending activity (i.e. ad
activity is predominantly hoc, risk appetite
focused in the United and ICAAP) understands
Kingdom (with a legacy how the Group performs
back book of mortgages over a variety of
in the Channel Islands) macroeconomic stress
and, as such, will scenarios and has
be impacted by any developed a suite
risks emerging from of early warning
changes in the macroeconomic indicators, which
environment. Risks are closely monitored
also remain around to identify changes
the disruption that in the economic
the UK's exit from environment. The
the European Union Board and management
will have on the economy. review detailed
portfolio reports
to identify any
changes in the Group's
risk profile.
Climate change As the worldwide focus The Group developed
on climate change an approach to assessing
intensifies, both and managing the
the physical risks risks relating to
and the transitional climate change within
risks associated with its Risk Management
climate change continue Framework. This
to grow. Climate change includes scenario
risks include: analysis, development
Physical risks can of key risk indicators
relate to specific and inclusion of
weather events, such climate risks within
as storms and flooding, operational resilience
or to longer-term activities.
shifts in the climate, A cross-functional
such as rising sea working group is
levels. These risks overseeing the Group's
could include adverse response to climate
movements in the value change, in line
of certain properties with industry best
that are in coastal practice and regulatory
and low lying areas, guidelines.
or located in areas As part of the Group's
prone to increased ICAAP a detailed
subsidence and heave. analysis was conducted
Transitional risks using third party
may arise from the data to complete
adjustment towards an initial assessment
a low-carbon economy, of the financial
such as tightening risk
energy efficiency that climate change
standards for domestic could pose to the
and commercial buildings. Group. This analysis
These risks could will be developed
include a potential further during 2021
adverse movement in and will be aligned
the value of properties with activity to
requiring substantial develop an integrated
updates to meet future ESG plan during
energy performance the first half of
requirements. 2021.
Reputational risk The Group's Chief
arising from a failure Risk Officers have
to meet changing societal, designated senior
investor or regulatory management responsibility
demands. for the management
of climate change
risk; during 2021
a Board member will
be specified to
ensure that the
Group meets
regulatory and wider
stakeholder expectations.
Principal risks and uncertainties (continued)
Emerging risk Description Mitigating action
------------- -------------------------- ---------------------------
Model risk The risk of financial During 2020, Board
loss, adverse regulatory and Executive level
outcomes, reputational model oversight
damage or customer Committees and a
detriment resulting suite of Group level
from deficiencies policies were introduced.
in the development, Further enhancements
application or ongoing are planned during
operation of models 2021 to ensure that
and ratings systems. the model governance
Post the completion arrangements meet
of the Combination regulatory expectations
with CCFS, the Group and model risk is
notes the increasing managed effectively.
usage of models to
conduct financial
assessments whilst
informing business
decisions. The Group
also notes changes
in industry best practice
with respect to managing
model risk.
LIBOR reform The LIBOR benchmark The Group ALCO has
may cease to be set set up a dedicated
after the end of 2021 working group to
due to the low level focus on this risk
of supporting unsecured and transition away
loans in the wholesale from the LIBOR benchmark.
interbank loan market. Key mitigating actions
The Group has exposure include new swaps
to the LIBOR benchmark being linked to
within some of its SONIA and existing
customer lending products LIBOR linked swaps
and wholesale derivative being transitioned
hedging transactions. to SONIA. LIBOR
If the benchmark were linked mortgages
to cease or become will also be transitioned
unreliable, these to referencing either
loans and derivatives the Bank of England
may reflect rates base rate or SONIA.
that do not accurately
represent short-term
funding costs, therefore
having an adverse
effect on returns.
Coronavirus The COVID-19 pandemic The Group has taken
has had a material a considered approach
impact on individuals to minimising and
and businesses where managing the impact
the Group has operations, of a coronavirus-related
including the UK and global pandemic.
India. The lockdown The Group approach
measures introduced represents a comprehensive
to stem the spread response strategy
of the virus have covering both severity
had a profound effect and consequences
on how businesses of a global pandemic.
operate and individuals The Group's response
work, which may have strategy covers
a materially adverse key aspects of an
impact on the Group's effective pandemic
profitability, capital response approach,
and liquidity positions. including prevention,
It is unclear how continuity,
the COVID-19 pandemic impact assessment
will evolve during and stress testing.
2021 and the impact Supporting the Group's
that the roll-out response strategy
of vaccines will have are established
and whether any new underlying capabilities
strains emerge. A to facilitate operational
further risk relates and financial resilience
to the impact once testing and planning,
government support active monitoring
measures are withdrawn and reporting procedures,
during 2021 and the and active communications
resulting impact on with all employees
business failures, (UK and India) and
unemployment levels supervisory authorities.
and house prices.
Principal risks and uncertainties (continued)
Emerging risk Description Mitigating action
---------------------- --------------------------- -------------------------
Negative interest To support economic The Group has reviewed
rates performance, resulting readiness for negative
from the impact of interest rates and
the pandemic, the presented findings
Bank of England may to the Board. The
consider reducing review covered the
the Bank of terms and conditions
England base rate of the Group's financial
below 0%. The Group contracts and any
would be impacted systems limitations.
across its lending Some key servicing
portfolios with adverse systems have been
movements in interest identified as requiring
income, offset by further development
reductions in interest to allow negative
payable on savings rates and in particular
accounts. negative pay rates.
A further risk relates Given a mixture
to increased operational of floors in terms
and conduct risks and conditions for
arising from system certain products
and process changes and the Group's
required to accommodate margins, negative
negative interest interest rates would
rates. be
Negative interest unlikely to cause
rates may also impact an issue until the
customer behaviour, Bank of England
with changes in the base rate reaches
demand for lending a rate of -75bps
and savings products or below. A working
potentially impacting group is currently
the Group's loan book examining further
growth plans and liquidity system development
coverage levels. to manage significant
negative rates.
Risk profile performance overview
Credit risk
The Group's fully secured loan portfolios performed robustly throughout
2020, with the credit profile remaining broadly stable, post careful
monitoring and management of both the OSB and CCFS lending portfolios.
The Group's credit risk appetite approach ensured that the loan
portfolios were positioned to perform well in both benign and stressed
macroeconomic environments. Prudent management actions taken shortly
after the onset of the COVID-19 pandemic, such as tightening loan to
values (LTVs) and other credit policy criteria across all loan types,
ensured that new lending performed well and was positioned to withstand
future stress.
Cautious underlying net loan book growth of 5%, or 9% excluding the
impact of structured asset sales in the year, was delivered via
controlled new lending in the Group's core Buy-to-Let and residential
owner-occupier segments, which more than offset reductions in bridging
and second charge outstanding balances. The Group also tightened
criteria in its more cyclical product lines. Mortgage lending balances
against semi-commercial and commercial lending also reduced, as did the
Group's development finance and funding lines ub-segments due to tighter
lending criteria and strong repayment inflows.
Sensible new lending LTV criteria and favourable property price indexing
resulted in the average weighted stock LTV for OSB and CCFS reducing
during 2020 to 64% and 67% respectively as at 31 December 2020 (31
December 2019: OSB restated(2) 65% and CCFS 69%), which resulted in a
prudent average weighted LTV profile of 65% at the Group level.
A low level of arrears continued to be observed during 2020, with just
0.9% of net loan balances greater than three months in arrears, which
was in line with the position as at 31 December 2019. These stable
metrics are in part supported by accounts being offered COVID-19 payment
deferrals, which will have stopped accounts missing payments during the
eligible period.
Risk profile performance overview (continued)
Group and solo banks interest coverage ratios for new lending improved
during 2020 to 201% for OSB and 193% for CCFS (2019: restated(3) 199%
OSB and 187% CCFS).
During 2020, forward looking external credit bureau probability of
default and customer indebtedness scores improved across the Group's
core lending segments.
To support our customers during the COVID-19 pandemic the Group granted
payment deferrals c. 26k accounts representing 28% of the loan book by
value during the peak at the end of June 2020. As at 31 December 2020
active payment deferrals represented only 1.3% of the Group's loan book
by value. Low levels of arrears have been observed from the payment
holiday cohort to date.
1. Average weighted LTV for OSB includes KR and Interbay Buy-to-Let,
semi-commercial and commercial, first and second charge residential
lending.
2. The Group restated the comparative LTVs due to a change in
calculation methodology.
3. Interest coverage ratio for 2019 was restated due to an improvement
in calculation methodology.
Expected Credit Losses (ECL)
Full year statutory impairment losses totalled GBP71.0m versus GBP15.6m
for 2019, with the increase being driven by the potential impact of the
COVID-19 pandemic on the UK economy and resulting changes in customer
behaviour and property valuations. The Group also recorded an impairment
provision of GBP20m in relation to potential fraudulent activity by a
third-party on a secured funding line provided by the Group.
Detailed below are a number of the COVID-19 related factors and other
material items which drove the elevated impairment charge within the
year:
a) Macroeconomic scenarios -- during 2020 the Group adopted a suite of
more adverse economic scenarios, which reflected the potential impact of
the COVID-19 pandemic across the UK economy. Rising unemployment levels
may result in increasing levels of customers falling into arrears and
defaulting on loan payments, whilst falling house prices may result in
lower levels of equity and therefore potential future losses post sale.
Downside scenarios also included the impact of economic disruption
caused from the United Kingdom's exit from the European Union.
Throughout the year, these scenarios were updated as the pandemic
progressed and government support measures were introduced. The
introduction and consequent updates made to forward-looking
macroeconomic scenarios drove GBP21.2m of the total impairment charge
during 2020 or 11bps of the annualised loan loss ratio.
b) Staging criteria -- the Group ensured it complied with industry best
practice and regulatory guidance with respect to payment deferrals and
their treatment in IFRS 9 staging criteria, which included payment
deferrals on their own not being treated as a significant increase in
credit risk. During 2020 the Group made iterative enhancements to
staging criteria, leveraging both internal and external information to
identify performing higher risk cohorts across the entire customer base,
but also including the payment deferral population, moving eligible
exposures into stage 2 where a lifetime loss allowance was held. During
2020 the impact from these staging enhancements was GBP4.8m of the
annual impairment charge or 3bps of the annualised loan loss ratio.
Risk profile performance overview (continued)
c) COVID-19 post model adjustments -- the Group implemented a number of
post model adjustments to ensure that modelled estimates remained
appropriate, considering the impact that government support measures
such as the repossession moratorium and payment deferrals had on credit
bureau files and on loss given default and probability of default
estimates. The quantum of these post model adjustments was impacted by
the interaction with the severe forward looking macroeconomic scenarios,
during the impairment calculation process. The combined impact of these
COVID-19 related post model adjustments contributed GBP10.4m of the
total 2020 impairment charge which equated to c. 6bps of the annualised
loan loss charge.
d) Model enhancements - post Combination, the Group continued to make
enhancements across the full suite of IFRS 9 impairment models, aligning
modelling approaches and definitions where appropriate. An example of
this was the implementation of an aligned definition of default across
the Group. In line with the normal course of business a number of model
recalibrations were made during the year, to ensure that modelled
estimates continued to align to actually observed performance. The
cumulative impact of these modelling enhancements contributed GBP10.7m
of the total loan loss charge during 2020, which contributed 6bps to the
loan loss ratio. The interaction of the severe forward looking
macroeconomic scenarios within IFRS 9 impairment calculations elevated
the impact of these modelling enhancements.
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and requires
a high level of judgement. The approach includes the estimation of
probability of default (PD), loss given default (LGD) and likely
exposure at default (EAD). An assessment of the maximum contractual
period with which the Group is exposed to the credit risk of the asset
is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the effect
of a range of possible economic outcomes, calculated on a probability
weighted basis. This requires firms to formulate forward-looking
macroeconomic forecasts and incorporate them in ECL calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral values
is established. For example, if unemployment levels increase, the Group
would observe an increasing number of accounts moving into arrears. If
residential or commercial property prices fall, the risk of losses being
realised on the sale of a property would increase.
The Group has adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry leading economics
advisory firm, that provide management and the Board with advice on
which scenarios to utilise and the probability weightings to attach to
each scenario.
A base case forecast is provided, along with a plausible upside
scenario. Two downside scenarios are also provided (downside and a
severe downside).
ii. How macroeconomic scenarios are utilised within ECL calculations
Probability of default estimates are either scaled up or down based on
the macroeconomic scenarios utilised.
Loss given default estimates are impacted by property price forecasts
which are utilised within loss estimates should an account be possessed
and sold.
Exposure at default estimates are not impacted by the macroeconomic
scenarios utilised.
Risk profile performance overview (continued)
Each of the above components are then directly utilised within the ECL
calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee macroeconomic
scenarios and probability weightings used within ECL calculations.
Updated scenarios are provided on a monthly basis where an assessment is
carried out by the Group's Risk function to determine whether an update
is required.
On a periodic basis, the Group's Risk function and economic adviser
provide the Group Risk and Audit Committees with an overview of recent
economic performance, along with updated base, upside and two downside
scenarios. The Risk function conducts a review of the scenarios
comparing them to other economic forecasts, which results in a proposed
course of action, which once approved is implemented.
iv. Changes made during 2020
a. Macroeconomic scenario
Post the onset of the COVID-19 pandemic, the Group implemented a suite
of adverse economic scenarios, which incorporated the potential impact
of the lockdown periods on economic activity, resulting in rising
forecasted unemployment levels and falling property prices. The Group
continued to utilise four scenarios including base and upside scenarios
and two downside scenarios. The downside scenarios also include
potential future economic disruption, resulting from the United Kingdom
leaving the European Union.
Throughout 2020, the scenario suite was monitored and updated as
government measures were updated and the impact of the pandemic evolved.
Risk profile performance overview (continued)
Forecast macroeconomic variables over a five-year period (includes
average over five years and the peak to trough projections):
Severe
Base Upside Downside downside
31 December 2020 case scenario scenario scenario
% % % %
Weighting applied 40 30 23 7
Economic driver Measure
Gross Domestic Product 5 year average (yearly
(GDP) GDP growth %) 3.2 3.6 2.6 2.2
Cumulative growth/(fall)
to peak/(trough)
(%) -5.8 -5.6 -6.7 -8.0
House Price Index 5 year average (yearly
(HPI) HPI growth %) 2.1 3.6 -0.4 -2.2
Cumulative growth/(fall)
to peak/(trough)
(%) -8.5 -6.3 -18.9 -26.4
Bank Base Rate (BBR) 5 year average (%) 0.5 0.8 0.1 0.1
Cumulative growth/(fall)
to peak/(trough)
(%) +1.4 +1.7 +0.0 +0.0
Unemployment Rate
(UR) 5 year average (%) 6.9 6.1 8.8 9.6
Cumulative growth/(fall)
to peak/(trough)
(%) +3.7 +3.1 +5.8 +6.5
Commercial Real 5 year average (yearly
Estate Index (CRE) HPI growth %) 2.1 3.6 -0.4 -5.5
Cumulative growth/(fall)
to peak/(trough)
(%) -8.5 -6.3 -18.9 -40.0
Risk profile performance overview (continued)
Severe
Base Upside Downside downside
31 December 2019 case scenario scenario scenario
% % % %
Weighting applied 40 10 35 15
Economic driver Measure
Gross Domestic Product 5 year average (yearly
(GDP) GDP growth %) 1.2 1.7 0.5 -0.3
Cumulative growth/(fall)
to peak/(trough) (%) 6.4 8.5 -3.6 -5.8
House Price Index 5 year average (yearly
(HPI) HPI growth %) 1.3 3.2 -1.5 -3.2
Cumulative growth/(fall)
to peak/(trough) (%) 5.6 14.8 -13.4 -21.1
Bank Base Rate (BBR) 5 year average (%) 1.3 1.5 0.2 0.1
Cumulative growth/(fall)
to peak/(trough) (%) +1.5 +1.7 -0.7 -0.6
Unemployment Rate
(UR) 5 year average (%) 4.5 3.4 6.3 7.2
Cumulative growth/(fall)
to peak/(trough) (%) +0.7 -1.0 +2.9 +4.1
Commercial Real 5 year average (yearly
Estate Index (CRE) HPI growth %) 1.3 3.2 -1.5 -5.8
Cumulative growth/(fall)
to peak/(trough) (%) +5.6 +14.8 -13.4 -40.0
b. Significant increase in credit risk rules
The Group's Significant Increase in Credit Risk (SICR) rules, prior to
the COVID-19 pandemic, considered changes in default risk, internal
impairment measures, changes in customer credit bureau files, or whether
forbearance measures had been applied.
The Group took steps to adjust the SICR criteria through the pandemic to
account for the changes in risk profile and specifically for payment
deferrals granted, noting that not all of the instances of a payment
deferral would be a significant increase in credit risk. Payment
deferrals granted due to COVID-19 alone were not automatically
considered as a SICR event in line with issued guidance, and adjustments
to the rules were as follows:
-- Payment deferrals considered as a SICR event where other significant high
risk factors are identified on customer's credit files;
-- Payment deferrals considered as a SICR event where an account also had
recent arrears; and
-- Customers with stress to their income considered as a SICR event.
Risk profile performance overview (continued)
Forbearance
Where borrowers experience financial difficulty, which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Bank.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears, a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
The specific tools available to assist customers vary by product and the
customers' status. The various treatments considered for customers are
as follows:
-- Temporary switch to interest only: a temporary account change to assist
customers through periods of financial difficulty where arrears do not
accrue at the original contractual payment. Any arrears existing at the
commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
mortgages to a lower contractual rate. Where this is a formal contractual
change the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where arrears accrue at the original
contractual payment. Any arrears existing at the commencement of the
arrangement are retained.
-- Voluntary-assisted sale: a period of time is given to allow borrowers to
sell the property and arrears accrue based on the contractual payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual payment. Arrears continue to accrue based on the
contractual payment.
-- Capitalisation of interest: arrears are added to the loan balance and are
repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where considered appropriate, the Group
will consider writing off part of the debt. This may occur where the
borrower has an agreed sale and there will be a shortfall in the amount
required to redeem the Group's charge, in which case repayment of the
shortfall may be agreed over a period of time, subject to an
affordability assessment or where possession has been taken by the Group;
and on the subsequent sale where there has been a shortfall loss.
-- Arrangement to pay: where an arrangement is made with the borrower to
repay an amount above the contractual monthly instalment, which will
repay arrears over a period of time.
-- Promise to pay: where an arrangement is made with the borrower to defer
payment or pay a lump sum at a later date.
-- Bridging loans more than 30 days past due: bridging loans which are more
than 30 days past their maturity date. Repayment is rescheduled to
receive a balloon or bullet payment at the end of the term extension
where the institution can duly demonstrate future cash flow availability.
The Group aims to proactively identify and manage forborne accounts,
utilising external credit reference bureau information to analyse
probability of default and customer indebtedness trends over time,
feeding pre-arrears watch list reports. Watch list cases are in turn
carefully monitored and managed as appropriate.
Risk profile performance overview (continued)
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing
basis for accuracy and appropriateness. Commercial properties are
subject to annual indexing, whereas residential properties are indexed
against monthly House Price Index data.
Solvency risk
The Group and each regulated bank maintains an appropriate level and
quality of capital to support its prudential requirements with
sufficient contingency to withstand a severe but plausible stress
scenario. The solvency risk appetite is based on a stacking approach,
whereby the various capital requirements (Pillar 1, ICG, CRD IV buffers,
Board and management buffers) are incrementally aggregated as a
percentage of available capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Group actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Group's business
plans and inorganic growth opportunities.
During 2020, the Group proactively managed the balance sheet, whilst the
PRA introduced capital support measures detailed within the CRR 'Quick
Fix' package which resulted in capital ratios strengthening. The
counter-cyclical buffer was also cut from 1% to 0% during the period as
a regulatory response to COVID-19.
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions,
arising from market-wide and Bank-specific events. OSB's and CCFS'
liquidity risk appetites have been calibrated to ensure that both Banks
always operate above the minimum prudential requirements with sufficient
contingency for unexpected stresses, whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Group continues to attract new retail savers and has high retention
levels with existing customers. In addition, the Combination allowed the
Group a wider range of wholesale funding options, including
securitisation issuances and use of retained notes from both Banks.
In 2020, both Banks actively managed their respective liquidity and
funding profiles within the confines of their risk appetites as set out
in each Bank's ILAAP.
Each Bank's risk appetite is based on internal stress tests that cover a
range of scenarios and time periods and therefore are a more severe
measure of resilience to a liquidity event than the standalone liquidity
coverage ratio (LCR). As at 31 December 2020, OSB had a liquidity
coverage ratio of 254% (2019: 199%) and CCFS 146% (2019:145%),
significantly in excess of the 2020 regulatory requirement of 100%.
Risk profile performance overview (continued)
Market risk
The Group proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures.
The Group accepts interest rate risk and basis risk as a consequence of
structural mismatches between fixed rate mortgage lending, sight and
fixed term savings and the maintenance of a portfolio of high quality
liquid assets. Interest rate exposure is mitigated on a continuous basis
through portfolio diversification, reserve allocation and the use of
financial derivatives within limits set by the Group ALCO and approved
by the Board.
The Group's balance sheet is completely GBP denominated. The Group has
some minor foreign exchange risk from funding the OSBI business. This is
minimised by pre-funding a number of months in advance and regularly
monitoring GBP/INR rates. Wholesale counterparty risk is measured on a
daily basis and constrained by counterparty risk limits.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector LIBOR remains a key benchmark and,
for each market impacted, solutions to this issue are progressing
through various industry bodies.
An internal working group has been established with strong oversight
from the Compliance and Risk functions. Risk assessments have been
completed to ensure this process is managed in a measured and controlled
manner. The Group no longer writes any LIBOR-linked business and is
transitioning new and back book swaps from a LIBOR to a SONIA basis.
Interest rate risk
The Group does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in proportion to
available CET1 capital and estimated annual net interest income to cover
capital and profit and loss risks.
The Group sets limits on the tenor and rate reset mismatches between
fixed rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed by reference to historical and
potential stress scenarios at consistent levels of modelled severity.
Throughout 2020, both Banks managed their interest rate risk exposures
within risk appetite limits.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market and managed rates. As with structural interest rate risk,
the Group does not seek to take a significant basis risk position, but
maintains defined limits to allow operational flexibility.
For both OSB and CCFS, exposure is assessed and monitored regularly
across a range of 'business as usual' and stressed scenarios.
Throughout 2020, both Banks managed their basis risk exposure within
their risk appetite limits.
Risk profile performance overview (continued)
Operational risk
The Group continues to adopt a proactive approach to the management of
operational risks. The operational risk management framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations. The Group's operational
processes, systems and controls are designed to minimise disruption to
customers, damage to the Group's reputation and any detrimental impact
on financial performance. The Group actively promotes the continual
evolution of its operating environment.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the Operational Risk function having a
Group-wide remit, ensuring a risk management model that is well embedded
and consistently applied. In addition, a community of Risk Champions
representing each business line and location has been identified.
Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the Operational Risk function.
Due to the COVID-19 pandemic and the resulting high number of employees
working and accessing systems from home, the risk of a cyber attack has
heightened. Whilst IT security risks continue to evolve, the level of
maturity of the Group's controls and defences has significantly
increased, supported by dedicated IT security experts. The Group's
ongoing penetration testing continues to drive enhancements by
identifying potential areas of risk.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory conduct
and aims to minimise breaches, financial costs and reputational damage
associated with non-compliance.
The Group has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
In order to minimise regulatory risk, the Group maintains a proactive
relationship with key regulators, engages with industry bodies such as
UK Finance, and seeks external expert advice. The Group also assesses
the impact of upstream regulation on itself and the wider market in
which it operates, and undertakes robust assurance assessments from
within the Risk and Compliance functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the market
segments in which it operates to be a fundamental part of its strategy
and a key driver to sustainable profitability and growth. The Group does
not tolerate any systemic failure to deliver fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to human
and/or operational failures. Where such incidents occur they are
thoroughly investigated and the appropriate remedial actions are taken
to address any customer detriment and to prevent recurrence.
The Group considers effective conduct risk management to be a product of
the positive behaviour of all employees, influenced by the culture
throughout the organisation and therefore continues to promote a strong
sense of awareness and accountability.
Risk profile performance overview (continued)
Strategic and business risk
The Board has clearly articulated the Group's strategic vision and
business objectives supported by performance targets. The Group does not
intend to undertake any medium to long-term strategic actions, which
would put at risk the Group's strategic or financial objectives.
To deliver against its strategic objectives and business plan, the Group
has adopted a sustainable business model based on a focused approach to
core niche market segments where its experience and capabilities give it
a clear competitive advantage.
The Group remains highly focused on delivering against its core
strategic objectives and strengthening its position further through
strong and sustainable financial performance.
Reputational risk
Reputational risk can arise from a variety of sources and is a second
order risk -- the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media coverage,
customer satisfaction scores, and Net Promoter Scores provided by
brokers.
Integration risk
At the point of the Combination, integration risk was identified as a
principal risk for the duration of the integration programme, though the
integration of the two entities was deemed inherently low risk owing to
the similarity of the two business models, with the programme involving
no material system or data migrations. The Group's Board took the view
that it has limited appetite for integration related risks and deemed it
appropriate to identify, assess and manage integration risks in full
compliance with the wider risk management framework and governance
disciplines of the Group.
Integration risk relates to any risk which may result in the nondelivery
of planned integration objectives with respect to desired strategic
outcomes and costs and synergies performance targets. Additionally,
integration risk is also assessed with respect to the other principal
risks which may be adversely impacted as a consequence of the
integration activities.
The Board exercises oversight of the integration programme through the
Board Integration Committee based on defined critical success factors
and an integration risk appetite. The integration programme is supported
by an Integration Management Office, with clearly defined plans,
established roles and responsibilities, necessary financial discipline
and governance arrangements. The integration programme is subject to
second line oversight and third line assurance to enable the Board and
senior management to monitor progress against plan and performance
against integration risk appetite.
The integration programme and the underlying risk profile continued to
perform in line with expectations during 2020, where no material risk
incidents or trends where identified during the year. The integration
programme did experience some level of disruption owing to the pandemic,
but overall the programme has continued to progress as planned.
Non-Financial Information Statement
The requirements of sections 414CA and 414CB of the Companies Act 2006
relating to non-financial reporting are addressed in this section. We
have a range of policies and guidance that support key outcomes for all
our stakeholders. Performance against our strategic non-financial
performance measures is one indicator of the effectiveness and outcomes
of policies and statements. The Group's policies and statements include,
but are not limited to, those summarised in the table below. During the
year, the policies of OSB and CCFS were reviewed and combined to apply
at a Group level, as appropriate. The table provides cross references to
where further information is included within the Annual Report.
Non-Financial Information Statement (continued)
Due diligence undertaken Outcomes/Impacts/Risks
Description of policies/statement
Environmental matters
---------------------------------- ------------------------------- -----------------------------
Our Environmental Policy The Environmental The focus of actions
outlines our commitment Policy was reviewed in 2020 has been
to by the newly-established on extending our
reducing our environmental Environmental Working environmental management
impact and to continually Group which focuses system and sharing
improving our environmental on: best practice across
performance as an integral 1. assessing the impact the Group. Key highlights
part of business activities for the year include:
of our business strategy. and driving initiatives 1. submitting our
The to minimise the consumption Energy Saving Opportunity
policy seeks to ensure of energy, water, Scheme (ESOS), which
that we paper, office supplies, highlighted areas
meet or exceed all relevant transportation, maintenance for improvement across
legal and cleaning; our sites which have
and regulatory environmental 2. aligning the environmental been taken forward
obligations. data and actions for for consideration;
all entities within 2. purchasing electric
the Group; vans for the fleet
3. developing an environmental and electric vehicle
culture across the charge points have
Group; and been introduced in
4. Encouraging environmental Chatham and Wolverhampton;
responsibility with 3. introducing video
employees and within conferencing across
supply chains. the Group to reduce
travel-related carbon
footprint;
4. introducing automatic
LED lighting where
possible and as offices
are refurbished;
and
5. creating an Environmental
Working Group across
the Group to raise
awareness of the
work being undertaken
and drive initiatives
across all sites
to improve employee
engagement.
Our Group Flexible Working The Group Flexible We seek to accommodate,
Policy sets out a range Working Policy was where possible, all
of flexible working arrangements drafted by HR Management requests for flexible
and the approach that and reviewed by the working, with the
the Group will take in Group's Legal and majority of requests
reviewing formal Flexible Company Secretariat being agreed.
Working Requests from function. The policy The Group Homeworking
employees. was then endorsed Policy introduced
Our Group Homeworking by the Governance an attestation for
Policy is applicable to Forum and approved those working from
all UK employees and provides by the Group Executive home (formally, informally
clarity in respect of Committee. and on an
the Group's A similar process, enforced basis).
approach regarding formal as outlined above, The attestation is
homeworking arrangements was followed for the linked to the Group
(i.e. following a Flexible Group Homeworking Homeworking Policy
Working Request being Policy. In addition, requiring employees
agreed), informal the policy was reviewed who work from home
arrangements and enforced by the Health and to confirm that they
arrangements (e.g. COVID-19). Safety, Data Protection are aware of and
and Information Security can appropriately
teams and the Governance mitigate risks presented
Forum requested that by working from home
an external review in respect of data
of content be undertaken protection, information
given the high percentage security and health
of employees working and safety.
from home as a result
of COVID-19. An external
review was undertaken
prior to the policy
being approved.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Employee matters
-------------------------------- ------------------------------- ----------------------------
Our Diversity and Inclusion In order to ensure A Group-wide Diversity
Policy sets out the Group's appropriate Board and Inclusion Working
commitment to promoting oversight of matters Group was established
equality of opportunity, relating to diversity during 2020, broadening
providing an inclusive and inclusion, updates the scope of the
workplace and eliminating are regularly provided Women's Networking
any unfair treatment or to the Group Forum which was previously
unlawful discrimination. Nomination and Governance in place.
Committee. The Group has progressed
In addition, the Group towards achievement
General Counsel and of our published
Company Secretary, Women in Finance
who is the Executive Charter target and
responsible for diversity in respect of published
and inclusion, issues Gender Pay Gap data,
regular updates to which is related
all employees in order to our diversity
to drive awareness and inclusion initiatives.
of ongoing internal In recent years,
initiatives and progress the Group's diversity
relating to diversity and inclusion focus
and inclusion. has tended to centre
An external adviser, around gender.
Legal and HR were The Group is committed
involved in drafting to ensuring a broader
the new policy, which focus on diversity
was endorsed by the matters, with this
Governance Forum and being robustly demonstrated
approved by the Group during National Inclusion
Executive Committee. Week 2020.
Our Whistleblowing Policy A Whistleblowing Report The Group Audit Committee
-- Raising a Concern ensures is regularly presented receives a whistleblowing
that all employees are to the Group Audit report quarterly
encouraged to raise any Committee and an annual and is responsible
concerns they may have report is presented for overseeing the
about the conduct of others to the Board. The effective operation
in the business or the Chair of the Group of the policy; this
way in which the business Audit Committee is aims to mitigate
is run, in good faith the designated Whistleblowers' the risk of undetected
and without fear of unfair Champion. wrongdoing and unwanted
treatment. exposure for the
Group.
Our Group Health and Safety An external health Additional measures
Policy outlines our approach and safety risk assessment were put in place
and responsibilities under was undertaken in in accordance with
statutory legislation. 2020 at our offices COVID-19 guidelines
We recognise our duty and branches to ensure to ensure any employees
and responsibility and that we adhered to attending our offices
the Health and Safety the UK Government-issued or customers visiting
Policy ensures that the document Working Safely our branches could
Group complies with legislation during COVID-19 in do so in a safe way.
to protect its employees offices and contact Health and safety
and customers, and provides centres. statistics are provided
a suitable and safe environment The Health and Safety on a dashboard shared
for employees, customers Working Group meet monthly with the
and anyone affected by twice per annum to Board along with
the Group's operations. review the objectives an annual Health
of the Health and and Safety Report.
Safety Policy. Any Risk assessments
relevant matters arising are completed across
from these meetings the Group annually
are reported to Operational and in 2020 included
Risk. COVID-secure certification.
An accountable Executive Annual health and
is responsible for safety training is
the Health and Safety completed by all
Policy and a third employees.
party adviser reviews Health and Safety
it annually prior awareness in the
to it being approved workplace has increased
by the Board. with updates provided
on the Group intranet
to reduce the possibility
of injury to employees
and customers.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
------------------------------- -------------------------------- ------------------------------
Our Modern Slavery Statement The Modern Slavery Our Vendor Management
outlines the measures Working Group annually team includes specific
we have taken to combat reviews the Vendor testing of key controls
the risks of modern slavery Code of Conduct which within the Vendor
and human trafficking is issued to our approved Management Risk Assessment
in our businesses and third party service Matrix. Relationship
supply chains. providers at the time owners are also tested
As part of our ongoing of onboarding and for their awareness
compliance, a review was as part of the annual of the process and
undertaken of the policies assessment. This year, requirements in respect
potentially impacted by the Vendor Code of of modern slavery
modern slavery and human Conduct has been updated which forms part
trafficking with appropriate to align with Home of the Group's mandatory
amendments made, where Office Guidance issued training programme
necessary. in respect of the and awareness updates,
additional risks of in line with the
modern slavery posed Vendor Management
by COVID-19. Framework.
We perform relevant There are breach
checks via the Organisation reporting procedures
for Economic Co-operation in place and there
and Development (OECD) were no reportable
Watch at the onboarding incidents in this
stage and, where required, financial year.
as part of our ongoing
due diligence checks.
In addition, our standard
contract terms include
reference to the required
modern slavery or
relevant contract
terms.
All employees are
required to complete
mandatory training
to raise awareness.
Our Group Vendor Management The required due diligence We recognise the
and Outsourcing Policy and risk assessment importance of building
sets out the core requirements criteria changes and strong relationships
which we must meet and updates have been and governance with
provides a structure to included in the policy our third parties
efficiently manage potential to align with the and of the possible
and contracted third-party European Banking Authority reputational risk
relationships ensuring and other applicable this can impose.
the right level of engagement guidelines. We actively monitor
and due diligence, in Activities during our third parties
compliance with our regulatory the year included: to ensure they are
obligations. 1. a review of existing adhering to our requirements,
third party services so that we can in
to ensure alignment turn meet our obligations
with the new policy to stakeholders.
and reclassification;
2. implementation
of the new policy
which is being managed
through business communication,
training and awareness
sessions scheduled
for assigned relationship
owners; and
3. annual assurance
update provided to
the Board.
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters
---------------------------------- ------------------------------- ---------------------------
Our Lending Policy sets All changes to the The Group Risk Committee
out the parameters within Lending Policy require challenges how the
which we are willing to approval from the Lending Policy is
lend money responsibly Group Credit Committee, applied to ensure
within our set criteria with material changes that the right outcomes
and credit risk appetite. escalated to the Group are achieved.
Risk Committee. The credit risk appetite
As a second line of of the Group monitors
defence, the Credit the performance and
Quality Assurance make-up of the portfolio
process monitors adherence relative to pre-agreed
to the policy through trigger limits and
a risk-based sampling therefore is a measure
approach. of the overall performance
System parameters of the Lending Policy.
and underwriting processes Non-adherence to
act as an additional the credit risk appetite
control to ensure could lead to business
lending parameters being written outside
are not breached. the agreed risk appetite.
Our Group Complaint Handling We investigate complaints Complaints remained
Policy outlines, at a competently, diligently aligned to the level
high level, our regulatory and impartially, supported of business activity.
expectations for complaint by appropriately trained Complaints are also
handling from a customercentric employees. Root cause a component of Executive
perspective. analysis is used to bonus scheme metrics
identify and solve affecting remuneration
underlying issues outcomes.
rather than apply Complaints may be
quick fixes. an early warning
Complaint performance of not treating customers
forms part of management fairly, which has
information provided regulatory consequences
to Management Committees for the Group.
and to the Board.
Analysis of complaints
outcomes and potential
business and customer
impact is an integral
part of the Group's
processes.
Our Group Customer Regular case study An enhanced training
Vulnerability Policy sets reviews through the programme has been
the standards and approach Vulnerable Customer developed to focus
for the identification Review Committee ensure on more complex customer
and treatment of vulnerable best practice processes scenarios including
customers and provides across the different identifying vulnerable
guidance to all areas customer journeys customers and how
of the Group to ensure are monitored and best to serve them
vulnerable customers consistently shared with representatives and their changing
receive fair outcomes. from differing customer-facing needs.
and second line functions. There is a potential
The Compliance function impact to our reputation
conducts second line and regulatory risks
thematic reviews across for not treating
both vulnerable customer customers fairly.
and other operational Customer complaint
processes should the data shows there
need arise. were no systemic
issues in vulnerability
processes and outcomes
for the year.
Our Group Data Protection The Group Data Protection The privacy and security
Policy ensures that there Officer reports twice of personal information
are adequate policies each year, to the is respected and
and procedures in place Group Executive Committee protected. We regard
to enable compliance with and the Board, regarding sound privacy practices
the General Data Protection compliance with the as a key element
Regulation (GDPR) and Data Protection Policy of corporate governance
the Data Protection Act and reports on any and accountability.
2018; and confirms the data incidents and Non compliance would
necessary steps that should data subject access expose the Group
be taken when processing requests. to the potential
personal data. breach of GDPR provisions.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
------------------------------- ------------------------------ ---------------------------
Our Group Arrears Management As the second line Our arrears rates
and Forbearance Policy of defence, the Compliance are monitored through
ensures that we address function reviewed the Group Credit
the need for internal customer journeys; Committee on a monthly
systems and processes these reviews are basis to ensure senior
to treat customers in risk-based and look management oversight
financial difficulties at customer outcomes of arrears trends.
fairly, including being across the collections There is credit risk
proactive with customers and litigation processes associated with credit
who display characteristics to ensure customers losses following
of being on the cusp of are dealt with in the ineffective management
financial difficulty. an effective and fair of customer accounts.
manner. This has been an
The Compliance function area of focus for
conducts second line the Board and Executives
thematic reviews across and adjustments were
collection and litigation made to accommodate
processes, should payment deferral
the need arise. requests, as a result
of COVID-19.
Our Anti-Bribery and Corruption The policies are subject No material issues
policies outline our stance to an annual review or breaches have
to conduct all of our process with approval arisen from the Group's
business in a honest and provided by the Group adherence to the
ethical manner. We take Audit Committee. existing Anti-Bribery
a zero- tolerance approach Anti-Bribery and Corruption and Corruption policies
to bribery and corruption training forms part and processes.
and are committed to acting of the wider Financial We recognise that
professionally, fairly Crime training package there may be instances
and with integrity in that is mandatory where an employee
all of our business dealings for each employee may be exposed to
and relationships. to complete on an the risk of bribery
The purpose of the policies annual basis. or corruption and
are to provide employees In addition, the requirements as result, provide
and contractors with clear set out in the Anti-Bribery numerous channels
guidelines to ensure that and Corruption policies in which an employee
we conduct our activity are incorporated into can report such an
in an ethical and appropriate the Group's Vendor event, including
manner including complying Management and Outsourcing via the whistleblowing
with the laws and regulations Policy. process.
of each jurisdiction in Gifts, hospitality During the tender
which we operate. and donations are process for a new
closely monitored supplier, all employees
through a log maintained involved in the process
by Risk and Compliance must ensure compliance
in accordance with with the Anti-Bribery
our associated policies and Corruption policies
and procedures. and requirements.
This approach also
applies to the Conflict
of Interest Policy.
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters
---------------------------------- ----------------------------- -----------------------------
Our Conflict of Interest During the year, a No material issues
Policy aims to identify, combined Group level or breaches have
maintain and operate effective policy was adopted arisen from the Group's
organisational and administrative to ensure that a consistent adherence to the
arrangements to identify approach is taken existing Conflicts
and take all reasonable across the Group in of Interest Policy
steps in order to avoid relation to the systems and processes.
conflicts where possible. and controls in place As a financial services
to identify, report provider, we face
and manage potential the risk of actual
and realised conflicts and potential conflicts
of interest. of interest periodically.
A detailed roll-out We recognise that
plan has been developed there may be instances
to ensure the policy where conflicts of
is implemented effectively interest are unavoidable
which will include and that a conflict
employee training, may exist even if
embedding a consistent no unethical or improper
Conflicts of Interest act or outcome results
declaration process, from it. Where it
developing Group-wide is not possible to
procedures and ensuring avoid a potential
risk-based assurance conflict of interest,
activity on adherence we are committed
to the policy is undertaken. to ensuring that
In addition, Conflicts any conflicts of
of Interest requirements interest that arise
are incorporated into are managed fairly
the Group's Vendor and in the best interests
Management and Outsourcing of our customers.
Policy. Group Compliance
maintains the conflict
register, which is
reviewed annually
by the Risk Management
Committees. In addition,
the Group Nomination
and Governance Committee
reviews Executive
and Director conflicts.
Our Fraud Policy outlines The Policy is subject As a financial services
our duty to comply with to an annual review provider, we recognise
prevailing legal and regulatory with approval provided that we are inherently
requirements and to have by the Group Audit exposed to the risk
appropriate systems and Committee. of fraud and that
controls in place to mitigate Fraud awareness training incidents will occur
the risk of fraud. This forms part of the as a result of doing
includes ensuring appropriate wider Financial Crime business. In order
monitoring and escalation training package that to mitigate these
procedures are in place is mandatory for each risks we have appropriate
and are operating effectively. employee to complete systems and controls
Our strategy for managing on an annual basis. in place.
fraud risk is to adopt External stakeholders, Key risk and performance
a zero-tolerance approach customers, clients indicators are agreed
towards any form of fraud; and relevant third by senior management
however, we accept that parties are made aware and reviewed on a
incidents of fraud will of our robust stance regular basis. Management
occur as a result of doing towards fraud management information on fraud-related
business. through literature activity is presented
The purpose of the policy or similar communication on a regular basis
and supporting procedures channels. to senior management
is to provide a consistent The Risk Management in order to provide
approach throughout the Committees and the visibility of our
Group to the prevention, Group Risk Committee fraud exposure and
detection and investigation regularly review and any associated loss.
of fraud. The policy forms monitor fraud reporting. All potential fraud
an integral part of the incidents are investigated
Group Financial Crime by a dedicated Financial
Framework. Crime team that is
specifically trained
in identifying and
reporting fraudulent
behaviour.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
-------------------------------- ----------------------------- ----------------------------
Our Anti-Money Laundering All employees are No material issues or
and Counter Terrorist required to complete breaches have arisen from
Financing Policy seeks annual training. the Group's adherence to
to explain the responsibility The policy is subject the existing Anti-Money
of senior managers, the to an annual review Laundering and Counter
Money Laundering and Reporting process with approval Terrorist Financing Policy
Officer (MLRO) and all provided by the Group and processes. As a
employees. The policy Audit Committee. financial services
requires that the highest We have documented provider, the Group
ethical standards are processes and procedures recognises that it is
met and requires all employees in place to identify inherently exposed to the
to act with integrity the Group's customers risk of financial crime.
at all times. We have prior to entering Key risk and performance
no appetite for breaching into a relationship. indicators are agreed by
legislation or regulation Systems and controls senior management and
regarding anti-money laundering have been adopted reviewed on a regular
or counter terrorist financing. to highlight activity basis. Management
deemed to be suspicious. information on financial
All suspicious activity crime related activity is
is investigated by presented to senior
a dedicated Financial management in order to
Crime team who are provide visibility of our
specifically trained exposure to financial
in identifying and crime.
reporting suspicious
behaviour.
Our Group Operational The policy is subject to an In March 2020, the
Resilience Policy documents annual review process with UK Government announced
the approach and expectations approval provided by the a UK-wide lockdown
of the Group in establishing Risk Management Committees. due to COVID-19.
and maintaining the appropriate We analyse the probability Whilst we believe
levels of operational and consequences of an that we have taken
resilience as well as unplanned event that could appropriate actions
the level of impact tolerance affect the Group. We also and have an operating
that the Group is willing identify the key risks model that is well
to accept in respect of faced by the Group and put positioned to support
incidents or events that measures and controls in the Group throughout
may impact the provision place to protect the Group the crisis, we remain
of its services. against these risks. In on alert to respond
The policy is closely September 2020, a data to any further changes
linked with our Business centre recovery exercise in circumstances.
Continuity Plan. took place which involved a Failing to be resilient
full shutdown of primary could have a devastating
servers. As a result, effect on the business
further enhancements will to the extent that
be worked through, during it becomes difficult
2021. or even impossible
to carry out business
as usual activities.
Description of the business
model
---------------------------------- ----------------------------- ----------------------------
A description of the business model is set out on page 3.
Principal risks and uncertainties
A description of the principal risks and uncertainties is set out on
pages 39 to 52.
This Strategic report was approved by the Board and signed on its behalf
by:
Jason Elphick
General Counsel and Company Secretary
27 April 2021
The Directors present their Report, together with the audited Financial
Statements and Auditor's Report, for the year ended 31 December 2020.
Information presented in other sections
Information relating to future developments, principal risks and
uncertainties and engagement with suplliers, customers and others has
been included in the Strategic Report.
Information on financial instruments including financial risk management
objectives and policies including, the policy for hedging the exposure
of the Group to price risk, credit risk, liquidity risk and cash flow
risk can be found in the Risk review on pages 32 to 62.
Details on how the Company has complied with section 172 can be found
throughout the Strategic and Directors' Reports and on page 10.
Results
The results for the year are set out in the Statement of Comprehensive
Income on page 94.
Directors
The Directors who served during the year and to the date of this report
were as follows:
Graham Allatt
Eric Anstee (until 4 February 2020)
Timothy Brooke Thom (until 7 May 2020)
Rodney Duke (until 4 February 2020)
Andrew Golding
Elizabeth Noël Harwerth
Margaret Hassall (until 7 May 2020)
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Ian Ward (until 7 May 2020)
David Weymouth
Sir Malcolm Williamson (until 4 February 2020)
None of the Directors had any interest either during or at the end of
the year in any material contract or arrangement with the Company.
Directors' indemnities
The Articles provide, subject to the provisions of UK legislation, an
indemnity for Directors and Officers of the Company in respect of
liabilities they may incur in the discharge of their duties or in the
exercise of their powers, including any liabilities relating to the
defence of any proceedings brought against them, which relate to
anything done or omitted, or alleged to have been done or omitted, by
them as Officers or employees of the Company. Directors' and Officers'
liability insurance cover is in place in respect of all Directors.
Equal opportunities
The Group is committed to applying its Diversity and Inclusion Policy at
all stages of recruitment and selection. Short-listing, interviewing and
selection will always be carried out without regard to gender, gender
reassignment, sexual orientation, marital or civil partnership status,
colour, race, nationality, ethnic or national origins, religion or
belief, age, pregnancy or maternity leave or trade union membership. Any
candidate with a disability will not be excluded unless it is clear that
the candidate is unable to perform a duty that is intrinsic to the role,
having taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process will be made to ensure that no applicant is
disadvantaged because of his/her disability. Line Managers conducting
recruitment interviews will ensure that the questions they ask job
applicants are not in any way discriminatory or unnecessarily intrusive.
This commitment also applies to existing employees, with the necessary
adjustments made, where there is a change in circumstances.
Employee engagement
Employees are kept informed of developments within the business and in
respect of their employment through a variety of means, such as employee
meetings, briefings and the intranet. Employee involvement is encouraged
and views and suggestions are taken into account when planning new
products and projects.
The OSBG Sharesave 'save as you earn' Scheme is a Group wide
all-employee share option scheme which is open to all UK-based
employees. The Sharesave Scheme allows employees to purchase options by
saving a fixed amount of between GBP5 and GBP500 per month over a period
of either three or five years, at the end of which the options, subject
to leaver provisions, are usually exercisable. The Sharesave Scheme has
been in operation since June 2014 and options are granted annually, with
the exercise price set at a 20% discount of the share price on the date
of grant.
The Workforce Advisory Forum (known as OneVoice ) was established in
2019 to gather the views of the workforce to enable the Board and Group
Executive Committee to consider a broadly representative range of
stakeholder perspectives to guide strategic decisions for the future of
the Company and its subsidiaries. OneVoice consists of volunteer
representatives (of which there are 21 in total) from each of the
various business areas and locations, as well as permanent members
consisting of a designated NED, Mary McNamara; a member of the Group
Executive Committee, Jason Elphick; and a representative from HR
Management. Other NEDs and members of the Group Executive Committee are
invited to attend meetings on a rotational basis.
Members of the Board are keen to engage with our employees across all
locations and find the experience of visiting our branches and offices
within the UK and India invaluable; however, due to travel restrictions
in place throughout 2020 as a result of COVID-19, these visits have not
been physically possible. It is hoped that once restrictions are lifted
and, provided it is safe to do so, visits to branches and offices will
resume.
During 2020, three OneVoice meetings were held. In advance of each
meeting, employee representatives are encouraged to engage with
employees within their nominated business areas and across all Group
locations and identify topics impacting the workforce, which it is felt
should be brought to the attention of the Board and Group Executive
Committee. A number of items were considered and discussed by OneVoice
including communication, HR harmonisation activities, integration,
technology, as well as the impact of COVID-19, particularly, in relation
to employee well-being.
The Group is committed to diversity and to making sure everyone in our
business feels included, this year we introduced a Diversity and
Inclusion Working Group. This working group brings together a broad mix
of employees from across the UK business to drive our diversity and
inclusion agenda. Jason Elphick, our Diversity Champion delivered a Q&A
session for employees to understand more about the Group's diversity and
inclusion agenda.
Political donations
Neither the Company nor any of its subsidiaries made any political
donations this year.
Going concern statement
The Board undertakes regular rigorous assessments, in accordance with
the 'Guidance on Risk Management, Internal Control and Related Financial
and Business Reporting', published by the Financial Reporting Council in
September 2014, of whether the Group is a going concern in light of
current economic conditions and all available information about future
risks and uncertainties. In assessing whether the going concern basis is
appropriate, projections for the Group have been prepared, covering its
future performance, capital and liquidity for a period in excess of 12
months from the date of approval of these Financial Statements. These
forecasts have been subject to sensitivity tests, including stress
scenarios, which have been compared to the latest Brexit and COVID-19
pandemic economic scenarios provided by the Group's external economic
advisors, as well as reverse stress tests. The assessments were
significantly influenced by COVID-19 implications, covering the Group's
capital, liquidity and operational resilience, including the following:
-- The Financial and capital forecasts were prepared under stress scenarios
which were assessed against the latest COVID-19 related economic
forecasts provided by the Group's external economic advisors. Reverse
stress tests were also run, to assess what combinations of House Price
Index and unemployment variables would result in the Group utilising its
regulatory capital buffers in full and breaching the Group's minimum
prudential requirements along with analysis and insight from the Group's
ICAAP. The Directors assessed the likelihood of those reverse stress
scenarios occurring within the next 12 months and concluded that the
likelihood is remote.
-- The latest liquidity and contingent liquidity positions and forecasts
were assessed against the ILAAP stress scenarios, which were reviewed for
suitability in the context of COVID-19 related stresses.
-- The Group continues to assess the resilience of its business operating
model and supporting infrastructure in the context of the emerging
economic, business and regulatory environment. The key areas of focus
continue to be on the provision of critical services to customers,
employee health and safety and the evolving governmental policies and
guidelines. The Group has assessed and enhanced its information
technology platforms to support its employees with flexible working and
homeworking across all locations, ensuring stable access to core systems,
data and communication devices. The response to the pandemic demonstrates
the inherent resilience of the Group's critical processes and
infrastructure. It also reflects the necessary agility in responding to
future operational demands. The operational dependencies on third-party
vendors and outsourcing arrangements continues to be an important area of
focus.
The Group's financial projections, supported by the COVID-19 assessments,
demonstrate that the Group has sufficient capital and liquidity to
continue to meet its regulatory capital requirements as set out by the
PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result, it is appropriate to prepare these Financial
Statements on a going concern basis.
The role and structure of the Board
The Board of Directors (the Board) is responsible for the long-term
success of the Company and provides leadership to the Group. The Board
focuses on setting strategy and monitoring performance and ensures that
the necessary financial and human resources are in place to enable the
Company to meet its objectives.
The Board is responsible for setting the tone from the top in relation
to conduct, culture and values, for ensuring continuing commitment to
treating customers fairly, carrying out business honestly and openly and
preventing bribery, corruption, fraud or the facilitation of tax
evasion.
The Board operates in accordance with the Company's Articles of
Association (the Articles) and its own written terms of reference. The
Board has established an Audit and a Risk Committee, which each have
their own terms of reference and are reviewed at least annually. Details
of each Committee's activities during 2020 are shown below.
The Board retains specific powers in relation to the approval of the
Group's strategic aims, policies and other matters, which must be
approved by it under legislation or the Articles. These powers are set
out in the Board's written terms of reference and Matters Reserved to
the Board which are reviewed at least annually.
The Board met 15 times during 2020. All Directors are expected to attend
all meetings of the Board, any Committees of which they are members and
to devote sufficient time to the Company's affairs to fulfil their
duties as Directors. Where Directors are unable to attend a meeting,
they are encouraged to submit any comments on the meeting materials in
advance to the Chair, to ensure that their views are recorded and taken
into account during the meeting. David Weymouth, Graham Allatt and
Noël Harwerth provided comments for the meetings they were not able
to attend.
Roles of the Chairman, Chief Executive Officer and Senior Independent
Director
The roles of Chairman and Chief Executive Officer (CEO) are distinct and
held by different people. There is a clear division of responsibilities,
which has been agreed by the Board and is formalised in a schedule of
responsibilities for each.
The Chairman, David Weymouth, is responsible for setting the 'tone at
the top' and ensuring that the Board has the right mix of skills,
experience and development so that it can focus on the key issues
affecting the business and for leading the Board and ensuring it acts
effectively. Andy Golding, as CEO, has overall responsibility for
managing the Group and implementing the strategies and policies agreed
by the Board.
Noël Harwerth is the Senior Independent Director (SID). The SID's
role is to act as a sounding board for the Chairman and to support him
in the delivery of his objectives. This includes ensuring that the views
of all other Directors are communicated to, and given due consideration
by, the Chairman.
Balance and independence
The effectiveness of the Board and its Committees in discharging their
duties is essential for the success of the Company. In order to operate
effectively, the Board and its Committees comprise a balance of skills,
experience, independence and knowledge to encourage constructive debate
and challenge to the decision-making process.
Audit Committee
The primary role of the Committee is to assist the Board in overseeing
the systems of internal control and external financial reporting. The
Committee's specific responsibilities are set out in its terms of
reference, which are reviewed at least annually. The Audit Committee is
Chaired by Rajan Kapoor, the other members are Graham Allatt, Noël
Harwerth and Sarah Hedger. The Committee met eight times during 2020;
all members attended these meetings. The Committee considered, on behalf
of the Board, whether the 2020 Annual Report and Accounts taken as a
whole are fair, balanced and understandable and, whether the disclosures
are appropriate. Further details on the activities of the Committee are
set out in the Group's annual report and accounts.
Risk Committee
The primary objective of the Committee is to support the Board in
discharging its risk oversight and governance responsibilities. The
Committee's specific responsibilities are set out in its terms of
reference, which are reviewed at least annually. The Committee is
Chaired by Graham Allatt, the other members are Noël Harwerth and
Rajan Kapoor. The Committee met 11 times during 2020. All members
attended these meetings. Further details on the activities of the
Committee are set out in the Group's annual report and accounts.
Environment
Environmental matters are considered in the Strategic report above.
Internal Control
The Board retains ultimate responsibility for setting the Company's risk
appetite and ensuring that there is an effective Risk Management
Framework to maintain levels of risk within the risk appetite. The Board
regularly reviews its procedures for identifying, evaluating and
managing risk, acknowledging that a sound system of internal control
should be designed to manage rather than eliminate the risk of failure
to achieve business objectives.
Key information in respect of the Group's SRMF and objectives and
processes for mitigating risks, including liquidity risk, are set out in
detail on pages 32 to 62.
Auditor
Deloitte LLP was appointed as auditor for the year and has indicated its
willingness to continue in office as auditor. A resolution to re-appoint
Deloitte as external auditor will be presented at the Company's Annual
General Meeting.
Each of the persons who is a Director at the date of approval of this
Annual Report confirms that:
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report and Directors' Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- the Director has taken all the steps that he ought to have taken as a
director in order to make himself aware of any relevant audit information
and to establish that the Company's auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with
the provisions of s418 of the Companies Act 2006.
This report was approved by the Board on 27 April 2021 and signed on its
behalf by:
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
The Directors are responsible for preparing the Annual Report and the
Group and parent Company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company
financial statements for each financial year. Under that law they are
required to prepare the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs as adopted by the EU) and applicable law and have elected
to prepare the parent Company financial statements on the same basis.
Under company, law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent Company and of their
profit or loss for that period. In preparing each of the Group and
parent Company financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted
by the EU;
-- assess the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the parent Company and the Group enabling them to
ensure that the financial statements comply with the Companies Act 2006.
They are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error and, have
general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, that complies with
that law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Approved by the Board and signed on its behalf by:
Jason Elphick
General Counsel and Company Secretary
27 April 2021
Report on the audit of the Financial Statements
1. Opinion
In our opinion:
-- the Financial Statements of OneSavings Bank plc (the 'parent company')
and its subsidiaries (the 'Group') give a true and fair view of the state
of the Group's and of the parent company's affairs as at 31 December 2020
and of the Group's profit for the year then ended;
-- the Group financial statements have been properly prepared in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and International Financial
Reporting Standards (IFRSs) as adopted by the European Union;
-- the parent company financial statements have been properly prepared in
accordance with international accounting standards in conformity with the
requirements of the Companies Act 2006; and
-- the Financial Statements have been prepared in accordance with the
requirements of the Companies Act 2006.
We have audited the Financial Statements which comprise:
-- the consolidated statement of comprehensive income;
-- the consolidated and parent company statements of financial position;
-- the consolidated and parent company statements of changes in equity;
-- the consolidated and parent company statements of cash flows; and
-- the related notes 1 to 53.
The financial reporting framework that has been applied in their
preparation of the Group financial statements is applicable law and
international accounting standards in conformity with the requirements
of the Companies Act 2006 and IFRSs as adopted by the European Union.
The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law
and international accounting standards in conformity with the
requirements of the Companies Act 2006.
2. Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor's responsibilities
for the audit of the Financial Statements section of our report.
We are independent of the Group and the parent company in accordance
with the ethical requirements that are relevant to our audit of the
Financial Statements in the UK, including the Financial Reporting
Council's (the 'FRC's') Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We confirm that
non-audit services prohibited by the FRC's Ethical Standard were not
provided to the Group or the parent company.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
-- loan impairment provisions; and
-- effective interest rate income recognition.
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used for the Group financial statements was
GBP14m which was determined by reference to normalised profit before tax
and net assets. Normalised profit before tax is explained on page 85.
Scoping
Our Group audit scope focused primarily on three subsidiaries subject to
a full scope audit. The subsidiaries selected for a full scope audit
were OneSavings Bank plc, Charter Court Financial Services Limited and
Interbay ML, Ltd. These three subsidiaries account for 98% of the
Group's total assets, 98% of the Group's total liabilities, 96% of the
Group's interest receivable and similar income and 98% of the Group's
profit before tax.
Significant changes in our approach
In the prior year we identified the accounting for the acquisition of
the Charter Court Financial Services Group and the classification of
exceptional items and integration costs to be key audit matters. In the
current year, due to the Group undertaking no new acquisitions and the
reduction in exceptional items and integration costs, these areas have
not been identified as key audit matters for the year ended 31 December
2020.
4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate.
Our evaluation of the Directors' assessment of the Group's and parent
company's ability to continue to adopt the going concern basis of
accounting included:
-- We obtained and read management's going concern assessment, which
included specific consideration of the impacts of the Covid-19 pandemic
and the Group's operational resilience, in order to understand, challenge
and evidence the key judgements made by management;
-- We obtained an understanding of relevant controls around management's
going concern assessment;
-- We obtained management's income statement, balance sheet and cash flow
forecasts and challenged key assumptions and their projected impact on
capital and liquidity ratios, particularly with respect to loan book
growth and potential credit losses;
-- Supported by our in-house prudential risk specialists, we read the most
recent ICAAP and ILAAP submissions, assessed management's capital and
liquidity projections, assessed the results of management's capital
reverse stress testing, challenged key assumptions and methods used in
the capital reverse stress testing models and tested the mechanical
accuracy of the capital reverse stress testing models;
-- We read correspondence with regulators to understand the capital and
liquidity requirements imposed by the Group's regulators, and evidence
any changes to those requirements;
-- We met with the Group's lead regulators, the Prudential Regulation
Authority and the Financial Conduct Authority, and discussed their views
on existing and emerging risks to the Group and we considered whether
these were reflected appropriately in management's forecasts and stress
tests;
-- We assessed the historical accuracy of forecasts prepared by management;
and
-- We assessed the appropriateness of the disclosures made in the Financial
Statements in view of the FRC guidance.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group's and parent
company's ability to continue as a going concern for a period of at
least twelve months from when the Financial Statements are authorised
for issue.
Our responsibilities and the responsibilities of the Directors with
respect to going concern are described in the relevant sections of this
report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the Financial Statements of
the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) that we identified.
These matters included those which had the greatest effect on: the
overall audit strategy, the allocation of resources in the audit; and
directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
In the prior year we identified the accounting for the acquisition of
the Charter Court Financial Services Group and the classification of
exceptional items and integration costs to be key audit matters. In the
current year, due to the Group undertaking no new acquisitions and the
reduction in exceptional items and integration costs from GBP20.8m in
2019 to GBP13.1m in 2020, these areas have not been identified as key
audit matters for the year ended 31 December 2020.
1.1 Loan impairment provisions
Refer to the judgements in applying accounting policies and critical
accounting estimates on page 115 and Note 22 on page 135.
------------------------------------------------------------------------------------
Key audit matter IFRS 9 requires loan impairment provisions to be recognised
description on an expected credit loss ("ECL") basis. The estimation
of ECL provisions in the Group's loan portfolios is
inherently uncertain and requires management to make
significant judgements and estimates. ECL provisions
as at 31 December 2020 were GBP111.0m (2019: GBP42.9m),
which represented 0.58% (2019: 0.23%) of loans and
advances to customers. ECLs are calculated both for
individually significant loans and collectively on
a portfolio basis which require the use of statistical
models incorporating loss data and assumptions on
the recoverability of customers' outstanding balances.
Covid-19 has increased the complexity in estimating
ECLs, particularly with regards to determining appropriate
forward looking macroeconomic scenarios and appropriately
identifying significant increases in credit risk.
The ECL provision requires management to make significant
judgements and estimates. We therefore consider there
to be a key audit matter due to fraud or error in
respect of the Group's ECL provision.
We identified five specific areas in relation to the
ECL that require significant management judgement
or relate to assumptions to which the overall ECL
provision is particularly sensitive.
-- Significant increase in credit risk (SICR): The
assessment of whether there has been a significant
increase in credit risk between the date of origination
of the exposure and 31 December 2020. There is a risk
that management's staging criteria does not capture
SICR and/or are applied incorrectly.
-- Macroeconomic scenarios: As set out on page 109,
the Group sources economic forecasts from a third
party economics expert and considers a minimum of
four probability weighted scenarios, including base,
upside, downside and severe downside scenarios. Due
to the economic uncertainty arising from Covid-19,
there have been significant changes to the economic
assumptions in each of the scenarios, as well as a
change to the weightings applied to each scenario.
The key economic variables were determined to be the
house price index ("HPI") and unemployment. There
is significant judgement in determining the probability
weighting of each scenario and the assumptions and
characteristics of each scenario applied.
-- Probability of Default (PD) for accounts which
have taken Covid-19 payment holidays: Management applies
significant judgement in determining the PD for borrowers
who have taken Covid-19 payment holidays. There are
limited observed behavioural data for accounts which
took payment holidays in 2020, and these data are
likely to have been distorted by current government
support measures and therefore may not be an accurate
reflection of the underlying credit risk of the Covid-19
payment holiday population as at 31 December 2020.
-- Propensity to go into possession following default
("PPD") and forced sale discount ("FSD") assumptions:
PPD measures the likelihood that a defaulted loan
will progress into repossession. FSD measures the
difference in sale proceeds between a sale under normal
conditions and sale at auction. The loss given default
("LGD") by loan assumed in the ECL provision calculation
is highly sensitive to the PPD and FSD assumptions.
-- Commercial and individually assessed collateral
valuations: In 2020, management implemented a blended
approach to value semi commercial properties held
by the Group, using a combination of both residential
and commercial index movements. The use of a blended
commercial property index involves management judgement
in determining the weightings assigned to the residential
and commercial components of the blended commercial
property index. In addition, management uses an in-house
real estate team to estimate the market value of collateral
on a case by case basis for individually assessed
loans.
-------------------- --------------------------------------------------------------
How the scope of We obtained an understanding of the relevant financial
our audit responded controls over the ECL provision with particular focus
to the key audit on controls over significant management assumptions
matter and judgements used in the ECL determination.
To challenge the Group's SICR criteria, we:
-- Evaluated the Group's SICR policy and assessed
whether it complies with IFRS 9
-- Assessed the PD thresholds used in the SICR
assessment by reference to standard validation
metrics including the proportion of transfers to
stage two driven solely by being 30 days past due,
the volatility of loans in stage two and the
proportion of loans that spend little or no time in
stage two before moving to stage three;
-- Challenged the appropriateness of changes made to
management's staging framework in response to
Covid-19 during the year against the requirements of
IFRS 9 and, supported by our modelling specialists,
assessed the appropriateness of the changes made in
the staging model;
-- Tested whether the PD thresholds set by management
had been appropriately applied in practice as at 31
December 2020; and
-- Performed an independent assessment for a sample of
loan accounts, including a focused sample of Covid-19
payment holiday accounts which exited forbearance, to
determine whether they have been appropriately
allocated to the correct stage.
To challenge the Group's macro-economic scenarios
and the probability weightings applied we:
-- Agreed the macroeconomics scenarios used in the ECL
model to reports prepared by the third party
economics expert;
-- Assessed the competence, capability and objectivity
of the third party economics expert, which included
making specific inquiries to understand their
approach and modelling assumptions to derive the
scenarios;
-- Supported by our economic specialists, assessed and
challenged management's assessment of scenarios
considered and the probability weightings assigned to
them in light of the economic position as at 31
December 2020;
-- Involved our economic specialists to challenge the
Group's economic outlook by reference to other
available economic outlook data;
-- Performed a benchmarking exercise to compare the
appropriateness of selected macroeconomic variables
and weightings to those used by peer lenders. The key
economic variables were the house price index ("HPI")
and unemployment;
-- Supported by our analytics and modelling specialists,
assessed and challenged the changes made to the model
methodology and computer code in the macroeconomics
overlay model which applies the scenarios to the
relevant ECL components; and
-- For a sample of loans, we independently recalculated
the ECL using the macroeconomic variables to check
they were being applied appropriately.
To challenge the Group's PDs for accounts which took
Covid-19 payment holidays in 2020 we:
-- Evaluated the Group's staging framework and assessed
whether the treatment of accounts which took Covid-19
payment holidays in 2020 complies with IFRS 9;
-- Supported by our analytics and modelling specialists,
assessed and challenged the computer code script to
determine whether the PD adjustments for accounts
which took Covid-19 payment holidays in 2020 had been
implemented within the model correctly;
-- Performed an independent assessment for a sample of
loan accounts which took Covid-19 payment holidays in
2020 and those which had not taken such holidays to
challenge the completeness and accuracy of the
recording of payment holiday forbearance in the
lending systems;
-- Assessed the recent performance of borrowers who were
granted payment holidays in order to challenge the
PDs applied;
-- Performed a peer benchmarking exercise to industry
peers to compare the Group's ECL coverage ratio on
the Covid-19 payment holiday population.
To challenge the Group's PPD and FSD assumptions we:
-- Supported by our analytics and modelling specialists,
challenged the changes made to computer code in the
LGD models;
-- Recalculated the PPD rates observed on defaulted
cases and compared them with the rates used by the
Group in the ECL models;
-- Recalculated the FSD observed on recent property
sales on the defaulted accounts and compared them
with the rates used by the Group in the ECL models;
-- Assessed the appropriateness of PPD and FSD
assumptions adopted by management through
benchmarking to industry peers; and
-- Assessed the impact of findings raised in
management's independent model validation conducted
in 2020.
We performed the following procedures to challenge
the Group's blended commercial property index used
for commercial property valuations and the case by
case estimate of the market value of collateral for
individually assessed loans:
-- Supported by our property valuation specialists,
examined management's valuation policies, challenged
the use of a blended commercial property index
approach and tested a sample of collateral valuations
for commercial properties and individually assessed
loans by reference to available market data; and
-- Tested the mechanical accuracy of management's
blended commercial property index calculation and
that the indexed valuation was appropriately applied
in the ECL determination.
-------------------- --------------------------------------------------------------
Key observations We determined that the methodology used and the SICR
criteria, PDs applied to accounts which took Covid-19
payment holidays in 2020, and PPD and FSD assumptions
management have made in determining the ECL provision
as at 31 December 2020 were reasonable. We determined
management's collateral valuations to be reasonable
and the blended commercial property index to be appropriately
determined and applied.
Notwithstanding that estimating the probability and
impact of future economic outcomes is inherently judgemental
and that there is heightened economic uncertainty
due to Covid-19, on balance, we consider that the
macroeconomic scenarios selected by the Directors
and the probability weightings applied generate an
appropriate portfolio loss distribution. We therefore
determined that loan impairment provisions are appropriately
stated.
-------------------- --------------------------------------------------------------
1.2 Effective interest rate income recognition
Refer to the judgements in applying accounting policies and critical
accounting estimates on page 115, the accounting policy on page 102
and Notes 3 and 4 on pages 118 and 119.
-------------------------------------------------------------------------------
Key audit matter In accordance with the requirements of IFRS 9, management
description is required to spread directly attributable fees,
discounts, incentives and commissions on a constant
yield basis ("effective interest rate, EIR") over
the shorter of the expected and contractual life of
the loan assets. EIR is complex and the Group's approach
to determining the EIR involves the use of models
and significant estimation in determining the behavioural
life of loan assets. Given the complexity and judgement
involved in accounting for EIR, there is an opportunity
and incentive for management to manipulate the amount
of interest income reported in the Financial Statements
and revenue recognition is an area susceptible to
fraud.
The Group's net interest income for the year ended
31 December 2020 was GBP472.2m (2019: GBP344.7m).
EIR adjustments arise from revisions to estimated
cash receipts or payments for loan assets that occur
for reasons other than a movement in market interest
rates or credit losses. They result in an adjustment
to the carrying amount of the loan asset, with the
adjustment recognised in the income statement in interest
income and similar income. As the EIR adjustments
reflect changes to the timing and volume of forecast
customer redemptions, they are inherently judgemental.
The level of judgement exercised by management is
increased given the limited availability of historical
repayment information. For two of the loan portfolios,
KRBS and Precise, the EIR adjustments are sensitive
to changes in the behavioural life "curves". Covid-19
introduces additional uncertainty with regards to
forecasting expected behavioural lives and prepayment
rates due to its significant impact on the UK economy
and housing market, as well as the measures taken
by the UK government to stimulate the economy in response
to Covid-19, such as the furlough scheme, payment
holidays and the stamp duty holiday. We therefore
identified the estimation of the behavioural life
for these portfolios as a focus area of our audit.
We also identified a key audit matter in relation
to EIR adjustments on the Group's legacy acquired
portfolios. EIR on acquired loan portfolios is inherently
more judgemental than originated loan portfolios as
it involves modelling the expected cash flows on acquisition
and comparing to actual and forecast cash flows at
each balance sheet date. These loan portfolios are
also underwritten outside of the Group's standard
processes and therefore may have different profiles
than self-originated loans.
---------------- -------------------------------------------------------------
How the scope of We obtained an understanding of the relevant controls
our audit responded over EIR, focusing on the calculation and review of
to the key audit EIR adjustments and the determination of prepayment
matter curves.
For the two portfolios where the EIR adjustments were
most significant and sensitive to changes in behavioural
life, we involved our in-house analytics and modelling
specialists to run the Group's loan data for all products
through our own independent EIR model, using the behavioural
life curves derived by the Group. We compared our
calculation of the EIR adjustment required to the
amount recorded by management.
For the same portfolios, we involved our in-house
modelling specialists to independently derive a behavioural
life curve using the Group's loan data over recent
years. We used these curves in our own independent
EIR model to derive an independent output showing
the EIR adjustments that should have been recorded
in 2020. We compared this output to the amounts recorded
by management.
We also tested the completeness and accuracy of a
sample of inputs into the EIR model for originated
loans.
For the legacy acquired portfolios, supported by our
analytics and modelling specialists, we challenged
the assumptions and modelling approach taken to determine
the EIR adjustments, tested the completeness and accuracy
of a sample of inputs to the modelling, re-performed
the discounted cash flow calculations and challenged
whether forecasts were consistent with historical
performance and our understanding of the nature of
the cash flows.
In challenging the Group's assumptions over the estimated
life of loan accounts, we also independently considered
whether behavioural data since the start of the first
national lockdown in March 2020 were indicative of
future behaviour. We considered factors such as the
significant impact that Covid-19 has had on the UK
economy and housing market, and the measures taken
by the UK government to stimulate the economy, such
as the furlough scheme, payment holidays and the stamp
duty holiday.
-------------------- -------------------------------------------------------------
Key observations Notwithstanding that estimating the future behaviour
of loan assets is inherently judgemental and that
there is heightened economic uncertainty due to Covid-19,
we determined that the EIR models and assumptions
used were appropriate and that net interest income
for the period is appropriately stated.
-------------------- -------------------------------------------------------------
6. Our application of materiality
1.1 Materiality
We define materiality as the magnitude of misstatement in the Financial
Statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use
materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the
Financial Statements as a whole as follows:
Group financial statements Parent company financial statements
----------- ------------------------------------------------------------ ------------------------------------------------------
Materiality GBP14.0m (2019: GBP14.0m) GBP11.1m (2019: GBP10.2m)
----------- ------------------------------------------------------------ ------------------------------------------------------
Basis for We determined materiality for the Group by reference We determined materiality for the parent company based
determining to 5% of normalised profit before tax of GBP271.1m on 5% of normalised profit before tax. We excluded
materiality (GBP13.6m), and 1% of net assets of GBP1,676.9m (GBP16.8m), integration costs and exceptional transaction costs
capped at prior year materiality of GBP14.0m. from statutory profit before tax, consistent with
Normalised profit before tax is statutory profit before our approach to Group materiality.
tax of GBP260.4m as at 31 December 2020 (2019: GBP209.1m)
excluding integration costs of GBP9.8m (2019: GBP5.2m)
and exceptional items of GBP3.3m (2019: GBP15.6m).
In prior year the normalised profit before tax also
excluded the negative goodwill credit of GBP10.8m.
----------- ------------------------------------------------------------ ------------------------------------------------------
Rationale We considered both a profit based measure and net We consider a profit based measure to be the most
for the assets as benchmarks for determining materiality. relevant benchmark for users of the accounts.
benchmark This is consistent with the prior year approach.
applied The emergence of Covid-19 has caused significant economic
uncertainty and we therefore capped the materiality
at the prior year level of GBP14.0m.
In the prior year we determined materiality for the
Group by reference to a range of GBP11.0m to GBP15.0m
based on 5% of normalised profit before tax of GBP219.1m
and 1% of net assets of GBP1,477.0m as at 31 December
2019.
----------- ------------------------------------------------------------ ------------------------------------------------------
1.2 Performance materiality
We set performance materiality at a level lower than materiality to
reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the Financial Statements as a
whole.
Group financial statements Parent company financial
statements
--------------- ----------------------------- ------------------------------
Performance 60% of Group materiality 60% of parent company
materiality (2019: 70%) materiality (2019: 70%)
--------------- ----------------------------- ------------------------------
Basis and Group performance materiality was set at 60% of Group
rationale for materiality (2019: 70%). In determining performance
determining materiality, we considered a number of factors, including:
performance our understanding of the control environment; our
materiality understanding of the business; and the low number
of uncorrected misstatements identified in the prior
year. We reduced performance materiality from the
prior year in response to the potentially pervasive
impact of Covid-19 on the control environment and
financial reporting.
--------------- -------------------------------------------------------------
1.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee
all audit differences in excess of GBP700k (2019: GBP700k), as well as
differences below that threshold that, in our view, warranted reporting
on qualitative grounds. We also report to the Audit Committee on
disclosure matters that we identified when assessing the overall
presentation of the Financial Statements.
7. An overview of scope of our audit
1.1 Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the Group
and its environment, including Group-wide controls and assessing the
risks of material misstatement at the Group level.
Our Group audit scope focused primarily on OneSavings Bank plc and the
two main subsidiary entities, being the banking entity Charter Court
Financial Services Limited, as well as Interbay ML, Ltd, another
significant lending subsidiary. The Company and two subsidiaries were
significant components and subject to a full scope audit (2019: the
Company and two subsidiaries subject to a full scope audit). They
represent 96% (2019: 96%) of the Group's interest receivable and similar
income, 98% (2019: 97%) of profit before tax, 98% (2019: 98%) of total
assets and 98% (2019: 98%) of total liabilities. The subsidiaries were
selected to provide an appropriate basis of undertaking audit work to
address the risks of material misstatement including those identified as
key audit matters above. Our audits of each of the subsidiaries were
performed using lower levels of materiality based on their size relative
to the Group. The materiality for each subsidiary audit ranged from
GBP5.3m to GBP11.1m (2019: GBP5.4m to GBP10.2m).
We tested the Group's consolidation process and carried out analytical
procedures to confirm that there were no significant risks of material
misstatement in the aggregated financial information of the remaining
subsidiaries not subject to a full scope audit or specified audit
procedures.
1.2 Our consideration of the control environment
We identified the key IT systems relevant to the audit to be those used
in the financial reporting, lending and savings businesses. For these
controls we involved our IT specialists to perform testing over the
general IT controls, including testing of user access and change
management systems.
In the current year we relied on controls for some of the lending
business and related interest income. For the areas where we relied on
controls, we performed walkthroughs with management to understand the
process and controls, identified and tested relevant controls that
address risks of material misstatement in financial reporting.
1.3 Oversight of the audit teams
All audit work for the purposes of the Group audit was performed by
Deloitte LLP in the UK. The audit team for the Group and the parent
company were based in London. There was a component audit team for the
component audit of Charter Court Financial Services Limited which is
based in Wolverhampton. The Senior Statutory Auditor has responsibility
for directing and supervising all aspects of the audit work of the
component auditor. In discharging this responsibility, the Group audit
team held regular meetings with local management and had regular virtual
meetings with the component audit team to oversee the component audit.
The Group audit team maintained dialogue with the component auditor
throughout all phases of the audit and performed a remote file review of
the component audit team's work.
8. Other information
The other information comprises the information included in the annual
report other than the Financial Statements and our auditor's report
thereon. The Directors are responsible for the other information
contained within the annual report.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with
the Financial Statements or our knowledge obtained in the course of the
audit, or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives rise to a
material misstatement in the Financial Statements themselves. If, based
on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that
fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the Directors' responsibilities statement,
the Directors are responsible for the preparation of the Financial
Statements and for being satisfied that they give a true and fair view,
and for such internal control as the Directors determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are responsible for
assessing the Group's and the parent company's ability to continue as a
going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or the parent company or
to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether the
Financial Statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor's report that
includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the
Financial Statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of
our auditor's report.
11. Extent to which the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with
laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in
respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is
detailed below.
1.1 Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material misstatement in respect
of irregularities, including fraud and non-compliance with laws and
regulations, we considered the following:
-- the nature of the industry and sector, control environment and business
performance including the design of the Group's remuneration policies,
key drivers for directors' remuneration, bonus levels and performance
targets;
-- the Group's own assessment of the risks that irregularities may occur
either as a result of fraud or error that was approved by the Board;
-- results of our enquiries of management, internal audit and the Audit
Committee about their own identification and assessment of the risks of
irregularities;
-- any matters we identified having obtained and reviewed the Group's
documentation of their policies and procedures relating to:
-- identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
-- detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud. As set
out on page 206, the Directors recorded an impairment provision of
GBP20.0m in relation to potential fraudulent activity by a third
party on a secured funding line provided by the Group;
-- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team including the
component audit team and involving relevant internal specialists,
including tax, valuations, real estate, IT and analytics and modelling
specialists regarding how and where fraud might occur in the Financial
Statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and
incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas: loan
impairment provisions, effective interest rate income recognition and
the classification of exceptional items and integration costs. In common
with all audits under ISAs (UK), we are also required to perform
specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks
that the Group operates in, focusing on provisions of those laws and
regulations that had a direct effect on the determination of material
amounts and disclosures in the Financial Statements. The key laws and
regulations we considered in this context included the relevant
provisions of the UK Companies Act 2006, Listing Rules and tax
legislation.
In addition, we considered provisions of other laws and regulations that
do not have a direct effect on the Financial Statements but compliance
with which may be fundamental to the Group's ability to operate or to
avoid a material penalty. These included the Group's prudential
regulatory requirements and capital, liquidity and conduct requirements.
1.2 Audit response to risks identified
As a result of performing the above, we identified loan impairment
provisions and effective interest rate income recognition using the
effective interest rate as key audit matters related to the potential
risk of fraud. The key audit matters section of our report explains the
matters in more detail and also describes the specific procedures we
performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified
included the following:
-- reviewing the Financial Statement disclosures and testing to supporting
documentation to assess compliance with provisions of relevant laws and
regulations described as having a direct effect on the Financial
Statements;
-- enquiring of management, the Audit Committee and in-house and external
legal counsel concerning actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due to
fraud;
-- reading minutes of meetings of those charged with governance, reviewing
internal audit reports and reviewing correspondence with the Prudential
Regulation Authority, the Financial Conduct Authority and HMRC;
-- in addressing the risk of fraud in the classification of exceptional
items and integration costs, testing the appropriateness of the
classification for a sample of these items;
-- in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of
any significant transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws, regulations and potential
fraud risks to all engagement team members including internal
specialists and the component audit team and remained alert to any
indications of fraud or non-compliance with laws and regulations
throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
-- the information given in the strategic report and the Directors' report
for the financial year for which the Financial Statements are prepared is
consistent with the Financial Statements; and
-- the strategic report and the Directors' report have been prepared in
accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the
parent company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the strategic
report or the Directors' report.
13. Opinions on other matters prescribed by the Capital Requirements
(Country-by-Country Reporting) Regulation 2013
In our opinion the information given in note 48 to the Financial
Statements for the financial year ended 31 December 2020 has been
properly prepared, in all material respects, in accordance with the
Capital Requirements (Country-by Country Reporting) Regulations 2013.
14. Matters on which we are required to report by exception
1.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our
opinion:
-- we have not received all the information and explanations we require for
our audit; or
-- adequate accounting records have not been kept by the parent company, or
returns adequate for our audit have not been received from branches not
visited by us; or
-- the parent company financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
1.2 Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our
opinion certain disclosures of directors' remuneration have not been.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
1.1 Auditor tenure
Following the recommendation of the Audit Committee, we were appointed
by the shareholders of the Group on 9 May 2019 to audit the Group
financial statements for the year ended 31 December 2019 and subsequent
financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is two years,
covering the years ended 31 December 2019 to 31 December 2020.
1.2 Consistency of the audit report with the additional report to the
Audit Committee
Our audit opinion is consistent with the additional report to the Audit
Committee we are required to provide in accordance with ISAs
(UK)........................................
16. Use of our report
This report is made solely to the Company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company's
members those matters we are required to state to them in an auditor's
report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company and the Company's members as a body, for our audit work, for
this report, or for the opinions we have formed.
Giles Lang, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
27 April 2021
Group Group
2020 2019
Note GBPm GBPm
Interest receivable and similar income 3 711.9 539.9
Interest payable and similar charges 4 (239.7) (195.2)
Net interest income 472.2 344.7
Fair value gains/(losses) on financial
instruments 5 7.4 (3.3)
Gain/(loss) on sale of financial instruments 6 20.0 (0.1)
Other operating income 7 9.0 2.1
Total income 508.6 343.4
Administrative expenses 8 (157.1) (108.7)
Provisions 38 (0.1) -
Impairment of financial assets 23 (71.0) (15.6)
Impairment of intangible assets 9 (7.0) -
Gain on Combination with CCFS - 10.8
Integration costs 12 (9.8) (5.2)
Exceptional items 13 (3.3) (15.6)
Profit before taxation 260.3 209.1
Taxation 14 (64.1) (50.3)
Profit for the year 196.2 158.8
Other comprehensive income
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as Fair Value through Other Comprehensive
Income:
Arising in the year 1.0 0.8
Revaluation of foreign operations - (0.6)
Tax on items in other comprehensive income (0.5) (0.2)
Other comprehensive income 0.5 -
---------------------------------------------------- ----
Total comprehensive income for the year 196.7 158.8
-------
The above results are derived wholly from continuing operations.
The notes on pages 99 to 209 form part of these accounts.
The Financial Statements on pages 94 to 209 were approved by the Board
of Directors on 27 April 2021.
Group Group Company Company
2020 2019 2020 2019
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.4 0.5 0.4
Loans and advances to credit
institutions 17 2,676.2 2,204.6 1,518.1 1,196.0
Investment securities 18 471.2 635.3 15.0 149.8
Loans and advances to customers 19 19,230.7 18,446.8 8,531.7 8,394.2
Fair value adjustments on
hedged assets 25 181.6 16.8 127.4 52.8
Derivative assets 24 12.3 21.1 4.7 8.7
Other assets 26 9.1 14.3 5.7 7.5
Current taxation asset 8.4 - 3.8 -
Deferred taxation asset 27 4.7 4.8 3.1 2.2
Property, plant and equipment 29 39.2 41.6 20.5 21.2
Intangible assets 30 20.6 31.4 7.0 7.7
Investments in subsidiaries
and intercompany loans 31 - - 3,137.3 3,629.4
Total assets 22,654.5 21,417.1 13,374.8 13,469.9
-------------------------------- ---- -------- -------- -------- --------
Liabilities
Amounts owed to credit
institutions 32 3,570.2 3,068.8 1,900.5 1,671.1
Amounts owed to retail
depositors 33 16,603.1 16,255.0 9,705.3 9,435.7
Fair value adjustments on
hedged liabilities 25 8.2 (5.1) 3.1 (0.1)
Amounts owed to other customers 34 72.9 29.7 5.8 8.9
Debt securities in issue 35 421.9 296.3 - -
Derivative liabilities 24 163.6 92.8 93.8 54.3
Lease liabilities 36 11.7 13.3 3.9 4.3
Other liabilities 37 27.8 34.9 13.8 17.1
Provisions 38 1.8 1.6 1.6 1.6
Current taxation liability - 41.5 - 16.4
Deferred taxation liability 28 48.3 63.1 - -
Deemed loan liabilities 20 - - 66.2 240.2
Intercompany loans 31 - - 37.9 643.9
Subordinated liabilities 39 10.5 10.6 10.5 10.6
Perpetual subordinated bonds 40 37.6 37.6 37.6 37.6
20,977.6 19,940.1 11,880.0 12,141.6
Equity
Share capital 42 4.5 4.5 4.5 4.5
Share premium 42 - 864.2 - 864.2
Retained earnings 1,604.6 553.2 1,423.7 407.0
Other reserves 43 67.8 55.1 66.6 52.6
1,676.9 1,477.0 1,494.8 1,328.3
Total equity and liabilities 22,654.5 21,417.1 13,374.8 13,469.9
-------------------------------- ---- -------- -------- -------- --------
The profit after tax for the year ended 31 December 2020 of OneSavings
Bank plc as a Company was GBP164.5m (2019: GBP155.2m). As permitted by
section 408 of the Companies Act 2006, no separate Statement of
Comprehensive Income is presented in respect of the Company.
The notes on pages 99 to 209 form part of these accounts. The financial
statements on pages 94 to 209 were approved by the Board of Directors on
27 April 2021 and signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
OneSavings Bank plc
Statement of Changes in Equity
For the year ended 31 December 2020
Foreign Share-based Additional
Share Share Capital Transfer Own exchange FVOCI payment Retained Tier 1
capital premium contribution reserve shares(1) reserve reserve reserve earnings securities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 2.4 158.8 6.5 (12.8) - (0.4) (0.1) 4.7 439.3 60.0 658.4
Profit for the year - - - - - - - - 158.8 - 158.8
Shares issued as consideration
for CCFS Combination 2.0 705.1 - - - - - - (6.4) - 700.7
Own shares - - - - (3.7) - - - - - (3.7)
Coupon paid on Additional
Tier 1 securities - - - - - - - - (5.5) - (5.5)
Dividends paid - - - - - - - - (37.3) - (37.3)
Other comprehensive
income - - - - - (0.6) 0.8 - - - 0.2
Share-based payments 0.1 0.3 - - - - - (0.2) 4.3 - 4.5
Tax recognised in
equity - - - - - - (0.2) 1.1 - - 0.9
At 31 December 2019 4.5 864.2 6.5 (12.8) (3.7) (1.0) 0.5 5.6 553.2 60.0 1,477.0
Profit for the year - - - - - - - - 196.2 - 196.2
Own shares(1) - - - - 3.7 - - - (3.5) - 0.2
Coupon paid on Additional
Tier 1 securities - - - - - - - - (5.5) - (5.5)
Dividends paid - - - - - - - - - - -
Other comprehensive
income - - - - - - 1.0 - - - 1.0
Share-based payments - 2.6 - - - - - 2.4 3.2 - 8.2
Tax recognised in
equity - - - - - - (0.5) (0.2) 0.5 - (0.2)
Transfer between reserves - - (6.5) 12.8 - - - - (6.3) - -
Cancellation of OneSavings
Bank plc share capital
and share premium (4.5) (866.8) - - - - - - 871.3 - -
Issuance of OneSavings
Bank plc share capital
to OSBG 4.5 - - - - - - - (4.5) - -
At 31 December 2020 4.5 - 0.0 - - (1.0) 1.0 7.8 1,604.6 60.0 1,676.9
------------------------------- -------- ------- ------------- -------- --------- --------- -------- ----------- --------- ----------- -------
(1) The Group ceased look-through accounting for the Employee Benefit
Trusts following the insertion of OSB GROUP PLC as the listed and
ultimate holding company of the Group on 27 November 2020.
OneSavings Bank plc
Statement of Changes in Equity (continued)
For the year ended 31 December 2020
Share-based Additional
Share Share Capital Transfer Own FVOCI payment Retained Tier 1
capital premium contribution reserve shares(1) reserve reserve earnings securities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 2.4 158.8 6.2 (15.2) - (0.1) 4.7 296.7 60.0 513.5
Profit for the year - - - - - - - 155.2 - 155.2
Shares issued as consideration
for CCFS Combination 2.0 705.1 - - - - - (6.4) - 700.7
Own shares - - - - (3.7) - - - - (3.7)
Coupon paid on Additional
Tier 1 securities - - - - - - - (5.5) - (5.5)
Dividends paid - - - - - - - (37.3) - (37.3)
Other comprehensive
income - - - - - 0.1 - - - 0.1
Share-based payments 0.1 0.3 - - - - (0.2) 4.3 - 4.5
Tax recognised in
equity - - - - - - 0.8 - - 0.8
At 31 December 2019 4.5 864.2 6.2 (15.2) (3.7) - 5.3 407.0 60.0 1,328.3
Profit for the year - - - - - - - 164.5 - 164.5
Own shares(1) - - - - 3.7 - - (3.9) - (0.2)
Coupon paid on Additional
Tier 1 securities - - - - - - - (5.5) - (5.5)
Dividends paid - - - - - - - - - -
Other comprehensive
income - - - - - (0.1) - - - (0.1)
Share-based payments - 2.6 - - - - 1.6 3.8 - 8.0
Tax recognised in
equity - - - - - - (0.2) - - (0.2)
Transfer between reserves - - (6.2) 15.2 - - - (9.0) -
Cancellation of OneSavings
Bank plc share capital
and share premium (4.5) (866.8) - - - - - 871.3 - -
Issuance of OneSavings
Bank plc share capital
to OSBG 4.5 - - - - - - (4.5) -
At 31 December 2020 4.5 - - - - (0.1) 6.7 1,423.7 60.0 1,494.8
------------------------------- -------- -------- ------------- -------- --------- ------- ----------- --------- ----------- -------
(1) The Company ceased look-through accounting for the Employee Benefit
Trusts following the insertion of OSB GROUP PLC as the listed and
ultimate holding company of the Group on 27 November 2020.
The reserves are further disclosed in note 43
Group Group Company Company
2020 2019 2020 2019
Note GBPm GBPm GBPm GBPm
Cash flows from operating activities
Profit before taxation 260.3 209.1 197.3 189.4
Expenses recognised in equity - (6.4) - (6.4)
Adjustments for non-cash items 50 76.7 26.2 39.2 33.2
Changes in operating assets
and liabilities 50 (1,537.0) (711.8) (573.7) (577.4)
Cash used in operating activities (1,200.0) (482.9) (337.2) (361.2)
Provisions refunded/(paid) 0.1 (0.2) - (0.2)
Net tax paid (128.8) (53.0) (53.6) (32.4)
Net cash used in operating activities (1,328.7) (536.1) (390.8) (393.8)
Cash flows from investing activities
Unencumbered cash acquired on
CCFS Combination - 870.4 - -
Maturity and sales of investment
securities 18 407.3 357.7 291.1 349.0
Purchases of investment securities 18 (190.9) (389.9) (205.9) (389.9)
Interest received on investment
securities 7.0 - 0.4 0.0
Sales of financial instruments 6 539.9 - 248.9 -
Purchases of equipment and intangible
assets 30,29 (7.5) (11.6) (4.3) (6.7)
Cash generated from investing
activities 755.8 826.6 330.2 (47.6)
Cash flows from financing activities
Financing received 41 1,991.2 872.7 1,059.6 601.8
Financing repaid 41 (1,103.6) (338.5) (764.7) (275.0)
Cash held in deconsolidated
special purpose vehicles (23.0) - - -
Interest paid on financing (18.9) (2.6) (9.8) (2.5)
Coupon paid on Additional Tier
1 securities (5.5) (5.5) (5.5) (5.5)
Dividends paid 15 - (37.3) - (37.3)
Proceeds from issuance of shares
under employee SAYE schemes 42 2.5 0.4 2.6 0.4
Cash payments on lease liabilities 36 (2.0) (1.1) (0.6) (0.8)
Cash generated from financing
activities 840.7 488.1 281.6 281.1
Net increase/(decrease) in cash
and cash
equivalents 267.8 778.6 221.0 (160.3)
Cash and cash equivalents at
the beginning of the year 16 2,102.8 1,324.2 1,156.6 1,316.9
Cash and cash equivalents at
the end of the year 16 2,370.6 2,102.8 1,377.6 1,156.6
Movement in cash and cash equivalents 267.8 778.6 221.0 (160.3)
--------- ------- ------- -------
1. Accounting policies
The principal accounting policies applied in the preparation of the
financial statements for the Group and the Company are set out below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by the
European Union (EU) and interpretations issued by the International
Financial Reporting Interpretations Committee (IFRIC).
The financial statements have been prepared on a historical cost basis,
as modified by the revaluation of investment securities held at fair
value through other comprehensive income (FVOCI) and derivative
contracts and other financial assets held at fair value through profit
or loss (FVTPL) (see note p(vi)).
As permitted by section 408 of the Companies Act 2006, no Statement of
Comprehensive Income is presented for the Company.
b) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in the light of current economic conditions and all
available information about future risks and uncertainties.
In assessing whether the going concern basis is appropriate, projections
for the Group have been prepared, covering its future performance,
capital and liquidity for a period in excess of 12 months from the date
of approval of these Financial Statements. These forecasts have been
subject to sensitivity tests, including stress scenarios, which have
been compared to the latest Brexit and COVID-19 pandemic economic
scenarios provided by the Group's external economic advisors, as well as
reverse stress tests.
The assessments were significantly influenced by COVID-19 implications,
covering the Group's capital, liquidity and operational resilience,
including the following:
-- Financial and capital forecasts were prepared under stress scenarios
which were assessed against the latest COVID-19 related economic
forecasts provided by the Group's external economic advisors. Reverse
stress tests were also run, to assess what combinations of House Price
Index and unemployment variables would result in the Group utilising its
regulatory capital buffers in full and breaching the Group's minimum
prudential requirements along with analysis and insight from the Group's
Internal Capital Adequacy Assessment Process (ICAAP). The Directors
assessed the likelihood of those reverse stress scenarios occurring
within the next 12 months and concluded that the likelihood is remote.
-- The latest liquidity and contingent liquidity positions and forecasts
were assessed against the ILAAP stress scenarios, which were reviewed for
suitability in the context of COVID-19 related stresses.
-- The Group continues to assess the resilience of its business operating
model and supporting infrastructure in the context of the emerging
economic, business and regulatory environment. The key areas of focus
continue to be on the provision of critical services to customers,
employee health and safety and the evolving governmental policies and
guidelines. The Group has assessed and enhanced its information
technology platforms to support its employees with flexible working and
homeworking across all locations, ensuring stable access to core systems,
data and communication devices. The response to the pandemic demonstrates
the inherent resilience of the Group's critical processes and
infrastructure. It also reflects the necessary agility in responding to
future operational demands. The operational dependencies on third-party
vendors and outsourcing arrangements continue to be an important area of
focus.
1. Accounting policies (continued)
The Group's financial projections, supported by the COVID-19 assessments,
demonstrate that the Group has sufficient capital and liquidity to
continue to meet its regulatory capital requirements as set out by the
PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result, it is appropriate to prepare these Financial
Statements on a going concern basis.
c) Basis of consolidation
The Group accounts include the results of the Company and its subsidiary
undertakings. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the date
that control ceases. Upon consolidation, intercompany transactions,
balances and unrealised gains on transactions are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence of
impairment of the asset transferred. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency, so far as is
possible, with the policies adopted by the Group.
Subsidiaries are those entities, including structured entities, over
which the Group has control. The Group controls an entity when it is
exposed, or has rights, to variable returns from its involvement with
the entity and has the ability to affect those returns through its power
over the investee. The Group has power over an entity when it has
existing rights that give it the current ability to direct the
activities that most significantly affect the entity's returns. Power
may be determined on the basis of voting rights or, in the case of
structured entities, other contractual arrangements.
Where the Group does not retain a direct ownership interest in a
securitisation entity, but the Directors have determined that the Group
controls those entities, they are treated as subsidiaries and are
consolidated. Control is determined to exist if the Group has the power
to direct the activities of each entity (for example, managing the
performance of the underlying mortgage assets and raising debt on those
mortgage assets which is used to fund the Group) and, in addition to
this, control is exposed to a variable return (for example, retaining
the residual risk on the mortgage assets). Securitisation structures
that do not meet these criteria are not treated as subsidiaries and are
excluded from the consolidated accounts. The Company applies the net
approach in accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against the
deemed loan balance.
The Group's Employee Benefit Trust (EBT) was controlled and recognised
by the Company using the look-through approach until 27 November 2020,
when OSB GROUP PLC was inserted as the listed holding company of the
Group.
The Group is not deemed to control an entity when it exercises power
over an entity in an agency capacity. In determining whether the Group
is acting as an agent, the Directors consider the overall relationship
between the Group, the investee and other parties to the arrangement
with respect to the following factors: (i) the scope of the Group's
decision-making power; (ii) the rights held by other parties; (iii) the
remuneration to which the Group is entitled; and (iv) the Group's
exposure to variability of returns. The determination of control is
based on the current facts and circumstances and is continuously
assessed. In some circumstances, different factors and conditions may
indicate that different parties control an entity depending on whether
those factors and conditions are assessed in isolation or in totality.
Judgement is applied in assessing the relevant factors and conditions in
totality when determining whether the Group controls an entity.
Specifically, judgement is applied in assessing whether the Group has
substantive decision-making rights over the relevant activities and
whether it is exercising power as a principal or an agent.
1. Accounting policies (continued)
d) Business combinations
The Group uses the acquisition method to account for business
combinations. The Group recognises the identifiable assets acquired and
liabilities assumed at their acquisition date fair values. The Group
recognises deferred tax on the difference between fair value and the
acquisition date carrying value in accordance with International
Accounting Standard (IAS) 12. The consideration transferred for each
business combination is measured at fair value and, comprises the sum of
equity interest issued by the Group. Acquisition-related costs are
recognised as exceptional items within profit or loss.
The Group recognises goodwill on business combinations when the fair
value of consideration transferred exceeds the fair value of
identifiable assets acquired less the fair value of liabilities assumed.
The Group recognises a gain within profit or loss when the fair value of
consideration transferred is less than the fair value of identifiable
assets acquired less the fair value of liabilities assumed.
The Group reports provisional amounts for business combinations when the
accounting is incomplete at the reporting date following the
combination. During the measurement period, the Group adjusts
provisional amounts recognised at the acquisition date to reflect new
information obtained that existed as of the acquisition date and would
have affected the measurement of the amounts recognised as at that date.
The Group also recognises additional assets or liabilities during the
reporting period if new information is obtained that existed as of the
acquisition date and would have resulted in the recognition of those
assets or liabilities as at that date. The Group adjusts the gain taken
to profit or loss where there is negative goodwill, or adjusts goodwill
recognised on the balance sheet, when provisional amounts are finalised
or additional assets and liabilities are recognised during the
measurement period. The measurement period shall not exceed one year
from the acquisition date.
The Group finalised the acquisition date fair values of assets acquired
and liabilities assumed in the Combination with CCFS prior to 3 October
2020. There were no changes to the provisional fair values recognised on
the assets or liabilities.
e) Foreign currency translation
The consolidated financial statements are presented in Pounds Sterling
which is the presentation currency of the Group. The financial
statements of each of the Company's subsidiaries are measured using the
currency of the primary economic environment in which the subsidiary
operates (the functional currency). Foreign currency transactions are
translated into the functional currencies using the exchange rates
prevailing at the date of the transactions. Monetary items denominated
in foreign currencies are retranslated at the rate prevailing at the
period end.
Foreign exchange (FX) gains and losses resulting from the retranslation
and settlement of these items are recognised in profit or loss.
Non-monetary items measured at cost in the foreign currency are
translated using the spot FX rate at the date of the transaction.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date. The
income and expenses of foreign operations are translated at the rates on
the dates of transactions. Exchange differences on foreign operations
are recognised in other comprehensive income and accumulated in the
foreign exchange reserve within equity.
1. Accounting policies (continued)
f) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis of
internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate resources to
segments and to assess their performance. For this purpose, the chief
operating decision maker of the Group is the Board of Directors.
The Group provides loans and asset finance within the UK and the Channel
Islands only.
The Group segments its lending business and operates under two segments:
-- OneSavings Bank (OSB)
-- Charter Court Financial Services (CCFS)
The Group has disclosed the risk management tables in note 45 at a
sub-segment level to provide detailed analysis of the Group's core
lending business.
g) Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments measured at amortised cost are recognised in profit or loss
using the effective interest rate (EIR) method. The EIR is the rate
which discounts the expected future cash flows, over the expected life
of the financial instrument, to the net carrying value of the financial
asset or liability.
When calculating the EIR, the Group estimates cash flows considering all
contractual terms of the instrument and behavioural aspects (for example,
prepayment options) but not considering future credit losses. The
calculation of the EIR includes transaction costs and fees paid or
received that are an integral part of the interest rate, together with
the discounts or premiums arising on the acquisition of loan portfolios.
Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each acquired book and
where they diverge significantly from expectation, the future cash flows
are reset. In assessing whether to adjust future cash flows on an
acquired portfolio, the Group considers the cash variance on an absolute
and percentage basis. The Group also considers the total variance across
all acquired portfolios. Where cash flows for an acquired portfolio are
reset, they are discounted at the EIR to derive a new carrying value,
with changes taken to profit or loss as interest income.
The EIR is adjusted where there is a change to the reference interest
rate (LIBOR or base rate) affecting portfolios with a variable interest
rate which will impact future cash flows. The revised EIR is the rate
which exactly discounts the revised cash flows to the net carrying value
of the loan portfolio.
Interest income on investment securities is included in interest
receivable and similar income. Interest on derivatives is included in
interest receivable and similar income or interest expense and similar
charges following the underlying instrument it is hedging.
Coupons paid on Additional Tier 1 securities (AT1 securities) are
recognised directly in equity in the period in which they are paid.
1. Accounting policies (continued)
h) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption charges
within the EIR.
Fees received on mortgage administration services and mortgage
origination activities, which are not an integral part of the EIR, are
accounted for in accordance with IFRS 15 Revenue from Contracts with
Customers, with income recognised when the services are delivered and
the benefits are transferred to clients and customers.
Other fees and commissions are recognised on the accruals basis as
services are provided or on the performance of a significant act, net of
VAT and similar taxes.
i) Integration costs and exceptional items
Integration costs and exceptional items are those items of income or
expenses that do not relate to the Group's core operating activities,
are not expected to recur and are material in the context of the Group's
performance. These items are disclosed separately within the Statement
of Comprehensive Income and the Notes to the Financial Statements.
j) Taxation
Income tax comprises current and deferred tax. It is recognised in
profit or loss, other comprehensive income or directly in equity,
consistent with the recognition of items it relates to. The Group
recognises tax on the AT1 securities directly in profit or loss.
Current tax is the expected tax charge on the taxable income for the
year and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amounts of assets or
liabilities for accounting purposes and carrying amounts for tax
purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise the
asset. The recognition of deferred tax is mainly dependent on the
projections of future taxable profits and future reversals of temporary
differences. The current projections of future taxable income indicate
that the Group will be able to utilise its deferred tax asset within the
foreseeable future.
The Company and the subsidiaries are in a group payment arrangement for
corporation tax and show a net corporation tax liability and deferred
tax asset accordingly. In 2019, the Group's CCFS subsidiaries were not
part of the group payment arrangement and the corporation tax liability
and deferred tax asset were not netted.
k) Dividends
Dividends are recognised in equity in the period in which they are paid
or, if earlier, approved by shareholders.
Dividend income from investments is recognised when the shareholders'
rights to receive payment have been established.
1. Accounting policies (continued)
l) Cash and cash equivalents
For the purposes of the Consolidated Statement of Cash Flows, cash and
cash equivalents comprise cash, non-restricted balances with central
banks and highly liquid financial assets with original maturities of
less than three months subject to an insignificant risk of changes in
their fair value.
m) Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the
software is a unique and identifiable asset controlled by the Group and
will generate future economic benefits. Costs to establish technological
feasibility or to maintain existing levels of performance are recognised
as an expense. The Group only recognises internally-generated intangible
assets if all of the following conditions are met:
-- an asset is being created that can be identified after establishing the
technical and commercial feasibility of the resulting product;
-- it is probable that the asset created will generate future economic
benefits; and
-- the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally generated intangible asset,
after its purchase or completion, is recognised as an expense in the
period in which it is incurred. Where no internally generated intangible
asset can be recognised, development expenditure is recognised as an
expense in the period in which it is incurred.
Intangible assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
Intangible assets are amortised in profit or loss over their estimated
useful lives as follows:
Software and internally generated assets 5 year straight line
Development costs, brand and technology 4 year straight line
Broker relationships 5 year profile
Bank licence 3 year straight line
The Group reviews the amortisation period on an annual basis. If the
expected useful life of assets is different from previous assessments,
the amortisation period is changed accordingly.
n) Property, plant and equipment
Property, plant and equipment comprise freehold land and buildings,
major alterations to office premises, computer equipment and fixtures
measured at cost less accumulated depreciation. These assets are
reviewed for impairment annually, and if they are considered to be
impaired, are written down immediately to their recoverable amounts.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
1. Accounting policies (continued)
The cost of repairs and renewals is charged to profit or loss in the
period in which the expenditure is incurred.
o) Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment. A
full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note 31.
The Company performs an annual impairment assessment of its investment
in subsidiary undertakings, assessing the carrying value of the
investment in each subsidiary against the subsidiaries' net asset values
at the reporting date for indication of impairment. Where there is
indication of impairment, the Company estimates the subsidiaries value
in use by estimating future profitability and the impact on the net
assets of the subsidiary. The Company recognises an impairment directly
in profit or loss when the recoverable amount, which is the greater of
the value in use or the fair value less costs to sell, is less than the
carrying value of the investment. Impairments are subsequently reversed
if the recoverable amount exceeds the carrying value.
p) Financial instruments
i. Classification
The Group classifies financial instruments based on the business model
and the contractual cash flow characteristics of the financial
instruments. Under IFRS 9, the Group classifies financial assets into
one of three measurement categories:
-- Amortised cost -- assets in a business model to hold financial assets in
order to collect contractual cash flows, where the contractual terms of
the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount
outstanding.
-- Fair value through other comprehensive income (FVOCI) -- assets held in a
business model which collects contractual cash flows and sells financial
assets where the contractual terms of the financial assets give rise on
specified dates to cash flows that are SPPI on the principal amount
outstanding.
-- Fair value through profit or loss (FVTPL) -- assets not measured at
amortised cost or FVOCI. The Group measures derivatives and an acquired
mortgage portfolio under this category.
The Group classifies non-derivative financial liabilities as measured at
amortised cost.
The Group has no financial assets and liabilities classified as held for
trading.
The Group reassesses its business models each reporting period.
The Group classifies certain financial instruments as equity where they
meet the following conditions:
-- the financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions;
-- the financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- the financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
Equity financial instruments comprise own shares and AT1 securities.
Accordingly, the coupon paid on the AT1 securities is recognised
directly in retained earnings when paid.
1. Accounting policies (continued)
ii. Recognition
The Group initially recognises loans and advances, deposits, debt
securities issued and subordinated liabilities on the date on which they
are originated or acquired. All other financial instruments are
accounted for on the trade date which is when the Group becomes a party
to the contractual provisions of the instrument.
For financial instruments classified as amortised cost, the Group
initially recognises financial assets and financial liabilities at fair
value plus transaction income or costs that are directly attributable to
its origination, acquisition or issue. These financial instruments are
subsequently measured at amortised cost using the effective interest
rate.
Transaction costs relating to the acquisition or issue of a financial
instrument at FVOCI and FVTPL are recognised in the profit or loss as
incurred.
iii. Derecognition
The Group derecognises financial assets when the contractual rights to
the cash flows expire or the Group transfers substantially all risks and
rewards of ownership of the financial asset. In assessing the Group's
retention programmes the principles of IFRS 9 and relevant guidance in
IAS 8 in respect of debt issuance, results in the original mortgage
asset being derecognised with a new financial asset recognised.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated or
otherwise modified. The Group considers the renegotiated or modified
cash flows are not wholly different from the contractual cash flows and
does not consider that forbearance measures give rise to a derecognition
event.
Financial liabilities are derecognised only when the obligation is
discharged, cancelled or has expired.
iv. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the Consolidated Statement of Financial Position when, and
only when, the Group currently has a legally enforceable right to offset
the amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously.
The Group's derivatives are covered by industry standard master netting
agreements. Master netting agreements create a right of set-off that
becomes enforceable only following a specified event of default or in
other circumstances not expected to arise in the normal course of
business. These arrangements do not qualify for offsetting and as such
the Group reports derivatives on a gross basis.
Collateral in respect of derivatives is subject to the standard industry
terms of International Swaps and Derivatives Association (ISDA) Credit
Support Annex. This means that the cash received or given as collateral
can be pledged or used during the term of the transaction but must be
returned on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions upon the
counterparty's failure to post collateral. Collateral paid or received
does not qualify for offsetting and is recognised in loans and advances
to credit institutions and amounts owed to credit institutions
respectively.
1. Accounting policies (continued)
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, plus or minus the cumulative amortisation using
the EIR method of any difference between the initial amount recognised
and the maturity amount, minus any reduction for impairment.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its absence,
the most advantageous market to which the Group has access at that date.
When available, the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument. A market is
regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on
an ongoing basis. The Group measures the fair value of its investment
securities and Perpetual Subordinated Bonds (PSBs) using quoted market
prices.
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs.
The Group uses a combination of LIBOR and SONIA curves to value its
derivatives however, using overnight index swap (OIS) curves would not
materially change their value. The fair value of the Group's derivative
financial instruments incorporates credit valuation adjustments (CVA)
and debit valuation adjustments (DVA). The DVA and CVA take into account
the respective credit ratings of the Bank and counterparty and whether
the derivative is collateralised or not. Derivatives are valued using
discounted cash flow models and observable market data and will be
sensitive to benchmark interest and basis rate curves.
1. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage expected credit loss (ECL)
approach for measuring impairment. The three impairment stages are as
follows:
-- Stage 1 -- a 12-month ECL allowance is recognised where there is no
significant increase in credit risk (SICR) since initial recognition.
-- Stage 2 -- a lifetime loss allowance is held for assets where a SICR is
identified since initial recognition. The assessment of whether credit
risk has increased significantly since initial recognition is performed
for each reporting period for the life of the loan.
-- Stage 3 -- requires objective evidence that an asset is credit impaired,
at which point a lifetime ECL allowance is recognised.
The Group measures impairment through the use of individual and modelled
assessments.
1. Accounting policies (continued)
Individual assessment
The Group's provisioning process requires individual assessment for high
exposure or higher risk loans, where Law of Property Act (LPA) receivers
have been appointed, the property is taken into possession or there are
other events that suggest a high probability of credit loss. Loans are
considered at a connection level, i.e. including all loans connected to
the customer.
The Group estimates cash flows from these loans, including expected
interest and principal payments, rental or sale proceeds, selling and
other costs. The Group obtains up-to-date independent valuations for
properties put up for sale.
If the present value of estimated future cash flows discounted at the
original EIR is less than the carrying value of the loan, a provision is
recognised for the difference. Such loans are classified as impaired. If
the present value of the estimated future cash flows exceeds the
carrying value, no provision is recognised.
The Group applies a modelled assessment to all loans with no
individually-assessed provision.
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12 month (stage 1) or
lifetime basis depending on whether a SICR has occurred since initial
recognition (stage 2) or where an account meets the Group's definition
of default (stage 3).
The ECL calculation is a product of an individual loan's probability of
default (PD), exposure at default (EAD) and loss given default (LGD)
discounted at the EIR. The ECL drivers of PD, EAD and LGD are modelled
at an account level. The assessment of whether a significant increase in
credit risk has occurred is based on quantitative relative PD thresholds
and a suite of qualitative triggers.
In accordance with PRA COVID-19 guidance, the Group does not
automatically consider the take up of customer payment deferrals during
the pandemic to be an indication of a SICR and, in the absence of other
indicators such as previous arrears, low credit score or high other
indebtedness, the staging of these loans remains unchanged in its ECL
calculations.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR, which
results in an exposure being moved from stage 1 to stage 2.
At the point of initial recognition, a loan is assigned a PD estimate.
For each monthly reporting date thereafter, an updated PD estimate is
computed. The Group's transfer criteria analyses relative changes in PD
versus the PD assigned at the point of origination, together with
qualitative triggers using both internal indicators and external credit
bureau information to assess for SICR. In the event that given early
warning triggers have not already identified SICR, an account more than
30 days past due has experienced a SICR.
A borrower will move back into stage 1 only if the SICR definition is no
longer triggered.
1. Accounting policies (continued)
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to
determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- If an account is more than 90 days past due.
-- Accounts that have moved into an unlikely to pay position, which includes
forbearance, bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk improves such
that it no longer meets the 90 days past due and unlikeliness to pay
criteria and following this has completed an internally-approved
probation period. The borrower will move to stage 1 or stage 2 dependent
on whether the SICR applies.
Forward-looking macroeconomic scenarios
The risk of default and expected credit loss assessments take into
consideration expectations of economic changes that are deemed to be
reasonably possible.
The Group conducts analysis to determine the most significant factors
which may influence the likelihood of an exposure defaulting in the
future. The macroeconomic factors relate to the House Price Index (HPI),
unemployment rate (UR), Gross domestic product (GDP), Commercial Real
Estate Index (CRE) and the BoE Base Rate (BBR).
The Group has derived an approach for factoring probability-weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates. The macroeconomic scenarios feed directly into the ECL
calculation, as the adjusted PD, lifetime PD and LGD estimates are used
within the individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group considers four probability-weighted scenarios,
base, upside, downside and severe downside scenarios.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. The
ECL models are also used to set the Group's credit risk appetite
thresholds and limits.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of the
asset which is the date at which the loan is originated or the date a
loan is purchased and at each balance sheet date thereafter. The maximum
period considered when measuring ECL (either 12 months or lifetime ECL)
is the maximum contractual period over which the Group is exposed to the
credit risk of the asset. For modelling purposes, the Group considers
the contractual maturity of the loan product and then considers the
behavioural trends of the asset.
Purchased or originated credit impaired (POCI)
Acquired loans that meet the Group's definition of default (90 days past
due or an unlikeliness to pay position) at acquisition are treated as a
POCI asset. These assets attract a lifetime ECL allowance over the full
term of the loan, even when the loan no longer meets the definition of
default post acquisition. The Group does not originate credit-impaired
loans.
1. Accounting policies (continued)
Intercompany loans
Intercompany receivables in the Company financial statements are
assessed for ECL based on an assessment of the PD and LGD, discounted to
a net present value.
Other financial assets
Other financial assets comprise cash balances with the BoE and other
credit institutions and high grade investment securities. The Group
deems the likelihood of default across these counterparties as low and,
hence does not recognise a provision against the carrying balances.
q) Loans and receivables
Loans and receivables are predominantly mortgage loans and advances to
customers with fixed or determinable payments that are not quoted in an
active market and that the Group does not intend to sell in the near
term. They are initially recorded at fair value plus any directly
attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less impairment losses. Where
exposures are hedged by derivatives, designated and qualifying as fair
value hedges, the fair value adjustment for the hedged risk to the
carrying value of the hedged loans and advances is reported in fair
value adjustments for hedged assets.
Loans and the related provision are written off when the underlying
security is sold. Subsequent recoveries of amounts previously written
off are taken through profit or loss.
Loans and advances over which the Group transfers its rights to the
collateral thereon to the BoE under the TFS, TFSME and Indexed Long-Term
Repo (ILTR) schemes are not derecognised from the Statement of Financial
Position, as the Group retains substantially all the risks and rewards
of ownership, including all cash flows arising from the loans and
advances and exposure to credit risk. The Group classifies TFS, TFSME
and ILTR as amortised cost under IFRS 9 Financial Instruments.
Loans and advances include a small acquired mortgage portfolio where the
contractual cash flows include payments that are not solely payments of
principal and interest and as such are measured at fair value through
profit or loss. The Group initially recognises these loans at fair value,
with direct and incremental costs of acquisition recognised directly in
profit or loss and, subsequently measures them at fair value.
Loans and receivables contain the Group's asset finance lease lending.
Finance leases are initially measured at an amount equal to the net
investment in the lease, using the interest rate implicit in the finance
lease. Direct costs are included in the initial measurement of the net
investment in the lease and reduce the amount of income recognised over
the lease term. Finance income is recognised over the lease term, based
on a pattern reflecting a constant periodic rate of return on the net
investment in the lease.
r) Investment securities
Investment securities comprise securities held for liquidity purposes
(UK treasury bills and Residential Mortgage-Backed Securities (RMBS)).
These assets are non-derivatives that are designated as FVOCI or
classified as amortised cost.
Assets classified as amortised cost are originally recognised at fair
value and subsequently measured at amortised cost using the EIR method,
less impairment losses.
1. Accounting policies (continued)
Assets held at FVOCI are measured at fair value with movements taken to
other comprehensive income and accumulated in the FVOCI reserve within
equity, except for impairment losses which are taken to profit or loss.
When the instrument is sold, the gain or loss accumulated in equity is
reclassified to profit or loss.
s) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue and subordinated liabilities are the
Group's sources of debt funding. They comprise deposits from retail
customers and credit institutions, including collateralised loan
advances from the BoE under the TFS, TFSME and ILTR, asset-backed loan
notes issued through the Group's securitisation programmes and
subordinated liabilities. Subordinated liabilities include the Sterling
PSBs where the terms allow no absolute discretion over the payment of
interest. These financial liabilities are initially measured at fair
value less direct transaction costs, and subsequently held at amortised
cost using the EIR method.
Cash received under the TFS, TFSME and ILTR is recorded in amounts owed
to credit institutions. Interest is accrued over the life of the
agreements on an EIR basis.
t) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements (repo) are
retained in the financial statements if they fail derecognition criteria
of IFRS 9 described in paragraph p(iii) above. The financial assets that
are retained in the financial statements are reflected as loans and
advances to customers or investment securities and the counterparty
liability is included in amounts owed to credit institutions or other
customers. Financial assets purchased under agreements to resell at a
predetermined price where the transaction is financing in nature
(reverse repo) are accounted for as loans and advances to credit
institutions. The difference between the sale and repurchase price is
treated as interest and accrued over the life of the agreement using the
EIR method.
u) Derivative financial instruments
The Group uses derivative financial instruments (interest rate swaps and
basis swaps) to manage its exposure to interest rate risk. In accordance
with its Treasury Policy, the Group does not hold or issue derivative
financial instruments for proprietary trading.
Derivative financial instruments are recognised at their fair value with
changes in their fair value taken to profit or loss. Fair values are
calculated by discounting cash flows at the prevailing interest rates.
All derivatives are classified as assets when their fair value is
positive and as liabilities when their fair value is negative. If a
derivative is cancelled, it is derecognised from the Statement of
Financial Position.
The Group also uses derivatives to hedge the interest rate risk inherent
in irrevocable offers to lend. This exposes the Group to movements in
the fair value of derivatives until the loan is drawn. The changes to
fair value are recognised in profit or loss in the period.
The Group is party to a limited number of options and warrants. These
are recognised as a derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or warrant
can be reliably measured.
v) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS
9. The Group uses fair value hedge accounting for a portfolio hedge of
interest rate risk.
1. Accounting policies (continued)
Portfolio hedge accounting allows for hedge effectiveness testing and
accounting over an entire portfolio of financial assets or liabilities.
To qualify for hedge accounting at inception, the hedge relationship is
clearly documented and the derivative must be expected to be highly
effective in offsetting the hedged risk. In addition, effectiveness must
be tested throughout the life of the hedge relationship.
The Group applies fair value portfolio hedge accounting to its fixed
rate portfolio of mortgages and saving accounts. The hedged portfolio is
analysed into repricing time periods based on expected repricing dates,
utilising the Group Assets and Liabilities Committee (ALCO) approved
prepayment curve. Interest rate swaps are designated against the
repricing time periods to establish the hedge relationship. Hedge
effectiveness is calculated as a percentage of the fair value movement
of the interest rate swap against the fair value movement of the hedged
item over the period tested.
The Group considers the following as key sources of hedge
ineffectiveness:
-- the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
-- the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
-- minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
-- the transition relating to LIBOR reforms whereby some hedged instruments
and hedged items are based on different benchmark rates.
Where there is an effective hedge relationship for fair value hedges,
the Group recognises the change in fair value of each hedged item in
profit or loss with the cumulative movement in their value being shown
separately in the Statement of Financial Position as fair value
adjustments on hedged assets and liabilities. The fair value changes of
both the derivative and the hedge substantially offset each other to
reduce profit volatility.
The Group discontinues hedge accounting when the derivative ceases
through expiry, when the derivative is cancelled or the underlying
hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge accounting or is
cancelled whilst still effective, the fair value adjustment relating to
the hedged assets or liabilities within the hedge relationship prior to
the derivative becoming ineffective or being cancelled remains on the
Statement of Financial Position and is amortised over the remaining life
of the hedged assets or liabilities. The rate of amortisation over the
remaining life is in line with expected income or cost generated from
the hedged assets or liabilities. Each reporting period, the expectation
is compared to actual with an accelerated run-off applied where the two
diverge by more than set parameters.
w) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative financial
instruments. The DVA is based on the expected loss a counterparty faces
due to the risk of the Group's default. The CVA reflects the Group's
risk of the counterparty's default.
The methodology is based on a standard calculation, taking into account:
-- the one-year PD, updated on a regular basis;
-- the expected exposure at default;
-- the expected LGD; and
-- the average maturity of the swaps.
1. Accounting policies (continued)
x) Provisions and contingent liabilities
A provision is recognised when there is a present obligation as a result
of a past event, it is probable that the obligation will be settled and
the amount can be estimated reliably.
Provisions include ECLs on the Group's undrawn loan commitments.
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events which are either not
probable or the amount of the obligation cannot be reliably measured.
Contingent liabilities are not recognised but disclosed unless they are
not material or their probability is remote.
y) Employee benefits -- defined contribution scheme
The Group contributes to defined contribution personal pension plans or
defined contribution retirement benefit schemes for all qualifying
employees who subscribe to the terms and conditions of the schemes'
policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as incurred.
z) Share-based payments
Equity-settled share-based payments to employees providing services are
measured at the fair value of the equity instruments at the grant date
in accordance with IFRS 2. The fair value excludes the effect of
non-market-based vesting conditions.
The cost of the awards are charged on a straight-line basis to profit or
loss (with a corresponding increase in the share-based payment reserve
within equity) over the vesting period in which the employees become
unconditionally entitled to the awards. The cumulative expense within
the share-based payment reserve is reclassified to retained earnings
upon exercise.
The amount recognised as an expense for non-market conditions and
related service conditions is adjusted each reporting period to reflect
the actual number of awards expected to be met. The amount recognised as
an expense for awards subject to market conditions is based on the
proportion that is expected to meet the condition as assessed at the
grant date. No adjustment is made to the fair value of each award
calculated at grant date.
Share-based payments that are not subject to further vesting conditions
(i.e. the Deferred Share Bonus Plan (DSBP) for senior managers) are
expensed in the year services are received with a corresponding increase
in equity. Awards granted to Executive Directors in March 2020 are
subject to service conditions through to vesting and are expensed over
the vesting period. Awards granted to Executive Directors in April 2021
are not subject to future service conditions and are expensed in 2020
where the service is deemed to have been provided.
Where the allowable cost of share-based options or awards for tax
purposes is greater than the cost determined in accordance with IFRS 2,
the tax effect of the excess is taken to the share-based payment reserve
within equity. The tax effect is reclassified to retained earnings upon
vesting.
Employer's national insurance is charged to profit or loss at the share
price at the reporting date on the same service or vesting schedules as
the underlying options and awards.
1. Accounting policies (continued)
Following the insertion of OSBG, the Group ceased consolidating the EBT
and no longer recognises own shares. In 2019, own shares were recorded
at cost and deducted from equity and represented shares of OSB that were
held by the Employee Benefit Trust.
1) Leases
The Group recognises right-of-use assets and lease liabilities for
leases over 12 months long. Right-of-use assets and lease liabilities
are initially recognised at the net present value of future lease
payments, discounted at the rate implicit in the lease or, where not
available, the Group's incremental borrowing cost. Subsequent to initial
recognition, the right-of-use asset is depreciated on a straight-line
basis over the term of the lease. Future rental payments are deducted
from the lease liability, with interest charged on the lease liability
using the incremental borrowing cost at the time of initial recognition.
The Group recognises lease liability payments within financing
activities in the Consolidated Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an option
to terminate early exists.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly in profit or loss.
1) Adoption of new standards
International financial reporting standards issued and adopted for the
first time in the year ended 31 December 2020
The following financial reporting standard amendments and
interpretations were in issue and have been applied in the financial
statements from 1 January 2020.
-- Amendments to the Conceptual Framework for Financial reporting, including
amendments to references to the Conceptual Framework in IFRS Standards.
-- Amendments to IFRS 3 -- Definition of a business.
-- Amendments to IAS 1 and IAS 8 -- Definition of material.
There has been no material impact on the financial statements of the
Group from the adoption of these financial reporting standard amendments
and interpretations.
International financial reporting standards issued but not yet adopted
which are applicable to the Group
The following financial reporting standards were in issue but have not
been applied in the financial statements, as they were yet effective on
31 December 2020.
Effective for accounting periods beginning on or after 1 June 2020:
-- Amendments to IFRS 16 -- COVID-19 related rent concessions
Effective for accounting periods beginning on or after 1 January 2021:
-- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate
Benchmark Reform -- Phase 2
-- Amendments to IAS 1 -- Classification of liabilities as current or
non-current.
1. Accounting policies (continued)
-- Annual improvements to IFRS Standards 2018-2020 -- Minor amendments to
IFRS 1, IFRS 9 and IFRS 16.
The Group does not expect that the adoption of the financial reporting
standards listed above will have a material impact on the financial
statements of the Group in future periods.
1. Judgements in applying accounting policies and critical accounting
estimates
In preparing these financial statements, the Group has made judgements,
estimates and assumptions which affect the reported amounts within the
current and next financial year. Actual results may differ from these
estimates.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
(i) Loan book impairments
Significant increase in credit risk for classification in stage 2
The Group's Significant Increase in Credit Risk (SICR) rules, prior to
the COVID-19 pandemic, considered changes in default risk, internal
impairment measures, changes in customer credit bureau files, or whether
forbearance measures had been applied. The Group took steps to adjust
the SICR criteria through the pandemic to account for the changes in
risk profile and specifically for payment deferrals granted, noting that
not all of the instances of a payment deferral would be a significant
increase in credit risk. Payment deferrals granted due to COVID-19 alone
were not automatically considered as a SICR event in line with issued
guidance, and adjustments to the rules were as follows:
-- Payment deferrals considered as a SICR event where other significant high
risk factors are identified on customer's credit files;
-- Payment deferrals considered as a SICR event where an account also had
recent arrears; and
-- Customers with stress to their income considered as a SICR event.
(ii) IFRS 9 classification
The Group has applied judgement in determining whether the contractual
terms of a financial asset give rise on specified dates to cash flows
that are solely payments of principal or interest (SPPI) on the
principal amount outstanding when applying the classification criteria
of IFRS 9. The main area of judgement is over the Group's loans and
advances to customers which have been accounted for under amortised cost
with the exception of one acquired mortgage book of GBP19.1m (2019:
GBP22.1m) that is recognised at FVTPL.
Estimates
The Group has made the following estimates in the application of the
accounting policies that have a significant risk of material adjustment
to the carrying amount of assets and liabilities within the next
financial year:
(i) Loan book impairments
Set out below are details of the critical accounting estimates which
underpin loan impairment calculations. Less significant estimates are
not discussed as they do not have a material effect. The Group has
recognised total impairments of GBP111.0m (2019: GBP42.9m) at the
reporting date as disclosed in note 22.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key areas
of estimation within modelled provisioning calculations include those
regarding the PD, the LGD and forward-looking macroeconomic scenarios.
Loss given default model
The Group has a number of LGD models, which include a number of
estimated inputs including propensity to go to possession given default
(PPD), forced sale discount (FSD), time to sale (TTS) and sale cost
estimates. The LGD is sensitive to the application of the HPI. For the
OSB segment at 31 December 2020 a 10% fall in house prices would result
in an incremental GBP25.6m (2019: GBP13.6m) of provision being required.
For the CCFS segment at 31 December 2020 a 10% fall in house prices
would result in an incremental GBP13.9m (2019: GBP3.8m) of provision
being required. The combined impact across both OSB and CCFS businesses
of a 10% fall in house prices would result in an increase in total
provisions of GBP39.5m (2019: GBP17.4m) as at 31 December 2020.
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect both the PD and LGD
estimates. Therefore the expected credit losses calculations are
sensitive to both the scenarios utilised and their associated
probability weightings.
The Group sources economic forecasts from an appropriately qualified,
independent third party. The Group considers four probability-weighted
scenarios: base, upside, downside and severe downside scenarios. Due to
the current uncertainty in relation to the ongoing COVID-19 global
pandemic and the recently agreed Brexit trade agreement the choice of
scenarios and weightings are subject to a significant degree of
estimation. The Group's macroeconomic scenarios can be found in the
Strategic Report on page 3.
The following tables detail the ECL scenario sensitivity analysis with
each scenario weighted at 100% probability. The purpose of using
multiple economic scenarios is to model the non-linear impact of
assumptions surrounding macroeconomic factors and ECL calculated:
100% Severe
As at 100% Base 100% Upside 100% Downside downside
31-Dec-20 Weighted case scenario scenario scenario scenario
Total loans before provisions,
GBPm 19,322.6 19,322.6 19,322.6 19,322.6 19,322.6
Modelled ECL, GBPm 71.6 54.6 40.1 113.5 166.7
Non-modelled ECL, GBPm 39.4 39.4 39.4 39.4 39.4
Total ECL, GBPm 111.0 94.0 79.5 152.9 206.1
-------- -------------- ----------- ------------- -----------
ECL Coverage, % 0.57 0.49 0.41 0.79 1.07
As at
31-Dec-19
Total loans before provisions,
GBPm 18,467.6 18,467.6 18,467.6 18,467.6 18,467.6
Modelled ECL, GBPm 37.4 24.4 14.6 48.1 62.5
Non-modelled ECL, GBPm 5.5 5.5 5.5 5.5 5.5
Total ECL, GBPm 42.9 29.9 20.1 53.6 68.0
ECL Coverage, % 0.23 0.16 0.11 0.29 0.37
-------- -------------- ----------- ------------- -----------
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant
estimation is required in calculating their EIR using cash flow models
which include assumptions on the likely macroeconomic environment,
including HPI, unemployment levels and interest rates, as well as loan
level and portfolio attributes and history used to derive prepayment
rates and the amount of incurred losses.
Through the Combination in 2019, the Precise Mortgages book is treated
as an acquired book with a fair value uplift to book value, at the point
of initial recognition, of GBP301.0m, reflecting a premium applied to
the book. Fair value sensitivities have been completed on the Precise
Mortgages book, including the market rate applied to the discounted cash
flows, being one month LIBOR plus a margin (margin blended average used
2.91%). Where the margin applied is increased/decreased by 25bps the
initial premium recognised on the book increases/decreases by
GBP66.0m/GBP67.0m.
The EIR on loan books purchased at significant discounts or premiums is
particularly sensitive to the weighted average life of the loan book
through the constant prepayment rate (CPR) and the constant default rate
(CDR) estimates assumed, as the purchase discount or premium is
recognised over the expected life of the loan book through the EIR. New
defaults are modelled at zero loss (as losses will be recognised in
profit or loss as impairment losses) and therefore have the same impact
on the EIR as prepayments.
Incurred losses at acquisition are calculated using the Group's modelled
provision assessment (see (i) Loan book impairments above for further
details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows, unless the variance is due
to changes in expectations of market rates of interest. The Group
monitors the actual cash flows for each acquired book, and where they
diverge significantly from expectation, the revised future cash flows
are discounted at the original EIR, with any resulting change in carry
value creating a corresponding gain or loss in the Statement of
Comprehensive Income as Interest Income. In assessing whether to adjust
future cash flows on an acquired portfolio, the Group considers the cash
variance on an absolute and percentage basis. The Group also considers
the total variance across all acquired portfolios and the economic
outlook. The Group recognised a GBP3.5m loss in 2020 as a result of
resetting cash flows on acquired books (2019: gain of GBP0.5m). The
largest acquired book is Precise with sensitivities completed on
increasing/reducing the life of the book by six months which results in
a reset gain/loss of c. GBP33m/GBP37m (2019: c.GBP48m/GBP50m).
(iii) Effective interest rate on organic lending
Estimates are made when calculating the EIR for newly-originated loan
assets. These include the likely customer redemption profiles.
Mortgage products offered by the Group include directly attributable net
fee income and a period on reversion rates after the fixed/discount
period. Products revert to the standard variable rate (SVR) or Base plus
a margin for the Kent Reliance brand or a LIBOR/Base plus a margin for
the Precise brand. The Group uses historical customer behaviours,
expected take-up rate of retention products and macroeconomic forecasts
in its assessment of prepayment rates. Customer prepayments in a fixed
rate or incentive period can give rise to Early Repayment Charge (ERC)
income.
Estimation is used in assessing whether and for how long mortgages that
reach the end of the initial product term stay on reversion rates, and
to the quantum and timing of prepayments that incur ERCs. The estimate
of customer weighted average life will determine the period over which
net fee income and expected reversionary income is recognised.
2. Judgements in applying accounting policies and critical accounting
estimates (continued)
Sensitivities have been applied to the Precise and Kent Reliance loan
books, to illustrate the impact on interest income of a change in the
expected weighted average lives of the loan books. An extension of the
expected life will typically result in increased expectations of post
reversionary income, less ERCs and a recognition of net fee income over
a longer period. A shortening of the expected life will lead to reduced
post reversionary income, more ERCs and a recognition of net fees over a
shorter period.
The potential duration of a change in customer behaviour as a result of
COVID-19 remains uncertain. However, a period of six months' variance in
the weighted average lives of the loan books was selected for this
sensitivity, given the initial quick recovery in the property and
mortgage markets post national lockdown experienced in 2020. This
recovery was due, in part, to government stimulus in the form of a
temporary reduction in stamp duty and the provision of cheaper funding
to banks, in the form of the Bank of England's Term Funding Scheme for
SMEs.
Applying a six month extension in the expected weighted average life of
the organic loan books, would result in a gain of c. GBP22.6m (2019:
GBP23.6m) recognised in Net Interest Income. It includes a c. GBP13.8m
(2019: GBP19.5m) gain in relation to the Kent Reliance loan book, where
the impact of the proactive Choices programme, which offers borrowers a
new product as an alternative to paying the Bank's higher Standard
Variable Rate (SVR), may significantly reduce the likelihood of
borrowers extending the period of time paying SVR and reduce the amount
of the potential reset gain.
Applying a six month reduction in the expected weighted average life of
the loan books, would result in a reset loss of c. GBP6.9m (2019:
GBP4.6m) recognised in Net Interest Income. This includes c. GBP2.0m
(2019: GBP0.4m) gain in relation to the Kent Reliance loan book.
3. Interest receivable and similar income
Group Group
2020 2019
GBPm GBPm
At amortised cost:
On OSB mortgages 500.6 480.5
On CCFS mortgages 331.9 80.2
On investment securities 2.5 0.6
On other liquid assets 5.3 12.2
Amortisation of fair value adjustments on
CCFS Combination(1) (67.8) (22.6)
Amortisation of fair value adjustments on
hedged assets(2) (17.9) -
At fair value through profit or loss:
Net expense on derivative financial instruments
- lending activities (47.7) (14.0)
On CCFS mortgages - 0.3
At FVOCI:
On investment securities 5.0 2.7
711.9 539.9
------------------------------------------------ ------ ------
(1) Amortisation of fair value adjustments on CCFS loan book at
Combination.
(2) The amortisation relates to hedged assets where the hedges were
terminated before maturity and were effective at the point of
termination.
4. Interest payable and similar charges
Group Group
2020 2019
GBPm GBPm
On retail deposits 245.5 177.3
On BoE borrowings 8.4 13.3
On perpetual subordinated bonds 1.7 1.8
On subordinated liabilities 0.8 0.7
On wholesale borrowings 1.3 1.9
On debt securities in issue 3.4 3.7
On lease liabilities 0.3 0.1
Amortisation of fair value adjustments on
CCFS Combination(1) (3.3) (1.0)
Net income on derivative financial instruments
- savings activities (18.4) (2.6)
239.7 195.2
----------------------------------------------- ------ -----
(1) Amortisation of fair value adjustments on CCFS customer deposits at
Combination.
5. Fair value gains/(losses) on financial instruments
Group Group
2020 2019
GBPm GBPm
Fair value changes in hedged assets 107.3 70.1
Hedging of assets (116.8) (75.1)
Fair value changes in hedged liabilities (4.1) (4.6)
Hedging of liabilities 6.8 4.8
Ineffective portion of hedges (6.8) (4.8)
Net (losses)/gains on unmatched swaps (18.0) 3.5
Amortisation of inception adjustments 13.0 -
Amortisation of acquisition related inception
adjustments 17.0 3.3
Amortisation of de-designated hedge relationships 2.4 -
Fair value movements on mortgages at FVTPL (0.2) -
Amortisation of fair value adjustments on
hedged assets - (5.5)
Debit and credit valuation adjustment - 0.2
7.4 (3.3)
------
Amortisation of inception adjustments relates in part to hedged assets
and liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination. The inception
adjustment is being amortised over the life of the derivative
instruments acquired on Combination and recognises an offsetting asset
or liability to the fair value of the derivative instruments on the date
of Combination. The remainder of the amortisation of inception
adjustment relates to the amortisation of the hedging adjustments
arising when hedge accounting commences, primarily on derivative
instruments previously taken out against the mortgage pipeline and also
on derivative instruments previously taken out against new retail
deposits.
6. Gain/(loss) on sales of financial instruments
On 17 January 2020, the Group sold the Canterbury A2 note for proceeds
of GBP225.4m. After incurring costs of GBP0.2m, a gain on sale of
GBP1.9m was recognised.
On 23 January 2020, the Group sold the F note and residual certificates
of the Canterbury securitisation for proceeds of GBP23.6m. Following the
sale the Group had no remaining interest in the Canterbury
securitisation. As a result, consolidation of Canterbury into the Group
ceased on disposal. The Group recognised a gain on sale of GBP16.0m upon
deconsolidation.
On 23 January 2020, the Group securitised GBP375.5m of mortgage loans
through Precise Mortgage Funding 2020-1B plc (PMF 2020-1B), issuing
GBP388.9m of Sterling floating rate notes. The Group retained the class
A2 notes, with all other note classes and the residual certificates
being sold to the external market. As such, the Group has not
consolidated PMF 2020-1B as substantially all of the risks and rewards
have been transferred. The Group recognised a gain on sale of GBP2.0m on
disposal. Excluding the impact of the fair value adjustment on the
mortgages on Combination with OSB of GBP13.1m, the underlying gain on
sale was GBP15.1m.
On 14 September 2020, the Group sold GBP150.0m of Canterbury 3 A2 notes
for GBP150.1m, resulting in a gain on sale of GBP0.1m.
In 2019, the Group identified an additional GBP0.1m of customer receipts
due to the purchaser of the personal loan portfolio in the prior year,
recognising an additional loss on sale of GBP0.1m.
7. Other operating income
Group Group
2020 2019
GBPm GBPm
Interest received on mortgages held at FVTPL(1) 0.6 -
Fees and commissions receivable 8.4 3.4
Other operating costs(2) - (1.3)
9.0 2.1
------------------------------------------------ ----- -----
(1) In 2019, GBP0.3m interest received on mortgages held at FVTPL was
included in interest receivable and similar income (see note 3).
(2) Other operating costs includes commission expense incurred on retail
savings generated from the branch network which is included in
administration expenses from 2020.
8. Administrative expenses
Group Group
2020 2019
GBPm GBPm
Staff costs 86.0 60.5
Facilities costs 5.7 3.6
Marketing costs 5.1 4.0
Support costs 18.6 12.7
Professional fees 22.3 10.4
Other costs(1) 5.6 9.3
Depreciation (see note 29) 5.6 3.9
Amortisation (see note 30) 8.2 4.3
157.1 108.7
--------------------------- ----- -----
(1) In 2019, other costs mainly comprised irrecoverable VAT. In 2020,
the Group included irrecoverable VAT within the underlying expense.
Included in professional fees are amounts paid to the Company's auditor
as follows:
Group Group
2020 2019
GBP'000 GBP'000
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 899 1,269
Fees payable to the Company's auditor for
the audit of the accounts of subsidiaries 1,299 846
Total audit fees 2,198 2,115
Audit-related assurance services(1) 217 187
Other assurance services(2) 45 142
Other non-audit services(3) 101 -
Total non-audit fees 363 329
--------------------------------------------
Total fees payable to the Group's Auditor 2,561 2,444
------- -------
(1) Includes review of interim financial information and profit
verifications
(2) 2020 costs comprise an assurance review of APMs, 2019 costs related
to the Combination and agreed upon procedures in respect of
securitisations
(3) Primarily comprises work related to the insertion of a new holding
company.
Staff costs comprise the following:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Salaries, incentive pay and
other benefits 68.5 49.1 30.7 31.4
Share-based payments 5.1 4.0 4.9 4.0
Social security costs 8.1 4.4 4.5 3.4
Other pension costs 4.3 3.0 2.6 2.3
86.0 60.5 42.7 41.1
----- ----- ------- -------
8. Administrative expenses (continued)
The average number of people employed by the Group (including Executive
Directors) during the year is analysed below. For 2019, the average for
CCFS is based on the post Combination period.
Group Group Company Company
2020 2019 2020 2019
OSB
Operations 835 812 356 325
Support functions 297 286 180 204
CCFS
Operations 579 530 - -
Support functions 105 161 - -
1,816 1,789 536 529
------------------ ----- ----- ------- -------
9. Impairment of intangible assets
Assets arising on the Combination with CCFS in 2019 included a broker
relationships intangible asset with a fair value of GBP17.1m on
Combination. A key input to the calculation of the fair value was CCFS
anticipated lending volumes over three years post combination which have
been revised due to COVID-19 impacts, with an impairment of GBP7.0m
recognised. The remaining carrying value of the broker relationships
intangible asset at 31 December 2020 is GBP5.7m (2019: GBP16.1m).
10. Directors' emoluments and transactions
Company Company
2020 2019
GBP'000 GBP'000
Short-term employee benefits(1) 2,675 2,334
Post-employment benefits 99 112
Share-based payments(2) 425 632
3,199 3,078
-------------------------------- ------- -------
(1) Short-term employee benefits comprise Directors' salary costs,
Non-Executive Directors' fees and other short-term incentive benefits,
which are disclosed in the OSB GROUP PLC Annual Report on Remuneration.
(2) Share-based payments represent the amounts received by Directors for
schemes that vested during the year. Following the insertion of OSB
GROUP PLC as the holding company on 27 November 2020, the share awards
and options over OneSavings Bank plc shares were automatically
transferred to OSB GROUP PLC shares.
In addition to the total Directors' emoluments above, the Executive
Directors were granted deferred bonuses of GBP495k (2019: GBP511k) in
the form of shares. The DSBP awards that will be granted in April 2021
will have a holding period of three years with no further conditions
attached other than standard clawback situations. In March 2020 and
prior, the DSBP awards were subject to either a three or five year
vesting period with conditions attached, notably if the Director leaves
prior to vesting, the award is forfeited unless a good leaver reason
applies such as redundancy, retirement or ill health.
The Executive Directors received a further share award under the PSP
with a grant date fair value of GBP1,359k (2019: GBP1,305k) using a
share price of GBP2.58 (2019: GBP3.90) (the average mid-market quotation
for the preceding five days before grant). These shares vest annually
from year three in tranches of 20 per cent, subject to performance
conditions discussed in note 11 and the OSB GROUP PLC Annual Report on
Remuneration.
10. Directors' emoluments and transactions (continued)
Some Non-Executive Directors who left office during the year, received a
payment equal to three months' fee in lieu of the unexpired period of
notice, totalling GBP59k. There was no compensation for loss of office
during 2019.
There were no outstanding loans granted in the ordinary course of
business to Directors and their connected persons as at 31 December 2020
and 2019.
The highest paid Director employed by the Company received emoluments of
GBP1,329k (2019: GBP1,315k) and payments in respect of personal pension
plans of GBP59k (2019: GBP67k) in the year. This includes an estimated
amount of GBP406k relating to PSP awards which are due to vest in May
2021.
The OSB GROUP PLC Annual Report on Remuneration and note 11 Share-based
payments provide further details on Directors' emoluments.
11. Share-based payments
Following the insertion of OSB GROUP PLC as the holding company on 27
November 2020, the share awards and options over OneSavings Bank plc
shares were automatically transferred to OSB GROUP PLC shares.
The Group operates the following share-based schemes:
Sharesave Scheme
The Save As You Earn (SAYE) or Sharesave Scheme is a share option scheme
which is available to all UK-based employees. The Sharesave Scheme
allows employees to purchase options by saving a fixed amount of between
GBP5 and GBP500 per month over a period of either three or five years at
the end of which the options, subject to leaver provisions, are usually
exercisable. If not exercised, the amount saved is returned to the
employee. The Sharesave Scheme has been in operation since 2014 and an
invitation to join the scheme is usually extended annually, with the
option price calculated using the mid-market price of an OSB GROUP PLC
ordinary share over the three dealing days prior to the Invitation Date
and applying a discount of 20%.
Deferred Share Bonus Plan (DSBP)
The DSBP applies to Executive Directors and certain senior managers with
50% of their performance bonuses to be deferred in shares for three
years for Executive Directors and one or five years for senior managers.
There are no further performance or vesting conditions attached to
deferred awards for senior managers, which also applies to Executive
Directors for awards granted from April 2021; the share awards are
subject to clawback provisions. The DSBP awards are expensed in the year
services are received with a corresponding increase in equity. Awards
granted to Executive Directors in March 2020 and prior, are subject to
vesting conditions and are expensed over the vesting period.
DSBP awards for senior managers carry entitlements to dividend
equivalents, which are paid when the awards vest. DSBP awards granted
from April 2021 to Executive Directors are entitled to dividend
equivalents; awards granted in prior years were not entitled to dividend
equivalents.
Performance Share Plan (PSP)
Executive Directors and certain senior managers are also eligible for a
PSP award based on performance conditions and vest in tranches over
three to seven years.
1. Share-based payments (continued)
The performance conditions that apply to PSP awards from 2020 are based
on a combination of earnings per share (EPS) weighting of 35%, total
shareholder return (TSR) 35%, risk-based 15% and return on equity (ROE)
15%. Prior to 2020, PSP awards were based on a combination of EPS
weighting of 40%, TSR 40% and ROE 20%. The PSP conditions are assessed
independently. For the EPS element, growth targets are linked to the
Group's three-year growth plan, measuring growth from the base figure
for the prior year. For the TSR element, the Group's ordinary shares
relative performance is measured against the FTSE 250 (excluding
investment trusts). The risk-based measure is assessed against the risk
management performance with regard to all relevant risks including, but
not limited to, an assessment of regulatory risk, operational risk,
conduct risk, liquidity risk, funding risk, marketing risk and credit
risk. For the ROE element, growth rates are assessed against OSB GROUP
PLC's underlying profit after taxation as a percentage of average
shareholders' equity.
As part of the Combination, the Group granted mirror PSP awards for the
2018 and 2019 CCFS schemes that terminated upon the Combination. The
mirror PSP schemes follow the same performance conditions as the Group's
2018 and 2019 PSP awards.
The share-based expense for the year includes a charge in respect of the
Sharesave Scheme, DSBP and PSP. All charges are included in employee
expenses within note 8 Administrative expenses.
The share-based payment expense during the year comprised the following:
Group Group
2020 2019
GBPm GBPm
Sharesave Scheme 0.5 0.2
Deferred Share Bonus Plan 3.9 1.3
Performance Share Plan 0.7 2.5
5.1 4.0
-------------------------- ----- -----
Movements in the number of share awards and their weighted average
exercise prices are presented below:
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2020 2,869,146 2.63 738,473 3,096,371
Granted 1,483,202 2.29 839,735 2,756,176
Exercised/Vested (1,080,430) 2.32 (449,608) (383,205)
Forfeited (526,586) 2.79 (8,843) (482,815)
At 31 December
2020 2,745,332 2.53 1,119,757 4,986,527
----------------- ---------------- ------------ -----------
Exercisable:
At 31 December
2020 118,402 2.89 - -
----------- ---------------- ------------
1. Share-based payments (continued)
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2019 841,629 2.93 1,258,712 1,737,997
Granted 1,261,307 2.65 476,933 1,079,392
CCFS mirror/roll over
schemes 1,183,475 2.42 - 931,853
Exercised/Vested (154,963) 1.96 (920,891) (235,241)
Forfeited (262,302) 3.23 (76,281) (417,630)
At 31 December 2019 2,869,146 2.63 738,473 3,096,371
---------------------- ---------------- ------------ -----------
Exercisable:
At 31 December 2019 - - - -
--------- ---------------- ------------
For the share-based awards granted during the year, the weighted average
grant date fair value was 188 pence (2019: 208 pence).
The range of exercise prices and weighted average remaining contractual
life of outstanding awards are as follows:
2020 2019
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
Sharesave Scheme
227-335 pence (2019: 134 -
335 pence) 2,745,332 2.5 2,869,146 2.0
Deferred Share Bonus Plan
Nil 1,119,757 0.7 738,473 0.6
Performance Share Plan
Nil 4,986,527 2.5 3,096,371 1.7
8,851,616 2.3 6,703,990 1.7
--------------------------- --------- ------------- --------- -------------
1. Share-based payments (continued)
Sharesave Scheme
2020 2019 2018 2017 2016
Contractual
life, years 3 5 3 5 3 5 3 5 3 5
Share price
at issue, GBP 2.86 2.86 3.32 3.32 4.19 4.19 3.93 3.93 3.00 3.00
Exercise price,
GBP 2.29 2.29 2.65 2.65 3.35 3.35 3.15 3.15 2.40 2.40
Expected volatility,
% 57.6 57.6 31.9 31.9 16.1 16.5 18.0 17.3 18.4 20.1
Dividend yield,
% 3.3 3.3 4.8 4.8 4.4 4.4 4.1 4.1 4.6 4.6
Grant date fair
value, GBP 1.22 1.34 0.90 0.91 0.40 0.43 0.75 0.70 0.10 0.15
--------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
The share save schemes are not entitled to dividends between the option
and exercise date. A Black Scholes model is used to determine the grant
date fair value with two inputs:
Expected volatility - from 2019, the expected volatility is based on
OSBG's share price post insertion, and the OSB share price prior to
insertion. Prior to this the Group used the FTSE 350 diversified
financials volatility as insufficient history was available for the
Company's share price.
Dividend -- based on the average dividend yield across external analyst
reports for the quarter prior to scheme grant date.
Deferred Share Bonus Plan
2020 2019 2018 2017
Contractual life,
years 3 3 3 3 5
Mid-market share
price, GBP 2.58 3.96 3.80 4.04 4.04
Attrition rate,
% - 8.4 9.7 11.8 11.8
Dividend yield,
% 5.6 4.7 4.6 4.0 4.0
Grant date fair
value, GBP 2.21 3.47 3.34 3.61 3.37
------------------ ---- ---- ---- ---- ----
For DSBP awards where conditions exists an attrition rate is applied as
an estimate of the actual number of awards that will meet the related
conditions at the vesting date. These schemes carry no rights to
dividend equivalents and a Black Scholes model is used to determine the
grant date fair value with a dividend yield input applied -- based on
the average dividend yield across external analyst reports for the
quarter prior to scheme grant date.
Performance Share Plan
Performance awards are typically made annually at the discretion of the
Group Remuneration Committee. Awards are based on a mixture of internal
financial performance targets, risk-based measures and relative TSR.
Performance conditions exist for the scheme notably that you are
employed by the Company at the vesting date, with good leaver exceptions,
and an attrition rate is applied as an estimate of the actual number of
awards that will meet the related conditions at the vesting date. The
awards are not entitled to a dividend equivalent between grant date and
vesting and a Black Scholes model is used to determine the grant date
fair value with a dividend yield input applied -- based on the average
dividend yield across external analyst reports for the quarter prior to
scheme grant date.
11. Share-based payments (continued)
The fair value of an option that is subject to market conditions (the
relative share price element of the Performance Share Plan) is
determined at grant date using a Monte Carlo model at the time of grant.
The inputs into the models are as follows:
2020 2019 2018 2017
Contractual life,
years 3-7 3 3 3
Mid-market share
price, GBP 2.58 3.96 4.11 4.04
Attrition rate,
% 7.3 8.4 9.7 11.8
Expected volatility,
% 43.9 26.8 29.1 63.7
Dividend yield,
% 5.6 4.7 4.6 4.0
Vesting rate - TSR
% 27.8 44.9 54.0 60.0
Grant date fair
value, GBP 2.06 3.47 3.61 3.61
--------------------- ---- ---- ---- ----
CCFS PSP Mirror Schemes
2019 2018
Contractual life,
years 3 2
Mid-market share
price, GBP 3.54 3.54
Expected volatility,
% 28.6 28.6
Attrition rate,
% - -
Dividend yield,
% 4.8 4.8
Vesting rate - TSR,
% 37.4 37.4
Grant date fair
value, GBP 3.29 3.17
--------------------- ---- ----
12. Integration costs
Group Group
2020 2019
GBPm GBPm
Consultant fees 1.7 3.0
Staff costs 8.1 2.2
9.8 5.2
---------------- -----
Consultant fees relate to advice on the Group's future operating
structure. Staff costs relate to key personnel who will leave the Group
under the new operating model, but have been retained to assist in the
integration for a fixed period.
1. Exceptional items
Group Group
2020 2019
GBPm GBPm
Consultant fees 2.0 4.0
Legal and professional fees 1.3 4.6
Success fees - 7.0
3.3 15.6
---------------------------- ----- -----
Exceptional items for 2020 relate to the insertion of OSB GROUP PLC as
the new holding company and listed entity of the OSB Group. 2019
expenses relate to the all-share Combination with CCFS.
1. Taxation
The Group publishes its tax strategy on its corporate website. The table
below shows the components of the Group's tax charge for the year:
Group Group
2020 2019
GBPm GBPm
Corporation taxation (79.7) (57.1)
Deferred taxation 0.8 (0.2)
Release of deferred taxation on CCFS Combination(1) 14.8 7.0
Total taxation (64.1) (50.3)
---------------------------------------------------- ------ ------
(1) Release of deferred taxation on CCFS Combination relates to the fair
value unwind of the CCFS assets and liabilities at the acquisition date.
The charge for taxation on the Group's profit before taxation differs
from the charge based on the standard rate of UK Corporation Tax of 19%
(2019: 19%) as follows:
Group Group
2020 2019
GBPm GBPm
Profit before taxation 260.3 209.1
Profit multiplied by the standard rate of
UK Corporation Tax (19%) (49.5) (39.7)
Bank surcharge(1) (11.0) (8.5)
Taxation effects of:
Expenses not deductible for taxation purposes (1.6) (3.0)
Impact of deferred tax rate change (4.4) -
Negative goodwill on acquisition not taxable - 2.0
Adjustments in respect of earlier years 0.4 (2.7)
Tax adjustments in respect of share-based
payments (0.8) (0.7)
Impact of tax losses carried forward - 0.5
Tax on AT1 securities 1.5 1.0
Timing differences on capital items 1.3 0.2
Other - 0.6
Total taxation charge (64.1) (50.3)
---------------------------------------------- ------ ------
(1) Tax charge for the two banking entities of GBP18.4m offset by the
tax impact of unwinding CCFS Combination items of GBP5.8m (2019: Tax
charge for the two banking entities of GBP10.4m offset by the tax impact
of unwinding CCFS Combination items of GBP1.9m).
Factors affecting tax charge for the year
The effective tax rate for the year ended 31 December 2020, excluding
the impact of the deferred tax rate change and adjustments in respect of
earlier years, was 23.1% (2019: 22.8%).
The (GBP4.4m) impact of the deferred tax rate change relates
predominantly to the deferred tax liability from the CCFS combination
(see note 28).
During the year a tax charge of GBP0.3m (2019: tax charge of GBP1.1m) of
tax has been recognised directly within equity relating to the Group's
share-based payment schemes.
14. Taxation (continued)
During the year a tax credit of GBP0.5m (2019: tax credit of GBP0.2m)
has been recognised within other comprehensive income relating to
investment securities classified as FVOCI.
Factors that may affect future tax charges
In the March 2020 Budget, it was announced that the cuts in corporation
tax rate to 18% and then to 17% previously enacted would not occur with
the corporation tax rate held at 19%. As a result, closing deferred tax
balances are calculated at 19% with the impact of the increase from
17%/18% to 19% reflected in the period.
On 3 March 2021, the government announced that the corporation tax rate
will increase from 19% to 25% from 1 April 2023. This rate change was
not substantively enacted at the balance sheet date and so has not been
reflected in these financial statements. The government has also
acknowledged that this increase in the main rate will result in an
uncompetitive position for UK banks which also currently pay the 8% Bank
Surcharge, and so has also announced a review of the Bank Surcharge will
take place in Autumn 2021. Given that the majority of the Group's
deferred tax is recognised at the combined corporation tax and Bank
Surcharge rate, we are not yet able to estimate the impact of the
combined rate changes on our deferred tax balances. We have assessed the
impact of the increase of the corporation tax rate in isolation and
concluded that it will not have a material impact on the Group's
deferred tax balances.
15. Dividends
During the year, the Company paid the following dividends:
Company Company
2020 2019
Pence per
GBPm share GBPm Pence per share
Final dividend for the prior
year - - 25.3 10.3
Interim dividend for the current
year - - 12.0 4.9
- 37.3
---------------------------------
The Directors do not a propose a final dividend (2019: nil).
16. Cash and cash equivalents
The following table analyses the cash and cash equivalents disclosed in
the Consolidated Statement of Cash Flows:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Cash in hand 0.5 0.4 0.5 0.4
Unencumbered loans and advances
to credit institutions 2,370.1 2,052.5 1,377.1 1,106.3
Investment securities with
original maturity less than
3 months - 49.9 - 49.9
2,370.6 2,102.8 1,377.6 1,156.6
-------------------------------- ------- ------- ------- -------
17. Loans and advances to credit institutions
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Unencumbered:
BoE call account 2,256.5 1,916.2 1,356.4 1,081.8
Call accounts 55.6 81.7 20.6 24.0
Cash held in special purpose
vehicles(1) 51.0 44.0 0.1 0.5
Term deposits 7.0 10.6 - -
Encumbered:
BoE cash ratio deposit 52.3 41.7 34.0 27.5
Cash held in special purpose
vehicles(1) 42.7 - - -
Cash margin given 211.1 110.4 107.0 62.2
2,676.2 2,204.6 1,518.1 1,196.0
----------------------------- ------- ------- ------- -------
(1) Cash held in special purpose vehicles is ring-fenced for the use in
managing the Group's securitised debt facilities under the terms of
securitisation agreements.
18. Investment securities
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Held at FVOCI:
UK and EU Sovereign debt - 149.8 - 149.8
RMBS loan notes 285.0 358.9 15.0 -
285.0 508.7 15.0 149.8
Held at amortised cost:
RMBS loan notes 186.2 126.6 - -
186.2 126.6 - -
Less: Expected credit losses - - - -
186.2 126.6 - -
471.2 635.3 15.0 149.8
At 31 December 2020 the Group had GBP147.1m (2019: GBP173.0m) of FVOCI
RMBS and GBP13.7m (2019: nil) of amortised cost RMBS loan notes sold
under repos or pledged as collateral. The Company had no investment
securities sold under repos or pledged as collateral as at the 2020 and
2019 reporting dates.
The Directors consider that the primary purpose of holding investment
securities is prudential. These securities are held as liquid assets
with the intention of use on a continuing basis in the Group's
activities and are classified as FVOCI and amortised cost in accordance
with the Group's business model for each security.
18. Investment securities (continued)
Movements during the year of investment securities held by the Group and
Company are analysed as follows:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
At 1 January 635.3 58.9 149.8 58.9
Additions(1) 291.6 439.8 205.9 439.8
CCFS Combination - 493.5 - -
Disposals and maturities(2) (457.2) (357.7) (341.0) (349.0)
Movement in accrued interest 0.5 - 0.4 -
Changes in fair value 1.0 0.8 (0.1) 0.1
At 31 December 471.2 635.3 15.0 149.8
------- ------- ------- -------
(1) The Group's additions include GBP100.7m of retained RMBS loan notes
following the deconsolidation of PMF 2020-1B.
(2) Disposals and maturities include GBP49.9m of UK Sovereign debt which
had an original maturity of less than three months.
At 31 December 2020, the Group's investment securities included
investments in unconsolidated structured entities (see note 45) of
GBP100.7m (2019: nil) notes in PMF 2020-1B and GBP285.0m (2019:
GBP358.9m) notes in PMF 2019-1B. The Company's investment securities
included investments in unconsolidated structured entities of GBP15.0m
(2019: nil) notes in PMF 2019-1B. The investments represent the maximum
exposure to loss from unconsolidated structured entities.
19. Loans and advances to customers
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Held at amortised cost:
Loans and advances (see note 20) 19,257.1 18,419.9 8,596.2 8,420.8
Finance leases (see note 21) 65.5 47.7 - -
19,322.6 18,467.6 8,596.2 8,420.8
Less: Expected credit losses (see
note 22) (111.0) (42.9) (64.5) (26.6)
19,211.6 18,424.7 8,531.7 8,394.2
-------- -------- ------- -------
Residential mortgages held at fair
value 19.1 22.1 - -
19,230.7 18,446.8 8,531.7 8,394.2
-----------------------------------
20. Loans and advances
2020 2019
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 9,310.8 6,749.5 16,060.3 9,999.2 7,240.0 17,239.2
Stage 2 1,362.0 1,327.6 2,689.6 442.4 307.1 749.5
Stage 3 344.5 48.1 392.6 277.7 16.7 294.4
Stage 3 (POCI) 48.6 66.0 114.6 53.6 83.2 136.8
11,065.9 8,191.2 19,257.1 10,772.9 7,647.0 18,419.9
--------------- -------- ------- -------- -------- ------- --------
2020 2019
Company GBPm GBPm
Gross carrying
amount
Stage 1 7,080.4 7,785.0
Stage 2 1,215.2 371.3
Stage 3 255.2 211.1
Stage 3 (POCI) 45.4 53.4
8,596.2 8,420.8
------- -------
The mortgage loan balances pledged as collateral for liabilities are:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
BoE under TFS, TFSME and ILTR 5,203.2 4,458.3 2,917.8 2,775.7
Securitisation 435.4 366.7 146.2 234.3
Warehouse funding - 97.4 - -
Master servicer for securitisation
vehicle - 40.4 - 40.4
5,638.6 4,962.8 3,064.0 3,050.4
----------------------------------- ------- ------- ------- -------
The Group's securitisation programmes, use of TFS, TFSME and ILTR and
Warehouse funding arrangements result in certain assets being encumbered
as collateral against such funding. As at 31 December 2020, the
percentage of the Group's gross customer loans and receivables that are
encumbered was 29% (2019: 27%).
At 31 December 2019, GBP40.4m of retention loans (i.e. loans in
securitisation portfolios that are retained by the originator) were
treated as encumbered. For 2020, the Group has treated these as
unencumbered as they are available to use to raise collateral as long as
the risk and rewards of the loans remain with the Group.
1. Loans and advances (continued)
The Company adopts a net accounting approach for retained interests in
securitisation transactions that are consolidated into the Group,
disclosing the net amount as a deemed loan liability. The table below
shows the Company's securitised mortgages and retained loan notes:
Company Company
2020 2019
GBPm GBPm
Loans and advances to customers 1,920.0 464.3
Deemed loan premium 14.7 6.5
Retained loan notes (1,868.5) (230.6)
66.2 240.2
-------------------------------- --------- -------
As at 31 December 2020, the Company had GBP686.9m (2019: nil) of the
retained loan notes sold under repos or pledged as collateral.
The tables below show the movement in loans and advances to customers by
IFRS 9 stage during the year, based on the following assumptions:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 8,279.6 436.8 225.4 56.2 8,998.0
Originations(1) 4,098.6 - - - 4,098.6
CCFS Combination(3) 7,091.1 43.5 - 94.4 7,229.0
Repayments and write-offs(2) (1,825.2) (21.6) (47.5) (17.3) (1,911.6)
Transfers:
- To Stage 1 176.9 (162.7) (14.2) - -
- To Stage 2 (495.9) 517.7 (21.8) - -
- To Stage 3 (86.1) (64.5) 150.6 - -
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 17,239.2 749.5 294.4 136.8 18,419.9
Originations(1) 3,767.0 - - - 3,767.0
Acquisitions 60.8 - - 1.5 62.3
Disposals (787.3) (16.1) (1.0) - (804.4)
Repayments and write-offs(2) (2,119.1) (3.9) (41.0) (23.7) (2,187.7)
Transfers:
- To Stage 1 324.8 (293.5) (31.3) - -
- To Stage 2(4) (2,300.3) 2,344.5 (44.2) - -
- To Stage 3 (124.8) (90.9) 215.7 - -
At 31 December 2020 16,060.3 2,689.6 392.6 114.6 19,257.1
----------------------------- --------- ------- ------- ------- ---------
(1) Originations include further advances and drawdowns on existing
commitments.
(2) Repayments and write-offs include customer redemptions.
(3) The mortgages acquired in the all-share Combination with CCFS are
shown at the acquisition date fair value.
(4) Increase from previous year due to the additional qualitative and
quantitative tests applied in 2020 for loans with payment
deferrals. Payment deferrals increased in 2020 notably through COVID-19
initiatives and impacts.
1. Loans and advances (continued)
During the year the Group purchased one external mortgage book at par.
The Group did not purchase any external mortgage books during 2019 other
than those acquired in the Combination.
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 6,657.0 346.6 164.8 55.9 7,224.3
Originations(1) 2,395.3 - - - 2,395.3
Repayments and write-offs(2) (1,153.2) (19.1) (26.4) (6.0) (1,204.7)
Transfers:
- To Stage 1 117.8 (106.8) (11.0) - -
- To Stage 2 (178.7) 196.4 (17.7) - -
- To Stage 3 (53.4) (46.1) 99.5 - -
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 7,785.0 371.3 211.1 53.4 8,420.8
Originations(1) 1,523.1 - - - 1,523.1
Disposals (401.3) (8.3) (1.0) - (410.6)
Repayments and write-offs(2) (955.0) 54.4 (28.5) (8.0) (937.1)
Transfers:
- To Stage 1 126.0 (107.0) (19.0) - -
- To Stage 2(3) (920.5) 956.8 (36.3) - -
- To Stage 3 (76.9) (52.0) 128.9 - -
At 31 December 2020 7,080.4 1,215.2 255.2 45.4 8,596.2
----------------------------- --------- ------- ------- ------- ---------
(1) Originations include further advances and drawdowns on existing
commitments.
(2) Repayments and write-offs include customer redemptions.
(3) Increase from previous year due to the additional qualitative and
quantitative tests applied in 2020 for loans with payment holidays.
Payment holidays increased in 2020 notably through COVID-19 initiatives
and impacts.
The Company did not purchase any external mortgage books during 2020 and
2019 other than those acquired in the Combination.
21. Finance leases
The Group provides asset finance lending through InterBay Asset Finance
Limited.
Group Group
2020 2019
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 21.9 14.1
Between one and five years 50.4 38.5
More than 5 years 1.3 1.2
73.6 53.8
Unearned finance income (8.1) (6.1)
Net investment in finance leases 65.5 47.7
----------------------------------------------- ----- -----
Net investment in finance leases, receivable
Less than one year 18.6 11.5
Between one and five years 45.7 35.0
More than five years 1.2 1.2
65.5 47.7
-----
The Group has recognised GBP2.6m of ECLs on finance leases as at 31
December 2020 (2019: GBP0.3m).
22. Expected credit loss
The ECL has been calculated based on various scenarios as set out below:
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Group 2020 2020 2020 2019 2019 2019
At 31 December 2020 GBPm % GBPm GBPm % GBPm
Scenarios
Upside 40.1 30 12.0 14.6 10 1.5
Base case 54.6 40 21.8 24.4 40 9.7
Downside scenario 113.5 23 26.1 48.1 35 16.8
Severe downside
scenario 166.7 7 11.7 62.5 15 9.4
Total weighted
provisions 71.6 37.4
Non-modelled
Provisions:
Individually-assessed
provisions - - 29.0 - - 4.2
Post model
adjustments(1) - - 10.4 - - 1.3
Total provision 111.0 42.9
---------------------- --------- --------- -------------- --------- --------- --------------
(1) COVID-19 post model adjustments -- the Group implemented a number of
post model adjustments to ensure that modelled estimates remained
appropriate, in light of the impact that COVID-19 support measures, such
as the repossession moratorium and the impact of payment deferrals on
the credit bureau files, had on probability of default and loss given
default estimates. In addition updated model estimates were also aligned
to recently observed actual performance. Additional information can be
found in the Strategic Report on pages 3 to 69.
1. Expected credit loss (continued)
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Company 2020 2020 2020 2019 2019 2019
At 31 December 2020 GBPm % GBPm GBPm % GBPm
Scenarios
Upside 22.5 30 6.8 9.9 10 1.0
Base case 30.1 40 12.0 17.2 40 6.9
Downside scenario 65.2 23 15.0 31.1 35 10.9
Severe downside
scenario 96.9 7 6.8 39.1 15 5.9
Total weighted
provisions 40.6 24.7
Non-modelled
Provisions:
Individually-assessed
provisions - - 22.0 - - 0.8
Post model
adjustments(1) - - 1.9 - - 1.1
Total provision 64.5 26.6
---------------------- --------- --------- -------------- --------- --------- --------------
(1) COVID-19 post model adjustments -- the Group implemented a number of
post model adjustments to ensure that modelled estimates remained
appropriate, in light of the impact that COVID-19 support measures, such
as the repossession moratorium and the impact of payment deferrals on
the credit bureau files, had on probability of default and loss given
default estimates. In addition updated model estimates were also aligned
to recently observed actual performance. Additional information can be
found in the Strategic Report overview on pages 3 to 69.
The Group and Company ECL by segment and IFRS 9 stage are shown below:
2020 2019
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 12.3 8.9 21.2 3.5 2.1 5.6
Stage 2 17.9 13.1 31.0 3.6 2.0 5.6
Stage 3 49.4 2.3 51.7 23.4 0.4 23.8
Stage 3 (POCI) 4.0 3.1 7.1 5.1 2.8 7.9
83.6 27.4 111.0 35.6 7.3 42.9
--------------- ---- ---- ----- ---- ---- -----
2020 2019
Company GBPm GBPm
Stage 1 8.4 2.8
Stage 2 16.3 3.3
Stage 3 35.9 15.4
Stage 3 (POCI) 3.9 5.1
64.5 26.6
--------------- ---- ----
1. Expected credit loss (continued)
The tables below show the movement in the ECL by IFRS 9 stage during the
year. ECLs on originations reflect the IFRS 9 stage of loans originated
during the year as at 31 December and not the date of origination.
Remeasurement of loss allowance relates to existing loans which did not
redeem during the year and includes the impact of loans moving between
IFRS 9 stages.
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 4.5 5.6 10.2 1.6 21.9
Originations 1.9 - - - 1.9
CCFS Combination - - - 3.6 3.6
Repayments and write-offs (0.6) (0.4) (4.3) (0.2) (5.5)
Remeasurement of loss
allowance (3.4) (0.5) 18.8 (0.6) 14.3
Transfers:
- To Stage 1 1.9 (1.6) (0.3) - -
- To Stage 2 (0.2) 0.6 (0.4) - -
- To Stage 3 (0.1) (1.0) 1.1 - -
Changes in assumptions
and model parameters 1.4 2.6 (3.2) - 0.8
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 5.6 5.6 23.8 7.9 42.9
Originations 6.3 - - - 6.3
Acquisitions - - 0.1 - 0.1
Disposals (0.1) (0.2) (0.1) - (0.4)
Repayments and write-offs (0.7) (0.3) (4.1) (1.1) (6.2)
Remeasurement of loss
allowance 6.3 7.7 29.0 (0.2) 42.8
Transfers:
- To Stage 1 2.0 (1.4) (0.6) - -
- To Stage 2 (1.0) 2.8 (1.8) - -
- To Stage 3 (0.1) (1.2) 1.3 - -
Changes in assumptions
and model parameters 2.9 18.0 4.1 0.5 25.5
At 31 December 2020 21.2 31.0 51.7 7.1 111.0
-------------------------- ------- ------- ------- ------- -----
1. Expected credit loss (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 3.6 4.7 6.2 1.6 16.1
Originations 1.3 - - - 1.3
Repayments and write-offs (0.3) (0.4) (2.8) (0.1) (3.6)
Remeasurement of loss
allowance (4.5) (2.3) 12.8 0.1 6.1
Transfers:
- To Stage 1 1.4 (1.2) (0.2) - -
- To Stage 2 (0.2) 0.5 (0.3) - -
- To Stage 3 (0.1) (0.9) 1.0 - -
Changes in assumptions
and model parameters 1.4 2.6 (3.2) - 0.8
Incurred loss protection 0.2 0.3 1.9 3.5 5.9
At 31 December 2019 2.8 3.3 15.4 5.1 26.6
Originations 2.4 - - - 2.4
Disposals (0.1) (0.1) (0.1) - (0.3)
Repayments and write-offs (0.2) (0.2) (2.9) (0.1) (3.4)
Remeasurement of loss
allowance 2.1 3.1 22.3 (1.4) 26.1
Transfers:
- To Stage 1 0.8 (0.5) (0.3) - -
- To Stage 2 (0.4) 2.1 (1.7) - -
- To Stage 3 - (0.8) 0.8 - -
Changes in assumptions
and model parameters 1.0 9.4 2.4 0.3 13.1
At 31 December 2020 8.4 16.3 35.9 3.9 64.5
-------------------------- ------- ------- ------- ------- -----
The tables below show the stage 2 ECL balances by transfer criteria:
Carrying Carrying
value ECL Coverage value ECL Coverage
2020 2020 2020 2019 2019 2019
Group GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 946.9 17.0 1.80 588.2 4.8 0.82
Qualitative measures 1,680.7 12.7 0.76 79.8 0.4 0.44
30 days past due
backstop 63.4 1.3 2.05 81.5 0.4 0.54
Total 2,691.0 31.0 1.15 749.5 5.6 0.75
--------------------- -------- ---- -------- -------- ---- --------
1. Expected credit loss (continued)
Carrying Carrying
value ECL Coverage value ECL Coverage
2020 2020 2020 2019 2019 2019
Company GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 354.5 8.6 2.43 306.8 3.0 0.98
Qualitative measures 835.4 6.9 0.83 35.2 0.1 0.32
30 days past due
backstop 25.3 0.8 3.16 29.3 0.2 0.80
Total 1,215.2 16.3 1.34 371.3 3.3 0.90
--------------------- -------- ---- -------- -------- ---- --------
The Group has a number of qualitative measures to determine whether a
SICR has taken place. These triggers utilise both internal performance
information, to analyse whether an account is in distress but not yet in
arrears, and external credit bureau information, to determine whether
the customer is experiencing financial difficulty with an external
credit obligation.
23. Impairment of financial assets
The charge for impairment of financial assets in the Consolidated
Statement of Comprehensive Income comprises:
Group Group
2020 2019
GBPm GBPm
Write-offs in year 1.9 4.1
Disposals 0.4 -
CCFS Combination - 3.6
Increase in ECL provision 68.7 7.9
71.0 15.6
-------------------------- ----- -----
The CCFS Combination losses relate to the initial ECL recognised on the
CCFS loan book following the Combination in October 2019.
24. Derivatives
The table below reconciles the gross amount of derivative contracts to
the carrying balance shown in the Consolidated Statement of Financial
Position:
Net amount
of financial Contracts subject Cash collateral
assets / (liabilities) to master netting paid / (received)
Gross amount presented agreements not not offset
of recognised in the Consolidated offset in the in the Consolidated
financial Statement Consolidated Statement
assets of Financial Statement of of Financial Net
/ (liabilities) Position Financial Position Position amount
Group GBPm GBPm GBPm GBPm GBPm
At 31 December
2020
Derivative
assets:
Interest rate
risk hedging 12.3 12.3 (11.8) - 0.5
12.3 12.3 (11.8) - 0.5
--------------- ---------------- ----------------------- ------------------- -------------------- ------
Derivative
liabilities:
Interest rate
risk hedging (163.6) (163.6) 11.8 210.5 58.7
(163.6) (163.6) 11.8 210.5 58.7
--------------- ---------------- ----------------------- ------------------- -------------------- ------
At 31 December
2019
Derivative assets:
Interest rate
risk hedging 21.1 21.1 (9.8) (8.0) 3.3
21.1 21.1 (9.8) (8.0) 3.3
Derivative liabilities:
Interest rate
risk hedging (92.8) (92.8) 9.8 110.4 27.4
(92.8) (92.8) 9.8 110.4 27.4
------------------------ ------ ------ ----- ----- ----
Included within the Group's derivative liabilities is GBP0.1m (2019:
GBP3.4m) of derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
Net amount Contracts subject
of financial to master netting Cash collateral
Gross amount assets / (liabilities) agreements paid / (received)
of recognised presented not offset not offset
financial in the Statement in the Statement in the Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
Company GBPm GBPm GBPm GBPm GBPm
At 31 December
2020
Derivative
assets:
Interest rate
risk hedging 4.7 4.7 (4.2) - 0.5
4.7 4.7 (4.2) - 0.5
------------------
Derivative
liabilities:
Interest rate
risk hedging (93.8) (93.8) 4.2 106.4 16.8
(93.8) (93.8) 4.2 106.4 16.8
--------------- ---------------- ----------------------- ------------------ ------------------ ------
At 31 December
2019
Derivative assets:
Interest rate
risk hedging 8.7 8.7 (2.5) (7.8) (1.6)
8.7 8.7 (2.5) (7.8) (1.6)
Derivative liabilities:
Interest rate
risk hedging (54.3) (54.3) 2.5 62.2 10.4
(54.3) (54.3) 2.5 62.2 10.4
------------------------ ------ ------ ----- ----- -----
1. Derivatives (continued)
Included within the Company's derivative liabilities is nil (2019:
GBP3.4m) of derivative contracts not covered by master netting
agreements and therefore no cash collateral has been paid.
The tables below profile the timing of nominal amounts for interest rate
risk hedging derivatives based on contractual maturity:
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Group GBPm GBPm GBPm GBPm GBPm
At 31 December 2020
Derivative assets 8,687.8 1,450.7 3,407.8 3,808.3 21.0
Derivative
liabilities 10,392.4 148.0 1,868.0 8,065.9 310.5
19,080.2 1,598.7 5,275.8 11,874.2 331.5
------------------- ------------- --------- ------- ----------- ---------
At 31 December 2019
Derivative assets 7,795.4 1,110.8 2,608.2 3,760.9 315.5
Derivative
liabilities 9,982.4 144.3 2,528.6 7,155.5 154.0
17,777.8 1,255.1 5,136.8 10,916.4 469.5
------------------- ------------- --------- ------- ----------- ---------
The Group has 925 (2019: 1,175) derivative contracts with an average
fixed rate of 0.47% (2019: 0.91%).
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Company GBPm GBPm GBPm GBPm GBPm
At 31 December 2020
Derivative assets 3,585.0 630.0 2,040.0 915.0 -
Derivative
liabilities 3,729.0 - 134.0 3,422.0 173.0
7,314.0 630.0 2,174.0 4,337.0 173.0
------------------- ------------- --------- ------- ----------- ---------
At 31 December 2019
Derivative assets 3,080.0 475.0 1,395.0 1,110.0 100.0
Derivative
liabilities 4,462.9 8.3 789.6 3,549.0 116.0
7,542.9 483.3 2,184.6 4,659.0 216.0
------------------- ------------- --------- ------- ----------- ---------
The Company has 154 (2019: 205) derivative contracts with an average
fixed rate of 0.18% (2019: 1.17%).
1. Hedge accounting
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Hedged assets
Current hedge relationships 197.5 64.2 134.8 36.1
Swap inception adjustment (100.5) (67.8) (50.1) -
Cancelled hedge relationships 84.6 20.4 42.7 16.7
Fair value adjustments on hedged
assets 181.6 16.8 127.4 52.8
------- ------ ------- -------
Hedged liabilities
Current hedge relationships (11.8) (2.9) (3.3) 0.1
Swap inception adjustment 6.2 8.0 2.8 -
De-designated hedge relationships (2.6) - (2.6) -
Fair value adjustments on hedged
liabilities (8.2) 5.1 (3.1) 0.1
---------------------------------- ------- ------ ------- -------
The swap inception adjustment relates in part to hedged assets and
liabilities recognised on the Combination where pre-existing hedge
relationships ceased on the date of Combination. The swap inception
adjustment is being amortised over the life of the derivative
instruments acquired on Combination and recognises an offsetting asset
or liability to the fair value of the derivative instruments on the date
of Combination. The remainder of the swap inception adjustment relates
to the hedging adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against the
mortgage pipeline and also on derivative instruments previously taken
out against new retail deposits.
Cancelled hedge relationships predominantly represent the unamortised
fair value adjustment for interest rate risk hedges that have been
cancelled and replaced due to IBOR transition ,securitisation activities
and legacy long-term fixed rate mortgages (c. 25 years at origination).
The tables below analyse the Group's and Company's portfolio hedge
accounting for fixed rate loans and advances to customers:
Group 2020 Group 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 11,282.4 11,159.7 10,312.5 10,248.3
Cumulative fair value adjustments 197.5 (156.9) 64.2 (75.6)
Fair value adjustments for
the period 107.3 (116.8) 70.1 (75.1)
Cumulative fair value on cancelled
hedge relationships 84.6 - 20.4 -
The cumulative fair value adjustments of the hedging instrument comprise
GBP0.7m (2019: GBP13.2m) recognised within derivative assets and
GBP157.6m (2019: GBP88.8m) recognised within derivative liabilities.
25. Hedge accounting (continued)
Company 2020 Company 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 3,772.2 3,699.0 4,574.0 4,537.9
Cumulative fair value adjustments 134.7 (89.9) 36.1 (45.5)
Fair value adjustments for
the period 72.2 (80.6) 39.8 (43.7)
Cumulative fair value on cancelled
hedge relationships 42.7 - 16.7 -
The cumulative fair value adjustments of the hedging instrument comprise
GBP0.2m (2019: GBP6.8m) recognised within derivative assets and GBP90.1m
(2019: GBP52.3m) recognised within derivative liabilities.
The movement in cancelled hedge relationships is as follows:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
At 1 January 20.4 17.3 16.7 17.3
New cancellations(1) 86.1 8.6 38.2 4.9
Amortisation (17.9) (5.5) (8.2) (5.5)
Derecognition of hedged item (4.0) - (4.0) -
At 31 December 84.6 20.4 42.7 16.7
----------------------------- ------ ----- ------- -------
(1) Following the securitisation of mortgages during the year and LIBOR
swaps transferred to SONIA swaps through the IBOR transition, the Group
cancelled swaps which were effective prior to the event, with the
designated hedge moved to cancelled hedge relationships to be amortised
over the original life of the swap.
The tables below analyse the Group's and Company's portfolio hedge
accounting for fixed rate amounts owed to retail depositors:
Group 2020 Group 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 6,849.9 6,858.0 6,684.6 6,687.5
Cumulative fair value adjustments (11.8) 9.2 (2.9) 3.5
Fair value adjustments for
the period (4.1) 6.8 (4.6) 4.8
The cumulative fair value adjustments of the hedging instrument comprise
GBP9.4m (2019: GBP5.9m) recognised within derivative assets and GBP0.2m
(2019: GBP2.4m) recognised within derivative liabilities.
25. Hedge accounting (continued)
Company 2020 Company 2019
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 3,050.4 3,050.0 2,804.9 2,805.0
Cumulative fair value adjustments (3.3) 3.3 (0.1) 0.5
Fair value adjustments for
the period (1.0) 3.8 (1.8) 2.2
The cumulative fair value adjustments of the hedging instrument comprise
GBP3.3m (2019: GBP1.0m) recognised within derivative assets and nil
(2019: GBP0.5m) recognised within derivative liabilities.
26. Other assets
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Prepayments 7.3 9.3 4.2 3.2
Other assets 1.8 5.0 1.5 4.3
9.1 14.3 5.7 7.5
------------- ----- ----- ------- -------
27. Deferred taxation asset
Losses
carried Accelerated Share-based IFRS 9 transitional
forward depreciation payments adjustments Others(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 1.4 (0.1) 1.5 0.7 - 3.5
Profit or loss
(charge)/credit (0.5) 0.3 0.8 (0.1) (0.7) (0.2)
CCFS Combination - (0.1) 0.5 0.1 1.4 1.9
Transferred to corporation
tax liability - - (1.3) - - (1.3)
Tax taken directly to
OCI - - - - (0.2) (0.2)
Tax taken directly to
equity - - 1.1 - - 1.1
At 31 December 2019 0.9 0.1 2.6 0.7 0.5 4.8
Profit or loss
credit/(charge) - 0.3 0.9 - (0.4) 0.8
Transferred to corporation
tax liability - - (0.6) - - (0.6)
Tax taken directly to
OCI - - - - (0.5) (0.5)
Tax taken directly to
equity - - 0.2 - - 0.2
At 31 December 2020 0.9 0.4 3.1 0.7 (0.4) 4.7
--------------------------- -------- ------------- ----------- ------------------- --------- -----
(1) Others include deferred taxation assets recognised on financial
assets classified as FVOCI, derivatives and short-term timing
differences.
1. Deferred taxation asset (continued)
In 2020, the profit or loss credit/(charge) includes GBP(0.3m) impact of
the deferred tax rate change (2019: nil).
As at 31 December 2020, the Group had GBP3.5m (2019: GBP3.5m) of losses
for which a deferred tax asset has not been recognised as the Group does
not expect sufficient future profits to be available to utilise the
losses.
Accelerated Share-based IFRS 9 transitional
depreciation payments adjustments Total
Company GBPm GBPm GBPm GBPm
At 31 December 2018 (0.2) 1.5 0.3 1.6
Profit or loss credit 0.3 0.8 - 1.1
Transferred to corporation
tax liability - (1.3) - (1.3)
Tax taken directly to equity - 0.8 - 0.8
At 31 December 2019 0.1 1.8 0.3 2.2
Profit or loss credit 0.3 1.2 - 1.5
Transferred to corporation
tax liability - (0.8) - (0.8)
Tax taken directly to equity - 0.2 - 0.2
At 31 December 2020 0.4 2.4 0.3 3.1
---------------------------- ------------- ----------- ------------------- -----
28. Deferred taxation liability:
The deferred tax liability recognised on the Combination relates to the
timing differences of the recognition of assets and liabilities at fair
value, where the fair values will unwind in future periods in line with
the underlying asset or liability. The deferred tax liability has been
measured using the relevant rates for the expected periods of
utilisation.
CCFS Combination
Group GBPm
At 31 December 2018 -
CCFS Combination 70.1
Profit or loss credit (7.0)
At 31 December 2019 63.1
-------------------------- ----------------
Profit or loss credit (14.8)
At 31 December 2020 48.3
-------------------------- ----------------
In 2020, the profit or loss credit includes GBP4.7m impact of the
deferred tax rate change (2019: nil).
29. Property, plant and equipment
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2019 16.0 0.9 11.0 3.8 - 31.7
Additions 3.1 1.5 2.4 2.5 0.1 9.6
CCFS
Combination - 0.3 2.1 6.4 1.2 10.0
Disposals and
write-offs(1) - - (1.2) - - (1.2)
Foreign
exchange
difference 0.2 - 0.1 - - 0.3
At 31 December
2019 19.3 2.7 14.4 12.7 1.3 50.4
Additions - 0.3 2.5 0.6 - 3.4
Disposals and
write-offs(1) - - (3.0) (0.2) - (3.2)
Foreign
exchange
difference (0.1) - (0.1) - - (0.2)
At 31 December
2020 19.2 3.0 13.8 13.1 1.3 50.4
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2019 0.8 0.3 5.0 - - 6.1
Charged in
year 0.3 0.2 2.3 1.0 0.1 3.9
Disposals and
write-offs(1) - - (1.2) - - (1.2)
At 31 December
2019 1.1 0.5 6.1 1.0 0.1 8.8
Charged in
year 0.3 0.4 2.9 1.8 0.2 5.6
Disposals and
write-offs(1) - - (3.0) (0.2) - (3.2)
At 31 December
2020 1.4 0.9 6.0 2.6 0.3 11.2
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2020 17.8 2.1 7.8 10.5 1.0 39.2
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2019 18.2 2.2 8.3 11.7 1.2 41.6
(1) During the year the Group wrote off fully depreciated assets.
29. Property, plant and equipment (continued)
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Company GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2019 11.5 0.7 8.2 2.3 - 22.7
Additions - 1.5 1.9 2.6 0.1 6.1
Disposals and
write-offs(1) - - (0.9) - - (0.9)
At 31 December
2019 11.5 2.2 9.2 4.9 0.1 27.9
Additions - 0.3 1.3 0.6 - 2.2
Disposals and
write-offs(1) - - (2.7) - - (2.7)
At 31 December
2020 11.5 2.5 7.8 5.5 0.1 27.4
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2019 0.7 0.3 3.8 - - 4.8
Charged in
year 0.2 0.1 1.8 0.7 - 2.8
Disposals and
write-offs(1) - - (0.9) - - (0.9)
At 31 December
2019 0.9 0.4 4.7 0.7 - 6.7
Charged in
year 0.2 0.2 1.7 0.8 - 2.9
Disposals and
write-offs(1) - - (2.7) - - (2.7)
At 31 December
2020 1.1 0.6 3.7 1.5 - 6.9
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2020 10.4 1.9 4.1 4.0 0.1 20.5
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2019 10.6 1.8 4.5 4.2 0.1 21.2
(1) During the year the Company wrote off fully depreciated assets.
1. Intangible assets
Computer
software
Development and Assets arising
costs licences on consolidation(2) Total
Group GBPm GBPm GBPm GBPm
Cost
At 1 January 2019 - 13.6 - 13.6
Additions 0.5 3.8 - 4.3
CCFS Combination - - 23.6 23.6
Disposals and
write-offs(1) - (2.0) - (2.0)
At 31 December 2019 0.5 15.4 23.6 39.5
Additions 1.8 2.6 - 4.4
Disposals and
write-offs(1) - (1.3) - (1.3)
At 31 December 2020 2.3 16.7 23.6 42.6
------------------------- ----------- --------- -------------------- -----
Amortisation
At 1 January 2019 - 5.8 - 5.8
Charged in year - 3.0 1.3 4.3
Disposals and write-offs(1) - (2.0) - (2.0)
At 31 December 2019 - 6.8 1.3 8.1
Charged in year 0.1 3.6 4.5 8.2
Impairment in the year - - 7.0 7.0
Disposals and write-offs(1) - (1.3) - (1.3)
At 31 December 2020 0.1 9.1 12.8 22.0
---------------------------- --- ----- ---- -----
Net book value
At 31 December 2020 2.2 7.6 10.8 20.6
At 31 December 2019 0.5 8.6 22.3 31.4
----------------------------
(1) During the year the Group wrote off fully amortised assets.
(2) Assets arising on consolidation comprise broker relationships of
GBP5.8m (2019: GBP16.1m), technology of GBP2.9m (2019: GBP3.2m), brand
name of GBP1.2m (2019: GBP1.6m) and banking licence of GBP0.9m (2019:
GBP1.4m). The carrying value of the intangible assets are reviewed each
reporting period with a GBP7.0m impairment recognised in relation to
broker relationships due to impacts of the COVID-19 pandemic.
30. Intangible assets (continued)
Computer software
and licences
Company GBPm
Cost
At 1 January 2019 12.1
Additions 3.3
Disposals and write-offs(1) (1.9)
At 31 December 2019 13.5
Additions 2.2
Disposals and write-offs(1) (1.0)
At 31 December 2020 14.7
---------------------------- -----------------
Amortisation
At 1 January 2019 5.0
Charged in year 2.7
Disposals and write-offs(1) (1.9)
At 31 December 2019 5.8
Charged in year 2.9
Disposals and write-offs(1) (1.0)
At 31 December 2020 7.7
---------------------------- -----------------
Net book value
At 31 December 2020 7.0
At 31 December 2019 7.7
----------------------------
(1) During the year the Company wrote off fully amortised assets.
31. Investments in subsidiaries, intercompany loans and transactions
with related parties
The balances between the Company and its subsidiaries at the reporting
date are summarised in the table below:
Shares in
subsidiary Intercompany Intercompany
undertakings loans receivable loans payable
GBPm GBPm GBPm
At 1 January 2019 1.8 1,898.9 (262.4)
Additions - 1,062.2 (378.9)
CCFS Combination 707.1 - (3.6)
Repayments - (40.6) 1.0
At 31 December 2019 708.9 2,920.5 (643.9)
Additions - 53.4 (6.2)
Repayments - (545.5) 612.2
At 31 December 2020 708.9 2,428.4 (37.9)
-------------------- ------------- ----------------- --------------
The Company assesses intercompany loans receivable for impairment.
A list of the Company's direct subsidiaries for 2020 is shown below:
At 31 December 2020
Direct investments Activity Registered office Ownership
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
The Company holds ordinary shares in all its direct subsidiaries.
OSB India Private Limited is owned 70.28% by the Company, 29.72% by
Easioption Limited and 0.001% by Reliance Property Loans Limited.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's indirect subsidiaries for 2020 is shown below:
At 31 December 2020
Indirect investments Activity Registered office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.2
plc Special purpose vehicle Churchill Place -
Canterbury Finance No.3
plc Special purpose vehicle Churchill Place -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Mortgage administration
Charter Mortgages Limited and analytical services Charter Court 100%
CMF 2020-1 plc Special purpose vehicle Churchill Place -
CML Warehouse Number
1 Limited Special purpose vehicle Bartholomew -
CML Warehouse Number
2 Limited Special purpose vehicle Churchill Place -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I
Limited Holding company Reliance House 100%
Inter Bay Financial II
Limited Holding company Reliance House 100%
InterBay Asset Finance Asset finance and
Limited mortgage provider Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
Precise Mortgage Funding Special purpose vehicle Great St. Helen's -
2014-1 plc
Precise Mortgage Funding Special purpose vehicle Great St. Helen's -
2014-2 plc
Precise Mortgage Funding Special purpose vehicle Great St. Helen's -
2015-1 plc
Precise Mortgage Funding Special purpose vehicle Great St. Helen's -
2015-3R plc
All investments in subsidiaries are of ordinary shares.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the Group's
consolidated financial statements.
All of the above investments are reviewed annually for impairment. Based
on assessment of the future cash flows of each entity no impairment has
been recognised.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's direct subsidiaries for 2019 is shown below:
At 31 December 2019
Registered
Direct investments Activity Office Ownership
Charter Court Financial
Services Group plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's indirect subsidiaries for 2019 is shown below:
At 31 December 2019
Registered
Indirect investments Activity office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.1
plc Special purpose vehicle Reliance House -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Mortgage administration
Charter Mortgages Limited and analytical services Charter Court 100%
Canada Square,
CMF 2020-1 plc1 Special purpose vehicle London -
CML Warehouse Number Great St.
1 Limited Special purpose vehicle Helen's,London -
CML Warehouse Number Great St.
2 Limited Special purpose vehicle Helen's,London -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I
Limited Holding company Reliance House 100%
Inter Bay Financial II
Limited Holding company Reliance House 100%
InterBay Asset Finance Asset finance and
Limited mortgage provider Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
InterBay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
Precise Mortgage Funding Special purpose vehicle Great St. -
2014-1 plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Great St. -
2014-2 plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Great St. -
2015-1 plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Great St. -
2015-3R plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Great St. -
2018-1B plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Great St. -
2018-2B plc Helen's,London
Precise Mortgage Funding Special purpose vehicle Canada Square, -
2020-1B plc2 London
The following are the registered offices of the subsidiaries:
Bartholomew - 1 Bartholomew Lane, London, England, EC2N 2AX
Charter Court - 2 Charter Court, Broadlands, Wolverhampton, WV10 6TD
Churchill Place -- 5 Churchill Place, 10(th) Floor, London, E14 5HU
Guernsey -- 1(st) Floor, Tudor House, Le Bordage, St Peter Port,
Guernsey, GY1 1DB
Great St. Helen's,London - 35 Great St. Helen's, London, EC3A 6AP
India - Salarpuria Magnificia No. 78, 9(th) & 10(th) floor, Old Madras
Road, Bangalore, India, 560016.
Jersey - 26 New Street, St Helier, Jersey, JE2 3RA
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4 4ET
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
The transactions between the Company and its subsidiaries are disclosed
below:
2020 2019
Charged Charged
by/(to) by/(to)
the Company Balance the Company Balance
during the due to/(by) during the due to/(by)
year the Company year the Company
Direct investments GBPm GBPm GBPm GBPm
Charter Court Financial Services
Group plc - - - (3.6)
Easioption Limited - 0.5 - 0.5
Guernsey Home Loans Limited 0.2 8.8 0.2 9.6
Guernsey Home Loans Limited
(Guernsey) 0.5 23.9 0.7 29.9
Heritable Development Finance
Limited (1.3) (0.6) (1.8) (0.9)
Jersey Home Loans Limited - 2.5 - 2.5
Jersey Home Loans Limited
(Jersey) 2.1 111.6 2.9 123.2
OSB India Private Limited (9.3) 8.0 (8.9) 9.0
Prestige Finance Limited (3.7) (0.8) (2.8) (0.2)
Reliance Property Loans Limited 0.1 3.3 0.1 3.4
Indirect investments
Charter Court Financial Services
Limited 4.3 4.1 - -
5D Finance Limited - 0.6 - 0.5
Canterbury Finance No.1 plc - - - 3.7
Inter Bay Financial I Limited 0.3 19.6 0.4 19.3
Inter Bay Financial II Limited 0.6 (5.6) 0.4 125.7
InterBay Asset Finance Limited 1.1 94.9 0.5 46.0
Interbay Funding, Ltd (12.0) (30.9) (7.6) (639.2)
Interbay ML, Ltd 47.1 2,150.6 37.5 2,547.2
30.0 2,390.5 21.6 2,276.6
In addition to the above subsidiaries, the Company has transactions with
Kent Reliance Provident Society (KRPS), one of its founding
shareholders. KRPS runs member engagement forums for the Company. In
exchange, the Company provides KRPS with various services including IT,
finance and other support functions. During the year the Company was
charged for services provided by KRPS amounting to GBP0.2m (2019:
GBP0.2m). As at 31 December 2020, KRPS had GBP0.3m (2019: GBP0.3m)
deposited with the Company.
All related party transactions were made on terms equivalent to those
that prevail in arm's length transactions. During the year there were no
related party transactions between the key management personnel and the
Company other than as described below.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
Transactions with key management personnel
During the year the Board extended the definition of key management
personnel to comprise the Directors and Executive team, previously
Directors only. Directors' remuneration is disclosed in note 10 and in
the OSB GROUP PLC Annual Report on Remuneration. The table below shows
the Executive team's aggregate remuneration:
Group Group
2020 2019
GBP'000 GBP'000
Short-term employee benefits 3,743 4,282
Post-employment benefits 49 45
Share-based payments 501 1,888
4,293 6,215
----------------------------- ------- -------
No loans were issued to related parties during 2020 (2019: nil).
Key management personnel and connected persons held deposits with the
Group of GBP1.4m (2019: GBP1.8m).
32. Amounts owed to credit institutions
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
BoE TFS 2,568.6 2,632.8 1,500.4 1,502.8
BoE TFSME 1,000.1 - 400.1 -
BoE ILTR - 290.6 - 160.5
Warehouse funding - 93.6 - -
Commercial repo 0.1 41.4 - -
Cash margin received - 8.0 - 7.8
Loans from credit institutions 1.4 2.4 - -
3,570.2 3,068.8 1,900.5 1,671.1
------------------------------- ------- ------- ------- -------
33. Amounts owed to retail depositors
The table below shows the Group's retail depositors by operating segment,
where the OSB segment also represents the Company's retail depositors:
OSB CCFS Total OSB CCFS Total
2020 2020 2020 2019 2019 2019
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 6,275.6 4,781.4 11,057.0 5,617.9 4,907.6 10,525.5
Variable rate
deposits 3,429.7 2,116.4 5,546.1 3,817.9 1,911.6 5,729.5
9,705.3 6,897.8 16,603.1 9,435.8 6,819.2 16,255.0
-------------------- ------- ------- -------- ------- ------- --------
34. Amounts owed to other customers
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Fixed rate deposits 46.0 26.0 5.8 8.9
Variable rate deposits 26.9 3.7 - -
72.9 29.7 5.8 8.9
35. Debt securities in issue
Group Group
2020 2019
GBPm GBPm
Asset backed loan notes at
amortised cost 421.9 296.3
Amount due for settlement within 12
months - 40.1
Amount due for settlement after 12
months 421.9 256.2
421.9 296.3
------------------------------------ ----- -----
The asset-backed loan notes are secured on fixed and variable rate
mortgages and are redeemable in part from time to time, but such
redemptions are limited to the net principal received from borrowers in
respect of underlying mortgage assets. The maturity date of the funds
matches the contractual maturity date of the underlying mortgage assets.
It is likely that a large proportion of the underlying mortgage assets
and, therefore these notes, will be repaid within five years.
Asset-backed loan notes may all be repurchased by the Group at any
interest payment date on or after the call dates, or at any interest
payment date when the current balance of the mortgages outstanding is
less than or equal to 10% of the principal amount outstanding on the
loan notes on the date they were issued.
Interest is payable at fixed margins above LIBOR or SONIA.
As at 31 December 2020, notes were issued through the following funding
vehicles:
Group Group
2020 2019
GBPm GBPm
CMF 2020-1 plc 288.6 -
Canterbury Finance No.3 plc 133.3 -
Canterbury Finance No.1 plc - 256.2
Precise Mortgage Funding 2015-1
plc - 40.1
421.9 296.3
-------------------------------- ----- -----
36. Lease liabilities
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
At 1 January 13.3 3.8 4.3 2.3
CCFS Combination - 7.7 - -
New leases 0.1 3.6 0.1 3.5
Lease terminated - (0.8) - (0.8)
Lease repayments (2.0) (1.1) (0.6) (0.8)
Interest accruals 0.3 0.1 0.1 0.1
At 31 December 11.7 13.3 3.9 4.3
------------------ ----- -------
During the year, the Group incurred expenses of GBP0.7m (2019: GBP0.7m)
in relation to short-term leases and nil (2019: GBP0.1m) in relation to
low-value assets.
37. Other liabilities
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Falling due within one year:
Accruals 19.7 23.1 9.9 11.7
Deferred income 0.6 1.1 0.6 1.0
Other creditors 7.5 10.7 3.3 4.4
27.8 34.9 13.8 17.1
----------------------------- ----- ----- ------- -------
38. Provisions and contingent liabilities
The Financial Services Compensation Scheme (FSCS) provides protection of
deposits for the customers of authorised financial services firms,
should a firm collapse. FSCS protects retail deposits of up to GBP85k
for single account holders and GBP170k for joint holders. As OSB and
CCFS both hold banking licences, the full FSCS protection is available
to customers of each bank.
The compensation paid out to consumers is initially funded through loans
from the BoE and HM Treasury. In order to repay the loans and cover its
costs, the FSCS charges levies on firms regulated by the PRA and the
FCA. The Group is among those firms and pays the FSCS a levy based on
its share of total UK deposits.
The Group has reviewed its current exposure to Payment Protection
Insurance (PPI) claims, following the FCA deadline for PPI claims on 29
August 2019 and has recognised a provision of GBP0.3m as at 31 December
2020 (2019: GBP0.3m). The Group has maintained its provision for FCA
conduct rules exposures of GBP1.2m (2019: GBP1.3m) to cover potential
future claims.
38. Provisions and contingent liabilities (continued)
An analysis of the Group's and Company's FSCS and other provisions is
presented below:
2020 2019
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January (0.2) 1.6 0.2 1.6 0.1 1.7 - 1.8
Refund/(paid)
during the year 0.3 (0.2) - 0.1 (0.1) (0.1) - (0.2)
Charge/(credit) - 0.1 - 0.1 (0.2) - 0.2 -
At 31 December 0.1 1.5 0.2 1.8 (0.2) 1.6 0.2 1.6
----------------- ----- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
2020 2019
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January (0.1) 1.6 0.1 1.6 0.1 1.7 - 1.8
Refund/(paid)
during the year 0.2 (0.2) - - (0.1) (0.1) - (0.2)
Charge/(credit) - - - - (0.1) - 0.1 -
At 31 December 0.1 1.4 0.1 1.6 (0.1) 1.6 0.1 1.6
----------------- ----- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in connection with a
multi-firm thematic review into forbearance measures adopted by lenders
in respect of a portion of the mortgage market. The Group is responding
to information requests from the FCA. It is not possible to reliably
predict or estimate the outcome of the review, if any, on the Group and
is a contingent liability.
39. Subordinated liabilities
Group and Group and
Company Company
2020 2019
GBPm GBPm
At 1 January 10.6 10.8
Repayment of debt at maturity (0.1) (0.2)
At 31 December 10.5 10.6
-------------------------------- --------- ---------
1. Subordinated liabilities (continued)
The Group's and Company's outstanding subordinated liabilities are
summarised below:
Group and Group and
Company Company
2020 2019
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022
(LIBOR +5%) 0.1 0.2
Floating rate subordinated loans 2022
(LIBOR +2%) 0.2 0.2
Fixed rate:
Subordinated liabilities 2024
(7.45%) 10.2 10.2
10.5 10.6
-------------------------------------- --------- ---------
The fixed rate subordinated liabilities are repayable at the dates
stated or earlier, in full, at the option of the Group with the prior
consent of the PRA. All subordinated liabilities are denominated in
Pounds Sterling and are unlisted.
The rights of repayment of the holders of these subordinated liabilities
are subordinated to the claims of all depositors and all other
creditors.
40. Perpetual subordinated bonds
Group and Group and
Company Company
2020 2019
GBPm GBPm
Sterling Perpetual Subordinated Bonds
(4.5991%) 22.3 22.3
Sterling Perpetual Subordinated Bonds
(4.6007%) 15.3 15.3
37.6 37.6
The bonds are listed on the London Stock Exchange.
The 4.5991% bonds were issued with a clause in the terms relating to the
Board's discretion over the payment of coupons being conditional and are
therefore classified as financial liabilities. The coupon rate is
4.5991% until the next reset date on 7 March 2021.
The 4.6007% bonds were issued with no discretion over the payment of
interest and may not be settled in the Group's own equity. They are
therefore classified as financial liabilities. The coupon rate is
4.6007% until the next reset date on 27 August 2024.
41. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's and Company's
liabilities classified as financing activities within the Statement of
Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities PSBs
(see note (see note (see note (see note
32) 35) 39) 40) Total
Group GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 1,584.0 - 10.8 37.6 1,632.4
Cash movements:
Principal drawdowns 587.7 285.0 - - 872.7
Principal repayments (273.7) (64.6) (0.2) - (338.5)
Non-cash movement:
CCFS Combination 1,168.4 75.1 - - 1,243.5
Accrued interest movement 2.4 0.8 - - 3.2
At 31 December 2019 3,068.8 296.3 10.6 37.6 3,413.3
Cash movements:
Principal drawdowns 1,505.0 486.2 - - 1,991.2
Principal repayments (998.9) (104.6) (0.1) - (1,103.6)
Deconsolidation of
special purpose vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest movement (4.7) 0.2 - - (4.5)
At 31 December 2020 3,570.2 421.9 10.5 37.6 4,040.2
-------------------------- ------------- --------------- ------------ ---------- ---------
Amounts owed
to credit Subordinated
institutions Deemed Loans liabilities PSBs
(see note (see note (see note (see note
32) 20) 39) 40) Total
Company GBPm GBPm GBPm GBPm GBPm
At 31 December 2018 1,584.0 - 10.8 37.6 1,632.4
Cash movements:
Principal drawdowns 316.8 285.0 - - 601.8
Principal repayments (230.0) (44.8) (0.2) - (275.0)
Non-cash movement:
Accrued interest movement 0.3 - - - 0.3
At 31 December 2019 1,671.1 240.2 10.6 37.6 1,959.5
Cash movements:
Principal drawdowns 905.0 154.6 - - 1,059.6
Principal repayments (672.8) (91.8) (0.1) - (764.7)
Non-cash movements:
Deconsolidation of
special purpose vehicles - (236.8) - (236.8)
Accrued interest movement (2.8) - - - (2.8)
At 31 December 2020 1,900.5 66.2 10.5 37.6 2,014.8
-------------------------- ------------- ------------ ------------ ---------- -------
42. Share capital
Number of
shares authorised Nominal
and fully value Premium
Ordinary shares paid GBPm GBPm
At 1 January 2019 244,487,537 2.4 158.8
CCFS Combination 199,643,055 2.0 705.1
Shares issued under OSB employee share
plans 1,312,862 0.1 0.3
At 31 December 2019 445,443,454 4.5 864.2
Shares issued under OSB employee share
plans 1,860,744 - 2.6
Cancellation of OneSavings Bank plc
GBP0.01 share capital and share premium (447,304,198) (4.5) (866.8)
Issuance of OneSavings Bank plc GBP0.01
share capital 447,304,198 4.5 -
At 31 December 2020 447,304,198 4.5 -
----------------------------------------- ------------------ ------- -------
As part of the insertion of OSBG, the existing listed share capital and
share premium of the Company was cancelled on 27 November 2020 and the
share capital and share premium amounts of the Company transferred to
retained earnings. The Company subsequently issued the same number of
new unlisted GBP0.01 ordinary shares from retained earnings to OSBG.
The holders of ordinary shares are entitled to receive dividends as
declared from time to time, and are entitled to one vote per share at
meetings of the Company. All ordinary shares rank equally with regard to
the Company's residual assets.
All ordinary shares issued in the current and prior year were fully
paid.
43. Other reserves
The Group's and Company's other reserves are as follows:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Share-based payment 7.8 5.6 6.7 5.3
Capital contribution - 6.5 - 6.2
Transfer - (12.8) - (15.2)
Own shares - (3.7) - (3.7)
FVOCI 1.0 0.5 (0.1) -
Foreign exchange (1.0) (1.0) - -
Equity bonds 60.0 60.0 60.0 60.0
67.8 55.1 66.6 52.6
--------------------- ----- ------ ------- -------
Capital contribution
The capital contribution reserve relates to one-off nil price share
awards of shares in OSB granted to certain senior managers on OSB's
admission to the London Stock Exchange in June 2014. The awards were
granted by OSB's major shareholder at the time of the IPO. The reserve
was transferred to retained earnings during the year following
distribution of all the awards.
43. Other reserves (continued)
Transfer reserve
The transfer reserve in 2019 represented the difference between the
value of net assets transferred to the Group from Kent Reliance Building
Society in 2011 and the value of shares issued to the A ordinary
shareholders. The net assets transferred were predominantly savings and
mortgages that have now either been replaced by new products, which is a
derecognition event of the initial net asset, or are no longer with the
Group. The balance was therefore transferred to retained earnings in
2020.
Own shares
Following the insertion of OSB GROUP plc as the listed entity of the
Group, whose shares will settle obligations under share-based payment
awards, the Company ceased adopting the look-through approach for the
EBT from 27 November 2020.
FVOCI reserve
The FVOCI reserve represents the cumulative net change in the fair value
of investment securities measured at FVOCI.
Foreign exchange
The foreign exchange reserve relates to the revaluation of the Group's
Indian subsidiary, OSB India Private Limited.
Additional Tier 1 securities
Additional Tier 1 securities comprise GBP60.0m of Fixed Rate Resetting
Perpetual Subordinated Contingent Convertible Securities that qualify as
Additional Tier 1 capital under the Capital Requirements Directive and
Regulation (CRD IV). The securities will be subject to full conversion
into ordinary shares of OSB in the event that its CET1 capital ratio
falls below 7%. The AT1 securities will pay interest at a rate of 9.125%
per annum until the first reset date of 25 May 2022, with the reset
interest rate equal to 835.9 basis points over the five-year semi-annual
mid-swap rate for such a period. Interest is paid semi-annually on 25
May and 25 November. OSB may, at any time, cancel any interest payment
at its full discretion and must cancel interest payments in certain
circumstances specified in the terms and conditions of the AT1
securities. The AT1 securities are perpetual with no fixed redemption
date. OSB may, in its discretion and subject to satisfying certain
conditions, redeem all (but not some) of the AT1 securities at the
principal amount outstanding plus any accrued but unpaid interest from
the first reset date and on any interest payment date thereafter.
44. Financial commitments and guarantees
a) The Group did not have any contracted or anticipated capital
expenditure commitments not provided for as at 31 December 2020 (2019:
nil).
b) The Group's minimum lease commitments under operating leases not
subject to IFRS 16 are summarised in the table below:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Land and buildings: due within:
One year 0.1 0.6 0.1 0.1
0.1 0.6 0.1 0.1
-------------------------------- ----- ----- ------- -------
44. Financial commitments and guarantees (continued)
c) Undrawn loan facilities:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
OSB mortgages 547.2 639.2 522.0 459.7
CCFS mortgages 420.8 568.1 - -
Asset Finance 11.5 3.6 - -
979.5 1,210.9 522.0 459.7
--------------- ----- ------- ------- -------
Undrawn loan facilities are approved loan applications which have not
yet been exercised. They are payable on demand and are usually drawn
down or expire within three months.
d) The Group did not have any issued financial guarantees as at 31
December 2020 (2019: nil).
45. Risk management
Overview
Financial instruments form the vast majority of the Group's and
Company's assets and liabilities. The Group manages risk on a
consolidated basis and risk disclosures that follow are provided on this
basis.
Types of financial instrument
Financial instruments are a broad definition which includes financial
assets, financial liabilities and equity instruments. The main financial
assets of the Group are loans to customers and liquid assets, which in
turn consist of cash in the BoE call accounts, call accounts with other
credit institutions and UK and EU sovereign debt. These are funded by a
combination of financial liabilities and equity instruments. Financial
liability funding comes predominantly from retail deposits and drawdowns
under the BoE TFS, TFSME and ILTR, supported by debt securities,
subordinated debt, wholesale and other funding. Equity instruments
include own shares and AT1 securities meeting the equity classification
criteria. The Group's main activity is mortgage lending; it raises funds
or invests in particular types of financial assets to meet customer
demand and manage the risks arising from its operations. The Group does
not trade in financial instruments for speculative purposes.
The Group uses derivative instruments to manage its financial risks.
Derivative financial instruments (derivatives) are financial instruments
whose value changes in response to changes in underlying variables such
as interest rates. The most common derivatives are futures, forwards and
swaps. Of these, the Group only uses swaps.
Derivatives are used by the Group solely to reduce (hedge) the risk of
loss arising from changes in market rates. Derivatives are not used for
speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its risk
exposures are interest rate swaps. Interest rate swaps convert fixed
interest rates to floating or vice versa. As with other derivatives, the
underlying product is not sold and payments are based on notional
principal amounts.
1. Risk management (continued)
Unhedged fixed rate liabilities create the risk of paying
above-the-market rate if interest rates subsequently decrease. Unhedged
fixed rate mortgages and liquid assets bear the opposite risk of income
below-the-market rate when rates go up. While fixed rate assets and
liabilities naturally hedge each other to a certain extent, this hedge
is usually never perfect because of maturity mismatches and principal
amounts.
The Group uses swaps to convert its instruments, such as mortgages,
deposits and liquid assets, from fixed or base rate-linked rates to
reference linked variable rates. This ensures a guaranteed margin
between the interest income and interest expense, regardless of changes
in the market rates.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector, LIBOR remains a key benchmark
and, for each market impacted, solutions to this issue are progressing
through various industry bodies. The Group has closely monitored the
market and the output from the various industry working groups managing
the transition to new benchmark interest rates. This includes
announcements made by LIBOR regulators (including the FCA) regarding the
transition from GBP LIBOR to SONIA. The FCA has made clear that, at the
end of 2021, it will no longer seek to persuade, or compel, banks to
submit to LIBOR.
In 2018, the Group set up an internal working group, comprising all of
the key business lines that are involved with this change, including
work streams covering risk management, contracts, systems and conduct
risk considerations, with strong oversight from the Compliance and Risk
functions. The programme is overseen by the LIBOR Transition Working
Group which reports into ALCO. Risk assessments have been completed to
ensure this process is managed in a measured and controlled manner.
The Group no longer offers any LIBOR-linked loans and is transitioning
new and back book swaps from a GBP LIBOR to a SONIA basis. The Group has
no exposure to existing IBORs, other than to GBP LIBOR.
The Group adopted the Phase 1 amendments 'Interest Rate Benchmark
reform: Amendments to IFRS 9/IAS 39 and IFRS 7'. These amendments
modified specific hedge accounting requirements to allow hedge
accounting to continue for affected hedges during the period of
uncertainty before the hedged items or hedging instruments are amended
as a result of the interest rate benchmark reform. The Group has not
early adopted 'Interest Rate Benchmark Reform -- Phase 2: Amendments to
IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition
and Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4
Insurance Contracts and IFRS 16 Leases' which was issued in August 2020.
These amendments will become mandatory for annual reporting periods
beginning on or after 1 January 2021. Adopting these amendments will
enable the Group to reflect the effects of transitioning from IBOR to
alternative benchmark interest rates (also referred to as 'risk free
rates' or RFRs) without giving rise to accounting impacts that would not
provide useful information to users of financial statements.
The application of the Phase 1 amendments impacts the Group's accounting
in the following ways. Hedge accounting relationships will continue even
when, for IBOR fair value hedges, the benchmark interest rate component
may not be separately identifiable.
The Group will not discontinue portfolio hedge accounting should the
retrospective assessment of hedge effectiveness for a hedging
relationship, that is subject to the interest rate benchmark reform,
fall outside the 80-125 per cent range. For portfolio hedging
relationships that are not subject to the interest rate benchmark reform
the entity continues to cease hedge accounting if retrospective
effectiveness is outside the 80-125 per cent range.
1. Risk management (continued)
The Group will continue to apply the Phase 1 amendments to IFRS 9/IAS 39
until the uncertainty arising from the interest rate benchmark reform,
with respect to the timing and the amount of the underlying cash flows
to which the Group is exposed, ends. The Group expects this uncertainty
will continue until the Group's contracts that reference IBORs are
amended to specify the date on which the interest rate benchmark will be
replaced and the basis for the cash flows of the alternative benchmark
rate are determined, including any fixed spread.
The phase 1 relief does not extend to the requirement that the
designated interest rate risk component continues to be reliably
measurable and if the risk component is no longer reliably measurable,
the hedging relationship is discontinued. The Group has determined that
GBP LIBOR interest rate risk components continue to be reliably
measurable.
Mortgages
New loan product transition was completed for CCFS in 2019 and OSB
launched new BBR-linked products during 2020 to replace loans with a
LIBOR component.
At 31 December 2020, the Group had GBP8,001.7m of GBP LIBOR-linked
lending, including funding lines and mortgages that will revert to LIBOR
in the future, out of a total mortgage balance of GBP19,257.1m. The
Group continues to work through the back book transition for existing
loans which is planned to be completed before the end of 2021.
Investment securities
At 31 December 2020, the Group had GBP118.7m of GBP LIBOR-linked
investment securities, comprising RMBS loan notes and the Group is
monitoring the issuers' intentions in respect of IBOR transition with
GBP40.0m transferred to SONIA coupons after the year end.
Retail savings
None of the OSB or CCFS current or back book retail savings products
have a GBP LIBOR component within the product.
Additional Tier 1 securities
The GBP60.0m Additional Tier 1 securities pay interest at a rate of
9.125% per annum until the first reset date on 25 May 2022. In advance
of the reset date, the Group will agree the benchmark rate to be
adopted.
Derivatives
As at 31 December 2020, the derivatives in the CCFS segment have all
transitioned across to a SONIA basis with the OSB segment yet to
complete. The total nominal amount of the Group's derivatives was
GBP19,080.2m, of which the Group had GBP LIBOR-linked swaps with a
nominal value of GBP8,020.0m and a fair value liability of GBP89.1m
hedging assets and liabilities. It is planned that existing derivatives
will be actively transitioned onto alternative benchmarks before the end
of 2021.
Types of risk
The principal financial risks to which the Group is exposed are credit,
liquidity and market risks, the latter comprising interest and exchange
rate risk. In addition to financial risks, the Group is exposed to
various other risks, most notably operational, conduct and regulatory,
which are covered in the Risk review on pages 32 to 62.
1. Risk management (continued)
Credit risk
Credit risk is the risk that losses may arise as a result of the Group's
borrowers or market counterparties failing to meet their obligations to
repay.
The Group has adopted the Standardised Approach for assessment of credit
risk regulatory capital requirements. This approach considers risk
weightings as defined under Basel II and Basel III principles.
The classes of financial instruments to which the Group is most exposed
are loans and advances to customers, loans and advances to credit
institutions, cash in the BoE call account, call and current accounts
with other credit institutions and investment securities. The maximum
credit risk exposure equals the total carrying amount of the above
categories plus off-balance sheet undrawn committed mortgage facilities.
Credit risk - loans and advances to customers
Credit risk associated with mortgage lending is largely driven by the
housing market and level of unemployment. A recession and/or high
interest rates could cause pressure within the market, resulting in
rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's Lending
Policy. Changes to the policy are approved by the Group Risk Committee,
with mandates set for the approval of loan applications.
The Group Credit Committee and the ALCO regularly monitor lending
activity, taking appropriate actions to reprice products and adjust
lending criteria in order to control risk and manage exposure. Where
necessary and appropriate, changes to the Lending Policy are recommended
to the Group Risk Committee.
The following tables show the Group's and Company's maximum exposure to
credit risk and the impact of collateral held as security, capped at the
gross exposure amount, by impairment stage. Capped collateral excludes
the impact of forced sale discounts and costs to sell.
2020
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9,366.8 9,303.4 6,749.5 6,747.9 16,116.3 16,051.3
Stage 2 1,363.4 1,359.8 1,327.6 1,327.6 2,691.0 2,687.4
Stage 3 352.6 323.3 48.1 48.1 400.7 371.4
Stage 3
(POCI) 48.6 48.4 66.0 66.0 114.6 114.4
11,131.4 11,034.9 8,191.2 8,189.6 19,322.6 19,224.5
------- -------------- ----------- -------------- ----------- -------------- -----------
1. Risk management (continued)
2019
OSB CCFS Total
--------------------------- ---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,046.9 9,987.1 7,240.0 7,239.5 17,286.9 17,226.6
Stage 2 442.4 441.8 307.1 307.0 749.5 748.8
Stage 3 277.7 275.2 16.7 16.7 294.4 291.9
Stage 3
(POCI) 53.6 50.1 83.2 83.1 136.8 133.2
10,820.6 10,754.2 7,647.0 7,646.3 18,467.6 18,400.5
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in the UK
and the Channel Islands.
The Group uses indexed loan to value (LTV) ratios to assess the quality
of the uncapped collateral held. Property values are updated to reflect
changes in the HPI. A breakdown of loans and advances to customers by
indexed LTV is as follows:
2020 2019
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,740.3 419.3 2,159.6 11 1,732.6 567.8 2,300.4 12
50% - 60% 1,462.0 483.3 1,945.3 10 1,301.8 612.3 1,914.1 10
60% - 70% 2,813.4 1,109.3 3,922.7 20 2,435.7 1,588.5 4,024.2 22
70% - 80% 3,942.9 5,144.3 9,087.2 47 4,182.1 4,236.3 8,418.4 46
80% - 90% 879.1 1,033.7 1,912.8 10 946.0 641.5 1,587.5 9
90% - 100% 105.8 1.3 107.1 1 91.1 0.6 91.7 -
>100% 187.9 - 187.9 1 131.3 - 131.3 1
Total loans before
provisions 11,131.4 8,191.2 19,322.6 100 10,820.6 7,647.0 18,467.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
The table below shows the LTV banding for the OSB segments' two major
lending streams:
2020 2019
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 795.7 944.6 1,740.3 16 905.9 826.7 1,732.6 16
50% - 60% 1,228.1 233.9 1,462.0 13 1,062.8 239.0 1,301.8 12
60% - 70% 2,602.1 211.3 2,813.4 25 2,240.2 195.5 2,435.7 23
70% - 80% 3,693.4 249.5 3,942.9 35 3,993.5 188.6 4,182.1 38
80% - 90% 584.5 294.6 879.1 8 621.4 324.6 946.0 9
90% - 100% 89.4 16.4 105.8 1 45.1 46.0 91.1 1
>100% 171.4 16.5 187.9 2 114.3 17.0 131.3 1
Total loans
before provisions 9,164.6 1,966.8 11,131.4 100 8,983.2 1,837.4 10,820.6 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
45. Risk management (continued)
The tables below show the sub-segment LTV analysis of the OSB BTL/SME
lending stream:
2020
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 643.3 80.6 12.5 59.3 795.7
50% - 60% 1,040.1 84.3 64.2 39.5 1,228.1
60% - 70% 2,407.4 132.0 56.4 6.3 2,602.1
70% - 80% 3,411.7 251.3 - 30.4 3,693.4
80% - 90% 370.1 214.4 - - 584.5
90% - 100% 54.1 35.3 - - 89.4
>100% 117.9 24.0 - 29.5 171.4
Total loans before
provisions 8,044.6 821.9 133.1 165.0 9,164.6
---------------------- ---------- ---------- ------------ ------- -------
2019
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 579.9 96.5 125.7 103.8 905.9
50% - 60% 894.3 119.8 5.0 43.7 1,062.8
60% - 70% 1,994.1 210.2 5.0 30.9 2,240.2
70% - 80% 3,514.5 445.7 - 33.3 3,993.5
80% - 90% 603.3 7.7 10.4 - 621.4
90% - 100% 38.9 1.4 - 4.8 45.1
>100% 102.0 6.7 - 5.6 114.3
Total loans before
provisions 7,727.0 888.0 146.1 222.1 8,983.2
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
The tables below show the sub-segment LTV analysis of the OSB
Residential lending stream:
2020
Funding
First charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Band
0% - 50% 835.8 105.1 3.7 944.6
50% - 60% 167.2 64.5 2.2 233.9
60% - 70% 151.7 58.1 1.5 211.3
70% - 80% 208.1 39.9 1.5 249.5
80% - 90% 274.8 19.3 0.5 294.6
90% - 100% 12.4 3.6 0.4 16.4
>100% 10.7 4.9 0.9 16.5
Total loans before provisions 1,660.7 295.4 10.7 1,966.8
----------------------------- ------------ ------------- ------- -------
2019
Funding
First charge Second charge lines Total
OSB GBPm GBPm GBPm GBPm
Band
0% - 50% 708.0 115.4 3.3 826.7
50% - 60% 158.1 77.5 3.4 239.0
60% - 70% 122.3 70.9 2.3 195.5
70% - 80% 137.0 49.5 2.1 188.6
80% - 90% 291.7 32.3 0.6 324.6
90% - 100% 40.0 5.7 0.3 46.0
>100% 9.5 7.3 0.2 17.0
Total loans before provisions 1,466.6 358.6 12.2 1,837.4
----------------------------- ------------ ------------- ------- -------
The table below shows the LTV banding for the CCFS segments' four major
lending streams:
2020
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 92.7 242.1 50.4 34.1 419.3 5
50% - 60% 196.0 233.9 17.9 35.5 483.3 6
60% - 70% 632.9 400.2 16.8 59.4 1,109.3 14
70% - 80% 3,916.2 1,155.7 21.1 51.3 5,144.3 62
80% - 90% 600.7 410.8 - 22.2 1,033.7 13
90% - 100% 0.5 0.8 - - 1.3 -
Total loans before
provisions 5,439.0 2,443.5 106.2 202.5 8,191.2 100
------------------- ---------- ----------- -------- -------- ------- ---
1. Risk management (continued)
2019
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 144.7 261.8 121.1 40.2 567.8 7
50% - 60% 283.9 253.1 29.4 45.9 612.3 8
60% - 70% 957.0 538.6 26.6 66.3 1,588.5 21
70% - 80% 3,246.6 897.7 37.5 54.5 4,236.3 56
80% - 90% 321.5 301.4 1.2 17.4 641.5 8
90% - 100% 0.2 0.4 - - 0.6 -
Total loans before
provisions 4,953.9 2,253.0 215.8 224.3 7,647.0 100
------------------- ---------- ----------- -------- -------- ------- ---
The table below shows the LTV banding for the Company's segments' two
major lending streams:
2020 2019
BTL/SME Residential Total BTL/SME Residential Total
Company GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 560.9 880.7 1,441.6 17 670.7 763.6 1,434.3 17
50% - 60% 912.8 204.6 1,117.4 13 816.4 215.0 1,031.4 12
60% - 70% 1,978.7 183.1 2,161.8 25 1,639.5 175.9 1,815.4 22
70% - 80% 2,855.8 243.0 3,098.8 36 2,925.4 179.1 3,104.5 37
80% - 90% 322.7 292.4 615.1 7 560.7 321.0 881.7 10
90% - 100% 49.9 16.2 66.1 1 40.0 45.1 85.1 1
>100% 83.7 11.7 95.4 1 54.9 13.5 68.4 1
Total loans before
provisions 6,764.5 1,831.7 8,596.2 100 6,707.6 1,713.2 8,420.8 100
------------------ ------- ----------- ------- --- ------- ----------- ------- ---
The tables below show the sub-segment LTV analysis of the Company's
BTL/SME lending stream:
2020
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 487.2 1.9 12.5 59.3 560.9
50% - 60% 806.5 2.6 64.2 39.5 912.8
60% - 70% 1,913.7 2.3 56.4 6.3 1,978.7
70% - 80% 2,820.5 4.9 - 30.4 2,855.8
80% - 90% 322.2 0.5 - - 322.7
90% - 100% 49.9 - - - 49.9
>100% 50.7 3.5 - 29.5 83.7
Total loans before
provisions 6,450.7 15.7 133.1 165.0 6,764.5
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
2019
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 438.9 2.3 125.7 103.8 670.7
50% - 60% 765.2 2.5 5.0 43.7 816.4
60% - 70% 1,601.1 2.5 5.0 30.9 1,639.5
70% - 80% 2,886.3 5.8 - 33.3 2,925.4
80% - 90% 549.8 0.5 10.4 - 560.7
90% - 100% 35.2 - - 4.8 40.0
>100% 45.8 3.5 - 5.6 54.9
Total loans before
provisions 6,322.3 17.1 146.1 222.1 6,707.6
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the sub-segment LTV analysis of the Company's
Residential lending stream:
2020
Funding
First charge Second charge lines Total
Company GBPm GBPm GBPm GBPm
Band
0% - 50% 771.9 105.1 3.7 880.7
50% - 60% 137.9 64.5 2.2 204.6
60% - 70% 123.5 58.1 1.5 183.1
70% - 80% 201.6 39.9 1.5 243.0
80% - 90% 272.6 19.3 0.5 292.4
90% - 100% 12.2 3.6 0.4 16.2
>100% 5.9 4.9 0.9 11.7
Total loans before provisions 1,525.6 295.4 10.7 1,831.7
----------------------------- ------------ ------------- ------- -------
2019
Funding
First charge Second charge lines Total
Company GBPm GBPm GBPm GBPm
Band
0% - 50% 644.9 115.4 3.3 763.6
50% - 60% 134.1 77.5 3.4 215.0
60% - 70% 102.7 70.9 2.3 175.9
70% - 80% 127.5 49.5 2.1 179.1
80% - 90% 288.1 32.3 0.6 321.0
90% - 100% 39.1 5.7 0.3 45.1
>100% 6.0 7.3 0.2 13.5
Total loans before provisions 1,342.4 358.6 12.2 1,713.2
----------------------------- ------------ ------------- ------- -------
1. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers experience
financial difficulties which impact their ability to service their
financial commitments under the loan agreement. These are explained in
the Principal risks and uncertainties on pages 32 to 62.
A summary of the forbearance measures undertaken (excluding COVID-19
related payment deferrals) during the year is shown below. The balances
disclosed reflect the year end balance of the accounts where a
forbearance measure was undertaken during the year.
Number At 31 December Number At 31 December
Group of accounts 2020 of accounts(1) 2019(1)
Forbearance type 2020 GBPm 2019 GBPm
Interest-only switch 108 14.1 59 8.4
Interest rate reduction 22 2.2 35 1.6
Term extension 430 27.0 30 6.6
Payment deferral 447 38.7 87 4.1
Voluntary-assisted sale 2 0.1 26 1.0
Payment concession (reduced monthly
payments) 34 1.7 73 3.6
Capitalisation of interest 2 0.1 - -
Full or partial debt forgiveness 11 0.2 6 -
Total 1,056 84.1 316 25.3
------------------------------------ ------------ -------------- --------------- --------------
Loan type
First charge owner-occupier 570 54.0 85 10.5
Second charge owner-occupier 372 15.0 198 7.4
Buy-to-Let 113 14.9 32 7.4
Commercial 1 0.2 1 -
Total 1,056 84.1 316 25.3
------------------------------------ ------------ -------------- --------------- --------------
(1) CCFS forbearance is included post Combination.
As at 31 December 2020, active COVID-19 payment deferrals represented
only 1.3% of the Group's loan book by value.
1. Risk management (continued)
Number At 31 December Number At 31 December
Company of accounts 2020 of accounts 2019
Forbearance type 2020 GBPm 2019 GBPm
Interest-only switch 78 9.2 48 7.2
Interest rate reduction 19 2.1 34 1.3
Term extension 19 1.6 19 6.1
Payment deferral 339 20.6 72 1.7
Voluntary-assisted sale 2 0.1 24 0.5
Payment concession (reduced monthly
payments) 31 1.3 69 2.5
Capitalisation 2 - - -
Full or partial debt forgiveness 11 0.2 6 -
Total 501 35.1 272 19.3
------------------------------------ ------------ -------------- ------------ --------------
Loan type
First charge owner-occupier 104 16.1 59 7.0
Second charge owner-occupier 364 14.1 185 5.8
Buy-to-Let 33 4.9 28 6.5
Total 501 35.1 272 19.3
------------------------------------ ------------ -------------- ------------ --------------
As at 31 December 2020, active COVID-19 payment deferrals represented
only 1.8% of the Company's loan book by value.
Geographical analysis by region
An analysis of loans by region is provided below:
Group Group
2020 2019
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- ------- -------- --- -------- ------- -------- ---
East Anglia 407.6 866.2 1,273.8 7 391.9 810.9 1,202.8 7
East Midlands 455.5 463.4 918.9 5 415.2 410.3 825.5 4
Greater London 4,851.9 2,837.4 7,689.3 40 4,738.7 2,713.7 7,452.4 41
Guernsey 35.8 - 35.8 - 45.3 - 45.3 -
Jersey 122.9 - 122.9 1 141.4 - 141.4 1
North East 140.1 208.4 348.5 2 136.7 179.5 316.2 2
North West 635.4 674.8 1,310.2 7 587.3 605.4 1,192.7 6
Northern Ireland 12.9 - 12.9 - 14.2 - 14.2 -
Scotland 47.0 214.2 261.2 1 48.5 190.9 239.4 1
South East 2,419.8 1,316.7 3,736.5 19 2,375.2 1,209.6 3,584.8 20
South West 757.0 478.5 1,235.5 6 747.5 466.0 1,213.5 7
Wales 249.2 209.9 459.1 2 239.3 202.6 441.9 2
West Midlands 744.5 529.2 1,273.7 7 702.2 496.0 1,198.2 6
Yorks and
Humberside 251.8 392.5 644.3 3 237.2 362.1 599.3 3
Total loans before
provisions 11,131.4 8,191.2 19,322.6 100 10,820.6 7,647.0 18,467.6 100
------------------- -------- ------- -------- --- -------- ------- -------- ---
1. Risk management (continued)
Company Company
2020 2019
Region GBPm % GBPm %
------- --- ------- ---
East Anglia 337.6 4 319.3 4
East Midlands 321.1 4 297.1 4
Greater London 3,779.9 44 3,737.7 44
North East 110.8 1 109.3 1
North West 478.3 6 448.1 5
Northern Ireland 12.8 - 14.1 -
Scotland 39.2 - 44.0 1
South East 1,936.8 23 1,921.3 23
South West 608.5 7 601.4 7
Wales 194.3 2 191.1 2
West Midlands 583.5 7 556.8 7
Yorks and Humberside 193.4 2 180.6 2
Total loans before provisions 8,596.2 100 8,420.8 100
------------------------------- ------- --- ------- ---
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances to
customers into internal risk grades based on the 12 month PD calculated
at the reporting date. The PDs include a combination of internal
behavioural and credit bureau characteristics. The risk grades are
further grouped into the following credit quality segments:
-- Excellent quality - where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality - where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality - where the assets require closer monitoring and the risk
of default is of greater concern.
The credit grade for the Group's investment securities and loans and
advances to credit institutions is based on the external credit rating
of the counterparty.
1. Risk management (continued)
The following tables disclose the credit risk quality ratings of loans
and advances to customers by IFRS 9 stage:
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Group 2020 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 4,689.6 295.4 - - 4,985.0
Good 4,564.9 756.4 - - 5,321.3
Satisfactory 106.7 242.8 - - 349.5
Lower 5.6 68.8 - - 74.4
Impaired - - 352.6 - 352.6
POCI - - - 48.6 48.6
CCFS
Excellent 4,352.8 398.8 - - 4,751.6
Good 2,338.8 667.2 - - 3,006.0
Satisfactory 55.3 140.2 - - 195.5
Lower 2.6 121.4 - - 124.0
Impaired - - 48.1 - 48.1
POCI - - - 66.0 66.0
16,116.3 2,691.0 400.7 114.6 19,322.6
------------- -------- ------- ----- ------- --------
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Group 2019 GBPm GBPm GBPm GBPm GBPm
OSB(1)
Excellent 5,033.6 11.0 - - 5,044.6
Good 4,859.3 200.5 - - 5,059.8
Satisfactory 147.3 154.8 - - 302.1
Lower 6.7 76.1 - - 82.8
Impaired - - 277.7 - 277.7
POCI - - - 53.6 53.6
CCFS
Excellent 3,632.7 20.5 - - 3,653.2
Good 3,359.7 93.7 - - 3,453.4
Satisfactory 222.8 39.1 - - 261.9
Lower 24.8 153.8 - - 178.6
Impaired - - 16.7 - 16.7
POCI - - - 83.2 83.2
17,286.9 749.5 294.4 136.8 18,467.6
------------- -------- --------
(1) The Group has restated the prior year comparatives for OSB to
include finance lease assets.
1. Risk management (continued)
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Company 2020 GBPm GBPm GBPm GBPm GBPm
Loans and advances to customers
Excellent 3,092.9 256.0 - - 3,348.9
Good 3,888.9 674.1 - - 4,563.0
Satisfactory 95.6 228.7 - - 324.3
Lower 3.0 56.4 - - 59.4
Impaired - - 255.2 - 255.2
POCI - - - 45.4 45.4
7,080.4 1,215.2 255.2 45.4 8,596.2
-------------------------------- ------- ------- ----- ------- -------
Company 2019
Loans and advances to customers
Excellent 3,565.3 10.3 - - 3,575.6
Good 4,086.1 148.0 - - 4,234.1
Satisfactory 127.3 147.0 - - 274.3
Lower 6.3 66.0 - - 72.3
Impaired - - 211.1 - 211.1
POCI - - - 53.4 53.4
7,785.0 371.3 211.1 53.4 8,420.8
-------------------------------- ------- ------- ----- ------- -------
The tables below show the Group's and Company's other financial assets
by credit risk rating grade:
Excellent Good Satisfactory Total
Group 2020 GBPm GBPm GBPm GBPm
Investment securities 471.2 - - 471.2
Loans and advances to credit
institutions 2,432.9 233.4 9.9 2,676.2
Derivative assets 6.5 5.8 - 12.3
2,910.6 239.2 9.9 3,159.7
----------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
Group 2019 GBPm GBPm GBPm GBPm
Investment securities 635.3 - - 635.3
Loans and advances to credit
institutions 2,047.8 146.1 10.7 2,204.6
Derivative assets 11.6 9.5 - 21.1
2,694.7 155.6 10.7 2,861.0
----------------------------- --------- ----- ------------ -------
1. Risk management (continued)
Excellent Good Satisfactory Total
Company 2020 GBPm GBPm GBPm GBPm
Investment securities 15.0 - - 15.0
Loans and advances to credit
institutions 1,442.2 75.9 - 1,518.1
Derivative assets 4.7 - - 4.7
1,461.9 75.9 - 1,537.8
----------------------------- --------- ---- ------------ -------
Excellent Good Satisfactory Total
Company 2019 GBPm GBPm GBPm GBPm
Investment securities 149.8 - - 149.8
Loans and advances to credit
institutions 1,140.7 55.3 - 1,196.0
Derivative assets 7.2 1.5 - 8.7
1,297.7 56.8 - 1,354.5
----------------------------- --------- ---- ------------ -------
Credit risk - loans and advances to credit institutions and investment
securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk arising
from these investments is closely monitored and managed by the Group's
Treasury function. In managing these assets, Group Treasury operates
within guidelines laid down in the Treasury Policy approved by ALCO and
performance is monitored and reported to ALCO monthly, including through
the use of an internally developed rating model based on counterparty
credit default swap spreads.
The Group has limited exposure to emerging markets (Indian operations)
and non-investment grade debt. ALCO is responsible for approving
treasury counterparties.
During the year, the average balance of cash in hand, loans and advances
to credit institutions and investment securities on a monthly basis was
GBP3,196.0m (2019: GBP2,016.2m).
The tables below show the industry sector of the Group's loans and
advances to credit institutions and investment securities:
Group Group
2020 2019
GBPm % GBPm %
BoE(1) 2,308.8 73 1,957.9 69
Other banks 367.4 12 246.7 9
Central government - - 149.8 5
Securitisation 471.2 15 - -
Supranationals - - 485.5 17
Total 3,147.4 100 2,839.9 100
---------------------- ------- --- ------- ---
(1) Balances with the BoE include GBP52.3m (2019: GBP41.7m) held in the
cash ratio deposit.
1. Risk management (continued)
Company Company
2020 2019
GBPm % GBPm %
BoE1 1,390.4 91 1,109.3 83
Other banks 127.7 8 86.7 6
Central government - - 149.8 11
Securitisation 15.0 1 - -
Total 1,533.1 100 1,345.8 100
---------------------- ------- --- ------- ---
(1) Balances with the BoE include GBP34.0m (2019: GBP27.5m) held in the
cash ratio deposit.
The tables below show the geographical exposure of the Group's loans and
advances to credit institutions and investment securities:
Group Group
2020 2019
GBPm % GBPm %
United Kingdom 3,137.5 100 2,829.2 100
India 9.9 - 10.7 -
Total 3,147.4 100 2,839.9 100
------------------ ------- --- ------- ---
Company Company
2020 2019
GBPm % GBPm %
United Kingdom 1,533.1 100 1,345.8 100
Total 1,533.1 100 1,345.8 100
------------------ ------- --- ------- ---
The Group monitors exposure concentrations against a variety of criteria,
including asset class, sector and geography. To avoid refinancing risks
associated with any one counterparty, sector or geographical region, the
Board has set appropriate limits.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets to
fulfil obligations as they become due or the cost of raising liquid
funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence in the
solvency of the Group and to enable the Group to meet its financial
obligations as they fall due. This is achieved through maintaining a
prudent level of liquid assets and control of the growth of the
business. The Group has established a call account with the BoE and has
access to its contingent liquidity facilities.
1. Risk management (continued)
Liquidity management is the responsibility of ALCO, with day-to-day
management delegated to Treasury as detailed in the Treasury Policy.
ALCO is responsible for setting limits over the level and maturity
profile of wholesale funding and for monitoring the composition of the
Group financial position. For each material class of financial liability
a contractual maturity analysis is provided below.
The Group also monitors a range of triggers, defined in the contingency
funding plan and recovery and resolution plan, which are designed to
capture liquidity stresses in advance in order to allow sufficient time
for management action to take effect. These are monitored daily by the
Risk team, with breaches immediately reported to the CRO, CEO, CFO and
the Group Treasurer.
The tables below provide a contractual maturity analysis of the Group's
financial assets and liabilities:
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 3,810.7 2,733.5 6,517.5 3,541.4 -
Amounts owed to credit
institutions 3,570.2 0.4 85.0 1,035.3 2,449.5 -
Amounts owed to other
customers 72.9 26.9 7.5 38.5 - -
Derivative liabilities 163.6 - 0.2 4.5 153.9 5.0
Debt securities in
issue 421.9 - - - 421.9 -
Lease liabilities 11.7 - 0.2 0.7 3.6 7.2
Subordinated
liabilities 10.5 - 0.2 0.1 10.2 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 20,891.5 3,838.0 2,827.2 7,596.6 6,580.5 49.2
----------------------- -------- --------- --------- ---------- ---------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 2,676.2 2,512.8 111.1 18.3 - 34.0
Investment securities 471.2 - 0.3 - 470.9 -
Loans and advances to
customers 19,230.7 4.1 316.7 266.4 1,239.7 17,403.8
Derivative assets 12.3 - 1.3 3.7 7.1 0.2
Total assets 22,390.9 2,517.4 429.4 288.4 1,717.7 17,438.0
----------------------- -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,320.6) (3,718.4) (11,026.6) (15,889.4) 1,499.4
----------------------- -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,255.0 4,050.7 2,411.9 6,579.3 3,213.1 -
Amounts owed to credit
institutions 3,068.8 10.2 232.0 193.5 2,633.1 -
Amounts owed to other
customers 29.7 3.7 2.8 23.1 0.1 -
Derivative liabilities 92.8 - - 2.3 83.4 7.1
Debt securities in
issue 296.3 - - 40.1 256.2 -
Lease liabilities 13.3 - 0.3 1.0 3.8 8.2
Subordinated
liabilities 10.6 - 0.2 0.1 10.3 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 19,804.1 4,064.6 2,647.8 6,839.4 6,200.0 52.3
----------------------- -------- --------- --------- ---------- ---------- ---------
Financial asset by type
Cash in hand 0.4 0.4 - - - -
Loans and advances to
credit institutions 2,204.6 2,077.1 85.8 - - 41.7
Investment securities 635.3 - 49.9 116.4 469.0 -
Loans and advances to
customers 18,446.8 4.5 290.7 524.1 1,174.8 16,452.7
Derivative assets 21.1 - 0.3 3.0 16.0 1.8
Total assets 21,308.2 2,082.0 426.7 643.5 1,659.8 16,496.2
----------------------- -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,982.6) (4,203.7) (10,399.6) (14,939.8) 1,504.1
----------------------- -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,705.3 2,998.8 1,325.1 3,420.7 1,960.7 -
Amounts owed to credit
institutions 1,900.5 - 85.0 1,035.3 780.2 -
Amounts owed to other
customers 5.8 - 0.5 5.3 - -
Derivative liabilities 93.8 - - 1.1 88.8 3.9
Lease liabilities 3.9 - - 0.1 0.2 3.6
Subordinated
liabilities 10.5 - 0.2 0.1 10.2 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 11,757.4 2,998.8 1,411.4 4,462.6 2,840.1 44.5
----------------------- -------- --------- --------- --------- --------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 1,518.1 1,484.1 - - - 34.0
Investment securities 15.0 - - - 15.0 -
Loans and advances to
customers 8,531.7 - 151.9 82.6 269.0 8,028.2
Derivative assets 4.7 - 0.6 1.8 2.1 0.2
Total assets 10,070.0 1,484.6 152.5 84.4 286.1 8,062.4
----------------------- -------- --------- --------- --------- --------- ---------
Cumulative liquidity
gap (1,514.2) (2,773.1) (7,151.3) (9,705.3) (1,687.4)
----------------------- -------- --------- --------- --------- --------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,435.7 3,254.6 1,338.4 3,229.0 1,613.7 -
Amounts owed to credit
institutions 1,671.1 7.8 160.5 - 1,502.8 -
Amounts owed to other
customers 8.9 - 0.5 8.4 - -
Derivative liabilities 54.3 - - 0.6 46.8 6.9
Lease liabilities 4.3 - - 0.2 0.4 3.7
Subordinated
liabilities 10.6 - 0.2 0.1 10.3 -
Perpetual Subordinated
Bonds 37.6 - 0.6 - - 37.0
Total liabilities 11,222.5 3,262.4 1,500.2 3,238.3 3,174.0 47.6
----------------------- -------- --------- --------- --------- --------- ---------
Financial asset by type
Cash in hand 0.4 0.4 - - - -
Loans and advances to
credit institutions 1,196.0 1,168.5 - - - 27.5
Investment securities 149.8 - 49.9 99.9 - -
Loans and advances to
customers 8,394.2 - 136.7 168.4 273.3 7,815.8
Derivative assets 8.7 - 0.1 1.0 7.1 0.5
Total assets 9,749.1 1,168.9 186.7 269.3 280.4 7,843.8
----------------------- -------- --------- --------- --------- --------- ---------
Cumulative liquidity
gap (2,093.5) (3,407.0) (6,376.0) (9,269.6) (1,473.4)
----------------------- -------- --------- --------- --------- --------- ---------
1. Risk management (continued)
Liquidity risk -- contractual cash flows
The following tables provide an analysis of the Group's gross
contractual cash flows, derived using interest rates and contractual
maturities at the reporting date and excluding impacts of early payments
or non-payments:
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 16,644.9 7,302.6 3,610.5 4,121.0 1,610.8
Amounts owed to credit
institutions and other
customers 3,643.1 3,658.8 113.4 1,048.9 826.6 1,669.9
Derivative liabilities 163.6 157.7 11.0 41.4 103.8 1.5
Debt securities in
issue 421.9 426.4 17.3 52.0 67.3 289.8
Lease liabilities 11.7 13.2 0.5 1.2 6.4 5.1
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
Perpetual Subordinated
Bonds 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 20,891.5 20,953.9 7,445.9 4,754.8 5,139.1 3,614.1
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 979.5 979.5 979.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,676.2 2,676.2 2,623.9 18.3 - 34.0
Investment securities 471.2 494.9 1.2 4.0 483.8 5.9
Loans and advances
to customers 19,230.7 36,156.7 373.4 1,132.4 4,960.5 29,690.4
Derivative assets 12.3 12.1 3.2 4.6 4.3 -
Total assets 22,390.9 39,340.4 3,002.2 1,159.3 5,448.6 29,730.3
------------------------ -------- ------------- --------- ------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,255.0 16,407.3 5,532.0 4,309.7 4,911.8 1,653.8
Amounts owed to credit
institutions and other
customers 3,098.5 3,133.3 255.1 229.5 2,648.7 -
Derivative liabilities 92.8 91.4 5.6 20.7 61.4 3.7
Debt securities in
issue 296.3 315.3 14.4 82.9 218.0 -
Lease liabilities 13.3 22.4 0.7 1.4 17.1 3.2
Subordinated liabilities 10.6 14.2 0.4 0.5 13.3 -
Perpetual Subordinated
Bonds 37.6 45.5 0.4 1.3 6.8 37.0
Total liabilities 19,804.1 20,029.4 5,808.6 4,646.0 7,877.1 1,697.7
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 1,210.9 1,210.9 1,210.9 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 2,204.6 2,204.6 2,162.9 - - 41.7
Investment securities 635.3 672.4 52.1 123.2 497.1 -
Loans and advances
to customers 18,446.8 37,024.4 371.6 1,423.6 5,032.4 30,196.8
Derivative assets 21.1 23.4 2.4 5.7 15.1 0.2
Total assets 21,308.2 39,925.2 2,589.4 1,552.5 5,544.6 30,238.7
------------------------ -------- ------------- --------- ------- ------- ---------
45. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,705.3 9,686.7 6,490.7 2,200.4 995.6 -
Amounts owed to credit
institutions and other
customers 1,906.3 1,883.5 61.0 1,041.4 781.1 -
Derivative liabilities 93.8 93.3 5.0 25.3 61.6 1.4
Lease liabilities 3.9 4.9 0.2 0.3 2.0 2.4
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
Perpetual Subordinated
Bonds 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 11,757.4 11,721.3 6,558.0 3,268.2 1,854.3 40.8
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 522.0 522.0 522.0 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 1,518.1 1,518.1 1,484.1 - - 34.0
Investment securities 15.0 15.0 - - 15.0 -
Loans and advances
to customers 8,531.7 17,211.8 108.4 603.8 2,141.1 14,358.5
Derivative assets 4.7 4.3 1.3 2.1 0.9 -
Total assets 10,070.0 18,749.7 1,594.3 605.9 2,157.0 14,392.5
------------------------ -------- ------------- --------- ------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,435.7 9,495.9 3,657.4 917.0 3,267.7 1,653.8
Amounts owed to credit
institutions and other
customers 1,680.0 1,697.6 174.6 13.8 1,509.2 -
Derivative liabilities 54.3 55.0 2.3 11.8 37.3 3.6
Lease liabilities 4.3 4.8 0.2 0.4 1.9 2.3
Subordinated liabilities 10.6 14.2 0.4 0.5 13.3 -
Perpetual Subordinated
Bonds 37.6 45.5 0.4 1.3 6.8 37.0
Total liabilities 11,222.5 11,313.0 3,835.3 944.8 4,836.2 1,696.7
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 459.7 459.7 459.7 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 1,196.0 1,196.0 1,168.5 - - 27.5
Investment securities 149.8 150.0 50.0 100.0 - -
Loans and advances
to customers 8,394.2 18,218.7 114.8 717.7 2,256.2 15,130.0
Derivative assets 8.7 8.7 0.7 1.7 6.2 0.1
Total assets 9,749.1 19,573.8 1,334.4 819.4 2,262.4 15,157.6
------------------------ -------- ------------- --------- ------- ------- ---------
The actual repayment profile of retail deposits may differ from the
analysis above due to the option of early withdrawal with a penalty.
Perpetual Subordinated Bonds have been shown to the next interest rate
reset date.
The actual repayment profile of loans and advances to customers may
differ from the analysis above since many mortgage loans are repaid
prior to the contractual end date.
1. Risk management (continued)
Liquidity risk -- asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following tables
provide an analysis of the Group's encumbered and unencumbered assets:
Group
2020
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 211.1 95.0 2,256.5 113.6 2,676.2
Investment securities 161.0 - 310.2 - 471.2
Loans and advances to
customers 5,638.6 - 2,752.0 10,840.1 19,230.7
Derivative assets - - - 12.3 12.3
Non-financial assets - - - 263.6 263.6
6,010.7 95.0 5,319.2 11,229.6 22,654.5
----------------------------- -------------- -------- -------------- -------- --------
Group
2019
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to credit
institutions 110.4 41.7 1,916.2 136.3 2,204.6
Investment securities 173.0 - 462.3 - 635.3
Loans and advances to
customers 4,922.4 40.4 1,939.6 11,544.4 18,446.8
Derivative assets - - - 21.1 21.1
Non-financial assets - - - 108.9 108.9
5,205.8 82.1 4,318.5 11,810.7 21,417.1
----------------------------- -------------- -------- -------------- -------- --------
(1) Represents assets that are not pledged but that the Group believes
it is restricted from using to secure funding for legal or other
reasons.
(2) Represents assets that are not restricted for use as collateral, but
the Group treats as available as collateral once they are readily
available to secure funding in the normal course of business.
1. Risk management (continued)
Company
2020
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 0.5
Loans and advances to credit
institutions 107.0 34.0 1,356.4 20.7 1,518.1
Investment securities - - 15.0 - 15.0
Loans and advances to
customers 3,064.0 - - 5,467.7 8,531.7
Derivative assets - - - 4.7 4.7
Non-financial assets - - - 3,304.8 3,304.8
3,171.0 34.0 1,371.9 8,797.9 13,374.8
----------------------------- -------------- -------- -------------- -------- --------
Company
2019
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to credit
institutions 62.2 27.5 1,081.8 24.5 1,196.0
Investment securities - - 149.8 - 149.8
Loans and advances to
customers 3,010.0 40.4 910.1 4,433.7 8,394.2
Derivative assets - - - 8.7 8.7
Non-financial assets - - - 3,720.8 3,720.8
3,072.2 67.9 2,142.1 8,187.7 13,469.9
----------------------------- -------------- -------- -------------- -------- --------
(1) Represents assets that are not pledged but that the Group believes
it is restricted from using to secure funding for legal or other
reasons.
(2) Represents assets that are not restricted for use as collateral, but
the Group treats as available as collateral once they are readily
available to secure funding in the normal course of business.
1. Risk management (continued)
Liquidity risk -- liquidity reserves
The tables below analyse the Group's liquidity reserves, where carrying
value is considered to be equal to fair value:
Group Group Company Company
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Unencumbered balances with central
banks 2,256.5 1,916.2 1,356.4 1,081.8
Unencumbered cash and balances
with other banks 113.6 136.3 20.7 24.5
Other cash and cash equivalents 0.5 0.4 0.5 0.4
Unencumbered investment securities 310.2 462.3 15.0 149.8
2,680.8 2,515.2 1,392.6 1,256.5
----------------------------------- ------- ------- ------- -------
Market risk
Market risk is the risk of an adverse change in the Group's income or
the Group's net worth arising from movement in interest rates, exchange
rates or other market prices. Market risk exists, to some extent, in all
the Group's businesses. The Group recognises that the effective
management of market risk is essential to the maintenance of stable
earnings and preservation of shareholder value.
Interest rate risk
The primary market risk faced by the Group is interest rate risk.
Interest rate risk is the risk of loss from adverse movement in the
overall level of interest rates. It arises from mismatches in the timing
of repricing of assets and liabilities, both on and off-balance sheet.
The Group does not run a trading book or take speculative interest rate
positions and therefore all interest rate risk resides in the banking
book (interest rate risk in the banking book (IRRBB)). IRRBB is most
prevalent in mortgage lending where fixed rate mortgages are not funded
by fixed rate deposits of the same duration, or where the fixed rate
risk is not hedged by a fully matching interest rate derivative.
Exposure is mitigated on a continuous basis through the use of
derivatives and reserve allocations.
Currently interest rate risk is managed separately for OSB and CCFS due
to the use of different treasury management and asset and liability
management (ALM) systems. However, the methodology applied to the
setting of risk appetites was aligned across the Group in 2020. Both
Banks apply an economic value at risk approach as well as an earnings at
risk approach for interest rate risk and basis risk. The interest rate
sensitivity is impacted by behavioural assumptions used by the Group;
the most significant of which are prepayments and reserve allocations.
Expected prepayments are modelled based on historical analysis and
current market rates. The reserve allocation strategy is approved by
ALCO and set to reflect the current balance sheet and future plans.
Economic value at risk is measured using the impact of six different
internally derived interest rate scenarios. The internal scenarios are
defined by ALCO and are based on three 'shapes' of curve movement (shift,
twist and flex). Historical data is used to calibrate the severity of
the scenarios to the Group's risk appetite. The Board has set limits on
interest rate risk exposure of 2.25% and 1% of CET1 for OSB and CCFS,
respectively.
1. Risk management (continued)
The table below shows the maximum decreases to net interest income under
these scenarios after taking into account the derivatives:
2020 2019
Group GBPm GBPm
OSB 5.6 4.3
CCFS 0.7 3.7
Group 6.3 8.0
Exposure for earnings at risk is measured by the impact of a +/-50bps
parallel shift in interest rates on the expected profitability of the
Group in the next 12 months. The risk appetite limit is 2% of full year
net interest income (NII). The table below shows the maximum decreases
after taking into account the derivatives:
2020 2019
Group GBPm GBPm
OSB(1) (0.1) 2.5
CCFS 2.2 0.6
Group 2.1 3.1
(1) Due to product floors earnings increases in both the +50bps and
-50bps scenarios.
The Group is also exposed to basis risk. Basis risk is the risk of loss
from an adverse divergence in interest rates. It arises where assets and
liabilities reprice from different variable rate indices. These indices
may be market rates (e.g. bank base rate, LIBOR or SONIA) or
administered (e.g. the Group's SVR, other discretionary variable rates,
or that received on call accounts with other banks).
The Group measures basis risk using the impact of five scenarios on net
interest income over a one-year period including movements such as
diverging base, LIBOR and SONIA rates. Historical data is used to
calibrate the severity of the scenarios to the Group's risk appetite.
The Board has set a limit on basis risk exposure of 4% of full year net
interest income. The table below shows the maximum decreases to net
interest income at 31 December 2020 and 2019:
2020 2019
Group GBPm GBPm
OSB 5.4 9.3
CCFS 8.0 9.7
Group 13.4 19.0
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in respect of
its Indian operations. A 5% increase in exchange rates would result in a
GBP0.4m (2019: GBP0.4m) effect in profit or loss and GBP0.5m (2019:
GBP0.4m) in equity.
The Company is not exposed to foreign exchange risk since all its assets
and liabilities are denominated in Pounds Sterling.
1. Risk management (continued)
Structured entities
The structured entities consolidated within the Group at 31 December
2020 were Canterbury Finance No.2 plc, Canterbury Finance No.3 plc and
CMF 2020-1 plc. These entities hold legal title to a pool of mortgages
which are used as a security for issued debt. The transfer of mortgages
fails derecognition criteria because the Group retained the subordinated
notes and residual certificates issued and as such did not transfer
substantially the risks and rewards of ownership of the securitised
mortgages. Therefore, the Group is exposed to credit, interest rate and
other risks on the securitised mortgages.
Cash flows generated from the structured entities are ring-fenced and
are used to pay interest and principal of the issued debt securities in
a waterfall order according to the seniority of the bonds. The
structured entities are self-funded and the Group is not contractually
or constructively obliged to provide further liquidity or financial
support.
The structured entities consolidated within the Group at 31 December
2019 were Canterbury Finance No.1 plc and Precise Mortgage Funding
2015-1 plc.
Unconsolidated structured entities
Structured entities, which were sponsored by the Group include Precise
Mortgage Funding 2015-2B plc, Precise Mortgage Funding 2017-1B plc,
Charter Mortgage Funding 2017-1 plc, Precise Mortgage Funding 2018-1B
plc, Charter Mortgage Funding 2018-1 plc, Precise Mortgage Funding
2019-1B plc, Canterbury Finance No.1 plc and Precise Mortgage Funding
2020-1B plc.
These structured entities are not consolidated by the Group, as the
Group does not control the entities and is not exposed to the risks and
rewards of ownership from the securitised mortgages. The Group has no
contractual arrangements with the unconsolidated structured entities
other than the investments disclosed in note 18 and servicing the
structured entities' mortgage portfolios.
The Group has not provided any support to the unconsolidated structured
entities listed and has no obligation or intention to do so.
During 2020 the Group received GBP5.0m interest income (2019: GBP2.7m)
and GBP4.6m servicing income (2019: GBP1.1m) from unconsolidated
structured entities.
46. Financial instruments and fair values
1. Financial assets and financial liabilities
The following tables summarise the classification and carrying value of
the Group's financial assets and financial liabilities:
2020
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 0.5
Loans and advances to credit
institutions 17 - - 2,676.2 2,676.2
Investment securities 18 - 285.0 186.2 471.2
Loans and advances to
customers 19 19.1 - 19,211.6 19,230.7
Derivative assets 24 12.3 - - 12.3
31.4 285.0 22,074.5 22,390.9
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - 16,603.1 16,603.1
Amounts owed to credit
institutions 32 - - 3,570.2 3,570.2
Amounts owed to other
customers 34 - - 72.9 72.9
Debt securities in issue 35 - - 421.9 421.9
Derivative liabilities 24 163.6 - - 163.6
Subordinated liabilities 39 - - 10.5 10.5
Perpetual Subordinated Bonds 40 - - 37.6 37.6
163.6 - 20,716.2 20,879.8
----------------------------- ---- ---------- ----- --------- --------------
46. Financial instruments and fair values (continued)
2019
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances to credit
institutions 17 - - 2,204.6 2,204.6
Investment securities 18 - 508.7 126.6 635.3
Loans and advances to
customers 19 22.1 - 18,424.7 18,446.8
Derivative assets 24 21.1 - - 21.1
43.2 508.7 20,756.3 21,308.2
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - 16,255.0 16,255.0
Amounts owed to credit
institutions 32 - - 3,068.8 3,068.8
Amounts owed to other
customers 34 - - 29.7 29.7
Debt securities in issue 35 - - 296.3 296.3
Derivative liabilities 24 92.8 - - 92.8
Subordinated liabilities 39 - - 10.6 10.6
Perpetual Subordinated Bonds 40 - - 37.6 37.6
92.8 - 19,698.0 19,790.8
----------------------------- ---- ---------- ----- --------- --------------
1. Financial instruments and fair values (continued)
2020
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 0.5
Loans and advances to credit
institutions 17 - - 1,518.1 1,518.1
Investment securities 18 - 15.0 - 15.0
Loans and advances to
customers 19 - - 8,531.7 8,531.7
Derivative assets 24 4.7 - - 4.7
4.7 15.0 10,050.3 10,070.0
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - 9,705.3 9,705.3
Amounts owed to credit
institutions 32 - - 1,900.5 1,900.5
Amounts owed to other
customers 34 - - 5.8 5.8
Derivative liabilities 24 93.8 - - 93.8
Subordinated liabilities 39 - - 10.5 10.5
Perpetual Subordinated Bonds 40 - - 37.6 37.6
93.8 - 11,659.7 11,753.5
----------------------------- ---- ---------- ----- --------- --------------
2019
Fair value
through
profit or Amortised Total carrying
loss FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances to credit
institutions 17 - - 1,196.0 1,196.0
Investment securities 18 - 149.8 - 149.8
Loans and advances to
customers 19 - - 8,394.2 8,394.2
Derivative assets 24 8.7 - - 8.7
8.7 149.8 9,590.6 9,749.1
----------------------------- ---- ---------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 33 - - 9,435.7 9,435.7
Amounts owed to credit
institutions 32 - - 1,671.1 1,671.1
Amounts owed to other
customers 34 - - 8.9 8.9
Derivative liabilities 24 54.3 - - 54.3
Subordinated liabilities 39 - - 10.6 10.6
Perpetual Subordinated Bonds 40 - - 37.6 37.6
54.3 - 11,163.9 11,218.2
----------------------------- ---- ---------- ----- --------- --------------
1. Financial instruments and fair values (continued)
The Group has no financial assets nor financial liabilities classified
as held for trading.
1. Fair values
The following tables summarise the carrying value and estimated fair
value of financial instruments not measured at fair value in the
Statement of Financial Position:
2020 2019
Carrying Estimated Carrying Estimated
value fair value value fair value
Group GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.4 0.4
Loans and advances to credit
institutions 2,676.2 2,676.2 2,204.6 2,204.6
Investment securities 186.2 186.6 126.6 126.6
Loans and advances to customers 19,211.6 19,352.0 18,424.7 18,654.2
22,074.5 22,215.3 20,756.3 20,985.8
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 16,603.1 16,666.1 16,255.0 16,259.7
Amounts owed to credit
institutions 3,570.2 3,570.2 3,068.8 3,068.8
Amounts owed to other customers 72.9 72.9 29.7 29.7
Debt securities in issue 421.9 421.9 296.3 296.3
Subordinated liabilities 10.5 10.7 10.6 10.7
Perpetual Subordinated Bonds 37.6 32.3 37.6 33.2
20,716.2 20,774.1 19,698.0 19,698.4
-------------------------------- -------- ----------- -------- -----------
2020 2019
Carrying Estimated Carrying Estimated
value fair value value fair value
Company GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.4 0.4
Loans and advances to credit
institutions 1,518.1 1,518.1 1,196.0 1,196.0
Loans and advances to customers 8,531.7 8,670.1 8,394.2 8,566.3
10,050.3 10,188.7 9,590.6 9,762.7
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 9,705.3 9,736.4 9,435.7 9,435.8
Amounts owed to credit
institutions 1,900.5 1,900.5 1,671.1 1,671.1
Amounts owed to other customers 5.8 5.8 8.9 8.9
Subordinated liabilities 10.5 10.7 10.6 10.7
Perpetual Subordinated Bonds 37.6 32.3 37.6 33.2
11,659.7 11,685.7 11,163.9 11,159.7
-------------------------------- -------- ----------- -------- -----------
1. Financial instruments and fair values (continued)
The fair values in these tables are estimated using the valuation
techniques below. The estimated fair value is stated as at 31 December
and may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of each financial
instrument.
Cash in hand
This represents physical cash across the Group's branch network where
fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current accounts and
call accounts with central governments and other banks with an original
maturity of less than three months. Fair value is not considered to be
materially different to carrying value.
Investment Securities
Investment securities' fair values are provided by a third party and are
based on the market values of similar financial instruments.
Loans and advances to customers
This mainly represents secured mortgage lending to customers. The fair
value of fixed rate mortgages has been estimated by discounting future
cash flows at current market rates of interest. Future cash flows
include the impact of expected credit losses. The interest rate on
variable rate mortgages is considered to be equal to current market
product rates and as such fair value is estimated to be equal to
carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated by
discounting future cash flows at current market rates of interest.
Retail deposits at variable rates and deposits payable on demand are
considered to be at current market rates and as such fair value is
estimated to be equal to carrying value.
Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE TFS, TFSME and
ILTR, warehouse funding and commercial repos. Fair value is considered
to be equal to carrying value.
Amounts owed to other customers
This represents fixed rate saving products to corporations and local
authorities with original maturities greater than three months. The fair
value is estimated by discounting future cash flows at current market
rates of interest.
Debt securities in issue
While the Group's debt securities in issue are listed, the quoted prices
for an individual note may not be indicative of the fair value of the
issue as a whole, due to the specialised nature of the market in such
instruments and the limited number of investors participating in it.
Fair value is not considered to be materially different to carrying
value.
Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated by using quoted
market prices of similar instruments at the reporting date. The PSBs are
listed on the London Stock Exchange with fair value being the quoted
market price at the reporting date.
1. Financial instruments and fair values (continued)
1. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable: Group Carrying amount Principal
amount Level 1 Level 2 Level 3 Total 2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets Investment securities 285.0 284.7 - 285.0 -
285.0 Loans and advances to customers 19.1 21.8 - - 19.1 19.1 Derivative
assets 12.3 8,687.8 - 12.3 - 12.3 316.4 8,994.3 - 297.3 19.1 316.4
Financial liabilities Derivative liabilities 163.6 10,392.4 -
163.6 - 163.6 Group Carrying amount Principal amount Level 1 Level 2
Level 3 Total 2019 GBPm GBPm GBPm GBPm GBPm GBPm Financial assets
Investment securities 508.7 509.5 149.8 358.9 - 508.7 Loans and advances
to customers 22.1 24.8 - - 22.1 22.1 Derivative assets 21.1 7,795.4 -
21.0 0.1 21.1 551.9 8,329.7 149.8 379.9 22.2 551.9 Financial
liabilities Derivative liabilities 92.8 9,982.4 - 92.8 - 92.8 Company
Carrying amount Principal amount Level 1 Level 2 Level 3 Total 2020 GBPm
GBPm GBPm GBPm GBPm GBPm Financial assets Investment
securities 15.0 15.0 - 15.0 - 15.0 Derivative assets 4.7 3,585.0 - 4.7 -
4.7 19.7 3,600.0 - 19.7 - 19.7 Financial liabilities
Derivative liabilities 93.8 3,729.0 - 93.8 - 93.8 46. Financial
instruments and fair values (continued) Company Carrying amount Principal
amount Level 1 Level 2 Level 3 Total 2019 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets Investment securities 149.8 150.0 149.8 - - 149.8
Derivative assets 8.7 3,080.0 - 8.7 - 8.7 158.5 3,230.0 149.8 8.7 -
158.5 Financial liabilities Derivative liabilities 54.3 4,462.9 - 54.3 -
54.3 Level 1: Fair values that are based entirely on quoted market prices
(unadjusted) in an actively traded market for identical assets and
liabilities that the Group has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1 instruments.
Since valuations are based on readily available observable market prices,
this makes them most reliable, reduces the need for management judgement
and estimation and also reduces the uncertainty associated with
determining fair values. Level 2: Fair values that are based on one or
more quoted prices in markets that are not active or for which all
significant inputs are taken from directly or indirectly observable
market data. These include valuation models used to calculate the present
value of expected future cash flows and may be employed either when no
active market exists or when there are no quoted prices available for
similar instruments in active markets. Level 3: Fair values for which any
one or more significant input is not based on observable market data and
the unobservable inputs have a significant effect on the instrument's
fair value. Valuation models that employ significant unobservable inputs
require a higher degree of management judgement and estimation in
determining the fair value. Management judgement and estimation are
usually required for the selection of the appropriate valuation model to
be used, determination of expected future cash flows on the financial
instruments being valued, determination of the probability of
counterparty default and prepayments, determination of expected
volatilities and correlations and the selection of appropriate discount
rates.
1. Financial instruments and fair values (continued)
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable: Estimated fair value Group
Carrying amount Principal amount Level 1 Level 2 Level 3 Total 2020 GBPm
GBPm GBPm GBPm GBPm GBPm Financial assets Cash in hand 0.5
0.5 - 0.5 - 0.5 Loans and advances to credit institutions 2,676.2 2,676.1
- 2,676.2 - 2,676.2 Investment securities 186.2 186.2 - 186.6 - 186.6
Loans and advances to customers 19,211.6 19,200.1 - 3,314.5 16,037.5
19,352.0 22,074.5 22,062.9 - 6,177.8 16,037.5 22,215.3 Financial
liabilities Amounts owed to retail depositors 16,603.1
16,507.3 - 5,546.1 11,120.0 16,666.1 Amounts owed to credit institutions
3,570.2 3,569.3 - 3,570.2 - 3,570.2 Amounts owed to other customers 72.9
72.7 - - 72.9 72.9 Debt securities in issue 421.9 421.8 - 421.9 - 421.9
Subordinated liabilities 10.5 10.3 - - 10.7 10.7 Perpetual Subordinated
Bonds 37.6 37.0 32.3 - - 32.3 20,716.2 20,618.4 32.3 9,538.2 11,203.6
20,774.1 Group Carrying amount Principal amount Level 1 Level 2 Level 3
Total 2019 GBPm GBPm GBPm GBPm GBPm GBPm Financial assets Cash in hand
0.4 0.4 - 0.4 - 0.4 Loans and advances to credit institutions 2,204.6
2,204.3 - 2,204.6 - 2,204.6 Investment securities 126.6 126.4 126.6 - -
126.6 Loans and advances to customers 18,424.7 18,281.3 - 3,409.1
15,245.1 18,654.2 20,756.3 20,612.4 126.6 5,614.1 15,245.1 20,985.8
Financial liabilities Amounts owed to retail depositors 16,255.0 16,133.5
- 3,817.8 12,441.9 16,259.7 Amounts owed to credit institutions 3,068.8
3,063.3 - 3,068.8 - 3,068.8 Amounts owed to other customers 29.7 29.5 - -
29.7 29.7 Debt securities in issue 296.3 295.5 - 296.3 - 296.3
Subordinated liabilities 10.6 10.4 - - 10.7 10.7 Perpetual Subordinated
Bonds 37.6 37.0 33.2 - - 33.2 19,698.0 19,569.2 33.2 7,182.9 12,482.3
19,698.4 46. Financial instruments and fair values (continued)
Estimated fair value Company Carrying amount Principal amount Level 1
Level 2 Level 3 Total 2020 GBPm GBPm GBPm GBPm GBPm GBPm Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5 Loans and advances to credit
institutions 1,518.1 1,518.1 - 1,518.1 - 1,518.1 Loans and advances to
customers 8,531.7 8,702.5 - 2,382.8 6,287.3 8,670.1 10,050.3 10,221.1 -
3,901.4 6,287.3 10,188.7 Financial liabilities Amounts owed
to retail depositors 9,705.3 9,645.8 - 3,429.7 6,306.7 9,736.4 Amounts
owed to credit institutions 1,900.5 1,900.0 - 1,900.5 - 1,900.5 Amounts
owed to other customers 5.8 5.8 - - 5.8 5.8 Subordinated liabilities 10.5
10.3 - - 10.7 10.7 Perpetual Subordinated Bonds 37.6 37.0 32.3 - - 32.3
11,659.7 11,598.9 32.3 5,330.2 6,323.2 11,685.7 Estimated fair value
Company Carrying amount Principal amount Level 1 Level 2 Level 3 Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm Financial assets Cash in hand 0.4 0.4
- 0.4 - 0.4 Loans and advances to credit institutions 1,196.0 1,195.7 -
1,196.0 - 1,196.0 Loans and advances to customers 8,394.2 8,533.2 -
2,431.5 6,134.8 8,566.3 9,590.6 9,729.3 - 3,627.9 6,134.8 9,762.7
Financial liabilities Amounts owed to retail depositors 9,435.7 9,364.5 -
3,817.8 5,618.0 9,435.8 Amounts owed to credit institutions 1,671.1
1,667.8 - 1,671.1 - 1,671.1 Amounts owed to other customers 8.9 8.8 - -
8.9 8.9 Subordinated liabilities 10.6 10.4 - - 10.7 10.7 Perpetual
Subordinated Bonds 37.6 37.0 33.2 - - 33.2 11,163.9 11,088.5 33.2
5,488.9 5,637.6 11,159.7 47. Pension schemeDefined contribution
schemeThe amount charged to profit or loss in respect of contributions to
the Group's defined contribution and stakeholder pension arrangements is
the contribution payable in the period. The total pension cost in the
year amounted to GBP4.3m (2019: GBP3.0m). 48. Country by country
reportingCountry by Country Reporting (CBCR) was introduced through
Article 89 of CRD IV, aimed at the banking and capital markets industry.
The name, nature of activities and geographic location of the Group's
companies are presented below: Jurisdiction Country Name Activities UK1
England OneSavings Bank plc Commercial banking 5D Finance Limited
Broadlands Finance Limited Charter Court Financial Services Group Plc
Charter Court Financial Services Limited Charter Mortgages Limited
Easioption Limited Exact Mortgage Experts Limited Guernsey Home Loans
Limited Heritable Development Finance Limited Inter Bay Financial I
Limited Inter Bay Financial II Limited InterBay Asset Finance Limited
Interbay Funding, Ltd Interbay Group Holdings Limited InterBay Holdings
Ltd Interbay ML, Ltd Jersey Home Loans Limited Prestige Finance Limited
Reliance Property Loans Limited Rochester Mortgages Limited Guernsey
Guernsey Home Loans Limited Jersey Jersey Home Loans Limited UK England
Canterbury Finance No. 2 plc Special purpose vehicle Canterbury Finance
No. 3 plc CMF 2020-1 plc CML Warehouse Number 1 Limited CML Warehouse
Number 2 Limited Precise Mortgage Funding 2014-1 plc Precise Mortgage
Funding 2014-2 plc Precise Mortgage Funding 2015-1 plc Precise Mortgage
Funding 2015-3R plc India India OSB India Private Limited Back office
processing 1 Guernsey Home Loans Limited (Guernsey) and Jersey Home Loans
Limited (Jersey) are incorporated in Guernsey and Jersey respectively but
are considered to be located in the UK as they are managed and controlled
in the UK with no permanent establishments in Guernsey or Jersey.
1. Country by country reporting (continued)
Other disclosures required by the CBCR directive are provided below: 2020
UK India Consolidation2 Total Average number of employees 1,330 486 -
1,816 Turnover1, GBPm 508.3 9.4 (9.1) 508.6 Profit/(loss) before tax,
GBPm 260.0 1.3 (1.0) 260.3 Corporation tax paid, GBPm 128.6 0.2 - 128.8
2019 UK India Consolidation2 Total Average number of employees 1,335
454 - 1,789 Turnover1, GBPm 343.1 8.9 (8.6) 343.4 Profit/(loss) before
tax, GBPm 208.8 1.6 (1.3) 209.1 Corporation tax paid, GBPm 52.6 0.4 -
53.0 1 Turnover represents total income before impairment losses,
regulatory provisions and operating costs, but after net interest, net
commissions and fees, gains and losses on financial instruments and
external servicing fees.2 Relates to a management fee from Indian
subsidiaries to OneSavings Bank plc for providing back office processing.
The tables below reconcile tax charged and tax paid during the year: UK
India Total 2020 GBPm GBPm GBPm Tax charge 63.8 0.3 64.1 Effects of:
Other timing differences 15.7 (0.1) 15.6 Tax outside of profit or
loss 0.2 - 0.2 Prior year tax paid during the year 41.8 - 41.8 Tax in
relation to future periods prepaid 7.1 - 7.1 Tax paid 128.6 0.2 128.8
UK India Total 2019 GBPm GBPm GBPm Tax charge 49.8 0.5 50.3 Effects
of: Other timing differences 4.3 (0.1) 4.2 Tax outside of profit or loss
(0.9) - (0.9) Prior year tax paid during the year 22.1 - 22.1 Current
year tax to be paid after the reporting date (22.7) - (22.7) Tax paid
52.6 0.4 53.0 49. Operating segmentsThe Group segments its lending
business and operates under two segments in line with internal reporting
to the Board:
-- OSB
-- CCFS
The Group separately discloses the impact of Combination accounting but
does not consider this a business segment. The financial position and
results of operations of the above segments are summarised below: OSB
CCFS Combination Total 2020 GBPm GBPm GBPm GBPm Balances at the reporting
date Gross loans and advances to customers 11,131.4 8,001.2 209.1
19,341.7 Expected credit losses (83.6) (28.2) 0.8 (111.0) Loans and
advances to customers 11,047.8 7,973.0 209.9 19,230.7 Capital expenditure
5.3 2.4 - 7.7 Depreciation and amortisation 7.1 2.4 4.3 13.8 Profit or
loss for the year Net interest income/(expense) 332.8 201.2
(61.8) 472.2 Other income 18.8 17.4 0.2 36.4 Total income/(expense) 351.6
218.6 (61.6) 508.6 Administrative expenses (95.3) (57.5) (4.3) (157.1)
Provisions - (0.1) - (0.1) Impairment of financial assets (50.7) (20.5)
0.2 (71.0) Impairment of intangible assets - - (7.0) (7.0) Integration
costs (7.5) (2.3) - (9.8) Exceptional items (3.3) - - (3.3) Profit/(loss)
before taxation 194.8 138.2 (72.7) 260.3 Taxation (46.9) (32.0) 14.8
(64.1) Profit/(loss) for the year 147.9 106.2 (57.9) 196.2 49.
Operating segments (continued) OSB CCFS Combination Total 2019 GBPm GBPm
GBPm GBPm Balances at the reporting date Gross loans and advances to
customers 10,820.6 7,374.4 294.7 18,489.7 Expected credit losses (35.6)
(8.0) 0.7 (42.9) Loans and advances to customers 10,785.0 7,366.4 295.4
18,446.8 Capital expenditure 10.2 1.1 - 11.3 Depreciation and
amortisation 6.3 1.3 0.6 8.2 Profit or loss for the year Net interest
income/(expense) 316.2 50.1 (21.6) 344.7 Other (expense)/income (12.9)
8.3 3.3 (1.3) Total income/(expense) 303.3 58.4 (18.3) 343.4
Administrative expenses (92.3) (15.1) (1.3) (108.7) Provisions 0.1 (0.1)
- - Impairment of financial assets (11.9) (0.1) (3.6) (15.6) Gain on
Combination with CCFS - - 10.8 10.8 Integration costs (2.5) (2.7) - (5.2)
Exceptional items (15.6) - - (15.6) Profit/(loss) before taxation 181.1
40.4 (12.4) 209.1 Taxation (47.1) (10.2) 7.0 (50.3) Profit/(loss) for the
year 134.0 30.2 (5.4) 158.8 50. Adjustments for non-cash items and
changes in operating assets and liabilities Group Group Company Company
2020 2019 2020 2019 GBPm GBPm GBPm GBPm Adjustments for non-cash items:
Depreciation and amortisation 13.8 8.2 5.7 5.4 Interest on
investment securities (7.5) - (0.8) - Interest on subordinated
liabilities 0.8 0.7 0.8 0.7 Interest on Perpetual Subordinated Bonds 1.7
1.8 1.7 1.8 Interest on securitised debt 3.4 0.8 - - Interest on
financing debt 8.4 2.4 4.4 0.3 Impairment charge on loans 71.0 15.6 40.4
7.5 Impairment on intangible assets acquired on Combination 7.0 - - -
(Gains)/losses on sale of financial instruments (20.0) 0.1 (17.8) 0.1
Provisions 0.1 - - - Interest on lease liabilities 0.3 0.1 0.1 0.1 Fair
value (gains)/losses on financial instruments (7.4) 3.3 (0.2) 13.3
Share-based payments 5.1 4.0 4.9 4.0 Gain on Combination with CCFS -
(10.8) - - Total adjustments for non-cash items 76.7 26.2 39.2 33.2
Changes in operating assets and liabilities: Increase in loans
and advances to credit institutions (154.0) (36.8) (51.3) (66.2) Increase
in loans to customers (1,705.0) (2,230.8) (639.2) (1,193.5) Increase in
intercompany balances - - (113.9) (644.0) Increase in retail deposits
348.1 1,637.8 269.6 1,363.8 Net decrease/(increase) in other assets 1.3
(4.8) (0.6) (1.9) Net decrease in derivatives and hedged items (64.3)
(20.1) (31.7) (14.0) Net increase/(decrease) in other customers deposits
43.2 (19.2) (3.1) (24.0) Net decrease in other liabilities (6.3) (37.3)
(3.5) 2.4 Exchange differences on working capital - (0.6) - - Total
changes in operating assets and liabilities (1,537.0) (711.8) (573.7)
(577.4) 51. Events after the reporting dateOn 26 February 2021, the
Group completed the purchase of a c.GBP55m portfolio of UK residential
mortgages, which were serviced by the Group, from a third party. The
portfolio was acquired at a discount to current balances. On 17 March
2021, OSB GROUP PLC issued a trading update stating that it had become
aware of potential fraudulent activity by a third party in relation to
one of the funding lines provided by the Group, secured against lease
receivables and the underlying hard assets. The Group had an outstanding
receivable against this funding line of GBP28.6m as at 31 December 2020.
Following an initial report from the Administrator to the third-party
company, appointed by the Group the Group concluded that conditions
existed as at the end of the reporting period which make this an
adjusting post balance sheet event, with an impairment of GBP20.0m
recognised in 2020. On 22 April 2021, Canterbury Finance No.1 plc
(Canterbury 1) sent out a notice from the Company to the Canterbury 1
note holders and the certificate holders informing them of an operational
oversight at the Company whereby a proportion of the Canterbury 1
Retention Portfolio, being 107 loans valued at GBP23.7m that the Company
undertook to retain as part of the Canterbury 1 securitisation, was
inadvertently included in the portfolio of mortgages acquired by
Canterbury Finance No.3 plc (Canterbury 3) for inclusion in a
securitisation issued on 4 September 2020 (the Canterbury 3
Securitisation). The Company judges the likelihood of any losses that the
Company would have suffered on the Retention Portfolio being mitigated by
the transfer of the Canterbury 1 Retention Portfolio to Canterbury 3 to
be remote. Nonetheless, to rectify the operational oversight, the Company
put in place a guarantee for the benefit of the Canterbury 3
Securitisation which covers losses on the proportion of the Canterbury 1
Retention Portfolio sold to Canterbury 3 in the remote event that such
losses were to result in losses on the notes in the Canterbury 3
Securitisation held by third-party investors. On 27 April 2021, the board
approved an interim dividend from the Company to its parent, OSB GROUP
PLC (OSBG), for GBP64.9m payable on the 27 May 2021 subject to the
shareholders of OSBG approving the OSBG recommended dividend at the
Annual General Meeting on the 27 May 2021. 52. Controlling partyAs at
31 December 2020 OSB was a wholly owned subsidiary of OSB GROUP PLC
(OSBG). OSBG is the largest group preparing consolidated financial
statements of which the Company is a member. Copies of OSBG's financial
statements may be obtained from the Company Secretary at the registered
office: OSB House, Quayside, Chatham Maritime, Chatham, Kent, ME4 4QZ.
53. Capital managementThe Company's capital management approach is to
provide a sufficient capital base to cover business risks and support
future business development. The Company remained, throughout the year,
compliant with its capital requirements as set out by the PRA, the
Group's primary prudential supervisor. The Company reports on an
individual consolidation basis (OSB solo) which includes the Company and
subsidiaries except for the offshore servicing entity OSB India, Special
Purpose Vehicles relating to securisations and the CCFS entities acquired
in October 2019. The capital management position is based on the three
'pillars' of Basel II. Under Pillar 1, the minimum capital requirements
are based on 8% of risk-weighted assets. Under Pillar 2, the regulated
entities complete an annual self-assessment of risks known as the
Internal Capital Adequacy Assessment Process (ICAAP). The PRA applies
additional requirements to this assessment amount to cover risks under
Pillar 2 to generate a Total Capital Requirement. Further, the PRA sets
capital buffers and the regulated entities apply for imposition of the
requirements and modification of rules incorporating the capital buffers
and Pillar 2 pursuant to the Financial Services and Markets Act 2000.
Basel III came into force through CRD IV. Basel III complements and
enhances Basel I and II with additional safety measures. Basel III
changed definitions of regulatory capital, introduced new capital buffers,
a non-risk adjusted leverage ratio, liquidity ratios and modified the way
regulatory capital is calculated. The ultimate responsibility for capital
adequacy rests with the Board of Directors. The Group's ALCO is
responsible for the management of the capital process within the risk
appetite defined by the Board, including approving policy, overseeing
internal controls and setting internal limits over capital ratios. The
regulated entities actively manage their capital position and report this
on a regular basis to the Board and senior management via the ALCO and
other governance committees. Capital requirements are included within
budgets, forecasts and strategic plans with initiatives being executed
against this plan.
1. Capital management (continued)
The OSB solo Pillar 1 capital information is presented below: (Unaudited)
2020 (Unaudited) 2019 GBPm GBPm Common Equity Tier 1 capital Called
up share capital 4.5 4.5 Share premium, capital contribution and
share-based payment reserve 8.0 875.9 Retained earnings 1,568.0 528.8
Transfer reserve - (12.8) Other reserves (1.1) (1.0) Total equity
attributable to ordinary shareholders 1,579.4 1,395.4 Foreseeable
dividends (39.0) (25.1) IFRS 9 transitional adjustment1 2.0 2.4 COVID-19
ECL transitional adjustment2 20.7 - Solo consolidation adjustments (7.8)
(6.9) Deductions from Common Equity Tier 1 capital Investment in
subsidiary (580.1) (603.6) Prudent valuation adjustment3 (0.1) (0.2)
Intangible assets4 (7.3) (8.3) Deferred tax asset (0.9) (0.9) Common
Equity Tier 1 capital 966.9 752.8 Additional Tier 1 capital AT1
securities 60.0 60.0 Total Tier 1 capital 1,026.9 812.8 Tier 2 capital
Subordinated debt and PSBs 47.3 47.4 Deductions from Tier 2 capital
(2.7) (0.7) Total Tier 2 capital 44.6 46.7 Total regulatory capital
1,071.5 859.5 Risk-weighted assets (unaudited) 5,626.3 5,351.4 1 The
regulatory capital includes a GBP4.9m add-back under IFRS 9 transitional
arrangements. This represents 75% of the IFRS 9 transitional adjustment
booked directly to retained earnings of GBP6.5m. The full impact of IFRS
9, if applied, would reduce total regulatory capital to GBP1,561.1m.2 The
COVID-19 ECL transitional adjustment relates to the increase in Stage 1
and Stage 2 ECL following the impacts of COVID-19 and for which
transitional rules are being adopted for regulatory capital purposes.3
OSB solo has adopted the simplified approach under the Prudent Valuation
rules, recognising a deduction equal to 0.1% of fair value assets and
liabilities after adjusting for hedge accounting.4 All software assets
continue to be fully deducted from capital in light of the pending
intention of the PRA to consult on the CRR 'Quick Fix' package in this
area.
1. Capital management (continued)
The movement in CET1 during the year was as follows: (Unaudited) 2020
(Unaudited) 2019 GBPm GBPm At 1 January 752.8 561.6 Movement in
retained earnings 1,039.2 89.2 Shares issued from Sharesave Scheme
vesting 2.6 0.4 Shares issued on Combination with CCFS - 707.1 Movement
in other reserves (857.8) - Movement in investment in subsidiary 23.5
(603.6) Movement in foreseeable dividends (13.9) 0.1 Movement in solo
consolidation adjustment (0.9) (1.5) IFRS 9 transitional adjustment (0.4)
(0.3) COVID-19 ECL transitional adjustment 20.7 - Movement in prudent
valuation adjustment 0.1 (0.1) Net decrease/(increase) in intangible
assets 1.0 (0.6) Movement in deferred tax asset for carried forward
losses - 0.5 At 31 December 966.9 752.8 ALCO Group Assets and Liabilities
Committee IRB Internal Ratings-Based approach to credit risk BoE Bank of
England CCFS Charter Court Financial Services Group plc LCR Loss Given
Default CEO Chief Executive Officer LIBOR London Interbank Offered Rate
CFO Chief Financial Officer LTV Loan to value CRD IV Capital Requirement
Directive and Regulation NIM Net Interest Margin CRO Chief Risk Officer
NPS Net Promoter Score DSBP Deferred Share Bonus Plan OSB OneSavings Bank
plc EAD Exposure at Default OSBG OSB GROUP PLC ECL Expected Credit Loss
PD Probability of Default EIR Effective Interest Rate PPD Propensity to
go to Possession Given Default EPS Earnings Per Share EU European Union
PRA Prudential Regulation Authority FCA Financial Conduct Authority PSBs
Perpetual Subordinated Bonds FRC Financial Reporting Council PSP
Performance Share Plan FSCS Financial Services Compensation Scheme RMBS
Residential Mortgage-Backed Securities FSD Forced Sale Discount RoE
Return on equity FTSE Financial Times Stock Exchange RWA Risk weighted
assets HPI House Price Inflation SAYE Save As You Earn or Sharesave IAS
International Accounting Standard SDLT Stamp Duty Land Tax ICAAP Internal
Capital Adequacy Assessment Process SICR Significant Increase in Credit
Risk IFRS International Financial Reporting Standards SID Senior
Independent Director ILAAP Internal Liquidity Adequacy Assessment Process
SME Small Medium Enterprise SONIA Sterling Overnight Index Average ILTR
Indexed Long-Term Repo SRMF Strategic Risk Management Framework IPO
Initial Public Offering TFS Term Funding Scheme
(END) Dow Jones Newswires
April 27, 2021 13:25 ET (17:25 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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