TIDMOSB
LEI: 213800ZBKL9BHSL2K459
OSB GROUP PLC
Interim report for the six months ended 30 June 2021
OSB GROUP PLC (OSBG or the Group), the specialist lending and
retail savings group, announces today its results for the six
months ended 30 June 2021.
Following the Combination with Charter Court Financial Services
Group plc (CCFS) on 4 October 2019, this press release includes
results on an underlying basis, in addition to the statutory basis,
which Management believe provide a more consistent basis for
comparing the Group's results between financial periods. Underlying
results exclude exceptional items, integration costs and other
acquisition-related items (see the reconciliation in the Financial
review).
Highlights
-- Underlying profit before tax1 increased 62% to a record GBP252.8m (H1
2020: GBP156.3m) and statutory profit before tax more than doubled to
GBP221.9m (H1 2020: GBP99.3m) driven predominantly by a release of
impairment provisions and a lower cost of retail funds
-- Underlying and statutory net loan book grew by 6% to GBP20.3bn and
GBP20.4bn, respectively in the period (FY 2020: GBP19.0bn and GBP19.2bn).
Organic originations in the first six months of 2021 were GBP2.5bn, up
16% from GBP2.1bn in the prior period
-- Underlying net interest margin (NIM)2 of 268bps (H1 2020: 250bps) and
statutory NIM of 236bps (H1 2020: 217bps) improved, primarily due to
lower cost of retail funds
-- Growth in income delivered an improved underlying cost to income ratio3
of 25% (H1 2020: 26%) and 28% on a statutory basis (H1 2020: 31%)
-- Underlying and statutory loan loss ratios4 improved to -15bps (H1 2020:
60bps and 59bps respectively) as the economy and outlook improved,
leading to a provision release. Arrears remained stable with balances
greater than three months at 1.3% and 0.5% for OSB and CCFS respectively
(31 December 2020: 1.3% and 0.5%)
-- Fully-loaded Common Equity Tier 1 capital ratio strengthened to 18.7% (31
December 2020: 18.3%) benefiting from profitability
-- Underlying return on equity5 of 24% (H1 2020: 18%) and statutory return
on equity of 19% (H1 2020: 9%) reflecting the increase in profitability
partially offset by higher equity
-- Underlying basic earnings per share6 of 41.8p (H1 2020: 26.1p) and
statutory basic earnings per share of 35.5p (H1 2020: 15.5p)
-- Interim dividend7 of 4.9 pence per share (H1 2020: nil) representing
one-third of the total 2020 dividend, in line with the Group's stated
policy
Commenting on the results, Group CEO, Andy Golding said:
"I am delighted with the strong financial and operational
performance of the Group in the first half of 2021, despite ongoing
challenges presented by the pandemic. The underlying net loan book
grew by 6%, supported by originations of GBP2.5bn at attractive
margins, as demand remained strong in our Buy-to-Let and
Residential sub-segments despite the Group maintaining tighter
criteria than pre-COVID.
We continue to produce strong returns for our shareholders, with
record half-yearly underlying profit before tax of GBP252.8m, up
62% on the first half of 2020, earnings per share of 41.8 pence, up
60% and underlying return on equity strengthening to 24%.
Credit performance remained strong in the first half, with
stable arrears, and the improving economy and outlook led to a
release of impairment provisions, as we updated our forward-looking
macroeconomic scenarios and rising house prices outperformed our
modelled assumptions.
Whilst we continue to control lending in our more cyclical
businesses, demand remains strong in our Buy-to-Let and Residential
segments, where we have recently reintroduced pre-pandemic
criteria, due to the improving economic backdrop and outlook. The
new products will help build our pipeline for completions in the
first quarter of 2022.
Based on our current pipeline and application levels, we remain
confident to deliver underlying net loan book growth of c.10% for
2021. We now expect full year underlying NIM to be c.270bps and the
underlying cost to income ratio to be marginally higher than in the
first half.
We remain focused on establishing an optimal capital structure
which supports both the strategy of the Group and shareholder
distributions. We will also update the market on our capital
management framework, including the evolution of our target capital
ratios and distribution policy to supplement dividends, as greater
clarity is obtained on our future capital requirements under Basel
3.1 and the timing of becoming an Internal Ratings Based bank.
We remain cognisant of ongoing uncertainty over the true impact
of the pandemic once Government support ends. However, our
resilient business model, strong capital position, secured loan
book and strong risk management capabilities, continue to position
us well to respond to the opportunities and challenges ahead and to
deliver attractive and sustainable returns for our shareholders
across the cycle."
Enquiries:
OSB GROUP PLC Brunswick Group
Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 838973 t: 020 7404 5959
Results presentation
A webcast presentation for analysts will be held at 9:30am on
Thursday 19 August.
The presentation will be webcast or call only and will be
available on the OSB Group website at
www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is
518429. Registration is open immediately.
About OSB GROUP PLC
OneSavings Bank plc (OSB) began trading as a bank on 1 February
2011 and was admitted to the main market of the London Stock
Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in
June 2015. On 4 October 2019, OSB acquired Charter Court Financial
Services Group plc (CCFS) and its subsidiary businesses. On 30
November 2020, OSB GROUP PLC became the listed entity and holding
company for the OSB Group. The Group provides specialist lending
and retail savings and is authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the
Financial Conduct Authority and Prudential Regulation Authority.
The Group reports under two segments, OneSavings Bank and Charter
Court Financial Services.
OneSavings Bank (OSB)
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England funding schemes,
including the Term Funding Scheme and the Term Funding Scheme for
SMEs.
Charter Court Financial Services Group (CCFS)
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise,
best-of-breed automated technology and systems, efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is provided by securitisation programmes and the Bank of England
funding schemes, including the Term Funding Scheme and the Term
Funding Scheme for SMEs.
Notes
1. Before exceptional items, integration costs and other
acquisition-related items of GBP30.9m (H1 2020: GBP57.0m)
2. Net interest income as a percentage of a 7 point average of
interest earning assets, annualised on an actual days basis
3. Administrative expenses as a percentage of total income
4. Impairment losses as a percentage of a 7 point average of
gross loans and advances, annualised
5. Profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on non-controlling interest
securities, gross of tax, as a percentage of a 7 point average of
shareholders' equity (excluding GBP60m of non-controlling interest
securities), annualised
6. Profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on non-controlling interest
securities, gross of tax, divided by the weighted average number of
ordinary shares in issue
7. The declared interim dividend of 4.9 pence per share is based
on one-third of the total 2020 dividend of 14.5 pence per share (H1
2020: nil)
Important disclaimer
This document should be read in conjunction with the documents
distributed by OSB GROUP PLC (OSBG) through the Regulatory News
Service (RNS). This document is not audited and contains certain
forward-looking statements with respect to the business, strategy
and plans of OSBG, its current goals, beliefs, intentions,
strategies and expectations relating to its future financial
condition, performance and results. Such forward-looking statements
include, without limitation, those preceded by, followed by or that
include the words 'targets', 'believes', 'estimates', 'expects',
'aims', 'intends', 'will', 'may', 'anticipates', 'projects',
'plans', 'forecasts', 'outlook', 'likely', 'guidance', 'trends',
'future', 'would', 'could', 'should' or similar expressions or
negatives thereof but are not the exclusive means of identifying
such statements. Statements that are not historical or current
facts, including statements about OSBG's, its directors' and/or
management's beliefs and expectations, are forward-looking
statements. By their nature, forward-looking statements involve
risk and uncertainty because they relate to events and depend upon
circumstances that may or may not occur in the future that could
cause actual results or events to differ materially from those
expressed or implied by the forward-looking statements. Factors
that could cause actual business, strategy, plans and/or results
(including but not limited to the payment of dividends) to differ
materially from the plans, objectives, expectations, estimates and
intentions expressed in such forward-looking statements made by
OSBG or on its behalf include, but are not limited to: general
economic and business conditions in the UK and internationally;
market related trends and developments; fluctuations in exchange
rates, stock markets, inflation, deflation, interest rates and
currencies; policies of the Bank of England, the European Central
Bank and other G8 central banks; the ability to access sufficient
sources of capital, liquidity and funding when required; changes to
OSBG's credit ratings; the ability to derive cost savings; changing
demographic developments, and changing customer behaviour,
including consumer spending, saving and borrowing habits; changes
in customer preferences; changes to borrower or counterparty credit
quality; instability in the global financial markets, including
Eurozone instability, the potential for countries to exit the
European Union (the EU) or the Eurozone, and the impact of any
sovereign credit rating downgrade or other sovereign financial
issues; technological changes and risks to cyber security; natural
and other disasters, adverse weather and similar contingencies
outside OSBG's control; inadequate or failed internal or external
processes, people and systems; terrorist acts and other acts of war
or hostility and responses to those acts; geopolitical factors, the
impact of outbreaks, epidemics and pandemics, such as the Covid-19
pandemic and ongoing challenges and uncertainties posed by the
Covid-19 pandemic for businesses and governments around the world;
changes in laws, regulations, taxation, accounting standards or
practices, including as a result of the UK's exit from the EU;
regulatory capital or liquidity requirements and similar
contingencies outside OSBG's control; the policies and actions of
governmental or regulatory authorities in the UK, the EU or
elsewhere including the implementation and interpretation of key
legislation and regulation; the ability to attract and retain
senior management and other employees; the extent of any future
impairment charges or write-downs caused by, but not limited to,
depressed asset valuations, market disruptions and illiquid
markets; market relating trends and developments; exposure to
regulatory scrutiny, legal proceedings, regulatory investigations
or complaints; changes in competition and pricing environments; the
inability to hedge certain risks economically; the adequacy of loss
reserves; the actions of competitors, including non-bank financial
services and lending companies; the success of OSBG in managing the
risks of the foregoing; and other risks inherent to the industries
in which OSBG operates.
Accordingly, no reliance may be placed on any forward-looking
statement. Neither OSBG, nor any of its directors, officers or
employees, provides any representation, warranty or assurance that
any of these statements or forecasts will come to pass or that any
forecast results will be achieved. Any forward-looking statements
made in this document speak only as of the date they are made and
it should not be assumed that they have been revised or updated in
the light of new information of future events. Except as required
by the Prudential Regulation Authority, the Financial Conduct
Authority, the London Stock Exchange PLC or applicable law, OSBG
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSBG's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
For additional information on possible risks to OSBG's business,
please see the Risk review section in the OSBG 2020 Annual Report
and Accounts. Copies of this are available at www.osb.co.uk and on
request from OSBG.
Nothing in this document and any subsequent discussion
constitutes or forms part of a public offer under any applicable
law or an offer to purchase or sell any securities or financial
instruments. Nor does it constitute advice or a recommendation with
respect to such securities or financial instruments, or any
invitation or inducement to engage in investment activity under
section 21 of the Financial Services and Markets Act 2000. Past
performance cannot be relied on as a guide to future performance.
Nothing in this document is intended to be, or should be construed
as, a profit forecast or estimate for any period.
Liability arising from anything in this document shall be
governed by English law, and neither the Company nor any of its
affiliates, advisors or representatives shall have any liability
whatsoever (in negligence or otherwise) for any loss howsoever
arising from any use of this document or its contents or otherwise
arising in connection with this document. Nothing in this document
shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and
foreign exchange conversions. Accordingly, in certain instances,
the sum or percentage change of the numbers contained in this
document may not conform exactly to the total figure given.
Non-IFRS performance measures
OSB GROUP PLC believes that the non-IFRS performance measures
included in this document provide a more consistent basis for
comparing the business' performance between financial periods, and
provide more detail concerning the elements of performance which
the Group is most directly able to influence or are relevant for an
assessment of the Group. They also reflect an important aspect of
the way in which operating targets are defined and performance is
monitored by the Board. However, any non-IFRS performance measures
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well. For further details,
refer to Alternative performance measures section in the OSBG 2020
Annual Report and Accounts. Copies of this are available at
www.osb.co.uk and on request from OSBG.
Key Performance Indicators - statutory
GBP2.5bn GBP20.4bn
Gross new organic lending up 16% Net loan book up 6%
H1 2020: GBP2.1bn FY 2020: GBP19.2bn
----------------------------------- ----------------------------------------
GBP221.9m 35.5p
Profit before tax up 123% Basic EPS(1) up 129%
H1 2020: GBP99.3m H1 2020: 15.5p
----------------------------------- ----------------------------------------
236bps 28%
Net interest margin(2) up 19bps Cost to income ratio(3) improved 3pps
H1 2020: 217bps H1 2020: 31%
----------------------------------- ----------------------------------------
-15bps 70bps
Loan loss ratio(4) improved 74bps Management expense ratio(5) unchanged
H1 2020: 59bps H1 2020: 70bps
----------------------------------- ----------------------------------------
19% 18.7%
Return on equity(6) improved 10pps Fully-loaded(7) CET1 ratio strengthened
H1 2020: 9% FY 2020: 18.3%
----------------------------------- ----------------------------------------
3 months + in arrears(8) stable Customer NPS(9) strong
OSB 1.3%, CCFS 0.5% OSB +68, CCFS +70
FY 2020: OSB 1.3%, CCFS 0.5% H1 2020: OSB +67, CCFS +83
----------------------------------- ----------------------------------------
1. Profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on non-controlling interest
securities, gross of tax, divided by the weighted average number of
ordinary shares in issue
2. Net interest income as a percentage of a 7 point average of
interest earning assets, annualised on an actual days basis
3. Administrative expenses as a percentage of total income
4. Impairment losses as a percentage of a 7 point average of
gross loans and advances, annualised
5. Administrative expenses as a percentage of 7 point average of
total assets, annualised
6. Profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on non-controlling interest
securities, gross of tax, as a percentage of a 7 point average of
shareholders' equity (excluding GBP60m of non-controlling interest
securities), annualised
7. Fully loaded is calculated without applying the transitional
provisions set out in Part Ten of the CRD IV Regulation
8. Portfolio arrears rate of accounts for which there are
missing or overdue payments by more than three months as a
percentage of gross loans
9. OSB customer Net Promoter Score relates to Kent Reliance
savings customers and CCFS customer NPS relates to Charter Savings
Bank customers. It is calculated based on customer responses to the
question of whether they would recommend the Group's products to a
friend. The responses provide a score between -100 and +100
Key Performance Indicators - underlying
Underlying key performance indicators for the six months to 30
June 2021 and 30 June 2020 reflect results for the combined Group,
excluding exceptional items, integration costs and other
acquisition-related items.
GBP2.5bn GBP20.3bn
Gross new organic lending up 16% Net loan book up 6%
H1 2020: GBP2.1bn FY 2020: GBP19.0bn
---------------------------------- -------------------------------------
GBP252.8m 41.8p
Profit before tax up 62% Basic EPS(1) up 60%
H1 2020: GBP156.3m H1 2020: 26.1p
---------------------------------- -------------------------------------
268bps 25%
Net interest margin(2) up 18bps Cost to income ratio(3) improved 1pp
H1 2020: 250bps H1 2020: 26%
---------------------------------- -------------------------------------
-15bps 69bps
Loan loss ratio(4) improved 75bps Management expense ratio(5) up 1bp
H1 2020: 60bps H1 2020: 68bps
---------------------------------- -------------------------------------
24%
Return on equity(6) improved 6pps
H1 2020: 18%
---------------------------------- -------------------------------------
For definitions of key ratios please see footnotes in statutory
KPIs above.
OSB Group continued to demonstrate the strength of its strategy
and business model in the first six months of 2021. We achieved
underlying and statutory net loan book growth of 6%, supported by
GBP2.5bn of new lending at attractive margins, and the quality of
our underwriting standards and lending criteria was evidenced by
the strong credit performance of our borrowers. I am extremely
grateful for the unwavering dedication of my colleagues, both in
the UK and in India, who delivered the quality of service our
customers have come to expect, as the Group adapted to successfully
meet the continuing challenges of the global pandemic.
Financial performance
I am delighted that the Group continued to generate a high level
of profitability in the first half of 2021, with record half-yearly
underlying pre-tax profit of GBP252.8m, up 62% on the prior period,
and underlying basic earnings per share of 41.8 pence, up 60% (H1
2020: GBP156.3m and 26.1 pence, respectively). On a statutory
basis, profit before tax increased to GBP221.9m (H1 2020: GBP99.3m)
and basic earnings per share was 35.5 pence (H1 2020: 15.5
pence).
Underlying net interest income increased to GBP299.0m from
GBP266.8m in the first half of 2020, and both underlying and
statutory net interest margins improved to 268bps and 236bps
respectively in the first half of 2021 (H1 2020: 250bps and 217bps,
respectively), due primarily to a lower cost of retail funds, as
well as lower average liquidity levels as the Group utilised excess
liquidity prudently built up at the start of the pandemic.
The business continued to benefit from Combination synergies and
other cost efficiencies, offset by lower average liquidity levels
compared to the prior period, which were reflected in a broadly
stable underlying management expense ratio of 69bps (H1 2020:
68bps). The underlying cost to income ratio which benefited from
higher income, further improved to 25% (H1 2020: 26%). The
statutory management expense ratio and cost to income ratio were
70bps and 28% respectively (H1 2020: 70bps and 31%).
The economy performed better than anticipated over the first
half of 2021 and the outlook has improved, which is reflected in
the forward-looking macroeconomic scenarios used in our IFRS 9
models. This led to a release of provisions and an impairment
credit of GBP15.1m on an underlying basis, representing an
underlying loan loss ratio of -15bps, compared with 60bps in the
first half of 2020. The statutory loan loss ratio was also -15bps
(H1 2020: 59bps).
I am particularly proud of the excellent returns the Group has
achieved in the period, with an underlying return on equity of 24%
(H1 2020:18%). The statutory return on equity was 19% (H1 2020: 9%)
and the Board has declared an interim dividend of 4.9 pence per
share, representing one-third of the total 2020 dividend, in line
with our stated policy.
Our strong lending franchise
We entered 2021 with a strong pipeline of new business and
demand remained strong in our Buy-to-Let and Residential
sub-segments, at attractive margins and on tighter criteria than
pre-COVID. The property purchase market proved resilient in the
first six months of 2021, despite the pandemic, with strong demand
stimulated in particular by the temporary reduction in stamp duty,
which also brought forward completions from July, as borrowers
rushed to meet the end of June deadline.
Throughout the first half of 2021, the Group remained a lender
of choice in our core market sub-segments with organic originations
of GBP2.5bn, up 16% on the same period last year (H1 2020
GBP2.1bn). This momentum supported an increase of 6% in the
underlying net loan book which reached GBP20.3bn at the end of June
2021 (31 December 2020: GBP19.0bn). The statutory net loan book
increased to GBP20.4bn (31 December 2020: GBP19.2bn).
Landlords are demonstrating higher confidence levels and we
continue to support them as they decide to add to their portfolios,
remortgage properties within their existing portfolios or
incorporate their business, selecting to do so with the Group's
expertise under its brands and mortgage propositions.
We continued to protect the quality of the Group's loan book
throughout the first half, controlling application volumes in our
core Residential and Buy-to-Let segments, by maintaining the
tighter risk appetite which we adopted during the pandemic, in
particular limiting maximum loan to values (LTVs) and loan sizes.
We also continued to control lending in our more cyclical market
sub-segments given the greater dependence these businesses have on
the wider economy, and we are pleased with the quality and
performance of these sub-segments.
In the third quarter, as a result of positive economic data and
an improved outlook, we have relaunched Buy-to-Let and Residential
products at higher LTVs, similar to pre-pandemic criteria, which
will help drive new business and build a strong pipeline of new
business, principally for early 2022 completions.
The Group continues to gain recognition from mortgage customers
and intermediaries, and in the first six months of 2021, Precise
Mortgages was recognised by Financial Reporter Awards as Best
Buy-to-Let Lender and by SFI Awards as Specialist Finance Lender of
the Year.
Proven strong credit and risk management
Throughout the first six months of 2021, the credit performance
of the Group's loan book remained stable, with balances over three
months in arrears at just 1.3% and 0.5% of the loan book at the end
of June for OSB and CCFS respectively (31 December 2020: 1.3% and
0.5%). In addition, credit quality remained strong, with the
weighted average LTV of the book reducing to 64% as at 30 June
2021, supported by house price appreciation (31 December 2020: 65%)
and the weighted average LTV of new business falling to 69% (H1
2020: restated 71%(1) ).
The improving economy and outlook led to a release of impairment
provisions of GBP24.4m for the first six months of 2021, as we
updated the forward-looking macroeconomic scenarios in our IFRS 9
models and rising house prices outperformed our modelled
assumptions. The underlying impairment credit of GBP15.1m,
represented an underlying loan loss ratio of -15bps, an improvement
from 60bps in the same period last year.
The Group commissioned an external review of processes and
controls in its funding lines business in the first half, following
the discovery of potential fraudulent activity by a third party on
a funding line provided by the Group, and secured against lease
receivables and the underlying hard assets. The review confirmed
that it was an isolated incident and the majority of recommended
enhancements to processes and controls have now been implemented
and the remainder will be made before the end of the year. There
was no change in the first half to the GBP20m impairment provision
taken in 2020 against the potential fraud. The funding lines
business remains primarily property-related and the Group does not
intend to add any new non-property related funding lines in the
future.
Multi-channel funding model
Retail deposits provided the primary source of funding for the
Group in the first half, reaching GBP17.1bn as at 30 June 2021. Our
competitive retail savings propositions, through the Kent Reliance
and Charter Savings Bank brands, allowed the Group to raise the
funds needed to support loan growth at attractive rates.
Over nine thousand new savings customers joined Kent Reliance in
the first six months of 2021 and Charter Savings Bank grew customer
numbers by nearly 17 thousand. The retention rate for savers
remained high, achieving 89% amongst Kent Reliance savers with
maturing fixed rate bonds and ISAs, and 86% for Charter Savings
Bank savers. Our efforts to provide excellent customer service and
transparent and fair savings products continue to be reflected in
the strong savers Net Promoter Scores of +68 for Kent Reliance and
+70 for Charter Savings Bank. I am delighted that Charter Savings
Bank won ISA Provider of the Year and Online Savings Provider of
the Year from Moneyfacts Consumer awards.
We continue to complement our retail savings franchises by
utilising our capabilities in the wholesale funding market. In
early July 2021, we completed the largest securitisation to date
under the Canterbury programme, with a value of GBP1.7bn. This
transaction created GBP1.4bn of AAA rated senior bonds and
significantly increased the contingent wholesale funding options
available to the Group. It also provided an opportunity to increase
efficiency in our drawings from the Bank of England under the TFS
and TFSME schemes which at the end of June 2021 totalled GBP2.3bn
and GBP1.4bn respectively (31 December 2020: GBP2.6bn and
GBP1.0bn).
Well-capitalised and sustainable business
The Group's capital position improved further in the period,
with a fully-loaded CET1 ratio of 18.7% as at 30 June 2021 (31
December 2020: 18.3%).
We continue to make good progress towards Internal Ratings Based
(IRB) accreditation and we are aiming to be ready to submit our
module 1 application by the end of the year. We are already seeing
the benefits from the enhanced risk models and assessment in our
day-to-day credit decision-making, which contribute to the strong
credit performance of our lending.
The integration of OSB and CCFS has continued to progress well
during the first half of 2021 and we remain ahead of schedule. As
at 30 June 2021, we had delivered run rate savings of c. GBP22m and
we expect to marginally exceed our run-rate pledge by the end of
the final year. Integration costs to date are also lower than
originally expected.
The development of our sustainability strategy is progressing
well and we will be presenting an integrated summary Environmental,
Social and Governance report in our 2021 annual report, including
the opportunities we have identified and the risks the Group
faces.
Our people are our key asset and we continue to work hard to
keep them safe and supported, in the UK and India. The majority of
our employees continue to work from home, and we have begun a
gradual transition to our offices in line with government
guidelines. Our customers continue to receive the support that they
are accustomed to, delivered by our resilient and effective
operations. The Group undertook a range of community and
fundraising initiatives in the first half, donating over GBP220k to
charitable causes.
Looking forward
The UK economy showed signs of recovery in the first half,
including house price appreciation, and the outlook improved,
although we remain cognisant of ongoing uncertainty over the true
impact of the pandemic once Government support ends.
Whilst we continue to control lending in our more cyclical
businesses, demand remains strong in our Buy-to-Let and Residential
businesses, where we have recently reintroduced pre-pandemic
criteria due to the improving economic backdrop and outlook. The
new products will help build our pipeline for completions in the
first quarter of 2022.
Based on our current pipeline and application levels, we remain
confident to deliver underlying net loan book growth of c.10% for
2021. We now expect underlying NIM for the full year to be c.270bps
and the underlying cost to income ratio to be marginally higher
than in the first half.
The Board remains focused on establishing an optimal capital
structure which supports both the strategy of the Group and
shareholder distributions, including one-off returns of capital.
The Board will also update the market on our capital management
framework, including the evolution of our target capital ratios and
distribution policy to supplement dividends as greater clarity is
obtained on the final approach that the UK will take to the
implementation of Basel 3.1 and the timing of becoming an IRB
bank.
Our resilient business model, strong capital position, secured
loan book and strong risk management capabilities, continue to
position us well to respond to opportunities and challenges ahead
and deliver attractive and sustainable returns for our shareholders
across the cycle.
Andy Golding
Chief Executive Officer
1. The Group restated the prior period LTV due to change in calculation
methodology.
Mortgage market
Strong demand in the UK housing market continued in the first
half of 2021, despite the country entering a third national
lockdown at the beginning of the year. The demand can be attributed
to a combination of the desire to upgrade to larger properties with
outside space, the gradual expansion of lender appetites and the
extension of the stamp duty holiday, which will now be phased out
before returning to the standard rate in October 2021, and which
brought forward completions from July as borrowers rushed to meet
the end of June deadline. Overall, UK gross mortgage lending in the
first six months of 2021 reached GBP170bn, up 58% compared with the
same period in 2020.(1)
This strong momentum, along with greater confidence in house
prices and more optimistic market prospects, has led many lenders
to progressively relax underwriting criteria and expand the variety
of products offered, including an increase in the number of
products available to customers with small deposits at higher loan
to value ratios. The number of mortgage products available at 95%
loan to value grew to 253 in June 2021, according to Moneyfacts,
representing a month-on-month increase of 61 products, while the
total number of mortgage products available reached a 16-month high
of 4,512 in June 2021.(2) In addition, borrowers have benefited
from attractive mortgage rates as price competition continued
amongst the high street lenders, which has seen 2-year fixed rate
products reach record lows below 1% in May 2021.(3)
The average house price reached GBP254,624 in May 2021, against
a backdrop of strong demand, further fueled by the persistent
shortage of housing in the UK, with the ONS reporting UK average
house price inflation of 10% in the 12 months to May 2021, the
highest growth rate recorded since September 2007.(4)
The above dynamics were also present to a lesser extent in the
UK Buy-to-Let mortgage market, due in part to the additional stamp
duty surcharge for second homes continuing to apply despite the
ongoing stamp duty holiday. Buy-to-Let gross advances reached
GBP18.8bn in the first five months of 2021, an increase of 14%
compared with the same period of 2020, representing the highest
lending for this period since 2016.(5)
Similar to the dynamics in the owner occupier segment, the first
six months of 2021 saw particularly strong activity in the
Buy-to-Let segment with lenders progressively increasing the number
of products available, loosening underwriting criteria and reducing
mortgage rates. According to research by BVA BDRC, this reopening,
coupled with strong rental yields and high tenant demand, has
resulted in a consistent rise in landlord confidence from the lows
seen in the first quarter of 2020, with landlords now significantly
more optimistic about business prospects than they were last
year.(6)
1. UK Finance, UK gross mortgage lending, MM23
2. Moneyfacts;
https://moneyfacts.co.uk/news/mortgages/rock-bottom-mortgage-rates-make-now-the-best-time-to-remortgage/
3. TSB launches new 0.99% remortgaging deal -- Which? News
4. ONS, UK House price index summary, May 2021
5. UK Finance, New and outstanding Buy-to-Let mortgages, Aug 2021
6. BVA BDRC Landlords Panel, Q1 2021
Review of Group's lending segments
The Group reports its lending business under two segments: OSB
and CCFS.
OneSavings Bank (OSB) segment
The following tables present the segment's contribution to
profit and loans and advances to customers on a statutory
basis:
Contribution to profit for the period
BTL/SME Residential Total
For the six months ended 30 June 2021 GBPm GBPm GBPm
-------------------------------------- -------- ------------ --------
Net interest income 148.0 40.6 188.6
Other income 4.0 1.0 5.0
-------------------------------------- -------- ------------ --------
Total income 152.0 41.6 193.6
Impairment of financial assets 2.7 2.4 5.1
-------------------------------------- -------- ------------ --------
Contribution to profit 154.7 44.0 198.7
For the six months ended 30 June 2020
Net interest income 129.7 33.8 163.5
Gain on sale of loans 18.0 - 18.0
Other (loss)/income (8.3) 1.3 (7.0)
-------------------------------------- -------- ------------ --------
Total income 139.4 35.1 174.5
Impairment of financial assets (28.2) (7.7) (35.9)
-------------------------------------- -------- ------------ --------
Contribution to profit 111.2 27.4 138.6
Loans and advances to customers
BTL/SME Residential Total
As at 30 June 2021 GBPm GBPm GBPm
-------------------------------------- -------- ------------ --------
Gross loans and advances to customers 9,657.4 2,076.7 11,734.1
Expected credit losses (64.4) (12.3) (76.7)
-------------------------------------- -------- ------------ --------
Net loans and advances to customers 9,593.0 2,064.4 11,657.4
Risk-weighted assets 4,474.1 903.2 5,377.3
As at 31 December 2020
-------------------------------------- -------- ------------ --------
Gross loans and advances to customers 9,164.6 1,966.8 11,131.4
Expected credit losses (67.0) (16.6) (83.6)
-------------------------------------- -------- ------------ --------
Net loans and advances to customers 9,097.6 1,950.2 11,047.8
Risk-weighted assets 4,282.9 874.4 5,157.3
Buy-to-Let/SME sub-segment
Loans and advances to customers
30-Jun-2021 31-Dec-2020
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 8,583.3 8,044.6
Commercial 801.7 821.9
Residential development 120.9 133.1
Funding lines 151.5 165.0
-------------------------------------- ----------- -----------
Gross loans and advances to customers 9,657.4 9,164.6
Expected credit losses (64.4) (67.0)
-------------------------------------- ----------- -----------
Net loans and advances to customers 9,593.0 9,097.6
-------------------------------------- ----------- -----------
This sub-segment comprises Buy-to-Let mortgages secured on
residential property held for investment purposes by experienced
and professional landlords, commercial mortgages secured on
commercial and semi-commercial properties held for investment
purposes or for owner-occupation, residential development finance
to small and medium-sized developers, secured funding lines to
other lenders and asset finance.
The Buy-to-Let/SME net loan book increased 5% to GBP9,593.0m in
the first six months of 2021 supported by organic originations of
GBP963.5m, which were 12% higher than in the same period of 2020
(H1 2020: GBP858.3m) and at tighter criteria than pre-COVID.
The Buy-to-Let gross loan book increased 7% to GBP8,583.3m at
the end of June 2021 (31 December 2020: GBP8,044.6m) as
professional, multi-property landlords, who represented 81% of
completions by value for the Kent Reliance brand (H1 2020: 94%)
continued to be active.
Many landlords chose to incorporate their businesses to optimise
their tax position, and 73% of mortgage applications in Kent
Reliance came from landlords borrowing via a limited company (H1
2020: 78%). Research by BVA BDRC in its Landlords Panel survey
shows that this segment of the market continues to expand, with
more landlords planning to grow their portfolios than reduce them
for the first time in over four years, with limited company
ownership remaining the most popular option for those looking to
purchase new properties.
As at 30 June 2021, the proportion of Kent Reliance Buy-to-Let
completions represented by refinancing reduced to 50% (H1 2020:
58%). Landlords continued to favour mortgages with longer initial
terms as mortgage rates became more attractive during the first
half of 2021, and five-year fixed rate mortgages represented 59% of
Kent Reliance completions (H1 2020: 46%). In addition, OSB's
retention programme, Choices, was successful in retaining
customers, with 76% of existing borrowers choosing a new product
with us within three months of their original product ending (H1
2020: 69%).
The weighted average loan to value (LTV) of the Buy-to-Let book
as at 30 June 2021 was 66% with an average loan size of GBP255k (31
December 2020: 67% and GBP260k). The weighted average interest
coverage ratio for Buy-to-Let originations during the first six
months of 2021 was 197% (H1 2020: restated(1) 208%).
Through its InterBay brand, the Group lends to borrowers
investing in commercial and semi-commercial property, reported in
the Commercial total, and more complex Buy-to-Let properties,
reported in the Buy-to-Let total. The gross loan book in the
commercial business reduced 2% to GBP801.7m (31 December 2020:
GBP821.9m) as the Group retained its prudent lending criteria
introduced as a response to the pandemic.
The weighted average LTV of the commercial book remained low at
71% and the average loan size was GBP385k for the first six months
of 2021 (31 December 2020: 71% and GBP385k).
InterBay Asset Finance, which predominantly targets UK SMEs and
small corporates financing business-critical assets, had a very
successful first half of 2021, with record volumes in the period as
demand increased and the CBILs scheme proved popular. The gross
carrying amount under finance leases was GBP98.2m as at 30 June
2021 (31 December 2020: GBP65.5m).
Our Heritable residential development business provides
development finance to small and medium-sized residential
developers. The preference is to fund house builders which operate
outside central London and provide relatively affordable family
housing, as opposed to complex city centre schemes where
affordability and construction cost control can be more
challenging. New applications come primarily from a mixture of
repeat business from the team's extensive existing relationships
and referrals.
The residential development funding gross loan book at the end
of June 2021 was GBP120.9m, with a further GBP188.0m committed (31
December 2020: GBP133.1m and GBP145.6m, respectively). The
increased rates of sale experienced by Heritable's developer
customers continued through the first half of 2021, leading to high
levels of loan repayments in the period.
Heritable has written GBP1,323m of loans since inception through
to the end of June 2021, of which GBP790m have been repaid. At the
end of June 2021, the business had commitments to finance the
development of 2,004 residential units, the majority of which are
houses located outside central London. Heritable continue to take
an exacting approach to approving funding for new customers given
the macroeconomic uncertainty.
OSB continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, primarily secured against property-related mortgages.
Total credit approved limits as at 30 June 2021 were GBP515.0m with
total loans outstanding of GBP151.5m (31 December 2020: GBP520.0m
and GBP165.0m, respectively). During the period, the Group adopted
a cautious risk approach and did not consider any new secured
funding line facilities, choosing to focus on servicing the
existing borrowers and continuing to apply restricted lending
criteria.
Buy-to-Let/SME net interest income increased 14% to GBP148.0m
from GBP129.7m in the prior period, primarily due to growth in the
loan book and a lower cost of retail funding. This segment also
benefited from GBP4.0m of other income relating to gains on the
Group's hedging activities (H1 2020: GBP8.3m loss) and an
impairment credit of GBP2.7m (H1 2020: GBP28.2m loss) due to less
severe forward-looking macroeconomic scenarios used in the Group's
IFRS 9 models to reflect the improved outlook partially offset by
growth in Buy-to-Let lending and decreases in commercial property
values. Overall, the Buy-to-Let/SME segment made a contribution to
profit of GBP154.7m, up 39% compared with GBP111.2m in the first
six months of 2020.
The Group remains highly focused on the risk assessment of new
lending, as demonstrated by the average book LTV in the
Buy-to-Let/SME segment of 67% (31 December 2020: 67%) with only
3.4% of loans exceeding 90% LTV (31 December 2020: 2.9%). The
average LTV for new Buy-to-Let/SME origination was 73% (H1 2020:
71%).
1. Interest coverage ratio for H1 2020 was restated due to
alignment of the calculation across both Banks.
Residential sub-segment
Loans and advances to customers
30-Jun-2021 31-Dec-2020
GBPm GBPm
-------------------------------------- ----------- -----------
First charge 1,807.0 1,660.7
Second charge 260.9 295.4
Funding lines 8.8 10.7
Gross loans and advances to customers 2,076.7 1,966.8
Expected credit losses (12.3) (16.6)
Net loans and advances to customers 2,064.4 1,950.2
-------------------------------------- ----------- -----------
This sub-segment comprises lending to owner-occupiers, secured
via first charge against a residential home and under the shared
ownership scheme, as well as funding lines to non-bank lenders that
operate in high yielding, specialist sub-segments, such as
residential bridge finance.
The Residential sub-segment net loan book grew 6% to GBP2,064.4m
as at 30 June 2021 (31 December 2020: GBP1,950.2m) with organic
originations of GBP299.4m during the period (H1 2020:
GBP184.7m).
First charge mortgages are provided under the Kent Reliance
brand, which largely serves prime credit quality borrowers with
more complex circumstances. This includes high net worth borrowers
with multiple income sources and self-employed borrowers, as well
as those buying a property in conjunction with a housing
association under shared ownership schemes.
The first charge gross loan book increased 9% in the period to
GBP1,807.0m from GBP1,660.7m at the end of 2020, as the Group
retained its strong presence in shared ownership, achieving record
levels of originations in this sub-segment. Lending to high net
worth individuals or borrowers with more complex income
circumstances remained limited due to tighter lending criteria
introduced by the Group as a response to the pandemic.
The OSB second charge mortgage brand, Prestige Finance, no
longer offers new mortgages to borrowers, with its loan book in
run-off and managed by Precise Mortgages. Second charge mortgages
are currently offered under the Precise Mortgages brand as part of
the CCFS segment. The Prestige Finance second charge residential
loan book had a gross value of GBP260.9m as at 30 June 2021 (31
December 2020: GBP295.4m).
OSB continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, such as residential first and second charge finance.
The Group continued to adopt a cautious approach to these more
cyclical businesses given macroeconomic uncertainty. Total credit
approved limits as at 30 June 2021 reduced to GBP28.2m with total
loans outstanding of GBP8.8m secured against property-related
mortgages (31 December 2020: GBP29.2m and GBP10.7m,
respectively).
Net interest income in the Residential sub-segment increased 20%
to GBP40.6m (H1 2020: GBP33.8m) due to growth in the loan book, the
benefit of a lower cost of retail funds and a GBP6.0m effective
interest rate gain due to cash outperformance versus modelled
assumptions on the second charge acquired books. This segment also
benefited from an impairment credit of GBP2.4m (H1 2020: GBP7.7m
loss), as the Group updated the forward-looking macroeconomic
scenarios used in its IFRS 9 models to reflect the improved
outlook, partially offset by post model adjustments. Overall,
contribution to profit from this segment increased 61% to GBP44.0m
compared with GBP27.4m in the same period of 2020.
The average book LTV reduced to 51% (31 December 2020: 54%) with
only 0.9% of loans by value with LTVs exceeding 90% (31 December
2020: 1.6%). The average LTV of new residential origination in the
first six months of 2021 reduced to 48% (H1 2020: 69%) as a result
of growth in shared ownership originations, which complete at much
lower LTVs.
Charter Court Financial Services (CCFS) segment
The following tables present the segment's contribution to
profit and loans and advances to customers on an underlying basis,
excluding acquisition-related items and the reconciliation to the
statutory results.
Contribution to profit for the period
For the six Total Total
months to 30 Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition- related items(2) statutory
June 2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income 67.0 37.7 3.0 3.4 (0.7) 110.4 (33.7) 76.7
Other income - - - - 12.4 12.4 7.3 19.7
Total income 67.0 37.7 3.0 3.4 11.7 122.8 (26.4) 96.4
Impairment of
financial
assets 6.7 1.8 1.2 0.3 - 10.0 (0.5) 9.5
Contribution
to profit 73.7 39.5 4.2 3.7 11.7 132.8 (26.9) 105.9
For the six Total Acquisition- related Total
months to 30 Buy-to-Let Residential Bridging Second charge Other(1) underlying items(2) statutory
June 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest
income 55.9 33.5 6.8 3.6 3.5 103.3 (33.0) 70.3
Gain on sale
of loans - - - - 15.1 15.1 (13.1) 2.0
Other income - 0.1 - - (8.1) (8.0) 6.5 (1.5)
Total income 55.9 33.6 6.8 3.6 10.5 110.4 (39.6) 70.8
Impairment of
financial
assets (5.7) (10.7) (0.9) (1.2) - (18.5) 0.2 (18.3)
Contribution
to profit 50.2 22.9 5.9 2.4 10.5 91.9 (39.4) 52.5
1. Other relates to net interest income from acquired loan
portfolios as well as gains on structured asset sales, fee income
from third party mortgage servicing and gains or losses on the
Group's hedging activities.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
Loans and advances to customers
Total
As at 30 June Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition-related items(2) Total statutory
2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans
and advances
to customers 5,877.9 2,472.0 75.4 171.3 18.1 8,614.7 173.8 8,788.5
Expected
credit
losses (11.4) (5.6) (0.5) (0.4) - (17.9) 0.2 (17.7)
Net loans and
advances to
customers 5,866.5 2,466.4 74.9 170.9 18.1 8,596.8 174.0 8,770.8
Risk-weighted
assets 2,333.7 1,009.3 38.7 69.2 6.5 3,457.4 78.3 3,535.7
Total
As at 31 Buy-to-Let Residential Bridging Second charge Other(1) underlying Acquisition-related items(2) Total statutory
December 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans
and advances
to customers 5,292.0 2,386.1 106.1 197.9 19.1 8,001.2 209.1 8,210.3
Expected
credit
losses (18.1) (7.5) (1.9) (0.7) - (28.2) 0.8 (27.4)
Net loans and
advances to
customers 5,273.9 2,378.6 104.2 197.2 19.1 7,973.0 209.9 8,182.9
Risk-weighted
assets 2,163.8 1,001.5 59.6 82.9 7.0 3,314.8 93.6 3,408.4
1. Other relates to acquired loan portfolios.
2. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
CCFS segment
Underlying loans and advances to customers
30-Jun-2021 31-Dec-2020
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 5,877.9 5,292.0
Residential 2,472.0 2,386.1
Bridging 75.4 106.1
Second charge 171.3 197.9
Other(1) 18.1 19.1
Gross loans and advances to customers 8,614.7 8,001.2
Expected credit losses (17.9) (28.2)
Net loans and advances to customers 8,596.8 7,973.0
-------------------------------------- ----------- -----------
1. Other relates to acquired loan portfolios
CCFS targets specialist mortgage market segments with a focus on
specialist Buy-to-Let mortgages secured on residential property
held for investment purposes by both non-professional and
professional landlords. It also provides specialist residential
mortgages to owner-occupiers, secured via either first or second
charge against prime and complex prime residential property and
under the Help-to-Buy scheme. In addition, it provides short-term
bridging, secured against residential property in both the
regulated and unregulated sectors of the market and second charge
lending.
The CCFS underlying net loan book grew 8% to GBP8,596.8m at the
end of June 2021 (31 December 2020: GBP7,973.0m) supported by
organic originations of GBP1,193.1m, which increased 11% from
GBP1,070.8m of new business written in the same period last
year.
Buy-to-Let sub-segment
In the first half of 2021, CCFS' organic originations in the
Buy-to-Let sub-segment through the Precise Mortgages brand
increased 16% to GBP808.5m (H1 2020: GBP697.2m) as the Group
benefited from strong demand at tighter criteria than pre-COVID.
The new business supported an 11% increase in the underlying gross
Buy-to-Let loan book in the period to GBP5,877.9m from GBP5,292.0m
at the end of 2020.
The demand for CCFS' Buy-to-Let products was particularly strong
amongst landlords borrowing via a limited company, which
represented 72% of Buy-to-Let completions for the Precise Mortgages
brand in the first half of 2021 (H1 2020: 52%) and loans for
specialist property types, including houses of multiple occupation
and multi-unit properties represented 24% of completions in this
sub-segment (H1 2020: 33%).
Precise Mortgages remained the highest ranked specialist lending
brand for Buy-to-Let based on unprompted willingness to recommend
in BVA BDRC's Project Mercury survey in Q1 2021.
The weighted average LTV of the loan book in this segment
remained at 69% with an average loan size of GBP191k (31 December
2020: 69% and restated(1) GBP195k). The new lending average LTV was
74% and the weighted average interest coverage ratio for Buy-to-Let
origination was 192% in the first half of 2021 (H1 2020: 73% and
205%, respectively).
Underlying net interest income in this sub-segment increased 20%
to GBP67.0m compared with GBP55.9m in the prior period, due
primarily to growth in the loan book and a lower cost of retail
funding, partially offset by an underlying EIR reset loss of GBP6m
to reflect customers spending less time on the higher revert rate
before taking a new product than expected. This segment also
benefited from an impairment credit of GBP6.7m (H1 2020: GBP5.7m
loss) as the Group updated the forward-looking macroeconomic
scenarios used in its IFRS 9 models to reflect the improved outlook
partially offset by growth in Buy-to-Let lending. On an underlying
basis, Buy-to-Let made a contribution to profit of GBP73.7m in the
first half of 2021, up 47% (H1 2020: GBP50.2m). On a statutory
basis, the Buy-to-Let sub-segment made a contribution to profit of
GBP49.5m (H1 2020: GBP31.6m).
Residential sub-segment
The underlying gross loan book in CCFS' Residential sub-segment
reached GBP2,472.0m at the end of June 2021, an increase of 4% from
GBP2,386.1m as at 31 December 2020. Organic originations, at
tighter underwriting criteria, were GBP312.5m in the first half of
2021, up 32% compared with GBP237.2m in the first half of 2020.
The Group continued to benefit from CCFS' expertise, with a
particularly strong focus on first time buyers and those purchasing
new build properties via the popular Help-to-Buy scheme. As new
restrictions to the Help-to-Buy scheme were introduced at the end
of March 2021, there was a spike in completions as borrowers sought
to finalise their purchases ahead of new rules coming into force.
Strong activity via the Help-to-Buy scheme was further boosted by
the stamp duty holiday and purchases represented 89% of completions
in this sub-segment in the period (H1 2020: 72%).
The average loan size in this sub-segment was GBP134k (31
December 2020: restated(1) GBP131k) with an average LTV for new
lending of 65% (H1 2020: 71%) and book LTV of 61% as at 30 June
2021 (31 December 2020: 62%).
Underlying net interest income grew to GBP37.7m (H1 2020:
GBP33.5m) reflecting a lower cost of retail funding and growth in
the loan book. The Residential sub-segment recorded an impairment
credit of GBP1.8m versus a GBP10.7m impairment loss in the first
half of 2020 as the Group updated the forward-looking macroeconomic
scenarios used in its IFRS 9 models to reflect the improved
outlook, partially offset by post model adjustments. Overall, on an
underlying basis, the Residential sub-segment made a contribution
to profit of GBP39.5m, up 72% compared with GBP22.9m in the same
period in 2020. On a statutory basis, the Residential sub-segment
made a contribution to profit of GBP30.2m (H1 2020: GBP11.6m).
Bridging sub-segment
The Group continued to control volumes in its high-quality
regulated bridging sub-segment, by continuing to limit the number
of products available and applying restricted lending criteria and
higher pricing than pre-pandemic. Short-term bridging originations
were lower at GBP67.7m in the first half of 2021 compared with
GBP108.7m in the first half of 2020, and as a result the gross loan
book in this sub-segment reduced to GBP75.4m as at 30 June 2021 (31
December 2020: GBP106.1m).
Underlying net interest income reduced to GBP3.0m from GBP6.8m
in the first half of 2020. The bridging sub-segment made a
contribution to profit of GBP4.2m in the first half of 2021 on an
underlying basis, down 29% compared with GBP5.9m in the same period
of 2020, reflecting the reduction in the loan book. The bridging
sub-segment recorded an impairment credit of GBP1.2m (H1 2020:
GBP0.9m loss). On a statutory basis, the bridging sub-segment made
a contribution to profit of GBP4.1m (H1 2020: GBP5.0m).
Second charge sub-segment
The second charge gross loan book reduced to GBP171.3m compared
with GBP197.9m as at 31 December 2020. The organic originations in
this sub-segment were GBP4.4m in the first half (H1 2020: GBP27.7m)
as significant lending policy restrictions remained in place as a
result of the pandemic. However, in the first six months of 2021,
the Group initiated a controlled relaxation of the lending criteria
by increasing the maximum LTV from 50% to 65% in March 2021, with a
continued focus on prime borrowers.
Underlying net interest income in the second charge sub-segment
remained broadly flat in the period at GBP3.4m (H1 2020: GBP3.6m)
and the contribution to profit increased to GBP3.7m (H1 2020:
GBP2.4m) due to an impairment credit of GBP0.3m versus an
impairment loss of GBP1.2m in the first half of 2020. On a
statutory basis, the contribution to profit from the second charge
sub-segment was GBP2.9m (H1 2020: GBP1.8m).
1. The Group restated prior period average loan size due to change in
calculation methodology.
Summary statutory results
Review of the Group's performance on a statutory basis for the
six months to 30 June 2021 and 2020.
H1 2021 H1 2020
Summary Profit or Loss GBPm GBPm
Net interest income 265.3 233.8
Net fair value gain/(loss) on financial instruments 16.1 (12.1)
Gain on sale of financial instruments 4.0 19.9
Other operating income 4.6 3.7
Administrative expenses (80.5) (76.7)
Provisions (0.1) (0.1)
Impairment of financial assets 14.6 (54.2)
Impairment of intangible assets - (7.0)
Integration costs (1.9) (6.3)
Exceptional items (0.2) (1.7)
Profit before tax 221.9 99.3
-------- -------
Profit after tax 161.5 72.0
-------- -------
H1 2021 H1 2020
Key ratios
Net interest margin 236bps 217bps
Cost to income ratio 28% 31%
Management expense ratio 70bps 70bps
Loan loss ratio -15bps 59bps
Return on equity 19% 9%
Basic earnings per share, pence 35.5 15.5
Dividend per share, pence 4.9 -
30-Jun-21 31-Dec-20
GBPm GBPm
Extracts from the Statement of Financial
Position
Loans and advances to customers 20,428.2 19,230.7
Retail deposits 17,097.2 16,603.1
Total assets 23,234.2 22,654.5
Key ratios
Common equity tier 1 ratio 18.7% 18.3%
Total capital ratio 18.7% 18.3%
Leverage ratio 7.0% 6.9%
For definitions of key ratios please see the Appendix.
Statutory profit
The Group's statutory profit before tax more than doubled for
the first half of 2021 to GBP221.9m (H1 2020: GBP99.3m), after
exceptional items, integration costs and other acquisition-related
items of GBP30.9m(1) (H1 2020: GBP57.0m) primarily due to an
impairment credit for the period, growth in the loan book, a
reduction in the cost of retail funds, and fair value gains on the
Group's hedging activities, partially offset by lower gains on sale
of financial instruments.
Statutory profit after tax was GBP161.5m for the first half of
2021, in line with the increase in profit before tax (H1 2020:
GBP72.0m) and included after-tax exceptional items, integration
costs and other acquisition-related items of GBP28.3m(1) (H1 2020:
GBP47.2m). The Group's effective tax rate remained broadly flat to
the prior period at 27.1%(2) (H1 2020: 27.5%).
Statutory return on equity for the first half of 2021 improved
to 19% (H1 2020: 9%) reflecting the increase in profitability,
partially offset by higher average equity in the period. Statutory
basic earnings per share increased to 35.5 pence (H1 2020: 15.5
pence), in line with the increase in profit after taxation.
Net interest income
Statutory net interest income increased by 13% in the period to
GBP265.3m (H1 2020: GBP233.8m), largely reflecting growth in the
loan book and a lower cost of retail funds.
Statutory net interest margin (NIM) was 236bps compared to
217bps in the prior period. The improvement in NIM of 19bps was
primarily due to a lower cost of retail funds as well as lower
levels of liquidity as the Group utilised excess liquidity
prudently built up at the start of the pandemic.
Net fair value gains/(losses) on financial instruments
Net fair value gains on financial instruments of GBP16.1m in the
first half of 2021 (H1 2020: GBP12.1m loss) included a GBP6.1m net
gain on unmatched swaps (H1 2020: GBP13.8m net loss) and a net gain
of GBP0.6m (H1 2020: GBP6.4m loss) in respect of the ineffective
portion of hedges. The Group also recorded a GBP0.2m gain (H1 2020:
GBP5.8m gain) from the amortisation of hedge accounting inception
adjustments, a GBP6.7m gain from the unwind of acquisition-related
inception adjustments (H1 2020: GBP5.1m gain) and a GBP2.5m gain
(H1 2020: GBP2.8m loss) from other items, including the
amortisation of the fair value relating to de-designated hedge
relationships.
The net gain 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 an increase in
interest rate outlook on the LIBOR and SONIA yield curves. The
Group economically hedges its committed pipeline of mortgages and
this unrealised gain unwinds over the life of the swaps through
hedge accounting inception adjustments.
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 GBP4.0m in the
first half of 2021 related to the disposal of A2 notes in the PMF
2019-1B securitisation in February 2021.
In the prior period, the Group made a gain of GBP19.9m on a
statutory basis which related to the disposal of the remaining
notes under the Canterbury No.1 and PMF 2020-1B securitisations in
January 2020.
Other operating income
Statutory other operating income of GBP4.6m (H1 2020: GBP3.7m)
comprised CCFS' commissions and servicing fees, including those
relating to securitised loans which have been derecognised from the
Group's balance sheet.
Administrative expenses
Administrative expenses increased by 5% to GBP80.5m in the first
half of 2021 (H1 2020: GBP76.7m).
The Group's statutory cost to income ratio improved to 28% (H1
2020: 31%) as a result of an increase in income in the period, due
primarily to the improved net interest margin and fair value gain
on financial instruments compared to losses in the prior period,
partially offset by lower gains on sale of financial
instruments.
The Group continued to make strong progress towards achieving
target synergies from the Combination. As at 30 June 2021, the
Group had delivered run rate savings of c. GBP22m. We continue to
find additional synergies and now project an end of year three run
rate marginally in excess of the original GBP22m target. Costs to
date to achieve these synergies were c. GBP15m by the end of the
first half of 2021, with some expected costs delayed into the
second half. Final integration costs are expected to be below the
target of GBP39m by the end of year three.
The statutory management expense ratio remained at 70bps in the
first half of 2021 (H1 2020: 70bps) as the benefits of additional
synergies and other cost efficiencies were offset by lower levels
of liquidity as compared to the prior period.
Impairment of financial assets
The Group recorded an impairment credit of GBP14.6m for the
first six months of 2021 (H1 2020: GBP54.2m loss) and the statutory
loan loss ratio improved to -15bps compared to 59bps in the first
half of 2020.
The Group reduced the severity of the forward-looking
macroeconomic scenarios used in its IFRS 9 models as the outlook
improved. This, together with a strong outperformance in house
prices in the first half compared to modelled assumptions, resulted
in a GBP24.4m release of impairment provisions in the period. This
release was partially offset by the impact of model enhancements
and post model adjustments to cover future model risks. Further
detail is provided in the Risk review section.
Impairment of intangible assets
There was no impairment of intangible assets in the first half
of 2021. The GBP7.0m recorded in the prior period related to the
intangible assets recognised on the acquisition of CCFS and the
impact of lower actual and expected lending volumes in CCFS on the
recoverable amount of the broker relationship intangible post
pandemic.
Integration costs
The Group recorded GBP1.9m of integration costs in the first
half of 2021 (H1 2020: GBP6.3m), largely related to staff costs for
key personnel retained to assist in the integration for a fixed
period, redundancy costs and professional fees for external advice
on the Group's future operating structure.
Exceptional items
Exceptional costs of GBP0.2m related to additional costs in
respect of the insertion of OSB GROUP PLC as the new holding
company and listed entity of the Group. Exceptional costs of
GBP1.7m in the first half of 2020 related to consultant, legal and
professional fees in respect of the Combination with CCFS.
Dividend
The Group's dividend policy is to declare interim dividends
equal to one-third of the prior year's total dividend. The Board
has therefore declared an interim dividend of 4.9 pence per share
for the first half of 2021, based on the 2020 total dividend of
14.5 pence per share.
The declared dividend will be paid on 22 September 2021, with an
ex-dividend date of 26 August 2021 and a record date of 27 August
2021.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 6% to GBP20,428.2m as at 30 June 2021 (31 December 2020:
GBP19,230.7m), reflecting originations of GBP2.5bn in the first
half.
Total assets grew by 3% to GBP23,234.2m (31 December 2020:
GBP22,654.5m), reflecting the growth in loans and advances,
partially offset by lower levels of liquidity.
Retail deposits increased by 3% to GBP17,097.2m as at 30 June
2021 (31 December 2020: GBP16,603.1m) as the Group utilised excess
liquidity to help fund loan book growth in the first half. The
Group continued to complement retail deposits with drawings under
the Bank of England's funding schemes. Drawings under the Term
Funding Scheme for SMEs stood at GBP1.4bn and drawings under the
Term Funding Scheme reduced to GBP2.3bn as at 30 June 2021 (31
December 2020: GBP1.0bn and GBP2.6bn, respectively).
At the end of June 2021, the Group had up to GBP250m (31
December 2020: GBP350m) of contingent wholesale funding capacity
available to it through the CCFS warehouse facilities, none of
which were utilised at the end of the period (31 December 2020:
GBPnil).
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 30 June 2021, OSB had GBP945.8m and CCFS had GBP1,270.1m
of HQLA LCR eligible assets (31 December 2020: GBP1,366.7m and
GBP1,069.1m, respectively). 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 30 June 2021, OSB had a liquidity coverage ratio of 178%
and CCFS 156% (31 December 2020: 254% and 146%, respectively) and
the Group LCR was 171% (31 December 2020: 198%), all significantly
in excess of the 2020 regulatory minimum of 100%. The Group had
prudently built up additional liquidity at the start of the
pandemic, which was utilised in part during the first half of 2021
to fund growth as the outlook improved.
Capital
The Group's capital position remained exceptionally strong, with
fully-loaded CET1 and total capital ratios of 18.7% as at 30 June
2021 (31 December 2020: 18.3%), benefiting from capital generation
from profitability in the period.
The Group had a leverage ratio of 7.0% as at 30 June 2021 (31
December 2020: 6.9%).
The combined Group had a Pillar 2a requirement of 1.18% of
risk-weighted assets (excluding a static integration add-on of
GBP19.5m) as at 30 June 2021, unchanged from the requirement as at
31 December 2020.
1. See the reconciliation of statutory to underlying results
below.
2. Effective tax rate excludes GBP0.2m of adjustments relating
to prior year.
Summary underlying results
Alternative performance measures
The Group presents alternative performance measures (APMs)
below, as Management believe they provide a more consistent basis
for comparing the Group's performance between financial
periods.
Underlying results for the six months to 30 June 2021 and 30
June 2020 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
which can be found above.
For the reconciliation between APMs and the statutory
equivalents, see the Appendix.
H1 2021 H1 2020
Summary Profit or Loss GBPm GBPm
Net interest income 299.0 266.8
Net fair value gain/(loss) on financial instruments 10.5 (18.6)
Gain on sale of financial instruments 2.3 33.0
Other operating income 4.6 3.7
Administrative expenses (78.6) (74.1)
Provisions (0.1) (0.1)
Impairment of financial assets 15.1 (54.4)
Profit before tax 252.8 156.3
-------- --------
Profit after tax 189.8 119.2
-------- --------
H1 2021 H1 2020
Key ratios
Net interest margin 268bps 250bps
Cost to income ratio 25% 26%
Management expense ratio 69bps 68bps
Loan loss ratio -15bps 60bps
Return on equity 24% 18%
Basic earnings per share, pence 41.8 26.1
30-Jun-21 31-Dec-20
GBPm GBPm
Extracts from the Statement of Financial
Position
Loans and advances to customers 20,254.2 19,020.8
Retail deposits 17,094.9 16,600.0
Total assets 23,083.4 22,472.2
Underlying profit
The Group's underlying profit before tax was GBP252.8m in the
first half of 2021, an increase of 62% compared with GBP156.3m in
the first half of 2020, primarily due to an impairment credit for
the period, growth in the loan book, a reduction in the cost of
retail funds and fair value gains on the Group's hedging
activities, partially offset by lower gains on sale of financial
instruments.
Underlying profit after tax was GBP189.8m, up 59% (H1 2020:
GBP119.2m) broadly in line with the increase in profit before
tax.
The Group's effective tax rate on an underlying basis increased
to 24.9% for the first half of 2021 (H1 2020: 23.7%), due to a
larger proportion of the profits being subject to the Bank
Corporation Tax Surcharge.
On an underlying basis, return on equity for the first half of
2021 improved to 24% (H1 2020: 18%) reflecting the higher
profitability, partially offset by higher average equity in the
period, and underlying basic earnings per share increased to 41.8
pence (H1 2020: 26.1 pence), due to the increase in profit after
tax.
Net interest income
Underlying net interest income increased 12% to GBP299.0m in the
first half of 2021 (H1 2020: GBP266.8m) due primarily to growth in
the loan book and a reduction in the cost of retail funds.
Underlying net interest margin was 268bps in the first half (H1
2020: 250bps) an improvement of 18bps due primarily to a lower cost
of retail funds, as well as lower liquidity levels.
Net fair value gains/(losses) on financial instruments
Underlying net fair value gains on financial instruments of
GBP10.5m in the first half of 2021 (H1 2020: GBP18.6m loss),
included a gain of GBP0.6m (H1 2020: GBP6.4m loss) from hedge
ineffectiveness, a gain on unmatched swaps of GBP6.1m (H1 2020:
GBP13.8m loss) and a GBP1.3m gain from the amortisation of hedge
accounting inception adjustments (H1 2020: GBP5.8m gain). Other
hedging and fair value movements amounted to a gain of GBP2.5m (H1
2020: GBP4.2m loss).
The net gain on unmatched swaps primarily relates to fair value
movements on mortgage pipeline swaps, prior to them being matched
against completed mortgages and was due to an increase in outlook
on the LIBOR and SONIA yield curves. The Group economically hedges
its committed pipeline of mortgages and this unrealised gain
unwinds over the life of the swaps through hedge accounting
inception adjustments.
Gain on sale of financial instruments
The underlying gain of GBP2.3m in the first six months of 2021
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
In 2020, the underlying gain of GBP33.0m related to the disposal
of the remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January 2020.
Other operating income
On an underlying basis, other operating income was GBP4.6m in
the first half of 2021 (H1 2020: GBP3.7m) and comprised CCFS'
commissions and servicing fees, including those relating to
securitised loans which have been deconsolidated from the Group's
balance sheet.
Administrative expenses
Underlying administrative expenses increased 6% to GBP78.6m in
the first half of 2021 (H1 2020: GBP74.1m).
The underlying cost to income ratio improved to 25% (H1 2020:
26%) as a result of a higher income in the period, due primarily to
the improved net interest margin.
The underlying management expense ratio remained broadly stable
at 69bps for the first half of 2021 (H1 2020: 68bps) as the
benefits of additional synergies and other cost efficiencies were
offset by lower levels of liquidity compared to the prior
period.
Impairment of financial assets
The Group recorded an underlying impairment credit of GBP15.1m
in the first half of 2021 (H1 2020: GBP54.4m loss) representing an
underlying loan loss ratio of -15bps (H1 2020: 60bps).
The Group reduced the severity of the forward-looking
macroeconomic scenarios used in its IFRS 9 models, as the outlook
improved. This, together with a strong outperformance in house
prices in the first half compared to modelled assumptions, resulted
in a GBP24.4m release of impairment provisions in the period. This
release was partially offset by the impact of model enhancements
and post model adjustments to cover future model risks. Further
detail is provided in the Risk review section.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP20,254.2m (31 December 2020: GBP19,020.8m) an increase of 6%
reflecting gross originations of GBP2.5bn in the first six months
of 2021.
Total underlying assets grew by 3% to GBP23,083.4m (31 December
2020: GBP22,472.2m) reflecting the growth in loans and advances,
partially offset by lower levels of liquidity.
Retail deposits increased by 3% to GBP17,094.9m (31 December
2020: GBP16,600.0m) 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 with combined
drawings under TFS and TFSME of GBP3.7bn at the end of June 2021
(31 December 2020: GBP3.6bn).
Reconciliation of statutory to underlying results
HY 2021 HY 2020
Statutory Reverse Reverse
results acquisition- related and exceptional items Underlying results Statutory results acquisition- related and exceptional items Underlying results
GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------- ------------------ -----------------
Net interest income 265.3 33.71 299.0 233.8 33.0 266.8
Net fair value
gain/(loss) on
financial
instruments 16.1 (5.6)(2) 10.5 (12.1) (6.5) (18.6)
Gain on sale of
financial
instruments 4.0 (1.7)(3) 2.3 19.9 13.1 33.0
Other operating income 4.6 -- 4.6 3.7 -- 3.7
------------------
Total income 290.0 26.4 316.4 245.3 39.6 284.9
Administrative
expenses (80.5) 1.9(4) (78.6) (76.7) 2.6 (74.1)
Provisions (0.1) -- (0.1) (0.1) -- (0.1)
Impairment of
financial assets 14.6 0.5(5) 15.1 (54.2) (0.2) (54.4)
Impairment of
intangible assets -- -- -- (7.0) 7.0 --
Integration costs (1.9) 1.9(6) -- (6.3) 6.3 --
Exceptional items (0.2) 0.2(7) -- (1.7) 1.7 --
------------------
Profit before tax 221.9 30.9 252.8 99.3 57.0 156.3
Profit after tax 161.5 28.3 189.8 72.0 47.2 119.2
Summary Balance Sheet
Loans and advances to
customers 20,428.2 (174.0)(8) 20,254.2 18,757.2 (242.8) 18,514.4
Other financial assets 2,732.9 29.1(9) 2,762.0 3,570.1 48.6 3,618.7
Other non-financial
assets 73.1 (5.9)(1) (0) 67.2 76.7 (8.3) 68.4
------------------------------------------- ------------------
Total assets 23,234.2 (150.8) 23,083.4 22,404.0 (202.5) 22,201.5
Amounts owed to retail
depositors 17,097.2 (2.3)(1) (1) 17,094.9 16,697.3 (4.5) 16,692.8
Other financial
liabilities 4,277.2 3.1(1) (2) 4,280.3 4,078.9 6.7 4,085.6
Other non-financial
liabilities 84.8 (48.4)(1) (3) 36.4 80.0 (54.7) 25.3
------------------
Total liabilities 21,459.2 (47.6) 21,411.6 20,856.2 (52.5) 20,803.7
Net assets 1,775.0 (103.2) 1,671.8 1,547.8 (150.0) 1,397.8
---------------------- --------- ------------------------------------------- ------------------ ----------------- ------------------------------------------- ------------------
Notes to the reconciliation of statutory to underlying results
table:
1. Amortisation of the net fair value uplift to CCFS' mortgage
loans and retail deposits on Combination.
2. Inception adjustment on CCFS' derivative assets and
liabilities on Combination.
3. Recognition of additional gain on sale of securitisation
notes, see note 7 to the accounts.
4. Amortisation of intangible assets recognised on
Combination.
5. Adjustment to expected credit losses on CCFS loans on
Combination.
6. Costs of integration of the two Banks post Combination, see
note 10 to the accounts
7. Reversal of exceptional items, see note 11 to the
accounts
8. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions.
9. Fair value adjustment to hedged assets
10. Adjustment to deferred tax asset and recognition of acquired intangibles on Combination.
11. Fair value adjustment to CCFS' retail deposits less accumulated amortisation.
12. Fair value adjustment to hedged liabilities
13. Adjustment to deferred tax liability and other
acquisition-related adjustments.
Key areas of focus during the six months to 30 June 2021
Strong progress was made in the first half of 2021 against the
Group's strategic risk management objectives for the year,
including the priority areas set out in the Annual Report and
Financial Statements for the year ended 31 December 2020.
Strong operating and financial performance was observed relative
to key business, financial and risk performance targets, despite
the challenges posed by the pandemic. The Group continued to
actively monitor the risk profile, the level and quality of
contingent financial resources available and ongoing operating
effectiveness.
The Group remains fully cognisant of the continued uncertainties
and risks associated with the pandemic and has considered them in
framing its response against its risk appetite. The UK vaccination
programme has supported the gradual easing of social and business
restrictions. The easing of these restrictions is now starting to
feed through into an improving macroeconomic outlook, however,
uncertainties and risks still remain. The longer term success of
the vaccine roll-out, in the context of any new variants, together
with the withdrawal of the government's economic support measures,
are drivers of future uncertainties and risks.
Leveraging the Group's well established risk management and
appetite frameworks, facilitated timely actions being taken to
maintain credit profile performance, controlling the risks of both
new lending and existing loan portfolios. The Group continues to
conduct frequent scenario analysis to understand how changes in the
credit profile may impact IFRS 9 expected credit loss and capital
performance.
The Group maintained its focus on capital resources and
requirements by actively reflecting upon inherent risks and
uncertainties. The Board continued to closely follow the evolving
nature of the regulatory capital regime, particularly the proposed
changes to the standardised risk weighting rules, the Group's
resolvability requirements and the implications of planned Internal
Ratings Based (IRB) accreditation.
Liquidity and funding risk management remained a key area of
focus ensuring that the Group continued to have a stable and
diverse funding mix in consideration of prudential requirements,
current and future competitive dynamics and customer behaviour.
The Group's Risk function continued to provide oversight, review
and challenge to the ongoing integration project and associated
risks. In particular, integration risk has been assessed with
respect to targeted synergies and costs, operational incidents and
disruptions, as well as customer detriment. The Board and senior
management's belief that the integration strategy is inherently low
risk remains unchanged as the Group continues to make good progress
across key work streams. To date, the integration project has
progressed as planned, with no material risks or incidents arising
as a function of project activity.
Fair treatment and customer outcomes are strongly reflected in
the Group's purpose, vision and values. The Group's customer
centric culture has played an important role in shaping the Group's
response to the pandemic, supporting all customers as required with
a particular focus on vulnerable customers.
Progress continues to be made across the Group's IRB project,
with end-state governance arrangements including the full suite of
IRB policies and standards being implemented as designed. The
Group's end state IRB models continue to be delivered and are being
integrated across a broad range of risk management disciplines. The
Group continues to believe that IRB will deliver enhanced decision
making across all phases of the credit lifecycle (i.e. pricing,
underwriting of new loans, existing customer management strategies
including remortgage underwriting, collections strategies and
capital optimisation). The Group continues to liaise with the
Prudential Regulation Authority with respect to its IRB approach
and timeline for accreditation.
During the six months to 30 June 2021, the Risk and Compliance
function made further progress against planned strategic goals,
including further embedding Group level frameworks, policies and
procedures. The Group's second line functions are now operating on
a shared service basis covering all the Group's legal entities and
brands. Appropriate governance, processes and controls continue to
be maintained to ensure
that both regulated banking entities continue to fully adhere to
their individual regulatory requirements. The Group's risk
frameworks have been developed to reflect the Group's unique risk
characteristics and have also been benchmarked to industry best
practice and regulatory expectations.
The Group's scenario analysis and stress testing capabilities
have been improved progressively to factor in pandemic based risk
drivers impacting individual lending business lines, by leveraging
external and internal data to estimate sensitivities of loan loss
provisions and capital requirements. Scenario analysis resulted in
a new post model adjustment being raised and existing adjustments
being updated if required to ensure provision levels and coverage
ratios remained appropriate in the context of expected risks and
uncertainties.
Reverse stress testing analysis represents an important
analytical exercise to identify and assess extreme scenarios which
would take the Group to the brink of failure. The Group assesses
the stress test scenarios on a continuous spectrum of severity to
inform business planning, assess stress based contingent financial
buffers and to identify the extreme 'break the bank' scenarios with
supporting recovery options. To support the Board of Directors'
going concern assessment at key reporting periods the Risk and
Compliance functions conduct regular reverse stress tests to
identify scenarios which would result in the Group and solo bank
minimum capital ratios being breached, assessing the probability of
these scenarios occurring over the going concern assessment
horizon. Due to the Group's ongoing profitability and strong
capital resource levels and stable capital requirements, the
identified scenarios required for the Group to breach its minimum
capital requirements have become progressively more extreme.
The Group also continues to build capabilities to demonstrate
compliance with its resolution strategy across key elements of the
Bank of England's resolvability assessment framework, ensuring it
has adequate financial resources in place in the context of
resolution and is able to support critical functions through
resolution and restructuring.
The Risk and Compliance function provided oversight and advisory
support to the business, ensuring incremental controls and process
enhancements are implemented across the funding lines business,
addressing recommendations raised following the independent process
and controls review conducted during the first half of the
year.
Climate change risk management continues to be an area of focus,
with further progress being made in enhancing the Group's
understanding of how physical and transitional risks relating to
climate change could impact the Group, and accordingly embedding a
robust risk management approach to managing these risks.
Principal risks and uncertainties
The Board is responsible for determining the nature and extent
of the principal risks it is willing to take in order to achieve
its strategic objectives.
The significant range of governmental, regulatory and central
bank support measures in place as a result of the COVID-19 pandemic
continues to result in significant uncertainty with respect to the
macroeconomic outlook and operating environment of the Group.
During the six months to 30 June 2021, the Board did not
identify any material change in the principal risks and
uncertainties disclosed in the Risk review section of the 2020
Annual Report on pages 70 to 80, which can be accessed via our
website at
https://www.globenewswire.com/Tracker?data=zXbBNCuNwD4R2NRwCQmkrrY8jaFjJ5j0UVZ3SskXqptMbg_vxWAevV_4h19fUvPpRvRz1QSeg7VdQVyYtUyFwQ==
www.osb.co.uk.
The table below provides a high level overview of the principal
risks which the Board believes are the most material with respect
to potential adverse movements impacting the business model, future
financial performance, solvency and liquidity.
Principal risks Key mitigating actions
----------------- -----------------------------------------------------------
Strategic and -- Regular monitoring by the Board and the Group
business risk Executive Committee of business and financial
performance against strategic agenda and risk
appetite. The financial plan is subject to regular
reforecasts in the context of the business
opportunities and threats facing the Group. The
balanced business scorecard is the primary mechanism
to support the Board and assesses management
performance against key targets. Use of stress
testing to flex core business planning assumptions to
assess potential performance under stressed operating
conditions.
-- The Group continued to utilise and enhance its stress
testing capabilities to assess and minimise potential
areas of macroeconomic vulnerability.
-- The Group continues to invest in its IT and data
management capabilities to increase the ability to
respond to regulatory change. A structured approach
to change management and fully leveraging internal
and external expertise allows the Group to respond
effectively to regulatory change.
-- The Group continues to develop products and services
which meet the requirements of the markets in which
it operates. Post the Combination, the Group has an
enlarged suite of products and capabilities to
utilise, along with increased scale and financial
resources to support a response to changes in
competition.
----------------- -----------------------------------------------------------
Reputational risk -- The Group actively monitors customer and broker
feedback to assess service levels. The Group has
established processes to review, assess and remediate
complaints in a timely manner.Culture and commitment
to treating customers fairly and being open and
transparent in communication with key stakeholders.
Established processes to proactively identify and
manage potential sources of reputational risk.
----------------- -----------------------------------------------------------
Credit risk Individual borrower defaults:
-- Across both OSB and CCFS a robust underwriting
assessment is undertaken to ensure a customer has the
ability and propensity to repay, and sufficient
security is available to support the new loan
requested. At CCFS an automated scorecard approach is
taken, whilst OSB utilises a bespoke manual
underwriting approach.
-- Should there be problems with a loan, the Collections
and Recoveries team works with customers 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 focuses on
property security, and is scrutinised by the Group's
independent Real Estate team as well as by external
valuers.
-- Development finance 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 portfolio limits on LTV,
affordability, sector and geographic concentration
that are approved by the Group Risk Committee and the
Board. These are reviewed on a semi-annual basis. In
addition, stress testing is performed 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 only with high quality wholesale
counterparties. Derivative exposures include
collateral agreements to mitigate credit exposures.
----------------- -----------------------------------------------------------
Principal risks Key mitigating actions
----------------- -----------------------------------------------------------
Market risk -- The Group's Treasury function actively hedges to
match the timing of cash flows from assets and
liabilities.
-- Due to the Group balance sheet structure, no active
management of basis risk was required during 2021.
-- Key mitigants include new swaps being linked to SONIA
and existing LIBOR linked swaps being transitioned to
SONIA. LIBOR linked mortgages continue to be migrated
to reference Bank of England base rates or SONIA
indices.
----------------- -----------------------------------------------------------
Liquidity and -- The Group's funding strategy is focused on a highly
funding risk stable retail deposit franchise. The large number of
depositors provides diversification and a high
proportion of balances are covered by the FSCS so
there is no material risk of a retail run.
-- 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 proactively manages its savings proposition
through both the Liquidity Working Group and the
Group Assets and Liabilities Committee, and the Group
has further diversified its retail channels by
expanding the range of pooled deposit providers.
-- The Group continuously monitors wholesale funding
markets, and is experienced in taking proactive
management actions where required. The Group has a
mature residential mortgage backed securitisation
programme (RMBS) and access to warehouse facilities,
to ensure it is not solely reliant on retail savings.
-- The Group has pre-positioned mortgage and RMBS
collateral with the Bank of England which allows it
to consider other relative funding sources such as
term funding schemes and indexed long term repo.
----------------- -----------------------------------------------------------
Solvency risk -- Currently the Group operates from a strong capital
position and has a consistent record of strong
profitability.
-- The Group actively monitors its capital requirements
and resources against financial forecasts and plans
and undertakes stress testing analysis to subject its
solvency ratios to extreme but plausible scenarios.
-- The Group also holds prudent levels of capital
buffers based on CRD IV requirements and expected
balance sheet growth.
-- The Group engages actively with regulators, industry
bodies and advisers to keep abreast of potential
changes and provides feedback through the
consultation process.
-- Proactive management of the Group's balance sheet and
support measures provided by the PRA via the CRR
'Quick Fix' package which included a reset of the
IFRS 9 capital transitional relief and the extension
of the SME support factor, together with ongoing
profitability, resulted in the Group's capital ratios
strengthening.
----------------- -----------------------------------------------------------
Operational risk IT security (including cyber risk)
-- The Group has invested significantly in enhancing its
protection against IT security threats, deploying a
series of tools designed to identify and prevent
network/system intrusions. This is further supported
by documented and tested procedures intended to
ensure the effective response to a security breach.
-- 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 remained
heightened versus pre pandemic levels. 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.
IT failure
-- The Group continues to invest in improving the
resilience of its core infrastructure. It has
identified its prioritised business services and the
infrastructure that is required to support them.
Tests are performed regularly to validate its ability
to recover from an incident.
Data quality and completeness
-- The Group established a dedicated Data Strategy
Programme, designed to ensure a consistent approach
to the maintenance and use of data. This includes
both documented procedures and frameworks and also
tools intended to improve the consistency of data
use.
Change management
-- The Group recognises that implementing change
introduces significant operational risk and has
therefore implemented a series of control gateways
designed to ensure that each stage of the change
management process has the necessary level of
oversight.
Organisational change and integration
-- There is a low risk integration project plan (e.g. no
large-scale integration-related IT project change
planned). Experienced and capable project management
office, with close oversight and direction provided
by the Group Executive Committee and Board.
Fraud
-- The Group has dedicated systems and resources to
monitor and manage fraud risk. The Group did
experience a fraud with respect to a single funding
line and our processes and controls have now been
independently reviewed. We remain confident the
incident was of an isolated nature and the majority
of recommended enhancements have been implemented and
the remainder will be implemented by the end of the
year.
----------------- -----------------------------------------------------------
Conduct risk Product suitability
-- The Group has a strategic commitment to provide
simple, customer-focused products. In addition, a
Product Governance framework is established to
oversee both the origination of new products and to
revisit the ongoing suitability of the existing
product suite.
Data protection
-- In addition to a series of network/system controls
the Group performs extensive root cause analysis of
any data leaks in order to ensure that the
appropriate mitigating actions are taken.
Integration risk
-- During the integration process, the Group is
committed to adopting a low-risk approach with a view
to taking reasonable steps to avoid causing poor
outcomes for its customers and the market.
Significant progress has been made across all
integration work streams with no material customer
detriment identified to date.
----------------- -----------------------------------------------------------
Compliance and Prudential regulatory changes
regulatory risk -- The Group has an effective horizon scanning process
to identify regulatory change.
-- All significant regulatory initiatives are managed by
structured programmes overseen by the Project
Management team and sponsored at Executive level.
-- The Group has proactively sought external expert
opinions to support interpretation of the
requirements and validation of its response, where
required.
-- The Group has initiated a study into external wall
cladding and is reviewing its own property portfolio
along with the collateral supporting lending
portfolios.
-- The Group also notes the recent support measures
announced by the government to help individuals to
ensure compliance with building safety standards,
including the removal of defective cladding.
Conduct regulation
-- The Group has a programme of regulatory horizon
scanning linking into a formal regulatory change
management programme. In addition, the focus on
simple products and customer oriented culture means
that current practice may not have to change
significantly to meet new conduct regulations.
-- All Group entities utilise underwriting, arrears,
repossession, forbearance and vulnerable customer
policies which are designed to comply with regulatory
rules and expectations. These policies articulate the
Group's commitment to ensuring that all customers,
especially 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.
----------------- -----------------------------------------------------------
Integration risk -- The Board is maintaining oversight of the integration
process. A dedicated Integration Management Office
has been established to drive the integration process
forward.
-- Independent assessment, monitoring and reporting is
being undertaken by the Risk and Internal Audit
functions.
----------------- -----------------------------------------------------------
Emerging risks
The Group proactively scans for emerging risks which may have an
impact on its operations and strategy. The Group considers its top
emerging risks to be:
Emerging risks Key mitigating actions
------------------------------------------------------------ -----------------------------------------------------------
Political and macroeconomic uncertainty -- The Group implemented robust monitoring processes and
Significant macroeconomic uncertainty remains due via stress testing activity (i.e. ad hoc, risk
to the COVID-19 pandemic, the potential for new variants appetite and ICAAP) it understands how the Group
to emerge and further lockdown measures being required, performs over a variety of macroeconomic stress
as well as the impact post removal of government support scenarios and has developed a suite of early warning
measures. The Group's lending activity is predominantly indicators, which are closely monitored to identify
focused in the United Kingdom (with a legacy back changes in the economic environment.
book of mortgages in the Channel Islands) and, as -- The Board and management review detailed portfolio
such, will be impacted by any risks emerging from reports to identify any changes in the Group's risk
changes in the macroeconomic environment. profile.
------------------------------------------------------------ -----------------------------------------------------------
Climate change -- The Group developed an approach to assessing and
As the worldwide focus on climate change intensifies, managing the risks relating to climate change within
both the physical risks and the transitional risks its Risk Management Framework. This includes scenario
associated with climate change continue to grow. analysis, development of key risk indicators and
Physical risks can relate to specific weather events, inclusion of climate risks within operational
such as storms and flooding, or to longer-term shifts resilience activities.
in the climate, such as rising sea levels. These risks -- A cross-functional working group is overseeing the
could include adverse movements in the value of certain Group's response to climate change, in line with
properties that are in coastal and low lying areas, industry best practice and regulatory guidelines.
or located in areas prone to increased subsidence -- As part of the Group's ICAAP, a detailed analysis was
and heave. conducted using third party data to perform an
Transitional risks may arise from the adjustment towards initial assessment of the financial risk that climate
a low-carbon economy, such as tightening energy efficiency change could pose to the Group. This analysis will be
standards for domestic and commercial buildings. These developed further during 2021.
risks could include a potential adverse movement in -- The Group's Chief Risk Officer has designated senior
the value of properties requiring substantial updates management responsibility for the management of
to meet future energy performance requirements. climate change risk; during 2021 a Board member was
Reputational risk arising from a failure to meet changing identified to ensure that the Group meets regulatory
societal, investor or regulatory demands. and wider stakeholder expectations.
------------------------------------------------------------ -----------------------------------------------------------
Model risk
The risk of financial loss, adverse regulatory outcomes, -- During 2020, Board and Executive level model
reputational damage or customer detriment resulting oversight Committees and a suite of Group level
from deficiencies in the development, application policies were introduced.
or ongoing operation of models and ratings systems.
Following the Combination with CCFS, the Group has -- Further enhancements are planned during 2021 to
seen the increasing use of models to conduct financial ensure that model governance arrangements meet
assessments and informing business decisions. The regulatory expectations and model risk is managed
Group also tracks changes in industry best practice effectively.
with respect to managing model risk.
------------------------------------------------------------ -----------------------------------------------------------
LIBOR reform -- The Group ALCO has set up a dedicated working group
The FCA has announced that the sterling LIBOR benchmark to focus on this risk across the Group and transition
will cease to be set by panel banks from the start away from the LIBOR benchmark by the end of the year.
of 2022 due to the low level of supporting unsecured Key mitigating actions include all new swaps being
loans in the wholesale interbank loan market. As a linked to SONIA, which is in place, and the
result the FCA requires all market participants to transition of all existing LIBOR linked swaps to
remove dependencies on LIBOR where possible before SONIA, which is nearing completion. A dedicated
the end of 2021. The Group has exposure to the LIBOR change control project covering all LIBOR linked
benchmark within some of its customer lending products mortgages is in an advanced stage to transition these
and wholesale derivative hedging transactions. loans to either the Bank of England base rate or
SONIA benchmark.
------------------------------------------------------------ -----------------------------------------------------------
Coronavirus -- The Group has taken a considered approach to
The COVID-19 pandemic has had a material impact on minimising and managing the impact of the pandemic.
individuals and businesses where the Group has operations, The Group's approach represents a comprehensive
including the UK and India. The lockdown measures response strategy covering both severity and
introduced to stem the spread of the virus have had consequences of the pandemic, including prevention,
a profound effect on how businesses operate and individuals continuity, impact assessment and stress testing.
work, which may have a materially adverse impact on Supporting the Group's response strategy are
the Group's profitability, capital and liquidity positions. established underlying capabilities to facilitate
It is unclear how the pandemic will evolve during operational and financial resilience testing and
2021 and the impact that the roll-out of vaccines planning, active monitoring and reporting procedures,
will have and whether any new strains will emerge. and active communications with all employees (UK and
A further risk relates to the withdrawal of government's India) and supervisory authorities.
support measures during 2021 and the resultant impact
on business failures, unemployment levels and house
prices.
------------------------------------------------------------ -----------------------------------------------------------
Negative interest rates -- The Group has reviewed readiness for negative
To support economic performance, resulting from the interest rates and presented findings to the Board.
impact of the pandemic, the Bank of England may consider The review covered the terms and conditions of the
reducing the Bank of England base rate below 0%. The Group's financial contracts and any systems
Group would be impacted across its lending portfolios limitations. Some key servicing systems have been
with adverse movements in interest income, offset identified as requiring further development to allow
by reductions in interest payable on savings accounts. negative rates and in particular negative pay rates.
A further risk relates to increased operational and Given a mixture of floors in terms and conditions for
conduct risks arising from system and process changes certain products and the Group's margins, negative
required to accommodate negative interest rates. interest rates are not expected to cause an issue
Negative interest rates may also impact customer behaviour, until the Bank of England base rate reaches a rate of
with changes in the demand for lending and savings -75bps or below. A working group is currently
products potentially impacting the Group's loan book examining further system development to manage
growth plans and liquidity coverage levels. significant negative rates.
------------------------------------------------------------ -----------------------------------------------------------
Credit risk portfolio performance
The Group's lending portfolios performed strongly during the six
months to 30 June 2021.
Statutory Group loans and advances to customers increased to
GBP20.4bn as at 30 June 2021 from GBP19.2bn at the end of 2020.
This loan book growth, driven by new Buy-to-Let and residential
first charge owner occupier lending, was achieved with tightened
lending criteria remaining in place, restricting loan to value
levels and other credit criteria.
Average weighted interest coverage ratios across Buy-to-Let
originations remained strong at 197% for OSB and 192% for CCFS (31
December 2020: 201% for OSB and 193% for CCFS). The proportion of
the Group's residential first charge mortgage portfolios with
higher loan to income multiples remained low as a percentage of the
mortgage book and reduced further within the reporting period.
Total loans and advances fell across the Group's second charge,
bridging and semi-commercial and commercial mortgage lending
sub-segments. No new funding lines were added during the period and
existing funding lines performance remained in line with
expectations.
Exposure to residential development finance lending remained low
at GBP120.9m as at 30 June 2021. Weighted average gross development
values remained prudent across the development finance business at
56%.
The Group saw opportunities to grow the asset finance business
in the first half in a controlled and considered manner, supported
by the Government's Coronavirus Business Interruption Loan Scheme
(CBILS). The gross carrying amount under finance leases reached
GBP98.2m after the strong growth in the period and accounted for
0.5% of the Group's total loans and advances to customers as at 30
June 2021.
The Group's ability to absorb future economic shocks improved
during the period as loan to value levels for existing lending
continued to reduce, resulting from (i) the impact of positive
residential property price movements due to the supply and demand
dynamics of the market and government support measures such as the
stamp duty holiday, and (ii) the restricted loan to value criteria
in place for new lending. The total weighted average loan to value
ratio for the loan book reduced to 63% for OSB and 66% for CCFS as
at 30 June 2021 (31 December 2020: OSB 64% and CCFS 67%). The Group
did however see a continued fall in commercial property prices,
with slow rises expected going forward with the return to
pre-pandemic levels not forecast until 2023.
Forward-looking internal and external credit scoring metrics
improved in the first half, taking into account internal
performance and the customers wider credit obligation
performance.
The numbers of customers with payment holidays continued to fall
and as at 30 June 2021 only 0.1% of total loans and advances
balance had a payment holiday in place. The Group continues to
observe a low proportion of customers at the end of the payment
holiday falling into arrears.
Arrears performance remained stable across both OSB and CCFS
with balances greater than three months in arrears at 1.3% for OSB
and 0.5% for CCFS, unchanged from 31 December 2020.
The Group continues to observe low levels of forbearance
relative to the total number of customers and outstanding loan
balances. During the six months to 30 June 2021, the Group observed
an increase in new forbearance measures granted, relative to the
number issued during 2020 and pre-pandemic levels (for forbearance
measures undertaken in the period see note 30 to the financial
statements). This trend was driven by ongoing assistance being
provided to customers as they came to the end of COVID-19 payment
holiday arrangements, transitioning onto standard forbearance
options where required. The Group continued to undertake a review
of the appropriateness of existing payment arrangements in
particular across the second charge lending segment, which resulted
in a number of customers migrating onto forbearance arrangements.
We expect this review to be completed during 2021 and to not
materially impact the overall balance of forbearance arrangements
across the Group.
Expected credit losses
The Group recorded a statutory impairment credit of GBP14.6m for
the six months to 30 June 2021, representing an annualised loan
loss of -0.15% compared to an impairment charge of GBP54.2m and an
annualised loan loss ratio of 0.59% during the six months to 30
June 2020.
The primary drivers of the impairment trends observed in the
period were as follows:
a. Macroeconomic scenarios
During the six months to 30 June 2021, macroeconomic performance
was stronger than previously forecast, whilst the outlook also
improved. The combined impact of both of these trends drove a total
cumulative provision release of GBP24.4m.
Strong residential house price growth throughout the period, in
part supported by stamp duty rule changes resulted in GBP10.4m of
the provision release, where actual house price increases
outperformed forecast estimates.
The Group continued to receive regular macroeconomic scenario
updates from its advisers, which were reviewed and discussed by
management and the Board, along with the probability weightings
applied to each scenario.
The Board and management noted the more positive outlook
relating to economic growth (GDP), lower than previously forecast
unemployment levels as the vaccine roll-out progressed at pace, and
the easing of lockdown restrictions continued. House price outcomes
also moderated, except in downside forecasts, in part due to the
success of the stamp duty rule changes introduced and the supply
and demand dynamics of the UK housing market. Downside house price
forecasts are now more severe, reflecting the position of the
housing market after the recent price surge being more susceptible
to an extreme correction.
There still remains significant uncertainty around how the
easing of lockdown measures and economic support measures will
unfold in the near to medium term; where scenarios show a wide
range of outcomes, therefore the management and the Board deemed it
prudent to maintain the same scenario probability weightings as at
31 December 2020.
To ensure that provision coverage levels remained appropriate,
the Group continued to hold a number of post model adjustments to
reflect any specific risks not captured within the economic
forecasts or modelled estimates. The Group undertakes supporting
top-down analysis of expected credit losses, across higher risk
lending segments, to validate and assess the adequacy of model
based provisions. The top-down lending segment analysis and
COVID-19 post model adjustments introduced in 2020 remain relevant
until the full impact of the relaxing of lockdown and economic
support measures is observed (see section d. Post model adjustments
for more information).
The introduction of new forward-looking macroeconomic scenarios
during the first half of 2021 drove a cumulative provision release
of GBP14.0m. Details of the scenarios utilised are provided
below.
Macroeconomic scenarios utilised within IFRS 9 impairment
calculations 30 June 2021:
Scenario (%)(1)
------------ ----------- ------------------- ----------------------------
Scenario Probability Economic measure Year end Year end Year end
weighting 2021 2022 2023
(%)
------------ ----------- ------------------- -------- -------- --------
Base case 40 GDP 6.8 5.6 2.0
Unemployment 5.8 4.9 4.5
House price growth 0.2 -4.9 0.2
------------ ----------- ------------------- -------- -------- --------
Upside 30 GDP 8.4 7.3 2.4
Unemployment 4.8 4.3 4.0
House price growth 4.0 -2.7 5.5
------------ ----------- ------------------- -------- -------- --------
Downside 23 GDP 3.9 3.9 1.7
Unemployment 7.2 6.9 6.7
House price growth -6.9 -14.0 -6.6
------------ ----------- ------------------- -------- -------- --------
Severe 7 GDP 2.4 2.8 1.5
Downside Unemployment 7.7 7.3 7.0
House price growth -10.4 -18.7 -11.6
------------ ----------- ------------------- -------- -------- --------
1. Scenarios show annual movement for GDP and house price growth and year
end positions for unemployment. House price growth includes indexation up
to and including 31 March 2021 and forecast estimates thereafter.
b. Staging criteria enhancements
The Group continued to leverage the enhanced staging criteria
introduced during 2020 utilising both internal and external credit
bureau data to identify higher risk cohorts, including previous or
current payment deferral accounts, moving eligible exposures to
stage 2 where a lifetime loss allowance is held. As the rule set
was unchanged since the year end and the credit profile remained
stable there was a negligible loan loss impact during the six
months to 30 June 2021.
c. Model enhancements
The Group's technical model governance committee receives
regular model performance reports prepared by the Group's Models
and Ratings function. Where required, proposals were made to ensure
that modelled estimates continued to mirror recently observed
outcomes. During the period, a small number of
updates were made across the suite of IFRS 9 models which
resulted in GBP1.2m of the loan loss charge during the six months
to 30 June 2021.
d. Post model adjustments
During the first six months of 2021, the Group reviewed 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 the impact
payment deferrals had on credit bureau files, coupled with the
ongoing risks post the end of the furlough scheme had on loss given
default and probability of default estimates. The Group's Risk
function also conducted detailed scenario analysis, identifying
specific risks relevant to each core lending line, to triangulate
whether modelled provisions remained appropriate. The cumulative
impact of changes to the Group's post model adjustments was a loan
loss charge of GBP3.2m during the period, removing the impact of
macroeconomic scenario changes.
e. Other
Other charges, largely relating to write-offs, standard
provision movements due to loan book growth and credit profile
changes, totalled GBP5.4m, representing c. 5bps of annualised loan
loss charge, against the backdrop of the stable credit profile
performance of the loan book.
The Group continues to focus on provision adequacy and the Risk
and Compliance function conducts regular provision adequacy
assessments, benchmarking the ongoing appropriateness of key
judgements and estimates made within the IFRS 9 provisioning
process with industry benchmarks and independent analysis to ensure
provision levels remain appropriate with respect to the wide range
of macroeconomic outcomes which could materialise over the near to
medium term.
The table below indicates the provision coverage levels as at 30
June 2021.
As at 30 June Gross carrying amount Expected Credit Loss Coverage ratio
2021 GBPm GBPm %(1)
Stage 1 17,355.4 11.4 0.07%
Stage 2 2,620.5 23.9 0.91%
Stage 3 + POCI 528.6 59.1 11.18%
Total 20,504.5 94.4 0.46%
As at 31 December Gross carrying amount Expected Credit Loss Coverage
2020 GBPm GBPm ratio %
-------------
Stage 1 16,116.3 21.2 0.13%
Stage 2 2,691.0 31.0 1.15%
Stage 3 + POCI 515.3 58.8 11.41%
Total 19,322.6 111.0 0.57%
1. Coverage ratios versus loans and advances is the total IFRS 9 provision
versus gross loans and advances.
Provision levels remained strong with a coverage ratio of 0.46%
as at 30 June 2021, which is double the coverage held pre-pandemic.
Coverage levels within the period reduced from 0.57% as at 31
December 2020 to 0.46% driven predominantly by positive residential
property indexing within the period and the more positive
forward-looking macroeconomic scenarios utilised within the IFRS 9
provisioning process.
Liquidity and funding risk
Liquidity and funding performance remained strong within the
reporting period. The Group continued to be predominantly funded by
retail savings. Only 7.0% of deposits remain above the FSCS
protection limit. Diversification of funding continues to be
provided by borrowing from the Bank of England under its funding
schemes. As at 30 June 2021, the Group's borrowing under the Term
Funding Scheme for SMEs totalled GBP1.4bn and GBP2.3bn under the
Term Funding Scheme. Securitisation remains central to the Group's
liability management strategy, as well as being a key funding
source.
Liquidity coverage ratios remained strong at 178% for OSB and
156% for CCFS (31 December 2020: OSB 254% and CCFS 146%) versus the
regulatory minimum of 100%. Strong lending within the period
reduced the Group's liquidity coverage ratios in line with
expectations.
Market risk
Interest rate risk is the key market risk the Group is exposed
to. Gap and basis risk are managed within defined risk appetite
limits for each bank. The Group's Treasury function actively hedges
risk to match the timing of cash flows from assets and liabilities
for each bank. The Group is actively transitioning from LIBOR to
SONIA swaps to reduce possible exposure to a dislocation of market
rates from base rate.
The Group has a small amount of foreign exchange exposure, due
to the rupee denominated running costs of the OSB India operation.
Rupee denominated running costs during the period to 30 June 2021
totalled GBP3.8m (30 June 2020: GBP4.2m).
Solvency risk
Solvency risk is a function of changes in balance sheet size,
risk profile, profitability and capital rules.
During the six months to 30 June 2021, the Group's balance sheet
grew, however the asset mix moved towards lower capital intensive
products. The Group's risk profile remained broadly stable during
the reporting period. Profitability was boosted by impairment
provision write backs, strong net interest income performance and
controlled operating expenses. The Group's capital requirements
remained largely consistent with the 31 December 2020 position,
with positive property price indexing also supporting falling risk
weighted asset levels and consequently lower capital requirements.
The net impact of these positive trends was a further strengthening
of the Group's capital ratios. As at 30 June 2021, the CET1 ratio
improved to 18.7% from 18.3% as at 31 December 2020.
The Group remains cognisant of the ongoing macroeconomic
uncertainty, which could result in a range of risk profile outcomes
impacting capital levels, in conjunction with future changes to the
Group's capital requirements including the reversal of the 'CRR
quick fix' measures, the reintroduction of the countercyclical
buffer and a broad range of potential outcomes with respect to how
Basel 3.1 reforms are adopted in the UK.
We, the Directors listed below, confirm that to the best of our
knowledge:
-- the condensed financial statements have been prepared in
accordance with IAS 34, Interim Financial Reporting, as adopted by
the United Kingdom (UK);
-- the interim management report includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed financial statements; and a description of the
principal risks and uncertainties for the remaining six months of
the financial year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first six months of the financial year and that have materially
affected the financial position or performance of the Group during
that period; and any changes in the related party transactions
described in the last Annual Report and Accounts that could do
so.
Graham Allatt
Andy Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
David Weymouth
By order of the Board
Date: 19 August 2021
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2021 which comprises the Condensed
Consolidated Statement of Comprehensive Income, the Condensed
Consolidated Statement of Financial Position, the Condensed
Consolidated Statement of Changes in Equity, the Condensed
Consolidated Statement of Cash Flows and related notes 1 to 36. We
have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the
Group will be prepared in accordance with United Kingdom adopted
International Financial Reporting Standards. The condensed set of
financial statements included in this half-yearly financial report
has been prepared in accordance with United Kingdom adopted
International Accounting Standard 34, Interim Financial
Reporting.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Financial Reporting Council for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2021 is not prepared, in all material respects, in accordance
with United Kingdom adopted International Accounting Standard 34
and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
Review of Interim Financial Information Performed by the
Independent Auditor of the Entity issued by the Financial Reporting
Council. Our work has been undertaken so that we might state to the
Company those matters we are required to state to it in an
independent review 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, for our review work, for this
report, or for the conclusions we have formed.
Deloitte LLP
Statutory Auditor
London, United Kingdom
19 August 2021
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
Note GBPm GBPm
Interest receivable and similar income 4 349.2 371.5
Interest payable and similar charges 5 (83.9) (137.7)
Net interest income 265.3 233.8
Fair value gains/(losses) on financial
instruments 6 16.1 (12.1)
Gain on sale of financial instruments 7 4.0 19.9
Other operating income 4.6 3.7
Total income 290.0 245.3
Administrative expenses 8 (80.5) (76.7)
Provisions 28 (0.1) (0.1)
Impairment of financial assets 22 14.6 (54.2)
Impairment of intangible assets 9 - (7.0)
Integration costs 10 (1.9) (6.3)
Exceptional items 11 (0.2) (1.7)
Profit before taxation 221.9 99.3
Taxation 12 (60.4) (27.3)
Profit for the period 161.5 72.0
-----------
Other comprehensive expense
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured as Fair Value through Other Comprehensive
income (FVOCI):
Arising in the period 0.3 (0.5)
Amounts reclassified to profit or loss
for investment
securities at FVOCI (2.0) -
Tax on items in other comprehensive expense 0.7 -
Revaluation of foreign operations (0.3) 0.1
Other comprehensive expense (1.3) (0.4)
---------------------------------------------------- ---- -----------
Total comprehensive income for the period 160.2 71.6
-----------
Attributable to:
Equity shareholders of the Company 157.5 68.9
Non-controlling interests 2.7 2.7
160.2 71.6
Dividend declared for the period, pence
per share 14 4.9 -
Earnings per share, pence per share
Basic 13 35.5 15.5
Diluted 13 35.2 15.5
The above results are derived wholly from continuing
operations.
Notes 1 to 36 form part of these Condensed Consolidated
Financial Statements.
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
Note GBPm GBPm
Assets
Cash in hand 0.4 0.5
Loans and advances to credit institutions 16 2,408.0 2,676.2
Investment securities 17 224.6 471.2
Loans and advances to customers 18 20,428.2 19,230.7
Fair value adjustments on hedged assets 23 59.2 181.6
Derivative assets 40.7 12.3
Other assets 10.3 9.1
Current taxation asset - 8.4
Deferred taxation asset 5.3 4.7
Property, plant and equipment 38.4 39.2
Intangible assets 19.1 20.6
Total assets 23,234.2 22,654.5
--------------------------------------------- ---- ----------- ----------
Liabilities
Amounts owed to credit institutions 24 3,753.0 3,570.2
Amounts owed to retail depositors 25 17,097.2 16,603.1
Fair value adjustments on hedged liabilities 23 (1.1) 8.2
Amounts owed to other customers 63.5 72.9
Debt securities in issue 26 357.1 421.9
Derivative liabilities 45.2 163.6
Lease liabilities 27 11.5 11.7
Other liabilities 27.3 27.8
Provisions 28 1.9 1.8
Current taxation liability 8.5 -
Deferred taxation liability 47.1 48.3
Subordinated liabilities 10.5 10.5
Perpetual subordinated bonds 37.5 37.6
21,459.2 20,977.6
Equity
Share capital 4.5 1,359.8
Share premium 0.1 -
Retained earnings 3,061.8 1,608.6
Other reserves (1,351.4) (1,351.5)
Shareholders' funds 1,715.0 1,616.9
Non-controlling interests 60.0 60.0
Total equity and liabilities 23,234.2 22,654.5
--------------------------------------------- ---- ----------- ----------
Notes 1 to 36 form part of these Condensed Consolidated
Financial Statements.
The Condensed Consolidated Financial Statements were approved by
the Board of Directors on 19 August 2021 and signed on its behalf
by
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Foreign Share-based Non-controlling
Share Share Capital Transfer Own exchange FVOCI payment Retained interest
capital(1) premium contribution reserve shares(2) reserve reserve reserve earnings securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 1,359.8 - - (1,355.3) (4.0) (1.0) 1.0 7.8 1,608.6 60.0 1,676.9
Profit for the period - - - - - - - - 161.5 - 161.5
Coupon paid on non-controlling
interest securities - - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - - (64.8) - (64.8)
Other comprehensive
expense - - - - - (0.3) (1.7) - - - (2.0)
Share-based payments - 0.1 - - - - - 0.7 4.2 - 5.0
Tax recognised in
equity - - - - - - 0.7 0.6 (0.2) - 1.1
Own shares(2) - - - - 0.1 - - - (0.1) - -
Capital reduction
of OSB GROUP PLC share
capital(1) (1,355.3) - - - - - - - 1,355.3 - -
At 30 June 2021 (Unaudited) 4.5 0.1 - (1,355.3) (3.9) (1.3) - 9.1 3,061.8 60.0 1,775.0
------------------------------- ----------- -------- ------------- --------- --------- --------- -------- ----------- --------- --------------- -------
At 1 January 2020 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 period - - - - - - - - 72.0 - 72.0
Own shares(2) - - - - 0.3 - - (0.3) - - -
Coupon paid on non-controlling
interest securities - - - - - - - - (2.7) - (2.7)
Dividends paid - - - - - - - - - - -
Other comprehensive
expense - - - - - 0.1 (0.5) - - - (0.4)
Share-based payments - 0.1 - - - - - 0.3 2.6 - 3.0
Tax recognised in
equity - - - - - - - (1.1) - - (1.1)
At 30 June 2020 (Unaudited) 4.5 864.3 6.5 (12.8) (3.4) (0.9) - 4.5 625.1 60.0 1,547.8
(1) On 26 February 2021, OSB GROUP PLC reduced the nominal value
of 447,312,780 shares from three hundred and four (304) pence each
to one (1) penny each, see note 1 for further details.
(2) The Group has adopted look-through accounting (see note 2)
and recognised the Employee Benefit Trusts within OSB GROUP PLC (HY
2020: OneSavings Bank plc).
Foreign Share-based Non-controlling
Share Share Capital Transfer Own exchange FVOCI payment Retained interest
capital premium contribution reserve shares(1) reserve reserve reserve earnings securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 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 - - - - - - - - 196.3 - 196.3
Coupon paid on non-controlling
interest 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) - -
Own shares(1) - - - - (0.3) - - - 0.4 - 0.1
Cancellation of OneSavings
Bank plc share capital
and share premium (4.5) (866.8) - - - - - - 866.8 - (4.5)
Issuance of OSB GROUP
PLC share capital 1,359.8 - - (1,355.3) - - - - - - 4.5
At 31 December 2020
(audited) 1,359.8 - - (1,355.3) (4.0) (1.0) 1.0 7.8 1,608.6 60.0 1,676.9
------------------------------- -------- -------- ------------- --------- --------- --------- -------- ----------- --------- --------------- -------
(1) The Group has adopted look-through accounting (see note 2)
and recognised the Employee Benefit Trusts within OSB GROUP PLC (HY
2020: OneSavings Bank plc).
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
Note GBPm GBPm
Cash flows from operating activities
Profit before taxation 221.9 99.3
Adjustments for non-cash items 33 (18.8) 60.0
Changes in operating assets and liabilities 33 (616.6) (957.8)
Cash used in operating activities (413.5) (798.5)
Provisions refunded 28 - 0.3
Net tax paid (44.1) (74.8)
Net cash used in operating activities (457.6) (873.0)
Cash flows from investing activities
Maturity and sales of investment securities 302.0 121.7
Purchases of investment securities 17 (53.3) (191.5)
Interest received on investment securities 1.6 -
Sales of financial instruments - 539.8
Purchases of equipment and intangible
assets (4.0) (3.8)
Cash generated from investing activities 246.3 466.2
Cash flows from financing activities
Financing received 29 469.7 1,250.7
Financing repaid 29 (351.8) (602.4)
Cash held in deconsolidated special purpose
vehicles - (23.0)
Interest paid on financing (5.0) (1.2)
Coupon paid on non-controlling interest
securities (2.7) (2.7)
Dividends paid 14 (64.8) -
Proceeds from issuance of shares under
employee SAYE schemes 0.1 0.1
Cash payments on lease liabilities 27 (0.9) (1.0)
Cash generated from financing activities 44.6 620.5
Net (decrease)/increase in cash and cash
equivalents (166.7) 213.7
Cash and cash equivalents at the beginning
of the period 15 2,370.6 2,102.8
Cash and cash equivalents at the end of
the period 15 2,203.9 2,316.5
Movement in cash and cash equivalents (166.7) 213.7
----------- -----------
1. Capital reduction
On 11 January 2021, the parent company OSB GROUP PLC (the
Company) published a Circular in relation to the Capital reduction,
which subject to shareholder approval as well as certain other
conditions set out in the Circular, was undertaken to create the
required distributable reserves to enable the Company to pay
dividends and other distributions to shareholders in the future.
The Circular stated that there would be no change to the total
number of shares or the total capital in the Company, or in the
Company and its subsidiaries (the Group's) capital ratios as a
result of the Capital reduction. On 26 February 2021, the Capital
reduction became effective with the Company reducing the nominal
value of 447,312,780 shares from three hundred and four (304) pence
each to one (1) penny each. This generated GBP1.4bn of
distributable reserves following interim accounts as at 28 February
2021 being prepared and delivered to Companies House supporting the
dividend distribution of GBP64.8m on 2 June 2021 by the
Company.
2. Accounting policies
a) Basis of preparation
These Interim Condensed Consolidated Financial Statements have
been prepared in accordance with the Disclosure Guidance and
Transparency Rules (DTR) of the Financial Conduct Authority (FCA)
and in accordance with International Accounting Standard 34 Interim
Financial Reporting as adopted by the UK.
The accounting policies, presentation and methods of computation
are consistent with those applied by the Group in its latest
audited financial statements, which were prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted
by the UK and interpretations issued by the International Financial
Reporting Interpretations Committee (IFRIC). They do not include
all the information required for a complete set of IFRS financial
statements. However, selected explanatory notes are included to
explain events and transactions that are significant to an
understanding of the changes in the Group's financial position and
performance since the last Annual Report and Accounts for the year
ended 31 December 2020.
The comparative figures for the year ended 31 December 2020 are
not the Group's statutory accounts for that financial year. The
statutory accounts for the year ended 31 December 2020 have been
delivered to the Registrar of Companies in England and Wales in
accordance with section 447 of the Companies Act 2006. The auditor
has reported on those accounts. Their report was unqualified; did
not include a reference to any matters to which the auditor drew
attention by way of emphasis without qualifying their report, and
did not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
The comparative figures for the year ended 31 December 2020 have
been presented to include OneSavings Bank plc's consolidated
assets, liabilities, income and expenses prospectively from the
date of insertion of the Company without restating pre-insertion
information, as if the Company had been the parent company
throughout the current and prior years.
These Interim Condensed Consolidated Financial Statements were
authorised for issue by the Company's Board of Directors on 19
August 2021.
1. Accounting policies (continued)
b) Accounting standards
The Group has 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 and became mandatory for
annual reporting periods beginning on or after 1 January 2021.
Adopting these amendments has enabled the Group to reflect the
effects of transitioning from interbank offered rates (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. See the IBOR transition section in note 30 Risk
Management for further details. The Group continues to apply the
Phase 1 amendments 'Interest Rate Benchmark reform: Amendments to
IFRS 9/IAS 39 and IFRS 7' where relevant.
The IFRS Interpretations Committee published an agenda decision
in April 2021 addressing how a customer should account for the
costs of configuring or customising the supplier's application
software in a Software-as-a-Service (SaaS) arrangement that is
determined to be a service contract.
The adoption of the financial reporting standards listed above
has not had a material impact on the Group.
All other accounting policies applied are consistent with those
set out on pages 192 to 204 of the 2020 Annual Report and
Accounts.
c) Going concern
The Board undertakes regular rigorous assessments 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 Interim Condensed
Consolidated Financial Statements. These forecasts have been
subject to sensitivity tests, including stress scenarios, which
have been compared to the latest COVID-19 pandemic economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests.
The assessments continue to be 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 economic forecasts provided by the
Group's external economic advisors. Reverse stress tests were also run,
to assess what combinations of House Price Index (HPI) 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 Internal Liquidity Adequacy Assessment Process
(ILAAP) stress scenarios, which were reviewed for suitability in the
context of COVID-19 related stresses.
1. Accounting policies (continued)
-- 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 from office or homeworking across
all locations, ensuring stable access to core systems, data and
communication devices. Investment is scheduled for further
flexibility on combinations of home and office working for staff
within a hybrid go to model. 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 changing operational demands. The
operational dependencies on third party vendors and outsourcing
arrangements continue to be an important area of focus.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
capital requirements as set out by the Prudential Regulation
Authority (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 Interim Condensed Consolidated Financial Statements on a
going concern basis.
d) 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 30 at
a sub-segment level to provide detailed analysis of the Group's
core lending business.
1. Judgements in applying accounting policies and critical accounting
estimates
The preparation of the Interim Condensed Consolidated Financial
Statements requires management to make judgements, estimates and
assumptions that affect the reported income and expense, assets and
liabilities and disclosure of contingencies at the date of the
Interim Condensed Consolidated Financial Statements. Although these
estimates and assumptions are based on management's best judgement
at that date, actual results may differ from these estimates.
Estimates and assumptions are reviewed on an ongoing basis.
Revisions to estimates are recognised in the period in which the
estimate is revised and in any future periods affected.
The judgements made by the Group in the application of its
accounting policies are consistent with those set out on pages 204
to 206 of the 2020 Annual Report and Accounts.
The following estimates may have a significant risk of material
adjustment to the carrying amount of assets within the next
financial period.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
(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 GBP94.4m (31 December
2020: GBP111.0m) at the reporting date as disclosed in note 21.
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 probability of default (PD), the loss
given default (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 30 June 2021 a 10% fall in house prices
would result in an incremental GBP20.2m (31 December 2020:
GBP25.6m) of provision being required. For the CCFS segment at 30
June 2021 a 10% fall in house prices would result in an incremental
GBP8.3m (31 December 2020: GBP13.9m) 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 GBP28.5m (31 December 2020: GBP39.5m) as at 30 June
2021.
Loan book impairments - forward-looking macroeconomic
scenarios
The Group's macroeconomic scenarios can be found in the Risk
review section above. The following tables detail the expected
credit losses (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:
Weighted
(see 100% Base 100% Upside 100% Downside 100% Severe
As at 30 June 2021 (Unaudited) note 21) case scenario scenario scenario downside scenario
Total loans before provisions,
GBPm 20,504.5 20,504.5 20,504.5 20,504.5 20,504.5
Modelled ECL, GBPm 52.1 36.6 23.4 90.4 137.0
Non-modelled ECL, GBPm 42.3 42.3 42.3 42.3 42.3
Total ECL, GBPm 94.4 78.9 65.7 132.7 179.3
ECL coverage, % 0.46 0.39 0.32 0.65 0.87
As at 31 December 2020
(Audited)
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
3. Judgements in applying accounting policies and critical accounting estimates (continued)
(ii) Loan book acquisition accounting and effective interest
rate
There have been no significant changes in key judgements and
assumptions for acquisition accounting and income recognition and
effective interest rate (EIR) calculations compared to those
applied at 31 December 2020, as described on pages 204 to 206 of
the 2020 Annual Report and Accounts.
Sensitivities have been applied to the Precise and Kent Reliance
organically originated 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
early redemption charges (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, such as 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.GBP27.9m recognised in net interest income. It includes a
c.GBP14.9m 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 organic loan books, would result in a reset loss of
c.GBP10.1m recognised in net interest income. This includes
c.GBP2.9m gain in relation to the Kent Reliance loan book.
The Group recognised a net GBP0.4m gain in the six months to 30
June 2021 as a result of resetting cash flows on acquired books.
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. GBP31m/GBP33m.
It is reasonably possible, on the basis of existing knowledge,
that a change in estimated cash recoveries of principal and
interest which are past due at loan maturity could result in a
material increase in the value of the acquired second charge loan
portfolios with a corresponding increase in net interest income. It
is currently impracticable to estimate reliably the possible
effects of a change in cash flow recoveries as they are subject to
application of the Group's forbearance and collections policies,
following further engagement with borrowers and regulatory
guidance.
4. Interest receivable and similar income
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
At amortised cost:
On OSB mortgages 258.9 248.6
On CCFS mortgages 166.5 166.3
On investment securities 1.0 1.5
On other liquid assets 1.2 4.0
Amortisation of fair value adjustments on
CCFS Combination(1) (35.3) (34.9)
Amortisation of fair value adjustments on
hedged assets(2) (17.0) -
At fair value through profit or loss (FVTPL):
Net expense on derivative financial instruments
- lending activities (26.5) (17.4)
On CCFS mortgages - 0.3
At FVOCI:
On investment securities 0.4 3.1
349.2 371.5
------------------------------------------------ ----------- -----------
(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.
5. Interest payable and similar charges
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
On retail deposits 84.1 134.9
On BoE borrowings 2.0 4.7
On perpetual subordinated bonds 0.8 0.8
On subordinated liabilities 0.4 0.4
On wholesale borrowings 0.4 2.6
On debt securities in issue 1.8 1.4
On lease liabilities 0.2 0.2
Amortisation of fair value adjustments on
CCFS Combination(1) (0.8) (1.9)
Amortisation of fair value adjustments on
hedged liabilities(2) (0.5) -
Net income on derivative financial instruments
- savings activities (4.5) (5.4)
83.9 137.7
----------------------------------------------- ----------- -----------
(1) Amortisation of fair value adjustments on CCFS customer
deposits at Combination.
(2) The amortisation relates to hedged assets where the hedges
were terminated before maturity and were effective at the point of
termination.
6. Fair value gains/(losses) on financial instruments
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Fair value changes in hedged assets (114.5) 137.8
Hedging of assets 114.7 (145.4)
Fair value changes in hedged liabilities 8.8 (15.1)
Hedging of liabilities (8.4) 16.3
Ineffective portion of hedges 0.6 (6.4)
Net gains/(losses) on unmatched swaps 6.1 (13.8)
Amortisation of inception adjustments(1) 0.2 5.8
Amortisation of acquisition related inception
adjustments(2) 6.7 5.1
Amortisation of de-designated hedge relationships(3) 2.2 -
Fair value movements on mortgages at FVTPL 0.2 (1.2)
Amortisation of fair value adjustments on
hedged assets - (1.7)
Debit and credit valuation adjustment 0.1 0.1
16.1 (12.1)
(1) Amortisation of inception adjustments relates to the
amortisation of the hedge accounting adjustments arising when hedge
accounting commences, primarily on derivative instruments
previously taken out against the mortgage pipeline and on
derivative instruments previously taken out against new retail
deposits.
(2) Amortisation of acquisition related inception adjustments
relates to hedge accounting assets and liabilities recognised on
the Combination. The inception adjustments are being amortised over
the life of the derivative instruments acquired on Combination
subsequently designated in hedging relationships.
(3) The amortisation of de-designated hedge relationships of
GBP2.2m (2020: GBPnil) relates to the amortisation of hedged items
where hedge accounting has been discontinued due to
ineffectiveness.
7. Gain on sales of financial instruments
On 10 February 2021, the Group sold the Precise Mortgage Funding
2019-1B plc A2 notes for GBP287.0m, generating a gain on sale of
GBP4.0m. Excluding the impact of the fair value adjustment on
Combination of GBP1.7m, the underlying gain on sale was
GBP2.3m.
On 17 January 2020, the Group sold the Canterbury Finance No.1
plc (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 Canterbury 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.
7. Gain on sales of financial instruments (continued)
On 23 January 2020, the Group securitised mortgage loans with a
par value of GBP375.5m through Precise Mortgage Funding 2020-1B plc
(PMF 2020-1B), issuing GBP388.9m of Sterling floating rate notes.
The Group retained the GBP100.7m 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 the risks and rewards have been transferred. The Group
recognised a gain on sale of GBP2.0m upon deconsolidation.
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.
8. Administrative expenses
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Staff costs 46.7 41.6
Facilities costs 2.9 3.0
Marketing costs 1.8 2.4
Support costs 8.7 9.2
Professional fees 10.3 10.7
Other costs 3.3 2.3
Depreciation 2.6 2.9
Amortisation 4.2 4.6
80.5 76.7
------------------ ----------- -----------
The average number of people employed by the Group (including
Executive Directors) during the period is analysed below:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
UK 1,218 1,343
India 509 485
1,727 1,828
------ ----------- -----------
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. During 2020 an impairment of GBP7.0m was recognised
arising from changes to CCFS anticipated lending volumes over three
years post combination, which are a key input to the calculation of
the fair value, and which were revised due to COVID-19 impacts. An
impairment assessment was performed during 2021 concluding that no
additional impairment was required. The remaining carrying value of
the broker relationships intangible asset at 30 June 2021 is
GBP4.3m (2020: GBP5.8m).
10. Integration costs
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Consultant fees 0.3 1.6
Staff costs 1.6 4.7
1.9 6.3
---------------- -----------
Consultant fees relate to advice on the Group's future operating
structure.
Staff costs relate to personnel who will leave or have left the
Group through the transition of operations to the new operating
model.
11. Exceptional items
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Consultant fees - 0.9
Legal and professional fees 0.2 0.8
0.2 1.7
---------------------------- ----------- -----------
Exceptional items relate to the insertion of OSB GROUP PLC as
the new holding company and listed entity of the Group.
12. 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 period:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Corporation taxation (63.3) (35.8)
Deferred taxation 0.9 0.4
Adjustments in respect of earlier years (0.2) -
Release of deferred taxation on CCFS Combination(1) 2.2 8.1
Total taxation (60.4) (27.3)
---------------------------------------------------- ----------- -----------
(1) Release of deferred taxation on CCFS Combination relates to
the unwind of the deferred tax liabilities recognised on the fair
value adjustments of the CCFS assets and liabilities at the
acquisition date (GBP7.8m) and the impact of the corporation tax
rate increase on these deferred tax liabilities (GBP5.6m).
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% (2020: 19%) as follows:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Profit before taxation 221.9 99.3
Profit multiplied by the standard rate of
UK Corporation Tax (19%) (42.2) (18.9)
Bank surcharge(1) (13.2) (3.5)
Taxation effects of:
Expenses not deductible for taxation purposes (0.2) (1.8)
Impact of deferred tax rate change(2) (5.4) (4.6)
Adjustments in respect of earlier periods (0.2) -
Income not taxable - 1.0
Tax adjustments in respect of share-based
payments (0.9) (0.6)
Impact of tax losses carried forward 0.3 0.1
Tax on coupons paid on non-controlling interest
securities 0.7 0.7
Timing differences 0.7 0.4
Other - (0.1)
Total taxation charge (60.4) (27.3)
------------------------------------------------ ----------- -----------
(1) Tax charge for the two banking entities of GBP15.5m (2020:
GBP7.1m) offset by the tax impact of unwinding CCFS Combination
items of GBP2.3m (2020: GBP3.6m).
(2) Due to change in corporation tax rate from 19% to 25% on 1
April 2023. (2020: Due to cancelled rate reductions from 19% to 17%
on 1 April 2020)
12. Taxation (continued)
Factors that may affect future tax charges
On 24 May 2021, the government substantively enacted legislation
to increase the corporation tax rate from 19% to 25% on 1 April
2023. The government has also acknowledged that this increase will
result in an uncompetitive position for UK banks, who are also
subject to the 8% Bank Surcharge, and have commenced a review of
the Bank Surcharge. This review is ongoing and as at 30 June 2021,
no reduction in the Bank Surcharge had been announced or enacted
into legislation, and so it is assumed for the purposes of deferred
tax calculations that the surcharge will remain at 8%.
13. Earnings per share
Earnings per share (EPS) is based on the profit for the period
and the weighted average number of ordinary shares in issue. Basic
EPS is calculated by dividing profit attributable to ordinary
shareholders by the weighted average number of ordinary shares in
issue during the period. Diluted EPS take into account share
options and awards which can be converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to
ordinary shareholders is arrived at by adjusting profit for the
period for the coupons on non-controlling interest securities
classified as equity:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Statutory profit after tax 161.5 72.0
Less: Coupon on non-controlling interest securities
classified as equity (2.7) (2.7)
Statutory profit attributable to ordinary
shareholders 158.8 69.3
---------------------------------------------------- ----------- -----------
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Weighted average number of shares, millions
Basic 447.7 445.9
Dilutive impact of share-based payment schemes 3.8 2.2
Diluted 451.5 448.1
Earnings per share, pence per share
Basic 35.5 15.5
Diluted 35.2 15.5
14. Dividends
Dividends paid during the period are disclosed below:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
Pence per Pence per
GBPm share GBPm share
Final dividend for the prior
year 64.8 14.5 - -
The Group's dividend policy is to declare interim dividends
based on one-third of the prior year's total dividend. The Board
continues to target a full year dividend payout ratio of at least
25 per cent of underlying profit after tax less coupons on
non-controlling interest securities.
The Directors have declared an interim dividend for the first
half of 2021 of GBP22.0m, 4.9 pence per share (2020: nil), based on
one-third of the total 2020 dividend of 14.5 pence per share,
payable on 22 September 2021 with an ex-dividend date of 26 August
2021 and a record date of 27 August 2021. This dividend is not
reflected in these financial statements as it was not declared at
the reporting date.
A summary of the Company's distributable reserves is shown
below, based on Company interim accounts prepared to 28 February
2021 following the capital reduction (see Note 1):
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
Retained earnings 1,359.4 -
Other distributable reserves(1) (3.1) -
Dividend distributed(2) (64.8) -
Distributable reserves 1,291.5 -
---------------------------------- ----------- ----------
(1) Other distributable reserves comprises the share-based
payment reserve of GBP0.9m, offset by own shares held in the
Group's employee benefit trust of GBP4.0m which are recognised
within OSBG under look-through accounting.
(2) The company made a dividend distribution of GBP64.8m on 2
June 2021 supported by GBP64.8m of dividends received from
subsidiaries.
15. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Condensed Consolidated Statement of Cash
Flows:
As at As at As at As at
30-Jun-21 31-Dec-20 30-Jun-20 31-Dec-19
(Unaudited) (Audited) (Unaudited) (Audited)
GBPm GBPm GBPm GBPm
----------------------------------------------------- ----------- ---------- ----------- ----------
Cash in hand 0.4 0.5 0.5 0.4
Unencumbered loans and advances to credit
institutions 2,203.5 2,370.1 2,316.0 2,052.5
Investment securities with an original maturity less
than 3 months - - - 49.9
2,203.9 2,370.6 2,316.5 2,102.8
----------------------------------------------------- ----------- ---------- ----------- ----------
16. Loans and advances to credit institutions
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
----------------------------------------- ----------- ----------
Unencumbered:
BoE call account 2,062.2 2,256.5
Call accounts 73.6 55.6
Cash held in special purpose vehicles(1) 62.2 51.0
Term deposits 5.5 7.0
Encumbered:
BoE cash ratio deposit 54.3 52.3
Cash held in special purpose vehicles(1) 32.6 42.7
Cash margin given 117.6 211.1
2,408.0 2,676.2
----------------------------------------- ----------- ----------
(1) Cash held in special purpose vehicles is ring-fenced for use
in managing the Group's securitised debt facilities under the terms
of securitisation agreements. Unencumbered cash held in special
purpose vehicles becomes available on the respective interest
payment date of the respective securitisation; whereas, the
encumbered balance is retained in the securitisation special
purpose vehicle for liquidity requirements.
17. Investment securities
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
----------------------------- ----------- ----------
Held at FVTPL:
RMBS loan notes 0.8 -
----------------------------- ----------- ----------
0.8 -
Held at FVOCI:
RMBS loan notes - 285.0
----------------------------- ----------- ----------
- 285.0
Held at amortised cost:
RMBS loan notes 223.8 186.2
----------------------------- ----------- ----------
223.8 186.2
Less: Expected credit losses - -
----------------------------- ----------- ----------
223.8 186.2
----------------------------- ----------- ----------
224.6 471.2
----------------------------- ----------- ----------
Residential Mortgage-Backed Securities (RMBS)
17. Investment securities (continued)
Movements during the period in investment securities held by the
Group are analysed below:
Six months
ended Year ended
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
----------------------------- ----------- ----------
At 1 January 471.2 635.3
Additions(1) 53.3 291.6
Disposals and maturities(2) (300.0) (457.2)
Movement in accrued interest (0.2) 0.5
Changes in fair value 0.3 1.0
-----------------------------
224.6 471.2
----------------------------- ----------- ----------
(1) The prior year additions included GBP100.7m of retained RMBS
loan notes following the deconsolidation of PMF 2020-1B.
(2) The prior year disposals and maturities included GBP49.9m of
UK Sovereign debt which had an original maturity of less than three
months.
18. Loans and advances to customers
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
------------------------------------------- ----------- ----------
Held at amortised cost:
Loans and advances (see note 19) 20,406.3 19,257.1
Finance leases (see note 20) 98.2 65.5
20,504.5 19,322.6
Less: Expected credit losses (see note 21) (94.4) (111.0)
-------------------------------------------
20,410.1 19,211.6
Residential mortgages held at fair value 18.1 19.1
----------
20,428.2 19,230.7
------------------------------------------- ----------- ----------
19. Loans and advances
As at 30-Jun-21 As at 31-Dec-20
(Unaudited) (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 9,910.3 7,352.7 17,263.0 9,310.8 6,749.5 16,060.3
Stage 2 1,316.1 1,302.7 2,618.8 1,362.0 1,327.6 2,689.6
Stage 3 360.3 58.0 418.3 344.5 48.1 392.6
Stage 3 (POCI) 49.2 57.0 106.2 48.6 66.0 114.6
11,635.9 8,770.4 20,406.3 11,065.9 8,191.2 19,257.1
--------------- -------- ------- -------- -------- ------- --------
19. Loans and advances (continued)
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the period:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 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(3) (2,300.3) 2,344.5 (44.2) - -
- To Stage 3 (124.8) (90.9) 215.7 - -
At 1 January 2021 16,060.3 2,689.6 392.6 114.6 19,257.1
Originations(1) 2,456.2 - - - 2,456.2
Acquisitions(4) 277.7 - - 2.7 280.4
Disposals(4) (214.4) - - - (214.4)
Repayments and write-offs(2) (1,249.0) (75.5) (37.4) (11.1) (1,373.0)
Transfers:
- To Stage 1 868.8 (850.0) (18.8) - -
- To Stage 2 (907.1) 930.1 (23.0) - -
- To Stage 3 (29.5) (75.4) 104.9 - -
At 30 June 2021 (Unaudited) 17,263.0 2,618.8 418.3 106.2 20,406.3
----------------------------- --------- ------- ------- ------- ---------
(1) Originations include further advances and drawdowns on
existing commitments.
(2) Repayments and write-offs include customer redemptions.
(3) Transfers to stage 2 were higher in 2020 due to the
additional qualitative and quantitative tests applied for loans
with payment deferrals. Payment deferrals increased in 2020 notably
through COVID-19 initiatives and impacts.
(4) The Group acted as co-arranger in the re-securitisation of
GBP229.6m of third party mortgages from the Rochester Financing
No.2 PLC securitisation to the new Rochester Financing No.3 PLC
securitisation on 15 June 2021. Neither securitisation is a
subsidiary of the Group. Under the terms of the mortgage sale
agreements, the Group recognised the mortgages as a purchase from
Rochester Financing No.2 PLC and immediately derecognised them as a
sale to Rochester Financing No.3 PLC. OneSavings Bank plc is the
master servicer of the mortgages, and has retained 5% of these
mortgages, as required under the retention rules. In addition to
the Group acting as co-arranger for the re-securitisation of
Rochester Financing No.2 PLC, the Group purchased an external
mortgage book, a c. GBP55m portfolio of UK residential mortgages,
at a discount to current balances (prior year one external mortgage
book purchased at par).
20. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 32.4 21.9
Between one and five years 75.8 50.4
More than five years 1.5 1.3
109.7 73.6
Unearned finance income (11.5) (8.1)
Net investment in finance leases 98.2 65.5
----------------------------------------------- ----------- ----------
Net investment in finance leases, receivable
Less than one year 28.6 18.6
Between one and five years 68.1 45.7
More than five years 1.5 1.2
98.2 65.5
-----------
The Group has recognised GBP2.9m of ECLs on finance leases as at
30 June 2021 (31 December 2020: GBP2.6m).
1. Expected credit loss
The ECL has been calculated based on various scenarios as set
out below:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
GBPm % GBPm GBPm % GBPm
Scenarios
Upside 23.4 30 7.0 40.1 30 12.0
Base case 36.6 40 14.7 54.6 40 21.8
Downside scenario 90.4 23 20.8 113.5 23 26.1
Severe downside
scenario 137.0 7 9.6 166.7 7 11.7
Total weighted
provisions 52.1 71.6
Non-modelled
provisions:
Individually-assessed
provisions - - 32.0 - - 29.0
Post model
adjustments(1) - - 10.3 - - 10.4
Total provision 94.4 111.0
---------------------- --------- --------- -------------- --------- --------- --------------
(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, furlough 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 Credit risk section of the Risk profile performance overview on
pages 81 to 87 of the 2020 Annual Report and Accounts.
The Group's ECL by segment and IFRS 9 stage is shown below:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 7.0 4.4 11.4 12.3 8.9 21.2
Stage 2 14.6 9.3 23.9 17.9 13.1 31.0
Stage 3 51.5 2.1 53.6 49.4 2.3 51.7
Stage 3 (POCI) 3.6 1.9 5.5 4.0 3.1 7.1
76.7 17.7 94.4 83.6 27.4 111.0
-------------- --------- -------- ---------- -------- -------- ---------
The tables below show the movement in the ECL by IFRS 9 stage
during the period. ECLs on originations and acquisitions reflect
the IFRS 9 stage of loans originated or acquired during the period
as at 30 June 2021 and not the date of origination. Remeasurement
of loss allowance relates to existing loans which did not redeem
during the period and includes the impact of loans moving between
IFRS 9 stages.
21. Expected credit loss (continued)
Stage
Stage 1 Stage 2 Stage 3 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 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 1 January 2021 21.2 31.0 51.7 7.1 111.0
Originations 2.0 - - - 2.0
Acquisitions 0.1 - - 0.1 0.2
Repayments and write-offs (1.4) (1.6) (4.2) (0.9) (8.1)
Remeasurement of loss allowance (17.2) (0.8) 4.1 (1.3) (15.2)
Transfers:
- To Stage 1 7.4 (7.0) (0.4) - -
- To Stage 2 (1.6) 2.6 (1.0) - -
- To Stage 3 (0.1) (2.3) 2.4 - -
Changes in assumptions
and model parameters 1.0 2.0 1.0 0.5 4.5
At 30 June 2021 (Unaudited) 11.4 23.9 53.6 5.5 94.4
The table below shows the stage 2 ECL balances by transfer
criteria:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
Carrying Carrying
value ECL Coverage value ECL Coverage
GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD
movement 1,058.4 13.8 1.30 946.9 17.0 1.80
Qualitative
measures 1,511.4 9.6 0.64 1,680.7 12.7 0.76
30 days past due
backstop 50.7 0.5 0.99 63.4 1.3 2.05
Total 2,620.5 23.9 0.91 2,691.0 31.0 1.15
----------------- --------- ------ ---------- --------- ----- ----------
The Group has a number of qualitative measures to determine
whether a significant increase in credit risk (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.
22. Impairment of financial assets
The charge for impairment of financial assets in the Condensed
Consolidated Statement of Comprehensive Income comprises:
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Write-offs in period 2.0 1.1
Disposals - (0.4)
(Decrease)/increase in ECL provision (16.6) 53.5
(14.6) 54.2
------------------------------------- ----------- -----------
23. Hedge accounting
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
Hedged assets
Current hedge relationships 1.8 197.5
Swap inception adjustment (36.3) (100.5)
Cancelled hedge relationships 93.7 84.6
Fair value adjustments on hedged assets 59.2 181.6
--------------------------------------------- ----------- ----------
Hedged liabilities
Current hedge relationships 0.8 (11.8)
Swap inception adjustment 3.2 6.2
Cancelled hedge relationships (2.1) -
De-designated hedge relationships (0.8) (2.6)
Fair value adjustments on hedged liabilities 1.1 (8.2)
--------------------------------------------- ----------- ----------
Swap inception adjustment relates to hedge accounting
adjustments arising when hedge accounting commences, primarily on
derivative instruments previously taken out against the mortgage
pipeline and on derivative instruments previously taken out against
new retail deposits.
De-designated hedge relationships relates to hedge accounting
adjustments on failed hedge accounting relationships. These
adjustments are amortised over the remaining lives of the original
hedged items.
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).
24. Amounts owed to credit institutions
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
BoE TFS 2,298.6 2,568.6
BoE TFSME 1,445.1 1,000.1
Commercial repo - 0.1
Loans from credit institutions 1.0 1.4
Cash collateral received 8.3 -
3,753.0 3,570.2
------------------------------- ----------- ----------
Term Funding Scheme (TFS)
Term Funding Scheme for SMEs (TFSME)
25. Amounts owed to retail depositors
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate
deposits 5,842.8 4,473.7 10,316.5 6,275.6 4,781.4 11,057.0
Variable rate
deposits 3,797.9 2,982.8 6,780.7 3,429.7 2,116.4 5,546.1
9,640.7 7,456.5 17,097.2 9,705.3 6,897.8 16,603.1
-------------- --------- -------- -------- ---------
26. Debt securities in issue
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
Asset backed loan notes at
amortised cost 357.1 421.9
-------------------------------------
Amount due for settlement after 12
months 357.1 421.9
357.1 421.9
----------------------------------- ----------- ----------
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. The Group expects that a large
proportion of the underlying mortgage assets, and therefore these
notes, will be repaid within five years.
26. Debt securities in issue (continued)
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 SONIA.
As at 30 June 2021, notes were in issue through the following
funding vehicles:
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
CMF 2020-1 plc 251.7 288.6
Canterbury Finance No.3 plc 105.4 133.3
357.1 421.9
----------------------------- ----------- ----------
27. Lease liabilities
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Audited)
GBPm GBPm
At 1 January 11.7 13.3
New leases 0.7 0.1
Lease terminated (0.2) -
Lease repayments (0.9) (2.0)
Interest accruals 0.2 0.3
11.5 11.7
------------------ -----------
28. Provisions and contingent liabilities
An analysis of the Group's Financial Services Compensation
Scheme (FSCS) and other provisions is presented below:
Other regulatory ECL on undrawn
FSCS provisions loan facilities Total
GBPm GBPm GBPm GBPm
At 1 January 2020 (0.2) 1.6 0.2 1.6
Refund/(paid) during the
period 0.3 (0.2) - 0.1
Charge - 0.1 - 0.1
At 1 January 2021 0.1 1.5 0.2 1.8
Refund/(paid) during the
period - - - -
Charge - - 0.1 0.1
At 30 June 2021 (Unaudited) 0.1 1.5 0.3 1.9
---------------------------- ----- ---------------- ---------------- -----
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 has responded 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.
29. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's
liabilities classified as financing activities within the Condensed
Consolidated Statement of Cash Flows:
Amounts owed Perpetual
to credit Debt securities Subordinated Subordinated
institutions in issue liabilities Bonds Total
(see note (see note
24) 26)
GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 3,570.2 421.9 10.5 37.6 4,040.2
Cash movements:
Principal
drawdowns 469.7 - - - 469.7
Principal
repayments (286.8) (65.0) - - (351.8)
Non-cash
movements:
Accrued interest
movement (0.1) 0.2 - (0.1) -
At 30 June 2021
(Unaudited) 3,753.0 357.1 10.5 37.5 4,158.1
----------------- ------------- --------------- ------------ ------------- -------
Amounts owed Perpetual
to credit Debt securities Subordinated Subordinated
institutions in issue liabilities Bonds Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 3,068.8 296.3 10.6 37.6 3,413.3
Cash movements:
Principal drawdowns 915.0 335.7 - - 1,250.7
Principal repayments (553.0) (49.4) - - (602.4)
Deconsolidation
of special purpose
vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest
movement (4.0) (0.7) - - (4.7)
At 30 June 2020
(Unaudited) 3,426.8 325.7 10.6 37.6 3,800.7
30. Risk management
The tables below are a summary of the Group's risk management
and financial instruments disclosures, of which a complete
disclosure for the year ended 31 December 2020 is included in the
Group's 2020 Annual Report and Accounts. The tables do not
represent all risks the Group is exposed to and should be read in
conjunction with the Risk review above.
IBOR transition
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. 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. This is included as an emerging risk within the Risk review
section above.
In 2018, the Group set up an internal working group, comprising
all of the key business lines that are involved with this change,
including workstreams 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 the Group Assets
and Liabilities Committee. 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 has adopted on 1 January 2021 '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 and became
mandatory for annual reporting periods beginning on or after 1
January 2021 (see note 2), enabling 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.
Mortgages
At 30 June 2021, the Group had GBP7,298.6m (31 December 2020:
GBP8,001.7m) of LIBOR-linked lending, including funding lines and
mortgages that will revert to LIBOR in the future out of total
mortgages balances of GBP20,406.3m (31 December 2020:
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.
Direct communication with impacted customers regarding the
cessation of LIBOR and its implications commenced during the first
half of 2021. The LIBOR Transition Working Group is monitoring
industry developments including the FCA's initiatives with regard
to 'tough legacy' loans and the UK Treasury 'safe harbour'
legislation. In addition the internal working group maintains close
contact with the UK Finance LIBOR Transition Steering Committee to
ensure it is fully appraised of all developments affecting LIBOR
transition.
Investment securities
At 30 June 2021, the Group had GBP142.4m (31 December 2020:
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.
Retail savings
None of the OSB or CCFS current or back book retail savings
products have a LIBOR component within the product.
1. Risk management (continued)
Non-controlling interest securities
The GBP60.0m non-controlling interest securities pay interest at
a rate of 9.125% per annum until the first reset date on 25 May
2022 when it reverts to a LIBOR swap rate. In advance of the reset
date, the Group will either refinance the security or agree the
benchmark rate to be adopted.
Derivatives
As at 30 June 2021, the total nominal amount of the Group's
derivatives was GBP18,985.9m (31 December 2020: GBP19,080.2m), of
which the Group had LIBOR-linked swaps with a nominal value of
GBP4,436.5m (31 December 2020: GBP8,020.0m) and a fair value of
GBP(2.6)m (31 December 2020: GBP89.1m) hedging assets and
liabilities. It is planned that existing derivatives will be
actively transitioned onto alternative benchmarks before the end of
2021.
The remaining LIBOR-linked swaps that have a reset in 2022 will
be actively transitioned onto SONIA-linked swaps before the end of
Q3 2021.
Credit risk
The following tables show the Group'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.
As at 30-Jun-21 (Unaudited)
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,002.7 9,900.7 7,352.7 7,351.4 17,355.4 17,252.1
Stage 2 1,317.8 1,313.7 1,302.7 1,302.7 2,620.5 2,616.4
Stage 3 364.4 338.2 58.0 58.0 422.4 396.2
Stage 3
(POCI) 49.2 49.1 57.0 57.0 106.2 106.1
11,734.1 11,601.7 8,770.4 8,769.1 20,504.5 20,370.8
------- -------------- ----------- -------------- ----------- -------------- -----------
As at 31-Dec-20 (Audited)
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
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
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands. The collateral value of assets
under the Group's asset finance leases are assumed to have zero
value for the purposes of producing the above disclosures. As at 30
June 2021 asset finance outstanding loans totalled GBP98.2m (31
December 2020: GBP65.5m).
1. Risk management (continued)
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:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,003.0 423.7 2,426.7 12 1,740.3 419.3 2,159.6 11
50% - 60% 1,588.6 490.4 2,079.0 10 1,462.0 483.3 1,945.3 10
60% - 70% 3,397.0 1,174.9 4,571.9 22 2,813.4 1,109.3 3,922.7 20
70% - 80% 3,671.2 5,765.8 9,437.0 46 3,942.9 5,144.3 9,087.2 47
80% - 90% 728.7 913.8 1,642.5 8 879.1 1,033.7 1,912.8 10
90% - 100% 104.8 1.8 106.6 1 105.8 1.3 107.1 1
>100% 240.8 - 240.8 1 187.9 - 187.9 1
Total loans
before provisions 11,734.1 8,770.4 20,504.5 100 11,131.4 8,191.2 19,322.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
The table below shows the LTV banding for the OSB segments' two
major lending streams:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 857.4 1,145.6 2,003.0 17 795.7 944.6 1,740.3 16
50% - 60% 1,350.6 238.0 1,588.6 14 1,228.1 233.9 1,462.0 13
60% - 70% 3,160.3 236.7 3,397.0 29 2,602.1 211.3 2,813.4 25
70% - 80% 3,378.3 292.9 3,671.2 31 3,693.4 249.5 3,942.9 35
80% - 90% 583.9 144.8 728.7 6 584.5 294.6 879.1 8
90% - 100% 94.2 10.6 104.8 1 89.4 16.4 105.8 1
>100% 232.7 8.1 240.8 2 171.4 16.5 187.9 2
Total loans
before provisions 9,657.4 2,076.7 11,734.1 100 9,164.6 1,966.8 11,131.4 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
Asset finance exposures are included in the OSB BTL/SME
sub-segment where collateral is considered to have zero value for
the purposes of deriving these disclosures. Therefore, growth in
balances with a LTV >100% is in part a result of the growth in
asset finance balances during the six months to 30 June 2021 to
GBP98.2m (31 December 2020: GBP65.5m), see the Risk review section
for further commentary on LTVs.
1. Risk management (continued)
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
As at 30-Jun-21 (Unaudited)
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 678.6 97.0 16.1 65.7 857.4
50% - 60% 1,195.0 90.4 46.7 18.5 1,350.6
60% - 70% 2,964.6 136.6 58.1 1.0 3,160.3
70% - 80% 3,178.4 198.5 - 1.4 3,378.3
80% - 90% 340.2 208.4 - 35.3 583.9
90% - 100% 58.4 35.8 - - 94.2
>100% 168.1 35.0 - 29.6 232.7
Total loans before
provisions 8,583.3 801.7 120.9 151.5 9,657.4
---------------------- ---------- ---------- ------------ ------- -------
As at 31-Dec-20 (Audited)
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
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
The tables below show the LTV analysis of the OSB Residential
sub-segment:
As at 30-Jun-21 (Unaudited) As at 31-Dec-20 (Audited)
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,029.3 110.3 6.0 1,145.6 835.8 105.1 3.7 944.6
50% - 60% 177.3 60.0 0.7 238.0 167.2 64.5 2.2 233.9
60% - 70% 189.6 46.3 0.8 236.7 151.7 58.1 1.5 211.3
70% - 80% 262.7 29.5 0.7 292.9 208.1 39.9 1.5 249.5
80% - 90% 134.3 10.1 0.4 144.8 274.8 19.3 0.5 294.6
90% - 100% 8.5 2.0 0.1 10.6 12.4 3.6 0.4 16.4
>100% 5.3 2.7 0.1 8.1 10.7 4.9 0.9 16.5
Total loans
before provisions 1,807.0 260.9 8.8 2,076.7 1,660.7 295.4 10.7 1,966.8
------------------ ------- ------- ------- ------- ------- ------- ------- -------
The table below shows the LTV analysis of the four CCFS
sub-segments:
As at 30-Jun-21 (Unaudited)
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 95.7 255.8 39.2 33.0 423.7 5
50% - 60% 200.9 246.0 11.9 31.6 490.4 6
60% - 70% 659.7 449.5 15.1 50.6 1,174.9 13
70% - 80% 4,471.2 1,243.8 8.8 42.0 5,765.8 66
80% - 90% 570.6 324.9 0.4 17.9 913.8 10
90% - 100% 0.4 1.4 - - 1.8 -
Total loans before
provisions 5,998.5 2,521.4 75.4 175.1 8,770.4 100
------------------ ---------- ----------- -------- -------- ------- ---
As at 31-Dec-20 (Audited)
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)
Forbearance measures undertaken
The Group has a range of options available where borrowers
experience financial difficulties that impact their ability to
service their financial commitments under the loan agreement. These
options are explained on page 84 of the 2020 Annual Report and
Accounts.
A summary of the forbearance measures undertaken (excluding
COVID-19 related payment deferrals) during the period is shown
below. The balances disclosed reflect the period end balance of the
accounts where a forbearance measure was undertaken during the
period.
As at 30-Jun-21 As at 31-Dec-20
(Unaudited) (Audited)
Number Number
Forbearance type of accounts GBPm of accounts GBPm
Interest-only switch 120 15.2 108 14.1
Interest rate reduction 187 2.5 22 2.2
Term extension 116 17.4 430 27.0
Payment deferral 428 37.3 447 38.7
Voluntary-assisted sale - - 2 0.1
Payment concession (reduced monthly
payments) 33 4.8 34 1.7
Capitalisation of interest 36 0.5 2 0.1
Full or partial debt forgiveness 176 2.0 11 0.2
Total 1,096 79.7 1,056 84.1
------------------------------------ ------------ ---- ------------ ----
Loan type
First charge owner-occupier 222 34.9 570 54.0
Second charge owner-occupier 749 13.3 372 15.0
Buy-to-Let 120 25.5 113 14.9
Commercial 5 6.0 1 0.2
Total 1,096 79.7 1,056 84.1
----------------------------- ----- ---- ----- ----
As at 30 June 2021, active COVID-19 payment deferrals
represented only 0.11% (31 December 2020, 1.3%) of the Group's loan
book by value.
1. Risk management (continued)
Geographical analysis by region
An analysis of loans, excluding asset finance leases, by region
is provided below:
As at 30-Jun-21 As at 31-Dec-20(1)
(Unaudited) (Audited)
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- ------- -------- --- -------- ------- -------- ---
East Anglia 363.5 928.9 1,292.4 6 406.1 866.2 1,272.3 7
East Midlands 525.7 511.6 1,037.3 5 452.6 463.4 916.0 5
Greater London 4,871.9 2,984.9 7,856.8 40 4,842.0 2,837.4 7,679.4 40
Guernsey 31.3 - 31.3 - 35.8 - 35.8 -
Jersey 110.0 - 110.0 1 122.9 - 122.9 1
North East 151.0 240.7 391.7 2 139.0 208.4 347.4 2
North West 685.7 729.5 1,415.2 7 623.7 674.8 1,298.5 7
Northern Ireland 12.5 - 12.5 - 12.9 - 12.9 -
Scotland 43.4 224.3 267.7 1 41.3 214.2 255.5 1
South East 2,757.7 1,405.3 4,163.0 20 2,401.2 1,316.7 3,717.9 19
South West 801.0 508.0 1,309.0 6 752.7 478.5 1,231.2 6
Wales 244.6 226.1 470.7 2 246.8 209.9 456.7 2
West Midlands 690.1 584.5 1,274.6 6 738.5 529.2 1,267.7 7
Yorks and
Humberside 347.5 426.6 774.1 4 250.4 392.5 642.9 3
Total loans before
provisions 11,635.9 8,770.4 20,406.3 100 11,065.9 8,191.2 19,257.1 100
------------------- -------- ------- -------- --- -------- ------- -------- ---
(1) The prior period comparative has been amended to exclude
asset finance leases as geography is not a key risk for leased
assets.
1. Risk management (continued)
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.
The following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage:
As at 30-Jun-21
(Unaudited)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 5,131.4 257.6 - - 5,389.0
Good 4,763.4 756.1 - - 5,519.5
Satisfactory 104.2 221.6 - - 325.8
Lower 3.7 82.5 - - 86.2
Impaired - - 364.4 - 364.4
POCI - - - 49.2 49.2
CCFS
Excellent 4,950.0 384.2 - - 5,334.2
Good 2,359.4 669.3 - - 3,028.7
Satisfactory 39.4 133.7 - - 173.1
Lower 3.9 115.5 - - 119.4
Impaired - - 58.0 - 58.0
POCI - - - 57.0 57.0
17,355.4 2,620.5 422.4 106.2 20,504.5
------------- -------- ------- ------- ------- --------
30. Risk management (continued)
As at 31-Dec-20
(Audited)
Stage Stage 3
Stage 1 Stage 2 3 (POCI) Total
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
------------- -------- ------- ----- ------- --------
The tables below show the Group's other financial assets by
credit risk rating grade:
As at 30-Jun-21
(Unaudited)
Excellent Good Satisfactory Total
GBPm GBPm GBPm GBPm
Investment securities 224.6 - - 224.6
Loans and advances to credit
institutions 2,224.6 180.6 2.8 2,408.0
Derivative assets 8.6 32.1 - 40.7
2,457.8 212.7 2.8 2,673.3
----------------------------- --------- ----- ------------ -------
As at 31-Dec-20
(Audited)
Excellent Good Satisfactory Total
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
----------------------------- --------- ----- ------------ -------
31. Financial instruments and fair values
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Condensed
Consolidated Statement of Financial Position grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 30 June 2021
(Unaudited) GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 0.8 - - - 0.8 0.8
Loans and advances to
customers 18.1 20.6 - - 18.1 18.1
Derivative assets 40.7 7,543.4 - 40.7 - 40.7
59.6 7,564.0 - 40.7 18.9 59.6
Financial liabilities
Derivative liabilities 45.2 11,392.5 - 45.2 - 45.2
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 31 December 2020
(Audited) 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
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.
31. Financial instruments and fair values (continued)
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value in the Condensed
Consolidated Statement of Financial Position grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 30 June 2021
(Unaudited) 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 2,408.0 2,407.9 - 2,408.0 - 2,408.0
Investment securities 223.8 223.5 - 223.8 - 223.8
Loans and advances to
customers 20,410.1 20,418.3 - 3,175.0 17,361.7 20,536.7
23,042.3 23,050.1 - 5,807.2 17,361.7 23,168.9
----------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 17,097.2 17,049.9 - 6,780.7 10,328.6 17,109.3
Amounts owed to credit
institutions 3,753.0 3,752.1 - 3,753.0 - 3,753.0
Amounts owed to other
customers 63.5 63.3 - - 63.5 63.5
Debt securities in
issue 357.1 356.9 - 357.1 - 357.1
Subordinated
liabilities 10.5 10.3 - - 10.9 10.9
Perpetual subordinated
bonds 37.5 37.0 34.9 - - 34.9
21,318.8 21,269.5 34.9 10,890.8 10,403.0 21,328.7
----------------------- -------- --------- ----- -------- -------- --------
Estimated fair value
Carrying Principal Level Level Level
amount amount 1 2 3 Total
As at 31 December 2020
(Audited) 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
----------------------- -------- --------- ----- ------- -------- --------
32. Operating segments
The 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
GBPm GBPm GBPm GBPm
Balances as at 30 June 2021
(Unaudited)
Gross loans and advances to
customers 11,734.1 8,614.7 173.8 20,522.6
Expected credit losses (76.7) (17.9) 0.2 (94.4)
Loans and advances to customers 11,657.4 8,596.8 174.0 20,428.2
Capital expenditure 3.0 0.8 - 3.8
Depreciation and amortisation 3.3 1.6 1.9 6.8
Profit for six months ended
30 June 2021 (Unaudited)
Net interest income/(expense) 188.6 110.4 (33.7) 265.3
Other income 5.0 12.4 7.3 24.7
Total income/(expense) 193.6 122.8 (26.4) 290.0
Administrative expenses (48.9) (29.7) (1.9) (80.5)
Provisions (0.2) 0.1 - (0.1)
Impairment of financial assets 5.1 10.0 (0.5) 14.6
Integration costs (1.3) (0.6) - (1.9)
Exceptional items (0.2) - - (0.2)
Profit/(loss) before taxation 148.1 102.6 (28.8) 221.9
Taxation (36.8) (25.8) 2.2 (60.4)
Profit/(loss) for the period 111.3 76.8 (26.6) 161.5
--------
(1) The taxation on Combination credit includes release of
deferred taxation on CCFS Combination relating to the unwind of the
deferred tax liabilities recognised on the fair value adjustments
of the CCFS assets and liabilities at the acquisition date of
GBP7.8m offset by the impact of the corporation tax rate increase
on these deferred tax liabilities of GBP5.6m.
32. Operating segments (continued)
OSB CCFS Combination Total
GBPm GBPm GBPm GBPm
Balances as at 31 December 2020
(Audited)
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 for six months ended
30 June 2020 (Unaudited) -
Net interest income/(expense) 163.5 103.3 (33.0) 233.8
Other income 11.0 7.1 (6.6) 11.5
Total income/(expense) 174.5 110.4 (39.6) 245.3
Administrative expenses (44.9) (29.2) (2.6) (76.7)
Provisions - (0.1) - (0.1)
Impairment of financial assets (35.9) (18.5) 0.2 (54.2)
Impairment of intangible assets - - (7.0) (7.0)
Integration costs (4.9) (1.4) - (6.3)
Exceptional items (1.7) - - (1.7)
Profit/(loss) before taxation 87.1 61.2 (49.0) 99.3
Taxation(1) (20.8) (14.6) 8.1 (27.3)
Profit/loss for the period 66.3 46.6 (40.9) 72.0
-------------------------------- -------- ------- ----------- --------
(1) The taxation on Combination credit of GBP8.1m includes a
GBP4.6m charge due to a 2% increase in the rate for the deferred
tax liability following the Government cancellation of the
corporation tax rate reduction on 19 March 2020.
33. Adjustments for non-cash items and changes in operating assets and liabilities
Six months Six months
ended ended
30-Jun-21 30-Jun-20
(Unaudited) (Unaudited)
GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 6.8 7.5
Interest on investment securities (1.4) -
Interest on subordinated liabilities 0.4 0.4
Interest on perpetual subordinated bonds 0.8 0.8
Interest on securitised debt 1.8 (0.7)
Interest on financing debt 2.4 (4.0)
Impairment charge on loans (14.6) 54.2
Impairment on intangible assets acquired on
Combination - 7.0
Gain on sale of financial instruments (4.0) (19.9)
Provisions 0.1 0.1
Interest on lease liabilities 0.2 0.2
Fair value (gains)/losses on financial instruments (16.1) 12.1
Share-based payments 4.8 2.3
Total adjustments for non-cash items (18.8) 60.0
--------------------------------------------------- ----------- -----------
Changes in operating assets and liabilities:
Decrease/(increase) in loans and advances
to credit institutions 101.6 (129.5)
Increase in loans to customers (1,182.7) (1,214.5)
Increase in retail deposits 494.1 442.3
Net increase in other assets (1.2) (0.4)
Net decrease in derivatives and hedged items (17.8) (41.5)
Net decrease in other customers deposits (9.8) (1.3)
Net decrease in other liabilities (0.5) (13.0)
Exchange differences on working capital (0.3) 0.1
Total changes in operating assets and liabilities (616.6) (957.8)
--------------------------------------------------- ----------- -----------
34. Capital management
The Group's individual regulated entities and the Group as a
whole complied with all of the capital requirements, which they
were subject to, for the periods presented.
The Group's Pillar 1 capital information is presented below:
As at As at
30-Jun-21 31-Dec-20
(Unaudited) (Unaudited)
GBPm GBPm
Common Equity Tier 1 capital
Called up share capital 4.5 1,359.8
Share premium, capital contribution and share-based
payment reserve 9.2 7.8
Retained earnings 3,061.8 1,608.6
Transfer reserve (1,355.3) (1,355.3)
Other reserves (5.2) (4.0)
Total equity attributable to ordinary shareholders 1,715.0 1,616.9
Foreseeable dividends (46.8) (64.9)
IFRS 9 transitional adjustment(1) 2.9 4.9
COVID-19 ECL transitional adjustment(2) 17.6 31.0
Deductions from Common Equity Tier 1 capital
Prudent valuation adjustment(3) (0.3) (0.4)
Intangible assets(4) (19.1) (20.6)
Deferred tax asset (0.6) (0.9)
Common Equity Tier 1 capital 1,668.7 1,566.0
----------- -----------
Total Tier 1 capital 1,668.7 1,566.0
----------- -----------
Total regulatory capital 1,668.7 1,566.0
Risk-weighted assets (unaudited) 8,913.0 8,565.7
(1) The regulatory capital includes a GBP2.9m add-back under
IFRS 9 transitional arrangements, being 50.0% remaining of the IFRS
9 transitional adjustment.
(2) The COVID-19 ECL transitional adjustment relates to the
Group's 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) The Group has adopted the simplified approach under the
Prudent Valuation rules, recognising a deduction equal to 1.0% of
fair value assets and liabilities.
(4) All software assets continue to be fully deducted from
capital in light of the pending intention of the PRA to consult on
the Capital Requirements Regulation (CRR) 'Quick Fix' package in
this area.
35. Related parties
The Group had no related party transactions during the six
months to 30 June 2021 that materially affected the position or
performance of the Group.
Transactions with Key Management Personnel
During the period, the Group granted 186,949 (2020: 467,408)
awards under the Deferred Share Bonus Plan and 866,508 (2020:
1,601,990) awards under the Performance Share Plan to 12 (2020: 13)
key management personnel. The awards were granted on 15 April 2021
with a grant price of GBP4.9420. Details of these plans can be
found in note 12 of the 2020 Annual Report and Accounts on pages
210 to 213.
36. Events after the reporting date
On 6 July 2021, the Group completed the Canterbury Finance No.4
securitisation, a fully retained transaction which securitised
GBP1.7bn of organically originated prime Buy-to-Let mortgage
assets. Subsequently, on 16 July 2021, the Group sold GBP100.0m AAA
notes to the external market.
On 4 August 2021, OneSavings Bank plc published a notification
to the holders of the GBP22.0m Perpetual Subordinated Bonds that
the bonds will, having been approved by the PRA and the OneSavings
Bank plc Board, be fully redeemed at par plus accrued interest on 7
September 2021.
Independent assurance statement by Deloitte LLP to OSB GROUP PLC
on selected Alternative Performance Measures
Opinion
We have performed an independent limited assurance engagement on
the Alternative Performance Measures (collectively, the APMs) set
out below for the interim period for the six months ended 30 June
2021. The definition and the basis of preparation for each of the
assured APMs is described in the Appendix to the Interim Report
below (OSB Group's APM Definitions and Basis of Preparation).
Statutory basis Underlying basis
-- Gross new lending -- Net interest margin
-- Net interest margin -- Cost to income
-- Cost to income -- Management expense ratio
-- Management expense ratio -- Loan loss ratio
-- Loan loss ratio -- Basic earnings per share
-- Dividend per share -- Return on equity
-- Basic earnings per share
-- Return on equity
------------------------------- -------------------------------
Based on our work as described in this report, nothing has come
to our attention that causes us to believe that the assured APMs
have not been prepared, in all material respects, in accordance
with OSB Group's APM Definitions and Basis of Preparation for the
interim period for the six months ended 30 June 2021.
Directors' responsibilities
The directors of OSB Group are responsible for
-- selecting APMs with which to describe the entity's performance and
appropriate criteria (as set out in the Group's APM Definitions and Basis
of Preparation) to measure them;
-- designing, implementing and maintaining internal controls relevant to the
preparation and presentation of the assured APMs that are free from
material misstatement, whether due to fraud or error; and
-- preparing and presenting the APMs.
Our responsibilities
Our responsibility is to express an opinion on the assured APMs,
based on our assurance work. We conducted our limited assurance
engagement in accordance with International Standard on Assurance
Engagements ISAE 3000 Assurance Engagements Other than Audits or
Reviews of Historical Financial Information, issued by the
International Auditing and Assurance Standards Board (IAASB).
We are required to plan and perform our procedures in order to
state whether anything had come to our attention that causes us to
believe that the assured APMs have not been prepared, in all
material respects, in accordance with OSB Group's APM Definitions
and Basis of Preparation.
The procedures performed in a limited assurance engagement vary
in nature and timing from, and are less in extent than for, a
reasonable assurance engagement and consequently, the level of
assurance obtained in a limited assurance engagement is
substantially lower than the assurance that would have been
obtained had a reasonable assurance engagement been performed.
Our procedures consisted primarily of:
-- Agreeing amounts used in the calculation of APMs which are derived or
extracted from the interim financial statements of OSB Group for the six
months ended 30 June 2021 to the interim financial statements.
-- For amounts used in the calculation of APMs which were not derived or
extracted from the interim financial statements of OSB Group for the six
months ended 30 June 2021, testing, on a limited sample basis, the
underlying data used in determining the assured APMs.
-- Checking the mathematical accuracy of the calculations used to prepare
the assured APMs and testing whether they were prepared in accordance
with OSB Group's APM Definitions and Basis of Preparation.
-- Reading the Interim Report for the six months ended 30 June 2021 and
assessing whether the assured APMs were presented and described
consistently.
We were not asked to give, and therefore have not given, any
assurance over (i) any APMs other than the assured APMs or (ii)
other data in the interim financial statements as part of this
engagement.
We believe that the evidence obtained is sufficient and
appropriate to provide a basis for our opinion.
Our independence and quality control
We have complied with the independence and other ethical
requirements of the FRC Ethical Standard and the Code of Ethics for
Professional Accountants issued by the International Ethics
Standards Board for Accountants, which is founded on fundamental
principles of integrity, objectivity, professional competence and
due care, confidentiality and professional behaviour.
We apply International Standard on Quality Control 1.
Accordingly, we maintain a comprehensive system of quality control
including documented policies and procedures regarding compliance
with ethical requirements, professional standards and applicable
legal and regulatory requirements.
Use of our report
This assurance report is made solely to OSB GROUP PLC in
accordance with ISAE 3000. Our work has been undertaken so that we
might state to OSB GROUP PLC those matters we are required to state
to them in this report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than OSB GROUP PLC for our work, this report, or
for the conclusions we have formed.
Deloitte LLP, London
19 August 2021
Key performance indicators
Underlying results for the six months to 30 June 2021 and 30
June 2020 exclude exceptional items, integration costs and other
acquisition-related items. The underlying results provide a more
consistent basis for comparing the Group's performance between
financial periods.
Net interest margin (NIM)
For the period of six months NIM is calculated as net interest
income annualised on an actual days basis, as a percentage of a 7
point average(1) 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.
HY 2021 HY 2020
GBPm GBPm
Net interest income -- statutory 265.3 233.8
Add back: acquisition-related items(2) 33.7 33.0
Net interest income -- underlying 299.0 266.8
------------------------------------------------- -------- -----------
Net interest income annualised on an actual days
basis:
Net interest income -- statutory A 535.0 470.2
Net interest income -- underlying B 603.0 536.5
7 point average of interest earning assets --
statutory C 22,650.2 21,654.9
7 point average of interest earning assets --
underlying D 22,459.1 21,434.4
NIM statutory equals A/C 2.36% 2.17%
NIM underlying equals B/D 2.68% 2.50%
Cost to income ratio
The cost to income ratio is defined as administrative expenses
as a percentage of total income. It is a measure of operational
efficiency.
HY 2021 HY 2020
GBPm GBPm
Administrative expenses -- statutory A 80.5 76.7
Add back: acquisition-related items(2) (1.9) (2.6)
Administrative expenses -- underlying B 78.6 74.1
---------------------------------------- ------- ------------
Total income -- statutory C 290.0 245.3
Add back: acquisition-related items(2) 26.4 39.6
Total income underlying D 316.4 284.9
---------------------------------------- ------- ------------
Cost to income statutory equals A/C 28% 31%
Cost to income underlying equals B/D 25% 26%
Management expense ratio
For the period of six months the management expense ratio is
defined as administrative expenses annualised on a simple basis as
a percentage of a 7 point average(1) of total assets.
HY 2021 HY 2020
GBPm GBPm
Administrative expenses -- statutory (as in cost
to income ratio above) A 80.5 76.7
Administrative expenses -- underlying (as in cost
to income ratio above) B 78.6 74.1
7 point average of total assets -- statutory C 22,858.5 21,924.8
7 point average of total assets -- underlying 22,694.1 21,697.4
D 0.70% 0.70%
Management expense ratio statutory equals A/C 0.69% 0.68%
on an annualised basis
Management expense ratio underlying equals B/D
on an annualised basis
Loan loss ratio
For the period of six months, the loan loss ratio is defined as
impairment losses annualised on a simple basis as a percentage of a
7 point average(1) of gross loans and advances. It is a measure of
the credit performance of the loan book.
HY 2021 HY 2020
GBPm GBPm
Impairment losses -- statutory A (14.6) 54.2
Add back: acquisition-related items(2) (0.5) 0.2
Impairment losses -- underlying B (15.1) 54.4
-------------------------------------------------------- --------- ------------
7 point average of gross loans -- statutory C 19,854.1 18,433.5
7 point average of gross loans -- underlying 19,685.6 18,202.5
D (0.15)% 0.59%
Loan loss ratio statutory equals A/C on an annualised (0.15)% 0.60%
basis
Loan loss ratio underlying equals B/D on an annualised
basis
Return on equity (RoE)
RoE is defined as profit attributable to ordinary shareholders,
which is profit after tax and after deducting coupons on
non-controlling interest securities, annualised on a simple basis,
as a percentage of a 7 point average(1) of shareholders' equity
(excluding GBP60m of non-controlling interest securities).
HY 2021 HY 2020
GBPm GBPm
Profit after tax - statutory 161.5 72.0
Coupons on non-controlling interest securities (2.7) (2.7)
Profit attributable to ordinary shareholders
-- statutory A 158.8 69.3
Add back: acquisition related items(2) 28.3 47.2
----------------------------------------------- ------- ---------
Profit attributable to ordinary shareholders
-- underlying B 187.1 116.5
----------------------------------------------- ------- ---------
7 point average of shareholders' equity (excluding
non-controlling
interest securities) -- statutory C
1,684.7 1,473.5
7 point average of shareholders' equity (excluding
non-controlling
interest securities) -- underlying D 1,564.2 1,297.6
Return on equity statutory equals A/C on an annualised basis
19% 9%
Return on equity underlying equals B/D on an annualised
basis
24% 18%
Basic earnings per share
Basic earnings per share is defined as profit attributable to
ordinary shareholders, which is profit after tax and after
deducting coupons on non-controlling interest securities, gross of
tax, divided by the weighted average number of ordinary shares in
issue.
HY 2021 HY 2020
GBPm GBPm
Profit attributable to ordinary shareholders --
statutory (as in RoE ratio above) A 158.8 69.3
Profit attributable to ordinary shareholders --
underlying (as in RoE ratio above) B 187.1 116.5
Weighted average number of ordinary shares in 447.7 445.9
issue -- statutory C
Weighted average number of ordinary shares in issue --
underlying D
447.7 445.9
Basic earnings per share statutory equals A/C
35.5 15.5
Basic earnings per share underlying equals B/D
41.8 26.1
1. 7 point average is calculated as an average of opening
balance and closing balances for six months to 30 June.
2. The acquisition-related items are detailed in the
reconciliation of statutory to underlying results in the Financial
review.
Registered office
OSB House
Quayside, Chatham Maritime
Chatham
Kent, ME4 4QZ
Registered in England, company number: 11976839
Internet
www.osb.co.uk
Auditor
Deloitte LLP
Statutory Auditor
1 New Street Square
London
EC4A 3HQ
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex, BN99 6DA
Brokers
Barclays Bank PLC
5 The North Colonnade
London, E14 4BB
RBC Europe Limited (trading as RBC Capital Markets)
Riverbank House
2 Swan Lane
London, EC4R 3BF
Media and Public Relations
Brunswick Group LLP
16 Lincoln's Inn Fields
London, WC2A 3ED
(END) Dow Jones Newswires
August 19, 2021 02:00 ET (06:00 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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