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OneSavings Bank plc - 2021 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules,
OneSavings Bank plc (the "Company") hereby releases the unedited
full text of its 2021 Annual Report and Accounts for the year ended
31 December 2021.
The document is now available on the Company's website at:
www.osb.co.uk
A copy of the above document has been submitted to the National
Storage Mechanism and will shortly be available for inspection
at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Enquiries:
OSB GROUP PLC
Nickesha Graham-Burrell
Group Head of Company Secretariat t: 01634 835 796
Investor relations
Email: osbrelations@osb.co.uk
https://www.globenewswire.com/Tracker?data=5OgvNtonIpsKGRw3opv5rkZsThTQFLCbzCqNySKkR5g9oe9WM0kFOpfUzptj82ry2_gJ47_LZUUolZurK6hrrdMBLBSHs-wNYiQiXw5S22Q=
t: 01634 838 973
Brunswick
Robin Wrench/Simone Selzer t: 020 7404 5959
About OSB GROUP 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 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's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group
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 and
best-of-breed automated technology and systems, ensuring 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 currently provided by securitisation programmes and the Bank of
England's Term Funding Scheme with additional incentives for
SMEs.
OneSavings Bank plc
Annual Report and Financial Statements
For the Year Ended 31 December 2021
Company Number: 07312896
Company Information 2
Strategic Report 3
Directors' Report 71
Statement of Directors' Responsibilities in respect
of the Strategic Report, the Directors' Report and the
Financial Statements 77
Independent Auditor's Report 78
Statement of Comprehensive Income 94
Statement of Financial Position 95
Statement of Changes in Equity 96
Statement of Cash Flows 98
Notes to the Financial Statements 99
DIRECTORS Graham Allatt
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Simon Walker
David Weymouth
COMPANY SECRETARY Jason Elphick
REGISTERED OFFICE Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
REGISTERED NUMBER 07312896 (England and Wales)
AUDITOR Deloitte LLP
Statutory Auditor
London
United Kingdom
The Directors present their Annual Report, including the
Strategic Report, Directors' Report and Statement of Directors'
Responsibilities, together with the audited Consolidated Financial
Statements and Auditor's Report for the year ended 31 December
2021.
OneSavings Bank plc (the Company or OSB) is a wholly-owned
subsidiary of OSB GROUP PLC (OSBG). The Group comprises OSB and its
subsidiaries; the OSB Group comprises OSBG and its
subsidiaries.
Our business model
The Group is a leading specialist mortgage lender, primarily
focused on carefully selected sub-segments of the mortgage market.
Our specialist lending is supported by our Kent Reliance and
Charter Savings Bank retail savings franchises. Our purpose is to
help our customers, colleagues and communities prosper.
Resources and relationships
Brands and heritage
We have a family of specialist lending brands targeting selected
segments of the mortgage market which are underserved by large UK
banking institutions. We have well-established savings franchises
through Kent Reliance, with its 150-year heritage, and the Charter
Savings Bank brand.
Employees
Our team of highly skilled employees possess expertise and
in-depth knowledge of the lending, property, capital and savings
markets, underwriting and risk assessment and customer
management.
Infrastructure
We benefit from cost and efficiency advantages provided by our
wholly-owned subsidiary, OSB India, as well as credit expertise and
mortgage administration services provided by Charter Court
Financial Services (CCFS).
Relationships with intermediaries and customers
Our strong and deep relationships with the mortgage
intermediaries that distribute our products continue to win us
industry recognition.
Capital strength
We have a strong common equity tier one (CET1) ratio and
capability to generate capital through profitability.
Our business model explained
The Group operates its lending business through two segments:
OSB and CCFS.
OneSavings Bank
Through our brands we tailor our lending proposition to the
specific needs of our borrowers. Under our Kent Reliance and
Interbay brands all of our loans are underwritten by experienced
and skilled underwriters, supported by technology to reduce the
administrative burden on underwriters and mortgage intermediaries.
We refer to scorecards and bureau data to support our skilled
underwriter loan assessments. We consider each loan on its own
merits, responding quickly and flexibly to offer the best solution
for each of our customers. No case is too complex for us, and for
those borrowers with more tailored or larger borrowing
requirements, our Transactional Credit Committee meets three times
each week, demonstrating our responsiveness to broker needs.
Buy-to-let/SME sub-segments
Buy-to-Let
We provide loans to limited companies and individuals, secured
on residential property held for investment purposes. We target
experienced and professional landlords or high net worth
individuals with established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured
on commercial and semi-commercial properties held for investment
purposes or for owner-occupation.
Residential development
We provide development loans to small and medium sized
developers of residential property.
Funding lines
We provide loans to non-bank finance companies secured against
portfolios of financial assets, principally mortgages.
Asset finance
We provide loans under hire purchase, leasing and refinancing
arrangements to UK SMEs and small corporates to finance
business-critical assets.
Residential sub-segments
First charge
We provide loans to individuals, secured by a first charge
against their residential home. Our target customers include those
with a high net worth and complex income streams, and near-prime
borrowers. We are also experts in shared ownership, lending to
first-time buyers and key workers buying a property in conjunction
with a housing association.
Funding lines
We provide funding lines to non-bank lenders who operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
Our business model explained (continued)
Charter Court Financial Services
Specialist lending business
Our Precise Mortgages brand uses an automated underwriting
platform to manage mortgage applications, and to deliver a rapid
decision in principle, based on rigorous lending policy rules and
credit scores. The platform is underpinned by extensive
underwriting expertise, enabling identification of new niches and
determining appropriate lending parameters. The platform enables
Precise Mortgages to react quickly to non-standard mortgage
requests which are common in the Group's target market
sub-segments, while ensuring consistent underwriting within the
Group's risk appetite. Quick response times help the Group to
compete for the 'first look' at credit opportunities, while a
robust manual verification process further strengthens the
disciplined approach to credit risk.
Buy-to-Let
We provide products to professional and non-professional
landlords with good quality credit histories, through a wide
product offering, including personal and limited company
ownership.
Residential
We provide a range of competitive products to prime borrowers,
complex prime borrowers (including self-employed, Help to Buy and
new-build) and near-prime borrowers.
Bridging
We focus on lending to customers who need to fund short-term
cash flow needs, for example, to cover light refurbishments, home
improvements, auction purchases and to 'bridge' delays in obtaining
mortgages and 'chain breaks'.
Second charge
We offer loans to prime residential customers with low
loan-to-value ratios, who require additional capital and who wish
to secure a loan with a charge against a property which is already
charged to another lender.
Our business model explained (continued)
Retail savings
The Group is predominantly funded by retail savings deposits
sourced through two brands: Kent Reliance and Charter Savings Bank
(CSB).
Kent Reliance is an award-winning retail savings franchise with
over 150 years of heritage and nine branches in the South East of
England. It also takes deposits via post, telephone and online,
while CSB, a multi award-winning retail savings bank, offers its
products online and via post.
Both Banks have a wide range of savings products, including easy
access, fixed term bonds, cash ISAs and business savings accounts.
CSB and Kent Reliance have diversified their retail funding sources
through pooled funding platforms. The range of products sourced via
these platforms includes easy access, longer term bonds and
non-retail deposits.
In 2021, CSB won many industry awards, including the prestigious
Moneyfacts Consumer Awards for Online Savings Provider of the Year
and ISA Provider of the Year.
Kent Reliance's proposition for savers is simple: to offer
consistently good-value savings products that meet customer needs
for cash savings and loyalty rates for existing customers.
CSB's philosophy is to maintain and develop its award-winning
business, offering competitively priced savings products. Operating
with an agile, nimble approach, CSB can respond quickly to the
funding requirements of the business at an advantageous cost of
funds.
Our securitisation platforms
The Group has built attractive diversification opportunities to
supplement its retail funding.
CCFS uses its securitisation platform as a means of providing
low-cost term funding. Wholesale funding enables the business to
rebalance the weighted average life of liabilities away from
shorter duration retail funding and thereby optimise the funding
mix. The Group recognises the cyclical nature of capital markets
funding and therefore utilises it opportunistically, taking
advantage of favourable market conditions.
CCFS is a programmatic issuer of high-quality residential
mortgage-backed securities (RMBS) through the Precise Mortgage
Funding (PMF) and Charter Mortgage Funding (CMF) franchises,
completing 14 securitisations worth more than GBP4.5bn to 31
December 2021.
In 2019, OSB established its Canterbury Finance securitisation
programme, to enable it to issue high-quality RMBS. It has since
issued four securitisations of organically originated mortgages
totalling GBP4.3bn to 31 December 2021.
The Group also has the capability to engage in transactions
which could result in the full derecognition of the underlying
mortgage assets, through the sale of residual positions in its
securitisation vehicles.
In 2021, CCFS also had access to a warehouse funding facility
from a Tier 1 investment bank. This facility was available as a
bridge to RMBS funding, helping the Group to maximise the
efficiency of its liquidity position through the transition from
retail deposit to securitisation funding. This warehouse facility
was closed in December 2021.
The Group also takes advantage of the Bank of England's funding
schemes. In 2021, the drawings under the Term Funding Scheme (TFS)
were fully repaid and drawings under the Term Funding Scheme for
SMEs (TFSME) increased to GBP4.2bn (2020: GBP2.6bn and GBP1.0bn
respectively).
Our business model explained (continued)
Unique operating model
Customer service
The Group operates customer service functions in multiple
locations across the UK including Chatham, Wolverhampton, Fareham,
London and Fleet. These, together with our wholly-owned subsidiary
OSB India, help us deliver on our aim of putting customers
first.
The Group has proven collections capabilities and expertise in
case management and supporting customers in financial difficulty,
from initial arrears through to repossession.
This offers valuable insights into, as well as the opportunity
to learn from, the performance of mortgage loan products. We have
deep credit expertise through proprietary data analytics.
We deliver cost efficiencies through excellent process design
and management. We have an efficient, scalable and resilient
infrastructure supported by strong IT security.
OSB India
OSB India (OSBI) is a wholly-owned subsidiary based in Bangalore
and Hyderabad, India.
OSBI puts customer service at the heart of everything it does,
and we reward our employees based on the quality of service they
provide to customers, demonstrated by our excellent customer Net
Promoter Score (NPS).
At OSBI, we employ highly talented and motivated employees at a
competitive cost. We benchmark our processes against industry best
practice, challenging what we do and eliminating customer pain
points as they arise. We continue to invest in developing skills
that enable highly efficient service management, matching those to
business needs both in India and the UK.
Various functions are also supported by OSBI, including Support
Services, Operations, IT, Finance and Human Resources. We have a
one team approach between the UK and India and we are proud of our
low employee turnover in India, with a regretted attrition rate of
just under 17%, comparing favourably to local industry
averages.
OSBI operates a fully paperless office --all data and processing
are in the UK.
Environmental, social and governance (ESG)
Our purpose is to help our customers, colleagues and communities
prosper. To achieve our purpose, we operate in a sustainable way
with relevant environmental, social and governance matters at the
heart of the Group.
As a specialist lender, we have been long aware of our
responsibilities and the positive impact we can make in society
through our activities.
We have always strived to have our customers, colleagues and
communities in mind through our culture and robust governance. As
such, responding to the challenges and opportunities that the ESG
matters present has naturally become an integral part of the
Group's strategy.
Relationships with our key stakeholders
Building strong relationships with all of our stakeholders
through regular engagement and open dialogue is fundamental to
achieving the Group's purpose to help our customers, colleagues and
communities prosper. Our relationships with our stakeholders are
central to the Group's strategy and culture; and are embedded in
the Board's responsibilities.
We outline below how the Group and its Directors engaged with
key stakeholders, and in doing so, discharged their duties under
section 172.
Customers
We pride ourselves on building strong, long-term relationships
with our customers. In 2021, we continued to demonstrate our
commitment to providing excellent service by supporting our
borrowers and savers throughout the uncertainties caused by the ebb
and flow of the pandemic. We continued to help those looking for
mortgages and by supported our savers, safely in branches or by
telephone, post and the internet.
We offer our savers an opportunity to let us know how we are
doing whenever they call or interact with our Banks by listening to
their views and acting upon what they tell us. Customer feedback is
collected throughout the year and despite the continuing
difficulties of the pandemic, increased volume of calls and savers'
activity, we are incredibly proud of achieving strong satisfaction
metrics for both Kent Reliance and Charter Savings Bank.
The needs of our customers are at the heart of our business; and
the Board believes that the long-term success of the Group is
dependent on the strength of our relationships with our
customers.
The Board's engagement with customers is indirect and Directors
are kept informed of customer-related matters through regular
reports, feedback and research. Satisfaction scores and retention
rates, together with the number of complaints and resolution times,
form part of the management and Board monthly reporting packs,
ensuring the visibility of our customer' experience to management
and the Board. Customer satisfaction scores are also used as part
of the Executive remuneration assessment and form the basis of new
initiatives and actions which continually improve customer
experience.
When the business is considering the launch of a new product,
customers and intermediaries may be consulted to ensure it meets
their needs and any concerns raised are addressed.
The following matters, which were identified as affecting our
stakeholders, were of particular interest to the Board in 2021:
-- the ongoing impact of COVID-19 on customers in terms of their behaviours,
financial health and any forbearance needs;
-- the impact of environmental, social and governance (ESG) factors;
-- industry-related conduct risk issues and the potential impact on
customers; and
-- management information in relation to customer complaints and complaints
data from the Financial Ombudsman Service, engagement scores,
satisfaction scores and retention rates.
In addition, management and the Board engaged with customers
through the Kent Reliance Provident Society (KRPS) which conducts
customer engagement activity studies for OSB. During 2021, KRPS
conducted two such studies.
The savings NPS for Kent Reliance in 2021 was +70 (2020: +67)
and for Charter Savings Bank was +71 (2020: +72).
Relationships with our key stakeholders (continued)
Intermediaries
Our lending products, with the exception of funding lines and
residential development loans, are distributed via mortgage
brokers. Mortgage brokers are vital to our success; we have adapted
the way in which we assist them during 2021, as the pandemic
impacted their businesses and how they serve their customers to
provide an even better service.
We pride ourselves in providing unique and consistent lending
propositions across all lending brands, which fulfil our goal of
making it easier for intermediaries to serve their customers, our
borrowers. Regular engagement with the broker community extends
beyond our propositions and enables us to continuously enhance the
service we provide, with our business development managers
listening and working closely with intermediaries to discuss cases
and helping to obtain swift and reliable decisions.
Broker and borrower satisfaction scores are tracked on a regular
basis, along with details of all complaints and are reviewed by the
Board and management within monthly reporting packs.
We held fewer intermediary events during 2021, but the Group's
Sales teams participated in 418 physical and virtual intermediary
events, interacting with brokers and keeping abreast of industry
developments and intermediary requirements.
The broker NPS for OSB in 2021 was +55 (2020: +49) and for CCFS
was +42 (2020: +54).
Colleagues
Our colleagues are our key asset and our success depends on the
1,782 talented individuals we employ.
We have always favoured interactive communication between
management and our employees through regular town hall meetings,
informal sessions with management and opportunities to ask
questions anonymously directly to the Chief Executive Officer (CEO)
with the questions and responses available on the intranet. These
methods of engagement proved popular with employees and have
contributed to many initiatives that were undertaken by the
business during the year.
Mary McNamara is the Non-Executive Director appointed by the
Board with responsibility for employee engagement and is a
permanent member of the Workforce Advisory Forum (known internally
as OneVoice). Mary has direct engagement with the workforce by
attending OneVoice meetings and other events organised by the
Diversity and Inclusion Working Group. This provides her with an
insight into the culture and concerns of the workforce, which she
is able to bring to the attention of the Board.
OneVoice was set up to gather the views of the workforce so that
the Board and management can consider a broadly representative
range of stakeholder perspectives to guide strategic decisions for
the future of the Group and oversee the alignment of the Values.
OneVoice has its own Terms of Reference which outlines the
objectives and composition of the Forum. Members of the workforce
are invited to apply to become an employee representative (provided
there are open vacancies to be filled) by completing a short
application form.
Relationships with our key stakeholders (continued)
Members of the Board and management attended OneVoice meetings
throughout the year in order to understand and discuss
employee-related issues directly with representatives across the
business. Employee representatives are encouraged to be open and
honest in their feedback at each meeting. The themes from OneVoice
discussions are shared and discussed with the Board and this
informs the approach towards new policies, benefits and any other
employee-related projects.
Engagement also took place via Group-wide surveys, including a
'Culture Pulse Survey' which was conducted across all employees and
a dashboard compiled of a series of measures and indicators was
provided to the Board to ensure visibility of how the Group's
Values are embedded into the culture. The Board reviewed the
results and discussed how to address any themes emerging from them.
OSB India was officially certified as a 'Great Place to Work' in
2021 for the fifth year in a row. The Group also participated in
the Financial Services Culture Board Survey in 2021.
The interests of the Group's employees were also considered by
the Board and its Committees during the year via regular updates
provided by senior management, the Group's HR function and the
feedback from meetings of working groups. One of the key topics at
the forefront of the Board's mind in 2021 was the continued impact
of the pandemic on our employees' lives, both professionally and
personally, their well-being and mental health.
Members of the Board also have standing invitations to attend
meetings of the Diversity and Inclusion Working Group, with its
members consisting of employee representatives from across the
business. Updates are submitted to the Board or its Committees on
an annual basis. Members of the Board oversee the Group's talent
management initiatives and senior management succession planning.
Finally, the Board has oversight of the Group's whistleblowing
activity and reviews and approves the Group's gender pay gap
reporting and its commitment to the Women in Finance Charter.
The Board monitors the effectiveness of its methods of engaging
with employees and adapts them where necessary. Areas of continued
focus include formalising a workforce engagement plan and
developing engagement improvement plans in areas which have been
identified as lower scoring in the results of employee surveys.
Shareholders
In 2021, the OSB Group Board focused on capital management,
including optimisation of the Group's capital structure. To that
end, new Additional Tier 1 (AT1) securities were issued at the OSB
Group level and new AT1 securities were issued by the Company to
OSBG. The legacy AT1 securities as well as Perpetual Subordinated
Bonds issued by the Company were redeemed.
Suppliers
Our business is supported by a large number of suppliers, which
in turn allows us, as a Group, to provide high standards of service
to our customers. The members of the Board do not interact directly
with the Group's suppliers; however, they are involved in
overseeing the Group's supplier relationships and are kept up to
date by management on supplier considerations and developments.
Supplier payment practice reports are published on a six-monthly
basis following approval by the Chief Financial Officer (CFO) and
signed by the main operating entities.
Relationships with our key stakeholders (continued)
The Group enters into standard terms with suppliers, which
include terms requiring payment within 30 days of the invoice date
following receipt of a valid invoice. Over 90% of all invoices are
paid within 30 days in line with the standard payment period for
qualifying contracts, with the average time taken to pay invoices
ranging from five to 14 days across the Group. The maximum
contractual payment period agreed varies between 30 days to 45
days. There have been no changes to the standard payment terms in
the reporting period. Any complaints received in respect of invoice
payments are considered as part of the dispute resolution process.
During the year, the Group did not deduct any sums from payments
under qualifying contracts as a charge for remaining on a supplier
list.
In 2021, the Board was also involved with the following aspects
of supplier relationships:
-- consideration of potential supplier challenges as a result of the
integration and the ongoing impact of COVID-19;
-- consideration of the risks associated with suppliers and the framework
for assurance;
-- oversight of key supplier relationships including the engagement between
the Group Audit Committee and the external auditor; and,
-- oversight of all levels of insurance in place for the Group.
The OSB Group's Modern Slavery and Human Trafficking Statement
is reviewed and approved on an annual basis and can be found on the
OSBG website at www.osb.co.uk.
Regulators
The Board recognises the importance of having an open and
continuous dialogue with all of our regulators, as well as other
government bodies and trade associations.
The Group maintains a proactive dialogue with the Prudential
Regulation Authority (PRA) and Financial Conduct Authority (FCA).
Engagement typically takes the form of regular and ad hoc meetings
attended by both members of the Board and Executives, as well as
subject matter experts. The number of meetings held with regulators
increased in 2021 and included, among other topics, operational
resilience, the ability to respond to a financial stress, business
continuity review and incident management. There was also
significant interaction with our regulators with regard to capital
management and the optimisation of our capital structure.
Even though the Directors do not participate in all meetings,
Executives, including the Group Chief Risk Officer and Group Chief
Credit and Compliance Officer provide the Board and its Committees
with feedback and regular updates in respect of the broader
regulatory developments and compliance considerations.
The Group also regularly interacts and has constructive
relationships with the Bank of England and HM Revenue & Customs
(HMRC), among others, which helps to ensure that the Group is
aligned with the relevant regulatory frameworks and that the
business is engaged with issues impacting the financial services
industry.
Relationships with our key stakeholders (continued)
Communities
The Group partners with national and local charities, which
offers employees the chance to make a difference both nationwide
and closer to home. Giving something back to our community is
important to all of us, whether it is through volunteering,
fundraising efforts that help protect our environment and aligns
with the Group's Stewardship value. Our nominated charity partners
are chosen by employees who give up their time and take part in a
variety of events, with the hope of making a meaningful impact to
these charities and to the lives of those that the charities
help.
The total amount donated to the charity partners and good causes
by the Group and the employees in the year was nearly GBP395k.
Engagement with our local communities is actively encouraged and
fully supported by the Board and management who believe that
fostering such relationships contributes to the communities in
which we operate to make a positive impact.
Environment
Sustainability is becoming increasingly important to the Board
and management. The Group operates under the highest governance and
ethical standards and is focused on reducing its impact on the
environment. The Board and management are cognisant of the impact
of social and environmental change on our business and stakeholders
and regularly promote awareness of environmental issues among our
employees, as well as adhering to our plan to become a greener
organisation and comply with enhanced regulation and
disclosures.
The Board is responsible for encouraging and overseeing an
environmentally friendly culture and ensuring that the business is
ready to respond to the growing impact of climate change on the
Group's activities in line with its Stewardship value.
Section 172 statement
The Directors are bound by their duties under section 172(1)(a)
to (f) of the Companies Act 2006 and the manner in which these have
been discharged; in particular their duty to act in the way they
consider, in good faith, promotes the success of the Company for
the benefit of its members as a whole.
The stakeholders which the Directors considered in this regard
are customers, intermediaries, colleagues, shareholders, suppliers,
regulators and the local communities in which we are located. These
stakeholders are considered to be those most likely to be impacted
by decisions taken by the Board. The pages 8 to 12 and those that
follow, set out how Directors complied with the requirements of
section 172 during the year.
Decision making
The Board recognises that considering our stakeholders in key
business decisions is fundamental to our ability to deliver the
Group's strategy in line with our long-term values and operating
the business in a sustainable way. Balancing the needs and
expectations of our key stakeholders has been at the forefront of
the Board's mind and has been more important than ever during 2021,
as a result of the global pandemic; whilst acknowledging that some
decisions will result in different outcomes for each
stakeholder.
Key strategic decision in the year
Capital management
During 2021, the Board made the decision to redeem legacy AT1
securities and Perpetual Subordinated Bonds issued by the Company
as they no longer qualified as capital at the OSB Group level. A
new issue of AT1 securities from OSBG was executed in October 2021
and new AT1 securities were issued by the Company to OSBG. These
steps were taken as the OSB Group seeks to optimise its capital
structure following the insertion of OSBG as the holding company
and listed entity of the Group.
The Group has a very strong capital position and proven capital
generation capability through profitability. These support
continued strong growth as well as additional distributions to
shareholders, despite ongoing uncertainty over the timing and
impact of Basel 3.1 and Internal Ratings-Based (IRB) accreditation.
The Board considered the expectations of its parent company OSBG in
relation to capital management and considers that its decisions
fulfiled those expectations and were also considered to be in the
long-term interests of the Company.
Section 172 statement (continued)
Commitment to net zero carbon emissions by 2050
In response to feedback received from shareholders, employees
and intermediaries, the Board felt that it was important for the
Group to commit to achieving net zero carbon emissions by 2050 in
line with the 2015 Paris Agreement. The Board has made the decision
to commit to reduce its financed greenhouse gas emissions by 47%
per m2 by 2030 and by 91% per m2 by 2050, from a base year of 2021
and to commit to achieving net zero greenhouse gas emissions in our
own operations (Scope 1, 2 and material Scope 3) by 2030 or sooner.
The Board acknowledges that setting targets drives concerted action
and a roadmap to achieve these targets is being drafted with the
aim of developing a robust plan over the next 12 to 18 months with
the assistance of the Net Zero Banking Alliance (NZBA) and the
Science Based Targets initiative (SBTi), which will assess the
Group's targets and approach to ensure that the outcomes can be
credibly achieved. The Board recognised the importance of having
distinct science-based targets and reducing the emissions of the
Group would have a positive impact on the environment. The Board
also considered the impact on and expectations of employees,
intermediaries and shareholders; which was a key factor in the
decision to proceed.
Risk appetite and lending criteria
Following indications of market recovery from the pandemic in
the summer of 2021, the Board considered its risk appetite in
relation to lending criteria and the appropriateness of increasing
the loan to value on some mortgages from 75 to 80%. In making its
decision, the Board took into consideration feedback from some
shareholders that the Group may have been conservative in the
recovering market. A range of customer indicators were also
considered including the level of payment deferrals, arrears data
and economic outlook; and also the impact on the Group's
Underwriting team. The Board deliberated whether changing the
lending criteria was within risk appetite and would be in the
long-term sustainable interest of the Company and Group. The Board
concluded that changing the lending criteria remained within the
Group's risk appetite and was appropriate for customers.
Market review
The UK housing and mortgage market
Despite the ongoing disruption as a result of the pandemic,
residential property transaction volumes rebounded in 2021,
reaching 1.5m according to HMRC, representing a 43% increase
compared to 1.0m in 2020. Similarly, UK gross mortgage lending
reached GBP313bn in 2021, representing an annual increase of 27%
from GBP246bn in the prior year. In both cases, the level of
activity reported in 2021 was higher than the level of activity
reported in 2019, prior to the pandemic. This increase was driven
by several factors, including the release of pent-up demand,
changing buyer preferences with a desire for space suitable for
home working, a Stamp Duty Land Tax (SDLT) holiday as well as
mortgage interest rates dropping to historic lows.
The year began with the third national lockdown, however housing
market disruption was significantly less severe than during the
first lockdown in March 2020 as the industry swiftly adapted their
working practices and processes to accommodate the need for social
distancing and other measures.
The removal of restrictions from July enabled property
transactions to progress with fewer delays and this led to rising
demand. Lenders responded by continuing to expand lending and
product criteria, with research published by Twenty7Tec showing
that the number of available mortgage products rose continually
throughout the year, from fewer than 10,000 in January 2021 to more
than 16,000 by the end of the year.
The SDLT holiday that was implemented in July 2020, continued to
generate increased purchase activity into 2021 as buyers sought to
benefit from the temporary increase in the 'nil-rate' band. This
measure was initially due to end in March 2021, but was extended to
June 2021 with a further temporary relief period in effect until
September 2021. It resulted in purchase completions increasing by
44% year on year to represent 70% of new mortgage lending by value
(2020: 62%) with notable spikes in activity in March, June and
September aligned with the relief withdrawal periods.
The increase in borrowers' demand, combined with continued low
mortgage interest rates and a lack of supply, led to upwards
pressure on house prices during the year. The ONS reported that
house prices rose by an average of 10.8% in 2021 (2020: 8.5%) and
growth was expected to continue into 2022. Equally, respondents to
the RICS Residential Market Survey in November 2021 expected prices
to continue to rise both in the near term and over a 12-month
horizon.
The UK savings market
The historically low interest rates, that were a dominant
feature of the savings market in 2021, did not prevent the trend of
increasing overall savings balances in the UK, which rose from
GBP1,953bn in December 2020 to GBP2,120bn at the end of 2021,
according to the Bank of England. There were also more providers
and more savings accounts on offer in the market in 2021, following
the decline seen in the previous year, as the total number of
savings products being promoted in December 2021 was 1,646,
compared to 1,514 in December 2020. According to the ONS, the
household savings ratio that peaked at 22.5% in 2020, as a result
of so-called accidental savings, reduced to 18.0% by the third
quarter of the year and 11.3% by the fourth quarter.
Overall, in 2021, according to the Household Sector Deposits
report, easy access accounts held by financial institutions
continued to exceed fixed term accounts. By the end of the year, as
consumer confidence around future prospects improved, savers began
to lock their cash away for longer periods of time in order to
secure a higher return. Fixed rate bonds accounted for over 50% of
all savings accounts in the fourth quarter of 2021, an increase
from about a quarter during much of 2020.
During the year, rates bounced back from the reductions seen
during 2020. Fixed rate bonds increased by 70bps over 2021 with
rates on variable rate products being slower to rise and only
increasing by 25bps. 2021 ended with a much anticipated base rate
increase of 15bps in December 2021.
Market review (continued)
The UK mortgage market and climate change
It has been estimated that privately owned residential
properties represent 15% of total carbon emissions in the UK and it
is acknowledged that there are significant barriers to implementing
energy efficiency improvements. The UK Government's focus on
achieving its net zero goals has highlighted the need to improve
the energy efficiency of UK housing stock.
Two key consultations relating to improving home energy
performance have been held by the Department for Business, Energy
and Industrial Strategy, however the outcomes are yet to be
published:
-- Improving housing the Energy Performance of Privately Rented Homes in
England and Wales closed in January 2021. The outcome is widely expected
to introduce a minimum requirement to ensure that all rental properties
achieve an EPC (Energy Performance Certificate) rating of C or higher
from 2028. It is also expected to increase the current required works cap
(the maximum amount that is expected to be paid to improve the property's
EPC rating) from GBP3,500 to GBP10,000, before exemptions can be applied.
-- Improving home energy performance through lenders closed in February
2021. The outcome is expected to impose a requirement on all lenders to
report on the EPC of their loan portfolio, along with a commitment to
show annual improvements towards an average rating of C or higher.
These changes could have a significant impact on the private
rented sector in the UK. The industry eagerly anticipates the
publication of the final outcomes from each of these consultations,
however discussion as well as action from lenders have already
taken place, with the emergence of a green finance sector. The
Green Finance Institute reported that nine Buy-to-Let lenders had
launched dedicated green finance products by the end of December
2021, however these products have largely seen limited success in
driving a change in borrowers' attitudes.
The Group's lending sub-segments
Buy-to-Let
According to UK Finance, Buy-to-Let gross advances reached
GBP45.9bn in 2021, a 15% increase from GBP38.3bn in 2020, despite
the lingering effects of the pandemic. Research conducted by BVA
BDRC, in its Landlords Panel survey in the third quarter, found
that half of landlords reported that their lettings business had
been negatively affected by the pandemic. However, this was fewer
than the 81% that had expected to suffer a negative impact at the
start of the pandemic, signalling that performance may have been
better than initially feared for many landlords. The increasing
optimism was also reflected in the landlord confidence indicators,
all of which reached a five-year high in the third quarter of
2021.
Purchase activity was significantly impacted in the early months
of 2020, however the SDLT holiday supported a strong recovery in
house purchase activity which continued throughout 2021. According
to UK Finance, Buy-to-Let purchases reached GBP17.5bn in 2021, a
73% increase from GBP10.1bn in 2020.
Within this market, the professionalisation of borrowers
continued due to the increased tax liability for private landlords
and sustained regulatory change that has occurred over a number of
years, which might have deterred new amateur entrants who would
otherwise be tempted by robust rental yields and strong capital
gains.
Market review (continued)
Research conducted by BVA BDRC on behalf of the Group reported
that in the fourth quarter of 2021, 24% of landlords with large
portfolios of 20 or more properties intended to acquire new
properties in the next 12 months compared to just 8% of
single-property landlords. The research also found that of those
landlords that planned to purchase new properties, more respondents
intended to buy within a limited company structure than as an
individual in their personal name.
According to UK Finance, remortgage activity in the Buy-to-Let
sector reached GBP27.0bn in 2021, a 1% decrease from GBP27.4bn in
2020. This decrease reflected the market's focus on purchases
fuelled by the temporary SDLT holiday.
In the Private Rented Sector (PRS), much like the housing market
as a whole, supply constraints have continued amidst increasing
tenant demand leading to upwards pressure on rents. As a result,
contributors to the RICS Residential Market Survey in November 2021
reported a rental growth projection of almost 4% over the next 12
months, with rental growth expected to average approximately 5%
over the next five years.
The fundamentals underpinning the PRS remained strong throughout
2021, with growth in house prices outpacing wage growth to stretch
affordability even further and the reduced availability of high
loan to value mortgages generated strong demand for rental
properties, particularly as individuals returned to office-based
working in central city locations.
Residential
The UK residential mortgage market was equally affected by the
SDLT holiday as buyers sought to complete purchases while they
could benefit from lower transactional costs. This resulted in
large spikes in purchase completions in March, June and September
aligned with the relief withdrawal periods.
According to UK Finance, purchase completions reached GBP190.1bn
in 2021, a 45% increase from GBP130.8bn in 2020 as home movers
sought more space and first time buyers took their first step onto
the property ladder, as the availability of high loan to value
mortgages increased.
Buyers also had an additional deadline to consider this year as
changes to the Government's popular Help to Buy scheme were
introduced at the end of March 2021; these changes restricted the
scheme to first time buyers only while also introducing new
regional property price caps. The Group offers products under the
scheme via the Precise Mortgages brand and benefitted from
increased activity in the first quarter, with buyers seeking to
complete their purchases before the new rules came into effect.
Commercial
Similar to the residential property market, the start to 2021
was marked by a national lockdown and meant that only essential
retailers were allowed to trade from premises. May saw the
reopening of non-essential retail and outdoor social and leisure
venues. Most indoor social and leisure venues opened in May, with
nightclubs being the final sector to reopen in July. The pandemic
support grants and the furlough scheme offered assistance to many
businesses through these challenging times.
As in 2020, and despite very strong summer trading that resulted
from limited international travel opportunities, the hospitality
and leisure sectors were severely impacted by coronavirus
restrictions. Retail shopping centres and the High Street were
already experiencing a contraction in demand and values before the
pandemic as consumers moved online. CBRE Group reported an annual
decline of 1.7% in rent for 'all retail, a further decline from the
8.3% reduction recorded in 2020'.
Market review (continued)
However, convenience retail and retail warehousing showed growth
in 2021 as shopping for essentials remained local. Whilst the prime
retail settings struggled, the lower value, tertiary and suburban
retail segments remained comparatively buoyant. In addition, mixed
use asset classes such as semi commercial property, which offers a
diverse income stream underpinned by the residential lettings,
continued to be attractive to investors. Overall, CBRE reported
that capital values for 'all retail' increased 6.3% in 2021, with
the growth substantially achieved in the last two quarters of the
year.
In contrast, the industrial sector, especially warehouse and
distribution, saw greater occupier and investor demand, resulting
in an increase in rents and capital values, with CBRE reporting
annual rental value and capital value growth of 9.0% and 35.6%,
respectively, for 'all industrial'. Finally, office space was
impacted by lower occupancy rates as office workers were working
from home for the majority of 2021. The attitude of businesses to
retaining office premises and presence has been mixed, however it
has been acknowledged by most that the office remains an important
tool to grow a business, to ingrain a desired culture and to
develop junior employees. Where new lettings and sales were made, a
flight to quality was apparent, with A-grade stock seeing greater
demand than B-grade stock, despite it being of lower value. CBRE
reported annual rental value and capital value growth of 0.7% and
3.4%, respectively for 'all offices'.
Overall, commercial property investment volumes recovered in
2021, reaching more than GBP55bn, up by nearly a quarter on the
2020 figure, and the highest level since 2018. The year ended on a
high, with GBP17.8bn transacted in the final quarter of the
year.
Residential development
The long period of house price growth in the UK, as well as
strong demand for housing outstripping both the housing supply and
real wage growth, has led to affordability issues and access to the
housing ladder being outside the reach of many. In 2021, the
pandemic support schemes put in place by the government appeared to
have boosted demand, which remained strong throughout the year. It
was the strongest for houses that were affordable to local
populations in the regions, which the Heritable business has
concentrated on funding. It was notable that sales rates for the
few apartment schemes funded in London were also high, seemingly
bucking the trend of that particular market. These have resulted in
high levels of repayments for the Heritable business through
2021.
It appears that some regions remain structurally reliant on the
government's Help to Buy scheme and therefore these areas tend to
be avoided by Heritable. When government intervention into the
housing markets, both directly and indirectly, is withdrawn there
is a risk that transaction volumes will fall. At that point the
support required by small and medium sized developers, which forms
Heritable's core audience for development finance, will
increase.
Second charge lending
According to the Finance and Leasing Association, second charge
mortgage lending reached GBP1.1bn in 2021, an increase of 47%
compared to 2020. The Group maintains a reduced presence in this
smaller market and continues to offer lending to low-risk, prime
borrowers.
Market review (continued)
Funding lines
There are a number of successful non-bank or alternative
providers of finance to retail and SME customers in the UK. These
businesses are funded through a variety of means, including
wholesale finance provided by banks, investment funds and
securitisation or bond markets, high net worth investors and
market-based peer-to-peer platforms.
The Group was an active provider of secured funding lines to
these specialty finance providers, primarily focusing on short-term
real estate finance and development finance. Through these
activities, the Group achieved senior secured exposure at
attractive returns to asset classes that it knows well, primarily
secured against property-related mortgages. OSB Group sees a
regular flow of opportunities; however, given the pandemic and
economic uncertainty, in 2021 the Group did not consider any new
client facilities, choosing to focus on servicing the existing
borrowers and applying amended, restricted lending criteria.
Key performance indicators (KPIs)
Throughout the Strategic report the KPIs are presented on a
statutory and an underlying basis for 2021, and a statutory and pro
forma underlying basis for 2020.
Management believe these provide a more consistent basis for
comparing the Group's performance between financial periods.
Underlying results for 2021 and 2020 exclude exceptional items,
integration costs and other acquisition-related items.
For a reconciliation of statutory results to underlying results,
see page 31.
1. Gross new lending
Statutory GBP4.5bn (2020: GBP3.8bn)
Definition - Gross new lending is defined as gross new organic
lending before redemptions.
2021 performance
Gross new lending increased 20% in the year and reflected strong
growth in new originations.
2. Net interest margin (NIM)
Statutory 253bps (2020: 216bps)
Underlying 282bps (2020: 247bps)
Definition - NIM is defined as net interest income as a
percentage of a 13 point average of interest earning assets (cash,
investment securities, loans and advances to customers and credit
institutions). It represents the margin earned on loans and
advances and liquid assets after swap expense/income and cost of
funds.
2021 performance
Both statutory and underlying NIM improved in 2021 primarily due
to lower cost of retail funds and a benefit of the effective
interest rate (EIR) gains.
3. Cost to income ratio
Statutory 26% (2020: 31%)
Underlying 24% (2020: 27%)
Definition - Cost to income ratio is defined as administrative
expenses as a percentage of total income. It is a measure of
operational efficiency.
2021 performance
Statutory and underlying cost to income ratios improved in 2021
as the Group benefitted from higher income in the year.
Key performance indicators (continued)
4. Management expense ratio
Statutory 71bps (2020: 71bps)
Underlying 70bps (2020: 70bps)
Definition
Management expense ratio is defined as administrative expenses
as a percentage of a 13 point average of total assets. It is a
measure of operational efficiency.
2021 performance
Statutory and underlying management expense ratios remained
stable in 2021 as the Group benefitted from cost synergies and
other efficiencies.
5. Loan loss ratio
Statutory -2bps (2020: 38bps)
Underlying -2bps (2020: 38bps)
Definition - Loan loss ratio is defined as impairment losses
expressed as a percentage of a 13 point average of gross loans and
advances. It is a measure of the credit performance of the loan
book.
2021 performance
Statutory and underlying loan loss ratios improved in the year
as the Group used less severe forward-looking macroeconomic
scenarios in its IFRS 9 models, albeit with additional 10%
weighting to the downside scenario to account for the cost of
living and affordability pressures, and benefitted from strong
house price performance.
6. Return on equity
Statutory 20% (2020: 13%)
Underlying 24% (2020: 19%)
Definition
Return on equity (RoE) is defined as profit attributable to
ordinary shareholders, which is profit after tax and after
deducting coupons on AT1 securities, gross of tax, as a percentage
of a 13 point average of shareholders' equity (excluding GBP150m of
AT1 securities).
2021 performance
Statutory and underlying return on equity improved in 2021 due
to strong profitability in the year.
Key performance indicators (continued)
7. OSB solo CRD IV Common Equity Tier 1 capital ratio
The PRA has granted the Company a waiver to comply with the
Capital Requirements Regulation (CRR) as an individual
consolidation which includes the Company and subsidiaries except
for the offshore servicing entity OSBI, Special Purpose Vehicles
(SPVs) relating to securitisations and the CCFS entities acquired
in October 2019.
OSB solo 19.4% (2020: 17.2%)
Definition
This is defined as CET1 capital as a percentage of risk-weighted
assets (calculated on a standardised basis) and is a measure of the
capital strength of the Company.
2021 performance
The CET1 ratio strengthened in the year supported by the strong
capital generation from profitability.
8. Savings customer satisfaction -- Net Promoter Score (NPS)
OSB +70 (2020: +67)
CCFS +71 (2020: +72)
Definition
The NPS measures our customers' satisfaction with our service
and products. It is based on customer responses to the question of
whether they would recommend us to a friend. The question scale is
0 for absolutely not to 10 for definitely yes. Based on the score,
a customer is defined as a detractor between 0 and 6, a passive
between 7 and 8 and a promoter between 9 and 10. Subtracting the
percentage of detractors from the percentage of promoters gives an
NPS of between -100 and +100.
2021 performance
OSB's savings customer NPS improved to +70 and CCFS' was an
outstanding +71.
Financial review
Summary statutory results for 2021 and 2020
For the year ended For the year ended
31 December 31 December
2021 2020
Summary Profit or Loss GBPm GBPm
Net interest income 587.6 472.2
Net fair value gain on financial
instruments 29.5 7.4
Gain on sale of financial instruments 4.0 20.0
Other operating income 7.9 9.0
Administrative expenses (166.5) (157.0)
Provisions (0.2) (0.1)
Impairment of financial assets 4.4 (71.0)
Impairment of intangible assets 3.1 (7.0)
Integration costs (5.0) (9.8)
Exceptional items (0.2) (3.3)
Profit before taxation 464.6 260.4
Profit after taxation 345.0 196.3
Key ratios
Net interest margin 253bps 216bps
Cost to income ratio 26% 31%
Management expense ratio 0.71% 0.71%
Loan loss ratio -0.02% 0.38%
Return on equity 20% 13%
As at As at
31 December 31 December
2021 2020
Extracts from the Statement of Financial
Position GBPm GBPm
Loans and advances to customers 21,080.3 19,230.7
Retail deposits 17,526.4 16,603.1
Total assets 24,532.5 22,654.5
Financial review (continued)
Statutory profit
The Group's statutory profit before tax increased by 78% to
GBP464.6m (2020: GBP260.4m) after exceptional items, integration
costs and other acquisition related items of GBP57.6m(1) (2020:
GBP85.8m). The increase was primarily due to growth in the loan
book, a lower cost of retail funds and an impairment credit. The
Group adopted adverse Covid-19 related forward-looking assumptions
in its IFRS 9 models in 2020 which resulted in a substantial
impairment charge in the prior year. The Group also benefitted from
fair value gains on the Group's hedging activities, which more than
offset lower gains on sale of financial instruments.
Statutory profit after tax was GBP345.0m in 2021, an increase of
76% from GBP196.3m in the prior year, due to the increase in profit
before tax partially offset by a higher effective tax rate. It
included after-tax exceptional items, integration costs and other
acquisition-related items of GBP47.8m(1) (2020: GBP68.6m).
The Group's effective tax rate increased to 25.7% in 2021 (2020:
23.1%) primarily due to a larger proportion of the profits being
subject to the Bank Corporation Tax Surcharge.
Statutory return on equity for 2021 improved to 20% (2020: 13%)
reflecting the increase in profitability in the year.
Net interest income
Statutory net interest income increased by 24% in 2021 to
GBP587.6m (2020: GBP472.2m), largely reflecting growth in the loan
book and a lower cost of retail funds as well. It also included net
effective interest rate (EIR) reset gains of GBP11.5m to reflect
updated prepayment assumptions based on customer behaviour.
Statutory net interest margin (NIM) was 253bps compared to
216bps in the prior year due primarily to a lower cost of retail
funds and the EIR reset gains, which contributed 5bps. In 2020,
statutory NIM was impacted by a delay in passing on the base rate
cuts in full to retail savers.
Net fair value gain on financial instruments
The statutory net fair value gain on financial instruments of
GBP29.5m in 2021 (2020: GBP7.4m) included a GBP10.3m net gain on
unmatched swaps (2020: GBP18.0m net loss) and a net gain of GBP2.4m
(2020: GBP6.8m loss) in respect of the ineffective portion of
hedges.
The Group also recorded a GBP3.0m gain (2020: GBP13.0m gain)
from the amortisation of hedge accounting inception adjustments, a
GBP13.4m gain from the unwind of acquisition-related inception
adjustments (2020: GBP17.0m gain) and a GBP0.2m gain (2020: GBP2.4m
gain) from amortisation of the fair value relating to de-designated
hedge relationships. Other items amounted to a gain of GBP0.2m
(2020: GBP0.2m loss).
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 the
interest rate outlook on the London Interbank Offered Rate (LIBOR)
and Sterling Overnight Index Average (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.
Financial review (continued)
Gain on sale of financial instruments
The gain on sale of financial instruments of GBP4.0m in 2021,
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
In 2020, the Group made a gain of GBP20.0m 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 and
a sale of AAA notes from the Canterbury No. 3 securitisation.
Other operating income
Statutory other operating income of GBP7.9m (2020: GBP9.0m)
mainly comprised CCFS' commissions and servicing fees, including
those relating to securitised loans which have been derecognised
from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased 6% to GBP166.5m in
2021 (2020: GBP157.0m) largely due to higher employee costs.
The Group's statutory cost to income ratio improved to 26%
(2020: 31%) as a result of the increase in total income, primarily
due to higher net interest income, and gains from the Group's
hedging activities which more than offset lower gains on sale of
financial instruments. The statutory management expense ratio
remained at 71bps in 2021 (2020: 71bps) as the Group maintained its
strong focus on cost discipline and efficiency.
The management expense and cost to income ratios in 2021 and
2020 also benefitted from lower spending as a result of lockdowns,
the working from home guidance and some hiring delays in an
increasingly competitive labour market.
The Group continued to make strong progress towards achieving
target synergies from the Combination. As at 31 December 2021, the
Group had delivered run rate savings of c. GBP24m and we expect to
marginally exceed our run-rate pledge by the end of the third
anniversary of the Combination. Integration costs to achieve these
synergies were c. GBP20m with final integration costs expected to
be below the target of GBP39m.
Impairment of financial assets
The Group recorded an impairment credit of GBP4.4m in 2021
(2020: GBP71.0m loss) and the statutory loan loss ratio improved to
-2bps compared to 38bps in 2020.
As the outlook improved, the Group used less severe
forward-looking macroeconomic scenarios in its IFRS 9 models,
albeit with an additional 10% weighting to the downside scenarios
applied to reflect future risks from an increase in the cost of
living and affordability pressures from further rises in interest
rates. This, together with the strong house price performance, led
to a release of provisions of GBP24.9m. This release was partially
offset by IFRS 9 model enhancements of GBP4.3m, post model
adjustments of GBP6.8m and other charges of GBP9.4m. Further detail
is provided in the Risk review section.
In 2020, impairment losses were largely due to adverse pandemic
related forward-looking macroeconomic scenarios adopted by the
Group, changes to staging criteria in line with the PRA guidance,
pandemic-related enhancements to the Group's models and fraudulent
activity by a third party on a funding line provided by the
Group.
Financial review (continued)
Impairment of intangible assets
The impairment credit of intangible assets of GBP3.1m related to
a partial reversal of the impairment of the broker relationships
intangible of GBP7.0m recorded in 2020, as lending volumes in 2021
were higher than previously anticipated.
Integration costs
The Group recorded GBP5.0m of integration costs in 2021 (2020:
GBP9.8m) which largely related to redundancy costs and professional
fees for external advice on the Group's future operating
structure.
Exceptional items
Exceptional costs of GBP0.2m in 2021 and GBP3.3m in 2020 related
to the insertion of OSB GROUP PLC as the new holding company and
listed entity of the Group.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 10% to GBP21,080.3m in 2021 (31 December 2020: GBP19,230.7m),
reflecting originations of GBP4.5bn in the year.
Total assets grew by 8% to GBP24,532.5m (31 December 2020:
GBP22,654.5m), primarily reflecting the growth in loans and
advances partially offset by acquisition-related adjustments.
On a statutory basis, retail deposits increased by 6% to
GBP17,526.4m from GBP16,603.1m as at 31 December 2020 as the Group
continued to attract new savers. The Group complemented its retail
deposits funding with drawings under the Bank of England's funding
schemes. In the year, the drawings under the TFS were fully repaid
(31 December 2020: GBP2.6bn) and drawings under the TFSME increased
to GBP4.2bn as at 31 December 2021 from GBP1.0bn at the end of the
prior year.
The CCFS warehouse facility was closed in December 2021.
Liquidity
Both OSB and CCFS operate under the PRA'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).
Both Banks operate within a target liquidity runway in excess of
the minimum LCR regulatory requirement, which is based on internal
stress testing. Both Banks have a range of contingent liquidity
and funding options available for possible stress periods.
As at 31 December 2021, OSB had GBP1,322.8m and CCFS had
GBP1,318.0m of HQLA LCR eligible assets (31 December 2020:
GBP1,366.7m and GBP1,069.1m, respectively). OSB also held a
significant portfolio of unencumbered prepositioned Bank of England
level C eligible collateral in the Bank of England Single
Collateral Pool. CCFS's portfolio of level C eligible collateral
met the majority of Bank of England drawings (with the remainder
collateralised by UK Government debt) but at year end CCFS did not
have significant levels of available prepositioned unencumbered
collateral, due to the 100% haircuts applied to LIBOR based assets
from 31 December 2021. LIBOR transition plans for the Group have
been submitted to the Bank of England for review, and when approved
the 100% haircuts will be removed releasing significant level C
eligible collateral for future use in Bank of England facilities
and contingent liquidity.
Financial review (continued)
As at 31 December 2021, OSB had a liquidity coverage ratio of
240% and CCFS 158% (31 December 2020: 254% and 146%, respectively)
and the Group LCR was 196% (31 December 2020: 198%), all
significantly in excess of the 2021 regulatory minimum of 100% plus
Individual Liquidity Guidance.
Capital
The OSB solo capital position remained strong with a CET1
capital ratio of 19.4% as at 31 December 2020 (31 December 2020:
17.2%).
Summary cash flow statement
For the year For the year
ended ended
31 December 31 December
2021 2020
------------------------------------------- ------------ ------------
Profit before tax 464.6 260.3
Net cash generated/(used in):
Operating activities (462.5) (1,328.7)
Investing activities 80.6 755.8
Financing activities 748.0 840.7
Net increase in cash and cash equivalents 366.1 267.8
Cash and cash equivalents at the beginning
of the period 2,370.6 2,102.8
Cash and cash equivalents at the end
of the period 2,736.7 2,370.6
------------------------------------------- ------------ ------------
Cash flow statement
The Group's cash and cash equivalents increased by GBP366.1m
during the year to GBP2,736.7m as at 31 December 2021.
Loans and advances to customers increased by GBP1,844.0m during
the year, partially funded by GBP923.3m of deposits from retail
customers and a decrease in loans and advances to credit
institutions (primarily the Bank of England call account) of
GBP167.4m. Additional funding was provided by cash generated from
financing activities of GBP748.0m and included GBP634.4m of net
drawings under the Bank of England's TFS and TFSME schemes and
GBP36.1m of net proceeds from securitisation of mortgages during
the year. Cash generated from investing activities was
GBP80.6m.
In 2020, loans and advances to customers increased by
GBP1,705.0m during the year, partially funded by GBP348.1m of
deposits from retail customers offset by an increase in loans and
advances to credit institutions (primarily the Bank of England call
account) of GBP154.0m. Additional funding was provided by cash
generated from financing activities of GBP840.7m and included
GBP935.9m of net drawings under the Bank of England's TFS and TFSME
schemes and GBP381.6m of net proceeds from securitisation of
mortgages, partially offset by the repayment of warehouse funding,
indexed long-term repos (ILTR) and commercial repos during the
year. Cash generated from investing activities was GBP755.8m,
mainly from the sale of RMBS securities and derecognition of
securitisations.
1. See the reconciliation of statutory to underlying results on
page 31.
Financial review (continued)
Summary of underlying results for 2021 and 2020
For the year ended For the year ended
31 December 31 December
2021 2020
Summary Profit or Loss GBPm GBPm
Net interest income 650.5 534.0
Net fair value loss on financial
instruments 18.5 (5.9)
Gain on sale of financial instruments 2.3 33.1
Other operating income 7.9 9.0
Administrative expenses (161.7) (152.7)
Provisions (0.2) (0.1)
Impairment of financial assets 4.9 (71.2)
Profit before taxation 522.2 346.2
Profit after taxation 392.8 264.9
Key ratios
Net interest margin 282bps 247bps
Cost to income ratio 24% 27%
Management expense ratio 0.70% 0.70%
Loan loss ratio -0.02% 0.38%
Return on equity 24% 19%
As at As at
31 December 31 December
2021 2020
Extracts from the Statement of
Financial Position GBPm GBPm
Loans and advances 20,936.9 19,020.8
Retail deposits 17,524.8 16,600.0
Total assets 24,404.2 22,472.2
Alternative performance measures
The Group presents alternative performance measures (APMs) in
this Strategic report as Management believe they provide a more
consistent basis for comparing the Group's performance between
financial periods.
Underlying results for 2021 and 2020 exclude exceptional items,
integration costs and other acquisition-related items. A
reconciliation of statutory to underlying results is disclosed on
page 31.
APMs reflect an important aspect of the way in which operating
targets are defined and performance is monitored by the Board.
However, any APMs in this document are not a substitute for IFRS
measures and readers should consider the IFRS measures as well.
Financial review (continued)
Underlying profit
The Group's underlying profit before tax was GBP522.2m for the
year, an increase of 51% compared with GBP346.2m in 2020, primarily
due to growth in the loan book a lower cost of retail funds and an
impairment credit. The Group adopted adverse Covid-19 related
forward-looking assumptions in its IFRS 9 models in 2020 which
resulted in a substantial impairment charge in the prior year. The
Group also benefitted from fair value gains on the Group's hedging
activities in 2021, which partially offset lower gains on the sale
of financial instruments.
Underlying profit after tax was GBP392.8m, up 48% (2020:
GBP264.9m) due to the increase in profit before tax partially
offset by an increase in the effective tax rate.
The Group's effective tax rate on an underlying basis increased
to 24.8% for 2021 (2020: 23.5%), due to a larger proportion of the
profits being subject to the Bank Corporation Tax Surcharge.
On an underlying basis, return on equity for 2021 improved to
24% (2020: 19%) reflecting higher profitability in the year.
Net interest margin
Underlying net interest income increased by 22% to GBP650.5m in
2021 (2020: GBP534.0m) due primarily to growth in the loan book and
a lower cost of retail funds. It also included net effective
interest rate reset gains of GBP18.6m (2020: GBP2.1m loss) to
reflect updated prepayment assumptions based on customer
behaviour.
The underlying net interest margin increased to 282bps from
247bps in 2020 primarily reflecting a lower cost of retail funds
and EIR gains which contributed 8bps. In 2020, underlying NIM was
impacted by a delay in passing on the base rate cuts in full to
retail savers.
Net fair value gain on financial instruments
The underlying net fair value gain on financial instruments was
GBP18.5m in 2021 compared to a loss of GBP5.9m in 2020.
The gain for 2021 included a gain on unmatched swaps of GBP10.3m
(2020: GBP18.0m loss), a gain of GBP2.4m (2020: GBP6.8m loss) from
hedge ineffectiveness, and a GBP5.4m gain from amortisation of
inception adjustments (2020: GBP16.7m gain). Other hedging and fair
value movements amounted to a net gain of GBP0.4m (2020: GBP2.2m
gain).
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 2021 related to the disposal
of A2 notes in the PMF 2019-1B securitisation in February 2021.
In 2020, the underlying gain of GBP33.1m related to the disposal
of the remaining notes under the Canterbury No.1 and PMF 2020-1B
securitisations in January 2020 and a sale of notes from the
Canterbury No.3 securitisation.
Financial review (continued)
Other operating income
On an underlying basis, other operating income was GBP7.9m in
2021 (2020: GBP9.0m) and mainly 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 were up 6% to GBP161.7m in
2021 (2020: GBP152.7m) due primarily to increased employee
costs.
The underlying cost to income ratio improved to 24% (2020: 27%)
as a result of higher total income, primarily due to an increase in
net interest income in the year and gains from the Group's hedging
activities partially offset by lower gains on sale of financial
instruments.
The underlying management expense ratio remained stable at 70bps
for 2021 (2020: 70bps) as the Group maintained its strong focus on
cost discipline and efficiency.
The management expense and cost to income ratios in 2021 and
2020 also benefitted from lower spending as a result of lockdowns,
the working from home guidance and some hiring delays in an
increasingly competitive labour market.
Impairment of financial assets
The Group recorded an underlying impairment credit of GBP4.9m in
2021 (2020: GBP71.2m loss) representing an underlying loan loss
ratio of -2bps (2020: 38bps).
As the outlook improved, the Group used less severe
forward-looking macroeconomic scenarios in its IFRS 9 models,
albeit with an additional 10% weighting to the downside scenarios,
to reflect future risks from an increase in the cost of living and
affordability pressures from further rises in interest rates. This,
together with the strong house price performance, led to a release
of provisions of GBP24.9m. This release was partially offset by
IFRS 9 model enhancements of GBP4.3m, post model adjustments of
GBP6.8m and other charges of GBP8.9m. Further detail is provided in
the Risk review section.
In 2020, impairment losses were largely due to adverse
pandemic-related forward-looking macroeconomic scenarios adopted by
the Group, changes to staging criteria in line with the PRA
guidance, pandemic-related enhancements to the Group's models and
fraudulent activity by a third party on a funding line provided by
the Group.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP20,936.9m (31 December 2020: GBP19,020.8m) an increase of 10%
reflecting gross originations of GBP4.5bn in the year.
Total underlying assets grew by 9% to GBP24,404.2m (31 December
2020: GBP22,472.2m), primarily reflecting the growth in loans and
advances.
Retail deposits increased by 6% to GBP17,524.8m (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 TFSME drawings which as at 31
December 2021 increased to GBP4.2bn from GBP1.0bn at the end of
2020 as the TFS drawings were fully repaid (31 December 2020:
GBP2.6bn).
Financial review (continued)
Reconciliation of statutory to underlying results
2021 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 587.6 62.9(1) 650.5 472.2 61.8 534.0
Net fair value
gain/(loss) on
financial
instruments 29.5 (11.0)(2) 18.5 7.4 (13.3) (5.9)
Gain on sale of
financial
instruments 4.0 (1.7)(3) 2.3 20.0 13.1 33.1
Other operating
income 7.9 - 7.9 9.0 - 9.0
Total income 629.0 50.2 679.2 508.6 61.6 570.2
Administrative
expenses (166.5) 4.8(4) (161.7) (157.0) 4.3 (152.7)
Provisions (0.2) - (0.2) (0.1) - (0.1)
Impairment of
financial
assets 4.4 0.5(5) 4.9 (71.0) (0.2) (71.2)
Impairment of
intangible
assets 3.1 (3.1) - (7.0) 7.0 -
Integration
costs (5.0) 5.0(6) - (9.8) 9.8 -
Exceptional
items (0.2) 0.2(7) - (3.3) 3.3 -
Profit before
tax 464.6 57.6 522.2 260.4 85.8 346.2
Profit after tax 345.0 47.8 392.8 196.3 68.6 264.9
Summary Balance Sheet
Loans and
advances to
customers 21,080.3 (143.4)(8) 20,936.9 19,230.7 (209.9) 19,020.8
Other financial
assets 3,382.3 22.0(9) 3,404.3 3,341.8 36.8 3,378.6
Other
non-financial
assets 69.9 (6.9)(10) 63.0 82.0 (9.2) 72.8
Total assets 24,532.5 (128.3) 24,404.2 22,654.5 (182.3) 22,472.2
Amounts owed to
retail
depositors 17,526.4 (1.6)(11) 17,524.8 16,603.1 (3.1) 16,600.0
Other financial
liabilities 4,908.7 2.3(12) 4,911.0 4296.6 4.4 4,301.0
Other
non-financial
liabilities 72.6 (45.0)(13) 27.6 77.9 (61.4) 16.5
Total
liabilities 22,507.7 (44.3) 22,463.4 20,977.6 (60.1) 20,917.5
Net assets 2,024.8 (84.0) 1,940.8 1,676.9 (122.2) 1,554.7
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 a loss on sale of securitisation notes
4. Amortisation of intangible assets recognised on
Combination
5. Adjustment to expected credit losses on CCFS loans on
Combination
6. Integration costs related to the Combination, see note 12 to
the accounts
7. Reversal of exceptional items, see note 13 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. 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
Risk review
Executive summary
Continued progress was made in 2021 against the Group's
strategic risk management objectives for the year, including the
priority areas set out in the Annual Report and Accounts for the
year ended 31 December 2020.
The Group delivered strong operating and financial performance
against the backdrop of an improving economic outlook. However, the
Group remains cognisant of the continued risks which could emerge
from pandemic related disruption, future economic shocks and a
deteriorating geopolitical situation in Europe. Prolonged
inflationary pressure coupled with monetary policy tightening could
feed through into consumer affordability and confidence.
It is important to note that the strong performance was
delivered within the confines of a prudent risk appetite. The Group
operated within the boundaries of its risk appetite limits during
2021. The Group's overall asset quality remained stable with
respect to customer behaviour and affordability levels, whilst
collateral values improved during the year. Arrears levels remained
broadly stable, although certain portfolio segments experienced
increases as the impact of the pandemic took effect, which were
offset by improvements in other segments.
Group risk appetite statements and limits were designed and
implemented, based on aligned approaches calibrated for anticipated
financial forecasts and stress test analysis. Risk appetite is
monitored and managed at the Group and at the solo Bank levels.
All risk management activities were considered within the
confines of the Board approved risk appetite supported by a set of
comprehensive frameworks, policies, systems and controls.
Established procedures ensured that all risks were subject to the
three lines of defence governance and oversight principles. The
Group operated with defined roles and responsibilities for risk
management, with oversight at the Board and executive level with
independent assurance provided by the Group's Internal Audit
function. The Group's risk management and governance arrangements
were leveraged effectively to guide and support decision making
during periods of heightened uncertainty and change.
Active monitoring and assessment of the Group's credit risk
portfolio drivers is a critical risk management discipline. This
was achieved through the active monitoring of credit portfolio
performance indicators, sensitivity and stress test analysis and
thematic deep dives. Cross-functional expertise was leveraged to
review emerging trends and take pre-emptive actions in accordance
with the defined risk appetite and governance standards. The
Group's investment in advanced credit analytics greatly enhanced
monitoring capabilities, improved forward-looking assessments and
supported stress testing and capacity planning analysis. This in
turn allowed the Board to make more informed decisions in uncertain
macroeconomic and political environments.
Ensuring that the Group continued to maintain expected credit
loss (ECL) provisions based on its underlying prudent risk
appetite, was an important consideration of the Board and senior
management. ECL provisions were assessed leveraging the Group's
IFRS 9 approved methodologies, individually assessed provisioning
approaches and portfolio segment based stress and sensitivity
analysis. Benchmarking analysis was provided to the Board and
Senior Management, enabling review and challenge of provision
coverage levels and underlying macroeconomic scenarios.
The Group also maintained strong levels of capital and funding
throughout 2021, being mindful of the heightened levels of future
uncertainty. Capital and funding levels were assessed against the
impacts of extreme but plausible economic, business and operational
shocks and reflected in the Group's solvency and liquidity risk
appetite.
Risk review (continued)
The Group's Risk and Compliance functions made good progress
against planned strategic risk and compliance objectives including
further embedding the Group Strategic Risk Management Framework
(SRMF) and enhancing underlying systems and controls. The Group
continued to invest in people and technology with key hires made to
focus on operational continuity in resolution, model development
and governance, data governance and controls, solvency and
operational risk management. The Group's second line functions
continued to operate effectively using a shared service operating
model and delivered all key objectives during the pandemic.
The Group's capital management framework was further enhanced
during the year, whilst considerable time was spent on running a
number of capital planning scenarios and sensitivities across a
range of potential Basel 3.1 outcomes. The Group's Internal
Adequacy Assessment Process (ICAAP) was further enhanced during the
year and subjected to a supervisory review and evaluation process
(CSREP) by the Prudential Regulation Authority (PRA). A number of
reverse stress tests were performed to provide visibility to the
Group and entity Boards with respect to the severity of the
macroeconomic scenario which could result in the Group and its
entities breaching minimum regulatory requirements, which were
utilised in the going concern and viability assessments.
Both the regulated Bank entities continued to retain prudent
levels of liquidity in the context of the uncertain economic and
business outlook. Particular attention was directed to the
monitoring of the entity level liquidity positions, focusing on
retail savings customer behaviour, competitor actions and product
changes within the wider savings market. Given the increasing
prominence of securitisation as a wholesale funding source, the
Group undertook a review to identify further areas of enhancement
with respect to systems and controls. This review was completed and
the implementation of identified enhancements is underway.
The Group engaged in a number of Financial Conduct Authority
thematic reviews and continued to invest in the level of subject
matter compliance experts, to facilitate good customer outcomes and
treat customers fairly and be well-positioned to respond to changes
in regulatory expectations and industry best practices.
Progress was made in developing and embedding policies,
processes and controls to ensure compliance with the Bank of
England's Resolvability Assessment Framework (RAF), including
meeting the requirements for operational continuity in resolution.
The Group also made significant progress in establishing the
required infrastructure to meet its future Minimum Requirements for
own Funds and Eligible Liabilities (MREL).
The Group is committed to reviewing its risk and controls
framework considering the operating environment, business operating
model and any learnings from recent risk incidents. Future pandemic
related disruptions, ongoing integration activity and regulatory
initiatives could result in an increase in the number of
operational risk incidents observed. The Group continuously
leverages its operational risk management and governance frameworks
to identify, assess and appropriately manage all operational
incidents. Reflecting on the risk events realised within the year,
resulted in additional focus and resources being assigned to
migrating the Group onto a single operational risk system, whilst
increasing capacity to continuously review, assess and test all key
risks and controls.
The Group leveraged its operational resilience capabilities and
framework to effectively manage any disruption caused by the
pandemic. The Group continued to review and enhance its operational
resilience capabilities and framework in the context of emerging
best practice standards, regulatory expectations and the changing
nature of its operating model.
Risk review (continued)
The Group views fair customer outcomes and provision of timely
and effective support to customers in distress as a central pillar
supporting its mission, vision and values. The Group has customer
centric policies and procedures in place which are subject to
ongoing reviews and benchmarking. The Group kept its customers
front and centre during all phases of the pandemic ensuring
customers continue to be treated fairly and in line with regulatory
guidelines. The Group was also appropriately attuned to the
emerging industry and regulatory focus on customer vulnerability
acknowledging planned changes in consumer duty regulation.
The Group's IRB Programme made tangible progress against plan
during the year. The Group's end state IRB models are passing
through the final stages of governance, whilst an extensive
self-assessment against IRB requirements has been completed and the
required application documents have been drafted and are going
through our governance process. The IRB capabilities developed by
the Group continue to be integrated into key risk and capital
management processes, and are already informing strategic decision
making and business planning activities. The anticipated delay in
Basel 3.1 implementation and the one year extension to the Group's
MREL deadlines, provided the Group with the opportunity to enhance
our level of end state compliance prior to submitting our module 1
application. We continue to engage with the PRA to agree a
submission date.
During the year, progress was made in implementing further
enhancements across the Group's strategy, governance, risk
management arrangements and disclosures relating to climate change
risk, to facilitate compliance with recommendations set out in the
PRA supervisory statement SS3/19. Climate risk was captured within
the Group's enterprise risk register and a specific climate risk
management framework was developed which is a sub- framework of the
overarching Group SRMF. A dedicated Climate Risk Committee was
established to ensure enhancements continued to be delivered as
required. The Group refreshed and enhanced analysis identifying and
quantifying the risks relating to climate change in relation to the
Group's loan portfolios. Impairment and capital considerations were
assessed via the ICAAP. Further detail are set out in the OSBG
annual report and accounts Task Force on Climate-related Financial
Disclosures (TCFD) report.
The Group was subjected to a fraud which it became aware of in
early 2021, in one of its third party funding lines which upon
detailed investigation was deemed an isolated incident. A provision
was raised in the 2020 annual accounts and adjusted during 2021 as
required. The impact of this incident was appropriately reflected
in the Group's risk appetite and was subject to appropriate
oversight and review by the Board and senior management.
Priority areas for 2022
A significant level of uncertainty remains around the UK
economic outlook and operating environment for 2022 and beyond.
Therefore, continued close monitoring of the Group's risk profile
and operating effectiveness remains a key priority. Other
priorities include:
-- Continue to leverage the Group's SRMF to actively identify, assess and
manage risks in line with approved risk appetite.
-- Fully integrate the Group's Risk and Control Self-Assessment (RCSA)
processes into a Group wide risk system which will ensure more dynamic
and continuous assessment, adherence to common standards, an improved
user interface and increased review and challenge.
-- Leverage enhancements made across the Group's portfolio analytical
capabilities to improve risk-based pricing, balance sheet management,
capital planning and stress testing.
-- Focus on the delivery of all required capabilities to ensure compliance
with the Bank of England's RAF and Operational Continuity in Resolution
(OCIR).
Risk review (continued)
-- Further enhance management information to facilitate a more informed
oversight of the Group's risk profile.
-- Make continued progress in obtaining IRB accreditation and further
leverage capabilities within wider risk management disciplines such as
IFRS 9 ECL calculations, underwriting, existing customer management and
collections to drive portfolio performance benefits and improvements in
shareholder returns.
Strategic Risk Management Framework
The SRMF sets out the principles and approach with respect to
the management of the Group's risk profile in order to successfully
fulfil its business strategy and objectives, including compliance
with all conduct and prudential regulatory objectives.
Post Combination, the Group implemented a transitional Group
risk management framework to drive a consistent approach to risk
identification and assessment across both regulated banking
entities. During 2021, sufficient progress was made in implementing
a Group approach across all key principal risks, which resulted in
the framework no longer being transitional in nature. Over time
further enhancements will be made as required.
The SRMF is the overarching framework which enables the Board
and senior management to actively manage and optimise the risk
profile within the constraints of the risk appetite. The SRMF also
enables informed risk-based decisions to be taken in a timely
manner, ensuring the interests and expectations of key stakeholders
can be met.
The SRMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The SRMF
links overarching risk principles to day-to-day risk monitoring and
management activities.
The modular construct of the SRMF provides an agile approach to
keeping pace with the evolving nature of the risk profile and
underlying drivers. The SRMF and its core modular components are
subject to periodic review and approval by the Board and its
relevant Committees. The key modules of the SRMF structure are as
follows:
1. Risk principles and culture -- the Group established a set of
risk management and oversight principles which inform and guide all
underlying risk management and assessment activities. These
principles are informed by the Group's Purpose, Vision and
Values.
2. Risk strategy and appetite -- the Group established a clear
business vision and strategy which is supported by an articulated
risk vision and underlying principles. The Board is accountable for
ensuring that the Group's SRMF is structured against the strategic
vision and is delivered within agreed risk appetite thresholds.
3. Risk assessment and control -- the Group is committed to
building a safe and secure banking operation via an integrated and
effective enterprise SRMF.
4. Risk definitions and categorisation -- the Group sets out its
principal risks which represent the primary risks to which the
Group is exposed.
5. Risk analytics -- the Group uses quantitative analysis and
statistical modelling to help improve its business decisions.
Risk review (continued)
6. Stress testing and scenario development -- stress testing is
an important risk management tool which is used to evaluate the
potential effects of a specific event and or movement in a set of
variables to understand the impact on the Group's financial and
operating performance. The Group has a dedicated stress testing
framework which sets out the Group's approach to stress
testing.
7. Securitisation framework -- the Group developed a
securitisation framework which articulates the key components of a
securitisation issuance that are relevant to the Group. This
sub-framework is now reflected within the wider SRMF. As
enhancement areas are identified and implemented, the framework
will be updated as required.
8. Risk data and information technology -- the maintenance of
high-quality risk information, along with the Group's data
enrichment and aggregation capabilities, are central to the Risk
function's objectives being achieved.
9. Risk Management Framework's policies and procedures -- risk
frameworks, policies and supporting documentation outline the
process by which risk is effectively managed and governed within
the Group.
10. Risk management information and reporting -- the Group
established a comprehensive suite of risk MI and reports covering
all principal risk types.
11. Risk governance and function organisation -- risk governance
refers to the processes and structures established by the Board to
ensure that risks are assumed and managed within the Board-approved
risk appetite, with clear delineation between risk taking,
oversight and assurance responsibilities. The Group's risk
governance framework is structured to adhere to the 'three lines of
defence' model.
Group organisational structure
The Board has ultimate responsibility for the oversight of the
Group's risk profile and risk management framework and where it
deems it appropriate, it delegates its authority to relevant
Committees. The Board and its Committees are provided with
appropriate and timely information relating to the nature and level
of the risks to which the Group is exposed and the adequacy of the
risk controls and mitigants.
The Internal Audit function provides independent assurance to
the Board and its Committees as to the effectiveness of the systems
and controls and the level of adherence with internal policies and
regulatory requirements. The Board also commissions third party
subject matter expert reviews and reports in relation to issues and
areas requiring deeper technical assessment and guidance.
Risk appetite
The Group aligns its strategic and business objectives with its
risk appetite which defines the level of risk which the Group is
willing to accept, enabling the Board and senior management to
monitor the risk profile relative to its strategic and business
performance objectives. Risk appetite is a critical mechanism
through which the Board and senior management are able to identify
adverse trends and respond to unexpected developments in a timely
and considered manner.
The risk appetite is calibrated to reflect the Group's strategic
objectives, business operating plans, as well as external economic,
business and regulatory constraints. In particular, the risk
appetite is calibrated to ensure that the Group continues to
deliver against its strategic objectives and operates with
sufficient financial buffers even when subjected to plausible but
extreme stress scenarios. The objective of the Board risk appetite
is to ensure that the strategy and business operating model is
sufficiently resilient.
Risk review (continued)
The Group's risk appetite is calibrated using statistical
analysis and stress testing to inform the process for setting
management triggers and limits against key risk indicators. The
calibration process is designed to ensure that timely and
appropriate actions are taken to maintain the risk profile within
approved thresholds. The Board and senior management actively
monitor actual performance against approved management triggers and
limits. Currently, there are two regulated banking entities within
the Group, risk appetite metrics and thresholds are set at both
individual entity and Group levels.
The Group's risk appetite is subject to a full refresh annually
across all principal risk types and a mid-year review where any
metrics can be assessed and updated as appropriate.
Management of climate change risk
During 2021 further progress was made in developing and
embedding the Group's climate risk management approach within the
Group's wider risk management arrangements. This included the
development of a specific Climate Risk Management Framework,
implementation of an ESG Committee and a dedicated Climate Risk
Committee and ESG steering group.
The Group is exposed to the following climate related risks:
-- Physical risk -- relates to climate or weather-related events such as
heatwaves, droughts, floods, storms, rising sea levels, coastal erosion
and subsidence. These risks could result in financial losses with respect
to the Group's own real estate and customer loan portfolios.
-- Transition risk -- arising from the effect of adjusting to a low-carbon
economy and changes to appetite, strategy, policy or technology. These
changes could result in a reassessment of asset values and increased
credit exposures for banks and other lenders as the costs and
opportunities arising from climate change become apparent. Reputational
risk arises from a failure to meet changing and more demanding societal,
investor and regulatory expectations.
Approach to analysing climate risk
As part of the ICAAP, the Risk function engaged with a third
party to provide detailed climate change assessments at a
collateral level for the Group's loan portfolios. The data was in
turn utilised to conduct profiling and financial risk
assessments.
a) Climate scenarios considered
The standard metric for assessing climate change risk is the
global greenhouse gas concentration as measured by Representative
Concentration Pathway (RCP) levels. The four levels adopted by the
Intergovernmental Panel for Climate Change for its fifth assessment
report (AR5) in 2014 are:
Risk review (continued)
Emissions scenario
Scenario Change in temperature
(degC) by 2100
-------- ---------------------
RCP 2.6 1.6 (0.9 -- 2.3)
-------- ---------------------
RCP 4.5 2.4 (1.7 -- 3.2)
-------- ---------------------
RCP 6.0 2.8 (2.0 -- 3.7)
-------- ---------------------
RCP 8.5 4.3 (3.2 -- 5.4)
-------- ---------------------
Note: figures within the brackets above detail the range in
temperatures. Single figures outside the brackets indicate the
averages.
b) Climate risk perils considered
The following three physical perils of climate change were
assessed:
-- Flood - wetter winters and more concentrated rainfall events will
increase flooding.
-- Subsidence - drier summers will increase subsidence via the shrink or
swell of clay.
-- Coastal erosion - increased storm surge and rising sea levels will
increase the rate of erosion.
For each of the physical perils and climate scenarios detailed
above, a decade by decade prediction, from the current year to 2100
on the likelihood of each was provided.
For flood and subsidence, the likelihood took the form of a
probability that a flood or subsidence event would occur over the
next ten years. For coastal erosion the distance of the property to
the coast line is provided by scenario and decade.
All peril impacts are calculated at the property level to a one
metre accuracy. This resolution is essential because flood and
subsidence risk factors can vary considerably between neighbouring
properties.
In addition to the physical perils, the current EPC of each
property was considered to allow for an assessment of transitional
risk due to policy change.
Both the OSB and CCFS portfolios were profiled against each of
the perils detailed under the best (RCP 2.6) and worst (RCP 8.5)
climate scenarios during the 2020's. The Risk function focused on
performance over the next ten years, considering the average
expected life of a mortgage.
-- Flood risk
By the 2030's, at the Group level, the percentage of properties
predicted to experience a flood is expected to increase from 0.48%
in the least severe scenario to 0.50% in the most severe scenario.
Both scenarios represent a low proportion of the Group's loan
portfolios.
-- Subsidence
In the 2030's, at the Group level the percentage of properties
predicted to experience subsidence is expected to increase from
0.41% in the least severe scenario to 0.43% in the most severe
scenario. The outcome of both scenarios represents a low proportion
of the Group's loan portfolios.
-- Coastal erosion
There are two elements to coastal erosion risk. The first
relates to the proximity of the property to the coast. The second
depends on whether the area in which the property is located is
likely to experience coastal erosion in the future.
Risk review (continued)
Both Banks have over 93% of their portfolios more than 1000
metres from the coastline, indicating a very low coastal erosion
risk across the Group.
The CCFS bank entity has only twelve properties within 100m of
the coastline, whilst the OSB bank entity has only nine.
c) Energy Performance Certificate profile
The EPC profile of both bank entities follows a similar trend to
the national average. At the Group level 35% of properties have an
EPC of C or better, 48% have an EPC of D, with 15% in E and
negligible percentages in F or G. 90% of the properties supporting
the Group's loan portfolios have the potential to have at least an
EPC rating of C.
Value at Risk assessment
The Value at Risk to the Group, measured through change to ECL
and Standardised and IRB Risk Weighted Assets (RWAs), is assessed
through the application of stress to collateral valuations as per
the methodology outlined below. Impacts are assessed against the
latest year end position.
Climate change scenarios
To get the full range of impacts, the most and least severe
climate change stress scenarios were considered.
The most severe, RCP 8.5, assumes there will be no concerted
effort at a global level to reduce greenhouse gas emissions. Under
this scenario, the predicted increase in global temperature is 3.2
- 5.4degC by 2100.
The least severe scenario, RCP 2.6, assumes early action is
taken to limit future greenhouse gas emissions. Under this
scenario, the predicted increase in global temperature is
0.9-2.3degC by 2100.
Methodology -- physical risks
For the physical risks, updated valuations are produced to
reflect the impact of a flood, subsidence and coastal erosion risk.
The ECL and RWAs are then recalculated taking these reduced
valuations as inputs. These reduced valuations directly impact the
loan to values (LTVs), and hence loss given default (LGD).
Risk review (continued)
Methodology -- transitional risks
OSB Group's expectation is that, under the early action scenario
(RCP 2.6), the government will require all properties to achieve
EPC A, B and C grades where possible. We considered this risk for
Buy-to-Let accounts only.
If a property is already efficient (i.e. EPC grade of C, B or A)
then the potential transitional risk is assumed to be zero as they
already meet the requirements.
If a property's potential EPC grade is less than C (which is the
minimum government target) then the property is given a target
energy efficiency equal to that of its maximum potential energy
efficiency. The difference between the property's target and
current energy efficiencies dictate the costs of the renovations
required to meet the regulation.
Once the cost of renovation has been estimated the LGD (to
reflect valuation impacts) and the probability of default (PD) (to
reflect affordability impacts) are stressed to recalculate the
ECL.
The valuation impacts are also used to recalculate RWAs.
To apply the LGD stress, a relationship between LGD and LTV was
derived. The LTV was stressed by subtracting the costs of
renovations from the property value. This stressed LTV was then
mapped back to a stressed LGD.
The stressed PD or LGD is then used to derive a stressed
ECL.
When it comes to calculating RWAs, the costs of meeting the EPC
guidelines are subtracted from the property valuations. This causes
a change in the loan to value level which leads to an increase in
RWAs.
d) Analysis outcome
The Group is exposed to a non-material EPC or capital risk,
based on the collateral and EPC profile of the Group's loan
portfolios.
e) Planned enhancements during 2022
In the future, the Group's climate risk data and scenario
analysis capabilities will be enhanced in line with industry best
practices.
During 2022 key areas of enhancement include:
-- Further embedding of the Climate Risk Management Framework.
-- Development of climate risk appetite statements and limits.
-- Further enhancements to the climate risk scenario analysis.
-- Embedding climate risk within the RCSA process across the Group
.
Principal risks and uncertainties
1. Strategic and business risk
The risk to the Group's earnings and profitability arising from
its strategic decisions, change in business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Risk appetite statement: The Group's strategic and business risk
appetite states that the Group does not intend to undertake any
medium- to long-term strategic actions that would put at risk its
vision of being a leading specialist lender, backed by strong and
dependable savings franchises. The Group adopts a long-term
sustainable business model which, while focused on niche
sub-sectors, is capable of adapting to growth objectives and
external developments.
1.1 Performance against targets
Performance against strategic and business targets does not meet
stakeholder expectations. This has the potential to damage the
Group's franchise value and reputation.
Mitigation
Regular monitoring by the Board and the Group Executive
Committee of business and financial performance against the
strategic agenda and risk appetite. The financial plan is subject
to regular reforecasts. The balanced business scorecard is the
primary mechanism to support how the Board assesses management
performance against key targets. Use of stress testing to flex core
business planning assumptions to assess potential performance under
stressed operating conditions.
Direction: increased
The Group delivered strong performance against targets during
2021 despite the continued impact of the pandemic. Future
improvements in unemployment levels and house prices, are somewhat
offset by the risks relating to rising inflation and future
interest rate rises.
Competition has increased across both the lending and savings
markets, however the Group has strong operational capabilities and
financial resources to continue to compete effectively.
1.2 Economic environment
The economic environment in the UK is an important factor
impacting the strategic and business risk profile.
A macroeconomic downturn may impact the credit quality of the
Group's existing loan portfolios and may influence future business
strategy as the Group's new business proposition becomes less
attractive due to lower returns.
Mitigation
The Group's business model as a secured lender helps limit
potential credit risk losses and supports performance through the
economic cycle. The Group continues to utilise and enhance its
stress testing capabilities to assess and minimise potential areas
of macroeconomic vulnerability.
Direction: unchanged
Economic risks during 2021 related to pressure on economic
growth due to the impact of pandemic restrictions resulting in
rising unemployment and falling house prices. During the year these
risks migrated to risks relating to rising inflation levels and
interest rates, which are in part mitigated by low unemployment
levels and stable house prices.
1.3 Competition risk
The risk that new bank entrants and existing peer banks shift
focus to the Group's market sub-segments, increasing the level of
competition.
Principal risks and uncertainties (continued)
Mitigation
The Group continues to develop products and services which meet
the requirements of the markets in which it operates. The Group has
a diversified suite of products and capabilities to utilise, along
with significant financial resources to support a response to
changes in competition.
Direction: increased
Competition risk progressively intensified across core lending
sectors in 2021, as competitors' lending appetites increased with
the improvement in the economic outlook.
2. Reputational risk
The potential risk of adverse effects that can arise from the
Group's reputation being affected due to factors such as unethical
practices, adverse regulatory actions, customer dissatisfaction and
complaints or negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of a credit risk or
operational risk can lead to a reputational risk impact.
Risk appetite statement: The Group does not knowingly conduct
business or organise its operations to put its reputation and
franchise value at risk.
2. 1 Deterioration of reputation
Potential loss of trust and confidence that our stakeholders
place in us as a responsible and fair provider of financial
services.
Mitigation
Culture and commitment to treating customers fairly and being
open and transparent in communication with key stakeholders.
Established processes in place to proactively identify and manage
potential sources of reputational risk.
Direction: decreased
The Group delivered strong performance across all core targets,
despite the disruptions caused by the pandemic.
3. Credit risk
Potential for loss due to the failure of a counterparty to meet
its contractual obligation to repay a debt in accordance with the
agreed terms.
Risk appetite statement: The Group seeks to maintain a
high-quality lending portfolio that generates adequate returns,
under normal and stressed conditions. The portfolio is actively
managed to operate within set criteria and limits based on profit
volatility, focusing on key sectors, recoverable values and
affordability and exposure levels.
The Group aims to continue to generate sufficient income and
control credit losses to a level such that it remains profitable
even when subjected to a credit portfolio stress of a 1 in 20
intensity stress scenario.
3.1 Individual borrower defaults
Borrowers may encounter idiosyncratic problems in repaying their
loans, for example loss of a job or execution problems with a
development project.
While in most cases of default the Group's lending is secured,
some borrowers may fail to maintain the value of the security,
which may result in a loss being incurred.
Principal risks and uncertainties (continued)
Mitigation
Across both OSB and CCFS, a robust underwriting assessment is
undertaken to ensure that 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,
supplemented by bespoke application scorecards to inform the
lending decision.
Should there be problems with a loan, the Collections and
Recoveries team works with customers who are unable to meet their
loan service obligations to reach a satisfactory conclusion while
adhering to the principle of treating customers fairly.
Our strategic focus on lending to professional landlords means
that properties are likely to be well managed, with income from a
diversified portfolio mitigating the impact of rental voids or
maintenance costs. Lending to owner-occupiers is subject to a
detailed affordability assessment, including the borrower's ability
to continue payments if interest rates increase. Lending on
commercial property is based more on security, and is scrutinised
by the Group's independent Real Estate team as well as by external
valuers.
Development finance lending is extended only after a deep
investigation of the borrower's track record and stress testing the
economics of the specific project.
Direction: unchanged
The drivers of borrower default risk have shifted from the risk
around rising unemployment and declining house prices, to rising
inflation and consequent increases in interest rates impacting
affordability for accounts which revert onto higher interest rates
and an increasing risk of borrower default.
3.2 Macroeconomic downturn
A broad deterioration in the UK economy would adversely impact
both the ability of borrowers to repay loans and the value of the
Group's security. Credit losses would impact the Group's lending
portfolios, even if individual impacts were to be small, the
aggregate impact on the Group could be significant.
Mitigation
The Group works within portfolio limits on LTV, affordability,
name, 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.
Direction: Unchanged
The economic outlook is uncertain although it improved in 2021,
future risks remain related to further COVID-19 variants, rising
inflation and resultant increases in interest rates driving higher
levels of customer defaults, falling collateral values and rising
impairment levels.
3.3 Wholesale credit risk
The Group has wholesale exposures both through call accounts
used for transactional and liquidity purposes and through
derivative exposures used for hedging.
Mitigation
The Group transacts only with high quality wholesale
counterparties. Derivative exposures include collateral agreements
to mitigate credit exposures.
Principal risks and uncertainties (continued)
Direction: unchanged
The Group's wholesale credit risk exposure remains limited to
high-quality counterparties, overnight exposures to clearing banks
and swap counterparties.
4. Market risk
Potential loss due to changes in market prices or values.
Risk appetite statement: The Group actively manages market risk
arising from structural interest rate positions.
The Group does not seek to take a significant interest rate
position or a directional view on interest rates and it limits its
mismatched and basis risk exposures.
4.1 Interest rate risk
The risk of loss from adverse movement in the overall level of
interest rates. It arises from mismatches in the timing of
repricing of assets and liabilities, both on and off balance sheet.
It includes the risks arising from imperfect hedging of exposures
and the risk of customer behaviour driven by interest rates, e.g.
early redemption.
Mitigation
The Group's Treasury function actively hedges to match the
timing of cash flows from assets and liabilities.
Direction: unchanged
The Group's simple asset and liability structure and ongoing
careful management resulted in the level of interest rate risk
remaining unchanged in 2021.
4.2 Basis risk
The risk of loss from an adverse divergence in interest rates.
It arises where assets and liabilities reprice from different
variable rate indices. These indices may be market, administered,
other discretionary variable rates, or that received on call
accounts with other banks.
Mitigation
Due to the Group balance sheet structure, no active management
of basis risk was required by OSB Group in 2021.
Direction: unchanged
Product design and balance sheet structure enabled the Group to
maintain the overall level of basis risk across both Banks
throughout the year.
5. Liquidity and funding risk
The risk that the Group, although solvent, does not have
sufficient financial resources to enable it to meet its obligations
as they fall due.
Risk appetite statement: The Group will maintain sufficient
liquidity to meet its liabilities as they fall due under normal and
stressed business conditions; this will be achieved by maintaining
strong retail savings franchises, supported by high-quality liquid
asset portfolios comprised of cash and readily-monetisable assets,
and through access to pre-arranged secured funding facilities. The
Board requirement to maintain balance sheet resources sufficient to
survive a range of severe but plausible stress scenarios is
interpreted in terms of the liquidity coverage ratio and the
Internal Liquidity Adequacy Assessment Process (ILAAP) stress
scenarios.
Principal risks and uncertainties (continued)
5.1 Retail funding stress
As the Group is primarily funded by retail deposits, a retail
run could put it in a position where it could not meet its
financial obligations.
Increased competition for retail savings driving up funding
costs, adversely impacting retention levels and profitability.
Mitigation
The Group's funding strategy is focused on a highly stable
retail deposit franchise. The Group's large number of depositors
provides diversification, where a high proportion of balances are
covered by the Financial Services Compensation Scheme (FSCS)
protection scheme, largely mitigating the risk of a retail run.
In addition, the Group performs in-depth liquidity stress
testing and maintains a liquid asset portfolio sufficient to meet
obligations under stress. The Group holds prudential liquidity
buffers to manage funding requirements under normal and stressed
conditions.
The Group has further diversified its retail channels by
expanding the range of pooled deposit providers used.
The Group proactively manages its savings proposition through
both the Liquidity Working Group and the Group Assets and
Liabilities Committee (ALCO). Finally, the Group has prepositioned
mortgage collateral and securitised notes with the Bank of England
which allows it to consider alternative funding sources to ensure
it is not solely reliant on retail savings. The Group also has a
mature RMBS programme.
Direction: unchanged
The Group's funding levels and mix remained strong throughout
the year.
During the year, OSB and CCFS were both able to attract
significant flows of new deposits and depositors when required.
5.2 Wholesale funding stress
A market-wide stress could close securitisation markets or make
issuance costs unattractive for the Group.
Mitigation
The Group continuously monitors wholesale funding markets and is
experienced in taking proactive management actions where
required.
The Group issued two securitisations in 2021 and the Group saw
strong demand for secured funding issuance.
Direction: unchanged
The Group's range of wholesale funding options available,
including repo or sale of retained notes, collateral upgrade trades
remained broadly unchanged.
5. 3 Refinancing of TFSME
In the year, the Group repaid its TFS drawings in full and drew
a total of GBP4.2bn under the TFSME creating a refinancing
concentration around the maturity of the scheme.
Mitigation
The Group has a TFSME allowance significantly above its
wholesale funding requirements which allowed the TFS scheme to be
fully refinanced by TFSME.
Principal risks and uncertainties (continued)
Direction: decreased
Drawings made across the TFSME scheme, repaying TFS borrowings
during the year, extended the repayment profile of wholesale
funding. This coupled with the fact that the Group has a
well-established retail deposit franchises and established
securitisation capability resulted in this risk decreasing in the
year.
6. Solvency risk
The potential inability of the Group to ensure that it maintains
sufficient capital levels for its business strategy and risk
profile under both the base and stress case financial
forecasts.
Risk appetite statement: the Group seeks to ensure that it is
able to meet its Board-level capital buffer requirements under a
severe but plausible stress scenario. The solvency risk appetite is
informed by the Group's prudential requirements and strategic and
financial objectives.
We manage our capital resources in a manner which avoids
excessive leverage and allows us flexibility in raising
capital.
6.1 Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and
unexpected losses which can result in the Group's capital
requirements increasing, or capital resources being depleted, such
that it no longer meets the solvency ratios as mandated by the PRA
and Board risk appetite.
The regulatory capital regime is subject to change and could
lead to increases in the level and quality of capital that the
Group needs to hold to meet regulatory requirements.
Mitigation
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.
Direction: decreased
The Group's stable credit profile and ongoing profitability,
coupled with capital structure optimisation during 2021 via the
issuance of AT1 securities, means the Group's capital resources
have improved.
The Group has been provided with an extra year to meet its
interim and end state MREL requirements, which helps mitigate the
risks around markets not being supportive of issue and the
resulting cost.
Risks remain around adverse credit profile performance,
resulting from further COVID-19 variants, rising inflation and
interest rates.
Uncertainty remains as to the impact of Basel 3.1, with the
implementation date likely to be beyond the initially planned 1
January 2023 date moving out to potentially 2025.
Principal risks and uncertainties (continued)
7. Operational risk
The risk of loss or a negative impact on the Group resulting
from inadequate or failed internal processes, people or systems, or
from external events.
Risk appetite statement: The Group's operational processes,
systems and controls are designed to minimise disruption to
customers, damage to the Group's reputation and any detrimental
impact on financial performance. The Group actively promotes the
continuous evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is
not possible.
7.1 IT security (including cyber risk)
The risks resulting from a failure to protect the Group's
systems and the data within them. This includes both internal and
external threats.
Mitigation
The Group 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.
Direction: unchanged
The Group has well-established processes to allow it to operate
effectively when employees work from home and the cyber risks
related to working remotely.
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.
7. 2 Data quality and completeness
The risks resulting from data being either inaccurate or
incomplete.
Mitigation
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.
Direction: unchanged
Progress was made in 2021 to embed Group-wide governance
frameworks in part driven by the Group's IRB project. Further work
is planned for 2022, to move closer to the Group's target end
state.
7.3 Change management
The risks resulting from unsuccessful change management
implementations, including the failure to respond effectively to
release-related incidents.
Mitigation
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.
Principal risks and uncertainties (continued)
Direction: increased
The Group continued to adopt an ambitious change agenda,
although core planned integration activity is largely complete. In
2021 this risk was monitored and managed well, however further
change is planned in 2022, against the challenging operating
environment resulting from the risk of new COVID-19 variants and
ongoing macroeconomic uncertainty.
7.4 IT failure
The risks resulting from a major IT application or
infrastructure failure impacting access to the Group's IT
systems.
Mitigation
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.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and
impact of an IT failure, the risks remain, in particular due to new
hybrid working arrangement. Further work is planned during
2022.
7.5 Organisational change and integration
The risks resulting from the Group's ongoing integration
activities, including systems, people and infrastructure.
Mitigation
There is a low risk integration project plan (e.g. no
large-scale integration-related IT project change planned). The
Group has an experienced and capable project management office,
with close oversight and direction provided by the Group
Executive.
Direction: unchanged
To date, organisational change resulting from the integration
project has been managed well and is largely complete. Further work
is required to reach the target end state and carefully considered
plans, strong risk identification, monitoring and management
capabilities remain in place.
8. Conduct risk
The risk that the Group's behaviours or actions result in
customer detriment or negatively impact the integrity of the
markets in which it operates.
Risk appetite statement: The Group aims to operate and conduct
its business to the highest standards which ensure integrity and
trust with respect to how the Group operates and manages its
relationships with key stakeholders. In this regard, the Group has
no appetite to knowingly assume risks which may result in an unfair
outcome for customers and/or cause disruptions in the market
sub-segments in which it operates. However, where the Group
identifies potential conduct risks it will proactively intervene by
managing, escalating and mitigating them promptly to ensure a fair
outcome is achieved.
8.1 Product suitability
Whilst the Group originates relatively simple products, there
remains a risk that products (primarily legacy) may be deemed to be
unfit for their original purpose in line with current regulatory
definitions.
Mitigation
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.
Principal risks and uncertainties (continued)
Direction: unchanged
Whilst this risk remained low as a result of increased awareness
and dedicated oversight, the Group remains aware of the changes to
the regulatory environment and their possible impact on product
suitability.
8.2 Data protection
The risk that customer data is accessed inappropriately, either
as a consequence of network/system intrusion or through operational
errors in the management of the data.
Non-compliance with General Data Protection Regulation (GDPR)
regulations.
Mitigation
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. The
Group has a dedicated project to drive compliance with GDPR
regulation.
Direction: unchanged
Further controls were introduced during 2021, although
network/system threats continue to evolve in both volume and
sophistication.
Good progress was made across key GDPR project work streams.
8.3 Integration risk
The risk that the integration programme directly or indirectly
causes poor outcomes for customers and the market.
Mitigation
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.
The Group will conduct detailed analysis of potential customer harm
associated with particular integration steps.
Direction: decreased
Integration activity is largely complete with no material issues
being identified to date. Controls are in place to ensure that the
integration programme does not result in poor customer
outcomes.
9. Compliance/regulatory risk
The risk that a change in legislation or regulation, or an
interpretation that differs from the Group's, will adversely impact
the Group.
Risk appetite statement: The Group views ongoing conformity with
regulatory rules and standards across all the jurisdictions in
which it operates as a critical component of its risk culture. The
Group does not knowingly accept compliance risk which could result
in regulatory sanctions, financial loss or damage to its
reputation. The Group will not tolerate any systemic failure to
comply with applicable laws, regulations or codes of conduct
relevant given its business operating model.
9.1 Prudential regulatory changes
The Group continues to see a high volume of key compliance
regulatory changes that impact its business activities. These
include the implementation of Basel 3.1 capital rules and increased
RAF requirements, including updated MREL.
Principal risks and uncertainties (continued)
Mitigation
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.
Direction: unchanged
The Group continues to have a high level of interaction with UK
regulators and continues to identify and respond effectively to all
regulatory changes.
9.2 Conduct regulation
Regulatory changes focused on the conduct of business could
force changes in the way the Group carries out business and impose
substantial compliance costs.
Product design, underwriting, arrears and forbearance policies
are misaligned to regulatory expectations which result in customers
not being treated fairly, particularly those experiencing financial
hardship or vulnerable customers, with the potential for
reputational damage, redress and other regulatory actions.
Mitigation
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,
including those who are vulnerable or experiencing financial
hardship, are treated fairly, consistently and in a way that
considers their individual needs and circumstances.
The Group does not tolerate any systematic failure to deliver
fair customer outcomes. On an isolated basis, incidents can result
in detriment due to human and/or operational failures. Where such
incidents occur, they are thoroughly investigated, and the
appropriate remedial actions are taken to address any customer
detriment and prevent recurrence.
Direction: increased
The level of regulatory change continues to be high, but the
Group has sufficient resources and capabilities to respond to any
changes in an effective and efficient manner.
The Group continues to interact with regulatory bodies to take
part in thematic reviews as required.
Identifying, monitoring and supporting vulnerable customers
continues to be a key area of focus. Ongoing reviews of long-term
arrears and forbearance customers, continues to ensure that payment
terms still remain appropriate.
New consumer duty regulation will require dedicated resources to
be deployed to ensure the Group continues to comply with emerging
regulatory requirements.
Principal risks and uncertainties (continued)
10. Integration risk
The risks resulting from the Group's ongoing integration
activities, including business, operational and financial
performance, systems, people and infrastructure.
Risk appetite statement: The Combination of OSB and CCFS is
intended to enhance scale, bringing together resources and
capabilities, and to explore further growth opportunities which
deliver attractive long-term returns. The delivery against the
integration strategy is framed within the Group's Purpose, Vision
and Values and the broader risk appetite. The integration is deemed
to be inherently low risk owing to the retention of core operating
brands, similarities of business models, no large-scale IT
integration or substantial migration of customer accounts.
Accordingly, the Board has a low risk appetite for adverse
integration activity outcomes, which put the strategic rationale of
the merger, the Group's Purpose, Vision and Values or broader risk
appetite at risk. In the event that integration work streams are
subject to delay or reprioritisation, the Board expects the
rationale to be clearly understood and justified, with defined
mitigating actions implemented, overseen by robust levels of
governance.
A reduction in the oversight of business as usual operational
performance, increased risk to operational resilience via the
change process, unintended staff attrition or infrastructure
failure, which in turn adversely impacts operating and financial
performance.
Mitigation
Well established change and project management capabilities,
coupled with continued close oversight from the Executive and Board
Committees ensures risks continue to be mitigated effectively.
Independent assessment, monitoring and reporting is being
undertaken by the Risk and Internal Audit functions.
Direction: decreased
This risk has decreased with key planned integration activity
largely complete. To date the integration project has progressed as
planned, and the governance, project management and control
structures have operated effectively, with no material risks
crystallising.
Emerging risks
The Group proactively scans for emerging risks which may have an
impact on its ongoing operations and strategy and considers its top
emerging risks to be:
Political and macroeconomic uncertainty
The impact of new COVID-19 variants remains unknown. The Group's
lending activity is predominantly focused in the United Kingdom
(with a legacy back book of mortgages in the Channel Islands) and,
as such, will be impacted by any risks emerging from changes in the
macroeconomic environment. Rising inflation and interest rates pose
risks to the Group's loan portfolio performance.
Mitigation
The Group has mature and robust monitoring processes and via
various stress testing activity (i.e. ad hoc, risk appetite and
ICAAP) understands how the Group performs over a variety of
macroeconomic stress scenarios and has developed a suite of early
warning indicators, which are closely monitored to identify changes
in the economic environment. The Board and management review
detailed portfolio reports to identify any changes in the Group's
risk profile.
Principal risks and uncertainties (continued)
Climate change
As the worldwide focus on climate change intensifies, both the
physical risks and the transitional risks associated with climate
change continue to grow. Climate change risks include:
-- Physical risks which relate to specific weather events, such as storms
and flooding, or to longer-term shifts in the climate, such as rising sea
levels. These risks could include adverse movements in the value of
certain properties that are in coastal and low lying areas, or located in
areas prone to increased subsidence and heave.
-- Transitional risks may arise from the adjustment towards a low-carbon
economy, such as tightening energy efficiency standards for domestic and
commercial buildings. These risks could include a potential adverse
movement in the value of properties requiring substantial updates to meet
future energy performance requirements.
-- Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
Mitigation
During 2021 further progress was made in developing and
embedding the Group's climate risk management approach within the
Group's wider risk management arrangements. This included the
development of a specific Climate Risk Management Framework,
implementation of an ESG Committee and a dedicated Climate Risk
Committee and ESG steering group.
Updated financial impact analysis was conducted as part of the
ICAAP.
The Group invested a significant amount of time in developing
the ESG and climate risk strategy and on development of TCFD.
The Group's Chief Risk Officers have designated senior
management responsibility for the management of climate change
risk.
Model risk
The risk of financial loss, adverse regulatory outcomes,
reputational damage or customer detriment resulting from
deficiencies in the development, application or ongoing operation
of models and ratings systems.
The Group also notes changes in industry best practice with
respect to model risk management.
Mitigation
The Group has well-established model risk governance
arrangements in place, with Board and Executive Committees in place
to ensure robust oversight of the Group's model risk profile.
Dedicated resources are in place to ensure model governance
arrangements continue to meet any changes in industry and
regulatory expectations.
Regulatory change
The Group remains subject to high levels of regulatory oversight
and an extensive and broad ranging regulatory change agenda,
including meeting the requirements of the RAF and OCIR. The Group
is therefore required to respond to prudential and conduct related
regulatory changes, taking part in thematic reviews as required.
There is also uncertainty in relation to the regulatory landscape
post the United Kingdom's exit from the European Union.
Mitigation
The Group has established horizon scanning capabilities, coupled
with dedicated prudential and conduct regulatory experts in place
to ensure the Group manages future regulatory changes
effectively.
Principal risks and uncertainties (continued)
The Group also has strong relationships with regulatory bodies,
and via membership of UK Finance inputs into upcoming regulatory
consultations.
Evolving working practices
The COVID-19 pandemic has resulted in new ways of working which
are impacting employee collaboration, the embedding of the Group's
purpose, vision and values and labour market dynamics, which are
making it more challenging to recruit and retain talent across
certain positions.
Mitigation
The Group operated effectively during the COVID-19 lockdown
periods, with the majority of staff working from home. A hybrid
working model has been established which continues to work
well.
Risk profile performance review
Credit risk
The Group's loan portfolios performed robustly during 2021.
Prudent criteria for new originations delivered strong new business
quality, whilst the back book also outperformed forecasted
expectations. In particular, the Group saw lower than forecasted
arrears levels and better than expected house price inflation.
The Group's prudent credit risk appetite ensures that loan
portfolios are positioned to perform well in both benign and stress
macroeconomic environments. This approach continued to serve the
Group well during the ongoing uncertainty surrounding the potential
impact that new variants of the COVID-19 virus can have on the UK's
macroeconomic outlook.
Net loan book growth of 10% was delivered through controlled new
lending in the Group's core Buy-to-Let and residential
owner-occupier sub-segments, which more than offset reductions in
bridging and second charge loan books. The Group also maintained
tightened criteria in its more cyclical product lines. Mortgage
lending balances against semi-commercial and commercial lending
also reduced, as did the Group's development finance and funding
lines sub-segments due to the tighter criteria deployed and strong
repayment inflows.
Sensible new lending LTV criteria and favourable property price
indexing resulted in the average weighted stock LTV for OSB and
CCFS reducing during 2021 to 60% and 65%, respectively as at 31
December 2021 (31 December 2020: OSB 64% and CCFS 67%), which
resulted in a prudent average weighted LTV profile of 62% for the
Group.
A low level of arrears continued to be observed during 2021,
with just 1.1% of net loan balances being greater than three months
in arrears, which was broadly in line with 0.9% as at 31 December
2020. Increasing arrears levels were observed across a small number
of portfolios as payment deferrals expired, however these increases
were partially offset by improving performance across other loan
portfolios.
Group and solo bank interest coverage ratios remained strong
during 2021 at 199% for OSB and 188% for CCFS (2020: 201% OSB and
193% CCFS).
During 2021, forward-looking external credit bureau probability
of default and customer indebtedness scores remained strong, with
some reversion back to pre-pandemic levels as customers returned to
spending, once lockdown restrictions were relaxed.
Risk profile performance review (continued)
Expected Credit Losses (ECL)
Balance sheet ECL reduced from GBP111.0m to GBP101.5m during the
year, a reduction of GBP9.5m. Balances written off and other
non-material items partially offset this movement to result in a
full year statutory impairment credit of GBP4.4m representing a
loan loss ratio of -2bps (2020: GBP71.0m charge, 38bps,
respectively), with the provision release in 2021 primarily driven
by forecasted improvements in the forward-looking macroeconomic
outlook, and positive house price movements observed during the
year.
A summary of the key impairment drivers during 2021
included:
a. Macroeconomic outlook -- improvements in the economic outlook resulted in a GBP24.9m net release in provision levels. This net release resulted from a GBP12.3m provisions release resulting from positive residential house price growth, whilst a further GBP22.2m of provision was released through less severe forward looking macroeconomic scenarios being implemented. These positive movements were partially offset by a further 10% weighting being applied to the downside macroeconomic scenarios in Q4 2021, to reflect potential go forward risks surrounding rises in the cost of living due to rising inflation and interest rate levels, which increased provision levels by GBP9.6m.
b. Model enhancements -- enhancements were made to the Group's underlying models to ensure estimates continued to reflect actual credit profile performance. The cumulative impact of these enhancements contributed GBP4.3m to the total loan loss charge for 2021.
c. COVID-19 post model adjustments -- during the pandemic the Group implemented a number of post model adjustments to ensure that idiosyncratic risks which were not captured by the IFRS 9 suite of models, were reflected in provision levels. An example of this was adjustments made to time to sale estimates to reflect the elongated legal process due to backlogs resulting from the COVID-19 possession moratorium. The cumulative impact of post model adjustments made during the year totalled GBP6.8m.
d. Credit profile provision charges - impairment charges driven by changes in the credit profile such as portfolio size, portfolio mix and changes in staging mix totalled GBP4.3m.
e. Other impairment charges incurred during the year related to balance sheet write offs and other immaterial combination related charges which cumulatively resulted in a GBP5.1m charge.
The Group continued to closely monitor impairment coverage
levels in the year.
Impairment coverage levels remained above pre-pandemic levels,
reflecting the continued uncertainty surrounding the macroeconomic
outlook. The Group's Risk function conducted top down analysis,
assessing portfolio specific risks relating to rising cost of
living and further interest rate rises, which confirmed the
appropriateness of modelled provision levels including any post
model adjustments.
Risk profile performance review (continued)
Coverage ratios table
Gross carrying Expected credit
As at 31 December amount losses
2021 GBPm GBPm Coverage ratio
Stage 1 18,188.4 12.1 0.07%
Stage 2 2,413.6 25.0 1.04%
Stage 3 (+ POCI) 562.1 64.4 11.46%
Total 21,164.1 101.5 0.48%
As at 31 December
2020
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%
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and
requires a high level of judgement. The approach includes the
estimation of PD, loss given default (LGD) and likely exposure at
default (EAD). An assessment of the maximum contractual period with
which the Group is exposed to the credit risk of the asset is also
undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the
effect of a range of possible economic outcomes, calculated on a
probability weighted basis. This requires firms to formulate
forward-looking macroeconomic forecasts and incorporate them in ECL
calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral
values is established. For example, if unemployment levels
increase, the Group would observe an increasing number of accounts
moving into arrears. If residential or commercial property prices
fall, the risk of losses being realised on the sale of a property
would increase.
The Group adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry leading
economics advisory firm, that provide management and the Board with
advice on which scenarios to utilise and the probability weightings
to attach to each scenario.
A base case forecast is provided, along with a plausible upside
scenario. Two downside scenarios are also provided (downside and a
severe downside).
ii. How macroeconomic scenarios are utilised within ECL
calculations
Probability of default estimates are either scaled up or down
based on the macroeconomic scenarios utilised.
Loss given default estimates are impacted by property price
forecasts which are utilised within loss estimates should an
account be possessed and sold.
Exposure at default estimates are not impacted by the
macroeconomic scenarios utilised.
Each of the above components are then directly utilised within
the ECL calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee
macroeconomic scenarios and probability weightings used within ECL
calculations. Updated scenarios are provided on a quarterly basis
where an assessment is carried out by the Group's Risk function to
determine whether an update is required.
Risk profile performance review (continued)
On a periodic basis, the Group's Risk function and economic
adviser provide the Group Risk and Audit Committees with an
overview of recent economic performance, along with updated base,
upside and two downside scenarios. The Risk function conducts a
review of the scenarios comparing them to other economic forecasts,
which results in a proposed course of action, which once approved
is implemented.
iv. Changes made during 2021
Throughout 2021, the scenario suite was monitored and updated as
government measures were updated and the impact of the pandemic
evolved.
As the macroeconomic outlook improved during 2021, the Group's
Risk and Audit Committees focused on assessing whether specific
risks had been captured within externally provided forward-looking
forecasts. Of particular focus were the risks relating to rising
costs of living and subsequent rising interest rates to control
inflation levels. The Board consequently decided to shift a 10%
weighting from the upside scenario, to the downside and severe
downside scenarios (5% applied to each) to acknowledge the
increasing risks relating to the rising cost of living and
potential impacts of rising interest rates not captured within the
scenarios at the year end.
Details relating to the scenarios utilised to set the 31
December 2021 IFRS 9 provision levels are provided in the table
below.
Forecast macroeconomic variables over a five-year period
(includes average over five years and the peak to trough
projections).
Severe
Base Upside Downside downside
case scenario scenario scenario
At 31 December 2021 % % % %
Weighting applied 40 20 28 12
Economic driver Measure
Gross Domestic 5 year average (yearly
Product (GDP) GDP growth %) 3.3 4.0 2.3 1.7
Cumulative growth/(fall)
to peak/(trough)
(%) 14.5 18.5 1.2 -0.4
House Price Index 5 year average (yearly
(HPI) HPI growth %) 1.9 4.5 -2.9 -5.8
Cumulative growth/(fall)
to peak/(trough)
(%) -3.5 -1.0 -22.2 -33.9
Bank Base Rate
(BBR) 5 year average (%) 0.3 1.1 -0.1 -0.3
Cumulative growth/(fall)
to peak/(trough)
(%) 0.7 1.7 -0.4 -0.6
Unemployment Rate
(UR) 5 year average (%) 4.2 3.7 6.1 6.5
Cumulative growth/(fall)
to peak/(trough)
(%) 0.1 -1.2 1.8 2.1
Commercial Real 5 year average (yearly
Estate Index (CRE) HPI growth %) 1.9 4.5 -2.9 -5.8
Cumulative growth/(fall)
to peak/(trough)
(%) -3.5 -1.0 -22.2 -33.9
Risk profile performance review (continued)
Severe
Base Upside Downside downside
case scenario scenario scenario
At 31 December 2020 % % % %
Weighting applied 40 30 23 7
----- --------- --------- ---------
Economic driver Measure
Gross Domestic 5 year average (yearly
Product (GDP) GDP growth %) 3.2 3.6 2.6 2.2
Cumulative growth/(fall)
to peak/(trough)
(%) -5.8 -5.6 -6.7 -8.0
House Price Index 5 year average (yearly
(HPI) HPI growth %) 2.1 3.6 -0.4 -2.2
Cumulative growth/(fall)
to peak/(trough)
(%) -8.5 -6.3 -18.9 -26.4
Bank Base Rate
(BBR) 5 year average (%) 0.5 0.8 0.1 0.1
Cumulative growth/(fall)
to peak/(trough)
(%) 1.4 1.7 0.0 0.0
Unemployment Rate
(UR) 5 year average (%) 6.9 6.1 8.8 9.6
Cumulative growth/(fall)
to peak/(trough)
(%) 3.7 3.1 5.8 6.5
Commercial Real 5 year average (yearly
Estate Index (CRE) HPI growth %) 2.1 3.6 -0.4 -5.5
Cumulative growth/(fall)
to peak/(trough)
(%) -8.5 -6.3 -18.9 -40.0
Forbearance
Where a borrower experiences financial difficulty, which impacts
their ability to service their financial commitments under the loan
agreement, forbearance may be used to achieve an outcome which is
mutually beneficial to both the borrower and the Group.
By identifying borrowers who are experiencing financial
difficulties pre-arrears or in arrears, a consultative process is
initiated to ascertain the underlying reasons and to establish the
best course of action to enable the borrower to develop credible
repayment plans to see them through the period of financial
stress.
The specific tools available to assist customers vary by product
and the customers' circumstances. The various options considered
for customers are as follows:
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
mortgage to a lower contractual rate. Where this is a formal contractual
change, the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
Risk profile performance review (continued)
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where arrears accrue at the original
contractual payment. Any arrears existing at the commencement of the
arrangement are retained.
-- Voluntary-assisted sale: a period of time is given to allow borrowers to
sell the property and arrears accrue based on the contractual payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual payment. Arrears continue to accrue based on the
contractual payment.
-- Capitalisation of interest: arrears are added to the loan balance and are
repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where considered appropriate, the Group
will consider writing off part of the debt. This may occur where the
borrower has an agreed sale and there will be a shortfall in the amount
required to redeem the Group's charge, in which case repayment of the
shortfall may be agreed over a period of time, subject to an
affordability assessment or where possession has been taken by the Group,
and on the subsequent sale where there has been a shortfall loss.
-- Arrangement to pay: where an arrangement is made with the borrower to
repay an amount above the contractual monthly instalment, which will
repay arrears over a period of time.
-- Promise to pay: where an arrangement is made with the borrower to defer
payment or pay a lump sum at a later date.
-- Bridging loans which are more than 30 days past their maturity date.
Repayment is rescheduled to receive a balloon or bullet payment at the
end of the term extension where the institution can duly demonstrate
future cash flow availability.
The Group aims to proactively identify and manage forborne
accounts, utilising external credit reference bureau information to
analyse probability of default and customer indebtedness trends
over time, feeding pre-arrears watch list reports. Watch list cases
are in turn carefully monitored and managed as appropriate.
During 2021, the Group conducted a review of long term arrears
cases with a particular focus on acquired second charge portfolios.
This review resulted in the Group entering into forbearance
arrangements with customers to ensure future repayment terms
remained sustainable. As a result, the Group saw an increase in new
forbearance measures granted within the year. Removing the impact
of this review, forbearance levels remained broadly stable year on
year.
Risk profile performance review (continued)
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an
ongoing basis for accuracy and appropriateness. Commercial
properties are subject to quarterly indexing, whereas residential
properties are indexed against monthly House Price Index (HPI)
data.
Solvency risk
The Group maintains an appropriate level and quality of capital
to support its prudential requirements with sufficient contingency
to withstand a severe but plausible stress scenario. The solvency
risk appetite is based on a stacking approach, whereby the various
capital requirements (Pillar 1, CRD IV buffers, Board and
management buffers) are incrementally aggregated as a percentage of
available capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth,
profitability, access to capital markets and regulatory changes.
The Group actively monitors all key drivers of solvency risk and
takes prompt action to maintain its solvency ratios at acceptable
levels. The Board and management also assess solvency when
reviewing the Group's business plans and inorganic growth
opportunities.
During 2021, the Group proactively managed the balance sheet,
whilst the PRA retained capital support measures detailed within
the CRR 'Quick Fix' package implemented in 2020 which continued to
support capital ratios. The counter-cyclical buffer remained at 0%,
with the PRA signalling that it would increase to 1% from 13
December 2022 in line with the usual 12-month implementation
period. If the UK economic recovery proceeds broadly in line with
the PRA's projections and a material change in the macroeconomic
outlook does not occur, the PRA expects to increase the rate to 2%
in the second quarter of 2022, which would also be expected to take
effect after the usual 12 month implementation period.
The OSB solo CET1 and total capital ratios under CRD IV
increased to 19.4% and 21.3%, respectively as at 31 December 2021
(31 December 2020: 17.2% and 19.0%, respectively) demonstrating the
strong organic capital generation capability of the business, the
impact of the regulatory support measures and prudent management of
the credit risk profile. Capital structure optimisation including
the issuance of AT1 securities contributed to the OSB solo's strong
capital ratios..
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow
imbalances and fluctuations in funding under both normal and
stressed conditions, arising from market-wide and Bank-specific
events. OSB's and CCFS' liquidity risk appetites have been
calibrated to ensure that both Banks always operate above the
minimum prudential requirements with sufficient contingency for
unexpected stresses, whilst actively minimising the risk of holding
excessive liquidity which would adversely impact the financial
efficiency of the business model.
Risk profile performance review (continued)
The Group continues to attract new retail savers and has high
retention levels with existing customers. In addition, the
Combination allowed the Group a wider range of wholesale funding
options, including securitisation issuances and use of retained
notes from both Banks.
In 2021, both Banks actively managed their respective liquidity
and funding profiles within the confines of their risk appetites as
set out in each Bank's ILAAP.
Funding and liquidity risk remained broadly stable throughout
the year. Retail funding was generally raised at a low cost of
funds due to increased available funds in the market. There was a
short period in the late third quarter where retail funding was
volatile as the Group funded the additional lending brought about
by the stamp duty land tax changes. The Group refinanced TFS
funding into TFSME and drew down further funds elongating the
funding profile by a further four years ahead of the scheme's
closure in October 2021.
Each Bank's risk appetite is based on internal stress tests that
cover a range of scenarios and time periods and therefore are a
more severe measure of resilience to a liquidity event than the
standalone liquidity coverage ratio (LCR). As at 31 December 2021,
OSB had a liquidity coverage ratio of 240% (2020: 254%) and CCFS
158% (2020: 146%), and the Group LCR was 198%, all significantly
above regulatory requirements.
Market risk
The Group proactively manages its risk profile in respect of
adverse movements in interest rates, foreign exchange rates and
counterparty exposures.
The Group accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage
lending, sight and fixed term savings and the maintenance of a
portfolio of high-quality liquid assets. Interest rate exposure is
mitigated on a continuous basis through portfolio diversification,
reserve allocation and the use of financial derivatives within
limits set by the Group ALCO and approved by the Board.
The Group's balance sheet is predominantly GBP denominated. The
Group has some minor foreign exchange risk from funding the OSBI
business. This is minimised by pre-funding a number of months in
advance and regularly monitoring GBP/INR rates. Wholesale
counterparty risk is measured on a daily basis and constrained by
counterparty risk limits.
Operational risk
The Group continues to adopt a proactive approach to the
management of operational risks. The operational risk management
framework has been designed to ensure a robust approach to the
identification, measurement and mitigation of operational risks,
utilising a combination of both qualitative and quantitative
evaluations. The Group's operational processes, systems and
controls are designed to minimise disruption to customers, damage
to the Group's reputation and any detrimental impact on financial
performance. The Group actively promotes the continual evolution of
its operating environment.
Where risks continue to exist, there are established processes
to provide the appropriate levels of governance and oversight,
together with an alignment to the level of risk appetite stated by
the Board.
Risk profile performance review (continued)
A strong culture of transparency and escalation has been
cultivated throughout the organisation, with the Operational Risk
function having a Group-wide remit, ensuring a risk management
model that is well embedded and consistently applied. In addition,
a community of Risk Champions representing each business line and
location has been identified. Operational Risk Champions ensure
that the operational risk identification and assessment processes
are established across the Group in a consistent manner. Risk
Champions are provided with appropriate support and training by the
Operational Risk function.
Due to the COVID-19 pandemic and the resulting high number of
employees working and accessing systems from home, the risk of a
cyber-attack has heightened. Whilst IT security risks continue to
evolve, the level of maturity of the Group's controls and defences
has significantly increased, supported by dedicated IT security
experts. The Group's ongoing penetration testing continues to drive
enhancements by identifying potential areas of risk.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory
conduct and aims to minimise breaches, financial costs and
reputational damage associated with non-compliance.
The Group has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation
and the impact of emerging regulation.
In order to minimise regulatory risk, the Group maintains a
proactive relationship with key regulators, engages with industry
bodies such as UK Finance and seeks external expert advice. The
Group also assesses the impact of incoming regulation on itself and
the wider market in which it operates, and undertakes robust
assurance assessments from within the Risk and Compliance
functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the
fair treatment of customers and in maintaining the integrity of the
market sub-segments in which it operates to be a fundamental part
of its strategy and a key driver to sustainable profitability and
growth. The Group does not tolerate any systemic failure to deliver
fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to
human and/or operational failures. Where such incidents occur they
are thoroughly investigated and the appropriate remedial actions
are taken to address any customer detriment and to prevent
recurrence.
The Group considers effective conduct risk management to be a
product of the positive behaviour of all employees, influenced by
the culture throughout the organisation and therefore continues to
promote a strong sense of awareness and accountability.
Strategic and business risk
The Board has clearly articulated the Group's strategic vision
and business objectives supported by performance targets. The Group
does not intend to undertake any medium to long-term strategic
actions, which would put the Group's strategic or financial
objectives at risk.
To deliver against its strategic objectives and business plan,
the Group has adopted a sustainable business model based on a
focused approach to core niche market sub-segments where its
experience and capabilities give it a clear competitive
advantage.
The Group remains highly focused on delivering against its core
strategic and financial objectives, against a highly competitive
and uncertain backdrop.
Risk profile performance review (continued)
Reputational risk
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of a credit risk or
operational risk can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media
coverage, customer satisfaction scores, the share price and NPS
provided by brokers.
Integration risk
Integration risk was identified as a principal risk for the
duration of the integration programme, though the integration of
the two entities was deemed inherently low risk owing to the
similarity of the two business models, with the programme involving
no material system or data migrations. The Board took the view that
it has limited appetite for integration related risks and deemed it
appropriate to identify, assess and manage integration risks in
full compliance with the wider risk management framework and
governance disciplines of the Group.
Integration risk relates to any risk which may result in the
non-delivery of planned integration objectives with respect to
desired strategic outcomes and costs and synergy performance
targets. Additionally, integration risk is also assessed with
respect to the other principal risks which may be adversely
impacted as a consequence of the integration activities.
The integration programme and the underlying risk profile
continued to perform in line with expectations with no material
risk incidents or trends identified during the year. The
integration programme did experience some level of disruption owing
to the pandemic, but overall the programme has continued to
progress as planned.
Non-Financial Information Statement
The requirements of sections 414CA and 414CB of the Companies
Act 2006 relating to non-financial reporting are addressed in this
section.
We have a range of policies and guidance that support key
outcomes for all our stakeholders. Performance against our
strategic non-financial performance measures is one indicator of
the effectiveness and outcomes of policies and statements. The
Group's policies and statements include, but are not limited to,
those summarised in the table below. During the year, the policies
of OSB and CCFS were reviewed and combined to apply at a Group
level, as appropriate. The table provides cross references to where
further information is included within the Annual Report.
Non-Financial Information Statement
Due diligence undertaken Outcomes/Impacts/Risks
Description of policies/statement
Environmental matters
---------------------------------- ----------------------------------------------------------- -----------------------------------------------------------
Our Environmental Policy The Environmental The focus of actions
embodies our Stewardship Policy was reviewed in 2021 has been
value, outlining our commitment by the Environmental on reducing the impact
to acting with conscience Working Group which of our directly controlled
and considering environmental focuses on: operations, developing
factors at all times. 1. assessing the impact of business activities and our environmental
The policy commits to driving initiatives to minimise the consumption of management systems
reducing our environmental energy, water, paper, office supplies, transportation maturity and sharing
impact and to continually , best practice across
improving our environmental maintenance and cleaning; the Group. Key highlights
performance as an integral 2. aligning the environmental data and actions for all for the year include:
part of our business strategy. entities within the Group; 1. transitioning our UK offices and branches where the
It seeks to ensure that 3. developing an environmental culture across the Group; Group had operational control to renewable
we meet or exceed all and electricity tariffs, reducing emissions
relevant legal and regulatory 4. Encouraging environmental responsibility with significantly;
environmental obligations. employees and within supply chains. 2. undertaken re-certification audits to ISO 14001:2015
Environmental management standard within our office
buildings;
3. completed the rollout of video conferencing
facilities within office buildings to reduce
unnecessary business travel;
4. continued to introduce energy efficient solutions
such as LED lighting as part of office refurbishments
or reactive maintenance;
5. established the Environmental, Social and Governance
Committee; and
6. initiated the development of a Net Zero plan. This
plan will determine the objectives and targets over
the near and long-term to achieve Net Zero emissions
across Scope 1, Scope 2 and Scope 3 emissions.
Employee matters
---------------------------------- ----------------------------------------------------------- -----------------------------------------------------------
Group Flexible Working The Group Flexible We seek to accommodate,
Policy sets out a range Working Policy was where possible, all
of flexible working arrangements drafted by HR Management requests for flexible
and the approach that and reviewed by the working, with the
the Group will take in Group's Legal and majority of requests
reviewing formal Flexible Company Secretariat being agreed.
Working Requests from function. The policy The Group Homeworking
employees. was then endorsed Policy introduced
Our Group Homeworking by the Governance an attestation for
Policy is applicable to Forum and approved those working from
all UK employees and provides by the Group Executive home (formally, informally
clarity in respect of Committee. and on an
the Group's A similar process, enforced basis) with
approach regarding formal as outlined above, this requiring employees
homeworking arrangements was followed for the who work from home
(i.e. following a Flexible Group Homeworking to confirm that they
Working Request being Policy. In addition, are aware of and
agreed), informal the policy was reviewed can appropriately
arrangements and enforced by the Health and mitigate risks presented
arrangements (e.g. COVID-19). Safety, Data Protection by working from home
and Information Security. in respect of data
An external review protection, information
was undertaken prior security and health
to the policy being and safety.
approved.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Employee matters
-------------------------------- ------------------------------- ----------------------------
Our Diversity and Inclusion In order to ensure Our Group-wide Diversity
Policy sets out the Group's appropriate Board and Inclusion Working
commitment to promoting oversight of matters Group has progressed
equality of opportunity, relating to diversity a number of initiatives
providing an inclusive and inclusion, updates and activities, some
workplace and eliminating are regularly provided of which supported
any unfair treatment or to the Group gender-related focus
unlawful discrimination. Nomination and Governance areas, such as progressing
Committee. towards our published
In addition, the Group Women in Finance
General Counsel and Charter target and
Company Secretary, reducing our gender
who is the Executive pay gap. The Diversity
responsible for diversity and Inclusion Working
and inclusion, issues Group has ensured
regular updates to a far broader focus
all employees in order on other areas of
to drive awareness diversity, which
of ongoing internal contributed to the
initiatives and progress Group achieving a
relating to diversity silver award as a
and inclusion. result of a Talent,
An external adviser, Inclusion and Diversity
Legal and HR were Evaluation (TIDE)
involved in drafting undertaken by the
the new policy, which Employers Network
has been through the for Equality and
governance process Inclusion (ENEI).
and approved by the
Group Nomination and
Governance Committee.
Our Whistleblowing Policy A Whistleblowing Report The Group Audit Committee
-- Raising a Concern aims is regularly presented receives a whistleblowing
to encourage all employees, to the Group Audit report quarterly
and others who have serious Committee and an annual and is responsible
concerns about wrongdoing report is presented for overseeing the
in the workplace, to raise to the Board. The effective operation
their concerns at the Chair of the Group of the policy; this
earliest opportunity. Audit Committee is aims to mitigate
The Group's whistleblowing the designated Whistleblowers' the risk of undetected
arrangements endeavour Champion. wrongdoing and unwanted
to manage whistleblowing exposure for the
cases fairly, consistently Group.
and in a way which protects
individual whistleblowers.
Our Group Health and Safety The management of A number of COVID-19
Policy outlines our approach COVID-19 and associated measures remain in
and responsibilities under risk assessment is place in our offices
statutory legislation. now subject to regular and branches, proportionate
We recognise our duty review with participation to the level of risk
and responsibility and from Property Services, determined through
the Health and Safety Operational Resilience risk assessment.
Policy ensures that the and the appointed Health and safety
Group complies with legislation third party Health statistics are provided
to protect its employees and Safety specialists. on a dashboard shared
and customers, and provides The Health and Safety monthly with the
a suitable and safe environment Working Group meet Board along with
for employees, customers twice per annum to an annual Health
and anyone affected by review the objectives and Safety Report.
the Group's operations. of the Health and Risk assessments
Safety Policy. Any are completed across
relevant matters arising the Group annually.
from these meetings Annual health and
are reported to Operational safety training is
Risk. completed by all
An accountable Executive employees.
is responsible for Health and Safety
the Health and Safety awareness in the
Policy and a third workplace has increased
party adviser reviews with updates provided
it annually prior on the Group intranet
to it being approved to reduce the possibility
by the Board. of injury to employees
and customers.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
------------------------------- ------------------------------- ------------------------------
Our Modern Slavery Statement The Modern Slavery The largest risks
and Vendor Code of Conduct Statement is updated to the Group are
and Ethics outlines the in line with the requirements. its supply chain,
measures we have taken In addition, as part its Indian operations
to combat the risks of of an annual review, and employment processes.
modern slavery and human the Modern Slavery To sufficiently mitigate
trafficking in our businesses Working Group updated the risks, our Vendor
and supply chains. its Vendor Code of Management team includes
Conduct and Ethics. specific testing
The Group's Executive of key controls within
Committee has approved the Vendor Management
the Code which is Risk Assessment Matrix
currently being issued in line with the
to all third party Vendor Management
service suppliers. Framework. The Group
The Code includes ensures that appropriate
provisions on the contractual wording
Group's Values, Diversity is included in its
and Inclusion and recruitment-related
Human Rights. It also contractual documentation
provides details of where appropriate.
breach reporting procedures. There are breach
We perform relevant reporting procedures
checks via the Organisation in place and there
for Economic Co-operation were no reportable
and Development (OECD) incidents in this
Watch at the onboarding financial year.
stage and, where required,
as part of our ongoing
due diligence checks.
In addition, our standard
contract terms include
reference to the required
modern slavery or
relevant contract
terms.
All employees are
required to complete
mandatory training
to raise awareness.
Our Group Vendor Management All third parties We recognise the
and Outsourcing Policy are classified according importance of building
sets out the core requirements to the nature of the strong relationships
which we must meet and services provided and governance with
provides a structure to and the associated our third parties
efficiently manage potential risk. Due diligence and of the possible
and contracted third-party relating to issues reputational risk
relationships ensuring such as data security, this can impose.
the right level of engagement financial stability, We actively monitor
and due diligence, in legal and reputational our third parties
compliance with our regulatory risks is undertaken to ensure they are
obligations. when onboarding, monitoring adhering to our requirements,
and exiting all third so that we can in
parties. turn meet our obligations
The monthly Vendor to stakeholders.
Management Committee
reviews compliance
with our Group Vendor
Management and Outsourcing
Policy and the performance
of our key third parties.
There is regular reporting
to the Group Risk
Committee and an annual
assurance update is
provided to the Board.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
-------------------------------- ------------------------------- ---------------------------
Our Lending Policy sets All changes to the Lending The Group Risk Committee
out the parameters within Policy require approval challenges how the
which we are willing from the Group Credit Lending Policy is
to lend money responsibly Committee, with material applied to ensure
within our set criteria changes escalated to that the right outcomes
and credit risk appetite. the Group Risk Committee. are achieved.
As a second line of The credit risk appetite
defence, the Credit of the Group monitors
Quality Assurance process the performance and
monitors adherence to make-up of the portfolio
the policy through a relative to pre-agreed
risk-based sampling trigger limits and
approach. therefore is a measure
System parameters and of the overall performance
underwriting processes of the Lending Policy.
act as an additional Non-adherence to
control to ensure lending the credit risk appetite
parameters are not breached. could lead to business
being written outside
the agreed risk appetite.
Our Group Complaint We investigate complaints Complaints remained
Handling Policy outlines, competently, diligently aligned to the level
at a high level, our and impartially, supported of business activity.
regulatory expectations by appropriately trained Complaints are also
for complaint handling employees. Our Complaints a component of Executive
from a customer centric processes are designed bonus scheme metrics
perspective. to be easily accessible affecting remuneration
by all customers and outcomes.
ensure that those in Complaints may be
vulnerable circumstances an early warning
experience the same of not treating customers
opportunities to complain fairly, which has
and a service that is regulatory consequences
tailored to individual for the Group.
needs. Root cause analysis
is used to identify
and solve underlying
issues rather than apply
quick fixes.
Complaint performance
forms part of management
information provided
to Management Committees
and to the Board. Analysis
of complaints outcomes
and potential business
and customer impact
is an integral part
of the Group's processes.
Our Group Customer Regular case study reviews An enhanced training
Vulnerability Policy through the Vulnerable programme has been
sets the standards and Customer Review Committee developed to focus
approach for the identification ensure best practice on more complex customer
and treatment of vulnerable processes across the scenarios including
customers and provides different customer journeys identifying vulnerable
guidance to all areas are monitored and shared customers and how
of the Group to ensure with representatives best to serve them
vulnerable customers from differing customer-facing and their changing
consistently receive and second line functions. needs.
fair outcomes. In line with policy There is a potential
the Compliance function impact to our reputation
conducts risk-based and regulatory risks
second line assurance for not treating
reviews across both customers fairly.
vulnerable customer Customer complaint
and other operational data shows there
processes, in accordance were no systemic
with its Annual Compliance issues in vulnerability
Assurance Plan, should processes and outcomes
the need arise. for the year.
Our Group Data Protection The Group Data Protection The privacy and security
Policy ensures that Officer reports twice of personal information
there are adequate policies each year, to the Group is respected and
and procedures in place Executive Committee protected. We regard
to enable compliance and the Board, regarding sound privacy practices
with the GDPR and the compliance with the as a key element
Data Protection Act Data Protection Policy of corporate governance
2018; and confirms the and reports on any data and accountability.
necessary steps that incidents and data subject Non-compliance would
should be taken when access requests. expose the Group
processing personal to the potential
data. breach of GDPR provisions.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
------------------------------ ------------------------------ ---------------------------------
Our Group Arrears Management As the second line Our arrears rates are
and Forbearance Policy of defence, the Compliance monitored through the
ensures that we address function reviewed Group Credit Committee
the need for internal customer journeys; on a monthly basis
systems and processes these reviews are to ensure senior management
to treat customers risk-based and look oversight of arrears
in financial difficulties at customer outcomes trends. There is credit
fairly, including being across the collections risk associated with
proactive with customers and litigation processes credit losses following
who display characteristics to ensure customers the ineffective management
of being on the cusp are dealt with in of customer accounts.
of financial difficulty. an effective and fair This has been an area
manner. of focus for the Board
The Compliance function and Executives and
conducts second line adjustments were made
thematic reviews across to accommodate payment
collection and litigation deferral requests,
processes, should as a result of COVID-19.
the need arise. To ensure that those
customers who had been
adversely impacted
by COVID-19 were supported
with regards to the
management of their
mortgage payments,
a clear set of internal
policies and procedures
were in place to effectively
manage all forbearance/payment
deferral requests.
The changes were put
in place in line with
the regulatory timelines
noted in the FCA guidance
and in line with that
guidance, any customers
requiring further support
outside the COVID-19
guidance period are
supported utilising
the standard policy
toolkit which is applied
in accordance with
all regulator/Mortgage
Conduct of Business
(MCOB) rules requirements.
Our Anti-Bribery and The policies are subject No material issues
Corruption policies to an annual review or breaches have arisen
outline our stance process with approval from the Group's adherence
to conduct all of our provided by the Group to the existing Anti-Bribery
business in an honest Audit Committee. and Corruption policies
and ethical manner. Anti-Bribery and Corruption and processes.
We take a zero- tolerance training forms part We recognise that there
approach to bribery of the wider Financial may be instances where
and corruption and Crime training package an employee may be
are committed to acting that is mandatory exposed to the risk
professionally, fairly for each employee of bribery or corruption
and with integrity to complete on an and as result, provide
in all of our business annual basis. numerous channels in
dealings and relationships. In addition, the requirements which an employee can
The purpose of the set out in the Anti-Bribery report such an event,
policies are to provide and Corruption policies including via the whistleblowing
employees and contractors are incorporated into process.
with clear guidelines the Group's Vendor During the tender process
to ensure that we conduct Management and Outsourcing for a new supplier,
our activity in an Policy. all employees involved
ethical and appropriate Gifts, hospitality in the process must
manner including complying and donations are ensure compliance with
with the laws and regulations closely monitored the Anti-Bribery and
of each jurisdiction through a log maintained Corruption policies
in which we operate. by Risk and Compliance and requirements. This
The policy forms an in accordance with approach also applies
integral part of the our associated policies to the Conflict of
Group Financial Crime and procedures. Interest Policy.
Risk Management Framework.
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters
---------------------------------- ------------------------------ --------------------------
Our Conflict of Interest The policy is subject No material issues
Policy aims to identify, to an annual review or breaches have
maintain and operate effective process with approval arisen from the Group's
organisational and administrative provided by the Group adherence to the
arrangements to identify Executive Committee. existing Conflicts
and take all reasonable Conflicts of interest of Interest Policy
steps in order to avoid training forms part and processes.
conflicts where possible. of the wider Financial As a financial services
Crime training package provider, we face
that is mandatory the risk of actual
for each employee and potential conflicts
to complete on an of interest periodically.
annual basis. We recognise that
Conflicts of interest there may be instances
disclosures are typically where conflicts of
made as part of the interest are unavoidable
recruitment process, and that a conflict
as part of the annual may exist even if
attestation process no unethical or improper
and/or when there act or outcome results
is a change to circumstances, from it. Where it
such as a new potential is not possible to
conflict arising. avoid a potential
In addition, conflicts conflict of interest,
of interest requirements we are committed
are incorporated into to ensuring that
the Group's Vendor any conflicts of
Management and Outsourcing interest that arise
Policy. are managed fairly
Group compliance maintains and in the best interests
the conflicts of interest of our customers.
register, which is
reviewed quarterly
by the Group Conduct
Risk Management Committee
and escalated to the
Group Risk Management
Committee, as required.
In addition, the Group
Nomination and Governance
Committee reviews
Executive and Director
conflicts.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
Our Fraud Policy outlines The Policy is subject During the first
our duty to comply with to an annual review half of 2021, following
prevailing legal and regulatory with approval provided the discovery of
requirements and to have by the Group Audit fraudulent activity
appropriate systems and Committee. by a third party
controls in place to mitigate Fraud awareness training on a funding line
the risk of fraud. This forms part of the provided by the Group
includes ensuring appropriate wider Financial Crime and secured against
monitoring and escalation training package that lease receivables
procedures are in place is mandatory for each and the underlying
and are operating effectively. employee to complete hard assets, the
Our strategy for managing on an annual basis. Group commissioned
fraud risk is to adopt External stakeholders, an external review
a zero-tolerance approach customers, clients of processes and
towards any form of fraud; and relevant third controls in its funding
however, we accept that parties are made aware lines business. The
incidents of fraud will of our robust stance review confirmed
occur as a result of doing towards fraud management that it was an isolated
business. through literature incident and the
The purpose of the policy or similar communication majority of recommended
and supporting procedures channels. enhancements to processes
is to provide a consistent All potential fraud and controls have
approach throughout the incidents are investigated now been implemented
Group to the prevention, by a dedicated Group and the remainder
detection and investigation Financial Crime team will be made before
of fraud. The policy forms that is specifically the end of the year.
an integral part of the trained in identifying The GBP20.0m impairment
Group Financial Crime and reporting fraudulent provision taken in
Framework. behaviour. 2020 against the
The Group will seek potential fraud has
to recover all losses increased to GBP22.0m.
arising from fraud-related The funding lines
activities and to business remains
take necessary action, primarily property
as appropriate. related and the Group
The Group Conduct does not intend to
Risk Management Committee, add any new non-property-related
Group Risk Management funding lines in
Committee and the the future.
Group Risk Committee As a financial services
regularly review and provider, we recognise
monitor fraud reporting. that we are inherently
exposed to the risk
of fraud and that
losses may occur
as a result of doing
business. In order
to deter, detect
and disrupt those
who would seek to
use the Group to
facilitate any form
of financial crime
we have appropriate
systems and controls
in place.
Key risk and performance
indicators are agreed
by senior management
and reviewed on a
regular basis. Management
information on fraud-related
activity is presented
on a regular basis
to senior management
in order to provide
visibility of our
fraud exposure and
any associated loss.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters
-------------------------------- --------------------------- ------------------------------
Our Anti-Money Laundering The policy is subject to No material issues
and Counter Terrorist an annual review process or breaches have
Financing Policy seeks with approval provided by arisen from the Group's
to explain the responsibility the Group Audit adherence to the
of senior managers, the Committee. Anti-money existing Anti-Money
Money Laundering and Reporting laundering and counter Laundering and Counter
Officer (MLRO) and all terrorist financing forms Terrorist Financing
employees. The policy part of the wider Policy and processes.
requires that the highest Financial Crime training As a financial services
ethical standards are package that is mandatory provider, the Group
met and requires all employees for each employee to recognises that it
to act with integrity complete on an annual is inherently exposed
at all times. We have basis. We have documented to the risk of financial
no appetite for breaching processes and procedures crime.
legislation or regulation in place to identify the Key risk and performance
regarding anti-money laundering Group's customers prior indicators are agreed
or counter terrorist financing. to entering into a by senior management
The policy provides a relationship. Systems and and reviewed on a
consistent approach to controls have been regular basis. Management
the deterrence and detection adopted to highlight information on financial
of those suspected of activity deemed to be crime related activity
laundering the proceeds suspicious. All is presented to senior
of crime or those involved suspicious activity is management in order
in the funding of terrorism investigated by a to provide visibility
and the relevant disclosure dedicated Financial Crime of our exposure to
to the necessary authorities. team who are specifically financial crime.
The policy forms an integral trained in identifying
part of the Group Financial and reporting suspicious
Crime Risk Management behaviour.
Framework.
Our Group Operational The Group's ongoing The Group continues to
Resilience Policy documents response to COVID-19 invest in improving its
the approach and expectations demonstrates how it can infrastructure and expects
of the Group in establishing respond rapidly and to deliver a number of
and enhancing its levels effectively to a severe enhancements in 2022 and
of resilience. It also threat to the services beyond. Whilst these changes
references how the Group that it provides to its are designed to improve its
complies with the Financial customers, although we services and efficiency, we
Conduct Authority and recognise that a pandemic recognise the implementation
Prudential Regulation is just one of a number risks associated with
Authority policies on of possible threats to delivering significant
Operational Resilience the disruption of change programmes and are
which were first published service. The Group is ensuring that operational
in March 2021. These policies well placed to respond to resilience remains a key
require all firms to adopt threats that occur consideration when setting
a proactive approach to suddenly and which may the change management
preventing a disruption last for an extended agenda.
to its services, whilst period. An Operational
also ensuring that sufficient Resilience Simulation
planning and testing is exercise was conducted in
established in order to January 2022.
respond effectively to
a disruptive incident.
Along with the wider industry,
the Group has made excellent
progress in implementing
the requirements of the
two regulatory policies.
Description of the business
model
---------------------------------- --------------------------- ------------------------------
A description of the business model is set out on page 3.
Principal risks and uncertainties
A description of the principal risks and uncertainties is set
out on pages 41 to 53.
This Strategic report was approved by the Board and signed on
its behalf by:
Jason Elphick
General Counsel and Company Secretary
31 March 2022
The Directors present their Report, together with the audited
Financial Statements and Auditor's Report, for the year ended 31
December 2021.
Information presented in other sections
Information relating to future developments, principal risks and
uncertainties and engagement with suppliers, customers and others
has been included in the Strategic Report.
Information on financial instruments including financial risk
management objectives and policies including, the policy for
hedging the exposure of the Group to price risk, credit risk,
liquidity risk and cash flow risk can be found in the Risk review
on pages 32 to 40.
Details on how the Company has complied with section 172 can be
found throughout the Strategic and Directors' Reports and on pages
13 and 14.
Results
The results for the year are set out in the Statement of
Comprehensive Income on page 94.
Directors
The Directors who served during the year and to the date of this
report were as follows:
Graham Allatt
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Simon Walker (appointed on 4 January 2022)
David Weymouth
None of the Directors had any interest either during or at the
end of the year in any material contract or arrangement with the
Company.
Directors' indemnities
The Articles provide, subject to the provisions of UK
legislation, an indemnity for Directors and Officers of the Company
in respect of liabilities they may incur in the discharge of their
duties or in the exercise of their powers, including any
liabilities relating to the defence of any proceedings brought
against them, which relate to anything done or omitted, or alleged
to have been done or omitted, by them as Officers or employees of
the Company. Directors' and Officers' liability insurance cover is
in place in respect of all Directors.
Equal opportunities
The Group is committed to applying its Diversity and Inclusion
Policy at all stages of recruitment and selection. Short-listing,
interviewing and selection will always be carried out without
regard to gender, gender reassignment, sexual orientation, marital
or civil partnership status, colour, race, nationality, ethnic or
national origins, religion or belief, age, pregnancy or maternity
leave or trade union membership. Any candidate with a disability
will not be excluded unless it is clear that the candidate is
unable to perform a duty that is intrinsic to the role, having
taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process will be made to ensure that no applicant
is disadvantaged because of his/her disability. Line Managers
conducting recruitment interviews will ensure that the questions
they ask job applicants are not in any way discriminatory or
unnecessarily intrusive. This commitment also applies to existing
employees, with the necessary adjustments made, where there is a
change in circumstances.
Employee engagement
Employees are kept informed of developments within the business
and in respect of their employment through a variety of means, such
as employee meetings, briefings and the intranet. Employee
involvement is encouraged and views and suggestions are taken into
account when planning new products and projects.
The OSBG Sharesave 'save as you earn' Scheme is a Group wide
all-employee share option scheme which is open to all UK-based
employees. The Sharesave Scheme allows employees to purchase
options by saving a fixed amount of between GBP5 and GBP500 per
month over a period of either three or five years, at the end of
which the options, subject to leaver provisions, are usually
exercisable (options granted prior to 2021 have a lower limit of
GBP5 and only a three-year scheme will be offered from 2021
onwards). The Sharesave Scheme has been in operation since June
2014 and options are granted annually, with the exercise price set
at a 20% discount of the share price on the date of grant.
A Workforce Advisory Forum (known as OneVoice) is in place to
gather the views of the workforce to enable the Board and Group
Executive Committee to consider a broadly representative range of
stakeholder perspectives to guide strategic decisions for the
future of the Company and its subsidiaries. OneVoice consists of
volunteer representatives (of which there are 30 in total) from
each of the various business areas and locations, as well as
permanent members consisting of a designated NED, Mary McNamara; a
member of the Group Executive Committee, Jason Elphick; and a
representative from HR Management. Other NEDs and members of the
Group Executive Committee are invited to attend meetings throughout
the year.
Members of the Board are keen to engage with our employees
across all locations and find the experience of visiting our
branches and offices within the UK and India invaluable; however,
due to travel restrictions in place throughout 2021 as a result of
the ongoing impact of COVID-19, these visits have not been
physically possible for most of the year. It is hoped that once
restrictions are lifted and, provided it is safe to do so, visits
to branches and offices will resume.
During 2021, four OneVoice meetings were held. In advance of
each meeting, employee representatives are encouraged to engage
with employees within their nominated business areas and across all
Group locations to identify topics impacting the workforce, which
it is felt should be brought to the attention of the Board and
Group Executive Committee. A number of items were considered and
discussed by OneVoice, including the 2021 Financial Services
Culture Board survey results and COVID-19, as well as topics
relating to ESG matters such as culture, diversity and inclusion,
diversity and recruitment at senior levels, general well-being and
mental health first aiders within the workplace, governance of pay
within the Group and return to office arrangements. The permanent
members of OneVoice were particularly interested in feedback from
the workforce on employee morale, employee engagement and the new
Stewardship value.
The Group is committed to diversity and to making sure everyone
in our business feels included. The Diversity and Inclusion Working
Group continued to develop the Group's Diversity and Inclusion
Strategy in line with the Respect Others value throughout 2021. The
Diversity and Inclusion Working Group brings together a broad mix
of employees (26 members) from across the UK business, as well as
representation from OSB India, to drive our diversity and inclusion
agenda to appreciate differences in age, gender, ethnicity,
religion, disability, sexual orientation, education, socio-economic
background and national origin and ensure that all employees are
treated fairly, with respect and given equal opportunities. Jason
Elphick, our Diversity Champion, along with the Diversity and
Inclusion Working Group, hosted a number of activities throughout
the year including International Women's Day, attended by our SID
(Noël Harwerth) and Group Chief Internal Auditor (Lisa Odendaal),
menopause training, mental health first aid and a Q&A session
during National Inclusion Week with attendance from the Chair of
the Group Audit Committee, Rajan Kapoor and Chair of the Group
Remuneration Committee and designated NED for employee matters,
Mary McNamara. Members and colleagues from the working group also
shared their experiences and reflected on what it meant to them to
be #unitedforinclusion, the theme for National Inclusion Week in
2021.
Political donations
Neither the Company nor any of its subsidiaries made any
political donations this year.
Going concern statement
The Board undertakes regular rigorous assessments of whether the
Group is a going concern in light of current economic conditions
and all available information about future risks and
uncertainties.
In assessing whether the going concern basis is appropriate,
projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12
months from the date of approval of these financial statements.
These forecasts have been subject to sensitivity tests, including
stress scenarios, which have been compared to the latest economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests. In making the assessment the Board
has considered all principal and emerging risks including climate
risk where the risk is likely to emerge outside of the going
concern assessment horizon.
The assessments include 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 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 ICAAP. The Directors assessed the likelihood of
those reverse stress scenarios occurring within the next 12 months
and concluded that the likelihood is remote.
-- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the ILAAP stress scenarios.
-- 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 evolving governmental
policies and guidelines. The Group continues to invest in its
information technology platforms to support its employees with
flexible working from office or homeworking across all locations
within a hybrid working model. The Group's response to the COVID-19
pandemic demonstrated the inherent resilience of the Group's
critical processes and infrastructure. It also demonstrated 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
requirements as set out by the PRA.
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in
excess of 12 months and as a result, it is appropriate to prepare
these financial statements on a going concern basis.
The role and structure of the Board
The Board of Directors (the Board) is responsible for the
long-term success of the Company and provides leadership to the
Group. The Board focuses on setting strategy and monitoring
performance and ensures that the necessary financial and human
resources are in place to enable the Company to meet its
objectives.
The Board is responsible for setting the tone from the top in
relation to conduct, culture and values, for ensuring continuing
commitment to treating customers fairly, carrying out business
honestly and openly and preventing bribery, corruption, fraud or
the facilitation of tax evasion.
The Board operates in accordance with the Company's Articles of
Association (the Articles) and its own written terms of reference.
The Board has established an Audit and a Risk Committee, which each
have their own terms of reference and are reviewed at least
annually. Details of each Committee's activities during 2021 are
shown below.
The Board retains specific powers in relation to the approval of
the Group's strategic aims, policies and other matters, which must
be approved by it under legislation or the Articles. These powers
are set out in the Board's written terms of reference and Matters
Reserved to the Board which are reviewed at least annually.
The Board met 15 times during 2021. All Directors are expected
to attend all meetings of the Board, any Committees of which they
are members and to devote sufficient time to the Company's affairs
to fulfil their duties as Directors. Where Directors are unable to
attend a meeting, they are encouraged to submit any comments on the
meeting materials in advance to the Chair, to ensure that their
views are recorded and taken into account during the meeting.
Graham Allatt and Noël Harwerth provided comments for the meetings
they were not able to attend.
Roles of the Chairman, Chief Executive Officer and Senior
Independent Director
The roles of Chairman and Chief Executive Officer (CEO) are
distinct and held by different people. There is a clear division of
responsibilities, which has been agreed by the Board and is
formalised in a schedule of responsibilities for each.
The Chairman, David Weymouth, is responsible for setting the
'tone at the top' and ensuring that the Board has the right mix of
skills, experience and development so that it can focus on the key
issues affecting the business and for leading the Board and
ensuring it acts effectively. Andy Golding, as CEO, has overall
responsibility for managing the Group and implementing the
strategies and policies agreed by the Board.
Noël Harwerth is the Senior Independent Director (SID). The
SID's role is to act as a sounding board for the Chairman and to
support him in the delivery of his objectives. This includes
ensuring that the views of all other Directors are communicated to,
and given due consideration by, the Chairman.
Balance and independence
The effectiveness of the Board and its Committees in discharging
their duties is essential for the success of the Company. In order
to operate effectively, the Board and its Committees comprise a
balance of skills, experience, independence and knowledge to
encourage constructive debate and challenge to the decision-making
process.
Audit Committee
The primary role of the Committee is to assist the Board in
overseeing the systems of internal control and external financial
reporting. The Committee's specific responsibilities are set out in
its terms of reference, which are reviewed at least annually. The
Audit Committee is chaired by Rajan Kapoor, the other members are
Graham Allatt, Noël Harwerth, Sarah Hedger and Simon Walker who
joined the Board on 4 January 2022. The Committee met eight times
during 2021; all members attended these meetings, except Noel
Harwerth who attended seven times. The Committee considered, on
behalf of the Board, whether the 2022 Annual Report and Accounts
taken as a whole are fair, balanced and understandable and, whether
the disclosures are appropriate. Further details on the activities
of the Committee are set out in the Group's annual report and
accounts.
Risk Committee
The primary objective of the Committee is to support the Board
in discharging its risk oversight and governance responsibilities.
The Committee's specific responsibilities are set out in its terms
of reference, which are reviewed at least annually. The Committee
is chaired by Graham Allatt, the other members are Noël Harwerth,
Rajan Kapoor and Simon Walker who joined the Board on 4 January
2022. The Committee met seven times during 2021. All members
attended these meetings. Further details on the activities of the
Committee are set out in the Group's annual report and
accounts.
Environment
Environmental matters are considered in the Strategic report
above.
Internal Control
The Board retains ultimate responsibility for setting the
Company's risk appetite and ensuring that there is an effective
Risk Management Framework to maintain levels of risk within the
risk appetite. The Board regularly reviews its procedures for
identifying, evaluating and managing risk, acknowledging that a
sound system of internal control should be designed to manage
rather than eliminate the risk of failure to achieve business
objectives.
Key information in respect of the Group's SRMF and objectives
and processes for mitigating risks, including liquidity risk, are
set out in detail on pages 35 to 36.
Auditor
Deloitte LLP was appointed as auditor for the year and has
indicated its willingness to continue in office as auditor. A
resolution to re-appoint Deloitte as external auditor will be
presented at the Company's Annual General Meeting.
Each of the persons who is a Director at the date of approval of
this Annual Report confirms that:
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report and Directors' Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- the Director has taken all the steps that they ought to have taken as a
director in order to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies Act
2006.
This report was approved by the Board on 31 March 2022 and
signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
The Directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards as
adopted by the United Kingdom (IFRSs as adopted by the UK) and
applicable law and have elected to prepare the parent Company
financial statements on the same basis.
Under company, law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the
Group and parent Company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted
by the UK;
-- assess the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the parent Company and the Group
enabling them to ensure that the financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error and, have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Approved by the Board and signed on its behalf by:
Jason Elphick
General Counsel and Company Secretary
31 March 2022
Report on the audit of the Financial Statements
1. Opinion
In our opinion:
-- the Financial Statements of OneSavings Bank plc (the 'parent company')
and its subsidiaries (the 'Group') give a true and fair view of the state
of the Group's and of the parent company's affairs as at 31 December 2021
and of the Group's profit for the year then ended;
-- the Group Financial Statements have been properly prepared in accordance
with United Kingdom adopted international accounting standards;
-- the parent company Financial Statements have been properly prepared in
accordance with United Kingdom adopted international accounting standards
and as applied in accordance with the provisions of the Companies Act
2006; and
-- the Financial Statements have been prepared in accordance with the
requirements of the Companies Act 2006.
We have audited the Financial Statements which comprise:
-- the consolidated statement of comprehensive income;
-- the consolidated and parent company statements of financial position;
-- the consolidated and parent company statements of changes in equity;
-- the consolidated and parent company statements of cash flows; and
-- the related notes 1 to 53.
The financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom adopted
international accounting standards and, as regards the parent
company Financial Statements, as applied in accordance with the
provisions of the Companies Act 2006.
2. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the Financial
Statements section of our report.
We are independent of the Group and the parent company in
accordance with the ethical requirements that are relevant to our
audit of the Financial Statements in the UK, including the
Financial Reporting Council's (the 'FRC's') Ethical Standard as
applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements. We confirm that we have not provided any non-audit
services prohibited by the FRC's Ethical Standard to the Group or
the parent company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year
were:
-- loan impairment provisions; and
-- effective interest rate income recognition.
Within this report, key audit matters are identified as
follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used for the Group Financial Statements
was GBP20m which was determined by reference to profit before tax
and net assets.
Scoping
Our Group audit scope focused primarily on OneSavings Bank plc
and the two main subsidiary entities, being the banking entity
Charter Court Financial Services Limited, as well as Interbay ML
Ltd, another significant lending subsidiary. The Company and two
subsidiaries were significant components and subject to a full
scope audit. They represent 98% (2020: 96%) of the Group's interest
receivable and similar income, 96% (2020: 98%) of profit before
tax, 97% (2020: 98%) of total assets and 99% (2020: 98%) of total
liabilities.
Significant changes in our approach
In the prior year, our key audit matter in respect of loan
impairment provisions included the PD related to borrowers who had
taken advantage of payment holidays and the Group's newly
implemented approach to indexing OneSavings Bank's commercial
properties. As the payment holiday scheme has now ended and the
Group's approach to indexing OneSavings Bank's commercial
properties is established, these areas no longer feature in our
loan impairment provisions key audit matter.
4. Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate.
Our evaluation of the directors' assessment of the Group's and
parent company's ability to continue to adopt the going concern
basis of accounting included:
-- We obtained and read management's going concern assessment, which
included consideration of the Group's operational resilience, in order to
understand, challenge and evidence the key judgements made by management;
-- We obtained an understanding of relevant controls around management's
going concern assessment;
-- We obtained management's income statement, balance sheet and capital and
liquidity forecasts and challenged key assumptions and their projected
impact on capital and liquidity ratios, particularly with respect to loan
book growth and potential credit losses;
-- Supported by our in-house prudential risk specialists, we read the most
recent ICAAP and ILAAP submissions, assessed management's capital and
liquidity projections, assessed the results of management's capital
reverse stress testing, challenged key assumptions and methods used in
the capital reverse stress testing model and tested the mechanical
accuracy of the capital reverse stress testing model;
-- We read correspondence with regulators to understand the capital and
liquidity requirements imposed by the Group's regulators, and evidence
any changes to those requirements;
-- We met with the Group's lead regulators, the Prudential Regulation
Authority and the Financial Conduct Authority, and discussed their views
on existing and emerging risks to the Group and we considered whether
these were reflected appropriately in management's forecasts and stress
tests;
-- We assessed the historical accuracy of forecasts prepared by management;
and
-- We assessed the appropriateness of the disclosures made in the Financial
Statements in view of the FRC guidance.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group's and parent company's ability to continue as a going concern
for a period of at least twelve months from when the Financial
Statements are authorised for issue.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the Financial
Statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1. Loan impairment provisions
Refer to the judgements in applying accounting policies and
critical accounting estimates on page 117 and Note 22 on page
141.
------------------------------------------------------------------------------
Key audit matter IFRS 9 requires loan impairment provisions to be
description recognised on an expected credit loss (ECL) basis.
The estimation of ECL provisions in the Group's
loan portfolios is inherently uncertain and requires
management to make significant judgements and estimates.
ECL provisions as at 31 December 2021 were GBP101.5m
(2020: GBP111.0m), which represented 0.48% (2020:
0.58%) of loans and advances to customers. ECLs
are calculated both for individually significant
loans and collectively on a portfolio basis which
require the use of statistical models incorporating
loss data and assumptions on the recoverability
of customers' outstanding balances.
The uncertain economic environment continues to
increase the complexity in estimating ECLs, particularly
with regards to determining appropriate forward
looking macroeconomic scenarios and appropriately
identifying significant increases in credit risk.
The ECL provision requires management to make significant
judgements and estimates. We therefore consider
this to be a key audit matter due to the risk of
fraud or error in respect of the Group's ECL provision.
We identified three specific areas in relation to
the ECL that require significant management judgement
or relate to assumptions to which the overall ECL
provision is particularly sensitive.
-- Significant increase in credit risk (SICR): The
assessment of whether there has been a significant
increase in credit risk between the date of
origination of the exposure and 31 December 2021.
There is a risk that management's staging criteria
does not capture SICR and/or are applied incorrectly.
-- Macroeconomic scenarios: As set out on page 55, the
Group sources economic forecasts from a third-party
economics expert and then applies judgement to
determine which scenarios to select and the
probability weightings to assign. The Group
considered four probability weighted scenarios,
including base, upside, downside and severe downside
scenarios. The key economic variables were determined
to be the house price index (HPI) and unemployment.
Due to the continuing uncertain economic environment,
including uncertainty in relation to future increases
in borrowers' and tenants' costs of living and rises
in inflation, there have been changes to the economic
assumptions in each of the scenarios, as well as a
change to the weightings applied to each scenario.
There is significant judgement in determining the
probability weighting of each scenario and the
assumptions and characteristics of each scenario
applied.
-- Propensity to go into possession following default
(PPD) and forced sale discount (FSD) assumptions: PPD
measures the likelihood that a defaulted loan will
progress into repossession. FSD measures the
difference in sale proceeds between a sale under
normal conditions and sale at auction. The loss given
default (LGD) by loan assumed in the ECL provision
calculation is highly sensitive to the PPD and FSD
assumptions.
---------------- ------------------------------------------------------------
How the scope We obtained an understanding of the relevant financial
of our audit controls over the ECL provision with particular focus
responded on controls over significant management assumptions
to the key and judgements used in the ECL determination.
audit matter To challenge the Group's SICR criteria, we:
-- Evaluated the Group's SICR policy and assessed
whether it complies with IFRS 9;
-- Assessed the quantitative and qualitative thresholds
used in the SICR assessment by reference to standard
validation metrics including the proportion of
transfers to stage two driven solely by being 30 days
past due, the volatility of loans in stage two and
the proportion of loans that spend little or no time
in stage two before moving to stage three;
-- Tested the completeness and accuracy of data used in
applying the quantitative and qualitative criteria in
the SICR assessment to assess whether loans were
assigned to the correct stage;
-- Supported by our credit risk specialists, identified
and challenged all changes made to the computer code
used to perform the SICR assessment, having performed
a full review of the computer code in previous
audits;
-- As part of our testing of the application of the SICR
criteria within the ECL model and with support from
our credit risk specialists, we independently
reperformed management's staging assessment across
all three stages using our in-house analytics tool;
and
-- Performed an independent assessment for a sample of
loan accounts which exited forbearance, to determine
whether they had been appropriately allocated to the
correct stage.
To challenge the Group's macroeconomic scenarios
and the probability weightings applied we:
-- Agreed the macroeconomics scenarios used in the ECL
model to reports prepared by management's third-party
economics expert;
-- Assessed the competence, capability and objectivity
of the third-party economics expert, which included
making specific inquiries to understand their
approach and modelling assumptions to derive the
scenarios;
-- Supported by our economic specialists, assessed and
challenged management's assessment of scenarios
considered and the probability weightings assigned to
them in light of the economic position as at 31
December 2021;
-- Involved our economic specialists to challenge the
Group's economic outlook by reference to other
available economic outlook data;
-- Compared the appropriateness of selected
macroeconomic variables and weightings to those used
by peer lenders. The key economic variables were the
house price index (HPI) and unemployment;
-- Assessed management's approach to the incorporation
and quantification of emerging risks within the ECL
model, including forecast cost of living increases
and climate change. We confirmed that the emerging
risks were not already captured within the existing
ECL model, challenged key assumptions, and tested the
completeness and accuracy of data used within the
assessment;
-- Supported by our credit risk specialists, assessed
and challenged the changes made to the model
methodology and computer code used in the
macroeconomics model which applies the scenarios to
the relevant ECL components, having performed a full
review of the computer code of the macroeconomics
model in previous audits;
-- Supported by our credit risk specialists, assessed
the performance of the macroeconomic model to confirm
whether the economic variables previously selected
were still appropriate in light of the uncertain
economic environment through considering the modelled
macroeconomic results relative to those observed in
historical recessions; and
-- For a sample of loans, we independently recalculated
the ECL using the macroeconomic variables to check
they were being applied appropriately.
To challenge the Group's PPD and FSD assumptions
we:
-- Supported by our credit risk specialists, identified
and challenged all changes made to computer code in
the LGD models, having performed a full review of the
computer code in previous audits;
-- Recalculated the PPD rates observed on defaulted
cases and compared them with the rates used by the
Group in the ECL models;
-- Recalculated the FSD observed on recent property
sales on the defaulted accounts and compared them
with the rates used by the Group in the ECL models;
-- Considered the findings raised in management's
independent model validation conducted in 2021 and
assessed the impact on the year-end provision; and
-- As a stand back test to consider potential
contradictory evidence, assessed the appropriateness
of PPD and FSD assumptions adopted by management
through benchmarking to industry peers.
To address the risk of material misstatement in loan
impairment due to fraud, our work included testing
the existence of a sample of collateral related to
funding lines.
------------- ------------------------------------------------------------
Key observations We determined that the methodology used, the
SICR criteria and PPD and FSD assumptions management
has made in determining the ECL provision as
at 31 December 2021 were reasonable.
Notwithstanding that estimating the probability
and impact of future economic outcomes is inherently
judgemental and that there is continuing economic
uncertainty, on balance, we consider that the
macroeconomic scenarios selected by the Directors
and the probability weightings applied generate
an appropriate portfolio loss distribution.
We therefore determined that loan impairment
provisions are appropriately stated.
---------------- -----------------------------------------------------
1.1. Effective interest rate income recognition
Refer to the judgements in applying accounting policies
and critical accounting estimates on page 117, the accounting
policy on pages 102 and 103 and Notes 3 and 4 on pages 121
and 122.
--------------------------------------------------------------------
Key audit matter In accordance with the requirements of IFRS
description 9, management is required to spread directly
attributable fees, discounts, incentives
and commissions on a constant yield basis
(effective interest rate, EIR) over the expected
life of the loan assets. EIR is complex and
the Group's approach to determining the EIR
involves the use of models and significant
estimation in determining the behavioural
life of loan assets. Given the complexity
and judgement involved in accounting for
EIR and given that revenue recognition is
an area susceptible to fraud, there is an
opportunity for management to manipulate
the amount of interest income reported in
the Financial Statements.
The Group's net interest income for the year
ended 31 December 2021 was GBP587.6m (2020:
GBP472.2m).
EIR adjustments arise from revisions to estimated
cash receipts or payments for loan assets
that occur for reasons other than a movement
in market interest rates or credit losses.
They result in an adjustment to the carrying
amount of the loan asset, with the adjustment
recognised in the income statement in interest
receivable and similar income. As the EIR
adjustments reflect changes to the timing
and volume of forecast customer redemptions,
they are inherently judgemental. The level
of judgement exercised by management is increased
given the limited availability of historical
repayment information. For two of the loan
portfolios, KRBS and Precise, the EIR adjustments
are sensitive to changes in the behavioural
life curves. As set out on page 23, changes
in the modelled behavioural life of these
portfolios during the year resulted in an
interest income gain of GBP11.5m (2020: GBPnil),
we therefore considered there to be an increased
level of risk in respect of this key audit
matter in the current year.
The continuing uncertain economic environment
brings additional uncertainty with regards
to forecasting expected behavioural lives
and prepayment rates. We therefore identified
the estimation of the behavioural life for
these portfolios as a focus area of our audit.
We also identified a key audit matter in
relation to EIR adjustments on the Group's
legacy acquired portfolios. EIR on acquired
loan portfolios is inherently more judgemental
than originated loan portfolios as it involves
modelling the expected cash flows on acquisition
and comparing to actual and forecast cash
flows at each balance sheet date. These loan
portfolios are also underwritten outside
of the Group's standard processes and therefore
may have different profiles than self-originated
loans.
---------------- --------------------------------------------------
How the scope of We obtained an understanding of the relevant
our audit responded controls over EIR, focusing on the calculation
to the key audit and review of EIR adjustments and the determination
matter of prepayment curves.
For the two portfolios where the EIR adjustments
were most significant and sensitive to changes
in behavioural life, we involved our in-house
analytics and modelling specialists to run the
Group's loan data for all products through our
own independent EIR model, using the behavioural
life curves derived by the Group. We compared
our calculation of the EIR adjustment required
to the amount recorded by management.
For the same portfolios, we involved our in-house
modelling specialists to independently derive
a behavioural life curve using the Group's loan
data over recent years. We used these curves
in our own independent EIR model to derive an
independent output showing the EIR adjustments
that should have been recorded in 2021. We compared
this output to the amounts recorded by management.
We also tested the completeness and accuracy
of a sample of inputs into the EIR model for
originated loans.
For the legacy acquired portfolios, supported
by our analytics and modelling specialists,
we challenged the assumptions and modelling
approach taken to determine the EIR adjustments,
tested the completeness and accuracy of a sample
of inputs to the modelling, re-performed the
discounted cash flow calculations and challenged
whether forecasts were consistent with historical
performance and our understanding of the nature
of the cash flows.
-------------------- ----------------------------------------------------
Key observations Notwithstanding that estimating the future behaviour
of loan assets is inherently judgemental and
that there is continuing economic uncertainty,
we determined that the EIR models and assumptions
used were appropriate and that net interest
income for the period is appropriately stated.
-------------------- ----------------------------------------------------
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the
Financial Statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the Financial Statements as a whole as follows:
Group Financial Statements Parent company Financial Statements
----------- ----------------------------------------------------------- --------------------------------------------------------
Materiality GBP20.1m (2020: GBP14.0m) GBP16.7m (2020: GBP11.1m)
----------- ----------------------------------------------------------- --------------------------------------------------------
Basis for We determined materiality for the Group by reference We determined materiality for the parent company by
determining to 1% of net assets of GBP2,024.4m (GBP20.1m), and reference to 1% of net assets.
materiality 5% of statutory profit before tax of GBP464.6m (GBP23.2m).
----------- ----------------------------------------------------------- --------------------------------------------------------
Rationale Consistent with the prior year, we considered both Consistent with the Group, we determined 1% of net
for the net assets and a profit-based measure as benchmarks assets to be the most relevant and stable benchmark
benchmark for determining materiality. to determine materiality.
applied We determined 1% of net assets to be the most relevant In the prior year, we considered a profit based measure
and stable benchmark to determine materiality. to be the most relevant benchmark for users of the
In the prior year, we capped materiality at the 2019 accounts.
materiality level of GBP14m, based on the significant
economic uncertainty resulting from the emergence
of Covid-19. Whilst some economic uncertainty remains,
the impact of Covid-19 was not as pervasive as 2020
and we have therefore removed the prior year cap.
----------- ----------------------------------------------------------- --------------------------------------------------------
6.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the Financial
Statements as a whole.
Group Financial Statements Parent company Financial
Statements
--------------- ----------------------------- ------------------------------
Performance 60% (2020: 60%) of Group 60% (2020: 60%) of parent
materiality materiality company materiality
--------------- ----------------------------- ------------------------------
Basis and Group performance materiality was set at 60% of Group
rationale for materiality (2020: 60%). In determining performance
determining materiality, we considered a number of factors, including:
performance our understanding of the control environment; our
materiality understanding of the business; and the low number
of uncorrected misstatements identified in the prior
year. In the prior year we reduced performance materiality
in response to the potentially pervasive impact of
Covid-19 and remote working on the Group's control
environment and financial reporting. In the current
year, to reflect that remote and hybrid working has
continued to some extent, we retained performance
materiality at the prior year level.
--------------- -------------------------------------------------------------
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP1,005k (2020:
GBP700k), as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the Financial Statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls and
assessing the risks of material misstatement at the Group
level.
Our Group audit scope focused primarily on OneSavings Bank plc
and the two main subsidiary entities, being the banking entity
Charter Court Financial Services Limited, as well as Interbay ML
Ltd, another significant lending subsidiary. The Company and two
subsidiaries were significant components and subject to a full
scope audit (2020: the Company and two subsidiaries subject to a
full scope audit). They represent 98% (2020: 96%) of the Group's
interest receivable and similar income, 96% (2020: 98%) of profit
before tax, 97% (2020: 98%) of total assets and 99% (2020: 98%) of
total liabilities. The subsidiaries were selected to provide an
appropriate basis of undertaking audit work to address the risks of
material misstatement including those identified as key audit
matters above. Our audits of each of the subsidiaries were
performed using lower levels of materiality based on their size
relative to the Group. The materiality for each subsidiary audit
ranged from GBP5.5m to GBP16.7m (2020: GBP5.3m to GBP11.1m).
We tested the Group's consolidation process and carried out
analytical procedures to confirm that there were no significant
risks of material misstatement in the aggregated financial
information of the remaining subsidiaries not subject to a full
scope audit or specified audit procedures.
7.2. Our consideration of the control environment
We identified the key IT systems relevant to the audit to be
those used in the financial reporting, lending and savings
businesses. For these controls we involved our IT specialists to
perform testing over the general IT controls, including testing of
user access and change management systems.
In the current year we relied on controls for some of the
lending business and related interest income and the Group's
in-house serviced savings business. For the areas where we relied
on controls, we performed walkthroughs with management to
understand the process and controls and identified and tested
relevant controls that address risks of material misstatement in
financial reporting.
7.3. Our consideration of climate-related risks
In planning our audit, we have considered the impact of climate
change on the Group's operations and impact on its Financial
Statements. The Group has set out its commitments, aligned with the
goals of the Paris Climate Accord, to be a net zero bank by 2050.
Further information is provided in the Section 172 statement on
page 14. The Group sets out its assessment of the potential impact
of climate change on page 37 of the Risk Management section of the
Annual Report.
In conjunction with our climate risk specialists, we have held
discussions with the Group to understand:
-- the process for identifying affected operations, including the governance
and controls over this process, and the subsequent effect on the
financial reporting for the Group; and
-- the long-term strategy to respond to climate change risks as they evolve.
Our audit work has involved:
-- challenging the completeness of the physical and transition risks
identified and considered in the Group's climate risk assessment and the
conclusion that there is no material impact of climate change risk on
current year financial reporting;
-- assessing management's approach to the incorporation and quantification
of climate change risks within the ECL model, (see the loan impairment
provision key audit matter above); and
-- assessing disclosures in the Annual Report, and challenging the
consistency between the Financial Statements and the remainder of the
Annual Report.
We have not been engaged to provide assurance over the accuracy
of climate change disclosures. As part of our audit procedures we
are required to read these disclosures to consider whether they are
materially inconsistent with the Financial Statements or knowledge
obtained in the audit and we did not identify any material
inconsistencies as a result of these procedures.
7.4. Working with other auditors
All audit work for the purposes of the Group audit was performed
by Deloitte LLP in the UK. The audit team for the Group and the
parent company were based in London. There was a component audit
team for the component audit of Charter Court Financial Services
Limited which is based in Wolverhampton. The Senior Statutory
Auditor has responsibility for directing and supervising all
aspects of the audit work of the component auditor. In discharging
this responsibility, the Group audit team held regular meetings
with local management and had regular virtual meetings with the
component audit team to oversee the component audit. The Group
audit team maintained dialogue with the component auditor
throughout all phases of the audit and performed a remote file
review of the component audit team's work.
8. Other information
The other information comprises the information included in the
annual report other than the Financial Statements and our auditor's
report thereon. The directors are responsible for the other
information contained within the annual report.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the Financial Statements or our knowledge
obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the Financial Statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
Financial Statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of Financial
Statements that are free from material misstatement, whether due to
fraud or error.
In preparing the Financial Statements, the directors are
responsible for assessing the Group's and the parent company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Group or the parent company or to cease operations, or have no
realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether
the Financial Statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these Financial
Statements.
A further description of our responsibilities for the audit of
the Financial Statements is located on the FRC's website at:
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
-- the nature of the industry and sector, control environment and business
performance including the design of the Group's remuneration policies,
key drivers for directors' remuneration, bonus levels and performance
targets;
-- the Group's own assessment of the risks that irregularities may occur
either as a result of fraud or error that was approved by the Board;
-- results of our enquiries of management, internal audit and the Audit
Committee about their own identification and assessment of the risks of
irregularities;
-- any matters we identified having obtained and reviewed the Group's
documentation of their policies and procedures relating to:
-- identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of non-compliance;
-- detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud. During
the first half of 2021, the Directors identified fraudulent
activity by a third party in respect of a secured funding line
provided by the Group, and recorded a loan impairment provision of
GBP20m in 2020, which has increased to GBP22m in 2021;
-- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
-- the matters discussed among the audit engagement team including the
component audit team and involving relevant internal specialists,
including tax, valuations, real estate, IT, credit risk and analytics and
modelling specialists regarding how and where fraud might occur in the
Financial Statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
loan impairment provisions and effective interest rate income
recognition. In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the Financial
Statements. The key laws and regulations we considered in this
context included the relevant provisions of the UK Companies Act,
Listing Rules and tax legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the Financial
Statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty. These
included the Group's prudential regulatory requirements and
capital, liquidity and conduct requirements.
11.2. Audit response to risks identified
As a result of performing the above, we identified loan
impairment provisions and effective interest rate income
recognition as key audit matters related to the potential risk of
fraud. The key audit matters section of our report explains the
matters in more detail and also describes the specific procedures
we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks
identified included the following:
-- reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with provisions of relevant laws and
regulations described as having a direct effect on the Financial
Statements;
-- enquiring of management, the Audit Committee and in-house and external
legal counsel concerning actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due to
fraud;
-- reading minutes of meetings of those charged with governance, reviewing
internal audit reports and reviewing correspondence with the Prudential
Regulation Authority, the Financial Conduct Authority and HMRC; and
-- in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of
any significant transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members including
internal specialists and the component audit team, and remained
alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the strategic report and the directors' report
for the financial year for which the Financial Statements are prepared is
consistent with the Financial Statements; and
-- the strategic report and the directors' report have been prepared in
accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
strategic report or the directors' report.
13. Matters on which we are required to report by exception
13.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require for
our audit; or
-- adequate accounting records have not been kept by the parent company, or
returns adequate for our audit have not been received from branches not
visited by us; or
-- the parent company Financial Statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
13.2. Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors' remuneration have
not been made.
We have nothing to report in respect of these matters.
14. Other matters which we are required to address
14.1. Auditor tenure
Following the recommendation of the Audit Committee, we were
appointed by the shareholders of the Group on 9 May 2019 to audit
the Group Financial Statements for the year ending 31 December 2019
and subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the
firm is three years, covering the years ending 31 December 2019 to
31 December 2021.
14.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to
the audit committee we are required to provide in accordance with
ISAs (UK).
15. Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
As required by the Financial Conduct Authority (FCA) Disclosure
Guidance and Transparency Rule (DTR) 4.1.14R, these Financial
Statements form part of the European Single Electronic Format
(ESEF) prepared Annual Financial Report filed on the National
Storage Mechanism of the UK FCA in accordance with the ESEF
Regulatory Technical Standard (('ESEF RTS'). This auditor's report
provides no assurance over whether the annual financial report has
been prepared using the single electronic format specified in the
ESEF RTS. We have been engaged to provide assurance on whether the
annual financial report has been prepared using the single
electronic format specified in the ESEF RTS and will report
separately to the members on this.
Rob Topley, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
31 March 2022
Group Group
2021 2020
Note GBPm GBPm
Interest receivable and similar income 3 746.8 711.9
Interest payable and similar charges 4 (159.2) (239.7)
Net interest income 587.6 472.2
Fair value gains on financial instruments 5 29.5 7.4
Gain on sale of financial instruments 6 4.0 20.0
Other operating income 7 7.9 9.0
Total income 629.0 508.6
Administrative expenses 8 (166.5) (157.1)
Provisions 37 (0.2) (0.1)
Impairment of financial assets 23 4.4 (71.0)
Impairment of intangible assets 9 3.1 (7.0)
Integration costs 12 (5.0) (9.8)
Exceptional items 13 (0.2) (3.3)
Profit before taxation 464.6 260.3
Taxation 14 (119.6) (64.1)
Profit for the year 345.0 196.2
Other comprehensive (expense)/income
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 year 18 1.1 1.0
Amounts reclassified to profit or loss
for investment
securities at FVOCI (2.0) -
Tax on items in other comprehensive
(expense)/income 0.5 (0.5)
Revaluation of foreign operations (0.1) -
Other comprehensive (expense)/income (0.5) 0.5
------------------------------------------------------
Total comprehensive income for the year 344.5 196.7
The above results are derived wholly from continuing
operations.
The notes on pages 99 to 220 form part of these accounts.
The financial statements on pages 94 to 220 were approved by the
Board of Directors on 31 March 2022.
Group Group Company Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.5 0.5
Loans and advances to credit
institutions 17 2,843.6 2,676.2 1,405.0 1,518.1
Investment securities 18 491.4 471.2 16.2 15.0
Loans and advances to customers 19 21,080.3 19,230.7 9,476.4 8,531.7
Fair value adjustments on hedged
assets 25 (138.9) 181.6 1.3 127.4
Derivative assets 24 185.7 12.3 50.5 4.7
Other assets 26 10.2 9.1 8.3 5.7
Current taxation asset - 8.4 - 3.8
Deferred taxation asset 27 5.6 4.7 4.9 3.1
Property, plant and equipment 28 35.1 39.2 17.3 20.5
Intangible assets 29 18.4 20.6 7.7 7.0
Investments in subsidiaries and
intercompany loans 30 0.6 - 3,096.4 3,137.3
Total assets 24,532.5 22,654.5 14,084.5 13,374.8
--------------------------------- ---- -------- -------- -------- --------
Liabilities
Amounts owed to credit
institutions 31 4,319.6 3,570.2 2,420.7 1,900.5
Amounts owed to retail depositors 32 17,526.4 16,603.1 9,739.4 9,705.3
Fair value adjustments on hedged
liabilities 25 (19.7) 8.2 (8.8) 3.1
Amounts owed to other customers 33 92.6 72.9 5.7 5.8
Debt securities in issue 34 460.3 421.9 - -
Derivative liabilities 24 19.7 163.6 8.7 93.8
Lease liabilities 35 10.7 11.7 3.9 3.9
Other liabilities 36 29.5 27.8 17.3 13.8
Provisions 37 2.0 1.8 1.9 1.6
Current taxation liability 1.3 - 2.7 -
Deferred taxation liability 38 39.8 48.3 - -
Deemed loan liabilities 20 - - 142.8 66.2
Intercompany loans 30 - - 33.2 37.9
Subordinated liabilities 39 10.3 10.5 10.3 10.5
Perpetual subordinated bonds 40 15.2 37.6 15.2 37.6
22,507.7 20,977.6 12,393.0 11,880.0
Equity
Share capital 42 4.5 4.5 4.5 4.5
Share premium 42 - - - -
Retained earnings 1,857.4 1,604.6 1,587.6 1,423.7
Other reserves 43 162.9 67.8 99.4 66.6
2,024.8 1,676.9 1,691.5 1,494.8
Total equity and liabilities 24,532.5 22,654.5 14,084.5 13,374.8
--------------------------------- ---- -------- -------- -------- --------
The profit after tax for the year ended 31 December 2021 of
OneSavings Bank plc as a company was GBP255.1m (2020: GBP164.5m).
As permitted by section 408 of the Companies Act 2006, no separate
Statement of Comprehensive Income is presented in respect of the
Company.
The notes on pages 99 to 220 form part of these accounts. The
financial statements on pages 94 to 220 were approved by the Board
of Directors on 31 March 2022 and signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
Foreign Share-based Additional
Share Share Capital Transfer Own exchange FVOCI payment Retained Tier 1
capital premium contribution reserve shares(1) reserve reserve reserve earnings securities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 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 - - - - - - - - 196.2 - 196.2
Other comprehensive income - - - - - - 1.0 - - - 1.0
Tax on items in other comprehensive
income - - - - - - (0.5) - - - (0.5)
Total comprehensive income - - - - - - 0.5 - 196.2 - 196.7
Coupon paid on Additional
Tier 1 securities - - - - - - - - (5.5) - (5.5)
Share-based payments - 2.6 - - - - - 2.4 3.2 - 8.2
Tax recognised in equity - - - - - - - (0.2) 0.5 - 0.3
Transfer between reserves - - (6.5) 12.8 - - - - (6.3) - -
Own shares(1) - - - - 3.7 - - - (3.5) - 0.2
Cancellation of OneSavings
Bank plc share capital and
share premium (4.5) (866.8) - - - - - - 871.3 - -
Issuance of OneSavings Bank
plc share capital to OSBG 4.5 - - - - - - - (4.5) - -
At 31 December 2020 4.5 - - - - (1.0) 1.0 7.8 1,604.6 60.0 1,676.9
Profit for the year - - - - - - - - 345.0 - 345.0
Other comprehensive expense - - - - - (0.1) (0.9) - - - (1.0)
Tax on items in other comprehensive
expense - - - - - - 0.5 - - - 0.5
Total comprehensive income - - - - - (0.1) (0.4) - 345.0 - 344.5
Coupon paid on Additional
Tier 1 securities - - - - - - - - (4.7) - (4.7)
Dividends paid - - - - - - - - (86.7) - (86.7)
Share-based payments - - 1.7 - - - - 2.3 2.7 - 6.7
Redemption of Additional
Tier 1 securities - - - - - - - - - (60.0) (60.0)
Transactions costs on redemption
of Additional Tier 1 securities - - - - - - - - (3.5) - (3.5)
Issuance of Additional Tier
1 securities - - - - - - - - - 150.0 150.0
Tax recognised in equity - - - - - - - 1.6 - - 1.6
At 31 December 2021 4.5 - 1.7 - - (1.1) 0.6 11.7 1,857.4 150.0 2,024.8
------------------------------------ -------- -------- ------------- -------- --------- --------- -------- ----------- --------- ----------- -------
(1) The Group ceased look-through accounting for the Employee
Benefit Trusts following the insertion of OSB GROUP PLC as the
listed and ultimate holding company of the Group on 27 November
2020.
Share capital and premium is disclosed in note 42 and the
reserves are further disclosed in note 43.
Share-based Additional
Share Share Capital Transfer Own FVOCI payment Retained Tier 1
capital premium contribution reserve shares(1) reserve reserve earnings securities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 4.5 864.2 6.2 (15.2) (3.7) - 5.3 407.0 60.0 1,328.3
Profit for the year - - - - - - - 164.5 - 164.5
Other comprehensive income - - - - - (0.1) - - - (0.1)
Total comprehensive income - - - - - (0.1) - 164.5 - 164.4
Coupon paid on Additional
Tier 1 securities - - - - - - - (5.5) - (5.5)
Share-based payments - 2.6 - - - - 1.6 3.8 - 8.0
Tax recognised in equity - - - - - - (0.2) - - (0.2)
Transfer between reserves - - (6.2) 15.2 - - - (9.0) - -
Own shares(1) - - - - 3.7 - - (3.9) - (0.2)
Cancellation of OneSavings
Bank plc share capital and
share premium (4.5) (866.8) - - - - - 871.3 - -
Issuance of OneSavings Bank
plc share capital to OSBG 4.5 - - - - - - (4.5) - -
At 31 December 2020 4.5 - - - - (0.1) 6.7 1,423.7 60.0 1,494.8
Profit for the year - - - - - - - 255.1 - 255.1
Other comprehensive income - - - - - 0.1 - - - 0.1
Total comprehensive income - - - - - 0.1 - 255.1 - 255.2
Coupon paid on Additional
Tier 1 securities - - - - - - - (4.7) - (4.7)
Dividends paid - - - - - - - (86.7) - (86.7)
Share-based payments - - - - - - 1.1 3.7 - 4.8
Redemption of Additional
Tier 1 securities - - - - - - - - (60.0) (60.0)
Transactions costs on redemption
of Additional Tier 1 securities - - - - - - - (3.5) - (3.5)
Issuance of Additional Tier
1 securities - - - - - - - - 90.0 90.0
Tax recognised in equity - - - - - - 1.6 - - 1.6
At 31 December 2021 4.5 - - - - - 9.4 1,587.6 90.0 1,691.5
--------------------------------- -------- -------- ------------- -------- --------- -------- ----------- --------- ----------- -------
(1) The Company ceased look-through accounting for the Employee
Benefit Trusts following the insertion of OSB GROUP PLC as the
listed and ultimate holding company of the Group on 27 November
2020.
Share capital and premium is disclosed in note 42 and the
reserves are further disclosed in note 43.
Group Group Company Company
2021 2020 2021 2020
Note GBPm GBPm GBPm GBPm
Cash flows from operating activities
Profit before taxation 464.6 260.3 314.5 197.3
Adjustments for non-cash items 49 (10.0) 76.7 12.2 39.2
Changes in operating assets and
liabilities 49 (799.8) (1,537.0) (817.4) (573.7)
Cash used in operating activities (345.2) (1,200.0) (490.7) (337.2)
Provisions refunded - 0.1 - -
Net tax paid (117.3) (128.8) (53.2) (53.6)
Net cash used in operating
activities (462.5) (1,328.7) (543.9) (390.8)
Cash flows from investing activities
Maturity and sales of investment
securities 547.7 407.3 215.4 291.1
Purchases of investment securities (468.2) (190.9) (216.6) (205.9)
Interest received on investment
securities 1.9 7.0 0.2 0.4
Sales of financial instruments 6 4.0 539.9 0.3 248.9
Proceeds from sale of property,
plant and equipment 28 2.0 - 2.0 -
Purchases of property, plant
and equipment and intangible
assets 28,29 (6.8) (7.5) (5.0) (4.3)
Cash generated/used from investing
activities 80.6 755.8 (3.7) 330.2
Cash flows from financing activities
Financing received 41 5,058.6 1,991.2 3,163.6 1,059.6
Financing repaid 41 (4,295.4) (1,103.6) (2,589.1) (764.7)
Cash held in deconsolidated special
purpose vehicles - (23.0) - -
Interest paid on financing (8.4) (18.9) (6.6) (9.8)
Coupon paid on Additional Tier
1 securities (4.7) (5.5) (4.7) (5.5)
Dividends paid 15 (86.7) - (86.7) -
Redemption of Additional Tier
1 securities (63.5) - (63.5) -
Issuance of Additional Tier 1
securities 150.0 - 90.0 -
Proceeds from issuance of shares
under employee SAYE schemes - 2.5 - 2.6
Cash payments on lease liabilities 35 (1.9) (2.0) (0.7) (0.6)
Cash generated from financing
activities 748.0 840.7 502.3 281.6
Net increase/(decrease) in cash
and cash
equivalents 366.1 267.8 (45.3) 221.0
Cash and cash equivalents at
the beginning of the year 16 2,370.6 2,102.8 1,377.6 1,156.6
Cash and cash equivalents at
the end of the year 16 2,736.7 2,370.6 1,332.3 1,377.6
Movement in cash and cash
equivalents 366.1 267.8 (45.3) 221.0
--------- --------- --------- -------
1. Accounting policies
The principal accounting policies applied in the preparation of
the financial statements for the Group and the Company are set out
below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the United Kingdom (UK) and interpretations issued by the
International Financial Reporting Interpretations Committee
(IFRIC).
The financial statements have been prepared on a historical cost
basis, as modified by the revaluation of investment securities held
at FVOCI and derivative contracts and other financial assets held
at fair value through profit or loss (FVTPL) (see note 1 o)
vi.).
The financial statements are presented in Pounds Sterling. All
amounts in the financial statements have been rounded to the
nearest GBP0.1m (GBPm). The functional currency of the Group is
Pounds Sterling, which is the currency of the primary economic
environment in which the Group operates.
b) 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 financial statements.
These forecasts have been subject to sensitivity tests, including
stress scenarios, which have been compared to the latest economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests. In making the assessment the Board
has considered all principal and emerging risks including climate
risk where the risk is likely to emerge outside of the going
concern assessment horizon.
The assessments include 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.
--
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 evolving governmental
policies and guidelines. The Group continues to invest in its
information technology platforms to support its employees with
flexible working from office or homeworking across all locations
within a hybrid working model. The Group's response to the COVID-19
pandemic demonstrated the inherent resilience of the Group's
critical processes and infrastructure. It also demonstrated 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
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 financial statements on a going concern basis.
c) Basis of consolidation
The Group accounts include the results of the Company and its
subsidiary undertakings. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group and are
deconsolidated from the date that control ceases. Upon
consolidation, intercompany transactions, balances and unrealised
gains on transactions are eliminated. Unrealised losses are also
eliminated unless the transaction provides evidence of impairment
of the asset transferred. Accounting policies of subsidiaries have
been changed where necessary to ensure consistency, so far as is
possible, with the policies adopted by the Group.
Subsidiaries are those entities, including structured entities,
over which the Group has control. The Group controls an entity when
it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the investee. The Group has power
over an entity when it has existing rights that give it the current
ability to direct the activities that most significantly affect the
entity's returns. Power may be determined on the basis of voting
rights or, in the case of structured entities, other contractual
arrangements.
Where the Group does not retain a direct ownership interest in a
securitisation entity, but the Directors have determined that the
Group controls those entities, they are treated as subsidiaries and
are consolidated. Control is determined to exist if the Group has
the power to direct the activities of each entity (for example,
managing the performance of the underlying mortgage assets and
raising debt on those mortgage assets which is used to fund the
Group) and, in addition to this, control is exposed to a variable
return (for example, retaining the residual risk on the mortgage
assets). Securitisation structures that do not meet these criteria
are not treated as subsidiaries and are excluded from the
consolidated accounts. The Company applies the net approach in
accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against
the deemed loan balance.
The Group's Employee Benefit Trust (EBT) was controlled and
recognised by the Company using the look-through approach until 27
November 2020, when OSB GROUP PLC was inserted as the listed
holding company of the Group.
1. Accounting policies (continued)
The Group is not deemed to control an entity when it exercises
power over an entity in an agency capacity. In determining whether
the Group is acting as an agent, the Directors consider the overall
relationship between the Group, the investee and other parties to
the arrangement with respect to the following factors: (i) the
scope of the Group's decision-making power; (ii) the rights held by
other parties; (iii) the remuneration to which the Group is
entitled; and (iv) the Group's exposure to variability of returns.
The determination of control is based on the current facts and
circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that different
parties control an entity depending on whether those factors and
conditions are assessed in isolation or in totality. Judgement is
applied in assessing the relevant factors and conditions in
totality when determining whether the Group controls an entity.
Specifically, judgement is applied in assessing whether the Group
has substantive decision-making rights over the relevant activities
and whether it is exercising power as a principal or an agent.
d) Foreign currency translation
The consolidated financial statements are presented in Pounds
Sterling which is the presentation currency of the Group. The
financial statements of each of the Company's subsidiaries are
measured using the currency of the primary economic environment in
which the subsidiary operates (the functional currency). Foreign
currency transactions are translated into the functional currencies
using the exchange rates prevailing at the date of the
transactions. Monetary items denominated in foreign currencies are
retranslated at the rate prevailing at the period end.
Foreign exchange (FX) gains and losses resulting from the
retranslation and settlement of these items are recognised in
profit or loss. Non-monetary items measured at cost in the foreign
currency are translated using the spot FX rate at the date of the
transaction.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date.
The income and expenses of foreign operations are translated at the
rates on the dates of transactions. Exchange differences on foreign
operations are recognised in other comprehensive income (OCI) and
accumulated in the foreign exchange reserve within equity.
1. Accounting policies (continued)
e) 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 relevant risk management tables in note
45 at a sub-segment level to provide detailed analysis of the
Group's core lending business.
f) Interest income and expense
Interest income and interest expense for all interest-bearing
financial instruments measured at amortised cost and FVOCI are
recognised in profit or loss using the effective interest rate
(EIR) method. The EIR is the rate which discounts the expected
future cash flows, over the expected life of the financial
instrument, to the net carrying value of the financial asset or
liability.
Interest income on financial assets categorised as stage 1 or 2
are recognised on a gross basis, with interest income on stage 3
assets recognised net of expected credit losses (ECL). See note 1
o) for further information on IFRS 9 stage classifications.
When calculating the EIR, the Group estimates cash flows
considering all contractual terms of the instrument and behavioural
aspects (for example, prepayment options) but not considering
future credit losses. The calculation of the EIR includes
transaction costs and fees paid or received that are an integral
part of the interest rate, together with the discounts or premiums
arising on the acquisition of loan portfolios. Transaction costs
include incremental costs that are directly attributable to the
acquisition or issue of a financial instrument.
1. Accounting policies (continued)
The Group monitors the actual cash flows for each book and
resets cash flows on a monthly basis, discounted at the EIR to
derive a new carrying value, with changes taken to profit or loss
as interest income.
The EIR is adjusted where there is a movement in the reference
interest rate (LIBOR, SONIA or base rate) affecting portfolios with
a variable interest rate which will impact future cash flows. The
revised EIR is the rate which exactly discounts the revised cash
flows to the net carrying value of the loan portfolio.
When the contractual terms of non-derivative financial
instruments have been amended as a direct consequence of Interbank
Offered Rate (IBOR) reform and the new basis for determining the
contractual cash flows is economically equivalent to the previous
basis, the Group changes the basis for determining the contractual
cash flows prospectively by revising the EIR.
Interest income on investment securities is included in interest
receivable and similar income. Interest on derivatives is included
in interest receivable and similar income or interest expense and
similar charges following the underlying instrument it is
hedging.
Coupons paid on Additional Tier 1 (AT1) securities are
recognised directly in equity in the period in which they are
paid.
g) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption
charges within the EIR.
Fees received on mortgage administration services and mortgage
origination activities, which are not an integral part of the EIR,
are recorded in other operating income and accounted for in
accordance with IFRS 15 Revenue from Contracts with Customers, with
income recognised when the services are delivered and the benefits
are transferred to clients and customers.
Other fees and commissions are recognised on the accruals basis
as services are provided or on the performance of a significant
act, net of VAT and similar taxes.
h) Integration costs and exceptional items
Integration costs and exceptional items are those items of
income or expense that do not relate to the Group's core operating
activities, are not expected to recur and are material in the
context of the Group's performance. These items are disclosed
separately within the Consolidated Statement of Comprehensive
Income and the Notes to the Consolidated Financial Statements.
i) Taxation
Income tax comprises current and deferred tax. It is recognised
in profit or loss, other comprehensive income or directly in
equity, consistent with the recognition of items it relates to. The
Group recognises tax on coupons paid on AT1 securities directly in
profit or loss.
Current tax is the expected tax charge on the taxable income for
the year and any adjustments in respect of previous years.
1. Accounting policies (continued)
Deferred tax is the tax expected to be payable or recoverable in
respect of temporary differences between the carrying amounts of
assets or liabilities for accounting purposes and carrying amounts
for tax purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise
the asset. The recognition of deferred tax is mainly dependent on
the projections of future taxable profits and future reversals of
temporary differences. The current projections of future taxable
income indicate that the Group will be able to utilise its deferred
tax asset within the foreseeable future.
Deferred tax liabilities are recognised for all taxable
temporary differences to the extent that it is probable that
taxable profits will be available against which deductible
temporary differences can be utilised.
The Company and its UK subsidiaries are in a group payment
arrangement for corporation tax and show a net corporation tax
liability and deferred tax liability accordingly.
The Company and its UK subsidiaries are in the same VAT
group.
j) Dividends
Dividends are recognised in equity in the period in which they
are paid or, if earlier, approved by shareholders.
Dividend income from investments is recognised when the
shareholders' rights to receive payment have been established.
k) Cash and cash equivalents
For the purposes of the Consolidated Statement of Cash Flows,
cash and cash equivalents comprise cash, non-restricted balances
with credit institutions and highly liquid financial assets with
maturities of less than three months from date of acquisition and
subject to an insignificant risk of changes in their fair
value.
l) Intangible assets
Purchased software and costs directly associated with the
development of computer software are capitalised as intangible
assets where the software is a unique and identifiable asset
controlled by the Group and will generate future economic benefits.
Costs to establish technological feasibility or to maintain
existing levels of performance are recognised as an expense. The
Group only recognises internally generated intangible assets if all
of the following conditions are met:
-- an asset is being created that can be identified after establishing the
technical and commercial feasibility of the resulting product;
-- it is probable that the asset created will generate future economic
benefits; and
-- the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally generated intangible
asset, after its purchase or completion, is recognised as an
expense in the period in which it is incurred. Where no internally
generated intangible asset can be recognised, development
expenditure is recognised as an expense in the period in which it
is incurred.
1. Accounting policies (continued)
Software-as-a-service (SaaS), is an arrangement that provides
the customer with the right to receive access to the supplier's
application software in the future which is treated as a service
contract, rather than a software lease or the acquisition of a
software intangible asset.
An intangible asset is only recognised if:
-- The customer has the contractual right to take possession of the software
during the hosting period without significant penalty.
-- It is feasible for the customer to run the software on its own hardware
or contract with a party unrelated to the supplier to host the software.
The costs of configuring or customising supplier application
software in a SaaS arrangement that is determined to be a service
contract is recognised as an expense or prepayment. Where the
configuration and customisation services are not distinct from the
right to receive access to the software, then the costs are
recognised as an expense over the term of the arrangement.
Intangible assets are reviewed for impairment semi-annually, and
if they are considered to be impaired, are written down immediately
to their recoverable amounts. Impairment losses previously
recognised for intangible assets, other than goodwill, are reversed
when there has been a change in the estimates used to determine the
asset's recoverable amount. An impairment loss reversal is
recognised in the Consolidated Statement of Comprehensive Income
and the carrying amount of the asset is increased to its
recoverable amount.
Intangible assets are amortised in profit or loss over their
estimated useful lives as follows:
Software and internally generated assets 5 year straight line
Development costs, brand and technology 4 year straight line
Broker relationships 5 year profile
Bank licence 3 year straight line
For development costs that are under construction, no
amortisation will be applied until the asset is available for use
and is calculated using a full month when available for use.
The Group reviews the amortisation period on an annual basis. If
the expected useful life of assets is different from previous
assessments, the amortisation period is changed accordingly.
m) Property, plant and equipment
Property, plant and equipment comprise freehold land and
buildings, major alterations to office premises, computer equipment
and fixtures measured at cost less accumulated depreciation. These
assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
1. Accounting policies (continued)
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in
the period in which the expenditure is incurred.
n) Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment.
A full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note
30.
The Company performs an annual impairment assessment of its
investment in subsidiary undertakings, assessing the carrying value
of the investment in each subsidiary against the subsidiary's net
asset values at the reporting date for indication of impairment.
Where there is indication of impairment, the Company estimates the
subsidiary's value in use by estimating future profitability and
the impact on the net assets of the subsidiary. The Company
recognises an impairment directly in profit or loss when the
recoverable amount, which is the greater of the value in use or the
fair value less costs to sell, is less than the carrying value of
the investment. Impairments are subsequently reversed if the
recoverable amount exceeds the carrying value.
o) Financial instruments
i. Classification
The Group classifies financial instruments based on the business
model and the contractual cash flow characteristics of the
financial instruments. Under IFRS 9, the Group classifies financial
assets into one of three measurement categories:
-- Amortised cost -- assets in a business model to hold financial assets in
order to collect contractual cash flows, where the contractual terms of
the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount
outstanding.
-- FVOCI -- assets held in a business model which collects contractual cash
flows and sells financial assets where the contractual terms of the
financial assets give rise on specified dates to cash flows that are SPPI
on the principal amount outstanding.
-- FVTPL -- assets not measured at amortised cost or FVOCI. The Group
measures derivatives, an acquired mortgage portfolio and an investment
security under this category.
The Group classifies non-derivative financial liabilities as
measured at amortised cost.
The Group has no financial assets and liabilities classified as
held for trading.
The Group reassesses its business models each reporting
period.
1. Accounting policies (continued)
The Group classifies certain financial instruments as equity
where they meet the following conditions:
-- the financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions;
-- the financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- the financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
During the year equity financial instruments comprised own
shares and AT1 securities. Accordingly, the coupons paid on the AT1
securities are recognised directly in retained earnings when
paid.
ii. Recognition
The Group initially recognises loans and advances, deposits,
debt securities issued and subordinated liabilities on the date on
which they are originated or acquired. All other financial
instruments are accounted for on the trade date which is when the
Group becomes a party to the contractual provisions of the
instrument.
For financial instruments classified as amortised cost, the
Group initially recognises financial assets and financial
liabilities at fair value plus transaction income or costs that are
directly attributable to its origination, acquisition or issue.
These financial instruments are subsequently measured at amortised
cost using the effective interest rate.
Transaction costs relating to the acquisition or issue of a
financial instrument at FVOCI and FVTPL are recognised in the
profit or loss as incurred.
AT1 securities are designated as equity instruments and
recognised at fair value on the date of issuance in equity along
with incremental costs directly attributable to the issuance of
equity instruments.
iii. Derecognition
The Group derecognises financial assets when the contractual
rights to the cash flows expire or the Group transfers
substantially all risks and rewards of ownership of the financial
asset.
The Group offers refinancing options to customers which have
been assessed within the principles of IFRS 9 and relevant guidance
including a read across in respect of debt issuance. The assessment
concludes the original mortgage asset is derecognised at the
refinancing point with a new financial asset recognised.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated
or otherwise modified. The Group considers the renegotiated or
modified cash flows are not a substantial modification from the
contractual cash flows and does not consider that forbearance
measures give rise to a derecognition event.
Financial liabilities are derecognised only when the obligation
is discharged, cancelled or has expired.
1. Accounting policies (continued)
iv. Offsetting
Financial assets and financial liabilities are offset and the
net amount presented in the Consolidated Statement of Financial
Position when, and only when, the Group currently has a legally
enforceable right to offset the amounts and it intends either to
settle them on a net basis or to realise the asset and settle the
liability simultaneously.
The Group's derivatives are covered by industry standard master
netting agreements. Master netting agreements create a right of
set-off that becomes enforceable only following a specified event
of default or in other circumstances not expected to arise in the
normal course of business. These arrangements do not qualify for
offsetting and as such the Group reports derivatives on a gross
basis.
Collateral in respect of derivatives is subject to the standard
industry terms of International Swaps and Derivatives Association
(ISDA) Credit Support Annex. This means that the cash received or
given as collateral can be pledged or used during the term of the
transaction but must be returned on maturity of the transaction.
The terms also give each counterparty the right to terminate the
related transactions upon the counterparty's failure to post
collateral. Collateral paid or received does not qualify for
offsetting and is recognised in loans and advances to credit
institutions and amounts owed to credit institutions,
respectively.
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, less principal payments or
receipts, plus or minus the cumulative amortisation using the EIR
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment of
assets.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or, in
its absence, the most advantageous market to which the Group has
access at that date.
When available, the Group measures the fair value of an
instrument using the quoted price in an active market for that
instrument. A market is regarded as active if transactions for the
asset or liability take place with sufficient frequency and volume
to provide pricing information on an ongoing basis. The Group
measures its investment securities and Perpetual Subordinated Bonds
(PSBs) at fair value using quoted market prices where
available.
If there is no quoted price in an active market, then the Group
uses valuation techniques that maximise the use of relevant
observable inputs and minimise the use of unobservable inputs.
The Group uses SONIA curves to value its derivatives, previously
a combination of LIBOR and SONIA curves (for further information on
IBOR transition, see note 45). The fair value of the Group's
derivative financial instruments incorporates credit valuation
adjustments (CVA) and debit valuation adjustments (DVA). The DVA
and CVA take into account the respective credit ratings of the
Group's two banking entities and counterparty and whether the
derivative is collateralised or not. Derivatives are valued using
discounted cash flow models and observable market data and are
sensitive to benchmark interest and basis rate curves.
1. Accounting policies (continued)
The fair value of investment securities held at FVTPL is
measured using a discounted cash flow model.
1. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage ECL approach for measuring
impairment. The three impairment stages are as follows:
-- Stage 1 -- a 12 month ECL allowance is recognised where there is no
significant increase in credit risk (SICR) since initial recognition.
-- Stage 2 -- a lifetime ECL allowance is held for assets where a SICR is
identified since initial recognition. The assessment of whether credit
risk has increased significantly since initial recognition is performed
for each reporting period for the life of the loan.
-- Stage 3 -- requires objective evidence that an asset is credit impaired,
at which point a lifetime ECL allowance is recognised.
The Group measures impairment through the use of individual and
modelled assessments.
Individual assessment
The Group's provisioning process requires individual assessment
for high exposure or higher risk loans, where Law of Property Act
(LPA) receivers have been appointed, the property is taken into
possession or there are other events that suggest a high
probability of credit loss. Loans are considered at a connection
level, i.e. including all loans connected to the customer.
The Group estimates cash flows from these loans, including
expected interest and principal payments, rental or sale proceeds,
selling and other costs. The Group obtains up-to-date independent
valuations for properties put up for sale.
For all individually assessed loans with a confirmed sale,
should the present value of estimated future cash flows discounted
at the original EIR be less than the carrying value of the loan, a
provision is recognised for the difference with such loans being
classified as impaired. However, should the present value of the
estimated future cash flows exceed the carrying value, no provision
is recognised. For all remaining individually assessed loans,
should a full loss be expected the provision is set to the carrying
value, with all other individually assessed loans applying the
greater of either the modelled or individual assessment.
The Group applies a modelled assessment to all loans with no
individually assessed provision.
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability weighted. ECL is measured on either a 12
month (stage 1) or lifetime basis depending on whether a SICR has
occurred since initial recognition (stage 2) or where an account
meets the Group's definition of default (stage 3).
1. Accounting policies (continued)
The ECL calculation is a product of an individual loan's
probability of default (PD), exposure at default (EAD) and loss
given default (LGD) discounted at the EIR. The ECL drivers of PD,
EAD and LGD are modelled at an account level. The assessment of
whether a significant increase in credit risk has occurred is based
on quantitative relative PD thresholds and a suite of qualitative
triggers.
In accordance with PRA COVID-19 guidance, the Group does not
automatically consider the take-up of customer payment deferrals
during the pandemic to be an indication of a SICR and, in the
absence of other indicators such as previous arrears, low credit
score or high other indebtedness, the staging of these loans
remains unchanged in its ECL calculations.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR,
which results in an exposure being moved from stage 1 to stage
2.
At the point of initial recognition, a loan is assigned a PD
estimate. For each monthly reporting date thereafter, an updated PD
estimate is computed. The Group's transfer criteria analyses
relative changes in PD versus the PD assigned at the point of
origination, together with qualitative triggers using both internal
indicators, such as forbearance, and external information, such as
changes in income and adverse credit information to assess for
SICR. In the event that given early warning triggers have not
already identified SICR, an account more than 30 days past due has
experienced a SICR.
A borrower will move back into stage 1 only if the SICR
definition is no longer triggered.
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria
to determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- If an account is more than 90 days past due.
-- Accounts that have moved into an unlikely to pay position, which includes
forbearance, bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk
improves such that it no longer meets the 90 days past due and
unlikeliness to pay criteria and following this has completed an
internally approved probation period. The borrower will move to
stage 1 or stage 2 dependent on whether the SICR applies.
Forward-looking macroeconomic scenarios
The risk of default and expected credit loss assessments take
into consideration expectations of economic changes that are deemed
to be reasonably possible.
The Group conducts analysis to determine the most significant
factors which may influence the likelihood of an exposure
defaulting in the future. The macroeconomic factors relate to the
HPI, unemployment rate (UR), Gross domestic product (GDP),
Commercial Real Estate Index (CRE) and the Bank of England Base
Rate (BBR).
1. Accounting policies (continued)
The Group has derived an approach for factoring
probability-weighted macroeconomic forecasts into ECL calculations,
adjusting PD and LGD estimates. The macroeconomic scenarios feed
directly into the ECL calculation, as the adjusted PD, lifetime PD
and LGD estimates are used within the individual account ECL
allowance calculations.
The Group sources economic forecast information from an
appropriately qualified third party when determining scenarios. The
Group considers four probability-weighted scenarios, base, upside,
downside and severe downside scenarios.
The base case is also utilised within the Group's impairment
forecasting process which in turn feeds the wider business planning
processes. The ECL models are also used to set the Group's credit
risk appetite thresholds and limits.
Period over which ECL is measured
Expected credit loss is measured from the initial recognition of
the asset which is the date at which the loan is originated or the
date a loan is purchased and at each balance sheet date thereafter.
The maximum period considered when measuring ECL (either 12 months
or lifetime ECL) is the maximum contractual period over which the
Group is exposed to the credit risk of the asset. For modelling
purposes, the Group considers the contractual maturity of the loan
product and then considers the behavioural trends of the asset.
Purchased or originated credit impaired (POCI)
Acquired loans that meet the Group's definition of default (90
days past due or an unlikeliness to pay position) at acquisition
are treated as POCI assets. These assets attract a lifetime ECL
allowance over the full term of the loan, even when these loans no
longer meet the definition of default post acquisition. The Group
does not originate credit-impaired loans.
Intercompany loans
Intercompany receivables in the Company financial statements are
assessed for ECL based on an assessment of the PD and LGD,
discounted to a net present value.
Other financial assets
Other financial assets comprise cash balances with the Bank of
England (BoE) and other credit institutions and high grade
investment securities. The Group deems the likelihood of default
across these counterparties as low and does not recognise a
provision against the carrying balances.
p) Loans and receivables
Loans and receivables are predominantly mortgage loans and
advances to customers with fixed or determinable payments that are
not quoted in an active market and that the Group does not intend
to sell in the near term. They are initially recorded at fair value
plus any directly attributable transaction costs and are
subsequently measured at amortised cost using the EIR method, less
impairment losses. Where exposures are hedged by derivatives,
designated and qualifying as fair value hedges, the fair value
adjustment for the hedged risk to the carrying value of the hedged
loans and advances is reported in fair value adjustments for hedged
assets.
1. Accounting policies (continued)
Loans and the related provision are written off when the
underlying security is sold. Subsequent recoveries of amounts
previously written off are taken through profit or loss.
Loans and advances over which the Group transfers its rights to
the collateral thereon to the BoE under the Term Funding Scheme
(TFS) and Term Funding Scheme with additional incentives for SMEs
(TFSME) are not derecognised from the Consolidated Statement of
Financial Position, as the Group retains substantially all the
risks and rewards of ownership, including all cash flows arising
from the loans and advances and exposure to credit risk. The Group
classifies TFS and TFSME as amortised cost under IFRS 9 Financial
Instruments.
Loans and advances include a small acquired mortgage portfolio
where the contractual cash flows include payments that are not
solely payments of principal and interest and as such are measured
at FVTPL. The Group initially recognises these loans at fair value,
with direct and incremental costs of acquisition recognised
directly in profit or loss and, subsequently measures them at fair
value.
Loans and receivables contain the Group's asset finance lease
lending. Finance leases are initially measured at an amount equal
to the net investment in the lease, using the interest rate
implicit in the finance lease. Direct costs are included in the
initial measurement of the net investment in the lease and reduce
the amount of income recognised over the lease term. Finance income
is recognised over the lease term, based on a pattern reflecting a
constant periodic rate of return on the net investment in the
lease.
q) Investment securities
Investment securities include securities held for liquidity
purposes (UK treasury bills, UK Gilts and Residential
Mortgage-Backed Securities (RMBS)). These assets are
non-derivatives that are designated as FVOCI or amortised cost.
Assets classified as amortised cost are originally recognised at
fair value and subsequently measured at amortised cost using the
EIR method, less impairment losses.
Assets held at FVOCI are measured at fair value with movements
taken to OCI and accumulated in the FVOCI reserve within equity,
except for impairment losses which are taken to profit or loss.
Where the instrument is sold, the gain or loss accumulated in
equity is reclassified to profit or loss.
Assets held at FVTPL are measured at fair value with movements
taken to the Consolidated Statement of Comprehensive Income.
r) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue and subordinated liabilities
are the Group's sources of debt funding. They comprise deposits
from retail customers and credit institutions, including
collateralised loan advances from the BoE under the TFS and TFSME,
asset-backed loan notes issued through the Group's securitisation
programmes and subordinated liabilities. Subordinated liabilities
include the Sterling PSBs where the terms allow no absolute
discretion over the payment of interest. These financial
liabilities are initially measured at fair value less direct
transaction costs, and subsequently held at amortised cost using
the EIR method.
Cash received under the TFS and TFSME is recorded in amounts
owed to credit institutions. Interest is accrued over the life of
the agreements on an EIR basis.
1. Accounting policies (continued)
s) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements (repo)
are retained in the financial statements if they fail derecognition
criteria of IFRS 9 described in paragraph p(iii) above. The
financial assets that are retained in the financial statements are
reflected as loans and advances to customers or investment
securities and the counterparty liability is included in amounts
owed to credit institutions or other customers. Financial assets
purchased under agreements to resell at a predetermined price where
the transaction is financing in nature (reverse repo) are accounted
for as loans and advances to credit institutions. The difference
between the sale and repurchase price is treated as interest and
accrued over the life of the agreement using the EIR method.
t) Derivative financial instruments
The Group uses derivative financial instruments (interest rate
swaps) to manage its exposure to interest rate risk. In accordance
with the Group Market and Liquidity Risk Policy, the Group does not
hold or issue derivative financial instruments for proprietary
trading.
Derivative financial instruments are recognised at their fair
value with changes in their fair value taken to profit or loss.
Fair values are calculated by discounting cash flows at the
prevailing interest rates. All derivatives are classified as assets
when their fair value is positive and as liabilities when their
fair value is negative. If a derivative is cancelled, it is
derecognised from the Consolidated Statement of Financial
Position.
The Group also uses derivatives to hedge the interest rate risk
inherent in irrevocable offers to lend. This exposes the Group to
movements in the fair value of derivatives until the loan is drawn.
The changes to fair value are recognised in profit or loss in the
period.
The Group is party to a limited number of warrants. These are
recognised as derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or
warrant can be reliably measured.
u) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of
IFRS 9. The Group uses fair value hedge accounting for a portfolio
hedge of interest rate risk.
Portfolio hedge accounting allows for hedge effectiveness
testing and accounting over an entire portfolio of financial assets
or liabilities. To qualify for hedge accounting at inception, hedge
relationships are clearly documented and derivatives must be
expected to be highly effective in offsetting the hedged risks. In
addition, effectiveness must be tested throughout the life of the
hedge relationship. This applies to all derivatives including
SONIA-linked derivatives entered into to replace LIBOR-linked
derivatives, as a result of IBOR reforms (see note 1 aa)).
1. Accounting policies (continued)
The Group applies fair value portfolio hedge accounting to its
fixed rate portfolio of mortgages and saving accounts. The hedged
portfolio is analysed into repricing time periods based on expected
repricing dates, utilising the Group Assets and Liabilities
Committee (ALCO) approved prepayment curve. During 2021 all
remaining LIBOR-linked derivatives with a maturity date post Q1
2022 were cancelled and new SONIA-linked derivatives entered into.
Interest rate swaps are designated against the repricing time
periods to establish the hedge relationship. Hedge effectiveness is
calculated as a percentage of the fair value movement of the
interest rate swap against the fair value movement of the hedged
item over the period tested.
The Group considers the following as key sources of hedge
ineffectiveness:
-- the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
-- the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
-- minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
-- the transition relating to LIBOR reforms whereby some hedged instruments
and hedged items are based on different benchmark rates.
Where there is an effective hedge relationship for fair value
hedges, the Group recognises the change in fair value of each
hedged item in profit or loss with the cumulative movement in their
value being shown separately in the Consolidated Statement of
Financial Position as fair value adjustments on hedged assets and
liabilities. The fair value changes of both the derivative and the
hedge substantially offset each other to reduce profit
volatility.
The Group discontinues hedge accounting when the derivative
ceases through expiry, when the derivative is cancelled or the
underlying hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge
accounting or is cancelled whilst still effective, including
LIBOR-linked derivatives cancelled as a result of IBOR reforms, the
fair value adjustment relating to the hedged assets or liabilities
within the hedge relationship prior to the derivative becoming
ineffective or being cancelled remains on the Consolidated
Statement of Financial Position and is amortised over the remaining
life of the hedged assets or liabilities. The rate of amortisation
over the remaining life is in line with expected income or cost
generated from the hedged assets or liabilities. Each reporting
period, the expectation is compared to actual with an accelerated
run-off applied where the two diverge by more than set
parameters.
v) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative
financial instruments. The DVA is based on the expected loss a
counterparty faces due to the risk of the Group's two banking
entities defaulting. The CVA reflects the Group's risk of the
counterparty's default.
The methodology is based on a standard calculation, taking into
account:
-- the one-year PD;
-- the expected EAD;
-- the expected LGD; and
-- the average maturity of the swaps.
1. Accounting policies (continued)
w) Provisions and contingent liabilities
A provision is recognised when there is a present obligation as
a result of a past event, it is probable that the obligation will
be settled and the amount can be estimated reliably.
Provisions include ECLs on the Group's undrawn loan
commitments.
Contingent liabilities are possible obligations arising from
past events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
which are either not probable or the amount of the obligation
cannot be reliably measured. Contingent liabilities are not
recognised but disclosed unless they are not material or their
probability is remote.
x) Employee benefits -- defined contribution scheme
The Group contributes to defined contribution personal pension
plans or defined contribution retirement benefit schemes for all
qualifying employees who subscribe to the terms and conditions of
the schemes' policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as
incurred.
y) Share-based payments
Equity-settled share-based payments to employees providing
services are measured at the fair value of the equity instruments
at the grant date in accordance with IFRS 2. The fair value
excludes the effect of non-market-based vesting conditions.
The cost of the awards are charged on a straight-line basis to
profit or loss (with a corresponding increase in the share-based
payment reserve within equity) over the vesting period in which the
employees become unconditionally entitled to the awards. The
increase within the share-based payment reserve is reclassified to
retained earnings upon exercise.
The amount recognised as an expense for non-market conditions
and related service conditions is adjusted each reporting period to
reflect the actual number of awards expected to be met. The amount
recognised as an expense for awards subject to market conditions is
based on the proportion that is expected to meet the condition as
assessed at the grant date. No adjustment is made to the fair value
of each award calculated at grant date.
Share-based payments that are not subject to further vesting
conditions (i.e. the Deferred Share Bonus Plan (DSBP) for senior
managers) are expensed in the year services are received with a
corresponding increase in equity. Awards granted to Executive
Directors in March 2020 are subject to service conditions through
to vesting and are expensed over the vesting period. Awards granted
to Executive Directors from April 2021 are not subject to future
service conditions and are expensed in the year where the service
is deemed to have been provided.
Where the allowable cost of share-based options or awards for
tax purposes is greater than the cost determined in accordance with
IFRS 2, the tax effect of the excess is taken to the share-based
payment reserve within equity. The tax effect is reclassified to
retained earnings upon vesting.
1. Accounting policies (continued)
Employer's national insurance is charged to profit or loss at
the share price at the reporting date on the same service or
vesting schedules as the underlying options and awards.
Following the insertion of OSBG, the Group ceased consolidating
the EBT and no longer recognises own shares.
z) Leases
The Group's leases are predominantly for offices and Kent
Reliance branches. The Group recognises right-of-use assets and
lease liabilities for leases over 12 months long. Right-of-use
assets and lease liabilities are initially recognised at the net
present value of future lease payments, discounted at the rate
implicit in the lease or, where not available, the Group's
incremental borrowing cost. Subsequent to initial recognition, the
right-of-use asset is depreciated on a straight-line basis over the
term of the lease. Future rental payments are deducted from the
lease liability, with interest charged on the lease liability using
the incremental borrowing cost at the time of initial recognition.
Lease liability payments are recognised within financing activities
in the Consolidated Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an
option to terminate early exists.
For modifications that increase the length of a lease; the
modified lease term is determined and the lease liability
remeasured by discounting the revised lease payments using a
revised discount rate, at the effective date of the lease
modification; a corresponding adjustment is made to the
right-of-use asset. Where modifications decrease the length of a
lease, the lease liability and right-of-use asset are reduced in
proportion to the reduction in the lease term, with any gain or
loss recognised in the profit or loss.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly in profit or loss.
1) Adoption of new standards
International financial reporting standards issued and adopted
for the first time in the year ended 31 December 2021
The following financial reporting standard amendments and
interpretations were in issue and have been applied in the
financial statements from 1 January 2021.
-- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate
Benchmark Reform -- Phase 2
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 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 45 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.
1. Accounting policies (continued)
The IFRS Interpretations Committee published an agenda decision
in April 2021 addressing how a customer should account for the
costs of configuring or customising a supplier's application
software in a SaaS arrangement that is determined to be a service
contract. This has accounting implications for any cloud-based
applications that may be held as an intangible asset as the new
guidance requires the majority of these costs should not be
recognised as an Intangible asset except in a few limited
circumstances. See note 1 l) for further details.
There has been no material impact on the financial statements of
the Group from the adoption of these financial reporting standard
amendments and interpretations.
International financial reporting standards issued but not yet
effective which are applicable to the Group
There are a number of minor amendments to financial reporting
standards that were in issue but have not been applied in the
financial statements, as they were not yet effective on 31 December
2021. The adoption of these amendments will not have a material
impact on the financial statements of the Group in future
periods.
2. Judgements in applying accounting policies and critical accounting estimates
In preparing these financial statements, the Group has made
judgements, estimates and assumptions which affect the reported
amounts within the current and future financial years. Actual
results may differ from these estimates.
Climate change is a global challenge and an emerging risk to
businesses, people and the environment. Therefore, in preparing the
financial statements, the Group has considered the impact of
climate-related risks on its financial position and performance,
including the impact on ECL and redemption profiles included in
EIR. While the effects of climate change represent a source of
uncertainty, the Group does not consider there to be a material
impact on its judgements and estimates from the physical or
transition risks in the short to medium term.
Estimates and judgements are regularly reviewed based on past
experience, expectations of future events and other factors.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
(i) Loan book impairments
Significant increase in credit risk for classification in stage
2
The Group's SICR rules, prior to the COVID-19 pandemic,
considered changes in default risk, internal impairment measures,
changes in customer credit bureau files, or whether forbearance
measures had been applied. The Group took steps to adjust the SICR
criteria through the pandemic to account for the changes in risk
profile and specifically for payment deferrals granted, noting that
not all of the instances of a payment deferral would be a
significant increase in credit risk.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
As the COVID-19 payment deferrals initiative has ceased, newly
granted payment holidays are considered a SICR event, aligned to
the pre-COVID-19 SICR approach. Other adjustments made during the
pandemic to account for high risk accounts and those with income
stress are still considered in the SICR criteria.
(ii) IFRS 9 classification
Application of the 'business model' requirements under IFRS 9
requires the Group to conclude on the business models that it
operates and is a fundamental aspect in determining the
classification of the Group's financial assets.
Management concluded that the Group's business model is a 'held
to collect' business model with the majority of the Group's assets
being loans and advances held at amortised cost. This conclusion
was reached on the basis that the Group originates and purchases
loans and advances in order to collect contractual cash flows over
the life of the originated or purchased financial instrument.
The Group has applied judgement in determining whether the
contractual terms of a financial asset give rise on specified dates
to cash flows that are SPPI on the principal amount outstanding
when applying the classification criteria of IFRS 9. The main area
of judgement is over the Group's loans and advances to customers
which have been accounted for under amortised cost with the
exception of one acquired mortgage book of GBP17.7m (2020:
GBP19.1m) that is recognised at FVTPL.
Estimates
The Group has made the following estimates in the application of
the accounting policies that have a significant risk of material
adjustment to the carrying amount of assets and liabilities within
the next financial year:
(i) Loan book impairments
Set out below are details of the critical accounting estimates
which underpin loan impairment calculations. Less significant
estimates are not discussed as they do not have a material effect.
The Group has recognised total impairments of GBP101.5m (2020:
GBP111.0m) at the reporting date as disclosed in note 22.
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 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, time to sale and sale cost
estimates. The LGD is sensitive to the application of the HPI. For
the OSB segment at 31 December 2021 a 10% fall in house prices
would result in an incremental GBP22.7m (2020: GBP25.6m) of
provision being required. For the CCFS segment at 31 December 2021
a 10% fall in house prices would result in an incremental GBP8.3m
(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 GBP31.0m (2020:
GBP39.5m) as at 31 December 2021.
The Group's forecasts of HPI movements used in the impairment
models are disclosed in the Risk profile performance review on page
56.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect LGD
estimates. Therefore the ECL calculations are sensitive to both the
scenarios utilised and their associated probability weightings.
The Group sources economic forecasts from an appropriately
qualified, independent third party. The Group considers four
probability-weighted scenarios: base, upside, downside and severe
downside scenarios. There still remains some uncertainty around the
pandemic, with the unknown economic impact of removing COVID-19
support measures in 2021 and the ongoing risk of further COVID-19
variants. There is also emerging uncertainty over the cost of
living, with high inflation and base rate increases forecast in the
near to medium term, therefore the management and Board deemed it
prudent to adjust the probability weightings as at 31 December 2021
to increase the contribution from the downside scenarios and
account for the increased economic uncertainty. The Group's
macroeconomic scenarios can be found in the Strategic Report on
page 55.
The following tables detail the ECL scenario sensitivity
analysis with each scenario weighted at 100% probability. The
purpose of using multiple economic scenarios is to model the
non-linear impact of assumptions surrounding macroeconomic factors
and ECL calculated:
Weighted 100% Severe
(see note 100% Base 100% Upside 100% Downside downside
As at 31-Dec-21 22) case scenario scenario scenario scenario
Total loans before provisions,
GBPm 21,164.1 21,164.1 21,164.1 21,164.1 21,164.1
Modelled ECL, GBPm 48.3 26.5 13.1 74.0 120.3
Non-modelled ECL, GBPm 53.2 53.2 53.2 53.2 53.2
Total ECL, GBPm 101.5 79.7 66.3 127.2 173.5
---------- -------------- ----------- ------------- -----------
ECL Coverage, % 0.48 0.38 0.31 0.60 0.82
As at 31-Dec-20
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
---------- -------------- ----------- ------------- -----------
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value.
Significant estimation is required in calculating their EIR using
cash flow models which include assumptions on the likely
macroeconomic environment, including HPI, unemployment levels and
interest rates, as well as loan level and portfolio attributes and
history used to derive prepayment rates and the amount of incurred
losses.
The EIR on loan books purchased at significant discounts or
premiums is particularly sensitive to the weighted average life of
the loan book through the constant prepayment rate (CPR) and the
constant default rate (CDR) estimates assumed, as the purchase
discount or premium is recognised over the expected life of the
loan book through the EIR. New defaults are modelled at zero loss
(as losses will be recognised in profit or loss as impairment
losses) and therefore have the same impact on the EIR as
prepayments.
Incurred losses at acquisition are calculated using the Group's
modelled provision assessment (see (i) Loan book impairments above
for further details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows, unless the variance is
due to changes in expectations of market rates of interest. The
Group monitors the actual cash flows for each acquired book, and
where they diverge significantly from expectation, the revised
future cash flows are discounted at the original EIR, with any
resulting change in carry value creating a corresponding gain or
loss in the Consolidated Statement of Comprehensive Income as
interest income. The Group also considers the total variance across
all acquired portfolios and the economic outlook.
The Group recognised a GBP7.5m loss in 2021 as a result of
resetting cash flows on acquired books (2020: loss of GBP3.5m). The
largest acquired book is Precise with sensitivities completed on
increasing/reducing the life of the book by six months which
results in a reset gain/loss of c. GBP27m/GBP31m (2020: c.
GBP33m/GBP37m).
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.
(iii) Effective interest rate on organic lending
Estimates are made when calculating the EIR for newly originated
loan assets. These include the likely customer redemption
profiles.
Mortgage products offered by the Group include directly
attributable net fee income and a period on reversion rates after
the fixed/discount period. Products revert to the standard variable
rate (SVR) or Base plus a margin for the Kent Reliance brand or a
SONIA/Base plus a margin for the Precise brand. The Group uses
historical customer behaviours, expected take-up rate of retention
products and macroeconomic forecasts in its assessment of
prepayment rates. Customer prepayments in a fixed rate or incentive
period can give rise to Early Repayment Charge (ERC) income.
Estimation is used in assessing whether and for how long
mortgages that reach the end of the initial product term stay on
reversion rates, and to the quantum and timing of prepayments that
incur ERCs. The estimate of customer weighted average life will
determine the period over which net fee income and expected
reversionary income is recognised. Estimates are reviewed regularly
and, as a consequence of the reviews, adjustments of GBP19.0m were
made in 2021, increasing net interest income and customer loans and
receivables.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Sensitivities have been applied to the Precise and Kent Reliance
loan books, to illustrate the impact on interest income of a change
in the expected weighted average lives of the loan books. An
extension of the expected life will typically result in increased
expectations of post reversionary income, less ERCs and a
recognition of net fee income over a longer period. A shortening of
the expected life will lead to reduced post reversionary income,
more ERCs and a recognition of net fees over a shorter period.
The potential duration of a change in customer behaviour as a
result of COVID-19, changes in lifestyle including working
patterns, higher cost of living and the macroeconomic outlook
remains uncertain. A period of six months' variance in the weighted
average lives of the loan books was selected to show this
sensitivity.
Applying a six month extension in the expected weighted average
life of the organic loan books would result in a gain of c.
GBP22.7m (2020: c. GBP22.6m) recognised in net interest income.
Applying a six month reduction in the expected weighted average
life of the loan book would result in a reset loss of c. GBP14.9m
(2020: c. GBP6.9m).
3. Interest receivable and similar income
Group Group
2021 2020
GBPm GBPm
At amortised cost:
On OSB mortgages 541.3 496.8
On CCFS mortgages 342.9 331.9
On finance leases 6.3 3.8
On investment securities 2.1 2.5
On other liquid assets 2.7 5.3
Amortisation of fair value adjustments on
CCFS Combination(1) (66.1) (67.8)
Amortisation of fair value adjustments on
hedged assets(2) (39.9) (17.9)
789.3 754.6
At FVTPL:
Net expense on derivative financial instruments
- lending activities (42.9) (47.7)
At FVOCI:
On investment securities 0.4 5.0
746.8 711.9
------------------------------------------------ ------ ------
(1) Amortisation of fair value adjustments on CCFS loan book at
Combination.
(2) The amortisation relates to hedged assets where the hedges
were terminated before maturity and were effective at the point of
termination.
4. Interest payable and similar charges
Group Group
2021 2020
GBPm GBPm
At amortised cost:
On retail deposits 156.7 245.5
On BoE borrowings 4.5 8.4
On PSBs 1.2 1.7
On subordinated liabilities 0.8 0.8
On wholesale borrowings 0.8 1.3
On debt securities in issue 3.9 3.4
On lease liabilities 0.3 0.3
Amortisation of fair value adjustments on
CCFS Combination(1) (1.5) (3.3)
Amortisation of fair value adjustments on
hedged liabilities(2) (1.1) -
165.6 258.1
At FVTPL:
Net income on derivative financial instruments
- savings activities (6.4) (18.4)
159.2 239.7
----------------------------------------------- ----- ------
(1) Amortisation of fair value adjustments on CCFS customer
deposits at Combination.
(2) The amortisation relates to hedged liabilities where the
hedges were terminated before maturity and were effective at the
point of termination.
5. Fair value gains on financial instruments
Group Group
2021 2020
GBPm GBPm
Fair value changes in hedged assets (297.8) 107.3
Hedging of assets 298.9 (116.8)
Fair value changes in hedged liabilities 27.4 (4.1)
Hedging of liabilities (26.1) 6.8
Ineffective portion of hedges 2.4 (6.8)
Net gains/(losses) on unmatched swaps 10.3 (18.0)
Amortisation of inception adjustments(1) 3.0 13.0
Amortisation of acquisition-related inception
adjustments(2) 13.4 17.0
Amortisation of de-designated hedge relationships(3) 0.2 2.4
Fair value movements on mortgages at FVTPL 1.2 (0.2)
Debit and credit valuation adjustment (1.0) -
29.5 7.4
-------
(1) The amortisation of inception adjustment relates to the
amortisation of the hedging adjustments arising when hedge
accounting commences, primarily on derivative instruments
previously taken out against the mortgage pipeline and also on
derivative instruments previously taken out against new retail
deposits.
1. Fair value gains on financial instruments (continued)
(2) 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) Relates to the amortisation of hedged items where hedge
accounting has been discontinued due to ineffectiveness.
6. 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 1) 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 1 for proceeds of GBP23.6m. Following
the sale the Group had no remaining interest in the Canterbury
securitisation. As a result, consolidation of Canterbury 1 into the
Group ceased on disposal. The Group recognised a gain on sale of
GBP16.0m upon deconsolidation.
On 23 January 2020, the Group securitised 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.
On 14 September 2020, the Group sold GBP150.0m of Canterbury
Finance No.3 plc A2 notes for GBP150.1m, resulting in a gain on
sale of GBP0.1m.
7. Other operating income
Group Group
2021 2020
GBPm GBPm
Interest received on mortgages held at FVTPL 0.5 0.6
Fees and commissions receivable 7.4 8.4
7.9 9.0
--------------------------------------------- ----- -----
8. Administrative expenses
Group Group
2021 2020
GBPm GBPm
Staff costs 92.5 86.0
Facilities costs 6.0 5.7
Marketing costs 4.0 5.1
Support costs(1) 25.3 18.6
Professional fees 16.9 22.3
Other costs 7.3 5.6
Depreciation (see note 28) 5.0 5.6
Amortisation (see note 29) 9.5 8.2
166.5 157.1
--------------------------- ----- -----
(1) External servicing costs of GBP6.1m are now categorised as
support costs in 2021 (2020: GBP6.0m categorised in professional
fees).
Included in professional fees are amounts paid to the Company's
auditor as follows:
Group Group
2021 2020
GBP'000 GBP'000
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 608 899
Fees payable to the Company's auditor for
the audit of the accounts of subsidiaries 1,722 1,299
Total audit fees 2,330 2,198
-------
Audit-related assurance services(1) 248 217
Other assurance services(2) 121 45
Other non-audit services(3) 240 101
Total non-audit fees 609 363
--------------------------------------------
Total fees payable to the Company's Auditor 2,939 2,561
------- -------
(1) Includes review of interim financial information and profit
verifications.
(2) 2021 costs comprise assurance reviews of Alternative
performance measures (APMs), integration costs and European Single
Electronic Format tagging. 2020 costs related to assurance review
of APMs and integration costs.
(3) 2021 costs comprise work related to the AT1 securities
issuance, a gap analysis in relation to TCFD and the European
Medium Term Note programme. 2020 primarily comprises work related
to the insertion of a new holding company.
1. Administrative expenses (continued)
Staff costs comprise the following:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Salaries, incentive pay and
other benefits 72.9 68.5 37.5 30.7
Share-based payments 6.7 5.1 5.0 4.9
Social security costs 7.7 8.1 4.7 4.5
Other pension costs 5.2 4.3 3.5 2.6
92.5 86.0 50.7 42.7
----- ----- ------- -------
The average number of people employed by the Group (including
Executive Directors) during the year is analysed below.
Group Group Company Company
2021 2020 2021 2020
UK 1,220 1,330 580 536
India 535 486 - -
1,755 1,816 580 536
------ ----- ----- ------- -------
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.
During 2021 an impairment assessment was performed and as actual
lending volumes were higher than anticipated the Group has
recognised an impairment reversal of GBP3.1m. The remaining
carrying value of the broker relationships intangible asset at 31
December 2021 is GBP5.0m (2020: GBP5.8m).
10. Directors' emoluments and transactions
Company Company
2021 2020
GBP'000 GBP'000
Short-term employee benefits(1) 2,825 2,675
Post-employment benefits 106 99
Share-based payments(2) 1,267 425
4,198 3,199
-------------------------------- ------- -------
(1) Short-term employee benefits comprise Directors' salary
costs, Non-Executive Directors' fees and other short-term incentive
benefits, which are disclosed in the Annual Report on
Remuneration.
(2) Share-based payments represent the amounts received by
Directors for schemes that vested during the year.
In addition to the total Directors' emoluments above, the
Executive Directors were granted deferred bonuses of GBP633k (2020:
GBP495k) in the form of shares. DSBP awards granted from April 2021
have a holding period of three years with no further conditions
attached other than standard clawback situations. In March 2020 and
prior years, the DSBP awards were subject to either a three or five
year vesting period with conditions attached, notably if the
Director leaves prior to vesting, the award is forfeited unless a
good leaver reason applies such as redundancy, retirement or
ill-health.
The Executive Directors received a further share award under the
Performance Share Plan (PSP) with a grant date fair value of
GBP1,458k (2020: GBP1,359k) using a share price of GBP4.94 (2020:
GBP2.58) (the mid-market quotation on the day preceding the date of
grant). These shares vest annually from year three in tranches of
20 per cent, subject to performance conditions discussed in note 11
and the OSB GROUP PLC Annual Report on Remuneration.
No compensation was paid for loss of office during 2021. The
compensation for loss of office during 2020 was GBP59k.
There were no outstanding loans granted in the ordinary course
of business to Directors and their connected persons as at 31
December 2021 and 2020.
The highest paid Director employed by the Company received
emoluments of GBP2,506k (2020: GBP1,329k) and payments in respect
of personal pension plans of GBP65k (2020: GBP59k) in the year.
The OSB GROUP PLC Annual Report on Remuneration and note 11
Share-based payments provide further details on Directors'
emoluments.
11. Share-based payments
The Group operates the following share-based schemes:
Sharesave Scheme
The Save As You Earn (SAYE) or Sharesave Scheme is a share
option scheme which is available to all UK-based employees. The
Sharesave Scheme allows employees to purchase options by saving a
fixed amount of between GBP5 and GBP500 per month over a period of
either three or five years at the end of which the options, subject
to leaver provisions, are usually exercisable. If not exercised,
the amount saved is returned to the employee. The Sharesave Scheme
has been in operation since 2014 and an invitation to join the
scheme is usually extended annually, with the option price
calculated using the mid-market price of an OSB GROUP PLC ordinary
share over the three dealing days prior to the Invitation Date and
applying a discount of 20%.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior
managers with 50% of their performance bonuses to be deferred in
shares for three years for Executive Directors and one or five
years for senior managers. There are no further performance or
vesting conditions attached to deferred awards for senior managers,
which also applies to Executive Directors for awards granted from
April 2021; the share awards are subject to clawback provisions.
The DSBP awards are expensed in the year services are received with
a corresponding increase in equity. Awards granted to Executive
Directors in March 2020 and prior, are subject to vesting
conditions and are expensed over the vesting period.
DSBP awards for senior managers carry entitlements to dividend
equivalents, which are paid when the awards vest. DSBP awards
granted from April 2021 to Executive Directors are entitled to
dividend equivalents; awards granted in prior years were not
entitled to dividend equivalents.
Performance Share Plan
Executive Directors and certain senior managers are also
eligible for a PSP award based on performance conditions which vest
in tranches over three to seven years.
The performance conditions that apply to PSP awards from 2020
are based on a combination of earnings per share (EPS) weighting of
35%, total shareholder return (TSR) 35%, risk-based 15% and return
on equity (ROE) 15%. Prior to 2020, PSP awards were based on a
combination of EPS weighting of 40%, TSR 40% and ROE 20%. The PSP
conditions are assessed independently. The EPS element assesses the
compound annual growth rate over the performance period, that is,
the annualised growth from a base year 0 to final year 3. For
example, the 2022 Award will measure the EPS growth from 1 January
2021 to 31 December 2024. For the TSR element, the OSBG's ordinary
shares relative performance is measured against the FTSE 250
(excluding investment trusts). The risk-based measure is assessed
against the risk management performance with regard to all relevant
risks including, but not limited to, an assessment of regulatory
risk, operational risk, conduct risk, liquidity risk, funding risk,
marketing risk and credit risk. For the ROE element, growth rates
are assessed against the Group's underlying profit after taxation
as a percentage of average shareholders' equity.
As part of the Combination, mirror PSP awards were granted to
replace the 2018 and 2019 CCFS schemes that terminated upon the
Combination. The mirror PSP schemes follow the same performance
conditions as the Group's 2018 and 2019 PSP awards.
1. Share-based payments (continued)
The share-based expense for the year includes a charge in
respect of the Sharesave Scheme, DSBP and PSP. All charges are
included in employee expenses within note 8 Administrative
expenses.
The share-based payment expense during the year comprised the
following:
Group Group
2021 2020
GBPm GBPm
Sharesave Scheme 0.7 0.5
Deferred Share Bonus Plan 3.8 3.9
Performance Share Plan 2.2 0.7
6.7 5.1
-------------------------- ----- -----
Movements in the number of share awards and their weighted
average exercise prices are set out below:
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2021 2,745,332 2.53 1,119,757 4,986,527
Granted 339,097 3.96 363,624 1,477,111
Exercised/Vested (270,709) 3.10 (683,456) (513,927)
Forfeited (392,460) 2.63 (2,809) (724,631)
At 31 December
2021 2,421,260 2.65 797,116 5,225,080
------------------ ---------------- ------------ -----------
Exercisable at:
31 December 2021 8,480 3.37 - -
--------- ---------------- ------------
1. Share-based payments (continued)
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2020 2,869,146 2.63 738,473 3,096,371
Granted 1,483,202 2.29 839,735 2,756,176
Exercised/Vested (1,080,430) 2.32 (449,608) (383,205)
Forfeited (526,586) 2.79 (8,843) (482,815)
At 31 December
2020 2,745,332 2.53 1,119,757 4,986,527
----------------- ---------------- ------------ -----------
Exercisable at:
31 December 2020 118,402 2.89 - -
----------- ---------------- ------------
For the share-based awards granted during the year, the weighted
average grant date fair value was 286 pence (2020: 188 pence).
The range of exercise prices and weighted average remaining
contractual life of outstanding awards are as follows:
2021 2020
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
Sharesave Scheme
227 - 335 pence (2020: 227
- 335 pence) 2,421,260 2.0 2,745,332 2.5
Deferred Share Bonus Plan
Nil 797,116 0.7 1,119,757 0.7
Performance Share Plan
Nil 5,225,080 2.4 4,986,527 2.5
8,443,456 2.1 8,851,616 2.3
--------------------------- --------- ------------- --------- -------------
1. Share-based payments (continued)
Sharesave Scheme
2021 2020 2019 2018 2017
Contractual life,
years 3 3 5 3 5 3 5 3 5
Share price at issue,
GBP 5.13 2.86 2.86 3.32 3.32 4.19 4.19 3.93 3.93
Exercise price,
GBP 3.96 2.29 2.29 2.65 2.65 3.35 3.35 3.15 3.15
Expected volatility,
% 37.9 57.6 57.6 31.9 31.9 16.1 16.5 18.0 17.3
Dividend yield,
% 4.5 3.3 3.3 4.8 4.8 4.4 4.4 4.1 4.1
Grant date fair
value, GBP 1.46 1.22 1.34 0.90 0.91 0.40 0.43 0.75 0.70
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
The Sharesave schemes are not entitled to dividends between the
option and exercise date. A Black Scholes model is used to
determine the grant date fair value with two inputs:
Expected volatility - from 2019, the expected volatility is
based on OSBG's share price post insertion, and the OSB share price
prior to insertion. Prior to this the Group used the FTSE 350
diversified financials volatility as insufficient history was
available for the Company's share price.
Dividend -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Deferred Share Bonus Plan
2020 2019 2018 2017
Contractual life,
years 3 3 3 5
Mid-market share
price, GBP 2.58 3.96 3.80 4.04
Attrition rate,
% - 8.4 9.7 11.8
Dividend yield,
% 5.6 4.7 4.6 4.0
Grant date fair
value, GBP 2.21 3.47 3.34 3.37
------------------ ---- ---- ---- ----
For awards granted from April 2021 there are no further
performance or vesting conditions attached to deferred awards, for
further details see DSBP above.
For DSBP awards where conditions exist, these schemes carry no
rights to dividend equivalents and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Performance Share Plan
Performance awards are typically made annually at the discretion
of the Group Remuneration Committee. Awards are based on a mixture
of internal financial performance targets, risk-based measures and
relative TSR.
Non-market performance conditions exist for the scheme notably
that you are employed by the Company at the vesting date with good
leaver exceptions, and an attrition rate is applied as an estimate
of the actual number of awards that will meet the related
conditions at the vesting date.
1. Share-based payments (continued)
The awards are not entitled to a dividend equivalent between
grant date and vesting and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
The fair value of an option that is subject to market conditions
(the relative share price element of the PSP is determined at grant
date using a Monte Carlo model at the time of grant.
The inputs into the models are as follows:
2021 2020 2019 2018
Contractual life,
years 3-7 3-7 3 3
Mid-market share
price, GBP 4.94 2.58 3.96 4.11
Attrition rate,
% 12.8 7.3 8.4 9.7
Expected volatility,
% 59.5 43.9 26.8 29.1
Dividend yield,
% 3.8 5.6 4.7 4.6
Vesting rate - TSR
% 40.8 27.8 44.9 54.0
Grant date fair
value, GBP 4.26 2.06 3.47 3.61
--------------------- ---- ---- ---- ----
CCFS PSP Mirror Schemes
2019 2018
Contractual life,
years 3 2
Mid-market share
price, GBP 3.54 3.54
Expected volatility,
% 28.6 28.6
Attrition rate,
% - -
Dividend yield,
% 4.8 4.8
Vesting rate - TSR,
% 37.4 37.4
Grant date fair
value, GBP 3.29 3.17
----------------------- ---- ----
12. Integration costs
Group Group
2021 2020
GBPm GBPm
Consultant fees 2.2 1.7
Staff costs 2.2 8.1
Impairment 0.6 -
5.0 9.8
---------------- -----
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.
Impairment relates to a property sold during the year.
13. Exceptional items
Group Group
2021 2020
GBPm GBPm
Consultant fees - 2.0
Legal and professional fees 0.2 1.3
0.2 3.3
---------------------------- ----- -----
Exceptional items relate to the insertion of OSB GROUP PLC as
the new holding company and listed entity which is outside of this
Group; with OSB being the only 100% owned direct subsidiary of OSB
GROUP PLC. These costs are borne by OSB.
14. Taxation
The Group publishes its tax strategy on its corporate website.
The table below shows the components of the Group's tax charge for
the year:
Group Group
2021 2020
GBPm GBPm
Corporation taxation 128.3 79.7
Deferred taxation (0.2) (0.8)
Release of deferred taxation on CCFS Combination(1) (8.5) (14.8)
Total taxation 119.6 64.1
---------------------------------------------------- ----- ------
(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 (GBP14.1m) (2020: GBP19.6m) and the impact of the
corporation tax rate increase on these deferred tax liabilities
(GBP5.6m) (2020: GBP4.8m).
1. Taxation (continued)
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:
Group Group
2021 2020
GBPm GBPm
Profit before taxation 464.6 260.3
Profit multiplied by the standard rate of
UK Corporation Tax (19%) 88.3 49.5
Bank surcharge(1) 27.7 11.0
Taxation effects of:
Expenses not deductible for taxation purposes 0.7 1.6
Impact of deferred tax rate change(2) 5.2 4.4
Adjustments in respect of earlier years - (0.4)
Tax adjustments in respect of share-based
payments 1.2 0.8
Tax on coupon paid on AT1 securities (2.2) (1.5)
Timing differences (1.3) (1.3)
Total taxation charge 119.6 64.1
---------------------------------------------- ----- -----
(1) Tax charge for the two banking entities of GBP31.9m (2020:
GBP16.8m) offset by the tax impact of unwinding CCFS Combination
items of GBP4.2m (2020: GBP5.8m).
(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).
Factors affecting tax charge for the year
On 24 May 2021, the Government substantively enacted legislation
to increase the corporation tax rate from 19% to 25% from 1 April
2023. This has increased the deferred tax charge in the year by
GBP5.2m.
The effective tax rate for the year ended 31 December 2021,
excluding the impact of adjustments in respect of earlier years and
the deferred tax rate change, was 24.6% (2020: 23.1%).
The GBP5.2m (2020: GBP4.4m) impact of the deferred tax rate
change relates predominantly to the deferred tax liability from the
CCFS combination (see note 27 and 38).
During the year a tax credit of GBP1.6m (2020: credit of
GBP0.3m) of tax has been recognised directly within equity relating
to the Group's share-based payment schemes.
During the year a tax credit of GBP0.5m (2020: charge of
GBP0.5m) has been recognised within OCI relating to investment
securities classified as FVOCI.
1. Taxation (continued)
Factors that may affect future tax charges
In November 2021, the government announced that the bank
surcharge would reduce from 8% to 3% from 1 April 2023, together
with an increase in the surcharge annual allowance from GBP25m to
GBP100m. These changes were not substantively enacted into
legislation at the balance sheet date and so have not been
reflected in these financial statements. We have assessed the
impact of these changes and concluded that they will not have a
material impact on the Group's deferred tax balances.
15. Dividends
During the year, the Company paid the following dividends:
Company Company
2021 2020
GBPm GBPm
Interim dividend for the current year 86.7 -
The Directors do not recommend a final dividend (2020: nil).
16. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Consolidated Statement of Cash Flows:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Cash in hand 0.5 0.5 0.5 0.5
Unencumbered loans and advances
to credit institutions 2,636.2 2,370.1 1,331.8 1,377.1
Investment securities 100.0 - - -
2,736.7 2,370.6 1,332.3 1,377.6
-------------------------------- ------- ------- ------- -------
17. Loans and advances to credit institutions
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Unencumbered:
BoE call account 2,496.4 2,256.5 1,313.5 1,356.4
Call accounts 43.3 55.6 18.1 20.6
Cash held in special purpose
vehicles(1) 89.6 51.0 0.2 0.1
Term deposits 6.9 7.0 - -
Encumbered:
BoE cash ratio deposit 59.5 52.3 36.5 34.0
Cash held in special purpose
vehicles(1) 48.0 42.7 - -
Cash margin given 99.9 211.1 36.7 107.0
2,843.6 2,676.2 1,405.0 1,518.1
----------------------------- ------- ------- ------- -------
(1) Cash held in special purpose vehicles (SPVs) is ring-fenced
for use in managing the Group's securitised debt facilities under
the terms of securitisation agreements. Cash held in internal SPVs
is treated as unencumbered in proportion to the retained interest
in the SPV based on the nominal value of the bonds held in the
Group to total bonds in the securitisation, and included in cash
and cash equivalents. Cash retained in SPVs designated as cash
reserve credit enhancement is treated as encumbered in proportion
to the external holdings in the SPV and excluded from cash and cash
equivalents.
18. Investment securities
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Held at FVTPL:
RMBS loan notes 0.7 - 0.7 -
0.7 - 0.7 -
Held at FVOCI:
UK Sovereign debt 152.1 - - -
RMBS loan notes 15.5 285.0 15.5 15.0
167.6 285.0 15.5 15.0
Held at amortised cost:
UK Sovereign debt 100.0 - - -
RMBS loan notes 223.1 186.2 - -
323.1 186.2 - -
Less: Expected credit losses - - - -
323.1 186.2 - -
491.4 471.2 16.2 15.0
1. Investment securities (continued)
At 31 December 2021, the Group had no RMBS held at FVOCI (2020:
GBP147.1m) and GBP119.5m of RMBS held at amortised cost (2020:
GBP13.7m) sold under repos. The Company had no investment
securities sold under repos as at the 2021 and 2020 reporting
dates.
The Directors consider that the primary purpose of holding
investment securities is prudential. These securities are held as
liquid assets with the intention of use on a continuing basis in
the Group's activities and are classified as FVTPL, FVOCI and
amortised cost in accordance with the Group's business model for
each security.
Movements during the year in investment securities held by the
Group and Company are analysed as follows:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
At 1 January 471.2 635.3 15.0 149.8
Additions(1,2) 568.2 291.6 216.6 205.9
Disposals and maturities(3) (549.7) (457.2) (215.4) (341.0)
Movement in accrued interest 0.6 0.5 (0.1) 0.4
Changes in fair value 1.1 1.0 0.1 (0.1)
At 31 December 491.4 471.2 16.2 15.0
------- ------- ------- -------
(1) Additions includes GBP100.0m of UK Treasury bills which had
a maturity of less than three months from date of acquisition
(2020: nil).
(2) The prior year additions included GBP100.7m of retained RMBS
loan notes following the deconsolidation of PMF 2020-1B.
(3) The prior year disposals and maturities included GBP49.9m of
UK Sovereign debt which had a maturity of less than three months
from date of acquisition.
At 31 December 2021, the Group's investment securities included
investments in unconsolidated structured entities (note 45) of
GBP100.7m notes in PMF 2020-1B and GBP21.0m notes in PMF 2017-1B
(2020: GBP100.7m notes in PMF 2020-1B, and GBP285.0m notes in PMF
2019-1B). The investments represent the maximum exposure to loss
from unconsolidated structured entities. The Company has no
investment securities in unconsolidated structured entities (2020:
GBP15.0m notes in PMF 2019-1B). The investments represent the
maximum exposure to loss from unconsolidated structured
entities.
19. Loans and advances to customers
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Held at amortised cost:
Loans and advances (see note 20) 21,047.9 19,257.1 9,540.2 8,596.2
Finance leases (see note 21) 116.2 65.5 - -
21,164.1 19,322.6 9,540.2 8,596.2
Less: Expected credit losses (see
note 22) (101.5) (111.0) (63.8) (64.5)
21,062.6 19,211.6 9,476.4 8,531.7
-------- -------- ------- -------
Residential mortgages held at FVTPL 17.7 19.1 - -
21,080.3 19,230.7 9,476.4 8,531.7
------------------------------------
20. Loans and advances
2021 2020
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 10,393.2 7,685.7 18,078.9 9,310.8 6,749.5 16,060.3
Stage 2 1,142.3 1,269.8 2,412.1 1,362.0 1,327.6 2,689.6
Stage 3 360.4 99.1 459.5 344.5 48.1 392.6
Stage 3 (POCI) 45.2 52.2 97.4 48.6 66.0 114.6
11,941.1 9,106.8 21,047.9 11,065.9 8,191.2 19,257.1
-------------------- -------- ------- -------- -------- ------- --------
2021 2020
Company GBPm GBPm
Gross carrying amount
Stage 1 8,220.7 7,080.4
Stage 2 984.5 1,215.2
Stage 3 294.0 255.2
Stage 3 (POCI) 41.0 45.4
9,540.2 8,596.2
------- -------
1. Loans and advances (continued)
The mortgage loan balances pledged as collateral for liabilities
are:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
BoE under TFS and TFSME 5,887.2 5,203.2 3,390.5 2,917.8
Securitisation 486.5 435.4 288.4 146.2
6,373.7 5,638.6 3,678.9 3,064.0
------------------------ ------- ------- ------- -------
The Group's securitisation programmes, use of TFS and TFSME
result in certain assets being encumbered as collateral against
such funding. As at 31 December 2021, the percentage of the Group's
gross customer loans and receivables that are encumbered was 30%
(2020: 29%).
The Company adopts a net accounting approach for retained
interests in securitisation transactions that are consolidated into
the Group, disclosing the net amount as a deemed loan liability.
The table below shows the Company's securitised mortgages and
retained loan notes:
Company Company
2021 2020
GBPm GBPm
Loans and advances to customers 3,081.6 1,920.0
Deemed loan premium (7.4) 14.7
Retained loan notes (2,931.4) (1,868.5)
142.8 66.2
-------------------------------- --------- ---------
As at 31 December 2021, the Company had GBP1,581.7m (2020:
GBP686.9m) of the retained loan notes sold under repos or pledged
as collateral.
1. Loans and advances (continued)
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the year:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group 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 (2,300.3) 2,344.5 (44.2) - -
- To Stage 3 (124.8) (90.9) 215.7 - -
At 31 December 2020 16,060.3 2,689.6 392.6 114.6 19,257.1
Originations(1) 4,523.4 - - - 4,523.4
Acquisitions(3) 277.7 - - 2.7 280.4
Disposals(3) (214.4) - - - (214.4)
Repayments and
write-offs(2) (2,539.8) (160.3) (78.6) (19.9) (2,798.6)
Transfers:
- To Stage 1 1,401.0 (1,370.2) (30.8) - -
- To Stage 2 (1,339.7) 1,384.1 (44.4) - -
- To Stage 3 (89.6) (131.1) 220.7 - -
At 31 December 2021 18,078.9 2,412.1 459.5 97.4 21,047.9
--------------------------- --------- --------- ------- ------- ---------
(1) Originations include further advances and drawdowns on
existing commitments.
(2) Repayments and write-offs include customer redemptions.
(3) 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).
1. Loans and advances (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 7,785.0 371.3 211.1 53.4 8,420.8
Originations(1) 1,523.1 - - - 1,523.1
Disposals (401.3) (8.3) (1.0) - (410.6)
Repayments and write-offs(2) (955.0) 54.4 (28.5) (8.0) (937.1)
Transfers:
- To Stage 1 126.0 (107.0) (19.0) - -
- To Stage 2 (920.5) 956.8 (36.3) - -
- To Stage 3 (76.9) (52.0) 128.9 - -
At 31 December 2020 7,080.4 1,215.2 255.2 45.4 8,596.2
Originations(1) 2,104.9 - - - 2,104.9
Acquisitions(3) 225.7 - - 0.9 226.6
Disposals(3) (214.4) - - - (214.4)
Repayments and write-offs(2) (1,006.2) (125.4) (36.2) (5.3) (1,173.1)
Transfers:
- To Stage 1 591.8 (577.2) (14.6) - -
- To Stage 2 (505.3) 536.5 (31.2) - -
- To Stage 3 (56.2) (64.6) 120.8 - -
At 31 December 2021 8,220.7 984.5 294.0 41.0 9,540.2
----------------------------- --------- ------- ------- ------- ---------
(1) Originations include further advances and drawdowns on
existing commitments.
(2) Repayments and write-offs include customer redemptions.
(3) The Company 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 Company. Under the terms of the mortgage sale
agreements, the Company 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. The Company is the master
servicer of the mortgages, and has retained 5% of these mortgages,
as required under the retention rules.
21. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
Group Group
2021 2020
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 39.7 21.9
Between one and five years 87.0 50.4
More than five years 0.9 1.3
127.6 73.6
Unearned finance income (11.4) (8.1)
Net investment in finance leases 116.2 65.5
----------------------------------------------- ------ -----
Net investment in finance leases, receivable
Less than one year 34.7 18.6
Between one and five years 80.6 45.7
More than five years 0.9 1.2
116.2 65.5
------
The Group has recognised GBP4.3m of ECLs on finance leases as at
31 December 2021 (2020: GBP2.6m).
22. Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
2021 2020
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Group GBPm % GBPm GBPm % GBPm
Scenarios
Upside 13.1 20 2.6 40.1 30 12.0
Base case 26.5 40 10.6 54.6 40 21.8
Downside scenario 74.0 28 20.7 113.5 23 26.1
Severe downside
scenario 120.3 12 14.4 166.7 7 11.7
Total weighted
provisions 48.3 71.6
Non-modelled
Provisions:
Individually-assessed
provisions 40.4 29.0
Post model
adjustments(1) 12.8 10.4
Total provision 101.5 111.0
---------------------- --------- --------- -------------- --------- --------- --------------
(1) To ensure that provision coverage levels remain appropriate,
management and the Board hold a number of post model adjustments,
to capture any specific risks not captured within the models and
economic forecasts as highlighted by the Group's risk functions
top-down lending segment analysis or adjustments that still remain
relevant from those introduced due to COVID-19 observations,
restrictions and economic support measures. Additional information
can be found in the Strategic Report on pages 53 to 62.
1. Expected credit losses (continued)
2021 2020
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Company GBPm % GBPm GBPm % GBPm
Scenarios
Upside 6.2 20 1.2 22.5 30 6.8
Base case 15.7 40 6.3 30.1 40 12.0
Downside scenario 47.8 28 13.4 65.2 23 15.0
Severe downside
scenario 79.9 12 9.6 96.9 7 6.8
Total weighted
provisions 30.5 40.6
Non-modelled
Provisions:
Individually-assessed
provisions 29.8 22.0
Post model
adjustments(1) 3.5 1.9
Total provision 63.8 64.5
---------------------- --------- --------- -------------- --------- --------- --------------
(1) To ensure that provision coverage levels remain appropriate,
management and the Board hold a number of post model adjustments,
to capture any specific risks not captured within the models and
economic forecasts as highlighted by the Group's risk functions
top-down lending segment analysis or adjustments that still remain
relevant from those introduced due to COVID-19 observations,
restrictions and economic support measures. Additional information
can be found in the Strategic Report on pages 53 to 62.
The Group and Company ECL by segment and IFRS 9 stage are shown
below:
2021 2020
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9.3 2.8 12.1 12.3 8.9 21.2
Stage 2 14.2 10.8 25.0 17.9 13.1 31.0
Stage 3 56.6 3.8 60.4 49.4 2.3 51.7
Stage 3 (POCI) 2.1 1.9 4.0 4.0 3.1 7.1
82.2 19.3 101.5 83.6 27.4 111.0
--------------- ---- ---- ----- ---- ---- -----
2021 2020
Company GBPm GBPm
Stage 1 6.1 8.4
Stage 2 12.1 16.3
Stage 3 43.6 35.9
Stage 3 (POCI) 2.0 3.9
63.8 64.5
--------------- ---- ----
1. Expected credit losses (continued)
The tables below show the movement in the ECL by IFRS 9 stage
during the year. ECLs on originations and acquisitions reflect the
IFRS 9 stage of loans originated or acquired during the year as at
31 December and not the date of origination. Re-measurement of loss
allowance relates to existing loans which did not redeem during the
year and includes the impact of loans moving between IFRS 9
stages.
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
At 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)
Re-measurement of
loss allowance 6.3 7.7 29.0 (0.2) 42.8
Transfers:
- To Stage 1 2.0 (1.4) (0.6) - -
- To Stage 2 (1.0) 2.8 (1.8) - -
- To Stage 3 (0.1) (1.2) 1.3 - -
Changes in assumptions
and model parameters 2.9 18.0 4.1 0.5 25.5
At 31 December 2020 21.2 31.0 51.7 7.1 111.0
Originations 5.7 - - - 5.7
Acquisitions 0.1 - - 0.1 0.2
Repayments and write-offs (2.8) (3.3) (7.4) (1.1) (14.6)
Re-measurement of
loss allowance (21.8) (0.8) 12.8 (2.1) (11.9)
Transfers:
- To Stage 1 11.3 (10.5) (0.8) - -
- To Stage 2 (2.3) 5.1 (2.8) - -
- To Stage 3 (0.3) (3.1) 3.4 - -
Changes in assumptions
and model parameters 1.0 6.6 3.5 - 11.1
At 31 December 2021 12.1 25.0 60.4 4.0 101.5
1. Expected credit losses (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 2.8 3.3 15.4 5.1 26.6
Originations 2.4 - - - 2.4
Disposals (0.1) (0.1) (0.1) - (0.3)
Repayments and write-offs (0.2) (0.2) (2.9) (0.1) (3.4)
Re-measurement of
loss allowance 2.1 3.1 22.3 (1.4) 26.1
Transfers:
- To Stage 1 0.8 (0.5) (0.3) - -
- To Stage 2 (0.4) 2.1 (1.7) - -
- To Stage 3 - (0.8) 0.8 - -
Changes in assumptions
and model parameters 1.0 9.4 2.4 0.3 13.1
At 31 December 2020 8.4 16.3 35.9 3.9 64.5
Originations 2.6 - - - 2.6
Repayments and write-offs (0.7) (1.6) (3.0) (0.2) (5.5)
Re-measurement of
loss allowance (8.9) 2.3 9.0 (1.6) 0.8
Transfers:
- To Stage 1 5.5 (5.0) (0.5) - -
- To Stage 2 (0.7) 2.0 (1.3) - -
- To Stage 3 (0.1) (2.2) 2.3 - -
Changes in assumptions
and model parameters - 0.3 1.2 (0.1) 1.4
At 31 December 2021 6.1 12.1 43.6 2.0 63.8
-------------------------- ------- ------- ------- ------- -----
The tables below show the stage 2 ECL balances by transfer
criteria:
2021 2020
Carrying Carrying
value ECL Coverage value ECL Coverage
Group GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 1,251.6 17.1 1.37 946.9 17.0 1.80
Qualitative measures 1,125.0 7.4 0.66 1,680.7 12.7 0.76
30 days past due
backstop 37.0 0.5 1.35 63.4 1.3 2.05
Total 2,413.6 25.0 1.04 2,691.0 31.0 1.15
--------------------- -------- ---- -------- -------- ---- --------
1. Expected credit losses (continued)
2021 2020
Carrying Carrying
value ECL Coverage value ECL Coverage
Company GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 425.8 7.7 1.81 354.5 8.6 2.43
Qualitative measures 543.8 4.1 0.75 835.4 6.9 0.83
30 days past due
backstop 14.9 0.3 2.01 25.3 0.8 3.16
Total 984.5 12.1 1.23 1,215.2 16.3 1.34
--------------------- -------- ---- -------- -------- ---- --------
The Group has a number of qualitative measures to determine
whether a SICR has taken place. These triggers utilise both
internal performance information, to analyse whether an account is
in distress but not yet in arrears, and external credit bureau
information, to determine whether the customer is experiencing
financial difficulty with an external credit obligation.
23. Impairment of financial assets
The (credit)/charge for impairment of financial assets in the
Consolidated Statement of Comprehensive Income comprises:
Group Group
2021 2020
GBPm GBPm
Write-offs in year 6.7 1.9
Disposals - 0.4
(Decrease)/increase in ECL provision (11.1) 68.7
(4.4) 71.0
------------------------------------- ------ -----
24. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Consolidated
Statement of Financial Position:
Net amount
of financial Contracts subject Cash collateral
assets / (liabilities) to master netting paid / (received)
Gross amount presented agreements not offset
of recognised in the Consolidated not offset in the Consolidated
financial Statement in the Consolidated Statement
assets of Financial Statement of of Financial Net
/ (liabilities) Position Financial Position Position amount
Group GBPm GBPm GBPm GBPm GBPm
At 31 December
2021
Derivative
assets:
Interest rate
risk hedging 185.7 185.7 (16.9) (115.3) 53.5
185.7 185.7 (16.9) (115.3) 53.5
--------------- ---------------- ----------------------- -------------------- -------------------- ------
Derivative
liabilities:
Interest rate
risk hedging (19.7) (19.7) 16.9 98.3 95.5
(19.7) (19.7) 16.9 98.3 95.5
--------------- ---------------- ----------------------- -------------------- -------------------- ------
At 31 December
2020
Derivative assets:
Interest rate
risk hedging 12.3 12.3 (11.8) - 0.5
12.3 12.3 (11.8) - 0.5
Derivative liabilities:
Interest rate
risk hedging (163.6) (163.6) 11.8 210.5 58.7
(163.6) (163.6) 11.8 210.5 58.7
------------------------ ------- ------- ------ ----- ----
Included within the Group's derivative assets is GBP48.7m (2020:
in derivative liabilities GBP(11.7)m) relating to derivative
contracts not covered by master netting agreements on which no cash
collateral has been paid.
1. Derivatives (continued)
Net amount Contracts subject
of financial to master netting Cash collateral
Gross amount assets / (liabilities) agreements paid / (received)
of recognised presented not offset not offset
financial in the Statement in the Statement in the Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
Company GBPm GBPm GBPm GBPm GBPm
At 31 December
2021
Derivative
assets:
Interest rate
risk hedging 50.5 50.5 (6.2) (42.1) 2.2
50.5 50.5 (6.2) (42.1) 2.2
------------------
Derivative
liabilities:
Interest rate
risk hedging (8.7) (8.7) 6.2 35.1 32.6
(8.7) (8.7) 6.2 35.1 32.6
--------------- ---------------- ----------------------- ------------------ ------------------ ------
At 31 December
2020
Derivative assets:
Interest rate
risk hedging 4.7 4.7 (4.2) - 0.5
4.7 4.7 (4.2) - 0.5
Derivative liabilities:
Interest rate
risk hedging (93.8) (93.8) 4.2 106.4 16.8
(93.8) (93.8) 4.2 106.4 16.8
------------------------ ------ ------ ----- ----- ----
Included within the Company's derivative liabilities is nil
(2020: nil) of derivative contracts not covered by master netting
agreements on which no cash collateral has been paid.
1. Derivatives (continued)
The tables below profile the timing of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Group GBPm GBPm GBPm GBPm GBPm
At 31 December 2021
Derivative assets 12,968.3 245.2 2,345.4 10,235.7 142.0
Derivative
liabilities 7,378.0 1,361.0 4,747.0 1,150.0 120.0
20,346.3 1,606.2 7,092.4 11,385.7 262.0
------------------- ------------- --------- ------- ----------- ---------
At 31 December 2020
Derivative assets 8,687.8 1,450.7 3,407.8 3,808.3 21.0
Derivative
liabilities 10,392.4 148.0 1,868.0 8,065.9 310.5
19,080.2 1,598.7 5,275.8 11,874.2 331.5
------------------- ------------- --------- ------- ----------- ---------
The Group has 841 (2020: 925) derivative contracts with an
average fixed rate of 0.34% (2020: 0.47%).
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Company GBPm GBPm GBPm GBPm GBPm
At 31 December 2021
Derivative assets 3,953.0 50.0 952.0 2,873.0 78.0
Derivative
liabilities 3,416.0 626.0 2,340.0 350.0 100.0
7,369.0 676.0 3,292.0 3,223.0 178.0
------------------- ------------- --------- ------- ----------- ---------
At 31 December 2020
Derivative assets 3,585.0 630.0 2,040.0 915.0 -
Derivative
liabilities 3,729.0 - 134.0 3,422.0 173.0
7,314.0 630.0 2,174.0 4,337.0 173.0
------------------- ------------- --------- ------- ----------- ---------
The Company has 108 (2020: 154) derivative contracts with an
average fixed rate of 0.34% (2020: 0.18%).
25. Hedge accounting
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Hedged assets
Current hedge relationships (190.9) 197.5 (52.7) 134.8
Swap inception adjustment (26.2) (100.5) 0.9 (50.1)
Cancelled hedge relationships 78.2 84.6 53.1 42.7
Fair value adjustments on hedged
assets (138.9) 181.6 1.3 127.4
---------------------------------- ------- ------- ------- -------
Hedged liabilities
Current hedge relationships 19.6 (11.8) 8.5 (3.3)
Swap inception adjustment 3.3 6.2 0.1 2.8
Cancelled hedge relationships (1.4) - 0.2 -
De-designated hedge relationships (1.8) (2.6) - (2.6)
Fair value adjustments on hedged
liabilities 19.7 (8.2) 8.8 (3.1)
---------------------------------- ------- ------- ------- -------
The 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).
The tables below analyse the Group's and Company's portfolio
hedge accounting for fixed rate loans and advances to
customers:
Group 2021 Group 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 12,364.3 12,550.2 11,282.4 11,159.7
Cumulative fair value adjustments (190.9) 187.4 197.5 (156.9)
Fair value adjustments for
the period (297.8) 298.9 107.3 (116.8)
Cumulative fair value on cancelled
hedge relationships 78.2 - 84.6 -
The cumulative fair value adjustments of the hedging instrument
comprise GBP187.7m (2020: GBP0.7m) recognised within derivative
assets and GBP0.3m (2020: GBP157.6m) recognised within derivative
liabilities.
1. Hedge accounting (continued)
Company 2021 Company 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 3,211.7 3,233.0 3,772.2 3,699.0
Cumulative fair value adjustments (52.7) 52.7 134.7 (89.9)
Fair value adjustments for
the period (104.1) 103.7 72.2 (80.6)
Cumulative fair value on cancelled
hedge relationships 53.1 - 42.7 -
The cumulative fair value adjustments of the hedging instrument
comprise GBP52.8m (2020: GBP0.2m) recognised within derivative
assets and GBP0.1m (2020: GBP90.1m) recognised within derivative
liabilities.
The movement in cancelled hedge relationships is as follows:
Group Group Company Company
2021 2020 2021 2020
Hedged assets GBPm GBPm GBPm GBPm
At 1 January 84.6 20.4 42.7 16.7
New cancellations(1) 33.5 86.1 32.9 38.2
Amortisation (39.9) (17.9) (22.5) (8.2)
Derecognition of hedged item - (4.0) - (4.0)
At 31 December 78.2 84.6 53.1 42.7
----------------------------- ------ ------ ------- -------
(1) Following the securitisation of mortgages during the year
and LIBOR swaps transferred to SONIA swaps through the IBOR
transition, the Group cancelled swaps which were effective prior to
the event, with the designated hedge moved to cancelled hedge
relationships to be amortised over the original life of the
swap.
The tables below analyse the Group's and Company's portfolio
hedge accounting for fixed rate amounts owed to retail
depositors:
Group 2021 Group 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 6,386.0 6,390.0 6,849.9 6,858.0
Cumulative fair value adjustments 19.6 (18.5) (11.8) 9.2
Fair value adjustments for
the period 27.4 (26.1) (4.1) 6.8
The cumulative fair value adjustments of the hedging instrument
comprise GBP0.3m (2020: GBP9.4m) recognised within derivative
assets and GBP18.8m (2020: GBP0.2m) recognised within derivative
liabilities.
25. Hedge accounting (continued)
Company 2021 Company 2020
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 3,087.9 3,090.0 3,050.4 3,050.0
Cumulative fair value adjustments 8.5 (8.5) (3.3) 3.3
Fair value adjustments for
the period 11.8 (11.6) (1.0) 3.8
The cumulative fair value adjustments of the hedging instrument
comprise GBP0.2m (2020: GBP3.3m) recognised within derivative
assets and GBP8.7m (2020: nil) recognised within derivative
liabilities.
26. Other assets
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Prepayments 9.3 7.3 7.4 4.2
Other assets 0.9 1.8 0.9 1.5
10.2 9.1 8.3 5.7
------------- ----- ----- ------- -------
27. Deferred taxation asset
Losses
carried Accelerated Share-based IFRS 9 transitional
forward depreciation payments adjustments Others(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 0.9 0.1 2.6 0.7 0.5 4.8
Profit or loss
credit/(charge) - 0.3 0.9 - (0.4) 0.8
Transferred to corporation
tax liability - - (0.6) - - (0.6)
Tax taken directly to
OCI - - - - (0.5) (0.5)
Tax taken directly to
equity - - 0.2 - - 0.2
At 31 December 2020 0.9 0.4 3.1 0.7 (0.4) 4.7
Profit or loss
(charge)/credit (0.4) 0.1 1.7 - (1.2) 0.2
Transferred to corporation
tax liability - - (1.4) - - (1.4)
Tax taken directly to
OCI - - - - 0.5 0.5
Tax taken directly to
equity - - 1.6 - - 1.6
At 31 December 2021 0.5 0.5 5.0 0.7 (1.1) 5.6
--------------------------- -------- ------------- ----------- ------------------- --------- -----
(1) Others includes deferred taxation assets recognised on
financial assets classified as FVOCI, derivatives and short-term
timing differences.
1. Deferred taxation asset (continued)
In 2021, the profit or loss (charge)/credit includes a credit of
GBP0.4m from the deferred tax rate change (2020: charge of
GBP0.3m).
As at 31 December 2021, the Group had GBP3.5m (2020: GBP3.5m) of
losses for which a deferred tax asset has not been recognised as
the Group does not expect sufficient future profits to be available
to utilise the losses.
Accelerated Share-based IFRS 9 transitional Unpaid
depreciation payments adjustments bonus Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 0.1 1.8 0.3 - 2.2
Profit or loss credit 0.3 1.2 - - 1.5
Transferred to corporation
tax liability - (0.8) - - (0.8)
Tax taken directly to
equity - 0.2 - - 0.2
At 31 December 2020 0.4 2.4 0.3 - 3.1
Profit or loss
(charge)/credit (0.1) 1.4 - 0.2 1.5
Transferred to corporation
tax liability - (1.3) - - (1.3)
Tax taken directly to
equity - 1.6 - - 1.6
At 31 December 2021 0.3 4.1 0.3 0.2 4.9
--------------------------- ------------- ----------- ------------------- ------ -----
28. Property, plant and equipment
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2020 19.3 2.7 14.4 12.7 1.3 50.4
Additions(1) - 0.3 2.5 0.6 - 3.4
Disposals and
write-offs(2) - - (3.0) (0.2) - (3.2)
Foreign
exchange
difference (0.1) - (0.1) - - (0.2)
At 31 December
2020 19.2 3.0 13.8 13.1 1.3 50.4
Additions(1) - - 2.6 0.6 0.1 3.3
Disposals and
write-offs(2) (2.8) (0.1) (1.3) (0.5) (0.2) (4.9)
Foreign
exchange
difference 0.1 - 0.1 - - 0.2
At 31 December
2021 16.5 2.9 15.2 13.2 1.2 49.0
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2020 1.1 0.5 6.1 1.0 0.1 8.8
Charged in
year 0.3 0.4 2.9 1.8 0.2 5.6
Disposals and
write-offs(2) - - (3.0) (0.2) - (3.2)
At 31 December
2020 1.4 0.9 6.0 2.6 0.3 11.2
Charged in
year(3) 0.9 0.2 2.9 1.5 0.1 5.6
Disposals and
write-offs(2) (0.8) (0.1) (1.3) (0.5) (0.2) (2.9)
At 31 December
2021 1.5 1.0 7.6 3.6 0.2 13.9
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2021 15.0 1.9 7.6 9.6 1.0 35.1
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2020 17.8 2.1 7.8 10.5 1.0 39.2
(1) Additions include modifications of GBP0.4m (2020: nil) of
right of use assets.
(2) During 2021 the Group disposed of a property for proceeds of
GBP2.0m and wrote off fully depreciated assets of GBP2.9m. In 2020,
the Group wrote off fully depreciated assets of GBP3.2m.
(3) Includes GBP0.6m of impairment on property sold during the
year which is included in note 12 integration cost (2020: nil).
28. Property, plant and equipment (continued)
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Company GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2020 11.5 2.2 9.2 4.9 0.1 27.9
Additions(1) - 0.3 1.3 0.6 - 2.2
Disposals and
write-offs(2) - - (2.7) - - (2.7)
At 31 December
2020 11.5 2.5 7.8 5.5 0.1 27.4
Additions(1) - - 1.4 0.6 - 2.0
Disposals and
write-offs(2) (2.8) (0.1) (1.2) (0.5) - (4.6)
At 31 December
2021 8.7 2.4 8.0 5.6 0.1 24.8
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2020 0.9 0.4 4.7 0.7 - 6.7
Charged in
year 0.2 0.2 1.7 0.8 - 2.9
Disposals and
write-offs(2) - - (2.7) - - (2.7)
At 31 December
2020 1.1 0.6 3.7 1.5 - 6.9
Charged in
year(3) 0.8 0.2 1.6 0.6 - 3.2
Disposals and
write-offs(2) (0.8) (0.1) (1.2) (0.5) - (2.6)
At 31 December
2021 1.1 0.7 4.1 1.6 - 7.5
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2021 7.6 1.7 3.9 4.0 0.1 17.3
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2020 10.4 1.9 4.1 4.0 0.1 20.5
(1) Additions include modifications of GBP0.4m (2020: nil) of
right of use assets.
(2) During 2021 the Company disposed of a property for proceeds
of GBP2.0m and wrote off fully depreciated assets of GBP2.6m. In
2020, the Company wrote off fully depreciated assets of
GBP2.7m.
(3) Includes GBP0.6m of depreciation on property sold during the
year which is included in note 12 integration cost (2020: nil).
29. Intangible assets
Computer
software
Development and Assets arising
costs licences on Combination(2) Total
Group GBPm GBPm GBPm GBPm
Cost
At 1 January 2020 0.5 15.4 23.6 39.5
Additions 1.8 2.6 - 4.4
Disposals and write-offs(1) - (1.3) - (1.3)
At 31 December 2020 2.3 16.7 23.6 42.6
Additions 1.4 2.8 - 4.2
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 3.7 16.0 23.4 43.1
--------------------------- ----------- --------- ------------------ -----
Amortisation
At 1 January 2020 - 6.8 1.3 8.1
Charged in year 0.1 3.6 4.5 8.2
Impairment in the year - - 7.0 7.0
Disposals and write-offs(1) - (1.3) - (1.3)
At 31 December 2020 0.1 9.1 12.8 22.0
Charged in year 0.5 3.2 5.8 9.5
Impairment reversal in
the year - - (3.1) (3.1)
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 0.6 8.8 15.3 24.7
---------------------------- --- ----- ----- -----
Net book value
At 31 December 2021 3.1 7.2 8.1 18.4
At 31 December 2020 2.2 7.6 10.8 20.6
----------------------------
(1) During the year the Group wrote off fully amortised
assets.
(2) Assets arising on Combination comprise broker relationships
of GBP5.0m (2020: GBP5.8m), technology of GBP1.9m (2020: GBP2.9m),
brand name of GBP0.8m (2020: GBP1.2m) and banking licence of
GBP0.4m (2020: GBP0.9m). The carrying value of the intangible
assets are reviewed each reporting period, a GBP3.1m impairment
reversal (2020: GBP7.0m impairment charge) was recognised in
relation to broker relationships due to less severe impacts of the
COVID-19 pandemic than originally estimated.
The Directors have considered the carrying value of intangible
assets and determined that there are no indications of impairment
at the year end.
29. Intangible assets (continued)
Development Computer software
costs and licences Total
Company GBPm GBPm GBPm
Cost
At 1 January 2020 - 13.5 13.5
Additions - 2.2 2.2
Disposals and write-offs(1) - (1.0) (1.0)
At 31 December 2020 - 14.7 14.7
Additions 1.4 2.2 3.6
Disposals and write-offs(1) - (2.7) (2.7)
At 31 December 2021 1.4 14.2 15.6
---------------------------- ----------------- -----
Amortisation
At 1 January 2020 - 5.8 5.8
Charged in year - 2.9 2.9
Disposals and write-offs(1) - (1.0) (1.0)
At 31 December 2020 - 7.7 7.7
Charged in year - 2.9 2.9
Disposals and write-offs(1) - (2.7) (2.7)
At 31 December 2021 - 7.9 7.9
---------------------------- ----------- ----------------- -----
Net book value
At 31 December 2021 1.4 6.3 7.7
At 31 December 2020 - 7.0 7.0
----------------------------
(1) During the year the Company wrote off fully amortised
assets.
30. Investments in subsidiaries, intercompany loans and transactions with related parties
The Group
The balance between the Group and its ultimate parent at the
reporting date is summarised in the table below:
Intercompany Intercompany
loans receivable loans receivable
2021 2020
Group GBPm GBPm
At 1 January - -
Additions 0.6 -
At 31 December 0.6 -
The transactions with OSBG during the year comprise GBP1.4m
transaction costs for the issuance of OSBG AT1 securities funded by
the Company partially offset by GBP0.8m cash received in the
Company on OSBG share issues.
The Company
The balances between the Company, its parent and its
subsidiaries at the reporting date are summarised in the table
below:
Investment Intercompany Intercompany
in subsidiaries loans receivable loans payable
Company GBPm GBPm GBPm
At 1 January 2020 708.9 2,920.5 (643.9)
Additions - 53.4 (6.2)
Repayments - (545.5) 612.2
At 31 December 2020 708.9 2,428.4 (37.9)
Additions - 85.7 (0.2)
Repayments - (126.6) 4.9
At 31 December 2021 708.9 2,387.5 (33.2)
-------------------- ---------------- ----------------- --------------
The Group and the Company assesses intercompany loans receivable
for impairment. No impairment was recognised during the year (2020:
nil).
Investments in subsidiaries are financial assets and
intercompany loans are financial assets and liabilities, all
carried at amortised cost.
30. Investments in subsidiaries, intercompany loans and transactions with related parties (continued)
A list of the Company's direct subsidiaries for 2021 is shown
below:
At 31 December 2021
Direct investments Activity Registered office Ownership
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
The Company holds ordinary shares in all its direct
subsidiaries.
OSB India Private Limited is owned 70.28% by the Company, 29.72%
by Easioption Limited and 0.001% by Reliance Property Loans
Limited.
31. Investments in subsidiaries, intercompany loans and transactions with related parties (continued)
A list of the Company's indirect subsidiaries for 2021 is shown
below:
At 31 December 2021
Indirect investments Activity Registered office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.2
plc Special purpose vehicle Churchill Place -
Canterbury Finance No.3
plc Special purpose vehicle Churchill Place -
Canterbury Finance No.4
plc Special purpose vehicle Churchill Place -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Charter Mortgages Mortgage administration
Limited and analytical services Charter Court 100%
CMF 2020-1 plc Special purpose vehicle Churchill Place -
CML Warehouse Number
2 Limited Special purpose vehicle Churchill Place -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I
Limited Holding company Reliance House 100%
Inter Bay Financial II
Limited Holding company Reliance House 100%
InterBay Asset Finance Asset finance and
Limited mortgage provider Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
All investments in subsidiaries are of ordinary shares.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the
Group's consolidated financial statements.
All of the above investments are reviewed annually for
impairment. Based on assessment of the future cash flows of each
entity no impairment has been recognised.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's direct subsidiaries for 2020 is shown
below:
At 31 December 2020
Registered
Direct investments Activity Office Ownership
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's indirect subsidiaries for 2020 is shown
below:
At 31 December 2020
Registered
Indirect investments Activity office Ownership
Reliance
5D Finance Limited Mortgage servicer House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.2 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.3 Churchill
plc Special purpose vehicle Place -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Mortgage administration
Charter Mortgages Limited and analytical services Charter Court 100%
Churchill
CMF 2020-1 plc Special purpose vehicle Place -
CML Warehouse Number
1 Limited Special purpose vehicle Bartholomew -
CML Warehouse Number Churchill
2 Limited Special purpose vehicle Place -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I Reliance
Limited Holding company House 100%
Inter Bay Financial II Reliance
Limited Holding company House 100%
InterBay Asset Finance Asset finance and Reliance
Limited mortgage provider House 100%
Reliance
Interbay Funding, Ltd Mortgage servicer House 100%
Reliance
Interbay Holdings Ltd Holding company House 100%
Reliance
Interbay ML, Ltd Mortgage provider House 100%
Precise Mortgage Funding Special purpose vehicle Great St. -
2014-1 plc Helen's
Precise Mortgage Funding Special purpose vehicle Great St. -
2014-2 plc Helen's
Precise Mortgage Funding Special purpose vehicle Great St. -
2015-1 plc Helen's
Precise Mortgage Funding Special purpose vehicle Great St. -
2015-3R plc Helen's
The following are the registered offices of the
subsidiaries:
Bartholomew -- 1 Bartholomew Lane, London, England, EC2N 2AX
Charter Court -- 2 Charter Court, Broadlands, Wolverhampton,
WV10 6TD
Churchill Place -- 5 Churchill Place, 10(th) Floor, London, E14
5HU
Guernsey -- 1(st) Floor, Tudor House, Le Bordage, St Peter Port,
Guernsey, GY1 1DB
Great St. Helen's, London -- 35 Great St. Helen's, London, EC3A
6AP
India -- Salarpuria Magnificia No. 78, 9(th) & 10(th) floor,
Old Madras Road, Bangalore, India, 560016.
Jersey -- 26 New Street, St Helier, Jersey, JE2 3RA
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4
4ET
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
During the year, the Group issued GBP150.0m of Fixed Rate
Resetting Perpetual Subordinated Securities to OSBG. Included
within this was GBP90.0m of Fixed Rate Resetting Perpetual
Subordinated Securities issued by the Company to OSBG. For further
details see note 43.
The transactions between the Company, its parent and its
subsidiaries are disclosed below:
2021 2020
Charged Charged
by/(to) by/(to)
the Company Balance the Company Balance
during the due to/(by) during the due to/(by)
year the Company year the Company
GBPm GBPm GBPm GBPm
Parent Company
OSB GROUP PLC - 0.6 - -
Direct investments
Easioption Limited - 0.5 - 0.5
Guernsey Home Loans Limited 0.1 7.7 0.2 8.8
Guernsey Home Loans Limited
(Guernsey) 0.2 15.5 0.5 23.9
Heritable Development Finance
Limited (1.5) (0.7) (1.3) (0.6)
Jersey Home Loans Limited - 2.0 - 2.5
Jersey Home Loans Limited
(Jersey) 1.2 88.6 2.1 111.6
OSB India Private Limited (9.5) 4.6 (9.3) 8.0
Prestige Finance Limited (0.2) 0.2 (3.7) (0.8)
Reliance Property Loans Limited - 2.8 0.1 3.3
Indirect investments
Charter Court Financial Services
Limited 9.0 1.1 4.3 4.1
Exact Mortgage Experts Limited (0.5) - - -
Charter Mortgages Limited - (0.1) - -
Broadlands Finance Limited - 0.1 - -
5D Finance Limited 0.4 46.4 - 0.6
Inter Bay Financial I Limited 0.2 19.7 0.3 19.6
Inter Bay Financial II Limited (0.1) (5.6) 0.6 (5.6)
InterBay Asset Finance Limited 1.2 133.8 1.1 94.9
Interbay Funding, Ltd (0.8) (26.8) (12.0) (30.9)
Interbay ML, Ltd 24.0 2,063.9 47.1 2,150.6
23.7 2,354.3 30.0 2,390.5
In addition to the above subsidiaries, the Company has
transactions with Kent Reliance Provident Society (KRPS), one of
its founding shareholders. KRPS runs member engagement forums for
the Company. In exchange, the Company provides KRPS with various
services including IT, finance and other support functions. During
the year the Company was charged for services provided by KRPS
amounting to GBP0.1m (2020: GBP0.2m). As at 31 December 2021, KRPS
had GBP0.2m (2020: GBP0.3m) deposited with the Company.
31. Amounts owed to credit institutions
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
BoE TFS - 2,568.6 - 1,500.4
BoE TFSME 4,203.1 1,000.1 2,378.6 400.1
Commercial repo 0.5 0.1 - -
Loans from credit institutions 0.6 1.4 - -
Cash collateral and margin
received 115.4 - 42.1 -
4,319.6 3,570.2 2,420.7 1,900.5
------------------------------- ------- ------- ------- -------
32. Amounts owed to retail depositors
The table below shows the Group's retail depositors by operating
segment, where the OSB segment also represents the Company's retail
depositors:
2021 2020
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 6,221.7 4,703.4 10,925.1 6,275.6 4,781.4 11,057.0
Variable rate
deposits 3,517.7 3,083.6 6,601.3 3,429.7 2,116.4 5,546.1
9,739.4 7,787.0 17,526.4 9,705.3 6,897.8 16,603.1
-------------------- ------- ------- -------- ------- ------- --------
33. Amounts owed to other customers
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Fixed rate deposits 50.3 46.0 5.7 5.8
Variable rate deposits 42.3 26.9 - -
92.6 72.9 5.7 5.8
34. Debt securities in issue
Group Group
2021 2020
GBPm GBPm
Asset-backed loan notes at
amortised cost 460.3 421.9
Amount due for settlement after 12
months 460.3 421.9
460.3 421.9
----------------------------------- ----- -----
34. Debt securities in issue (continued)
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.
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 31 December 2021, notes were issued through the following
funding vehicles:
Group Group
2021 2020
GBPm GBPm
CMF 2020-1 plc 199.8 288.6
Canterbury Finance No.3 plc 76.9 133.3
Canterbury Finance No.4 plc 183.6 -
460.3 421.9
---------------------------- ----- -----
35. Lease liabilities
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
At 1 January 11.7 13.3 3.9 4.3
New leases 0.7 0.1 0.6 0.1
Lease terminated (0.1) - - -
Lease repayments (1.9) (2.0) (0.7) (0.6)
Interest accruals 0.3 0.3 0.1 0.1
At 31 December 10.7 11.7 3.9 3.9
------------------ ----- ----- ------- -------
During the year, the Group incurred expenses of GBP0.2m (2020:
GBP0.7m) in relation to short-term leases and nil (2020: nil) in
relation to low-value assets.
36. Other liabilities
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Falling due within one year:
Accruals 23.1 19.7 13.1 9.9
Deferred income 0.9 0.6 0.9 0.6
Other creditors 5.5 7.5 3.3 3.3
29.5 27.8 17.3 13.8
----------------------------- ----- ----- ------- -------
37. Provisions and contingent liabilities
The Financial Services Compensation Scheme (FSCS) provides
protection of deposits for the customers of authorised financial
services firms, should a firm collapse. FSCS protects retail
deposits of up to GBP85k for single account holders and GBP170k for
joint holders. As OSB and CCFS both hold banking licences, the full
FSCS protection is available to customers of each bank.
The compensation paid out to consumers is initially funded
through loans from the BoE and HM Treasury. In order to repay the
loans and cover its costs, the FSCS charges levies on firms
regulated by the PRA and the Financial Conduct Authority (FCA). The
Group is among those firms and pays the FSCS a levy based on its
share of total UK deposits.
The Group has reviewed its current exposure to Payment
Protection Insurance (PPI) claims, following the FCA deadline for
PPI claims on 29 August 2019 and has recognised a provision of
GBP0.3m as at 31 December 2021 (2020: GBP0.3m). The Group has
maintained its provision for FCA conduct rules exposures of GBP1.2m
(2020: GBP1.2m) to cover potential future claims.
An analysis of the Group's and Company's FSCS and other
provisions is presented below:
2021 2020
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.5 0.2 1.8 (0.2) 1.6 0.2 1.6
Refund/(paid)
during the year - - - - 0.3 (0.2) - 0.1
Charge - - 0.2 0.2 - 0.1 - 0.1
At 31 December 0.1 1.5 0.4 2.0 0.1 1.5 0.2 1.8
----------------- ---- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
1. Provisions and contingent liabilities (continued)
2021 2020
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.4 0.1 1.6 (0.1) 1.6 0.1 1.6
Refund/(paid)
during the year - - - - 0.2 (0.2) - -
Charge - - 0.3 0.3 - - - -
At 31 December 0.1 1.4 0.4 1.9 0.1 1.4 0.1 1.6
----------------- ---- ---------------- ---------------- ----- ----- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in
connection with a multi-firm thematic review into forbearance
measures adopted by lenders in respect of a portion of the mortgage
market. The Group has responded to information requests from the
FCA. It is not possible to reliably predict or estimate the outcome
of the review and therefore its financial effect, if any, on the
Group.
38. Deferred taxation liability
The deferred tax liability recognised on the Combination relates
to the timing differences of the recognition of assets and
liabilities at fair value, where the fair values will unwind in
future periods in line with the underlying asset or liability. The
deferred tax liability has been measured using the relevant rates
for the expected periods of utilisation.
CCFS Combination
Group GBPm
At 1 January 2020 63.1
Profit or loss credit (14.8)
At 31 December 2020 48.3
Profit or loss credit (8.5)
At 31 December 2021 39.8
-------------------------- ----------------
In 2021, the profit or loss credit includes a debit of GBP5.6m
impact of the deferred tax rate change (2020: a debit of
GBP4.7m).
39. Subordinated liabilities
Group and Group and
Company Company
2021 2020
GBPm GBPm
At 1 January 10.5 10.6
Repayment of debt at maturity (0.2) (0.1)
At 31 December 10.3 10.5
-------------------------------- --------- ---------
1. Subordinated liabilities (continued)
The Group's and Company's outstanding subordinated liabilities
are summarised below:
Group and Group and
Company Company
2021 2020
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022
(LIBOR +5%) - 0.1
Floating rate subordinated loans 2022
(LIBOR +2%) 0.1 0.2
Fixed rate:
Subordinated liabilities 2024
(7.45%) 10.2 10.2
10.3 10.5
-------------------------------------- --------- ---------
The LIBOR-linked subordinated liabilities had a rate reset in
September 2021 before the cessation of LIBOR, these subordinated
liabilities are due to mature in September 2022.
The fixed rate subordinated liabilities are repayable at the
dates stated or earlier, in full, at the option of the Group with
the prior consent of the PRA. All subordinated liabilities are
denominated in Pounds Sterling and are unlisted.
The rights of repayment of the holders of these subordinated
liabilities are subordinated to the claims of all depositors and
all other creditors.
40. Perpetual Subordinated Bonds
Group and Group and
Company Company
2021 2020
GBPm GBPm
Sterling PSBs (4.5991%) - 22.3
Sterling PSBs (4.6007%) 15.2 15.3
15.2 37.6
The bonds are listed on the London Stock Exchange.
The GBP22.0m PSBs were redeemed on 7 September 2021 following
permission from the PRA and approval by the Board.
The 4.6007% bonds were issued with no discretion over the
payment of interest and may not be settled in the Group's own
equity. They are therefore classified as financial liabilities. The
coupon rate is 4.6007% until the next reset date on 27 August
2024.
41. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's and
Company's liabilities classified as financing activities within the
Statement of Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities PSBs
(see note (see note (see note (see note
31) 34) 39) 40) Total
Group 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 1,505.0 486.2 - - 1,991.2
Principal repayments (998.9) (104.6) (0.1) - (1,103.6)
Deconsolidation of
special purpose vehicles - (256.2) - - (256.2)
Non-cash movements:
Accrued interest movement (4.7) 0.2 - - (4.5)
At 31 December 2020 3,570.2 421.9 10.5 37.6 4,040.2
Cash movements:
Principal drawdowns 4,863.0 195.6 - - 5,058.6
Principal repayments (4,113.7) (159.5) (0.2) (22.0) (4,295.4)
Non-cash movements:
Accrued interest movement 0.1 2.3 - (0.4) 2.0
At 31 December 2021 4,319.6 460.3 10.3 15.2 4,805.4
-------------------------- ------------- --------------- ------------ ---------- ---------
41. Reconciliation of cash flows for financing activities (continued)
Amounts owed
to credit Subordinated
institutions Deemed Loans liabilities PSBs
(see note (see note (see note (see note
31) 20) 39) 40) Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2020 1,671.1 240.2 10.6 37.6 1,959.5
Cash movements:
Principal drawdowns 905.0 154.6 - - 1,059.6
Principal repayments (672.8) (91.8) (0.1) - (764.7)
Non-cash movements:
Deconsolidation of
special purpose vehicles - (236.8) - - (236.8)
Accrued interest movement (2.8) - - - (2.8)
At 31 December 2020 1,900.5 66.2 10.5 37.6 2,014.8
Cash movements:
Principal drawdowns 2,965.2 198.4 - - 3,163.6
Principal repayments (2,445.1) (121.8) (0.2) (22.0) (2,589.1)
Non-cash movements:
Accrued interest movement 0.1 - - (0.4) (0.3)
At 31 December 2021 2,420.7 142.8 10.3 15.2 2,589.0
-------------------------- ------------- ------------ ------------ ---------- ---------
42. Share capital
Number of
shares authorised Nominal
and fully value Premium
Ordinary shares paid GBPm GBPm
At 1 January 2020 445,443,454 4.5 864.2
Shares issued under OSB employee share
plans 1,860,744 - 2.6
Cancellation of OneSavings Bank plc
GBP0.01 share capital and share premium (447,304,198) (4.5) (866.8)
Issuance of OneSavings Bank plc GBP0.01
share capital 447,304,198 4.5 -
At 31 December 2020 447,304,198 4.5 -
At 31 December 2021 447,304,198 4.5 -
----------------------------------------- ------------------ ------- -------
As part of the insertion of OSBG, the existing listed share
capital and share premium of the Company was cancelled on 27
November 2020 and the share capital and share premium amounts of
the Company transferred to retained earnings. The Company
subsequently issued the same number of new unlisted GBP0.01
ordinary shares from retained earnings to OSBG.
The holders of ordinary shares are entitled to receive dividends
as declared from time to time, and are entitled to one vote per
share at meetings of the Company. All ordinary shares rank equally
with regard to the Company's residual assets.
All ordinary shares issued in the current and prior year were
fully paid.
43. Other reserves
The Group's and Company's other reserves are as follows:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Distributable:
Share-based payment 11.7 7.8 9.4 6.7
Capital contribution 1.7 - - -
FVOCI 0.6 1.0 - (0.1)
Foreign exchange (1.1) (1.0) - -
AT1 securities 150.0 60.0 90.0 60.0
162.9 67.8 99.4 66.6
--------------------- ----- ----- ------- -------
1. Other reserves (continued)
FVOCI reserve
The FVOCI reserve represents the cumulative net change in the
fair value of investment securities measured at FVOCI.
Foreign exchange reserve
The foreign exchange reserve relates to the revaluation of the
Group's Indian subsidiary, OSB India Private Limited.
AT1 Securities
AT1 securities comprised GBP60.0m of Fixed Rate Resetting
Perpetual Subordinated Contingent Convertible Securities that
qualify as AT1 capital under the Capital Requirements Directive and
Regulation (CRD IV). The securities will be subject to full
conversion into ordinary shares of OSB in the event that its Common
Equity Tier 1 (CET1) capital ratio falls below 7%. The AT1
securities will pay interest at a rate of 9.125% per annum until
the first reset date of 25 May 2022, with the reset interest rate
equal to 835.9 basis points over the five-year semi-annual mid-swap
rate for such a period. Interest is paid semi-annually on 25 May
and 25 November. OSB may, at any time, cancel any interest payment
at its full discretion and must cancel interest payments in certain
circumstances specified in the terms and conditions of the AT1
securities. The AT1 securities are perpetual with no fixed
redemption date. OSB may, in its discretion and subject to
satisfying certain conditions, redeem all (but not some) of the AT1
securities at the principal amount outstanding plus any accrued but
unpaid interest from the first reset date and on any interest
payment date thereafter. These were redeemed on 7 October 2021 at a
premium, with the premium of GBP3.5m recognised directly in
equity.
On 7 October 2021, the Group issued in total GBP150.0m of new
AT1 securities, GBP90.0m issued by the Company and GBP60.0m issued
by Charter Court Financial Services Limited. These AT1 securities
are Fixed Rate Resetting Perpetual Subordinated Securities that
qualify as AT1 capital under CRD IV. The securities will pay
interest at a rate of 6% per annum until the first reset date of 7
April 2027, with the reset interest rate equal to 539.3 basis
points over the 5-year Gilt Rate (benchmark gilt) for such a
period. Interest is paid semi-annually in April and October. The
Group may, at any time, cancel any interest payment at its full
discretion and must cancel interest payments in certain
circumstances specified in the terms and conditions of the
securities. The securities are perpetual with no fixed redemption
date. The Group may, in its discretion and subject to satisfying
certain conditions, redeem all (but not some) of the AT1 securities
at the principal amount outstanding plus any accrued but unpaid
interest from the first reset date and on any interest payment date
thereafter.
1. Other reserves (continued)
On 7 October 2021, the Company issued new Additional Tier 1
securities. Additional Tier 1 securities comprise GBP90.0m of Fixed
Rate Resetting Perpetual Subordinated Securities that qualify as
Additional Tier 1 capital under the CRD IV. The securities will pay
interest at a rate of 6% per annum until the first reset date of 07
April 2027, with the reset interest rate equal to 539.3 basis
points over the 5-year Gilt Rate (benchmark gilt) for such a
period. Interest is paid semi-annually in April and October. The
Company may, at any time, cancel any interest payment at its full
discretion and must cancel interest payments in certain
circumstances specified in the terms and conditions of the
securities. The securities are perpetual with no fixed redemption
date. The Company may, in its discretion and subject to satisfying
certain conditions, redeem all (but not some) of the AT1 securities
at the principal amount outstanding plus any accrued but unpaid
interest from the first reset date and on any interest payment date
thereafter.
44. Financial commitments and guarantees
a) The Group did not have any contracted or anticipated capital expenditure commitments not provided for as at 31 December 2021 (2020: nil).
b) The Group's minimum lease commitments under operating leases not subject to IFRS 16 are summarised in the table below:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Land and buildings: due within:
One year - 0.1 - 0.1
- 0.1 - 0.1
-------------------------------- ----- ----- ------- -------
c) Undrawn loan facilities:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
OSB mortgages 706.4 547.2 577.5 522.0
CCFS mortgages 434.5 420.8 - -
Asset Finance 14.4 11.5 - -
1,155.3 979.5 577.5 522.0
--------------- ------- ----- ------- -------
Undrawn loan facilities are approved loan applications which
have not yet been exercised. They are payable on demand and are
usually drawn down or expire within three months.
d) The Group did not have any issued financial guarantees as at 31 December 2021 (2020: nil).
45. Risk management
Overview
Financial instruments form the vast majority of the Group's and
Company's assets and liabilities. The Group manages risk on a
consolidated basis and risk disclosures that follow are provided on
this basis.
Types of financial instrument
Financial instruments are a broad definition which includes
financial assets, financial liabilities and equity instruments. The
main financial assets of the Group are loans to customers and
liquid assets, which in turn consist of cash in the BoE call
accounts, call accounts with other credit institutions, RMBS and UK
sovereign debt. These are funded by a combination of financial
liabilities and equity instruments. Financial liability funding
comes predominantly from retail deposits and drawdowns under the
BoE TFS and TFSME, supported by debt securities, subordinated debt,
wholesale and other funding. Equity instruments include own shares
and AT1 securities meeting the equity classification criteria. The
Group's main activity is mortgage lending; it raises funds or
invests in particular types of financial assets to meet customer
demand and manage the risks arising from its operations. The Group
does not trade in financial instruments for speculative
purposes.
The Group uses derivative instruments to manage its financial
risks. Derivative financial instruments (derivatives) are financial
instruments whose value changes in response to changes in
underlying variables such as interest rates. The most common
derivatives are futures, forwards and swaps. Of these, the Group
only uses swaps.
Derivatives are used by the Group solely to reduce (hedge) the
risk of loss arising from changes in market rates. Derivatives are
not used for speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its
risk exposures are interest rate swaps. Interest rate swaps convert
fixed interest rates to floating or vice versa. As with other
derivatives, the underlying product is not sold and payments are
based on notional principal amounts.
1. Risk management (continued)
Unhedged fixed rate liabilities create the risk of paying
above-the-market rate if interest rates subsequently decrease.
Unhedged fixed rate mortgages and liquid assets bear the opposite
risk of income below-the-market rate when rates go up. While fixed
rate assets and liabilities naturally hedge each other to a certain
extent, this hedge is usually never perfect because of maturity
mismatches and principal amounts.
The Group uses swaps to convert its instruments, such as
mortgages, deposits and liquid assets, from fixed or base
rate-linked rates to reference linked variable rates. This ensures
a guaranteed margin between the interest income and interest
expense, regardless of changes in the market rates.
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. During 2021 the FCA confirmed that LIBOR would be
discontinued on 31 December 2021.
In 2018, the Group set up an internal working group, comprising
all of the key business areas 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 ALCO.
Risk assessments have been completed to ensure this process is
managed in a measured and controlled manner.
The Group has no exposure to existing IBORs, other than to GBP
LIBOR. The Group no longer offers any LIBOR-linked loans and during
2021 all remaining LIBOR-linked derivatives with a maturity date
post Q1 2022 were cancelled and new SONIA-linked derivatives
entered into.
The Group adopted the Phase 1 amendments 'Interest Rate
Benchmark reform: Amendments to IFRS 9/IAS 39 and IFRS 7' in 2020.
These amendments modified specific hedge accounting requirements to
allow hedge accounting to continue for affected hedges during the
period of uncertainty before the hedged items or hedging
instruments are amended as a result of the interest rate benchmark
reform. The application of the Phase 1 amendments impacts the
Group's accounting in the following ways. Hedge accounting
relationships will continue even when, for IBOR fair value hedges,
the benchmark interest rate component may not be separately
identifiable.
The Group will not discontinue portfolio hedge accounting should
the retrospective assessment of hedge effectiveness for a hedging
relationship that is subject to the interest rate benchmark reform
fall outside the 80-125 per cent range. For portfolio hedging
relationships that are not subject to the interest rate benchmark
reform the entity continues to cease hedge accounting if
retrospective effectiveness is outside the 80-125 per cent
range.
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 (see
note 1 aa), 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. The Group, in regards to hedge
accounting has cancelled the LIBOR hedges to initiate new SONIA
hedges.
1. Risk management (continued)
Mortgages
At 31 December 2021, the Group had GBP6,293.0m (31 December
2020: GBP8,001.7m) of LIBOR-linked lending, including floating-rate
mortgages on LIBOR-linked rates and fixed-rate mortgages that would
have reverted to LIBOR-linked rates in the future, out of total
mortgages balances of GBP21,047.9m (31 December 2020:
GBP19,257.1m).
The Group has worked through the back book transition for
existing loans. Direct communication with impacted customers
regarding the cessation of LIBOR and its implications commenced
during the first half of 2021 and is now complete. All necessary
systemic changes including IT system modifications are complete and
the remaining LIBOR-linked mortgage balances will transition to a
LIBOR replacement rate, defined as the 3-month SONIA benchmark rate
plus the ISDA fixed adjustment spread of 0.1193%, at their first
rate resets in or after Q1 2022.
Investment securities
At 31 December 2021, the Group had GBP34.8m (2020: GBP118.7m) of
GBP LIBOR-linked investment securities, comprising RMBS loan notes,
which will either mature or transfer to SONIA coupons during Q1
2022.
Where LIBOR-linked investment securities do not transfer to
adopting SONIA as a reference rate, a synthetic LIBOR rate is
temporarily available for issuers to adopt. There are no concerns
on the performance of these investments. The Group will only
purchase SONIA-linked investment securities in future.
The FCA has confirmed it will allow the temporary use of a
synthetic LIBOR rate in all legacy LIBOR contracts, other than
cleared derivatives, that have not been changed by 31 December
2021. Synthetic LIBOR will be calculated in a way that does not
rely on submissions from panel banks, and is instead based on RFRs.
The availability of synthetic LIBOR is not guaranteed beyond the
end of 2022.
Retail savings
None of the OSB or CCFS current or back book retail savings
products have a GBP LIBOR component within the product.
Additional Tier 1 securities
The GBP60.0m AT1 securities, which were paying interest at a
rate of 9.125% per annum until their first reset date on 25 May
2022 when they would have reverted to a LIBOR swap rate, were
redeemed during October 2021.
Derivatives
As at 31 December 2021, the total nominal amount of the Group's
derivatives was GBP20,346.3m (31 December 2020: GBP19,080.2m), of
which the Group had LIBOR-linked swaps with a nominal value of
GBP436.0m (31 December 2020: GBP8,020.0m) and a fair value of
GBP(0.2)m (31 December 2020: GBP89.1m) hedging assets and
liabilities.
The remaining LIBOR-linked swaps at 31 December 2021 will mature
during Q1 2022.
Types of risk
The principal financial risks to which the Group is exposed are
credit, liquidity and market risks, the latter comprising interest
and exchange rate risk. In addition to financial risks, the Group
is exposed to various other risks, most notably operational,
conduct and compliance/regulatory, which are covered in the Risk
review on pages 32 to 40.
1. Risk management (continued)
Credit risk
Credit risk is the risk that losses may arise as a result of the
Group's borrowers or market counterparties failing to meet their
obligations to repay.
The Group has adopted the Standardised Approach for assessment
of credit risk regulatory capital requirements. This approach
considers risk weightings as defined under Basel II and Basel III
principles.
The classes of financial instruments to which the Group is most
exposed are loans and advances to customers, loans and advances to
credit institutions, cash in the BoE call account, call and current
accounts with other credit institutions and investment securities.
The maximum credit risk exposure equals the total carrying amount
of the above categories plus off-balance sheet undrawn committed
mortgage facilities.
Credit risk -- loans and advances to customers
Credit risk associated with mortgage lending is largely driven
by the housing market and level of unemployment. A recession and/or
high interest rates could cause pressure within the market,
resulting in rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's
Lending Policy. Changes to the policy are approved by the Group
Risk Committee, with mandates set for the approval of loan
applications.
The Group Credit Committee and ALCO regularly monitor lending
activity, taking appropriate actions to reprice products and adjust
lending criteria in order to control risk and manage exposure.
Where necessary and appropriate, changes to the Lending Policy are
recommended to the Group Risk Committee.
The following tables show the Group's and Company's maximum
exposure to credit risk and the impact of collateral held as
security, capped at the gross exposure amount, by impairment stage.
Capped collateral excludes the impact of forced sale discounts and
costs to sell.
2021
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,502.7 10,478.1 7,685.7 7,684.6 18,188.4 18,162.7
Stage 2 1,143.8 1,141.9 1,269.8 1,269.7 2,413.6 2,411.6
Stage 3 365.6 337.9 99.1 99.1 464.7 437.0
Stage 3
(POCI) 45.2 43.6 52.2 52.2 97.4 95.8
12,057.3 12,001.5 9,106.8 9,105.6 21,164.1 21,107.1
------- -------------- ----------- -------------- ----------- -------------- -----------
1. Risk management (continued)
2020
OSB CCFS Total
--------------------------- ---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 9,366.8 9,303.4 6,749.5 6,747.9 16,116.3 16,051.3
Stage 2 1,363.4 1,359.8 1,327.6 1,327.6 2,691.0 2,687.4
Stage 3 352.6 323.3 48.1 48.1 400.7 371.4
Stage 3
(POCI) 48.6 48.4 66.0 66.0 114.6 114.4
11,131.4 11,034.9 8,191.2 8,189.6 19,322.6 19,224.5
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands.
The Group uses indexed loan to value (LTV) ratios to assess the
quality of the uncapped collateral held. Property values are
updated to reflect changes in the HPI. A breakdown of loans and
advances to customers by indexed LTV is as follows:
2021 2020
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,293.3 428.2 2,721.5 13 1,740.3 419.3 2,159.6 11
50% - 60% 1,935.3 490.1 2,425.4 11 1,462.0 483.3 1,945.3 10
60% - 70% 4,179.0 1,241.9 5,420.9 26 2,813.4 1,109.3 3,922.7 20
70% - 80% 2,887.7 6,100.7 8,988.4 43 3,942.9 5,144.3 9,087.2 47
80% - 90% 513.2 844.4 1,357.6 6 879.1 1,033.7 1,912.8 10
90% - 100% 77.8 1.5 79.3 - 105.8 1.3 107.1 1
>100% 171.0 - 171.0 1 187.9 - 187.9 1
Total loans before
provisions 12,057.3 9,106.8 21,164.1 100 11,131.4 8,191.2 19,322.6 100
------------------ -------- ------- -------- --- -------- ------- -------- ---
1. Risk management (continued)
The table below shows the LTV banding for the OSB segments' two
major lending streams:
2021 2020
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,007.6 1,285.7 2,293.3 19 795.7 944.6 1,740.3 16
50% - 60% 1,693.7 241.6 1,935.3 16 1,228.1 233.9 1,462.0 13
60% - 70% 3,903.0 276.0 4,179.0 35 2,602.1 211.3 2,813.4 25
70% - 80% 2,647.7 240.0 2,887.7 24 3,693.4 249.5 3,942.9 35
80% - 90% 452.8 60.4 513.2 4 584.5 294.6 879.1 8
90% - 100% 66.2 11.6 77.8 1 89.4 16.4 105.8 1
>100% 165.1 5.9 171.0 1 171.4 16.5 187.9 2
Total loans
before provisions 9,936.1 2,121.2 12,057.3 100 9,164.6 1,966.8 11,131.4 100
------------------ ------- ----------- -------- --- ------- ----------- -------- ---
45. Risk management (continued)
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
2021
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 804.0 118.9 19.0 65.7 1,007.6
50% - 60% 1,532.0 105.1 40.1 16.5 1,693.7
60% - 70% 3,708.1 130.1 61.6 3.2 3,903.0
70% - 80% 2,423.7 224.0 - - 2,647.7
80% - 90% 249.5 165.9 - 37.4 452.8
90% - 100% 46.4 19.8 - - 66.2
>100% 104.0 30.6 - 30.5 165.1
Total loans before
provisions 8,867.7 794.4 120.7 153.3 9,936.1
---------------------- ---------- ---------- ------------ ------- -------
2020
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 643.3 80.6 12.5 59.3 795.7
50% - 60% 1,040.1 84.3 64.2 39.5 1,228.1
60% - 70% 2,407.4 132.0 56.4 6.3 2,602.1
70% - 80% 3,411.7 251.3 - 30.4 3,693.4
80% - 90% 370.1 214.4 - - 584.5
90% - 100% 54.1 35.3 - - 89.4
>100% 117.9 24.0 - 29.5 171.4
Total loans before
provisions 8,044.6 821.9 133.1 165.0 9,164.6
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
The tables below show the LTV analysis of the OSB Residential
sub-segment:
2021 2020
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% 1,173.3 111.8 0.6 1,285.7 835.8 105.1 3.7 944.6
50% - 60% 189.8 51.8 - 241.6 167.2 64.5 2.2 233.9
60% - 70% 240.2 35.8 - 276.0 151.7 58.1 1.5 211.3
70% - 80% 221.3 18.7 - 240.0 208.1 39.9 1.5 249.5
80% - 90% 56.5 3.9 - 60.4 274.8 19.3 0.5 294.6
90% - 100% 10.3 1.3 - 11.6 12.4 3.6 0.4 16.4
>100% 4.5 1.4 - 5.9 10.7 4.9 0.9 16.5
Total loans before
provisions 1,895.9 224.7 0.6 2,121.2 1,660.7 295.4 10.7 1,966.8
------------------ ------- ------- ------- ------- ------- ------- ------- -------
1. Risk management (continued)
The table below shows the LTV analysis of the four CCFS
sub-segment:
2021
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 104.8 261.0 30.2 32.2 428.2 5
50% - 60% 205.4 246.8 9.3 28.6 490.1 5
60% - 70% 702.4 480.1 14.9 44.5 1,241.9 14
70% - 80% 4,827.7 1,234.5 1.4 37.1 6,100.7 67
80% - 90% 560.5 268.9 0.5 14.5 844.4 9
90% - 100% 0.1 1.4 - - 1.5 -
Total loans before
provisions 6,400.9 2,492.7 56.3 156.9 9,106.8 100
------------------- ---------- ----------- -------- -------- ------- ---
2020
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 92.7 242.1 50.4 34.1 419.3 5
50% - 60% 196.0 233.9 17.9 35.5 483.3 6
60% - 70% 632.9 400.2 16.8 59.4 1,109.3 14
70% - 80% 3,916.2 1,155.7 21.1 51.3 5,144.3 62
80% - 90% 600.7 410.8 - 22.2 1,033.7 13
90% - 100% 0.5 0.8 - - 1.3 -
Total loans before
provisions 5,439.0 2,443.5 106.2 202.5 8,191.2 100
------------------- ---------- ----------- -------- -------- ------- ---
1. Risk management (continued)
The table below shows the LTV banding for the Company's
segments' two major lending streams:
2021 2020
BTL/SME Residential Total BTL/SME Residential Total
Company GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 708.3 1,213.9 1,922.2 20 560.9 880.7 1,441.6 17
50% - 60% 1,244.1 220.6 1,464.7 15 912.8 204.6 1,117.4 13
60% - 70% 3,167.5 273.4 3,440.9 37 1,978.7 183.1 2,161.8 25
70% - 80% 2,083.4 239.2 2,322.6 25 2,855.8 243.0 3,098.8 36
80% - 90% 249.0 59.8 308.8 3 322.7 292.4 615.1 7
90% - 100% 24.2 11.3 35.5 - 49.9 16.2 66.1 1
>100% 42.5 3.0 45.5 - 83.7 11.7 95.4 1
Total loans
before provisions 7,519.0 2,021.2 9,540.2 100 6,764.5 1,831.7 8,596.2 100
------------------ ------- ----------- ------- --- ------- ----------- ------- ---
The tables below show the LTV analysis of the Company's BTL/SME
sub-segment:
2021
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 616.8 6.8 19.0 65.7 708.3
50% - 60% 1,183.6 3.9 40.1 16.5 1,244.1
60% - 70% 3,102.7 - 61.6 3.2 3,167.5
70% - 80% 2,083.4 - - - 2,083.4
80% - 90% 211.6 - - 37.4 249.0
90% - 100% 24.2 - - - 24.2
>100% 8.5 3.5 - 30.5 42.5
Total loans before
provisions 7,230.8 14.2 120.7 153.3 7,519.0
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
2020
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 487.2 1.9 12.5 59.3 560.9
50% - 60% 806.5 2.6 64.2 39.5 912.8
60% - 70% 1,913.7 2.3 56.4 6.3 1,978.7
70% - 80% 2,820.5 4.9 - 30.4 2,855.8
80% - 90% 322.2 0.5 - - 322.7
90% - 100% 49.9 - - - 49.9
>100% 50.7 3.5 - 29.5 83.7
Total loans before
provisions 6,450.7 15.7 133.1 165.0 6,764.5
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the LTV analysis of the Company's
Residential sub-segment:
2021 2020
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,101.5 111.8 0.6 1,213.9 771.9 105.1 3.7 880.7
50% - 60% 168.8 51.8 - 220.6 137.9 64.5 2.2 204.6
60% - 70% 237.6 35.8 - 273.4 123.5 58.1 1.5 183.1
70% - 80% 220.6 18.6 - 239.2 201.6 39.9 1.5 243.0
80% - 90% 55.9 3.9 - 59.8 272.6 19.3 0.5 292.4
90% - 100% 10.0 1.3 - 11.3 12.2 3.6 0.4 16.2
>100% 1.6 1.4 - 3.0 5.9 4.9 0.9 11.7
Total loans before
provisions 1,796.0 224.6 0.6 2,021.2 1,525.6 295.4 10.7 1,831.7
------------------ ------- ------- ------- ------- ------- ------- ------- -------
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 in the Risk profile performance review on
pages 57 to 58.
A summary of the forbearance measures undertaken (excluding
COVID-19 related payment deferrals) during the year is shown below.
The balances disclosed reflect the year end balance of the accounts
where a forbearance measure was undertaken during the year.
Number At 31 December Number At 31 December
Group of accounts 2021 of accounts 2020
Forbearance type 2021 GBPm 2020 GBPm
Interest-only switch 159 18.6 108 14.5
Interest rate reduction 437 8.1 21 2.2
Term extension 271 16.6 431 27.1
Payment deferral 499 43.0 447 39.3
Voluntary-assisted sale 7 0.8 2 0.1
Payment concession (reduced monthly
payments) 51 12.1 34 2.1
Capitalisation of interest 65 1.1 2 0.1
Full or partial debt forgiveness 1,078 22.6 11 0.2
Total 2,567 122.9 1,056 85.6
------------------------------------ ------------ -------------- ------------ --------------
Loan type
First charge owner-occupier 424 34.8 176 27.1
Second charge owner-occupier(1) 1,931 38.7 665 22.7
Buy-to-Let 160 34.6 49 8.9
Commercial 52 14.8 166 26.9
Total 2,567 122.9 1,056 85.6
------------------------------------ ------------ -------------- ------------ --------------
The 2020 comparatives have been amended due to a revision to the
calculation methodology.
(1) Through 2021 the Group undertook an exercise and provided a
series of forbearance solutions and options to long-term arrears
customers on our Second charge portfolio to support and remedy the
accrued delinquency.
The COVID-19 payment deferrals scheme ended during 2021. At 31
December 2020 this represented only 1.3% of the Group's loan book
by value. For further information on forbearance see the Risk
profile performance review on page 57.
1. Risk management (continued)
Number At 31 December Number At 31 December
Company of accounts 2021 of accounts 2020
Forbearance type 2021 GBPm 2020 GBPm
Interest-only switch 128 14.4 78 9.6
Interest rate reduction 435 7.6 19 2.1
Term extension 76 8.2 19 1.7
Payment deferral 346 18.0 339 20.9
Voluntary-assisted sale 3 0.4 2 0.1
Payment concession (reduced monthly
payments) 38 6.4 31 1.8
Capitalisation 65 1.1 2 -
Full or partial debt forgiveness 1,077 22.6 11 0.2
Total 2,168 78.7 501 36.4
------------------------------------ ------------ -------------- ------------ --------------
Loan type
First charge owner-occupier 148 16.5 104 16.6
Second charge owner-occupier(1) 1,892 38.0 364 14.7
Buy-to-Let 128 24.2 33 5.1
Total 2,168 78.7 501 36.4
------------------------------------ ------------ -------------- ------------ --------------
The 2020 comparatives have been amended due to a revision to the
calculation methodology.
(1) Through 2021 the Company undertook an exercise and provided
a series of forbearance solutions and options to long term arrears
customers on our Second charge portfolio to support and remedy the
accrued delinquency.
The COVID-19 payment deferrals scheme ended during 2021. At 31
December 2020 this represented only 1.8% of the Company'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:
Group Group
2021 2020(1)
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- ------- -------- --- -------- ------- -------- ---
East Anglia 361.8 967.1 1,328.9 6 406.1 866.2 1,272.3 7
East Midlands 543.8 555.8 1,099.6 5 452.6 463.4 916.0 5
Greater London 4,983.7 3,052.6 8,036.3 39 4,842.0 2,837.4 7,679.4 40
Guernsey 26.3 - 26.3 - 35.8 - 35.8 -
Jersey 99.3 - 99.3 - 122.9 - 122.9 1
North East 153.9 244.4 398.3 2 139.0 208.4 347.4 2
North West 762.3 755.0 1,517.3 7 623.7 674.8 1,298.5 7
Northern Ireland 10.9 - 10.9 - 12.9 - 12.9 -
Scotland 35.2 226.0 261.2 1 41.3 214.2 255.5 1
South East 2,792.6 1,452.4 4,245.0 20 2,401.2 1,316.7 3,717.9 19
South West 825.5 544.3 1,369.8 7 752.7 478.5 1,231.2 6
Wales 272.1 240.6 512.7 2 246.8 209.9 456.7 2
West Midlands 706.9 629.8 1,336.7 7 738.5 529.2 1,267.7 7
Yorks and
Humberside 366.8 438.8 805.6 4 250.4 392.5 642.9 3
Total loans before
provisions 11,941.1 9,106.8 21,047.9 100 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)
Company Company
2021 2020
Region GBPm % GBPm %
------- --- ------- ---
East Anglia 301.3 3 337.6 4
East Midlands 439.4 5 321.1 4
Greater London 3,989.0 43 3,779.9 44
North East 123.9 1 110.8 1
North West 586.4 6 478.3 6
Northern Ireland 10.8 - 12.8 -
Scotland 29.0 - 39.2 -
South East 2,300.4 24 1,936.8 23
South West 688.5 7 608.5 7
Wales 218.8 2 194.3 2
West Midlands 570.6 6 583.5 7
Yorks and Humberside 282.1 3 193.4 2
Total loans before provisions 9,540.2 100 8,596.2 100
------------------------------- ------- --- ------- ---
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances
to customers into internal risk grades based on the 12 month PD
calculated at the reporting date. The PDs include a combination of
internal behavioural and credit bureau characteristics. The risk
grades are further grouped into the following credit quality
segments:
-- Excellent quality -- where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality -- where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality -- where the assets require closer monitoring and the risk
of default is of greater concern.
The credit grade for the Group's investment securities and loans
and advances to credit institutions is based on the external credit
rating of the counterparty.
1. Risk management (continued)
The following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage:
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Group 2021 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 5,305.7 148.4 - - 5,454.1
Good 5,079.2 687.1 - - 5,766.3
Satisfactory 113.5 232.4 - - 345.9
Lower 4.3 75.9 - - 80.2
Impaired - - 365.6 - 365.6
POCI - - - 45.2 45.2
CCFS
Excellent 5,126.6 319.1 - - 5,445.7
Good 2,519.6 693.9 - - 3,213.5
Satisfactory 35.0 147.7 - - 182.7
Lower 4.5 109.1 - - 113.6
Impaired - - 99.1 - 99.1
POCI - - - 52.2 52.2
18,188.4 2,413.6 464.7 97.4 21,164.1
------------- -------- ------- ----- ------- --------
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Group 2020 GBPm GBPm GBPm GBPm GBPm
OSB
Excellent 4,689.6 295.4 - - 4,985.0
Good 4,564.9 756.4 - - 5,321.3
Satisfactory 106.7 242.8 - - 349.5
Lower 5.6 68.8 - - 74.4
Impaired - - 352.6 - 352.6
POCI - - - 48.6 48.6
CCFS
Excellent 4,352.8 398.8 - - 4,751.6
Good 2,338.8 667.2 - - 3,006.0
Satisfactory 55.3 140.2 - - 195.5
Lower 2.6 121.4 - - 124.0
Impaired - - 48.1 - 48.1
POCI - - - 66.0 66.0
16,116.3 2,691.0 400.7 114.6 19,322.6
------------- -------- --------
1. Risk management (continued)
Stage
Stage Stage Stage 3
1 2 3 (POCI) Total
Company 2021 GBPm GBPm GBPm GBPm GBPm
Excellent 3,620.2 128.2 - - 3,748.4
Good 4,494.2 568.2 - - 5,062.4
Satisfactory 102.7 222.5 - - 325.2
Lower 3.6 65.6 - - 69.2
Impaired - - 294.0 - 294.0
POCI - - - 41.0 41.0
8,220.7 984.5 294.0 41.0 9,540.2
------------- ------- ------- ----- ------- -------
Company 2020
Excellent 3,092.9 256.0 - - 3,348.9
Good 3,888.9 674.1 - - 4,563.0
Satisfactory 95.6 228.7 - - 324.3
Lower 3.0 56.4 - - 59.4
Impaired - - 255.2 - 255.2
POCI - - - 45.4 45.4
7,080.4 1,215.2 255.2 45.4 8,596.2
------------- ------- ------- ----- ------- -------
The tables below show the Group's and Company's other financial
assets by credit risk rating grade:
Excellent Good Satisfactory Total
Group 2021 GBPm GBPm GBPm GBPm
Investment securities 491.4 - - 491.4
Loans and advances to credit
institutions 2,688.9 151.8 2.9 2,843.6
Derivative assets 43.0 142.7 - 185.7
3,223.3 294.5 2.9 3,520.7
----------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
Group 2020 GBPm GBPm GBPm GBPm
Investment securities 471.2 - - 471.2
Loans and advances to credit
institutions 2,432.9 233.4 9.9 2,676.2
Derivative assets 6.5 5.8 - 12.3
2,910.6 239.2 9.9 3,159.7
----------------------------- --------- ----- ------------ -------
1. Risk management (continued)
Excellent Good Satisfactory Total
Company 2021 GBPm GBPm GBPm GBPm
Investment securities 16.2 - - 16.2
Loans and advances to credit
institutions 1,373.6 31.4 - 1,405.0
Derivative assets 9.7 40.8 - 50.5
1,399.5 72.2 - 1,471.7
----------------------------- --------- ---- ------------ -------
Excellent Good Satisfactory Total
Company 2020 GBPm GBPm GBPm GBPm
Investment securities 15.0 - - 15.0
Loans and advances to credit
institutions 1,442.2 75.9 - 1,518.1
Derivative assets 4.7 - - 4.7
1,461.9 75.9 - 1,537.8
----------------------------- --------- ---- ------------ -------
Credit risk -- loans and advances to credit institutions and
investment securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk
arising from these investments is closely monitored and managed by
the Group's Treasury function. In managing these assets, Group
Treasury operates within guidelines laid down in the Group Market
and Liquidity Risk Policy approved by ALCO and performance is
monitored and reported to ALCO monthly, including through the use
of an internally developed rating model based on counterparty
credit default swap spreads.
The Group has limited exposure to emerging markets (Indian
operations) and non-investment grade debt. ALCO is responsible for
approving treasury counterparties.
During the year, the average balance of cash in hand, loans and
advances to credit institutions and investment securities on a
monthly basis was GBP2,926.0m (2020: GBP3,196.0m).
The tables below show the industry sector of the Group's loans
and advances to credit institutions and investment securities:
Group Group Company Company
2021 2020 2021 2020
GBPm % GBPm % GBPm % GBPm %
BoE(1) 2,555.9 76 2,308.8 73 1,350.0 95 1,390.4 91
Other banks 287.7 9 367.4 12 55.0 4 127.7 8
Central government 252.1 8 - - - - - -
Securitisation 239.3 7 471.2 15 16.2 1 15.0 1
Total 3,335.0 100 3,147.4 100 1,421.2 100 1,533.1 100
------------------- ------- --- ------- --- ------- --- ------- ---
(1) Balances with the BoE include GBP59.5m (2020: GBP52.3m) of
Group and GBP36.5m (2020: GBP34.0m) of the Company held in the cash
ratio deposit.
1. Risk management (continued)
The tables below show the geographical exposure of the Group's
loans and advances to credit institutions and investment
securities:
Group Group Company Company
2021 2020 2021 2020
GBPm % GBPm % GBPm % GBPm %
United Kingdom 3,328.0 100 3,137.5 100 1,421.2 100 1,533.1 100
India 7.0 - 9.9 - - - - -
Total 3,335.0 100 3,147.4 100 1,421.2 100 1,533.1 100
--------------- ------- --- ------- --- ------- --- ------- ---
The Group monitors exposure concentrations against a variety of
criteria, including asset class, sector and geography. To avoid
refinancing risks associated with any one counterparty, sector or
geographical region, the Board has set appropriate limits.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets
to fulfil obligations as they become due or the cost of raising
liquid funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence
in the solvency of the Group and to enable the Group to meet its
financial obligations as they fall due. This is achieved through
maintaining a prudent level of liquid assets and control of the
growth of the business. The Group has established a call account
with the BoE and has access to its contingent liquidity
facilities.
The Board has delegated the responsibility for liquidity
management to the Chief Executive Officer, assisted by ALCO, with
day-to-day management delegated to Treasury as detailed in the
Group Market and Liquidity Risk Policy. The Board is responsible
for setting risk appetite limits over the level and maturity
profile of funding and for monitoring the composition of the Group
financial position. For each material class of financial liability
a contractual maturity analysis is provided below.
The Group also monitors a range of triggers, defined in the
recovery plan, which are designed to capture liquidity stresses in
advance in order to allow sufficient time for management action to
take effect. These are monitored daily by the Risk team, with
breaches immediately reported to the Group Chief Risk Officer,
Chief Executive Officer, Chief Financial Officer and the Group
Treasurer.
1. Risk management (continued)
The tables below provide a contractual maturity analysis of the
Group's financial assets and liabilities:
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 5,004.6 2,350.3 7,458.5 2,713.0 -
Amounts owed to credit
institutions 4,319.6 42.1 1.0 - 4,203.2 73.3
Amounts owed to other
customers 92.6 14.8 8.1 45.0 24.7 -
Derivative liabilities 19.7 - 0.7 10.4 8.6 -
Debt securities in
issue 460.3 - - - 460.3 -
Lease liabilities 10.7 - 0.3 0.6 3.7 6.1
Subordinated
liabilities 10.3 - - 0.1 10.2 -
PSBs 15.2 - - - 15.2 -
Total liabilities 22,454.8 5,061.5 2,360.4 7,514.6 7,438.9 79.4
----------------------- -------- --------- --------- ---------- ---------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 2,843.6 2,667.8 52.0 10.1 - 113.7
Investment securities 491.4 - 172.7 6.1 312.6 -
Loans and advances to
customers 21,080.3 3.3 163.8 383.5 1,327.4 19,202.3
Derivative assets 185.7 - 0.1 5.4 179.9 0.3
Total assets 24,601.5 2,671.6 388.6 405.1 1,819.9 19,316.3
----------------------- -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (2,389.9) (4,361.7) (11,471.2) (17,090.2) 2,146.7
----------------------- -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 16,603.1 3,810.7 2,733.5 6,517.5 3,541.4 -
Amounts owed to credit
institutions 3,570.2 0.4 85.0 1,035.3 2,449.5 -
Amounts owed to other
customers 72.9 26.9 7.5 38.5 - -
Derivative liabilities 163.6 - 0.2 4.5 153.9 5.0
Debt securities in
issue 421.9 - - - 421.9 -
Lease liabilities 11.7 - 0.2 0.7 3.6 7.2
Subordinated
liabilities 10.5 - 0.2 0.1 10.2 -
PSBs 37.6 - 0.6 - - 37.0
Total liabilities 20,891.5 3,838.0 2,827.2 7,596.6 6,580.5 49.2
----------------------- -------- --------- --------- ---------- ---------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 2,676.2 2,512.8 111.1 18.3 - 34.0
Investment securities 471.2 - 0.3 - 470.9 -
Loans and advances to
customers 19,230.7 4.1 316.7 266.4 1,239.7 17,403.8
Derivative assets 12.3 - 1.3 3.7 7.1 0.2
Total assets 22,390.9 2,517.4 429.4 288.4 1,717.7 17,438.0
----------------------- -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (1,320.6) (3,718.4) (11,026.6) (15,889.4) 1,499.4
----------------------- -------- --------- --------- ---------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,739.4 3,157.5 1,361.7 3,889.5 1,330.7 -
Amounts owed to credit
institutions 2,420.7 42.1 - - 2,378.6 -
Amounts owed to other
customers 5.7 - 0.5 5.2 - -
Derivative liabilities 8.7 - 0.3 4.6 3.8 -
Lease liabilities 3.9 - - - 0.3 3.6
Subordinated
liabilities 10.3 - - 0.1 10.2 -
PSBs 15.2 - - - 15.2 -
Total liabilities 12,203.9 3,199.6 1,362.5 3,899.4 3,738.8 3.6
----------------------- -------- --------- --------- --------- ---------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 1,405.0 1,368.5 - - - 36.5
Investment securities 16.2 - - - 16.2 -
Loans and advances to
customers 9,476.4 - 40.8 126.8 337.1 8,971.7
Derivative assets 50.5 - - 1.9 48.4 0.2
Total assets 10,948.6 1,369.0 40.8 128.7 401.7 9,008.4
----------------------- -------- --------- --------- --------- ---------- ---------
Cumulative liquidity
gap (1,830.6) (3,152.3) (6,923.0) (10,260.1) (1,255.3)
----------------------- -------- --------- --------- --------- ---------- ---------
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,705.3 2,998.8 1,325.1 3,420.7 1,960.7 -
Amounts owed to credit
institutions 1,900.5 - 85.0 1,035.3 780.2 -
Amounts owed to other
customers 5.8 - 0.5 5.3 - -
Derivative liabilities 93.8 - - 1.1 88.8 3.9
Lease liabilities 3.9 - - 0.1 0.2 3.6
Subordinated
liabilities 10.5 - 0.2 0.1 10.2 -
PSBs 37.6 - 0.6 - - 37.0
Total liabilities 11,757.4 2,998.8 1,411.4 4,462.6 2,840.1 44.5
----------------------- -------- --------- --------- --------- --------- ---------
Financial asset by type
Cash in hand 0.5 0.5 - - - -
Loans and advances to
credit institutions 1,518.1 1,484.1 - - - 34.0
Investment securities 15.0 - - - 15.0 -
Loans and advances to
customers 8,531.7 - 151.9 82.6 269.0 8,028.2
Derivative assets 4.7 - 0.6 1.8 2.1 0.2
Total assets 10,070.0 1,484.6 152.5 84.4 286.1 8,062.4
----------------------- -------- --------- --------- --------- --------- ---------
Cumulative liquidity
gap (1,514.2) (2,773.1) (7,151.3) (9,705.3) (1,687.4)
----------------------- -------- --------- --------- --------- --------- ---------
1. Risk management (continued)
Liquidity risk -- contractual cash flows
The following tables provide an analysis of the Group's gross
contractual cash flows, derived using interest rates and
contractual maturities at the reporting date and excluding impacts
of early payments or non-payments:
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 17,554.7 9,305.7 5,883.7 2,365.3 -
Amounts owed to credit
institutions 4,319.6 4,359.8 45.2 5.2 4,236.1 73.3
Amounts owed to other
customers 92.6 92.6 22.9 45.0 24.7 -
Derivative liabilities 19.7 6.0 (0.4) 5.1 1.2 0.1
Debt securities in
issue 460.3 473.2 25.1 75.0 373.1 -
Lease liabilities 10.7 13.1 0.6 1.6 7.7 3.2
Subordinated liabilities 10.3 12.2 0.2 0.7 11.3 -
PSBs 15.2 16.8 0.2 0.5 16.1 -
Total liabilities 22,454.8 22,528.4 9,399.5 6,016.8 7,035.5 76.6
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 1,155.3 1,155.3 1,155.3 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,843.6 2,843.6 2,756.3 10.1 - 77.2
Investment securities 491.4 497.0 172.6 108.8 215.6 -
Loans and advances
to customers 21,080.3 41,290.2 374.4 1,331.0 5,711.9 33,872.9
Derivative assets 185.7 75.8 (1.4) 11.2 66.0 -
Total assets 24,601.5 44,707.1 3,302.4 1,461.1 5,993.5 33,950.1
------------------------ -------- ------------- --------- ------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors(1) 16,603.1 16,644.9 8,712.7 5,325.8 2,606.4 -
Amounts owed to credit
institutions(1) 3,570.2 3,585.8 86.0 1,037.7 2,462.1 -
Amounts owed to other
customers(1) 72.9 73.0 34.4 38.6 - -
Derivative liabilities 163.6 157.7 11.0 41.4 103.8 1.5
Debt securities in
issue(1) 421.9 426.4 17.8 53.1 355.5 -
Lease liabilities 11.7 13.2 0.5 1.2 6.4 5.1
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
PSBs 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 20,891.5 20,953.9 8,863.5 6,498.6 5,548.2 43.6
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 979.5 979.5 979.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,676.2 2,676.2 2,623.9 18.3 - 34.0
Investment securities 471.2 494.9 1.2 4.0 483.8 5.9
Loans and advances
to customers 19,230.7 36,156.7 373.4 1,132.4 4,960.5 29,690.4
Derivative assets 12.3 12.1 3.2 4.6 4.3 -
Total assets 22,390.9 39,340.4 3,002.2 1,159.3 5,448.6 29,730.3
------------------------ -------- ------------- --------- ------- ------- ---------
(1) The 2020 comparatives have been restated following a
misallocation of cash flows between time buckets in the prior
year.
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,739.4 9,720.5 6,467.9 2,288.6 964.0 -
Amounts owed to credit
institutions 2,420.7 2,443.3 43.3 1.8 2,398.2 -
Amounts owed to other
customers 5.7 5.7 0.5 5.2 - -
Derivative liabilities 8.7 8.2 0.1 5.0 3.0 0.1
Lease liabilities 3.9 4.4 0.2 0.5 2.4 1.3
Subordinated liabilities 10.3 10.3 0.2 0.1 10.0 -
PSBs 15.2 15.2 0.2 - 15.0 -
Total liabilities 12,203.9 12,207.6 6,512.4 2,301.2 3,392.6 1.4
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 577.5 577.5 577.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 1,405.0 1,405.0 1,405.0 - - -
Investment securities 16.2 16.3 0.7 0.1 15.5 -
Loans and advances
to customers 9,476.4 19,793.6 129.0 659.0 2,531.0 16,474.6
Derivative assets 50.5 50.5 (0.6) 3.3 47.8 -
Total assets 10,948.6 21,265.9 1,534.6 662.4 2,594.3 16,474.6
------------------------ -------- ------------- --------- ------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,705.3 9,686.7 6,490.7 2,200.4 995.6 -
Amounts owed to credit
institutions 1,900.5 1,877.7 60.5 1,036.1 781.1 -
Amounts owed to other
customers 5.8 5.8 0.5 5.3 - -
Derivative liabilities 93.8 93.3 5.0 25.3 61.6 1.4
Lease liabilities 3.9 4.9 0.2 0.3 2.0 2.4
Subordinated liabilities 10.5 13.1 0.4 0.5 12.2 -
PSBs 37.6 39.8 0.7 0.3 1.8 37.0
Total liabilities 11,757.4 11,721.3 6,558.0 3,268.2 1,854.3 40.8
------------------------ -------- ------------- --------- ------- ------- ---------
Off-balance sheet loan
commitments 522.0 522.0 522.0 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 1,518.1 1,518.1 1,484.1 - - 34.0
Investment securities 15.0 15.0 - - 15.0 -
Loans and advances
to customers 8,531.7 17,211.8 108.4 603.8 2,141.1 14,358.5
Derivative assets 4.7 4.3 1.3 2.1 0.9 -
Total assets 10,070.0 18,749.7 1,594.3 605.9 2,157.0 14,392.5
------------------------ -------- ------------- --------- ------- ------- ---------
The actual repayment profile of retail deposits may differ from
the analysis above due to the option of early withdrawal with a
penalty.
Cash flows on PSBs are disclosed up to the next interest rate
reset date.
The actual repayment profile of loans and advances to customers
may differ from the analysis above since many mortgage loans are
repaid prior to the contractual end date.
1. Risk management (continued)
Liquidity risk -- asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following
tables provide an analysis of the Group's encumbered and
unencumbered assets:
Group
2021
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 99.9 107.5 2,496.4 139.8 2,843.6
Investment securities 121.8 - 369.6 - 491.4
Loans and advances to
customers 6,373.7 - 2,746.3 11,960.3 21,080.3
Derivative assets - - - 185.7 185.7
Non-financial assets - - - (69.0) (69.0)
6,595.4 107.5 5,612.8 12,216.8 24,532.5
----------------------------- -------------- -------- -------------- -------- --------
Group
2020
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 211.1 95.0 2,256.5 113.6 2,676.2
Investment securities 161.0 - 310.2 - 471.2
Loans and advances to
customers 5,638.6 - 2,752.0 10,840.1 19,230.7
Derivative assets - - - 12.3 12.3
Non-financial assets - - - 263.6 263.6
6,010.7 95.0 5,319.2 11,229.6 22,654.5
----------------------------- -------------- -------- -------------- -------- --------
(1) Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
(2) Represents assets that are not restricted for use as
collateral, but the Group treats as available as collateral once
they are readily available to secure funding in the normal course
of business.
1. Risk management (continued)
Company
2021
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 36.7 36.5 1,313.5 18.3 1,405.0
Investment securities - - 16.2 - 16.2
Loans and advances to
customers 3,678.9 - - 5,797.5 9,476.4
Derivative assets - - - 50.5 50.5
Non-financial assets - - - 3,135.9 3,135.9
3,715.6 36.5 1,330.2 9,002.2 14,084.5
----------------------------- -------------- -------- -------------- -------- --------
Company
2020
Encumbered Unencumbered
------------------------ ------------------------
Pledged Available
as collateral Other(1) as collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 107.0 34.0 1,356.4 20.7 1,518.1
Investment securities - - 15.0 - 15.0
Loans and advances to
customers 3,064.0 - - 5,467.7 8,531.7
Derivative assets - - - 4.7 4.7
Non-financial assets - - - 3,304.8 3,304.8
3,171.0 34.0 1,371.9 8,797.9 13,374.8
----------------------------- -------------- -------- -------------- -------- --------
(1) Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
(2) Represents assets that are not restricted for use as
collateral, but the Group treats as available as collateral once
they are readily available to secure funding in the normal course
of business.
1. Risk management (continued)
Liquidity risk -- liquidity reserves
The tables below analyse the Group's liquidity reserves, where
carrying value is considered to be equal to fair value:
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Unencumbered balances with central
banks 2,496.4 2,256.5 1,313.5 1,356.4
Unencumbered cash and balances
with other banks 139.8 113.6 18.3 20.7
Other cash and cash equivalents 0.5 0.5 0.5 0.5
Unencumbered investment securities 369.6 310.2 16.2 15.0
3,006.3 2,680.8 1,348.5 1,392.6
----------------------------------- ------- ------- ------- -------
Market risk
Market risk is the risk of an adverse change in the Group's
income or the Group's net worth arising from movement in interest
rates, exchange rates or other market prices. Market risk exists,
to some extent, in all the Group's businesses. The Group recognises
that the effective management of market risk is essential to the
maintenance of stable earnings and preservation of shareholder
value.
Interest rate risk
The primary market risk faced by the Group is interest rate
risk. Interest rate risk is the risk of loss from adverse movement
in the overall level of interest rates. It arises from mismatches
in the timing of repricing of assets and liabilities, both on and
off-balance sheet. The Group does not run a trading book or take
speculative interest rate positions and therefore all interest rate
risk resides in the banking book (interest rate risk in the banking
book (IRRBB)). IRRBB is most prevalent in mortgage lending where
fixed rate mortgages are not funded by fixed rate deposits of the
same duration, or where the fixed rate risk is not hedged by a
fully matching interest rate derivative. Exposure is mitigated on a
continuous basis through the use of derivatives and reserve
allocations.
Currently interest rate risk is managed separately for OSB and
CCFS due to the use of different treasury management and asset and
liability management (ALM) systems. However, the methodology
applied to the setting of risk appetites was aligned across the
Group in 2020. Both Banks apply an economic value at risk approach
as well as an earnings at risk approach for interest rate risk and
basis risk. The interest rate sensitivity is impacted by
behavioural assumptions used by the Group; the most significant of
which are prepayments and reserve allocations. Expected prepayments
are modelled based on historical analysis and current market rates.
The reserve allocation strategy is approved by ALCO and set to
reflect the current balance sheet and future plans.
Economic value at risk is measured using the impact of six
different internally derived interest rate scenarios. The internal
scenarios are defined by ALCO and are based on three 'shapes' of
curve movement (shift, twist and flex). Historical data is used to
calibrate the severity of the scenarios to the Group's risk
appetite. The Board has set limits on interest rate risk exposure
of 2.25% and 1% of CET1 for OSB and CCFS, respectively.
1. Risk management (continued)
The table below shows the maximum decreases to net interest
income under these scenarios after taking into account the
derivatives:
2021 2020
Group GBPm GBPm
OSB 9.9 5.6
CCFS 1.1 0.7
11.0 6.3
Exposure for earnings at risk is measured by the impact of a
+/-50bps parallel shift in interest rates on the expected
profitability of the Group in the next 12 months. The risk appetite
limit is 2% of full year net interest income. The table below shows
the maximum decreases after taking into account the
derivatives:
2021 2020
Group GBPm GBPm
OSB(1) 0.5 (0.1)
CCFS(1) (0.4) 2.2
0.1 2.1
(1) Increases for OSB 2020 and CCFS 2021 due to product floors
earnings increases in both the +50bps and -50bps scenarios.
The Group is also exposed to basis risk. Basis risk is the risk
of loss from an adverse divergence in interest rates. It arises
where assets and liabilities reprice from different variable rate
indices. These indices may be market rates (e.g. BBR, LIBOR or
SONIA) or administered (e.g. the Group's SVR, other discretionary
variable rates, or that received on call accounts with other
banks).
The Group measures basis risk using the impact of five scenarios
on net interest income over a one-year period including movements
such as diverging base, LIBOR and SONIA rates. Historical data is
used to calibrate the severity of the scenarios to the Group's risk
appetite. The Board has set a limit on basis risk exposure of 4% of
full year net interest income. The table below shows the maximum
decreases to net interest income at 31 December 2021 and 2020:
2021 2020
Group GBPm GBPm
OSB 3.2 5.4
CCFS 3.8 8.0
7.0 13.4
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in
respect of its Indian operations. A 5% increase in exchange rates
would result in a GBP0.4m (2020: GBP0.4m) effect in profit or loss
and GBP0.5m (2020: GBP0.5m) in equity.
The Company is not exposed to foreign exchange risk since all
its assets and liabilities are denominated in Pounds Sterling.
1. Risk management (continued)
Structured entities
The structured entities consolidated within the Group at 31
December 2021 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 plc and CMF 2020-1 plc. These
entities hold legal title to a pool of mortgages which are used as
a security for issued debt. The transfer of mortgages fails
derecognition criteria because the Group retained the subordinated
notes and residual certificates issued and as such did not transfer
substantially the risks and rewards of ownership of the securitised
mortgages. Therefore, the Group is exposed to credit, interest rate
and other risks on the securitised mortgages.
Cash flows generated from the structured entities are
ring-fenced and are used to pay interest and principal of the
issued debt securities in a waterfall order according to the
seniority of the bonds. The structured entities are self-funded and
the Group is not contractually or constructively obliged to provide
further liquidity or financial support.
The structured entities consolidated within the Group at 31
December 2020 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc and CMF 2020-1 plc.
Unconsolidated structured entities
Structured entities, which were sponsored by the Group include
Precise Mortgage Funding 2017-1B plc, Charter Mortgage Funding
2017-1 plc, Precise Mortgage Funding 2018-1B plc, Charter Mortgage
Funding 2018-1 plc, Precise Mortgage Funding 2019-1B plc,
Canterbury Finance No.1 plc and Precise Mortgage Funding 2020-1B
plc.
These structured entities are not consolidated by the Group, as
the Group does not control the entities and is not exposed to the
risks and rewards of ownership from the securitised mortgages. The
Group has no contractual arrangements with the unconsolidated
structured entities other than the investments disclosed in note 18
and servicing the structured entities' mortgage portfolios.
The Group has not provided any support to the unconsolidated
structured entities listed and has no obligation or intention to do
so.
During 2021 the Group received GBP1.8m interest income (2020:
GBP5.0m) and GBP4.4m servicing income (2020: GBP4.6m) from
unconsolidated structured entities.
46. Financial instruments and fair values
1. Financial assets and financial liabilities
The following tables summarise the classification and carrying
value of the Group's financial assets and financial
liabilities:
2021
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 17 - - - 2,843.6 2,843.6
Investment securities 18 0.7 - 167.6 323.1 491.4
Loans and advances to
customers 19 17.7 - - 21,062.6 21,080.3
Derivative assets 24 - 185.7 - - 185.7
18.4 185.7 167.6 24,229.8 24,601.5
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 17,526.4 17,526.4
Amounts owed to credit
institutions 31 - - - 4,319.6 4,319.6
Amounts owed to other
customers 33 - - - 92.6 92.6
Debt securities in
issue 34 - - - 460.3 460.3
Derivative liabilities 24 - 19.7 - - 19.7
Subordinated
liabilities 39 - - - 10.3 10.3
PSBs 40 - - - 15.2 15.2
- 19.7 - 22,424.4 22,444.1
----------------------- ---- ---------- ----------- ----- --------- ---------
46. Financial instruments and fair values (continued)
2020
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to credit
institutions 17 - - - 2,676.2 2,676.2
Investment securities 18 - - 285.0 186.2 471.2
Loans and advances to
customers 19 19.1 - - 19,211.6 19,230.7
Derivative assets 24 - 12.3 - - 12.3
19.1 12.3 285.0 22,074.5 22,390.9
----------------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 16,603.1 16,603.1
Amounts owed to credit
institutions 31 - - - 3,570.2 3,570.2
Amounts owed to other
customers 33 - - - 72.9 72.9
Debt securities in issue 34 - - - 421.9 421.9
Derivative liabilities 24 - 163.6 - - 163.6
Subordinated liabilities 39 - - - 10.5 10.5
PSBs 40 - - - 37.6 37.6
- 163.6 - 20,716.2 20,879.8
----------------------------- ---- ---------- ----------- ----- --------- ---------
2021
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 17 - - - 1,405.0 1,405.0
Investment securities 18 0.7 - 15.5 - 16.2
Loans and advances to
customers 19 - - - 9,476.4 9,476.4
Derivative assets 24 - 50.5 - - 50.5
0.7 50.5 15.5 10,881.9 10,948.6
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 9,739.4 9,739.4
Amounts owed to credit
institutions 31 - - - 2,420.7 2,420.7
Amounts owed to other
customers 33 - - - 5.7 5.7
Derivative liabilities 24 - 8.7 - - 8.7
Subordinated
liabilities 39 - - - 10.3 10.3
PSBs 40 - - - 15.2 15.2
- 8.7 - 12,191.3 12,200.0
----------------------- ---- ---------- ----------- ----- --------- ---------
1. Financial instruments and fair values (continued)
2020
Mandatorily Amortised Total carrying
FVTPL FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 0.5
Loans and advances to credit
institutions 17 - - 1,518.1 1,518.1
Investment securities 18 - 15.0 - 15.0
Loans and advances to
customers 19 - - 8,531.7 8,531.7
Derivative assets 24 4.7 - - 4.7
4.7 15.0 10,050.3 10,070.0
----------------------------- ---- ----------- ----- --------- --------------
Liabilities
Amounts owed to retail
depositors 32 - - 9,705.3 9,705.3
Amounts owed to credit
institutions 31 - - 1,900.5 1,900.5
Amounts owed to other
customers 33 - - 5.8 5.8
Derivative liabilities 24 93.8 - - 93.8
Subordinated liabilities 39 - - 10.5 10.5
PSBs 40 - - 37.6 37.6
93.8 - 11,659.7 11,753.5
----------------------------- ---- ----------- ----- --------- --------------
The Group has no financial assets or financial liabilities
classified as held for trading.
1. Fair values
The following tables summarise the carrying value and estimated
fair value of financial instruments not measured at fair value in
the Consolidated Statement of Financial Position:
2021 2020
Carrying Estimated Carrying Estimated
value fair value value fair value
Group GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.5 0.5
Loans and advances to credit
institutions 2,843.6 2,843.6 2,676.2 2,676.2
Investment securities 323.1 323.8 186.2 186.6
Loans and advances to customers 21,062.6 21,079.5 19,211.6 19,352.0
24,229.8 24,247.4 22,074.5 22,215.3
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 17,526.4 17,524.9 16,603.1 16,666.1
Amounts owed to credit
institutions 4,319.6 4,319.6 3,570.2 3,570.2
Amounts owed to other customers 92.6 92.6 72.9 72.9
Debt securities in issue 460.3 460.3 421.9 421.9
Subordinated liabilities 10.3 10.6 10.5 10.7
PSBs 15.2 14.7 37.6 32.3
22,424.4 22,422.7 20,716.2 20,774.1
-------------------------------- -------- ----------- -------- -----------
1. Financial instruments and fair values (continued)
2021 2020
Carrying Estimated Carrying Estimated
value fair value value fair value
Company GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.5 0.5 0.5 0.5
Loans and advances to credit
institutions 1,405.0 1,405.0 1,518.1 1,518.1
Loans and advances to customers 9,476.4 9,448.4 8,531.7 8,670.1
10,881.9 10,853.9 10,050.3 10,188.7
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 9,739.4 9,737.3 9,705.3 9,736.4
Amounts owed to credit
institutions 2,420.7 2,420.7 1,900.5 1,900.5
Amounts owed to other customers 5.7 5.7 5.8 5.8
Subordinated liabilities 10.3 10.6 10.5 10.7
PSBs 15.2 14.7 37.6 32.3
12,191.3 12,189.0 11,659.7 11,685.7
-------------------------------- -------- ----------- -------- -----------
The fair values in these tables are estimated using the
valuation techniques below. The estimated fair value is stated as
at 31 December and may be significantly different from the amounts
which will actually be paid on the maturity or settlement dates of
each financial instrument.
Cash in hand
This represents physical cash across the Group's branch network
where fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current
accounts and call accounts with central governments and other banks
with an original maturity of less than three months. Fair value is
not considered to be materially different to carrying value.
Investment securities
Investment securities' fair values are provided by a third party
and are based on the market values of similar financial
instruments. The fair value of investment securities held at FVTPL
is measured using a discounted cash flow model.
Loans and advances to customers
This mainly represents secured mortgage lending to customers.
The fair value of fixed rate mortgages has been estimated by
discounting future cash flows at current market rates of interest.
Future cash flows include the impact of expected credit losses. The
interest rate on variable rate mortgages is considered to be equal
to current market product rates and as such fair value is estimated
to be equal to carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated
by discounting future cash flows at current market rates of
interest. Retail deposits at variable rates and deposits payable on
demand are considered to be at current market rates and as such
fair value is estimated to be equal to carrying value.
1. Financial instruments and fair values (continued)
Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE TFS and
TFSME and commercial repos. Fair value is considered to be equal to
carrying value.
Amounts owed to other customers
This represents saving products to corporations and local
authorities. The fair value of fixed rate deposits is estimated by
discounting future cash flows at current market rates of interest.
Deposits at variable rates are considered to be at current market
rates and the fair value is estimated to be equal to carrying
value.
Debt securities in issue
While the Group's debt securities in issue are listed, the
quoted prices for an individual note may not be indicative of the
fair value of the issue as a whole, due to the specialised nature
of the market in such instruments and the limited number of
investors participating in it. Fair value is not considered to be
materially different to carrying value.
Subordinated liabilities and PSBs
The fair value of subordinated liabilities is estimated by using
quoted market prices of similar instruments at the reporting date.
The PSBs are listed on the London Stock Exchange with fair value
being the quoted market price at the reporting date.
1. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the 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
Group amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 168.3 166.2 152.1 15.5 0.7 168.3
Loans and advances to
customers 17.7 19.7 - - 17.7 17.7
Derivative assets 185.7 12,968.3 - 185.7 - 185.7
371.7 13,154.2 152.1 201.2 18.4 371.7
Financial liabilities
Derivative liabilities 19.7 7,378.0 - 19.7 - 19.7
1. Financial instruments and fair values (continued)
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 285.0 284.7 - 285.0 - 285.0
Loans and advances to
customers 19.1 21.8 - - 19.1 19.1
Derivative assets 12.3 8,687.8 - 12.3 - 12.3
316.4 8,994.3 - 297.3 19.1 316.4
-----------------------------
Financial liabilities
Derivative liabilities 163.6 10,392.4 - 163.6 - 163.6
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 16.2 16.2 - 15.5 0.7 16.2
Derivative assets 50.5 3,953.0 - 50.5 - 50.5
66.7 3,969.2 - 66.0 0.7 66.7
Financial liabilities
Derivative liabilities 8.7 3,416.0 - 8.7 - 8.7
46. Financial instruments and fair values (continued)
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 15.0 15.0 - 15.0 - 15.0
Derivative assets 4.7 3,585.0 - 4.7 - 4.7
19.7 3,600.0 - 19.7 - 19.7
Financial liabilities
Derivative liabilities 93.8 3,729.0 - 93.8 - 93.8
Level 1: Fair values that are based entirely on quoted market
prices (unadjusted) in an actively traded market for identical
assets and liabilities that the Group has the ability to access.
Valuation adjustments and block discounts are not applied to Level
1 instruments. Since valuations are based on readily available
observable market prices, this makes them most reliable, reduces
the need for management judgement and estimation and also reduces
the uncertainty associated with determining fair values.
Level 2: Fair values that are based on one or more quoted prices
in markets that are not active or for which all significant inputs
are taken from directly or indirectly observable market data. These
include valuation models used to calculate the present value of
expected future cash flows and may be employed either when no
active market exists or when there are no quoted prices available
for similar instruments in active markets.
Level 3: Fair values for which any one or more significant input
is not based on observable market data and the unobservable inputs
have a significant effect on the instrument's fair value. Valuation
models that employ significant unobservable inputs require a higher
degree of management judgement and estimation in determining the
fair value. Management judgement and estimation are usually
required for the selection of the appropriate valuation model to be
used, determination of expected future cash flows on the financial
instruments being valued, determination of the probability of
counterparty default and prepayments, determination of expected
volatilities and correlations and the selection of appropriate
discount rates.
1. Financial instruments and fair values (continued)
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the
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
Group amount amount 1 2 3 Total
2021 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 2,843.6 2,843.6 - 2,843.6 - 2,843.6
Investment securities 323.1 322.9 - 323.8 - 323.8
Loans and advances to
customers 21,062.6 21,076.7 - 3,323.0 17,756.5 21,079.5
24,229.8 24,243.7 - 6,490.9 17,756.5 24,247.4
----------------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 17,526.4 17,469.0 - 6,601.3 10,923.6 17,524.9
Amounts owed to credit
institutions 4,319.6 4,318.5 - 4,319.6 - 4,319.6
Amounts owed to other
customers 92.6 92.5 - - 92.6 92.6
Debt securities in issue 460.3 460.2 - 460.3 - 460.3
Subordinated liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
22,424.4 22,365.3 14.7 11,381.2 11,026.8 22,422.7
----------------------------- -------- --------- ----- -------- -------- --------
Estimated fair value
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 2,676.2 2,676.1 - 2,676.2 - 2,676.2
Investment securities 186.2 186.2 - 186.6 - 186.6
Loans and advances to
customers 19,211.6 19,200.1 - 3,314.5 16,037.5 19,352.0
22,074.5 22,062.9 - 6,177.8 16,037.5 22,215.3
----------------------- -------- --------- ----- ------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 16,603.1 16,507.3 - 5,546.1 11,120.0 16,666.1
Amounts owed to credit
institutions 3,570.2 3,569.3 - 3,570.2 - 3,570.2
Amounts owed to other
customers 72.9 72.7 - - 72.9 72.9
Debt securities in
issue 421.9 421.8 - 421.9 - 421.9
Subordinated
liabilities 10.5 10.3 - - 10.7 10.7
PSBs 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
----------------------- -------- --------- ----- ------- -------- --------
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to credit
institutions 1,405.0 1,405.0 - 1,405.0 - 1,405.0
Loans and advances to
customers 9,476.4 9,611.8 - 2,402.8 7,045.6 9,448.4
10,881.9 11,017.3 - 3,808.3 7,045.6 10,853.9
----------------------------- -------- --------- ----- ------- ------- --------
Financial liabilities
Amounts owed to retail
depositors 9,739.4 9,704.9 - 3,517.7 6,219.6 9,737.3
Amounts owed to credit
institutions 2,420.7 2,420.1 - 2,420.7 - 2,420.7
Amounts owed to other
customers 5.7 5.7 - - 5.7 5.7
Subordinated liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
12,191.3 12,155.8 14.7 5,938.4 6,235.9 12,189.0
----------------------------- -------- --------- ----- ------- ------- --------
Estimated fair value
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to credit
institutions 1,518.1 1,518.1 - 1,518.1 - 1,518.1
Loans and advances to
customers 8,531.7 8,702.5 - 2,382.8 6,287.3 8,670.1
10,050.3 10,221.1 - 3,901.4 6,287.3 10,188.7
----------------------------- -------- --------- ----- ------- ------- --------
Financial liabilities
Amounts owed to retail
depositors 9,705.3 9,645.8 - 3,429.7 6,306.7 9,736.4
Amounts owed to credit
institutions 1,900.5 1,900.0 - 1,900.5 - 1,900.5
Amounts owed to other
customers 5.8 5.8 - - 5.8 5.8
Subordinated liabilities 10.5 10.3 - - 10.7 10.7
PSBs 37.6 37.0 32.3 - - 32.3
11,659.7 11,598.9 32.3 5,330.2 6,323.2 11,685.7
----------------------------- -------- --------- ----- ------- ------- --------
47. Pension scheme
Defined contribution scheme
The amount charged to profit or loss in respect of contributions
to the Group's defined contribution and stakeholder pension
arrangements is the contribution payable in the period. The total
pension cost in the year amounted to GBP5.2m (2020: GBP4.3m).
48. 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
2021 GBPm GBPm GBPm GBPm
Balances at the reporting
date
Gross loans and advances
to customers 12,057.3 8,981.4 143.1 21,181.8
Expected credit losses (82.2) (19.6) 0.3 (101.5)
Loans and advances to customers 11,975.1 8,961.8 143.4 21,080.3
Capital expenditure 5.0 1.8 - 6.8
Depreciation and amortisation 6.5 3.2 4.8 14.5
Profit or loss for the year
Net interest income/(expense) 414.8 235.7 (62.9) 587.6
Other income 8.7 20.0 12.7 41.4
Total income/(expense) 423.5 255.7 (50.2) 629.0
Administrative expenses (97.9) (63.8) (4.8) (166.5)
Provisions (0.3) 0.1 - (0.2)
Impairment of financial
assets (3.5) 8.4 (0.5) 4.4
Impairment of intangible
assets - - 3.1 3.1
Integration costs (4.0) (1.0) - (5.0)
Exceptional items (0.2) - - (0.2)
Profit/(loss) before taxation 317.6 199.4 (52.4) 464.6
Taxation(1) (76.3) (51.8) 8.5 (119.6)
Profit/(loss) for the year 241.3 147.6 (43.9) 345.0
--------
(1) The taxation on Combination credit includes a credit of
GBP14.1m 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, offset by a GBP5.6m deferred
tax charge due to the 6% increase in the main rate of the
corporation tax liability from 1 April 2023.
1. Operating segments (continued)
OSB CCFS Combination Total
2020 GBPm GBPm GBPm GBPm
Balances at the reporting
date
Gross loans and advances
to customers 11,131.4 8,001.2 209.1 19,341.7
Expected credit losses (83.6) (28.2) 0.8 (111.0)
Loans and advances to customers 11,047.8 7,973.0 209.9 19,230.7
Capital expenditure 5.3 2.4 - 7.7
Depreciation and amortisation 7.1 2.4 4.3 13.8
Profit or loss for the year
Net interest income/(expense) 332.8 201.2 (61.8) 472.2
Other income 18.8 17.4 0.2 36.4
Total income/(expense) 351.6 218.6 (61.6) 508.6
Administrative expenses (95.3) (57.5) (4.3) (157.1)
Provisions - (0.1) - (0.1)
Impairment of financial
assets (50.7) (20.5) 0.2 (71.0)
Impairment of intangible
assets - - (7.0) (7.0)
Integration costs (7.5) (2.3) - (9.8)
Exceptional items (3.3) - - (3.3)
Profit/(loss) before taxation 194.8 138.2 (72.7) 260.3
Taxation(1) (46.9) (32.0) 14.8 (64.1)
Profit/(loss) for the year 147.9 106.2 (57.9) 196.2
-------- ------- -----------
(1) The taxation on Combination credit of GBP14.8m includes a
GBP4.8m 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.
49. Adjustments for non-cash items and changes in operating assets and liabilities
Group Group Company Company
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 14.5 13.8 5.5 5.7
Interest on investment securities (2.5) (7.5) (0.1) (0.8)
Integration cost 0.6 - 0.6 -
Interest on subordinated liabilities 0.8 0.8 0.8 0.8
Interest on PSBs 1.2 1.7 1.2 1.7
Interest on securitised debt 3.9 3.4 - -
Interest on financing debt 5.3 8.4 3.3 4.4
Impairment (credit)/charge on loans (4.4) 71.0 0.2 40.4
Impairment (credit)/charge on intangible
assets acquired on Combination (3.1) 7.0 - -
Gains on sale of financial instruments (4.0) (20.0) (0.3) (17.8)
Provisions 0.2 0.1 0.3 -
Interest on lease liabilities 0.3 0.3 0.1 0.1
Fair value gains on financial instruments (29.5) (7.4) (4.4) (0.2)
Share-based payments 6.7 5.1 5.0 4.9
Total adjustments for non-cash items (10.0) 76.7 12.2 39.2
------------------------------------------ --------- --------- ------- -------
Changes in operating assets and
liabilities:
Decrease/(increase) in loans and advances
to credit institutions 98.7 (154.0) 67.8 (51.3)
Increase in loans and advances to
customers (1,844.0) (1,705.0) (944.9) (639.2)
(Increase)/decrease in intercompany
balances (0.6) - 36.2 (113.9)
Increase in amounts owed to retail
depositors 923.3 348.1 34.1 269.6
Net (increase)/decrease in other assets (1.1) 1.3 (2.6) (0.6)
Net increase/(decrease) in derivatives
and hedged items 3.6 (64.3) (12.3) (31.7)
Net increase/(decrease) in amounts owed
to other customers 18.9 43.2 0.9 (3.1)
Net increase/(decrease) in other
liabilities 1.5 (6.3) 3.4 (3.5)
Exchange differences on working capital (0.1) - - -
Total changes in operating assets and
liabilities (799.8) (1,537.0) (817.4) (573.7)
------------------------------------------ --------- --------- ------- -------
50. Events after the reporting date
On 17 January 2022, the OSB Group announced that the FCA had
approved the base prospectus (dated 14 January 2022) in relation to
the establishment of the OSB Group's GBP3.0bn Euro Medium Term Note
Programme. Under the programme, the OSBG, subject to compliance
with all relevant laws, regulations and directives, may from time
to time issue notes. The aggregate principal amount of notes issued
by the Company outstanding under the programme will not at any time
exceed GBP3.0bn. Additional information can be found on the OSB
Group's website.
The Board has authorised additional dividends of up to GBP100m
in support of the OSBG (the ultimate parent company) share
repurchase programme from 18 March 2022. The dividends will be made
at regular intervals as purchases are made through the programme
with 40% of dividends over the period in turn received from Charter
Court Financial Services Limited via Charter Court Financial
Services Group plc. The purchases made by OSBG will be announced to
the market each day in line with regulatory requirements. An
initial dividend of GBP10m was paid by the Company to OSBG on 21
March 2022 in relation to the share repurchase programme.
51. Controlling party
OSB GROUP PLC is the ultimate parent and controlling party
preparing consolidated financial statements as the largest group of
which the Company is a member. Copies of OSBG's financial
statements may be obtained from the Company Secretary at the
registered office: OSB House, Quayside, Chatham Maritime, Chatham,
Kent, ME4 4QZ.
52. Transactions with key management personnel
All related party transactions were made on terms equivalent to
those that prevail in arm's length transactions. During the year
there were no related party transactions between the key management
personnel and the Company other than as described below.
Directors' remuneration is disclosed in note 10 and in the OSB
GROUP PLC Annual Report on Remuneration. The table below shows the
Executive team's aggregate remuneration:
Group Group
2021 2020
GBP'000 GBP'000
Short-term employee benefits 5,144 3,743
Post-employment benefits 44 49
Share-based payments 2,414 501
7,602 4,293
----------------------------- ------- -------
Key management personnel and connected persons held deposits
with the Group of GBP0.9m (2020: GBP1.4m).
53. Capital management
The Company's capital management approach is to provide a
sufficient capital base to cover business risks and support future
business development. The Company remained, throughout the year,
compliant with its capital requirements as set out by the PRA, the
Group's primary prudential supervisor.
The Company reports on an individual consolidation basis (OSB
solo) which includes the Company and subsidiaries except for the
offshore servicing entity OSBI, SPVs relating to securitisations
and the CCFS entities acquired in October 2019.
The capital management position is based on the three 'pillars'
of Basel II.
Under Pillar 1, the minimum capital requirements are based on 8%
of risk-weighted assets.
Under Pillar 2, the regulated entities complete an annual
self-assessment of risks known as ICAAP. The PRA applies additional
requirements to this assessment amount to cover risks under Pillar
2 to generate a Total Capital Requirement. Further, the PRA sets
capital buffers and the regulated entities apply for imposition of
the requirements and modification of rules incorporating the
capital buffers and Pillar 2 pursuant to the Financial Services and
Markets Act 2000.
Basel III came into force through CRD IV. Basel III complements
and enhances Basel I and II with additional safety measures. Basel
III changed definitions of regulatory capital, introduced new
capital buffers, a non-risk adjusted leverage ratio, liquidity
ratios and modified the way regulatory capital is calculated.
The ultimate responsibility for capital adequacy rests with the
Board of Directors. ALCO is responsible for the management of the
capital process within the risk appetite defined by the Board,
including approving policy, overseeing internal controls and
setting internal limits over capital ratios.
The regulated entities actively manage their capital position
and report this on a regular basis to the Board and senior
management via the ALCO and other governance committees. Capital
requirements are included within budgets, forecasts and strategic
plans with initiatives being executed against this plan.
1. Capital management (continued)
The OSB solo Pillar 1 capital information is presented
below:
(Unaudited) (Unaudited)
2021 2020
GBPm GBPm
CET1 capital
Called up share capital 4.5 4.5
Share premium, capital contribution and share-based
payment reserve 10.6 8.0
Retained earnings 1,739.5 1,568.0
Other reserves (0.9) (1.1)
Total equity attributable to ordinary shareholders 1,753.7 1,579.4
Foreseeable dividends (73.1) (39.0)
IFRS 9 transitional adjustment(1) 1.4 2.0
COVID-19 ECL transitional adjustment(2) 12.1 20.7
Solo consolidation adjustments (6.8) (7.8)
Deductions from CET1 capital
Investment in subsidiary (538.5) (580.1)
Prudent valuation adjustment(3) - (0.1)
Intangible assets(4) (7.9) (7.3)
Deferred tax asset (0.5) (0.9)
CET1 capital 1,140.4 966.9
----------- -----------
AT1 capital
AT1 securities 90.0 60.0
Total Tier 1 capital 1,230.4 1,026.9
----------- -----------
Tier 2 capital
Subordinated debt and PSBs 25.1 47.3
Deductions from Tier 2 capital (4.6) (2.7)
Total Tier 2 capital 20.5 44.6
Total regulatory capital 1,250.9 1,071.5
Risk-weighted assets (unaudited) 5,863.4 5,626.3
(1) The regulatory capital includes a GBP1.4m 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
increase in stage 1 and stage 2 ECL following the impacts of
COVID-19 and for which transitional rules are being adopted for
regulatory capital purposes.
(3) OSB solo has adopted the simplified approach under the
Prudent Valuation rules, recognising a deduction equal to 0.1% of
fair value assets and liabilities after adjusting for hedge
accounting.
(4) All software assets continue to be fully deducted from
capital in light of the pending intention of the PRA to consult on
the CRR 'Quick Fix' package in this area.
1. Capital management (continued)
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2021 2020
GBPm GBPm
At 1 January 966.9 752.8
Movement in retained earnings 171.5 1,039.2
Shares issued from Sharesave Scheme vesting - 2.6
Movement in other reserves 2.8 (857.8)
Movement in investment in subsidiary 41.6 23.5
Movement in foreseeable dividends (34.1) (13.9)
Movement in solo consolidation adjustment 1.0 (0.9)
IFRS 9 transitional adjustment (0.6) (0.4)
COVID-19 ECL transitional adjustment (8.6) 20.7
Movement in prudent valuation adjustment 0.1 0.1
Net (increase)/decrease in intangible assets (0.6) 1.0
Movement in deferred tax asset for carried
forward losses 0.4 -
At 31 December 1,140.4 966.9
--------------------------------------------- ----------- -----------
AGM Annual General Meeting IRB Internal Ratings-Based approach
to credit risk
Individual Savings Account
ALCO Group Assets and Liabilities ISA
Committee
BoE Bank of England KRFI Kent Reliance for Intermediaries
CCFS Charter Court Financial Services KRPS Kent Reliance Provident Society
Limited
CEO Chief Executive Officer LCR Liquidity Coverage Ratio
CET1 Common Equity Tier 1 LGD Loss Given Default
CFO Chief Financial Officer LIBOR London Interbank Offered
Rate
CRD IV Capital Requirements Directive LTIP Long-Term Incentive Plan
and Regulation
CRO Chief Risk Officer LTV Loan to value
DSBP Deferred Share Bonus Plan NIM Net Interest Margin
EAD Exposure at Default NPS Net Promoter Score
ECL Expected Credit Loss OSB OneSavings Bank
plc
EIR Effective Interest Rate OSBG OSB GROUP PLC
EPS Earnings Per Share PD Probability of Default
EU European Union PPD Propensity to go to Possession
Given Default
FCA Financial Conduct Authority PRA Prudential Regulation Authority
FRC Financial Reporting Council PSBs Perpetual Subordinated Bonds
FSCS Financial Services Compensation PSP Performance Share Plan
Scheme
FSD Forced Sale Discount RMBS Residential Mortgage-Backed
Securities
FTSE Financial Times Stock Exchange RoE Return on equity
HMRC Her Majesty's Revenue and Customs RWA Risk weighted assets
HPI House Price Index SAYE Save As You Earn or Sharesave
IAS International Accounting Standards SDLT Stamp Duty Land Tax
IBOR Interbank Offered Rate SICR Significant Increase in Credit
Risk
ICAAP Internal Capital Adequacy Assessment SID Senior Independent Director
Process
ICR Interest Coverage Ratio SME Small and Medium Enterprises
IFRS International Financial Reporting SONIA Sterling Overnight Index
Standards Average
ILAAP Internal Liquidity Adequacy SRMF Strategic Risk Management
Assessment Process Framework
ILTR Indexed Long-Term Repo TFS Term Funding Scheme
IPO Initial Public Offering
(END) Dow Jones Newswires
March 31, 2022 09:58 ET (13:58 GMT)
Copyright (c) 2022 Dow Jones & Company, Inc.
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