TIDMOSB
LEI: 213800ZBKL9BHSL2K459
16 March 2023
Following the Combination with Charter Court Financial Services
Group plc (CCFS) on 4 October 2019, this press release includes
results on an underlying basis, in addition to the statutory basis,
which Management believe provide a more consistent basis for
comparing the Group's results between financial periods. Underlying
results exclude exceptional items, integration costs and other
acquisition-related items (see the reconciliation in the Financial
review).
OSB GROUP PLC (OSBG or the Group), the specialist lending and
retail savings group, announces today its results for the year
ended 31 December 2022.
Financial and operational highlights
-- Underlying profit before tax increased by 13% to a record GBP591.1m
(2021: GBP522.2m) and statutory profit before tax increased by 14% to
GBP531.5m (2021: GBP464.6m) primarily due to growth in the loan book, an
improved net interest margin and net fair value gains on financial
instruments
-- Underlying and statutory net loan book increased by 12% to GBP23.5bn and
GBP23.6bn, respectively (2021: GBP20.9bn and GBP21.1bn) supported by
organic originations of GBP5.8bn, up 29% from GBP4.5bn in 2021
-- Underlying net interest margin (NIM) of 303bps (2021: 282bps) and
statutory NIM of 278bps (2021: 253bps) increased, benefitting from base
rate rises
-- Underlying cost to income ratio increased to 25% (2021: 24%) and 27% on a
statutory basis (2021: 26%) with the benefit of higher fair value gains
partially offsetting the impact of higher administrative expenses
-- Underlying loan loss ratio of 14bps and statutory loan loss ratios of
13bps (2021: -2bps) reflected the worsening economic outlook, including
the potential impact of higher cost of living and borrowing on
affordability. Arrears remained stable with balances greater than three
months at 1.1% (31 December 2021: 1.1%)
-- Underlying return on equity was unchanged from prior year at 24% and
statutory return on equity increased to 21% (2021: 20%) due to strong
profitability
-- Underlying basic earnings per share (EPS) of 99.6 pence (2021: 86.7
pence) and statutory basic EPS of 90.8 pence (2021: 76.0 pence)
-- Capital remained strong with Common Equity Tier 1 ratio at 18.3% (2021:
19.6%) and total capital ratio at 19.7% (2021: 21.2%)
-- Share repurchase programme of GBP150m to commence on 17 March 2023
-- Recommended final dividend of 21.8 pence per share, which together with
the 2022 interim dividend of 8.7 pence per share, represents a payout
ratio of 30% of underlying earnings attributable to ordinary
shareholders. In addition, the Board has announced a special dividend of
GBP50m, 11.7 pence per share
Andy Golding, Group CEO, said:
"I am delighted with the outstanding results that OSB Group
delivered in 2022. The business has remained resilient in a
difficult macroeconomic environment, continuing to support and
provide valuable solutions for our customers.
Our lending franchise remained strong with net loan book growth
of 12% in the year and underlying pre-tax profit up 13% to GBP591m.
We achieved this while maintaining cost discipline, low credit
losses and a sector leading underlying return on equity of 24%.
The Group has a proven capital generation capability through
profitability and this enabled us to deliver the strong growth and
shareholder distributions in the form of both dividends and share
buybacks. We have increased our full year ordinary dividend per
share to 30.5 pence (2021: 26.0 pence per share), and are
announcing a special dividend of GBP50m (11.7 pence per share),
representing a total dividend for 2022 of 42.2 pence per share, and
a new GBP150m share buyback. The Group has a very strong capital
position, with a CET1 ratio of 18.3% as at 31 December 2022.
We remain cognisant of the uncertain macroeconomic outlook and
the potential impact of the higher cost of living and borrowing on
the mortgage market and affordability. We are building a healthy
pipeline of new business and have a proven track record of
retaining customers, attracting new business and working with high
quality borrowers. Based on current application volumes, we are
targeting underlying net loan book growth of c. 5% for 2023. The
underlying NIM for 2023 is expected to be broadly flat to 2022,
after the expected impact of planned Tier 2 and MREL qualifying
debt issuance, subject to market conditions. We expect our
underlying cost to income ratio to increase to c. 29% in 2023, due
to the significant fair value gains from hedging activities in
2022, continuing inflationary headwinds and the full-year impact of
hiring last year and further planned investment in the
business.
Our business model and strategy continue to deliver strong
outcomes. We are capitalising on continued demand for our
specialist lending products and are identifying opportunities to
further digitise our business operations to deliver additional
efficiencies. We will continue to invest in the Group to ensure it
remains well-positioned to meet the changing needs of our
customers, brokers and wider stakeholders. I remain confident in
the outlook for the Group and our ability to deliver sustainable
and attractive returns for our shareholders."
This announcement contains inside information as stipulated
under the Market Abuse Regulation no 596/2014, as it forms part of
the domestic law of the United Kingdom by virtue of the European
(withdrawal) Act 2018, as amended, on publication of this
announcement via a regulatory information service, this information
is considered to be in the public domain.
Not for release, publication or distribution or whole or in
part, directly or indirectly in, into or from any jurisdiction
where to do so would constitute a violation of the relevant laws of
such jurisdiction.
Enquiries:
OSB GROUP PLC Brunswick Group
Alastair Pate, Investor Relations Robin Wrench/Simone Selzer
t: 01634 83897 t: 020 7404 5959
Results presentation
A webcast presentation for analysts will be held at 9:30am on
Thursday 16 March.
The presentation will be webcast or call only and will be
available on the OSB Group website at
www.osb.co.uk/investors/results-reports-presentations.
The UK dial in number is 020 3936 2999 and the password is
479434. Registration is open immediately.
About OSB GROUP PLC
OneSavings Bank plc (OSB) began trading as a bank on 1 February
2011 and was admitted to the main market of the London Stock
Exchange in June 2014 (OSB.L). OSB joined the FTSE 250 index in
June 2015. On 4 October 2019, OSB acquired Charter Court Financial
Services Group plc (CCFS) and its subsidiary businesses. On 30
November 2020, OSB GROUP PLC became the listed entity and holding
company for the OSB Group. The Group provides specialist lending
and retail savings and is authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the
Financial Conduct Authority and Prudential Regulation Authority.
The Group reports under two segments, OneSavings Bank and Charter
Court Financial Services.
OneSavings Bank (OSB)
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group (CCFS)
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise 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.
Important disclaimer
This document should be read in conjunction with any other
documents or announcements distributed by OSB GROUP PLC (OSBG)
through the Regulatory Information Service (RIS). This document is
not audited and contains certain forward-looking statements with
respect to the business, strategy and plans of OSBG, its current
goals, beliefs, intentions, strategies and expectations relating to
its future financial condition, performance and results. Such
forward-looking statements include, without limitation, those
preceded by, followed by or that include the words 'targets',
'believes', 'estimates', 'expects', 'aims', 'intends', 'will',
'may', 'anticipates', 'projects', 'plans', 'forecasts', 'outlook',
'likely', 'guidance', 'trends', 'future', 'would', 'could',
'should' or similar expressions or negatives thereof but are not
the exclusive means of identifying such statements. Statements that
are not historical facts, including statements about OSBG's, its
directors' and/or management's beliefs and expectations, are
forward-looking statements. By their nature, forward-looking
statements involve risk and uncertainty because they relate to
events and depend upon circumstances that may or may not occur in
the future that could cause actual results or events to differ
materially from those expressed or implied by the forward-looking
statements. Factors that could cause actual business, strategy,
plans and/or results (including but not limited to the payment of
dividends) to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such
forward-looking statements made by OSBG or on its behalf include,
but are not limited to: general economic and business conditions in
the UK and internationally; market related trends and developments;
fluctuations in exchange rates, stock markets, inflation,
deflation, interest rates, energy prices and currencies; policies
of the Bank of England, the European Central Bank and other G7
central banks; the ability to access sufficient sources of capital,
liquidity and funding when required; changes to OSBG's credit
ratings; the ability to derive cost savings; changing demographic
developments, and changing customer behaviour, including consumer
spending, saving and borrowing habits; changes in customer
preferences; changes to borrower or counterparty credit quality;
instability in the global financial markets, including Eurozone
instability, the potential for countries to exit the European Union
(the EU) or the Eurozone, and the impact of any sovereign credit
rating downgrade or other sovereign financial issues; technological
changes and risks to cyber security; natural and other disasters,
adverse weather and similar contingencies outside OSBG's control;
inadequate or failed internal or external processes, people and
systems; terrorist acts and other acts of war or hostility and
responses to those acts; geopolitical events; the impact of
outbreaks, epidemics and pandemics or other such events; changes in
laws, regulations, taxation, accounting standards or practices,
including as a result of the UK's exit from the EU; regulatory
capital or liquidity requirements and similar contingencies outside
OSBG's control; the policies and actions of governmental or
regulatory authorities in the UK, the EU or elsewhere including the
implementation and interpretation of key legislation and
regulation; the ability to attract and retain senior management and
other employees; the extent of any future impairment charges or
write-downs caused by, but not limited to, depressed asset
valuations, market disruptions and illiquid markets; market
relating trends and developments; exposure to regulatory scrutiny,
legal proceedings, regulatory investigations or complaints; changes
in competition and pricing environments; the inability to hedge
certain risks economically; the adequacy of loss reserves; the
actions of competitors, including non-bank financial services and
lending companies; the success of OSBG in managing the risks of the
foregoing; and other risks inherent to the industries in which OSBG
operates.
Accordingly, no reliance may be placed on any forward-looking
statement. Neither OSBG, nor any of its directors, officers or
employees provides any representation, warranty or assurance that
any of these statements or forecasts will come to pass or that any
forecast results will be achieved. Any forward-looking statements
made in this document speak only as of the date they are made and
it should not be assumed that they have been revised or updated in
the light of new information of future events. Except as required
by the Prudential Regulation Authority, the Financial Conduct
Authority, the London Stock Exchange PLC or applicable law, OSBG
expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained in this document to reflect any change in OSBG's
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
For additional information on possible risks to OSBG's business,
please see the Risk review section in the OSBG 2022 Annual Report
and Accounts. Copies of this are available at www.osb.co.uk and on
request from OSBG.
Nothing in this document and any subsequent discussion
constitutes or forms part of a public offer under any applicable
law or an offer or the solicitation of an offer to purchase or sell
any securities or financial instruments. Nor does it constitute
advice or a recommendation with respect to such securities or
financial instruments, or any invitation or inducement to engage in
investment activity under section 21 of the Financial Services and
Markets Act 2000. Past performance cannot be relied on as a guide
to future performance. Statements about historical performance must
not be construed to indicate that future performance, share price
or results in any future period will necessarily match or exceed
those of any prior period. Nothing in this document is intended to
be, or should be construed as, a profit forecast or estimate for
any period.
In regard to any information provided by third parties, neither
OSBG nor any of its directors, officers or employees explicitly or
implicitly guarantees that such information is exact, up to date,
accurate, comprehensive or complete. In no event shall OSBG be
liable for any use by any party of, for any decision made or action
taken by any party in reliance upon, or for inaccuracies or errors
in, or omission from, any third party information contained herein.
Moreover, in reproducing such information by any means, OSBG may
introduce any changes it deems suitable, may omit partially or
completely any aspect of the information from his document, and
accepts no liability whatsoever for any resulting discrepancy.
Liability arising from anything in this document shall be
governed by English law, and neither OSBG nor any of its
affiliates, advisors or representatives shall have any liability
whatsoever (in negligence or otherwise) for any loss howsoever
arising from any use of this document or its contents or otherwise
arising in connection with this document. Nothing in this document
shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
Certain figures contained in this document, including financial
information, may have been subject to rounding adjustments and
foreign exchange conversions. Accordingly, in certain instances,
the sum or percentage change of the numbers contained in this
document may not conform exactly to the total figure given.
Non-IFRS performance measures
OSB GROUP PLC believes that any non-IFRS performance measures
included in this document provide a more consistent basis for
comparing the business' performance between financial periods, and
provide more detail concerning the elements of performance which
the Group is most directly able to influence or are relevant for an
assessment of the Group. They also reflect an important aspect of
the way in which operating targets are defined and performance is
monitored by the Board. However, any non-IFRS performance measures
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well. For further details,
refer to Alternative performance measures section in the OSBG 2022
Annual Report and Accounts. Copies of this are available at
www.osb.co.uk and on request from OSBG.
Chief Executive's Statement
I am extremely proud of the outstanding results that OSB Group
delivered in 2022. The Group's strategy, business model and high
quality customer franchises continued to prove resilient in a
difficult macroeconomic environment, as pandemic-related risks
eased, but were replaced by risks arising from political
instability, the war in Ukraine, as well as the increasing cost of
living and borrowing. Throughout this period of volatility we have
maintained close dialogue with our customers and intermediaries to
ensure we remain a trusted partner in the market segments we
serve.
Outstanding results in 2022
We delivered on the guidance set out at the start of 2022 and
further consolidated our position as a leading specialist lender in
the UK. Strong demand for the Group's lending products delivered
underlying and statutory net loan book growth of 12% in the year to
GBP23.5bn and GBP23.6bn, respectively (31 December 2021: GBP20.9bn
and GBP21.1bn).
I am particularly proud of our consistent and sector-leading
returns, with an underlying return on equity of 24% for 2022,
unchanged from the prior year. Statutory return on equity improved
to 21% (2021: 20%).
I am delighted that the Group delivered a record underlying
pre-tax profit of GBP591.1m in 2022, up 13% from GBP522.2m in 2021,
representing an underlying basic earnings per share of 99.6 pence
(2021: 86.7 pence). On a statutory basis, profit before tax
increased to GBP531.5m and basic earnings per share was 90.8 pence
(2021: GBP464.6m and 76.0 pence, respectively).
The underlying and statutory net interest margins improved to
303bps and 278bps respectively, benefitting from base rate rises
during the year (2021: 282bps and 253bps, respectively).
The Group maintained its focus on cost discipline and
efficiency. Underlying and statutory cost to income ratios
increased marginally, as previously guided, to 25% and 27%
respectively (2021: 24% and 26%), although benefitted from higher
fair value gains on financial instruments. The underlying
management expense ratio increased to 80bps (2021: 70bps) and the
statutory management expense ratio was 81bps (2021: 71bps). This
reflected the anticipated return to a more normalised level of
post-pandemic expenditure, inflationary headwinds and planned
investment in the business, which we expect to continue in 2023,
including refreshing and upgrading our technology infrastructure
following the successful integration of OSB with CCFS.
The credit performance of the Group's loan book remained strong
in 2022, reflecting our underwriting expertise and a robust rental
market.
The Group maintains a very strong capital position and proven
capital generation capability through profitability, with a CET1
ratio of 18.3% as at 31 December 2022 (31 December 2021: 19.6%).
This enabled the Group to deliver strong growth and shareholder
distributions in the form of both dividends and share buybacks. The
Board has recommended a full year ordinary dividend of 30.5 pence
per share representing a payout ratio of 30% of underlying earnings
attributable to ordinary shareholders. The Board has also announced
a special dividend of GBP50m, 11.7 pence per share, and a new
GBP150m share repurchase programme to commence on 17 March
2023.
These results were only delivered with the support of my
talented colleagues and I thank them all for their efforts.
The lending franchise performed strongly
Strong demand for the Group's mortgages across our core
Buy-to-Let and Residential sub-segments helped organic originations
reach GBP5.8bn in the year, an increase of 29% from GBP4.5bn in
2021. I am pleased that our renewed focus on commercial lending saw
originations more than triple in that sub-segment to GBP279m.
We entered the second half of 2022 with a very strong pipeline
and elevated levels of completions, as borrowers sought to lock in
attractive mortgage rates ahead of anticipated future rate rises.
We also experienced an increase in retention levels as we took
action to retain high quality mortgage customers.
The Group supported its customers in navigating the disruption
caused by September's mini-budget, which led to a spike in mortgage
interest rates and the withdrawal of products from the market
fuelled by swap spread volatility. Throughout that time, we were
honouring not only the offered pipeline, but also the pre-offer
pipeline, as we focused on maintaining our stable presence in the
market. This response was recognised particularly by professional
Buy-to-Let landlords and mortgage intermediaries.
I am pleased that the volatility in swap spreads reduced by the
end of the year, leading to product price reductions which improved
affordability for borrowers, especially in light of house price
appreciation and rent increases over the last few years.
We continued to demonstrate our leadership and commitment to the
Buy-to-Let sector through the publication of the Landlord Leaders
report in November. This research highlighted the continuing trend
towards professionalisation of the sector, with 45% of professional
landlords committed to growing their businesses and investing in
their properties, a trend that OSB Group is well placed to
serve.
Credit and risk management demonstrated underlying
resilience
The high quality of the Group's loan book was demonstrated by a
consistently strong credit performance, with balances over three
months in arrears remaining stable at just 1.1% of the loan book at
the end of December (31 December 2021: 1.1%). However, we recognise
the potential for the higher cost of living and interest rate
environment to have an impact on affordability for some of our
borrowers or their tenants, and we conducted detailed analysis to
understand which customers may be most affected. This analysis was
an important input into our 2022 IFRS 9 loan loss provision
post-model adjustments and sizing our operational resources should
some borrowers require additional assistance.
The Group recorded an impairment charge of GBP30.7m on an
underlying basis, which represented an underlying loan loss ratio
of 14bps for the year (2021: credit of GBP4.9m and -2bps,
respectively). The impairment charge reflected the worsening
economic outlook at the end of 2022, including the potential impact
of higher cost of living and borrowing on affordability. The
statutory impairment charge was GBP29.8m, equivalent to a loan loss
ratio of 13bps (2021: credit of GBP4.4m and -2bps,
respectively).
The weighted average loan to value (LTV) of the Group's loan
book decreased to 60% as at 31 December 2022 from 62% at the end of
2021, supported by house price appreciation. The weighted average
LTV of new business written by the Group increased to 71% from 69%
in 2021 and interest coverage ratios remained strong at 207% for
OSB and 191% for CCFS.
Multi-channel funding model
Retail deposits remained the primary source of funding for the
Group and the deposit book grew by 13% to GBP19.8bn in 2022 (31
December 2021: GBP17.5bn) as we priced our savings products
competitively following
the base rate rises.
We opened over 191,000 new savings accounts in the year, more
than four times the prior year level, and retention rates remained
very high; 94% for maturing fixed rate bonds and ISAs at Kent
Reliance and 88% for Charter Savings Bank. We maintained a very
strong focus on customer service combined with transparent and fair
savings products. The very strong demand we saw in the year had
some temporary impact on our service response times and performance
levels which was reflected in the strong but slightly lower Net
Promoter Scores for the year of +64 for Kent Reliance and +61 for
Charter Savings Bank. I am pleased that process enhancements we
implemented during the year have had a positive effect and are
being reflected in current scores.
In August 2022 we completed a fully retained c. GBP1.3bn
securitisation of Buy-to-Let mortgages under our Canterbury
programme to further optimise collateral placed with the Bank of
England and market counterparties. Drawings under the Term Funding
Scheme for SMEs remained at GBP4.2bn as at 31 December 2022 and the
Group intends to commence the initial repayment of these funds in
early 2024. We will continue to opportunistically access the
wholesale markets when conditions are favourable as they offer the
Group optionality and diversification of funding.
Capital management
The Group has a proven capital generation capability through
profitability and this enabled the Group to deliver strong growth
and shareholder distributions in the form of both dividends and
share buybacks. The Group has a very strong capital position, with
a CET1 ratio of 18.3% as at 31 December 2022 (31 December 2021:
19.6%), and is targeting a CET1 ratio of 14%, once the capital
stack has been optimised fully over the next couple of years,
subject to market conditions, through planned Tier 2 and MREL
qualifying debt issuance.
The Board has recommended a final dividend of 21.8 pence per
share, which together with the interim dividend of 8.7 pence per
share, results in a total ordinary dividend for the year of 30.5
pence per share. The ordinary dividend payout ratio of 30% of
underlying earnings is in line with our prior year payout ratio and
our stated desire to deliver a progressive dividend per share. In
addition, given the strong capital position of the Group, the Board
has announced a special dividend of GBP50m, 11.7 pence per share.
When combined with the recommended ordinary dividend this
represents a total dividend for 2022 of 42.2 pence per share and a
41% payout ratio. The Board remains committed to returning excess
capital to shareholders and has today announced a new GBP150m share
buyback programme to commence on 17 March 2023. When combined with
the ordinary and special dividends, this represents a total return
to shareholders of GBP332m and demonstrates the Board's intention
to use multiple levers to deliver shareholder returns.
We note the PRA's recently published consultation paper (CP) on
the implementation of Basel 3.1. We will be responding to that
paper and await confirmation of the final rules, which we expect to
be available by the end of 2023. We have estimated the impact on
the 31 December 2022 CET1 ratio to be a reduction of up to 2%
points, should the proposed rules be implemented as drafted in the
CP and prior to the Group receiving Internal Ratings-Based (IRB)
accreditation.
The Group continues to advance towards Internal Ratings-Based
(IRB) accreditation, with progress made throughout the year. The
Group has undertaken a comprehensive self-assessment exercise to
validate its level of compliance, in conjunction with drafting all
required module 1 submission documentation, which has passed
through internal governance. The Group has noted the PRA's industry
level feedback to ensure effective adherence to regulatory
expectation. Pre-application discussions have been held with the
PRA to outline the Group's approach to integrating IRB capabilities
and compliance. The Group is now actively engaging with the PRA
regarding a module 1 submission date. The programme continues to
integrate IRB capabilities informing the Group's business, key risk
and capital management disciplines.
The Board is confident that the Group's proven business strategy
and capital generation capability will continue to support both
strong net loan book growth and further capital returns to
shareholders, including a progressive dividend per share. The Board
remains committed to returning excess capital to shareholders.
ESG
We made good progress in continuing to embed our ESG framework
across the Group during 2022, with regular meetings of the ESG
segment of the Group Executive Committee and ESG reporting to the
Board. I am proud that we reduced our own greenhouse gas emissions
by 8.1% in the year, benefitting from a range of initiatives
implemented throughout the Group.
I am also particularly pleased that this year we reached a
milestone of 2,000 colleagues. We have been hiring talented
individuals across the Group, demonstrating our commitment to
customers, and ensuring the resilience of the business for the
future, placing us in an advantageous position for when the market
returns to healthy growth. We continue to develop OSB Group as a
diverse and inclusive organisation and we renewed our commitment to
having 33% of UK senior management positions filled by women by the
end of 2023. We are making progress to achieve this target.
Looking forward
Over the course of the last three years, we have successfully
delivered on our integration plans and our teams are now
benefitting from working on a number of common technology
platforms. We have now turned our attention towards identifying
opportunities to further digitise our business operations, to
deliver additional efficiencies and invest in the Group to ensure
it remains well-positioned to meet the evolving needs of our
customers, brokers and wider stakeholders.
The Group remains well capitalised, with strong liquidity and a
high quality loan book and customer franchises. We have supported
our customers and colleagues who all face the realities of the
increasing cost of living and rising interest rates, and we will
continue to focus on those who require most assistance.
The Group has a proven track record of delivering strong results
with a clear strategy and risk management framework. We have
consistently demonstrated our resilience, which allows us to look
to the future with optimism.
UK Finance is forecasting that the overall mortgage market will
be subdued in 2023, with an overall 15% year-on-year reduction in
gross mortgage lending and a particular reduction in expected
purchase activity. However, remortgaging is expected to outperform
purchasing activity, supported by an increased level of fixed rate
mortgages due to end during the year. The Buy-to-Let segment is
also predicted to see a reduction in lending following a strong
2022. Whilst part-time landlords may be more sellers than buyers in
the year ahead, professional landlords, who comprise the majority
of the Group's lending, remain active buyers and are looking
favourably at opportunities supported by continued strong tenant
demand and rental growth. Affordability challenges will be evident
in all lending segments resulting from the combined effects of
inflation and higher interest rates. This is particularly the case
for first time buyers in the residential segment and also for
amateur landlords. However, professional multi-property landlords
have benefitted from increases in rental yields and strong tenant
demand, and the Group's interest coverage ratios at origination
remained very high during the year at 207% for OSB and 191% for
CCFS.
We remain cognisant of the uncertain macroeconomic outlook and
the potential impact of the higher cost of living and borrowing on
the mortgage market and affordability, however we are building a
healthy pipeline of new business and have a proven track record of
retaining customers, attracting new business and working with high
quality borrowers. Based on current application volumes, we are
targeting underlying net loan book growth of c. 5% for 2023. The
underlying NIM for 2023 is expected to be broadly flat to 2022,
after the expected impact of planned Tier 2 and MREL qualifying
debt issuance, subject to market conditions. We expect our
underlying cost to income ratio to increase to c. 29% in 2023, due
to the significant fair value gains from hedging activities in
2022, continuing inflationary headwinds and the full-year impact of
hiring last year and further planned investment in the
business.
Andy Golding
Chief Executive Officer
16 March 2023
Segment review
The Group reports its lending business under two segments:
OneSavings Bank and Charter Court Financial Services.
OneSavings Bank (OSB) segment
The following tables present OSB's loans and advances to
customers and contribution to profit on a statutory basis:
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2022
Gross loans and advances to customers 10,920.0 2,324.7 13,244.7
Expected credit losses (95.2) (8.0) (103.2)
Net loans and advances to customers 10,824.8 2,316.7 13,141.5
Risk-weighted assets 5,258.8 1,033.7 6,292.5
Profit or loss for the year
Net interest income 383.1 77.6 460.7
Other income 7.1 1.8 8.9
Total income 390.2 79.4 469.6
Impairment of financial assets (23.5) 1.2 (22.3)
Contribution to profit 366.7 80.6 447.3
BTL/SME Residential Total
GBPm GBPm GBPm
Year ended 31-Dec-2021
Gross loans and advances to customers 9,936.1 2,121.2 12,057.3
Expected credit losses (72.0) (10.2) (82.2)
Net loans and advances to customers 9,864.1 2,111.0 11,975.1
Risk-weighted assets 4,614.1 957.6 5,571.7
Profit or loss for the year
Net interest income 340.5 74.3 414.8
Other income 7.2 1.5 8.7
Total income 347.7 75.8 423.5
Impairment of financial assets (6.2) 2.7 (3.5)
Contribution to profit 341.5 78.5 420.0
OSB Buy-to-Let/SME sub-segment
31-Dec-2022 31-Dec-2021
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 9,755.0 8,867.7
Commercial 881.3 794.4
Residential development 184.5 120.7
Funding lines 99.2 153.3
Gross loans and advances to customers 10,920.0 9,936.1
Expected credit losses (95.2) (72.0)
Net loans and advances to customers 10,824.8 9,864.1
This sub-segment comprises Buy-to-Let mortgages secured on
residential property held for investment purposes by experienced
and professional landlords, commercial mortgages secured on
commercial and semi-commercial properties held for investment
purposes or for owner occupation, residential development finance
to small and medium-sized developers, secured funding lines to
other lenders and asset finance.
The Buy-to-Let/SME net loan book increased by 10% to
GBP10,824.8m in 2022, supported by organic originations of
GBP2,283.8m, which were 27% higher than GBP1,804.7m in 2021.
Buy-to-Let/SME net interest income increased by 13% to GBP383.1m
from GBP340.5m in 2021, reflecting growth in the loan book and the
beneficial impact of base rate rises, due primarily to delays in
the market passing base rate rises on to savers in full. This
sub-segment also benefitted from net effective interest rate (EIR)
reset gain of GBP20.0m (2021: GBP24.9m). The gain was primarily due
to higher than expected redemptions in the fixed period of
Buy-to-Let mortgages, as borrowers sought to lock in rates early in
a period of rapidly rising rates, as well as higher anticipated
income in the reversion period for commercial mortgages.
This sub-segment also benefitted from GBP7.1m of other income
from the Group's hedging activities (2021: GBP7.2m) and recorded an
impairment charge of GBP23.5m (2021: GBP6.2m). The impairment
charge was due to the more severe forward-looking macroeconomic
scenarios adopted by the Group, post model adjustments to account
for rising cost of living and borrowing concerns, partially offset
by releases of pandemic-related provisions and the favourable
effect of house price appreciation in the year. Overall, the
Buy-to-Let/SME segment made a contribution to profit of GBP366.7m,
up 7% compared with GBP341.5m in 2021.
The Group remained highly focused on the risk assessment of new
lending, as demonstrated by the average loan to value (LTV) for
Buy-to-Let/SME originations of 73%, unchanged from 2021.1 The
average book LTV in the Buy-to-Let/SME segment reduced to 63% (31
December 2021: 65%)(1) benefitting from house price appreciation
with only 3.2% of loans exceeding 90% LTV (31 December 2021:
2.5%).
Buy-to-Let
The Buy-to-Let gross loan book increased by 10% to GBP9,755.0m
at the end of December 2022 (31 December 2021: GBP8,867.7m),
benefitting from increased refinance activity. Originations in this
segment were GBP1,804.6m in 2022, up 22% from GBP1,477.7m in the
prior year.
The PRA implemented new underwriting standards for Buy-to-Let
mortgages at the start of 2017, which introduced affordability
stress testing for mortgages fixed for less than five years,
triggering a shift towards five-year fixed rate products. The early
wave of these five-year fixed rate mortgages reached the end of
their initial term in 2022, leading to an increase in refinance
activity. The proportion of Kent Reliance Buy-to-Let completions
due to refinancing activity increased to 61% from 54% in 2021. The
proportion due to purchases reduced as the prior year benefitted
from a spike in purchase activity due to the stamp duty holiday.
Five-year fixed rate mortgages continued to be popular in 2022 due
to the expectation of further base rate rises and represented 70%
of Kent Reliance completions (2021: 62%).
Professional, multi-property landlords continued to add to their
portfolios and optimise their businesses from a tax perspective and
represented 86% of completions by value for the Kent Reliance brand
in 2022 (2021: 82%). Kent Reliance mortgage applications that came
from landlords borrowing via a limited company represented 78%
(2021: 73%).
Research conducted by BVA BDRC on behalf of the Group showed
that the proportion of landlords planning to purchase new
properties fell slightly during the year. However, of those
planning to acquire more properties, the proportion planning to do
so within a limited company ownership structure increased,
especially amongst landlords with portfolios of six or more
properties, signalling continued professionalisation of Buy-to-Let
landlords.
OSB continued to focus on retention under its Choices retention
programme, with 72% of existing borrowers choosing a new product
with us within three months of their initial rate ending (2021:
71%).
The weighted average LTV of the Buy-to-Let book as at 31
December 2022 was 62% with an average loan size of GBP255k (31
December 2021: 64% and GBP250k). The weighted average interest
coverage ratio for Buy-to-Let originations during 2022 was 207%
(2021: 199%).
Commercial
Through its InterBay brand, the Group lends to borrowers
investing in commercial and semi-commercial property, reported in
the Commercial total, and more complex Buy-to-Let properties and
portfolios, reported in the Buy-to-Let total.
Organic originations more than triple in 2022 to GBP278.7m
supporting growth in the gross loan book of 11% to GBP881.3m as at
31 December 2022 from GBP794.4m in the prior year. InterBay
experienced increased levels of interest and applications in 2022
as pandemic-related criteria restrictions were removed, and new
refurbishment products were relaunched in April.
The weighted average LTV of the commercial book remained low at
69% and the average loan size was GBP375k in 2022 (31 December
2021: 69% and GBP380k).
InterBay Asset Finance, which predominantly targets UK SMEs and
small corporates financing business critical assets, achieved a
record year of lending volumes. Average deal size increased and
customer credit covenants improved as businesses continued to
recover from the pandemic. The gross carrying amount under finance
leases increased by 40% to GBP163.2m as at 31 December 2022 (31
December 2021: GBP116.2m).
Residential development
Our Heritable residential development business provides
development finance to small and medium-sized residential property
developers. The preference is to fund house builders which operate
outside of central London and provide relatively affordable family
housing, as opposed to complex city centre schemes where
affordability and construction cost control can be more
challenging. New applications represented repeat business from the
team's extensive existing relationships.
The residential development finance gross loan book at the end
of 2022 was GBP184.5m, with a further GBP162.2m committed (31
December 2021: GBP120.7m and GBP188.0m, respectively). Total
approved limits were GBP502.6m, exceeding drawn and committed funds
due to the revolving nature of the facility where construction is
phased and facilities are redrawn as sales on the initially
developed properties occur (31 December 2021: GBP500.3m). The rates
of sale experienced by Heritable's developer customers increased
during the year, leading to high levels of loan repayments.
At the end of 2022, Heritable had commitments to finance the
development of 2,140 residential units, the majority of which are
houses located outside of central London. Heritable continues to
take an exacting approach to approving funding for new customers
given the macroeconomic uncertainty.
Funding lines
OSB continued to provide secured funding lines to non-bank
lenders which operate in certain high-yielding, specialist
sub-segments, primarily secured against property-related mortgages.
Total credit approved limits as at the end of 2022 were GBP274.0m
with total loans outstanding of GBP99.2m (31 December 2021:
GBP450.0m and GBP153.3m, respectively).
During the year, a cautious risk approach was maintained. Five
property-related funding lines were closed and no new facilities
were extended, as the Group chose to focus on servicing existing
borrowers.
1. Buy-to-Let/SME sub-segment average weighted LTVs include Kent
Reliance and InterBay Buy-to-Let, semi-commercial and commercial
lending.
OSB Residential sub-segment
31-Dec-2022 31-Dec-2021
GBPm GBPm
-------------------------------------- ----------- ------------
First charge 2,152.9 1,895.9
Second charge 171.8 224.7
Funding lines - 0.6
Gross loans and advances to customers 2,324.7 2,121.2
Expected credit losses (8.0) (10.2)
Net loans and advances to customers 2,316.7 2,111.0
This sub-segment comprises lending to owner-occupiers, secured
via first charge against a residential home and under shared
ownership schemes.
The Residential sub-segment net loan book grew by 10% to
GBP2,316.7m as at 31 December 2022 (31 December 2021: GBP2,111.0m)
with organic originations of GBP575.9m during the year (2021:
GBP558.6m).
Net interest income in the Residential sub-segment increased by
4% to GBP77.6m (2021: GBP74.3m) largely due to the growth in the
loan book and the beneficial impact of base rate rises, due
primarily to delays in the market passing base rate rises on to
savers in full. This sub-segment recognised a GBP1.6m net EIR loss
due to cash underperformance versus modelled assumptions on the
second charge acquired books (2021: GBP7.5m gain).
Other income of GBP1.8m (2021: GBP1.5m) was recognised from the
Group's hedging activities and an impairment credit of GBP1.2m
(2021: GBP2.7m) due to strong house price performance in the year,
partially offset by more severe forward-looking macroeconomic
scenarios adopted by the Group and post model adjustments to
account for rising cost of living and borrowing concerns. Overall,
contribution to profit from this segment increased by 3% to
GBP80.6m compared with GBP78.5m in 2021.
The average book LTV reduced to 45% (31 December 2021: 48%)(1)
with only 0.8% of loans by value with LTVs exceeding 90% (31
December 2021: 0.8%). The average LTV of new residential
origination during
2022 increased to 64% (2021: 50%)(1) as a result of a smaller
proportion of shared ownership originations than in the prior year,
(which complete at lower LTVs) and an increase in higher LTV
owner-occupied originations.
First charge
First charge mortgages are provided under the Kent Reliance
brand, which largely serves prime credit quality borrowers with
more complex circumstances. This includes high net worth
individuals with multiple income sources and self-employed
borrowers, as well as those buying a property in conjunction with a
housing association under shared ownership schemes.
The first charge gross loan book increased 14% in the period to
GBP2,152.9m from GBP1,895.9m at the end of 2021, as the Group
relaunched its residential proposition under the Kent Reliance
brand introducing a new range of products for complex prime
borrowers in May.
Second charge
The OSB second charge mortgage book is in run-off and managed by
Precise Mortgages. The total gross loans were GBP171.8m at the end
of 2022 (31 December 2021: GBP224.7m).
Funding lines
As at the end of 2022, OSB provided no secured funding lines
with the final exposure repaid in the year (31 December 2021:
GBP0.6m).
Charter Court Financial Services (CCFS) segment
The following tables present CCFS's loans and advances to
customers and contribution to profit on an underlying basis,
excluding acquisition-related items and a reconciliation to the
statutory results.
Buy-to- Total Acquisition- related Total
Year ended Let Residential Bridging Second charge Other(1,2) underlying Items(3) statutory
31-Dec-2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans and
advances to
customers 7,468.8 2,671.3 149.7 111.9 14.6 10,416.3 81.7 10,498.0
Expected credit
losses (23.5) (3.8) (0.5) (0.2) - (28.0) 1.2 (26.8)
Loans and
advances to
customers 7,445.3 2,667.5 149.2 111.7 14.6 10,388.3 82.9 10,471.2
Risk-weighted
assets 2,927.1 1,107.3 70.9 45.4 5.5 4,156.2 46.0 4,202.2
Profit or loss account
Net interest
income 206.0 96.0 5.0 5.9 (4.5) 308.4 (59.2) 249.2
Other income - - - - 46.2 46.2 10.4 56.6
Total income 206.0 96.0 5.0 5.9 41.7 354.6 (48.8) 305.8
Impairment of
financial
assets (9.5) 1.2 (0.2) 0.1 - (8.4) 0.9 (7.5)
Contribution to
profit 196.5 97.2 4.8 6.0 41.7 346.2 (47.9) 298.3
1. For loans and advances to customers 'Other' relates to
acquired loan portfolios.
2. For Profit or loss account, 'Other' relates to net interest
income from acquired loan portfolios as well as gains on structured
asset sales, fee income from third party mortgage servicing and
gains or losses on the Group's hedging activities.
3. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
Buy-to- Total Acquisition- related Total
Year ended Let Residential Bridging Second charge Other(1, 2) underlying Items(3) statutory
31-Dec-2021 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Gross loans and
advances to
customers 6,301.9 2,451.8 56.3 153.7 17.7 8,981.4 143.1 9,124.5
Expected credit
losses (13.9) (5.1) (0.3) (0.3) - (19.6) 0.3 (19.3)
Loans and
advances to
customers 6,288.0 2,446.7 56.0 153.4 17.7 8.961.8 143.4 9,105.2
Risk-weighted
assets 2,352.1 1,011.1 29.3 62.2 6.5 3,461.2 68.7 3,529.9
Profit or loss account
Net interest
income 151.0 81.3 5.2 6.7 (8.5) 235.7 (62.9) 172.8
Other income - - - - 20.0 20.0 12.7 32.7
Total income 151.0 81.3 5.2 6.7 11.5 255.7 (50.2) 205.5
Impairment of
financial
assets 4.3 2.3 1.4 0.4 - 8.4 (0.5) 7.9
Contribution to
profit 155.3 83.6 6.6 7.1 11.5 264.1 (50.7) 213.4
1. For loans and advances to customers 'Other' relates to
acquired loan portfolios.
2. For Profit or loss account, 'Other' relates to net interest
income from acquired loan portfolios as well as gains on structured
asset sales, fee income from third party mortgage servicing and
gains or losses on the Group's hedging activities.
3. For more details on acquisition-related adjustments, see
Reconciliation of statutory to underlying results in the Financial
review.
31-Dec-2022 31-Dec-2021
GBPm GBPm
-------------------------------------- ----------- -----------
Buy-to-Let 7,468.8 6,301.9
Residential 2,671.3 2,451.8
Bridging 149.7 56.3
Second charge 111.9 153.7
Other(1) 14.6 17.7
Gross loans and advances to customers 10,416.3 8,981.4
Expected credit losses (28.0) (19.6)
Net loans and advances to customers 10,388.3 8,961.8
1. Other relates to acquired loan portfolios
CCFS targets specialist mortgage market sub-segments with a
focus on specialist Buy-to-Let mortgages secured on residential
property held for investment purposes by both non-professional and
professional landlords. It also provides specialist residential
mortgages to owner-occupiers, secured against residential
properties, including those unsupported by the high street banks.
In addition, it provides short-term bridging, secured against
residential property in both the regulated and unregulated
sectors.
The CCFS underlying net loan book grew by 16% to GBP10,388.3m at
the end of 2022 (31 December 2021: GBP8,961.8m) supported by
organic originations of GBP2,969.4m, which increased by 37% from
GBP2,160.2m of new business written in 2021.
CCFS Buy-to-Let sub--segment
During 2022 CCFS' organic originations in the Buy-to-Let
sub-segment through the Precise Mortgages brand increased by 35% to
GBP1,998.7m (2021: GBP1,482.3m) supporting growth of 19% in the
underlying gross Buy-to-Let loan book in the year to GBP7,468.8m
from GBP6,301.9m at the end of 2021.
Underlying net interest income in this sub-segment increased by
36% to GBP206.0m compared with GBP151.0m in the prior year,
reflecting growth in the loan book and an improved net interest
margin due to the base rate rises. There were delays, especially in
the first half of the year, in the market passing base rate rises
on to savers in full. In addition, as rates rose, mortgage interest
income benefitted from higher than expected reversionary income
following the end of the fixed product term. This benefit was
partially offset by an expectation that customers would spend less
time on the higher reversionary rate before refinancing, leading to
net underlying EIR reset loss of GBP37.5m (2021: GBP14.7m).
This sub-segment recorded an impairment charge of GBP9.5m (2021:
GBP4.3m credit) largely due to more severe forward-looking
macroeconomic scenarios adopted by Group and post model adjustments
to account for rising cost of living and borrowing concerns,
partially offset by the release of pandemic-related provisions and
the favourable effect of house price appreciation in the year. On
an underlying basis, Buy-to-Let made a contribution to profit of
GBP196.5m in 2022, up 27% (2021: GBP155.3m).
The PRA implemented new underwriting standards for Buy-to-Let
mortgages at the start of 2017, which introduced affordability
stress testing for mortgages fixed for less than five years,
triggering a shift towards five-year fixed rate products. The early
wave of these five-year fixed rate mortgages reached the end of
their initial term in 2022, leading to an increase in refinance
activity in the market. Remortgages represented 50% of completions
under the Precise Mortgages brand in 2022 (2021: 39%) with
purchases reducing as a percentage of the total, as the prior year
benefitted from a spike in purchase activity due to the stamp duty
holiday. Longer term mortgages continued to be favoured by
landlords and five-year fixed rate products accounted for 74% of
completions, an increase from 64% recorded during 2021.
In addition, borrowing via a limited company made up 65% of
Buy-to-Let completions for the Precise Mortgages brand in 2022
(2021: 69%) and loans for specialist property types, including
houses of multiple occupation and multi-unit properties,
represented 21% of completions in this sub-segment (2021: 26%).
Research conducted by BVA BDRC on behalf of the Group found that
almost six in ten landlords that intended to acquire new properties
planned to do so within a limited company structure, continuing an
upward trend that has been observed over a number of years.
Precise Mortgages remained the highest ranked specialist lending
brand for Buy-to-Let mortgages based on unprompted willingness to
recommend in the BVA BDRC's Project Mercury survey in Q4 2022.
The weighted average LTV of the loan book in this segment
decreased to 66% benefitting from house price appreciation (31
December 2021: 68%). The new lending average LTV was 73% with an
average loan size of GBP191k (2021:74% and GBP192k, respectively).
The weighted average interest coverage ratio for Buy-to-Let
origination was 191% in 2022 (2021: 188%).
On a statutory basis, the Buy-to-Let sub-segment made a
contribution to profit of GBP154.8m in 2022 (2021: GBP109.5m).
CCFS Residential sub-segment
The underlying gross loan book in CCFS' Residential sub-segment
reached GBP2,671.3m in 2022, an increase of 9% from GBP2,451.8m as
at 31 December 2021 and organic originations increased 34% to
GBP749.4m in 2022 (2021: GBP558.0m).
Underlying net interest income increased to GBP96.0m (2021:
GBP81.3m) and reflected growth in the loan book and an improved net
interest margin, due to the base rate rises and delays in these
being passed on to retail savers in full, partially offset by an
underlying EIR reset loss of GBP4.0m (2021: GBPnil). The EIR reset
loss was due to an expectation that borrowers would spend less time
on the higher reversionary rate at the end of their fixed term.
The Residential sub-segment benefitted from an impairment credit
of GBP1.2m (2021: GBP2.3m) due to strong house price appreciation
in the year, partially offset by more severe forward-looking
macroeconomic scenarios adopted by the Group and post model
adjustments to account for rising cost of living and borrowing
concerns.
Overall, on an underlying basis, the Residential sub-segment
made a contribution to profit of GBP97.2m, up by 16% compared with
GBP83.6m in 2021.
The Group continued to benefit from CCFS' expertise, with a
strong focus on first time buyers, self-employed individuals and
those with minor adverse credit records. The Help to Buy scheme
closed to new applications in October 2022, with completions for
new purchases required by 31 March 2023 and represented 19% of
completions in this sub-segment in the year (2021: 44%).
The average loan size in this sub-segment was GBP147k (31
December 2021: GBP136k) with an average LTV for new lending
unchanged from prior year at 66% and a book LTV of 57% which
benefitted from house price appreciation in the year (31 December
2021: 59%).
On a statutory basis, the Residential sub-segment made a
contribution to profit of GBP81.9m (2021: GBP67.1m).
CCFS Bridging sub--segment
The Group continued to improve its bridging offering and in
April 2022 relaunched and rebranded its refurbishment product
criteria. Short-term bridging originations nearly doubled in the
year to GBP217.5m (2021: GBP109.1m) and as a result the gross loan
book in this sub-segment increased to GBP149.7m as at 31 December
2022 (31 December 2021: GBP56.3m).
Underlying net interest income remained broadly flat at GBP5.0m
(2021: GBP5.2m), and the impairment charge was GBP0.2m (2021:
GBP1.4m credit) largely due to balance sheet growth. The bridging
sub-segment made a contribution to profit of GBP4.8m in 2022 on an
underlying basis compared with GBP6.6m in 2021.
On a statutory basis, the bridging sub-segment made a
contribution to profit of GBP4.2m (2021: GBP6.4m).
CCFS Second charge sub-segment
The second charge gross loan book reduced to GBP111.9m compared
with GBP153.7m as at 31 December 2021, as the second charge
products under Precise Mortgages brand were withdrawn in August
2022.
Underlying net interest income in the second charge sub-segment
reduced to GBP5.9m (2021: GBP6.7m) and the contribution to profit
reduced to GBP6.0m (2021: GBP7.1m) after an impairment credit of
GBP0.1m (2021: GBP0.4m) largely due to the reduction in the size of
the loan book.
On a statutory basis, the contribution to profit from the second
charge sub-segment was GBP5.2m (2021: GBP5.7m).
Financial review
Review of the Group's performance on a statutory basis for 2022
and 2021.
FY 2022 FY 2021
Summary Profit or Loss GBPm GBPm
Net interest income 709.9 587.6
Net fair value gain on financial instruments 58.9 29.5
Gain on sale of financial instruments - 4.0
Other operating income 6.6 7.9
Administrative expenses (207.8) (166.5)
Provisions 1.6 (0.2)
Impairment of financial assets (29.8) 4.4
Impairment of intangible assets - 3.1
Integration costs (7.9) (5.0)
Exceptional items - (0.2)
Profit before tax 531.5 464.6
--------- ---------
Profit after tax 410.0 345.3
FY 2022 FY 2021
Key ratios(1)
Net interest margin 278bps 253bps
Cost to income ratio 27% 26%
Management expense ratio 81bps 71bps
Loan loss ratio 13bps -2bps
Return on equity 21% 20%
Basic earnings per share, pence 90.8 76.0
Ordinary dividend per share, pence 30.5 26.0
Special dividend per share, pence 11.7 -
31-Dec-22 31-Dec-21
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances to customers 23,612.7 21,080.3
Retail deposits 19,755.8 17,526.4
Total assets 27,566.7 24,531.9
Key ratios
Common equity tier 1 ratio 18.3% 19.6%
Total capital ratio 19.7% 21.2%
Leverage ratio(2) 8.4% 7.9%
1. For more detail on the calculation of key ratios, see the
Appendix.
2. In line with the latest UK Leverage Ratio Framework which
came into effect on 1 January 2022, the leverage ratio now excludes
claims on central banks. As at 31 December 2021, the ratio would
have been 8.9% on a like for like basis.
Statutory profit
The Group's statutory profit before tax increased by 14% to
GBP531.5m (2021: GBP464.6m) after exceptional items, integration
costs and other acquisition-related items of GBP59.6m(1) (2021:
GBP57.6m). The increase was primarily due to growth in the loan
book, an improved net interest margin and net fair value gain on
financial instruments resulting from rising swap rates, partially
offset by higher administration costs and an impairment charge
compared to an impairment credit in 2021.
Statutory profit after tax was GBP410.0m in 2022, an increase of
19% from GBP345.3m in the prior year, and included after-tax
exceptional items, integration costs and other acquisition-related
items of GBP38.7m1 (2021: GBP47.8m).
The Group's effective tax rate reduced to 23.1%(2) compared to
25.7% in the prior year, primarily due to a reduction in the
deferred tax provision following the enactment of the expected
decrease in the bank surcharge from 8% to 3% from April 2023.
Statutory return on equity for 2022 improved to 21% (2021: 20%)
reflecting the increase in profitability in the year.
Statutory basic earnings per share increased to 90.8 pence
(2021: 76.0 pence), in line with the increase in profit after
taxation.
Net interest income
Statutory net interest income increased by 21% in 2022 to
GBP709.9m (2021: GBP587.6m), largely reflecting growth in the loan
book and an improved net interest margin.
Statutory net interest margin (NIM) was 278bps compared to
253bps in the prior year, up 25bps, primarily due to the benefit of
base rate rises. There were delays, especially in the first half of
the year, in the market passing base rate rises on to savers in
full. In addition, as rates rose, mortgage interest income
benefitted from higher expected reversionary income following the
end of the fixed product term. This benefit was partially offset by
an expectation that customers would on average spend less time on
the higher reversionary rate before refinancing. The impact of
this, together with other behavioural changes, resulted in a net
effective interest rate (EIR) reset loss of GBP31.6m (2021:
GBP11.5m gain).
Net fair value gain on financial instruments
Statutory net fair value gain on financial instruments of
GBP58.9m in 2022 (2021: GBP29.5m) included a GBP57.1m net gain on
unmatched swaps (2021: GBP10.3m) following the significant rise in
swap prices in the fourth quarter and a loss of GBP8.1m (2021:
GBP2.4m gain) in respect of the ineffective portion of hedges.
The Group also recorded a GBP10.2m net gain (2021: GBP13.4m
gain) from the unwind of acquisition-related inception adjustments,
a GBP1.2m gain (2021: GBP3.0m) from the amortisation of hedge
accounting inception adjustments and a loss of GBP1.5m from other
items (2021: GBP0.4m gain).
The net gain on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages. This benefitted from a step up in
interest rate outlook on the SONIA yield curve largely in response
to the actions announced in the September mini budget. 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
There were no sales of financial instruments in 2022.
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.
Other operating income
Statutory other operating income of GBP6.6m (2021: GBP7.9m)
mainly comprised CCFS' commissions and servicing fees, including
those from servicing securitised loans that have been derecognised
from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased by 25% to GBP207.8m
in 2022 (2021: GBP166.5m), due primarily to spend returning to a
more normalised level post pandemic, inflationary headwinds and
planned investment in the business, including refreshing and
upgrading our technology infrastructure post-integration.
The Group's statutory cost to income ratio increased to 27%
(2021: 26%) as a result of the growth in administrative expenses,
moderated by strong income generation in the year, including the
net fair value gain on hedging activities.
The statutory management expense ratio increased to 81bps in
2022 (2021: 71bps) reflecting the higher administrative
expenses.
Impairment of financial assets
The Group recorded a statutory impairment charge of GBP29.8m in
2022 (2021: GBP4.4m credit) representing a statutory loan loss
ratio of 13bps (2021: -2bps).
The Group adopted more severe macroeconomic scenarios in its
IFRS 9 models as the outlook deteriorated, which led to a charge of
GBP11.6m. Post-model adjustments, primarily to account for rising
cost of living and borrowing concerns, amounted to a charge of
GBP13.3m and the strong loan book growth and changes in the risk
profile in the year resulted in a charge of GBP15.2m. These were
partially offset by a release of GBP10.3m due to house price
appreciation in the year and a GBP8.3m release from a reduction in
pandemic-related post-model adjustments and modelling enhancements.
Other charges amounted to GBP8.3m.
In the prior year, the impairment credit was largely due to the
Group's adoption of less severe forward-looking macroeconomic
scenarios in its IFRS 9 models, reflecting an improved outlook
together with the benefit of strong house price performance in the
year.
Impairment of intangible assets
There were no intangible asset impairments in 2022.
The impairment credit to intangible assets of GBP3.1m in the
prior year 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 GBP7.9m of integration costs in 2022 (2021:
GBP5.0m), which largely related to redundancy costs and consultant
fees for advice on the Group's future operating structure.
Exceptional items
There were no exceptional costs in 2022.
In the prior year, exceptional costs of GBP0.2m related to the
insertion of OSB GROUP PLC as the new holding company and listed
entity of the Group.
Dividend
The Board has recommended a final dividend of 21.8 pence per
share for 2022, which together with the interim dividend of 8.7
pence per share, represents 30% of underlying profit attributable
to ordinary shareholders. The Board has also announced a special
dividend of GBP50.3m, 11.7 pence per share (2021: nil). See the
Appendix for the calculation of the 2022 final dividend.
The recommended final dividend is subject to approval at the AGM
on 11 May 2023. The final and special dividends will be paid on 17
May 2023, with an ex-dividend date of 23 March 2023 and a record
date of 24 March 2023.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 12% to GBP23,612.7m in 2022 (31 December 2021: GBP21,080.3m),
supported by originations of GBP5.8bn in the year.
Total assets also grew by 12% to GBP27,566.7m (31 December 2021:
GBP24,531.9m), largely due to the growth in loans and advances to
customers and an increase in liquid assets.
On a statutory basis, retail deposits increased by 13% to
GBP19,755.8m as at 31 December 2022 from GBP17,526.4m in the prior
year, as the Group's attractively priced savings products proved
popular with customers.
The Group complemented its retail deposits funding with drawings
under the Bank of England's schemes. Drawings under the Term
Funding Scheme for SMEs as at 31 December 2022 remained unchanged
from GBP4.2bn at the end of 2021 and drawings under the Indexed
Long-Term Repo scheme were GBP300.9m.
Liquidity
OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk.
Each Bank holds its own significant liquidity buffer of liquidity
coverage ratio (LCR) eligible high-quality liquid assets
(HQLA).
Each Bank operates within a target liquidity runway in excess of
the minimum LCR regulatory requirement, which is based on internal
stress testing. Each Bank has a range of contingent liquidity and
funding options available for possible stress periods.
As at 31 December 2022, OSB had GBP1,494.1m and CCFS had
GBP1,522.8m of HQLA (31 December 2021: GBP1,322.8m and GBP1,318.0m,
respectively).
OSB and CCFS also held portfolios of unencumbered prepositioned
Bank of England level B and C eligible collateral in the Bank of
England Single Collateral Pool.
As at 31 December 2022, OSB had an LCR of 229% and CCFS 148% (31
December 2021: 240% and 158%, respectively) and the Group LCR was
185% (31 December 2021: 196%), all significantly in excess of the
regulatory minimum of 100% plus Individual Liquidity Guidance.
Capital
The Group's capital position remained strong, with a CET1 ratio
of 18.3% and a total capital ratio of 19.7% as at the end of 2022
(31 December 2021: 19.6% and 21.2%, respectively). Both ratios
reflected strong capital generation from profitability in the year
offset by loan book growth, foreseeable and paid dividends and the
impact of the GBP100m share repurchase programme completed in
2022.
The Group had a leverage ratio of 8.4%(3) as at 31 December 2022
(31 December 2021: 7.9%). The combined Group had a Pillar 2a
requirement of 1.27% (2021: 1.27%) of risk-weighted assets
(excluding a static integration add-on of GBP19.5m) as at 31
December 2022.
1. See the reconciliation of statutory to underlying results
2. Effective tax rate excludes GBP1.2m of adjustments relating
to earlier years
3. In line with the latest UK Leverage Ratio Framework which
came into effect on 1 January 2022, the leverage ratio now excludes
claims on central banks. As at 31 December 2021, the ratio would
have been 8.9% on a like for like basis.
Summary cash flow statement
Restated(1)
Group Group
31-Dec-2022 31-Dec-2021
GBPm GBPm
---------------------------------------------------- ------------- ------------
Profit before tax 531.5 464.6
Net cash generated/(used in):
Operating activities 428.5 (346.3)
Investing activities 63.2 80.6
Financing activities (184.3) 631.8
Net increase in cash and cash equivalents 307.4 366.1
Cash and cash equivalents at the beginning of the
period 2,736.7 2,370.6
Cash and cash equivalents at the end of the period 3,044.1 2,736.7
1. 2021 figures were restated, see note 1 b) in the Group's
Consolidated Financial Statements for further information
Cash flow statement
The Group's cash and cash equivalents increased by GBP307.4m
during the year to GBP3,044.1m as at 31 December 2022.
In 2022, loans and advances to customers increased by
GBP2,563.1m, primarily funded by GBP2,229.4m of deposits from
retail customers. The Group received GBP434.3m of cash collateral
on derivative exposures and paid GBP137.5m of initial margin,
reflecting new derivatives during the year. Cash used from
financing activities of GBP184.3m included GBP300.9m drawings under
the ILTR scheme offset by GBP193.6m repayment of debt securities,
GBP102.0m share repurchases, GBP133.1m dividend payments and
GBP45.3m interest on financing liabilities. Total drawings under
the Bank of England's TFSME scheme remained unchanged at GBP4.2bn.
Cash generated from investing activities was GBP63.2m.
In 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 GBP631.8m(1) 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.
1. Restated, see note 1 b) in the Group's Consolidated Financial Statements for further information
Review of the Group's performance on an underlying statutory
basis for 2022 and 2021
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 2022 and 2021 exclude exceptional
items, integration costs and other acquisition-related
items.
APMs reflect an important aspect of the way in which
operating targets are defined and performance is monitored
by the Board. However, any APMs in this document are
not a substitute for IFRS measures and readers should
consider the IFRS measures as well.
For more information on APMs and the reconciliation
between APMs and the statutory equivalents, see the
Appendix.
-----------------------------------------------------------
FY 2022 FY 2021
Summary Profit or Loss GBPm GBPm
Net interest income 769.1 650.5
Net fair value gains on financial instruments 48.5 18.5
Gain on sale of financial instruments - 2.3
Other operating income 6.6 7.9
Administrative expenses (204.0) (161.7)
Provisions 1.6 (0.2)
Impairment of financial assets (30.7) 4.9
Profit before tax 591.1 522.2
--------- ---------
Profit after tax 448.7 393.1
FY 2022 FY 2021
Key ratios(1)
Net interest margin 303bps 282bps
Cost to income ratio 25% 24%
Management expense ratio 80bps 70bps
Loan loss ratio 14bps -2bps
Return on equity 24% 24%
Basic earnings per share, pence 99.6 86.7
31-Dec-22 31-Dec-21
GBPm GBPm
Extracts from the Statement of Financial Position
Loans and advances to customers 23,529.8 20,936.9
Retail deposits 19,755.2 17,524.8
Total assets 27,487.6 24,403.6
1. For more detail on the calculation of key ratios, see the
Appendix.
Underlying profit
The Group's underlying profit before tax increased by 13% to
GBP591.1m from GBP522.2m in 2021. The increase was primarily due to
growth in the loan book, an improved net interest margin and net
fair value gain on financial instruments resulting from rising swap
rates, partially offset by higher administration costs and an
impairment charge compared to an impairment credit in 2021.
Underlying profit after tax was GBP448.7m, up 14% (2021:
GBP393.1m), broadly in line with the increase in profit before tax.
The Group's effective tax rate on an underlying basis reduced to
24.3%(1) for 2022 (2021: 24.7%).
On an underlying basis, return on equity for 2022 was 24%,
unchanged from the prior year.
The underlying basic earnings per share increased to 99.6 pence
(2021: 86.7 pence), due to the increase in profit after tax.
Net interest income
Underlying net interest income increased by 18% to GBP769.1m in
2022 (2021: GBP650.5m), largely reflecting growth in the loan book
and an improved net interest margin.
The underlying net interest margin increased to 303bps from
282bps in 2021, primarily due to the benefit of base rate rises.
There were delays, especially in the first half of the year, in the
market passing base rate rises on to savers in full. In addition,
as rates rose, mortgage interest income benefitted from higher
expected reversionary income following the end of the fixed product
term. This benefit was partially offset by an expectation that
customers would on average spend less time on the higher
reversionary rate before refinancing. The impact of this, together
with other behavioural changes, resulted in a net effective
interest rate (EIR) reset loss of GBP23.1m (2021: GBP18.6m
gain).
Net fair value gain on financial instruments
Underlying net fair value gain on financial instruments was
GBP48.5m in 2022 (2021: GBP18.5m) and included a gain on unmatched
swaps of GBP57.1m (2021: GBP10.3m) following the significant rise
in swap prices in the fourth quarter and a loss of GBP8.1m (2021:
GBP2.4m gain) from hedge ineffectiveness.
The Group also recorded a GBP1.2m gain (2021: GBP5.4m) from the
amortisation of hedge accounting inception adjustments and a loss
of GBP1.7m (2021: GBP0.4m gain) from other items.
The net gain on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages. This benefitted from a step up in
interest rate outlook on the SONIA yield curve largely in response
to the actions announced in the September mini budget. 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
There were no sales of financial instruments in 2022.
The gain on sale of financial instruments of GBP2.3m in 2021
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
Other operating income
On an underlying basis, other operating income was GBP6.6m in
2022 (2021: GBP7.9m) and mainly comprised CCFS' commissions and
servicing fees, including those from servicing securitised loans
that have been derecognised from the Group's balance sheet.
Administrative expenses
Underlying administrative expenses were up 26% to GBP204.0m in
2022 (2021: GBP161.7m), due primarily to spend returning to a more
normalised level post pandemic, inflationary headwinds and planned
investment in the business, including refreshing and upgrading our
technology infrastructure post-integration.
The Group's underlying cost to income ratio increased to 25%
(2021: 24%) as a result of the growth in administrative expenses,
moderated by strong income generation in the year, including the
fair value gain on hedging activities.
The underlying management expense ratio increased to 80bps in
2022 (2021: 70bps) reflecting the higher administrative
expenses.
Impairment of financial assets
The Group recorded an underlying impairment charge of GBP30.7m
in 2022 (2021: GBP4.9m credit) representing an underlying loan loss
ratio of 14bps (2021: -2bps).
The Group adopted more severe macroeconomic scenarios in its
IFRS 9 models as the outlook deteriorated, which led to a charge of
GBP11.6m. Post-model adjustments, primarily to account for rising
cost of living and borrowing concerns, amounted to a charge of
GBP13.3m and the strong loan book growth and changes in the risk
profile in the year resulted in a charge of GBP15.2m. These were
partially offset by a release of GBP10.3m due to house price
appreciation in the year and a GBP8.3m release from a reduction in
pandemic-related post-model adjustments and modelling enhancements.
Other charges amounted to GBP9.2m.
In the prior year, the impairment credit was largely due to the
Group's adoption of less severe forward-looking macroeconomic
scenarios in its IFRS 9 models, reflecting an improved outlook
together with the benefit of strong house price performance in the
year.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP23,529.8m (31 December 2021: GBP20,936.9m) an increase of 12%,
supported by gross originations of GBP5.8bn in the year.
Total underlying assets grew by 13% to GBP27,487.6m (31 December
2021: GBP24,403.6m), largely due to the growth in loans and
advances to customers and an increase in liquid assets.
On an underlying basis, retail deposits increased by 13% to
GBP19,755.2m (31 December 2021: GBP17,524.8m) as the Group's
attractively priced savings products proved popular with
customers.
The Group complemented its retail deposits funding with drawings
under the Bank of England's schemes. Drawings under the Term
Funding Scheme for SMEs as at 31 December 2022 remained unchanged
from GBP4.2bn at the end of 2021 and drawings under the Indexed
Long-Term Repo scheme were GBP300.9m.
1. Effective tax rate excludes GBP1.2m of adjustments relating
to earlier years
Reconciliation of statutory to underlying results
FY 2022 FY 2021
Statutory Reverse Reverse
results acquisition- related items Underlying results Statutory results acquisition- related and exceptional items Underlying results
GBPm GBPm GBPm GBPm GBPm GBPm
------------------
Net interest
income 709.9 59.21 769.1 587.6 62.9 650.5
Net fair value
gains on
financial
instruments 58.9 (10.4)(2) 48.5 29.5 (11.0) 18.5
Gain on sale of
financial
instruments -- -- -- 4.0 (1.7)(3) 2.3
Other operating
income 6.6 -- 6.6 7.9 -- 7.9
------------------
Total income 775.4 48.8 824.2 629.0 50.2 679.2
Administrative
expenses (207.8) 3.8(4) (204.0) (166.5) 4.8 (161.7)
Provisions 1.6 -- 1.6 (0.2) -- (0.2)
Impairment of
financial
assets (29.8) (0.9)(5) (30.7) 4.4 0.5 4.9
Impairment of
intangible
assets -- -- -- 3.1 (3.1)(6) --
Integration
costs (7.9) 7.9(7) -- (5.0) 5.0 --
Exceptional
items -- -- -- (0.2) 0.2(8) --
------------------
Profit before
tax 531.5 59.6 591.1 464.6 57.6 522.2
Profit after
tax 410.0 38.7 448.7 345.3 47.8 393.1
Summary Balance Sheet
Loans and
advances to
customers 23,612.7 (82.9)(9) 23,529.8 21,080.3 (143.4) 20,936.9
Other financial
assets 3,878.1 9.1(10) 3,887.2 3,382.3 22.0 3,404.3
Other
non-financial
assets 75.9 (5.3)(11) 70.6 69.3 (6.9) 62.4
--------------------------- ------------------
Total assets 27,566.7 (79.1) 27,487.6 24,531.9 (128.3) 24,403.6
Amounts owed to
retail
depositors 19,755.8 (0.6)(12) 19,755.2 17,526.4 (1.6) 17,524.8
Other financial
liabilities 5,548.5 0.8(13) 5,549.3 4,908.7 2.3 4,911.0
Other
non-financial
liabilities 61.4 (30.2)(14) 31.2 72.4 (45.0) 27.4
------------------
Total
liabilities 25,365.7 (30.0) 25,335.7 22,507.5 (44.3) 22,463.2
Net assets 2,201.0 (49.1) 2,151.9 2,024.4 (84.0) 1,940.4
------------------
Notes to the reconciliation of statutory to underlying results
table:
1. Amortisation of the net fair value uplift to CCFS' mortgage loans and retail deposits on Combination
2. Inception adjustment on CCFS' derivative assets and liabilities on Combination
3. Recognition of 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. Reversal of impairment of intangible assets
7. Reversal of integration costs related to the Combination
8. Reversal of exceptional items
9. Recognition of a fair value uplift to CCFS' loan book less accumulated amortisation of the fair value uplift and a movement on credit provisions
10. Fair value adjustment to hedged assets
11. Recognition of acquired intangibles on Combination
12. Fair value adjustment to CCFS' retail deposits less
accumulated amortisation
13. Fair value adjustment to hedged liabilities
14. Adjustment to deferred tax liability and other
acquisition-related adjustments
Risk review
Progress was made in 2022 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 2021.
Executive summary
The Group delivered strong financial performance against the
backdrop of the United Kingdom's uncertain macroeconomic outlook
resulting from the high levels of inflation and the ongoing
conflict in Ukraine. 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 2022.
The impact of the rising cost of living, the rising cost of
borrowing and the prospect of further increases in the Bank of
England base rate were key areas of focus for the Group in 2022.
The Group conducted additional analysis and made adjustments to the
macroeconomic scenarios used in its modelling and provisioning to
ensure that the impacts on customer affordability were covered.
The Group remained alert to the heightened cyber risk
environment driven by the situation in Ukraine and the embedding of
the hybrid working model for colleagues across the Group. Our cyber
security capabilities were maintained through continued investment
and frequent penetration testing.
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. The Group has a negligible exposure to Ukrainian, Russian
and Belarusian customers and closely monitored and managed these
customers as required.
The Group's risk management framework ensures that risks
continued to be identified, monitored and managed effectively,
which in turn supported the strong operational and financial
performance in the year. A full review of the risk appetite
statements and limits across all principal risk types was
undertaken in 2022, which informed the management of the Group's
lending and retail savings businesses in an uncertain and
competitive operating environment. 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 individual Bank levels.
The Group also maintained strong levels of capital and funding
throughout 2022, 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
appetites. A number of reverse stress tests were performed to
identify what severity of macroeconomic scenario could result in
the Group and its entities breaching minimum regulatory
requirements, which were utilised in the going concern and
viability assessments.
The Group experienced some operational challenges during 2022.
The number of base rate rises was responsible for strong demand for
savings accounts and the number of product rate changes required
was operationally challenging. In the second half, the market saw
an increasing level of borrowers looking to refinance with their
existing lender and in some cases refinance early to avoid
anticipated future interest rate rises. This caused a spike in
enquiries and application timelines which also resulted in
elongated call wait times.
The Group continues to focus on enhancing forecasting and stress
testing capabilities, with a particular focus on Internal Ratings
Based (IRB) stress testing and stress testing using Basel 3.1
scenarios.
The Group continues to advance towards IRB accreditation, with
progress made throughout the year. The Group has undertaken a
comprehensive self-assessment exercise to validate its level of
compliance, in conjunction with drafting all required module 1
submission documentation, which has passed through internal
governance. The Group has noted the PRA's industry level feedback
to ensure effective adherence to regulatory expectation.
Pre-application discussions have been held with the PRA to outline
the Group's approach to integrating IRB capabilities and
compliance. The Group is now actively engaging with the PRA
regarding a module 1 submission date. The programme continues to
integrate IRB capabilities informing the Group's business, key risk
and capital management disciplines.
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 the uncertain macroeconomic and
political environment.
Ensuring that the Group continued to maintain appropriate
expected credit loss provisions was an important consideration of
the Board and senior management. The Group undertook detailed
analysis to assess portfolio risks and consider if these were
adequately accounted for in IFRS 9 models and frameworks. The Group
identified a number of areas requiring post-model adjustments, most
notably to account for the increased credit risk from the
heightened cost of living and cost of borrowing, resulting in an
increase in provisions and a more pronounced increase in the
balances of accounts in stage 2, which was expected given the
mechanics of the IFRS 9 framework. In addition, a new suite of IFRS
9 models were implemented, which further increased alignment across
the Group. Expected credit loss provisions were assessed using the
Group's revised IFRS 9 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.
Significant investment continues to be made across the Group's
risk management capabilities and resources, to ensure that all
categories of risk continue to be managed effectively. An
independent third-party review was undertaken during the year which
indicated that the Group's risk management framework was
well-designed and embedded to support the Group's current and
future strategic plans. The review's recommended actions confirmed
management's existing plans and will drive further enhancements
ensuring that the Group continues to meet emerging regulatory
expectations, whilst supporting shareholder returns via the
management of financial risks.
A number of deep dive thematic reviews across all core loan
portfolios were conducted to ensure that credit risk strategies and
operational capabilities remained appropriate. As a secured lender,
the Group has prudent credit risk appetite limits in place which,
together with well-established management capabilities, position
the Group well to manage the impact of any potential affordability
stress from the ongoing rising cost of living or further increases
in interest rates. The Group continues to conduct sensitivity and
stress testing analysis to understand the financial and operational
impact of differing scenarios on arrears levels, financial
performance metrics and prudential requirements. These scenarios
also support operational capacity planning to help ensure that the
correct level of resourcing is in place within the Servicing and
Collections function. During the pandemic, the Group demonstrated
the effectiveness of its capabilities in managing and supporting
customers during a period of stress.
The ongoing delivery of planned enhancements to the Group's
operational resilience capabilities remains a key area of focus.
The Group's programme of work to ensure appropriate capabilities
and processes are in place to facilitate an orderly resolution of
the Group completed as planned, including the successful completion
of a resolution scenario fire drill which walked selected Board
members and senior management through the core steps of the
resolution timeline. The Group has put in place arrangements
designed to ensure that it is able to continue to serve customers
through resolution and any post-stabilisation restructuring.
The Group continues to implement a programme of work to further
embed the operational risk management framework across the Group,
including the completion of an enhanced risk and controls
self-assessment process and delivery of a more aligned approach to
the setting of operational risk appetite. The Group's Risk and
Control Self-Assessment (RCSA) process was integrated 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.
The Group views fair customer outcomes and provision of timely
and effective support to customers in distress as a central pillar
supporting its Purpose, Vision and Values. The Group has
customer-centric policies and procedures in place which are subject
to ongoing reviews and benchmarking. The Group was also
appropriately attuned to the emerging industry and regulatory focus
on customer vulnerability recognising that Consumer Duty
regulations set higher expectations for the Group in terms of
demonstrating that good outcomes for its customers is at the heart
of the Group's strategy and business objectives.
The Group continued to embed its approach to managing climate
risk through the further development of its climate risk management
framework. A dedicated ESG Technical Committee ensures that
enhancements are delivered as required.
Priority areas for 2023
A significant level of uncertainty remains around the UK
economic outlook and the operating environment for 2023 and beyond.
Therefore, continued close monitoring of the Group's risk profile
and operating effectiveness remains a key priority for the Risk and
Compliance function. Other priorities include:
-- Continue to leverage the Group's Enterprise Risk Management Framework and
existing capabilities to actively identify, assess and manage risks in
line with approved risk appetite.
-- Leverage enhancements made across the Group's portfolio analytical
capabilities, including the implementation of an enhanced stress testing
capability to improve risk-based pricing, balance sheet management,
capital planning and stress testing.
-- Make continued progress in obtaining IRB accreditation and further
leverage capabilities within wider risk management disciplines such as
IFRS 9 Expected Credit Loss (ECL) calculations, underwriting, existing
customer management and collections to drive portfolio performance
benefits and improvements in shareholder returns.
-- Implement and embed the FCA's Consumer Duty rules and requirements, via 5
key pillars of activity, to ensure that the Group complies with the new
Consumer Principle, cross-cutting rules and the four Consumer Duty
outcomes by 31 July 2023 for new and existing products and 31 July 2024
for closed products.
-- Continue to strengthen engagement and support with the first line of
defence to enhance conduct, regulatory and financial crime risk awareness
and key preventative and detective controls.
-- Further enhance and embed the Group's resolution framework, including
testing valuation and funding in resolution capabilities and testing
interactions between other resolution barriers.
-- Maintain oversight of capital management including the impact of MREL,
Basel 3.1 and IRB.
-- Continue the optimisation of funding strategy and enhancement of
sensitivity analysis around key liquidity drivers.
Enterprise Risk Management Framework
The Enterprise Risk Management Framework (ERMF) 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.
The ERMF is the overarching framework that enables the Board and
senior management to actively manage and optimise the risk profile
within the constraints of its risk appetite. The ERMF also enables
informed risk-based decisions to be taken in a timely manner,
ensuring that the interests and expectations of key stakeholders
can be met.
The ERMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The ERMF
links overarching risk principles to day-to-day risk monitoring and
management activities.
The modular construct of the ERMF provides an agile approach to
keeping pace with the evolving nature of the risk profile and
underlying drivers. The ERMF and its core modular components are
subject to periodic review and approval by the Board and its
relevant Committees. The key modules of the ERMF structure are as
follows:
1. Risk principles and culture - the Group established a set of
risk management and oversight principles that 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 ERMF 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 strategic risk management framework.
4. Risk definitions and categorisation - the Group sets out its
principal risks that 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.
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 stress testing framework
which sets out the Group's approach.
7. 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.
8. 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.
9. Risk management information and reporting - the Group
established a comprehensive suite of risk Management Information
(MI) and reports covering all principal risk types.
10. 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.
11. Use and embedding - dissemination of key framework
components across the Group to ensure that business activities and
decision-making are undertaken in line with the Board
expectations.
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 to 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 that 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's risk
appetite is to ensure that the strategy and business operating
model is sufficiently resilient.
The Group's risk appetite is calibrated using statistical
analysis and stress testing to inform the process for setting
management triggers and limits against key risk indicators. The
calibration process is designed to ensure that timely and
appropriate actions are taken to maintain the risk profile within
approved thresholds. The Board and senior management actively
monitor actual performance against approved management triggers and
limits. Currently, 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
There was further embedding of the Group's approach to climate
risk during 2022, with the Climate Risk Management Framework and
ESG governance structures now established.
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 property prices 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 on the loan book
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:
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 10 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 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 Energy
Performance Certificate (EPC) of each property was considered to
allow for an assessment of transitional risk due to policy change.
EPC ratings are based on a Standard Energy Procedure (SAP)
calculation which uses a government methodology to determine the
energy performance of properties by considering factors such as
construction materials, heating systems, insulation and air
leakage.
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.
-- Flood riskBy the 2030s, at the Group level, the percentage of properties
predicted to experience a flood is expected to increase from 0.49% in the
least severe scenario to 0.51% in the most severe scenario. Both
scenarios represent a low proportion of the Group's loan portfolios.
-- SubsidenceIn the 2030s, at the Group level, the percentage of properties
predicted to experience subsidence is expected to increase from 0.42% in
the least severe scenario to 0.45% in the most severe scenario. The
outcome of both scenarios represents a low proportion of the Group's loan
portfolios.
-- Coastal erosionThere 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.
Both Banks have over 93% of their portfolios more than 1,000
metres from the coastline, indicating a very low coastal erosion
risk across the Group.
The CCFS bank entity has 32 properties within 100 metres of the
coastline, whilst the OSB bank entity has 34.
c) Energy Performance Certificate profile
The EPC profile of both Bank entities follows a similar trend to
the national average. At the Group level 40% of properties have an
EPC of C or better, 45% have an EPC of D, 13% with an EPC of E and
negligible percentages in F or G. Over 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 each Bank, measured through change to
Expected Credit Loss (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.
Methodology -- transitional risks
The 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.
d) Analysis outcome
The physical risks currently present an immaterial ECL or
capital risk to the Group. The sensitivity to transitional risk is
larger than that of physical risk, although still very small,
particularly when considering the aggressive time frames on
government policy relating to minimum EPC requirements
e) Planned enhancements during 2023
In the future, the Group's climate risk data and scenario
analysis capabilities will continue to be enhanced.
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
2022 despite the continued impact of inflation, increasing interest
rates and the conflict in Ukraine. The ongoing macroeconomic
uncertainty and its potential impact on net interest margin,
affordability levels and house prices present an increased risk to
the Group's performance in 2023.
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: increased
The increase in macroeconomic environment risk in 2022 related
to inflation and increasing interest rates creating a squeeze on
borrowers' affordability levels. The ongoing macroeconomic
uncertainty will continue into 2023 with an increased risk to the
Group's credit risk profile, including the possibility of a
fall
in 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.
Mitigation
The Group continues to develop products and services that meet
the requirements of the markets in which it operates. The Group has
a diversified suite of products and capabilities to utilise,
together with significant financial resources to support a response
to changes in competition.
Direction: unchanged
The current economic outlook may limit the number of competitors
shifting their focus to the Group's key market sub-segments.
2. Reputational risk
The potential risk of the Group's reputation being affected due
to factors such as unethical practices, adverse regulatory actions,
customer or broker 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 any principal risk can lead to a reputational
risk impact.
Risk appetite statement: the Group has a very low appetite for
reputational risks. The Group will not conduct its business or
engage with stakeholders in a manner that could adversely impact
its reputation or franchise value. The Group recognises that
reputational risk is a consequence of other risks materialising and
in turn seeks to actively manage all risks within Board-approved
risk appetite levels. The Group strives to protect and enhance its
reputation at all times.
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. Review of relevant
Management Information (MI) including complaint volumes, Net
Promoter Scores, Customer Satisfaction results, Social Media and
Trustpilot feedback.
Direction: increased
The challenging macroeconomic environment in 2022 resulted in
significant shifts within both the UK's lending and savings
markets. This has brought about the need for all banks to become
increasingly agile with products offered in order to ensure that
all core targets continued to be met. Operational scalability and
efficiency challenges have impacted the Group's reputational risk
profile.
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.
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: increased
The drivers of borrower default risk have shifted to rising
inflation and the consequential increases in interest rates which
impact affordability for accounts which revert onto higher interest
rates and increase the 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: increased
The uncertain economic outlook and the ongoing geopolitical risk
due to the conflict in Ukraine resulted in high inflation and
increases in interest rates could drive higher levels of customer
defaults, rising impairment levels and falling residential and
commercial collateral values.
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.
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
Interest rate risk remained unchanged in 2022 due to the Group's
simple asset and liability structure and ongoing careful
management.
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
The Group did not require active management of basis risk in
2022 due to its balance sheet structure.
Direction: decreased
Basis risk exposures reduced year on year as a result of the
LIBOR Transition at the end of 2021.
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 ILAAP
stress scenarios.
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 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. 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
that it is not solely reliant on retail savings. The Group also has
a mature Retail Mortgage Backed Security (RMBS) programme.
Direction: increased
The Group's funding levels and mix remained strong throughout
the year.
In 2022, OSB and CCFS were able to attract significant flows of
new deposits and depositors, despite the volatile interest rate
environment and competitive savings market. During periods of
exceptionally high volatility, funding was drawn from the Bank of
England using the Indexed Long-term Repo scheme to support retail
funding and customer operations.
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 one securitisation in 2022 and has a range of
wholesale funding options available outside retained
securitisation, including Bank of England facilities, for which
collateral has been prepositioned.
Direction: unchanged
The Group's range of wholesale funding options available,
including repo or sale of retained notes or collateral upgrade
trades remained broadly unchanged.
5.3 Refinancing of TFSME
Current Term Funding Scheme for Small and Medium-sized
Enterprises (TFSME) borrowing by the Group remained at GBP4.2bn at
the end of 2022, with a refinancing concentration scheduled for
October 2025.
Mitigation
The Group has other wholesale options available to it, including
securitisation programmes and repo or sale of held notes, as well
as retail funding via its strong franchises, to replace the TFSME
borrowing gradually over the next few years ahead of the maturity
of this funding.
Direction: unchanged
TFSME borrowing remained unchanged during the year; however, the
current funding plan to refinance TFSME requires significant
securitisation issuance. These markets have seen increased
volatility during 2022, which could continue into 2023 so
additional refinancing options are being considered.
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. In particular,
we note the PRA's recently published consultation paper (CP) on the
implementation of Basel 3.1.
Mitigation
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: increased
The stable credit profile and ongoing profitability mean that
the Group's capital resources remain strong.
Risks remain around adverse credit profile performance resulting
from rising inflation and interest rates.
We have estimated the impact of Basel 3.1 on our 31 December
2022 CET1 ratio to be a reduction of up to 2% points, should the
proposed rules be implemented as drafted in the CP and prior to the
Group receiving Internal Ratings Based (IRB) accreditation.
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 programme of IT and cyber improvements continued with
the aim of 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 processes in place to allow it to operate
effectively when employees work from home and manage the cyber
risks related to working remotely.
Whilst IT security risks continue to evolve, work continues to
enhance the level of maturity of the Group's controls and defences,
supported by dedicated IT security experts.
The Group's has an ongoing programme of penetration testing in
place 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 previously established a dedicated Data Strategy
Programme, involving the recruitment of a Chief Data Officer and a
Data Governance Director, 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 2022 to embed Group-wide governance
frameworks in part driven by the Group's IRB project. Further work
is planned for 2023, 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.
Direction: increased
The Group continued to adopt an ambitious change agenda, which
was monitored and managed well in 2022. We are now turning our
attention towards identifying opportunities to further digitise our
business operations, to deliver additional efficiencies and invest
in the Group to ensure it remains well-positioned to meet the
changing needs of our customers, brokers and wider
stakeholders.
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.
The Group has established a site in Hyderabad to ensure that, in
the event of an operational incident in Bangalore, services can be
maintained.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and
impact of an IT failure, the risks remain, in particular due to the
new hybrid working arrangement. Further work is planned during
2023.
8. Conduct risk
The risk that the Group's culture, organisation, behaviours and
actions result in poor outcomes and detriment for customers and/or
damage to consumer trust and integrity of the markets in which it
operates.
Risk appetite statement: the Group has a very low appetite to
assume risks which may result in either poor or unfair customer
outcomes and/or cause disruptions in the market segments in which
it operates. The Group aims to avoid causing detriment or harm to
its customers and operates to the highest standards of conduct. The
Group will treat its customers, third-party partners, investors and
regulators with respect, fairness and transparency. The Group will
proactively look to identify where its products and services could
lead to poor outcomes or harm to its customers, and will take
appropriate action to mitigate this. Where customer harm occurs,
the Group will ensure that effective solutions are implemented to
address the root cause and a fair outcome is achieved.
8.1 Conduct risk
The risk that the Group fails to meet its expectations with
respect to conduct risk.
Mitigation
The Group's culture is clearly defined and monitored via its
Purpose, Vision and Values driven behaviours.
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.
The Group has an embedded Conduct Risk Management Framework
which clearly define roles and responsibilities for conduct risk
management and oversight across the Group's three lines of
defence.
Direction: increased
The conduct risk level increased due to macroeconomic
uncertainty. Some customers, particularly those who are vulnerable,
may experience financial difficulty as a result of the rising cost
of living and cost of borrowing. Volatile lending and savings
markets led to unprecedented high volumes of new business adversely
impacting customer service level agreements and leading to
increased complaints and reputational risk.
Conduct losses have remained stable with no breaches of risk
appetite reported during the last 12 months.
9. Regulatory risk
The risk of failure to effectively identify, interpret,
implement and adhere to all regulatory or legislative change that
impacts the Group.
Risk appetite statement: the Group views ongoing conformance
with regulatory rules and standards across all the jurisdictions in
which it operates as a critical facet of its risk culture. The
Group has a very low appetite to assume regulatory risk, which
could result in poor customer outcomes, customer detriment,
regulatory sanctions, financial loss or damage to its reputation.
The Group will proactively monitor for and will not tolerate any
systemic failure to comply with applicable laws, regulations or
codes of conduct relevant to its business.
The Group acknowledges that regulatory rules and standards are
subject to interpretation and subsequent translation into internal
policies and procedures. The Group interprets requirements to
ensure adherence with the intended purpose and spirit of the
regulation whilst being cognisant of commercial considerations and
good customer outcomes. To minimise regulatory risk, the Group
proactively engages with its regulators in a transparent manner,
participates in industry forums and seeks external advice to
validate its interpretations, where appropriate.
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
Resolvability Assessment Framework requirements, including updated
minimum requirements for own funds and eligible liabilities
(MREL).
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 continued 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.
This includes the risk that product design, pricing,
underwriting, arrears and forbearance and vulnerable customer
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 and forbearance
and vulnerable customer policies, which are designed to comply with
regulatory principles, 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 continued 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 proactively interact with regulatory
bodies to take part in thematic reviews and information requests,
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.
The Group has instigated a formal project to implement the FCA's
new Consumer Duty requirements within the required timelines.
10. Financial crime risk
The risk of financial or reputational loss resulting from
inadequate systems and controls to mitigate the risks from
financial crime.
Risk appetite statement: to minimise financial crime risk the
Group will design and maintain robust systems and controls to
identify, assess, manage and report any activity (internal or
external in nature) which exposes the Group to financial crime risk
in the form of money laundering, human trafficking, terrorist
financing, sanctions breaches, bribery, corruption and fraud. The
Group recognises the need to continuously review its systems and
controls to ensure that they are aligned to the nature and scale of
financial crime risk it is exposed to on a current and forward
looking basis.
10.1 Financial crime risk
The risk of financial or reputational loss resulting from a
failure to implement systems and controls to manage the risk from
money laundering, terrorist financing, sanctions, bribery,
corruption and cyber-crime.
Mitigation
The Group operates in a low-risk environment providing
relatively simple products to UK domiciled customers serviced
through a UK registered bank account. The Group has an established
screening programme that is deployed at the point of origination
and on a regular basis throughout the customer lifecycle. Where
applicable, enhanced due diligence is applied to ensure that any
increase in risk is appropriately managed and any activity remains
within risk appetite.
The Group has a horizon scanning programme that identifies
changes to money laundering regulations and any other financial
crime related legislation to ensure that we comply with all
regulatory obligations.
The Group reacted swiftly to the events in Ukraine and the
regular updates released in relation to the Russia and Belarus
financial sanctions regimes. The Group has negligible exposure to
the affected jurisdictions and no exposure to any specific
individual or entity contained within the revised sanctions
listings.
The Group's programme of cyber improvements continued with the
aim of enhancing its protection against IT security threats,
deploying a series of tools designed to identify and prevent
network/system intrusions. The Group's Financial Crime team will
support the Information Security Team, where appropriate, to ensure
that there are robust and effective controls in place and
sufficient training and awareness for all colleagues.
Direction: unchanged
The Group continues to focus primarily on the UK market with
accounts serviced from UK bank accounts.
The Group has processes in place to allow it to operate
effectively when employees work from home and manage 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.
10.2 Fraud risk
The risk of financial loss resulting from fraudulent action by a
person either internal or external.
Mitigation
The Group continues to invest in a range of systems and controls
that are deployed across its product range in order to detect and
prevent the exposure to fraud through the customer lifecycle. All
new business applications are subject to a range of controls to
identify and mitigate fraud. Customer activity is monitored in
order to detect suspicious activity or behaviour that may be
indicative of fraud.
These controls are further supported by documented policies and
procedures that are managed by experienced employees in a dedicated
Financial Crime function.
The Group continually monitors its detection capability with
periodic reviews of the parameters within its systems and control
framework to ensure that these remain fit for purpose and aligned
to mitigate any emerging risks.
Direction: increased
The Group remains aware that any potential downturn in the wider
economic environment may increase the risk of fraud activity across
its product range and will closely monitor changes in trends that
may be indicative of any new or emerging risks.
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 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 activities (i.e. ad hoc, risk appetite and
Internal Capital Adequacy Assessment Process (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.
Climate change
As the 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 2022, the Group further embedded its approach to climate
risk management, which included the development of a climate risk
appetite, and making enhancements to its Task Force on
Climate-Related Financial Disclosures (TCFD).
The Group's Chief Risk Officer has 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 including a PRA consultation paper
containing proposed expectations regarding banks' management of
model risk.
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 that 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 Resolvability Assessment
Framework and Operational Continuity in Resolution. The Group is
therefore required to respond to prudential and conduct-related
regulatory changes, taking part in thematic reviews, as
required.
There is also residual 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.
The Group also has strong relationships with regulatory bodies,
and via membership of UK Finance, inputs into upcoming regulatory
consultations.
Risk profile performance overview
Credit risk
The Group's loan portfolios performed robustly during 2022.
Prudent criteria for new originations delivered strong new business
quality, whilst the back book also outperformed forecast
expectations. In particular, the Group saw lower arrears levels
than forecast 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
stressed macroeconomic environments.
The Group delivered 12% net loan book growth in 2022 with strong
originations in the Group's core Buy-to-Let and residential
owner-occupier sub-segments, which more than offset reductions in
the second charge and funding lines sub-segments. New lending also
improved in semi-commercial and commercial as well as in the
Group's development finance sub-segments.
Favourable property price indexing resulted in a reduction in
the weighted average stock LTV for OSB and CCFS to 58% and 63%
respectively as at 31 December 2022 (31 December 2021: OSB 60% and
CCFS 65%), and a prudent weighted average LTV profile of 60% for
the Group, down from 62% at the end of 2021.
A low and stable level of arrears continued to be observed, with
just 1.1% of the Group's net loan balances being greater than three
months in arrears as at 31 December 2022, unchanged from the prior
year. 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.
Solo bank interest coverage ratios for Buy-to-Let loans remained
strong during 2022 at 207% for OSB and 191% for CCFS (2021: 199%
OSB and 188% CCFS).
During 2022, 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.
Expected Credit Losses (ECL)
Balance sheet expected credit losses increased from GBP101.5m to
GBP130.0m as at 31 December 2022. Other non-material items further
contributed to the increase and resulted in a full year statutory
impairment charge of GBP29.8m representing a loan loss ratio of
13bps (2021: GBP4.4m release, -2bps, respectively), with the
provision charge primarily driven by post-model adjustments to
account for rising cost of living and cost of borrowing concerns,
as well as the strong growth in the loan book in the year.
A summary of the key impairment charge drivers for 2022
included:
-- Macroeconomic outlook -- positive House Price Index (HPI) movements and
continued low unemployment were observed throughout 2022, however, the
outlook deteriorated throughout the year due to the war between Russia
and Ukraine and the fallout from the mini budget. The economic outlook at
the end of 2022 was driven by rising interest rates, higher than target
inflation and most notably a decrease in house prices. The change in
economic outlook contributed GBP11.6m of impairment charge in 2022,
whilst the improvement in house prices drove a release of GBP10.3m.
-- Model and staging enhancements -- enhancements were made to the Group's
underlying models to ensure that estimates continued to reflect actual
credit profile performance. Most notably, the Group's enhancements to
models, as part of the IRB programme, were incorporated into the Group's
IFRS 9 framework. In addition, the Group enhanced its Significant
Increase in Credit Risk (SICR) framework to adopt a default risk trigger,
sensitive to the economic outlook. The cumulative impact of these
modelling and staging enhancements was an GBP8.3m release for 2022.
-- Post-model adjustments -- the Group adopted a number of post-model
adjustments to account for external risks that were not sufficiently
addressed in the model and staging framework. The most significant were
adjustments made to the stage 2 approach to account for rising cost of
living and borrowing concerns due to the sharp increase in interest rates
and the historically high inflation. In total, the post-model adjustments
contributed GBP13.3m of impairment charge in 2022.
-- Credit profile provision charges - impairment charges driven by changes
in the credit profile such as portfolio growth, portfolio product mix and
changes in staging mix totalled GBP15.2m. Other charges, including
changes to individually assessed provisions and write offs, totalled
GBP8.3m.
The Group continued to closely monitor impairment coverage
levels in the year.
Impairment coverage levels were strengthened due to both the
observed cost of living and cost of borrowing drivers, and the
renewed uncertainty surrounding the macroeconomic outlook, with
coverage levels approaching those held at the peak of the pandemic.
The Group's Risk function conducted top-down analysis, assessing
portfolio-specific risks, which confirmed the appropriateness of
provision levels after taking into account the post-model
adjustments.
Coverage ratios table
Gross carrying Expected credit Coverage
amount losses ratio
As at 31 December 2022 GBPm GBPm GBPm
----------------------- -------------- --------------- --------
Stage 1 18,722.3 7.2 0.04%
----------------------- -------------- --------------- --------
Stage 2 4,417.1 50.9 1.15%
----------------------- -------------- --------------- --------
Stage 3 (+ POCI) 588.7 71.9 12.21%
----------------------- -------------- --------------- --------
Total 23,728.1 130.0 0.55%
----------------------- -------------- --------------- --------
Gross carrying Expected Coverage
amount credit losses ratio
As at 31 December 2021 GBPm GBPm GBPm
----------------------- -------------- --------------- --------
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%
----------------------- -------------- --------------- --------
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and
requires a high level of judgement. The approach includes the
estimation of probability of default (PD), loss given default (LGD)
and likely exposure at default (EAD). An assessment of the maximum
contractual period with which the Group is exposed to the credit
risk of the asset is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the
effect of a range of possible economic outcomes, calculated on a
probability-weighted basis. This requires firms to formulate
forward-looking macroeconomic forecasts and incorporate them in ECL
calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral
values is established. For example, if unemployment levels
increase, the Group would observe an increasing number of accounts
moving into arrears. If residential or commercial property prices
fall, the risk of losses being realised on the sale of a property
would increase.
The Group adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry-leading
economics advisory firm that provides management and the Board with
advice.
A base case forecast is provided, together 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 principally 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.
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, together 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 2022
Throughout 2022, the scenario suite was monitored and updated as
UK political and geopolitical developments occurred.
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 Group undertook a detailed
analysis to assess the portfolio risks and consider whether these
were adequately accounted for in the IFRS 9 models and frameworks,
and identified a number of areas requiring post-model adjustments,
most notably to account for the increased credit risk from the
heightened cost of living and cost of borrowing resulting in an
increase in the balance of accounts in stage 2.
The Board reflected on the ongoing appropriateness of
probabilities attached to the suite of IFRS 9 scenarios as the
macroeconomic outlook evolved throughout the year. Scenarios were
adjusted to a symmetrical probability, where the upside and
downside scenarios carry equal weightings, as a result of separate
post-model adjustments being raised to ensure that the current IFRS
9 framework adequately provisioned the underlying portfolio
risk.
Details relating to the scenarios utilised to set the 31
December 2022 IFRS 9 provision levels are provided in the table
below.
Forecast macroeconomic variables over a five-year period
Scenario %
--------- --------------------- ------------ ---------------------------------------
Year Year Year Year
Probability weighting Economic end end end end Year end
Scenario (%) measure 2022 2023 2024 2025 2026
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Base case 40 GDP 4.3 (0.7) 1.8 2.7 2.1
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Unemployment 3.7 4.7 4.2 3.9 3.8
--------- --------------------- ------------ ---- ------ ------ ----- ----------
House price
growth 9.0 (9.0) (3.4) 2.8 5.8
------------ ---- ------ ------ ----- ----------
CPI 10.7 3.4 2.0 1.6 1.2
------------ ---- ------ ------ ----- ----------
Bank Base
Rate 2.8 4.0 3.6 2.6 1.8
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Upside 30 GDP 4.6 1.9 2.9 3.4 2.2
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Unemployment 3.6 4.2 4.0 3.7 3.7
--------- --------------------- ------------ ---- ------ ------ ----- ----------
House price
growth 10.6 (6.7) (1.3) 4.4 5.6
------------ ---- ------ ------ ----- ----------
CPI 11.0 4.7 2.9 1.4 1.1
------------ ---- ------ ------ ----- ----------
Bank Base
Rate 3.0 5.3 4.8 3.4 2.3
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Downside 20 GDP 3.7 (4.4) 1.0 2.4 2.1
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Unemployment 4.2 6.3 7.0 7.0 6.7
--------- --------------------- ------------ ---- ------ ------ ----- ----------
House price
growth 6.8 (14.4) (8.0) (1.2) 6.1
------------ ---- ------ ------ ----- ----------
CPI 10.2 1.6 1.5 1.8 0.8
------------ ---- ------ ------ ----- ----------
Bank Base
Rate 2.9 3.8 3.1 1.9 1.3
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Severe
downside 10 GDP 3.2 (7.5) 0.1 1.9 2.1
--------- --------------------- ------------ ---- ------ ------ ----- ----------
Unemployment 4.3 6.8 7.6 7.6 7.2
--------- --------------------- ------------ ---- ------ ------ ----- ----------
House price
growth 5.0 (18.6) (12.1) (5.0) 6.5
------------ ---- ------ ------ ----- ----------
CPI 9.5 0.7 0.9 2.1 0.5
------------ ---- ------ ------ ----- ----------
Bank Base
Rate 2.6 2.8 2.0 0.6 0.5
--------- --------------------- ------------ ---- ------ ------ ----- ----------
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:
-- Temporary switch to interest only: a temporary account change to assist
customers through periods of financial difficulty where the contractual
monthly payment is reduced to the amount of interest owed in the month
for the duration of the account change. Any arrears existing at the
commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
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.
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where capital and interest accruals
during the payment holiday period are repaid from the end of the payment
holiday over the remaining term. 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 monthly
payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual monthly payment. Arrears continue to accrue based on
the contractual monthly 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 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 payment, 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.
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 using Commercial Real
Estate (CRE) data. Residential properties are indexed at least
quarterly, using House Price Index 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. The Group's fully-loaded CET1 and total capital
ratios under CRD IV reduced to 18.3% and 19.7%, respectively as at
31 December 2022 (31 December 2021: 19.6% and 21.2%, respectively).
The Group's leverage ratio was 8.4% as at 31 December 2022 (31
December 2021: 7.9%).
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash-flow
imbalances and fluctuations in funding, under both normal and
stressed conditions, arising from market-wide and Bank-specific
events. OSB's and CCFS' liquidity risk appetites have been
calibrated to ensure that both Banks always operate above the
minimum prudential requirements with sufficient contingency for
unexpected stresses, whilst actively minimising the risk of holding
excessive liquidity, which would adversely impact the financial
efficiency of the business model.
The Group continues to attract new retail savers and has high
retention levels with existing customers. In addition, the Group is
able to access a wide range of wholesale funding options, including
securitisation issuances and the use of retained notes from both
Banks as collateral for Bank of England facilities and repurchase
agreements with third parties.
In 2022, both Banks actively managed their respective liquidity
and funding profiles within the confines of their risk appetites as
set out in the Group's ILAAP.
Retail funding rates increased throughout the year due to the
significant increase in the Bank of England Base Rate. However,
swap rate increases during the year allowed both Banks to retain
more margin on savings rates offered to customers. There was a
short period towards the end of the first quarter where retail
funding was volatile as the first of the larger Base Rate increases
pushed competitor savings rates higher and increased competition;
however, both Banks were able to attract new depositors with
competitive rates.
Swap rate increases in 2022 also led to the Group receiving a
high level of variation margin collateral on the Group's interest
rate swaps. The Group has increased internal buffers to ensure that
sufficient funds are held at the Bank of England to meet any swap
margin calls that may arise if swap rates reduce.
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 2022,
OSB had a liquidity coverage ratio of 229% (2021: 240%) and CCFS
148% (2021: 158%), and the Group LCR was 185%, 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.
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, together with dedicated first line
risk and controls teams in some key areas of the business. Both the
dedicated first line risk and control teams and the 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.
A hybrid working model has been adopted across the Group, with
the exception being front-line customer-facing colleagues,
following the return to the office after the COVID-19 pandemic.
With a 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, work continues to enhance the level of
maturity of the Group's controls and defences, supported by
dedicated IT security experts. The Group's ongoing penetration
testing continues to drive enhancements by identifying potential
areas of risk.
The Group has established a site in Hyderabad to ensure that, in
the event of an operational incident in Bangalore, services can be
maintained.
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 forthcoming regulation on itself
and the 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 customer-centric culture throughout the organisation and
therefore continues to promote a strong sense of awareness and
accountability.
Financial crime risk
The Group operates in a low risk environment providing
relatively simple products to UK domiciled customers serviced
through a UK-registered bank account. The Group has an established
screening programme that is deployed at the point of origination
and on a regular basis throughout the customer lifecycle.
The Group continues to invest in a range of systems and controls
that are deployed across its product range in order to detect and
prevent the exposure to fraud through the customer lifecycle. All
new-to-business applications are subject to a range of controls to
identify and mitigate fraud. Customer activity is monitored in
order to detect suspicious activity or behaviour that may be
indicative of fraud.
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 focused on delivering against its core
strategic and financial objectives, against a highly competitive
and uncertain backdrop.
Reputational risk
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of another principal risk
can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media
coverage, customer satisfaction scores, the share price and Net
Promoter Scores provided by brokers.
Viability statement
In accordance with Provision 31 of the 2018 UK Corporate
Governance Code, the Board is required to assess the viability of
the Group over a stated time horizon with a supporting statement in
the Annual Report.
The viability statement is required to include an explanation of
how the prospects of the Group have been assessed, the time horizon
over which the assessment has been performed and why the assessment
period is deemed appropriate. The viability statement needs to be
supported by an assessment of the principal risks and uncertainties
to which the Group is exposed, and based on reasonable expectations
to conclude that the Group will be able to continue to operate and
meet its liabilities as they fall due over that period.
The Group uses a five-year timeframe in its business and
financial planning and for internal stress test scenarios. The
long-term direction is informed by business and strategic plans
which are set on an annual basis and are reviewed and refreshed
quarterly. The operating and financial plans consider, among other
matters, the Board's risk appetite, macroeconomic outlook, market
opportunity, the competitive landscape, and sensitivity of the
financial plans to volumes, margin pressures and any changes in
capital requirements.
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 viability assessment horizon. The
impacts of climate risk have been assessed as part of the Internal
Capital Adequacy Assessment Process (ICAAP), which concluded that
at present the associated financial risks are not material for the
Group.
The Group prepares financial forecasts over a five year time
horizon, with the Board and management focusing on the projections
over the first three years, with years four and five being
extrapolations of the earlier years. Key events which will impact
the Group's capital adequacy such as the introduction of Basel 3.1,
the impact of the implementation of the Group's Minimum
Requirements for Own Funds and Eligible Liabilities (MREL) and the
impact of the peak stress point of macroeconomic forecasts all fall
within a three year time horizon. Post consideration of these
factors, the Board considers a viability assessment horizon of
three years to remain appropriate.
The Banks within the Group are authorised by the PRA, and
regulated by the FCA and the PRA; and the Group undertakes regular
analysis of its risk profile and assumptions. It has a robust set
of policies, procedures and systems to undertake a comprehensive
assessment of all the principal risks and uncertainties to which it
is exposed on a current and forward-looking basis (as described in
the Principal risks and uncertainties).
The Group identifies, assesses, manages and monitors its risk
profile based on the disciplines outlined within the Group
Enterprise Risk Management Framework, in particular through
leveraging its risk appetite framework (as described in the Risk
review). Potential changes in the aggregated risk profile are
assessed across the business planning horizon by subjecting the
operating and financial plans to severe but plausible macroeconomic
and idiosyncratic stress scenarios.
The viability of the Group is assessed at both the Group and the
underlying regulated bank levels, through leveraging the risk
management frameworks and stress testing capabilities of both
regulated banks.
Stress testing is an integral risk management discipline, used
to assess the financial and operational resilience of the Group.
The Group has developed bespoke stress testing capabilities to
assess the impact of extreme but plausible scenarios in the context
of its principal risks impacting the primary strategic, financial
and regulatory objectives. Stress test scenarios are identified in
the context of the Group's operating model, identified risks,
business and economic outlook. The Group actively engages external
experts to inform the process by which it develops business and
economic stress scenarios.
A broad range of stress scenarios are analysed considering the
potential impacts to changes in HPI, unemployment, inflation and
interest rates over a range of severity scenarios. Stresses are
applied to lending volumes, capital requirements, liquidity and
funding mix, interest margins and credit and operational losses.
Stress testing also supports key regulatory submissions such as the
ICAAP, ILAAP and the Recovery Plan. ICAAP stress testing assesses
capital resources and requirements over a five-year period.
The Group has identified a broad suite of credible management
actions, which can be implemented to manage and mitigate the impact
of stress scenarios. These management actions are assessed under a
range of scenarios varying in severity and duration. Management
actions are evaluated based on speed of implementation, second
order consequences and dependency on market conditions and
counterparties. Management actions are used to inform capital,
liquidity and recovery planning under stress conditions.
In assessing the Group's long term viability, the Directors have
assumed that the Group will be able to issue MREL instruments to
meet its MREL requirements or, if required, obtain a 'flexible
add-on' extension to the MREL requirements of up to two years. The
Board assessed the uncertainty around the quantum and phasing of
MREL issuance resulting from the ongoing Basel 3.1 consultation and
the timing of the Group's IRB accreditation, whilst being cognisant
of the outlined criteria which must be met to apply for the
'flexible add-on' relating to (i) where a market dislocation
impacts capital markets issuance conditions, or (ii) whether the
institution's business model faces idiosyncratic challenges which
justify an extension. Obtaining a 'flexible add on' would be
subject to review and approval by the Bank of England.
In addition, the Group identifies a range of catastrophic
scenarios, which could result in the failure of its current
business model. Business model failure scenarios (Reverse Stress
Tests or RSTs) are primarily used to inform the Board of the outer
limits of the Group's risk profile. RSTs play an important role in
helping the Board and Executives to assess the available recovery
options to revive a failing business model.
The Group has established a comprehensive operational resilience
framework to actively assess the vulnerabilities and recoverability
of its critical services. The Group also conducts regular business
continuity and disaster recovery exercises.
The ongoing monitoring of all principal risks and uncertainties
that could impact the operating and financial plan, together with
the use of stress testing to ensure that the Group could survive a
severe but plausible stress, enables the Board to reasonably assess
the viability of the business model over a three-year period.
The Group has maintained strong capital and funding profiles
with a view to ensuring continued financial resilience. However,
the Group remains fully cognisant of the uncertain macroeconomic
environment and ensures that stress testing activities consider a
range of potential scenarios.
The Board has also considered the potential implications of the
current macroeconomic uncertainty in its assessment of the
financial and operational viability of the Group and has a
reasonable belief that the Group retains adequate levels of
financial resources (capital and liquidity) and operational
contingency.
In line with prior years, in the viability assessment process
the Board considered the latest macroeconomic forward-looking
scenarios utilised for business planning and the Group's IFRS 9
calculations which consider macroeconomic risks such as rising
levels of unemployment, inflation, interest rate rises and
movements in house prices. Utilising analysis which identifies
scenarios which would result in the Group becoming unviable, the
Board considered the plausibility of these scenarios materialising.
Forecasts and capital stress tests considered the impact of the
countercyclical buffer being progressively phased back in, IFRS 9
transitional arrangements unwinding, the Group's go-forward MREL
phasing in, whilst incorporating the Group's simulation of the
impact of Basel 3.1 implementation.
The potential impact of the macroeconomic environment on the
Group's operations is subject to continuous monitoring through the
Group's Management Committees, capital and liquidity, operational
resilience and business continuity planning working groups, with
appropriate escalation to the Board and supervisory
authorities.
The Group has progressively enhanced its approach to assessing
the viability of its strategy and business operating model, in
particular the Group has enhanced its capabilities by:
-- enhancing stress testing capabilities through more focused assessment of
vulnerable cohorts of its lending portfolio supported by increased
granularity of monitoring and risk reporting
-- increasing the diversification of its funding profile, supported by
enhanced assessment of funding and liquidity risk profiles
-- enhancing the assessment of operational resilience through the ongoing
review of priority business functions, including supporting
infrastructure and dependencies through a simulated business continuity
exercise.
The current financial forecasts, risk profile characteristics
and stress test analysis, the Group's capital, funding and
operational capabilities support the Directors' assessment that
they have a reasonable expectation that the Group will remain
viable over the three-year horizon.
Statement of Directors' Responsibilities
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 UK adopted International Financial Reporting
Standards (IFRS) 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 the year. 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,
Directors' Remuneration Report and Corporate Governance Statement
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.
Responsibility statement of the Directors in respect of the
annual financial report
Each of the persons who is a Director at the date of approval of
this report confirms, to the best of their knowledge, 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/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.
Each of the persons who is a Director at the date of approval of
this report confirms that:
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- they have taken all the steps 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 auditors are aware of that information.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
16 March 2023
2022 2021
Note GBPm GBPm
Interest receivable and similar income 3 1,069.3 746.8
Interest payable and similar charges 4 (359.4) (159.2)
Net interest income 709.9 587.6
Fair value gains on financial instruments 5 58.9 29.5
Gain on sale of financial instruments 6 - 4.0
Other operating income 7 6.6 7.9
Total income 775.4 629.0
Administrative expenses 8 (207.8) (166.5)
Provisions 37 1.6 (0.2)
Impairment of financial assets 24 (29.8) 4.4
Impairment of intangible assets 9 - 3.1
Integration costs 12 (7.9) (5.0)
Exceptional items 13 - (0.2)
Profit before taxation 531.5 464.6
Taxation 14 (121.5) (119.3)
Profit for the year 410.0 345.3
-------
Other comprehensive expense
Items which may be reclassified to profit or loss:
Fair value changes on financial instruments measured
at fair value through other comprehensive income (FVOCI):
Arising in the year 19 0.3 1.1
Amounts reclassified to profit or loss for investment
securities at FVOCI (0.7) (2.0)
Tax on items in other comprehensive expense 0.1 0.5
Revaluation of foreign operations (0.2) (0.1)
Other comprehensive expense (0.5) (0.5)
----------------------------------------------------------- ----
Total comprehensive income for the year 409.5 344.8
Attributable to:
Equity shareholders of the Company 409.5 340.1
Non-controlling interest - 4.7
409.5 344.8
Dividend, pence per share 16 42.2 26.0
Earnings per share, pence per share
Basic 15 90.8 76.0
Diluted 15 89.8 75.2
The above results are derived wholly from continuing
operations.
The notes below form part of these accounts.
The financial statements were approved by the Board of Directors
on 16 March 2023.
2022 2021
Note GBPm GBPm
Assets
Cash in hand 0.4 0.5
Loans and advances to credit institutions 18 3,365.7 2,843.6
Investment securities 19 412.9 491.4
Loans and advances to customers 20 23,612.7 21,080.3
Fair value adjustments on hedged assets 26 (789.0) (138.9)
Derivative assets 25 888.1 185.7
Other assets 27 15.0 10.2
Current taxation asset 1.7 -
Deferred taxation asset 28 6.3 5.6
Property, plant and equipment 29 40.9 35.1
Intangible assets 30 12.0 18.4
Total assets 27,566.7 24,531.9
--------------------------------------------- ---- --------- ---------
Liabilities
Amounts owed to credit institutions 31 5,092.9 4,319.6
Amounts owed to retail depositors 32 19,755.8 17,526.4
Fair value adjustments on hedged liabilities 26 (55.1) (19.7)
Amounts owed to other customers 33 113.1 92.6
Debt securities in issue 34 265.9 460.3
Derivative liabilities 25 106.6 19.7
Lease liabilities 35 9.9 10.7
Other liabilities 36 38.7 29.6
Provisions 37 0.4 2.0
Current taxation liability - 1.0
Deferred taxation liability 38 22.3 39.8
Subordinated liabilities 39 - 10.3
Perpetual Subordinated Bonds 40 15.2 15.2
25,365.7 22,507.5
Equity
Share capital 42 4.3 4.5
Share premium 42 2.4 0.7
Retained earnings 3,389.4 3,215.1
Other reserves 43 (1,195.1) (1,195.9)
Shareholders' funds 2,201.0 2,024.4
Total equity and liabilities 27,566.7 24,531.9
The notes below form part of these accounts. The financial
statements were approved by the Board of Directors on 16 March 2023
and signed on its behalf by
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Capital
redemption Additional
and Foreign Share-based Tier 1 Non-controlling
Share Share transfer Own exchange FVOCI payment Retained (AT1) interest
capital(1) premium reserve(2) shares(3) reserve reserve reserve earnings securities securities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 1,359.8 - (1,355.3) (4.0) (1.0) 1.0 7.8 1,608.6 - 60.0 1,676.9
Profit for the year - - - - - - - 345.3 - - 345.3
Other comprehensive expense - - - - (0.1) (0.9) - - - - (1.0)
Tax on items in other comprehensive expense - - - - - 0.5 - - - - 0.5
Total comprehensive (expense)/income - - - - (0.1) (0.4) - 345.3 - - 344.8
Coupon paid on non-controlling interest securities - - - - - - - (4.7) - - (4.7)
Dividends paid - - - - - - - (86.7) - - (86.7)
Share-based payments - 0.7 - - - - 4.0 2.9 - - 7.6
Own shares(3) - - - 0.5 - - - (0.5) - - -
Capital reduction of OSB GROUP PLC (OSBG) share
capital(1) (1,355.3) - - - - - - 1,355.3 - - -
Redemption of non-controlling interest securities - - - - - - - - - (60.0) (60.0)
Transactions costs on redemption of non-controlling
interest securities - - - - - - - (3.5) - - (3.5)
Issuance of AT1 securities - - - - - - - - 150.0 - 150.0
Transactions costs on issuance of AT1 securities - - - - - - - (1.6) - - (1.6)
Tax recognised in equity - - - - - - 1.6 - - - 1.6
At 31 December 2021 4.5 0.7 (1,355.3) (3.5) (1.1) 0.6 13.4 3,215.1 150.0 - 2,024.4
Profit for the year - - - - - - - 410.0 - - 410.0
Other comprehensive expense - - - - (0.2) (0.4) - - - - (0.6)
Tax on items in other comprehensive expense - - - - - 0.1 - - - - 0.1
Total comprehensive (expense)/income - - - - (0.2) (0.3) - 410.0 - - 409.5
Coupon paid on AT1 securities - - - - - - - (9.0) - - (9.0)
Dividends paid - - - - - - - (133.1) - - (133.1)
Share-based payments - 1.7 - - - - (0.2) 8.4 - - 9.9
Own shares(3) - - - 1.3 - - - (1.3) - - -
Share repurchase (0.2) - 0.2 - - - - (100.7) - - (100.7)
At 31 December 2022 4.3 2.4 (1,355.1) (2.2) (1.3) 0.3 13.2 3,389.4 150.0 - 2,201.0
---------------------------------------------------- ---------- ------- ---------- --------- -------- ------- ----------- -------- ---------- --------------- -------
1. On 26 February 2021, OSBG reduced the nominal value of 447,312,780 shares
from three hundred and four (304) pence each to one (1) penny each, see
note 42 for further details.
2. Includes Capital redemption reserve of GBP0.2m (2021: nil) and Transfer
reserve of GBP(1,355.3)m (2021: GBP(1,355.3)m).
3. The Group has adopted look-through accounting (see note 1 d)) and
recognised the Employee Benefit Trust (EBT) within OSBG.
Share capital and premium is disclosed in note 42 and the
reserves are further analysed in note 43.
2022 2021
Note GBPm GBPm
(Restated)(1)
Cash flows from operating activities
Profit before taxation 531.5 464.6
Adjustments for non-cash items 50 63.7 (10.0)
Changes in operating assets and liabilities(1) 50 (24.2) (683.6)
Cash generated/(used) in operating activities 571.0 (229.0)
Net tax paid (142.5) (117.3)
Net cash generated/(used) in operating activities(1) 428.5 (346.3)
Cash flows from investing activities
Maturity and sales of investment securities 663.7 547.7
Purchases of investment securities (596.5) (468.2)
Interest received on investment securities 7.7 1.9
Sales of financial instruments 6 - 4.0
Proceeds from sale of property, plant and equipment 29 - 2.0
Purchases of property, plant and equipment and intangible
assets 29,30 (11.7) (6.8)
Cash generated from investing activities 63.2 80.6
Cash flows from financing activities
Financing received(1) 41 429.5 4,943.2
Financing repaid 41 (324.2) (4,295.4)
Interest paid on financing 41 (45.3) (8.4)
Share repurchase(2) (102.0) -
Coupon paid on non-controlling interest securities - (4.7)
Coupon paid on AT1 securities (9.0) -
Dividends paid 16 (133.1) (86.7)
Redemption of non-controlling interest securities - (63.5)
Issuance of AT1 securities - 148.4
Proceeds from issuance of shares under employee Save
As You Earn (SAYE) schemes 1.7 0.8
Cash payments on lease liabilities 35 (1.9) (1.9)
Cash (used)/generated from financing activities (184.3) 631.8
-------------
Net increase in cash and cash
equivalents 307.4 366.1
Cash and cash equivalents at the beginning of the
year 17 2,736.7 2,370.6
Cash and cash equivalents at the end of the year 17 3,044.1 2,736.7
Movement in cash and cash equivalents 307.4 366.1
------- -------------
1. 2021 figures restated see note 1 b) for further details.
2. Includes GBP100.0m for shares repurchased, GBP0.7m transaction costs and
GBP1.3m incentive fee.
1. Accounting policies
1. 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 IFRS
Interpretations Committee (IFRS IC).
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 p)
vi.).
The financial statements are presented in Pounds Sterling. All
amounts in the financial statements have been rounded to the
nearest GBP0.1m (GBPm). Foreign operations are included in
accordance with the policies set out in this note.
The figures shown for the year ended 31 December 2022 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2022 on which the auditors have given an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006 will be delivered to the
Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2021 are not statutory
accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, contained an unqualified audit report
and did not contain an adverse statement under section 498(2) or
498(3) of the Companies Act 2006. This announcement has been agreed
with the Company's auditors for release.
1. Restatement
In the prior year, cash collateral and margin received on
interest rate swaps of GBP115.4m was included in financing cash
flows in the Consolidated Statement of Cash Flows. As the cash
flows arise on hedging activities related to items classified as
operating assets and liabilities within the Consolidated Statement
of Cash Flows, the cash flows should be included within operating
cash flows. In the current year, cash collateral and margin
received on interest rate swaps has been classified as an operating
cash flow in 2022 and the 2021 Consolidated Statement of Cash Flows
restated to reclassify a cash inflow of GBP115.4m from financing
activities to operating activities.
1. 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.
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), unemployment, default rates and consumer price index
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.
1. Accounting policies (continued)
-- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the Internal Liquidity Adequacy
Assessment Process (ILAAP) stress scenarios with the Group
maintaining sufficient liquidity throughout the going concern
assessment period.
-- 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 continues to be on the provision of the Group's
Important Business Services, minimising the impact of any service
disruptions on the Group's customers or the wider financial
services industry. The Group's response to the COVID-19 pandemic
demonstrated the inherent resilience of its critical processes and
infrastructure and its agility in responding to changing
operational demands. The Group recognises the need to continually
invest in the resilience of its services, with specific focus in
2023 on ensuring that the third parties on which it depends have
the appropriate levels of resilience and in further automating
those processes that are sensitive to increases in volume.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
capital requirements as set out by the Prudential Regulation
Authority (PRA).
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in
excess of 12 months and as a result, it is appropriate to prepare
these financial statements on a going concern basis.
1. 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 EBT is controlled and recognised by the Company
using the look-through approach, i.e. as if the EBT is included
within the accounts of the Company.
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:
1. Accounting policies (continued)
(i) the scope of the Group's decision-making power; (ii) the
rights held by other parties; (iii) the remuneration to which the
Group is entitled; and (iv) the Group's exposure to variability of
returns. The determination of control is based on the current facts
and circumstances and is continuously assessed.
In some circumstances, different factors and conditions may
indicate that different parties control an entity depending on
whether those factors and conditions are assessed in isolation or
in totality. Judgement is applied in assessing the relevant factors
and conditions in totality when determining whether the Group
controls an entity. Specifically, judgement is applied in assessing
whether the Group has substantive decision-making rights over the
relevant activities and whether it is exercising power as a
principal or an agent.
1. 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 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 foreign exchange 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. 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.
1. Accounting policies (continued)
1. 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). For
purchased or credit-impaired assets (see note 1 p) vii.), interest
income is calculated by applying the credit-adjusted EIR to the
amortised cost of the asset. The calculation of interest income
does not revert to a gross basis even if the credit risk of the
asset improves. See note 1 p) ii. 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.
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 (SONIA, synthetic LIBOR or base rate) affecting
portfolios with a variable interest rate which will impact future
cash flows. The revised EIR is the rate which exactly discounts the
revised cash flows to the net carrying value of the loan
portfolio.
When the contractual terms of non-derivative financial
instruments have been amended as a direct consequence of IBOR
reform during 2021 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 non-controlling interest securities and AT1
securities are recognised directly in equity in the period in which
they are paid.
1. 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.
1. Accounting policies (continued)
1. 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.
1. Taxation
Income tax comprises current and deferred tax. It is recognised
in profit or loss, OCI or directly in equity, consistent with the
recognition of items it relates to. The Group recognises tax on
coupons paid on non-controlling interest securities and AT1
securities directly in profit or loss.
Current tax is the expected tax charge on the taxable income for
the year and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in
respect of temporary differences between the carrying amounts of
assets or liabilities for accounting purposes and carrying amounts
for tax purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise
the asset. The recognition of deferred tax is mainly dependent on
the projections of future taxable profits and future reversals of
temporary differences. The current projections of future taxable
income indicate that the Group will be able to utilise its deferred
tax asset within the foreseeable future.
Deferred tax liabilities are recognised for all taxable
temporary differences.
The Company and its tax-paying UK subsidiaries are in a group
payment arrangement for corporation tax and show a net corporation
tax liability and deferred tax liability accordingly, with the
exception of WSE Bourton Road Limited which is applying to join the
arrangement.
The Company and its UK subsidiaries are in the same VAT
group.
1. Dividends
Dividends are recognised in equity in the period in which they
are paid or, if earlier, approved by shareholders.
1. 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,
subject to an insignificant risk of changes in their fair value and
are used by the Group in the management of its short-term
commitments.
1. Accounting policies (continued)
1. 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.
Software-as-a-service (SaaS), is an arrangement that provides
the Group 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 Group has the contractual right to take possession of the software
during the hosting period without significant penalty; and
-- It is feasible for the Group 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 lin
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.
1. Accounting policies (continued)
1. Property, plant and equipment
Property, plant and equipment comprise freehold land and
buildings, major alterations to office premises, computer equipment
and fixtures measured at cost less accumulated depreciation. These
assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in
the period in which the expenditure is incurred
o. Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment.
A full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note 2 to
the Company's financial statements.
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.
1. Accounting policies (continued)
1. Financial instruments
1. 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 or FVOCI,
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.
Financial instruments classified as amortised cost are subsequently
measured using the EIR method.
Transaction costs relating to the acquisition or issue of a
financial instrument at 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.
1. 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 non-derivative financial assets or liabilities
classified as held for trading.
The Group reassesses its business models each reporting
period.
The Group classifies certain financial instruments as equity
where they meet the following conditions:
-- the financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions;
-- the financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- the financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
During the year equity financial instruments comprised own
shares, and AT1 securities (2021: and non-controlling interest
securities). Accordingly, the coupons paid on the non-controlling
interest securities and AT1 securities are recognised directly in
retained earnings when paid.
1. Accounting policies (continued)
1. 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. 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. Offsetting
Financial assets and financial liabilities are offset and the
net amount presented in the Consolidated Statement of Financial
Position when, and only when, the Group currently has a legally
enforceable right to offset the amounts and it intends either to
settle them on a net basis or to realise the asset and settle the
liability simultaneously.
The Group's derivatives are covered by industry standard master
netting agreements. Master netting agreements create a right of
set-off that becomes enforceable only following a specified event
of default or in other circumstances not expected to arise in the
normal course of business. These arrangements do not qualify for
offsetting and as such the Group reports derivatives on a gross
basis.
Collateral in respect of derivatives is subject to the standard
industry terms of International Swaps and Derivatives Association
(ISDA) Credit Support Annex. This means that the cash received or
given as collateral can be pledged or used during the term of the
transaction but must be returned on maturity of the transaction.
The terms also give each counterparty the right to terminate the
related transactions upon the counterparty's failure to post
collateral. Collateral paid or received does not qualify for
offsetting and is recognised in loans and advances to credit
institutions and amounts owed to credit institutions,
respectively.
1. 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.
1. 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
1. Accounting policies (continued)
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. 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.
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 recognised 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.
1. Accounting policies (continued)
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability weighted. 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 SICR has occurred is based on
quantitative relative PD thresholds and a suite of qualitative
triggers.
In accordance with PRA COVID-19 guidance, the Group did 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 is
considered to have 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
unlikely 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.
1. Accounting policies (continued)
Forward-looking macroeconomic scenarios
The risk of default and ECL 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), Consumer Price Index (CPI), Gross
domestic product (GDP), Commercial Real Estate Index (CRE) and the
Bank of England Base Rate (BBR).
The Group has developed 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
ECL 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 unlikely 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.
1. Accounting policies (continued)
Share repurchase
Upon Board authorisation of a share repurchase programme and
signing an irrevocable agreement, a share repurchase liability is
recognised in other liabilities with the offset in retained
earnings. Each share repurchase reduces the provision. Upon share
cancellation, share capital is debited with a credit to the capital
redemption reserve equal to GBP0.01 for each share cancelled.
1. Loans and advances to customers
Loans and advances to customers are predominantly mortgage loans
and advances to customers with fixed or determinable payments that
are not quoted in an active market and that the Group does not
intend to sell in the near term. They are initially recorded at
fair value plus any directly attributable transaction costs and are
subsequently measured at amortised cost using the EIR method, less
impairment losses. Where exposures are hedged by derivatives,
designated and qualifying as fair value hedges, the fair value
adjustment for the hedged risk to the carrying value of the hedged
loans and advances is reported in fair value adjustments for hedged
assets.
Loans and the related provision are written off when there is a
shortfall remaining after the underlying security is sold.
Subsequent recoveries of amounts previously written off are taken
through profit or loss.
Loans and advances to customers over which the Group transfers
its rights to the collateral thereon to the BoE under the 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 TFSME as
amortised cost under IFRS 9 Financial Instruments.
Loans and advances to customers include a small acquired
mortgage portfolio where the contractual cash flows include
payments that are not SPPI and as such are measured at FVTPL.
Loans and advances to customers 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.
1. 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 on an individual basis as
amortised cost, FVOCI or FVTPL.
Assets classified as amortised cost are initially recognised at
fair value and subsequently measured at amortised cost using the
EIR method, less impairment losses.
1. Accounting policies (continued)
Assets held at FVOCI are measured at fair value with movements
taken to 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.
1. 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 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 TFSME is recorded in amounts owed to
credit institutions. Interest is accrued over the life of the
agreements on an EIR basis.
1. 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.
1. 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.
1. Accounting policies (continued)
1. 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 during 2021.
The Group applies fair value portfolio hedge accounting to its
fixed rate portfolio of mortgages and saving accounts. The hedged
portfolio is analysed into repricing time periods based on expected
repricing dates, utilising the Group Assets and Liabilities
Committee (ALCO) approved prepayment curve. Interest rate swaps are
designated against the repricing time periods to establish the
hedge relationship. Hedge effectiveness is calculated as a
percentage of the fair value movement of the interest rate swap
against the fair value movement of the hedged item over the period
tested.
The Group considers the following as key sources of hedge
ineffectiveness:
-- the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
-- the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
-- minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
-- the transition relating to LIBOR reforms during 2021 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
during 2021, 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.
1. Accounting policies (continued)
1. 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. 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.
1. 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.
1. 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
1. Accounting policies (continued)
through to vesting and are expensed over the vesting period.
Awards granted to Executive Directors from 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.
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.
Own shares are recorded at cost and deducted from equity and
represent shares of OSBG that are held by the EBT.
1. 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. Accounting policies (continued)
1. Adoption of new standards
International financial reporting standards issued and adopted
for the first time in the year ended 31 December 2022
There were a number of minor amendments to financial reporting
standards that are effective for the current year. 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
Certain amendments to accounting standards and interpretations
that were not effective on 31 December 2022 have not been early
adopted by the Group. The adoption of these amendments are not
expected to have a material impact on the financial statements of
the Group in future periods.
1. Judgements in applying accounting policies and critical accounting
estimates
In preparing these financial statements, the Group has made
judgements, estimates and assumptions which affect the reported
amounts within the current and future financial years. Actual
results may differ from these estimates.
As set out in the Task Force on Climate-related Financial
Disclosures (TCFD) report, 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 term.
Accordingly there is no significant risk of material adjustment of
the carrying amounts of assets and liabilities within the next
financial year as a result of climate change. As set out in note
23, whilst not material we have recognised a post model adjustment
(PMA) within the ECL provision of GBP4.4m in relation to climate
change.
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:
1. Loan book impairments
Significant increase in credit risk for classification in stage
2
The Group's SICR rules considers changes in default risk,
internal impairment measures, changes in customer credit bureau
files, or whether forbearance measures had been applied. As the
COVID-19 payment deferrals initiative has ceased, newly granted
payment holidays are considered a SICR event.
Other SICR adjustments made during the pandemic to account for
high risk accounts have since been removed with SICR adjustments
updated as the Group identified increases in credit risk as a
result of the Cost of Living and Cost of Borrowing stresses in the
UK, caused by high inflation and increases in interest rates.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
1. 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 assess the intention for holding financial assets and
the contractual terms of those assets, concluding that the Group's
business model is a 'held to collect' business model. This
conclusion was reached on the basis that the Group originates and
purchases loans and advances in order with the intention to collect
contractual cash flows over the life of the originated or purchased
financial instrument.
The Group considers 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 majority of the Group's assets being loans
and advances to customers which have been accounted for under
amortised cost with the exception of one acquired mortgage book of
GBP14.6m (2021: GBP17.7m) 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:
1. 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 GBP130.0m (2021:
GBP101.5m) at the reporting date as disclosed in note 23.
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 estimates
regarding propensity to go to possession given default (PPD),
forced sale discount, time to sale and sale costs. The LGD is
sensitive to the application of the HPI, with a 10% haircut seen to
be a reasonable percentage change when reviewing historical and
expected 12 month outcomes. The table below shows the resulting
incremental provision required in a 10% house price haircut being
directly applied to all exposures which not only adjust the sale
discount but the propensity to go to PPD.
OSB segment CCFS segment Group
31 December 2022 GBP28.0m GBP10.7m GBP38.7m
31 December 2021 GBP22.7m GBP8.3m GBP31.0m
The Group's forecasts of HPI movements used in the impairment
models are disclosed in the Risk profile performance review.
2. Judgements in applying accounting policies and critical accounting estimates (continued)
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect all model
components of the ECL thus the calculation remains sensitive to
both the scenarios utilised and their associated probability
weightings.
The Company has adopted an approach which utilises four
macroeconomic scenarios. These scenarios are provided by an
industry leading economics advisory firm, that provide management
and the Board with advice on which scenarios to utilise and the
probability weightings to attach to each scenario. A base case
forecast is provided, together with a plausible upside scenario.
Two downside scenarios are also provided (downside and a severe
downside).The Group's macroeconomic scenarios can be found in the
Credit Risk section of the Risk profile performance overview.
The following tables detail the ECL scenario sensitivity
analysis with each scenario weighted at 100% probability. The
purpose of using multiple economic scenarios is to model the
non-linear impact of assumptions surrounding macroeconomic factors
and ECL calculated:
100% Base 100% Severe
As at Weighted (see case 100% Upside 100% Downside downside
31-Dec-22 note 23) scenario scenario scenario scenario
Total loans
before
provisions,
GBPm 23,728.1 23,728.1 23,728.1 23,728.1 23,728.1
Modelled ECL,
GBPm 54.4 41.7 32.8 79.3 120.0
Non-modelled
ECL, GBPm 75.6 75.6 75.6 75.6 75.6
Total ECL,
GBPm 130.0 117.3 108.4 154.9 195.6
ECL coverage,
% 0.55 0.49 0.46 0.65 0.82
As at
31-Dec-21
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
1. Effective interest rate on 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 rate plus a margin for the Kent
Reliance brand or a SONIA/Base rate plus a margin for the Precise
brand. Subsequent to origination, changes in actual and expected
customer prepayment rates are reflected as increases or decreases
in the carrying value of loan assets with a corresponding increase
or decrease in interest income. The Group uses historical customer
behaviours, expected take-up rate of retention products and
macroeconomic forecasts in its assessment of expected prepayment
rates. Customer prepayments in a fixed rate or incentive period can
give rise to Early Repayment Charge (ERC) income.
Judgement 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
determines 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 with an adverse
impact of GBP31.6m were made in 2022 predominantly due to reducing
the time Precise customers are expected to spend on reversion rates
(2021: GBP19.0m favourable), decreasing net interest income and
loans and advances to customers.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
There were a number of base rate rises in quick succession in
2022, increasing the sensitivity to changes in behavioural
assumptions because higher reversion rates both increase the income
earned on loans in the reversion period and can lead to higher
repayment rates and therefore less time spent on reversion.
A three months' reduction in the weighted average lives of loans
in the reversion period was considered to be a reasonably possible
change in assumption based on observed changes in repayment rates
in reversion periods over the last two years and what could happen
to repayment rates in a high interest rate environment and an
uncertain macroeconomic outlook.
The sensitivity has been applied to both the Kent Reliance and
the Precise portfolios. In previous years the Precise portfolio
sensitivity was split between loans originated pre and post the
combination with CCFS on 4 October 2019. The combined sensitivity
reflects how the Group now assesses customer behaviour in the
portfolio.
Applying a three month reduction to the expected weighted
average life of the loan book in the reversion period would result
in a reset loss of c.GBP80.8m in 2023 (2021: c.GBP45.9m on a six
month basis in 2022).
1. Interest receivable and similar income
2022 2021
GBPm GBPm
At amortised cost:
On OSB mortgages 591.6 541.3
On CCFS mortgages 411.2 342.9
On finance leases 9.4 6.3
On investment securities 4.7 2.1
On other liquid assets 39.3 2.7
Amortisation of fair value adjustments on CCFS loan
book at Combination (61.5) (66.1)
Amortisation of fair value adjustments on hedged assets(1) (34.1) (39.9)
960.6 789.3
At FVTPL:
Net income/(expense) on derivative financial instruments
- lending activities 106.6 (42.9)
At FVOCI:
On investment securities 2.1 0.4
1,069.3 746.8
----------------------------------------------------------- ------- ------
1. 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
2022 2021
GBPm GBPm
At amortised cost:
On retail deposits 257.7 156.7
On BoE borrowings 64.8 4.5
On PSBs 0.7 1.2
On subordinated liabilities 1.1 0.8
On wholesale borrowings 3.9 0.8
On debt securities in issue 7.7 3.9
On lease liabilities 0.2 0.3
Amortisation of fair value adjustments on CCFS customer
deposits at Combination (1.0) (1.5)
Amortisation of fair value adjustments on hedged liabilities(1) (0.8) (1.1)
334.3 165.6
At FVTPL:
Net expense/(income) on derivative financial instruments
- savings activities 25.1 (6.4)
359.4 159.2
---------------------------------------------------------------- ----- -----
1. 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
2022 2021
GBPm GBPm
Fair value changes in hedged assets (620.6) (297.8)
Hedging of assets 621.9 298.9
Fair value changes in hedged liabilities 33.0 27.4
Hedging of liabilities (42.4) (26.1)
Ineffective portion of hedges (8.1) 2.4
Net gains on unmatched swaps 57.1 10.3
Amortisation of inception adjustments(1) 1.2 3.0
Amortisation of acquisition-related inception adjustments(2) 10.2 13.4
Amortisation of de-designated hedge relationships(3) (0.1) 0.2
Fair value movements on mortgages at FVTPL (0.9) 1.2
Debit and credit valuation adjustment (0.5) (1.0)
58.9 29.5
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.
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
There were no sales of financial instruments during the year
ended 31 December 2022.
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.
7. Other operating income
2022 2021
GBPm GBPm
Interest received on mortgages held at FVTPL 0.6 0.5
Fees and commissions receivable 6.0 7.4
6.6 7.9
--------------------------------------------- ---- ----
8. Administrative expenses
2022 2021
GBPm GBPm
Staff costs 109.3 92.5
Facilities costs 6.4 6.0
Marketing costs 4.5 4.0
Support costs 31.2 25.3
Professional fees 30.2 16.9
Other costs 12.8 7.3
Depreciation (see note 29) 5.2 5.0
Amortisation (see note 30) 8.2 9.5
207.8 166.5
--------------------------- ----- -----
8. Administrative expenses (continued)
Included in professional fees are amounts paid to the Company's
auditor as follows:
2022 2021
GBP'000 GBP'000
Fees payable to the Company's auditor for the audit
of the Company's annual accounts 75 68
Fees payable to the Company's auditor for the audit
of the accounts of subsidiaries 3,340 2,330
Total audit fees 3,415 2,398
-------
Audit-related assurance services(1) 254 258
Other assurance services(2) 259 121
Other non-audit services(3) 33 240
Total non-audit fees 546 619
---------------------------------------------------- ------- -------
Total fees payable to the Company's auditor 3,961 3,017
1. Includes review of interim financial information and profit
verifications.
2. Costs comprise assurance reviews of Alternative Performance Measures
(APMs), Environmental, social and governance (ESG) and European Single
Electronic Format (ESEF) tagging (2021: assurance reviews of APMs,
integration costs and ESEF tagging).
3. Costs primarily comprise work related to the European Medium Term Note
(EMTN) programme (2021: work related to the AT1 securities issuance, a
gap analysis in relation to TCFD and the EMTN programme).
Staff costs comprise the following:
2022 2021
GBPm GBPm
Salaries, incentive pay and other benefits 87.3 72.9
Share-based payments 8.1 6.7
Social security costs 9.5 7.7
Other pension costs 4.4 5.2
109.3 92.5
----- ----
The average number of people employed by the Group (including
Executive Directors) during the year is analysed below.
2022 2021
UK 1,274 1,220
India 622 535
1,896 1,755
------ ----- -----
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 2022 is GBP2.0m (2021: GBP5.0m).
10. Directors' emoluments and transactions
2022 2021
GBP'000 GBP'000
Short-term employee benefits(1) 3,213 2,825
Post-employment benefits 109 106
Share-based payments(2) 2,291 1,267
5,613 4,198
-------------------------------- ------- -------
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 GBP642k (2021:
GBP633k) in the form of shares. DSBP awards granted from April 2021
have a holding period of three to seven 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
GBP1,516k (2021: GBP1,458k) using a share price of GBP5.58 (2021:
GBP4.94) (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 Annual Report on Remuneration.
The Directors of the Company are employed and compensated by
OneSavings Bank plc.
No compensation was paid for loss of office during 2022 and
2021.
There were no outstanding loans granted in the ordinary course
of business to Directors and their connected persons as at 31
December 2022 and 2021.
The 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
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
GBP10 and GBP500 per month over a period of three 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 OSBG
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 to seven years for Executive Directors and one
year 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 Company'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, market 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.
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.
11. Share-based payments (continued)
The share-based payment expense during the year comprised the
following:
2022 2021
GBPm GBPm
Sharesave Scheme 0.6 0.7
Deferred Share Bonus Plan 4.2 3.8
Performance Share Plan 3.3 2.2
8.1 6.7
-------------------------- ---- ----
Movements in the number of share awards and their weighted
average exercise prices are set out below:
Deferred Share Performance
Sharesave Scheme Bonus Plan Share Plan
Weighted
average
exercise
Number price, GBP Number Number
At 1 January 2022 2,421,260 2.65 797,116 5,225,080
Granted 596,692 4.29 478,901 1,761,174
Exercised/Vested (624,664) 2.67 (511,034) (1,181,949)
Forfeited (245,316) 2.82 (1,593) (413,036)
At 31 December
2022 2,147,972 3.08 763,390 5,391,269
----------------- --------- -------------- --------------- -----------
Exercisable at:
31 December 2022 35,015 2.85 - -
--------- -------------- ---------------
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 - -
--------- -------------- ---------------
For the share-based awards granted during the year, the weighted
average grant date fair value was 396 pence (2021: 286 pence).
11. Share-based payments (continued)
The range of exercise prices and weighted average remaining
contractual life of outstanding awards are as follows:
2022 2021
Weighted average Weighted average
remaining remaining
contractual life contractual life
Exercise price Number (years) Number (years)
Sharesave Scheme
229 - 429 pence
(2021: 227 - 335
pence) 2,147,972 1.8 2,421,260 2.0
Deferred Share
Bonus Plan
Nil 763,390 0.9 797,116 0.7
Performance Share
Plan
Nil 5,391,269 2.7 5,225,080 2.4
8,302,631 2.3 8,443,456 2.1
------------------ --------- ----------------- --------- -----------------
Sharesave Scheme
2022 2021 2020 2019 2018 2017
Contractual life,
years 3 3 3 5 3 5 3 5 5
Share price at issue,
GBP 4.20 5.13 2.86 2.86 3.32 3.32 4.19 4.19 3.93
Exercise price, GBP 4.29 3.96 2.29 2.29 2.65 2.65 3.35 3.35 3.15
Expected volatility, % 31.4 37.9 57.6 57.6 31.9 31.9 16.1 16.5 17.3
Dividend yield, % 7.3 4.5 3.3 3.3 4.8 4.8 4.4 4.4 4.1
Grant date fair value,
GBP 0.68 1.46 1.22 1.34 0.90 0.91 0.40 0.43 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 the
Company's share price. 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.
11. Share-based payments (continued)
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 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 and People 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 a participant is employed by the Company at the vesting date
with good leaver exceptions, and an attrition rate is applied as an
estimate of the actual number of awards that will meet the related
conditions at the vesting date.
The awards are not entitled to a dividend equivalent between
grant date and vesting and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to the scheme grant date.
The fair value of an award 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:
2022 2021 2020 2019 2018
Contractual life, years 3-7 3-7 3-7 3 3
Mid-market share price, GBP 5.58 4.94 2.58 3.96 4.11
Attrition rate, % 6.9 12.8 7.3 8.4 9.7
Expected volatility, % 37.4 59.5 43.9 26.8 29.1
Dividend yield, % 4.7 3.8 5.6 4.7 4.6
Vesting rate - TSR % 32.3 40.8 27.8 44.9 54.0
Grant date fair value, GBP 4.64 4.26 2.06 3.47 3.61
--------------------------------- ---- ---- ---- ---- ----
12. Integration costs
2022 2021
GBPm GBPm
Consultant fees 4.9 2.2
Staff costs 3.0 2.2
Impairment - 0.6
7.9 5.0
---------------- ---- ----
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 2021.
13. Exceptional items
2022 2021
GBPm GBPm
Consultant fees - -
Legal and professional fees - 0.2
- 0.2
---------------------------- ---- ----
Exceptional items relate to the insertion of OSBG as the new
holding company and listed entity of the Group.
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:
2022 2021
GBPm GBPm
Corporation tax - current year 141.4 128.0
Corporation tax - prior year (0.9) -
Deferred tax - current year (1.2) (0.2)
Deferred tax - prior year (0.3) -
Release of deferred tax on CCFS Combination(1) (17.5) (8.5)
Total tax charge 121.5 119.3
----------------------------------------------- ------ -----
1. Release of deferred tax 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 GBP(12.8)m (2021:
GBP(14.1)m) and the impact of the bank surcharge decrease on these
deferred tax liabilities GBP(4.7)m (2021: the impact of the corporation
tax rate increase GBP5.6m).
The charge for taxation on the Group's profit before taxation
differs from the charge based on the standard rate of UK
Corporation Tax of 19% (2021: 19%) as follows:
2022 2021
GBPm GBPm
Profit before taxation 531.5 464.6
Profit multiplied by the standard rate of UK Corporation
Tax (19%) 101.0 88.3
Bank surcharge(1) 30.2 27.7
Taxation effects of:
Expenses not deductible for taxation purposes 0.5 0.7
Securitisation profits not taxable (2.2) -
Impact of deferred tax rate change(2) (5.1) 5.2
Adjustments in respect of earlier years (1.2) -
Tax adjustments in respect of share-based payments - 1.2
Tax on coupon paid on AT1 securities (1.7) -
Tax on coupon paid on non-controlling interest securities - (2.5)
Timing differences on capital items - (1.3)
Total tax charge 121.5 119.3
---------------------------------------------------------- ----- -----
1. Tax charge for the two banking entities of GBP34.3m (2021: GBP31.9m) offset by the tax impact of unwinding CCFS Combination items of GBP4.1m (2021: GBP4.2m).
2. Due to change in bank surcharge rate from 8% to 3% on 1 April 2023 (2021: due to change in corporation tax rate from 19% to 25% on 1 April 2023).
Factors affecting tax charge for the year
The effective tax rate for the year ended 31 December 2022,
excluding the impact of adjustments in respect of earlier years and
the deferred tax rate change, was 24.0% (2021: 24.6%).
14. Taxation (continued)
The GBP(5.1)m credit (2021: GBP5.2m charge) impact of the
deferred tax rate change relates predominantly to the deferred tax
liability from the CCFS combination (see note 28 and 38).
A tax charge of nil (comprising a deferred tax debit of GBP0.9m
and current tax credit of GBP0.9m) (2021: credit of GBP1.6m) has
been recognised directly within equity relating to the Group's
share-based payment schemes.
A tax credit of GBP0.1m (2021: credit of GBP0.5m) has been
recognised within OCI relating to investment securities classified
as FVOCI.
Factors that may affect future tax charges
On 24 May 2021, the government substantively enacted legislation
to increase the corporation tax rate from 19% to 25% from 1 April
2023. Further, on 24 February 2022, the government substantively
enacted legislation to decrease the bank surcharge rate from 8% to
3% from 1 April 2023, together with an increase in the surcharge
annual allowance (the level of taxable profits above which are
subject to the surcharge) from GBP25m to GBP100m.
In September 2022, the government announced that the above
changes would be cancelled, but then in October 2022 announced that
the changes would go ahead as enacted.
Deferred tax expected to unwind after 1 April 2023 is recognised
for entities that incur the bank surcharge at 28% (2021: 33%).
15. Earnings per share
EPS is based on the profit for the year and the weighted average
number of ordinary shares in issue. Basic EPS are calculated by
dividing profit attributable to ordinary shareholders by the
weighted average number of ordinary shares in issue during the
year. Diluted EPS take into account share options and awards which
can be converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to
ordinary shareholders is arrived at by adjusting profit for the
year for the coupon on securities classified as equity:
2022 2021
GBPm GBPm
Statutory profit after tax 410.0 345.3
Less: Coupon on non-controlling interest securities
classified as equity - (4.7)
Less: Coupon on AT1 securities classified as equity (9.0) -
Statutory profit attributable to ordinary shareholders 401.0 340.6
------------------------------------------------------- ----- -----
2022 2021
Weighted average number of shares, millions
Basic 441.5 448.1
Dilutive impact of share-based payment schemes 5.1 4.6
Diluted 446.6 452.7
Earnings per share, pence per share
Basic 90.8 76.0
Diluted 89.8 75.2
16. Dividends
2022 2021
GBPm Pence per share GBPm Pence per share
Final dividend for the prior
year 94.8 21.1 64.8 14.5
Interim dividend for the
current year 38.3 8.7 21.9 4.9
133.1 86.7
-------------------------------
The Directors recommend a final dividend of GBP93.7m, 21.8 pence
per share (2021: GBP94.8m, 21.1 pence per share) payable on 17 May
2023 with an ex-dividend date of 23 March 2023 and a record date of
24 March 2023. This dividend is not reflected in these financial
statements as subject to approval by shareholders at the AGM on 11
May 2023.
The Directors have also announced a special dividend of
GBP50.3m, 11.7 pence per share (2021: nil) payable on 17 May 2023
with an ex-dividend date of 23 March 2023 and a record date of 24
March 2023.
If the final dividend is approved this will make up the total
dividend for 2022 of GBP182.0m, 42.2 pence per share (2021:
GBP116.6m, 26.0 pence per share).
A summary of the Company's distributable reserves is shown
below:
2022 2021
GBPm GBPm
Retained earnings 1,359.3 1,358.4
Own shares(1) (2.2) (3.5)
Distributable reserves 1,357.1 1,354.9
------------------------- ------- -------
1. Own Shares comprises own shares held in the Group's EBT of GBP2.2m (2021:
GBP3.5m) which are recognised within OSBG under look-through accounting.
Further additional distributable reserves can be realised over
time from dividend receipts from profits generated from the
subsidiaries including two regulated banks within the Group.
17. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Consolidated Statement of Cash Flows:
2022 2021
GBPm GBPm
Cash in hand 0.4 0.5
Unencumbered loans and advances to credit institutions 2,953.7 2,636.2
Investment securities 90.0 100.0
3,044.1 2,736.7
------------------------------------------------------- ------- -------
18. Loans and advances to credit institutions
2022 2021
GBPm GBPm
Unencumbered:
BoE call account 2,806.5 2,496.4
Call accounts 73.2 43.3
Cash held in special purpose vehicles (SPVs)(1) 63.8 89.6
Term deposits 10.2 6.9
Encumbered:
BoE cash ratio deposit 62.8 59.5
Cash held in SPVs(1) 111.8 48.0
Cash margin given 237.4 99.9
3,365.7 2,843.6
------------------------------------------------ ------- -------
1. Cash held in SPVs is ring-fenced for use in managing the Group's
securitised debt facilities under the terms of securitisation agreements.
Cash held in SPVs is treated as unencumbered in proportion to the
retained interest in the SPV based on the nominal value of the bonds held
by 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.
19. Investment securities
2022 2021
GBPm GBPm
Held at amortised cost:
UK Sovereign debt - 100.0
RMBS loan notes 262.6 223.1
262.6 323.1
Less: Expected credit losses - -
262.6 323.1
Held at FVOCI:
UK Sovereign debt(1) 149.8 152.1
RMBS loan notes - 15.5
149.8 167.6
Held at FVTPL:
RMBS loan notes 0.5 0.7
0.5 0.7
412.9 491.4
----------------------------- ----- -----
1. Includes GBP90.0m of UK Treasury bills which had a maturity of less than
three months from date of acquisition (2021: nil).
At 31 December 2022, the Group had no RMBS held at FVOCI or
FVTPL (2021: nil) and GBP11.5m of RMBS held at amortised cost
(2021: GBP119.5m) sold under repos.
19. Investment securities (continued)
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 amortised cost, FVOCI
and FVTPL in accordance with the Group's business model for each
security.
The credit risk on investment securities held at amortised cost
has not significantly increased since initial recognition and they
are categorised as stage 1. The ECLs are less than GBP0.1m.
Movements during the year in investment securities held by the
Group are analysed as follows:
2022 2021
GBPm GBPm
At 1 January 491.4 471.2
Additions(1) 686.5 568.2
Disposals and maturities(2) (764.4) (549.7)
Movement in accrued interest (0.9) 0.6
Changes in fair value 0.3 1.1
At 31 December 412.9 491.4
------- -------
1. Additions includes GBP90.0m of UK Treasury bills which had a maturity of
less than three months from date of acquisition (2021: GBP100.0m).
2. Disposals and maturities includes GBP100.0m of UK Treasury bills which
had a maturity of less than three months from date of acquisition (2021:
nil).
At 31 December 2022, investment securities included investments
in unconsolidated structured entities (see note 45) of GBP100.7m
notes in PMF 2020-1B (2021: GBP100.7m notes in PMF 2020-1B and
GBP21.0m notes in PMF 2017-1B). The investments represent the
maximum exposure to loss from unconsolidated structured
entities.
20. Loans and advances to customers
2022 2021
GBPm GBPm
Held at amortised cost:
Loans and advances (see note 21) 23,564.9 21,047.9
Finance leases (see note 22) 163.2 116.2
23,728.1 21,164.1
Less: Expected credit losses (see note 23) (130.0) (101.5)
23,598.1 21,062.6
Held at FVTPL:
Residential mortgages 14.6 17.7
23,612.7 21,080.3
------------------------------------------- --------
21. Loans and advances
2022 2021
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 10,188.4 8,375.5 18,563.9 10,393.2 7,685.7 18,078.9
Stage 2(1) 2,508.9 1,907.4 4,416.3 1,142.3 1,269.8 2,412.1
Stage 3 345.7 156.0 501.7 360.4 99.1 459.5
Stage 3 (POCI) 38.5 44.5 83.0 45.2 52.2 97.4
13,081.5 10,483.4 23,564.9 11,941.1 9,106.8 21,047.9
------------------- -------- -------- -------- -------- ------- --------
1. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the Risk review.
The mortgage loan balances pledged as collateral for liabilities
are:
2022 2021
GBPm GBPm
BoE under TFSME and Indexed Long-Term Repo (ILTR) 6,439.7 5,887.2
Securitisation 265.4 486.5
6,705.1 6,373.7
-------------------------------------------------- ------- -------
The Group's securitisation programmes and use of TFSME and ILTR
result in certain assets being encumbered as collateral against
such funding. As at 31 December 2022, the percentage of the Group's
gross loans and advances to customers that are encumbered was 28%
(2021: 30%).
21. Loans and advances (continued)
The table below show the movement in loans and advances to
customers by IFRS 9 stage during the year:
Stage 1 Stage 2 Stage 3 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 16,060.3 2,689.6 392.6 114.6 19,257.1
Originations(1) 4,523.4 - - - 4,523.4
Acquisitions(2) 277.7 - - 2.7 280.4
Disposals(2) (214.4) - - - (214.4)
Repayments and
write-offs(3) (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
Originations(1) 5,829.6 - - - 5,829.6
Repayments and
write-offs(3) (2,855.3) (353.6) (89.3) (14.4) (3,312.6)
Transfers:
- To Stage 1 1,121.6 (1,098.0) (23.6) - -
- To Stage 2(4) (3,524.0) 3,574.6 (50.6) - -
- To Stage 3 (86.9) (118.8) 205.7 - -
At 31 December 2022 18,563.9 4,416.3 501.7 83.0 23,564.9
--------- --------- ------- -------------- ---------
1. Originations include further advances and drawdowns on existing
commitments.
2. 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 the then
current balances.
3. Repayments and write-offs include customer redemptions and write-offs
which are immaterial.
4. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the Risk review.
The contractual amount outstanding on loans and advances that
were written off during the reporting period and are still subject
to collections and recovery activity is GBP0.8m at 31 December 2022
(2021: GBP1.5m).
As at 31 December 2022 GBP110.0m of loans and advances (2021:
GBP97.4m) are in a probation period before they can move out of
Stage 3, see note 1 p) for further details.
22. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
2022 2021
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 60.7 39.7
Between one and two years 49.5 27.7
Between two and three years 36.0 27.5
Between three and four years 23.4 17.2
Between four and five years 9.9 14.6
More than five years 1.3 0.9
180.8 127.6
Unearned finance income (17.6) (11.4)
Net investment in finance leases 163.2 116.2
----------------------------------------------- ------ ------
Net investment in finance leases, receivable
Less than one year 52.4 34.7
Between one and two years 44.4 26.0
Between two and three years 33.2 25.5
Between three and four years 22.3 15.8
Between four and five years 9.6 13.3
More than five years 1.3 0.9
163.2 116.2
------
The Group has recognised GBP4.8m of ECLs on finance leases as at
31 December 2022 (2021: GBP4.3m).
23. Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
2022 2021
Weighted Weighted
ECL ECL ECL ECL
provision Weighting provision provision Weighting provision
GBPm % GBPm GBPm % GBPm
Scenarios
Upside 32.8 30 9.8 13.1 20 2.6
Base case 41.7 40 16.7 26.5 40 10.6
Downside
scenario 79.3 20 15.9 74.0 28 20.7
Severe
downside
scenario 120.0 10 12.0 120.3 12 14.4
Total
weighted
provisions 54.4 48.3
Non-modelled
provisions:
Individually
assessed
provisions 45.8 40.4
Post model
adjustments 29.8 12.8
Total
provision 130.0 101.5
------------- --------- --------- --------- --------- --------- ---------
The Group reflected on the ongoing appropriateness of
probabilities attached to the suite of IFRS 9 scenarios as the
macroeconomic outlook evolved throughout the year. Scenarios were
adjusted to a symmetrical probability, where the upside and
downside scenarios carry equal weightings, as a result of separate
post-model adjustments being raised to ensure that the current IFRS
9 framework adequately provisioned for the underlying portfolio
risk.
As at 31 December 2022, the Group identified increases in credit
risk as a result of the cost of living and cost of borrowing
stresses caused by high inflation and increases in interest rates.
As a result, the Group held an additional GBP16.0m of ECL in PMA
for risks not sufficiently accounted for in the IFRS 9 framework
(GBP7.3m for cost of living and GBP8.7m for cost of borrowing) as
at 31 December 2022. The approach to identify the PMA for the cost
of living is an increase in PD through analysing the effect of the
increases in living costs, such as house hold bills and groceries,
on affordability, which is used to increase the default risk to all
customers, with those on lower income more impacted. The cost of
borrowing PMA specifically identified those that are more at risk
of default due to reverting onto variable rate in the near future,
causing a payment increase and higher affordability risk, which is
used both to apply an additional significant increase in credit
risk SICR and stage 2 criteria and in some cases a higher default
risk.
The Group continued to observe an elongated time to sale, which
was in excess of modelled expectations and observations prior to
the pandemic which accounted for an additional GBP8.7m as a PMA as
at 31 December 2022. Whilst the Group expects the process delays to
reduce in time, a PMA was held to reflect an extended time to sale
in line with most recent observations for those in default.
As part of the Group's appreciation of climate risk and overall
ESG agenda, the Group recognises that properties with lower energy
efficiency are likely to require investment to reach minimum energy
efficiency standards in the future. As a result, to reflect the
expected transition risk and physical risks of climate change, the
Group held GBP4.4m of PMA as at 31 December 2022.
23. Expected credit losses (continued)
To reflect the ongoing cladding concerns, the Group identified a
valuation risk to a small number of properties and accounted for a
further sale discount for these properties by a PMA of GBP0.7m as
at 31 December 2022.
The Group's ECL by segment and IFRS 9 stage is shown below:
2022 2021
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 5.9 1.3 7.2 9.3 2.8 12.1
Stage 2 35.3 15.6 50.9 14.2 10.8 25.0
Stage 3 60.5 7.8 68.3 56.6 3.8 60.4
Stage 3 (POCI) 1.5 2.1 3.6 2.1 1.9 4.0
103.2 26.8 130.0 82.2 19.3 101.5
--------------- ----- ---- ----- ---- ---- -----
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 1 Stage 2 Stage 3 Stage 3 (POCI) Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 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
Originations 6.9 - - - 6.9
Repayments and write-offs (1.3) (3.0) (6.9) (0.3) (11.5)
Re-measurement of loss
allowance (15.1) 26.4 17.5 (0.7) 28.1
Transfers:
- To Stage 1 10.0 (9.2) (0.8) - -
- To Stage 2 (2.0) 3.9 (1.9) - -
- To Stage 3 (0.1) (2.1) 2.2 - -
Changes in assumptions and
model parameters (3.3) 9.9 (2.2) 0.6 5.0
At 31 December 2022 7.2 50.9 68.3 3.6 130.0
23. Expected credit losses (continued)
The table below shows the stage 2 ECL balances by transfer
criteria:
2022 2021
Carrying value ECL Coverage Carrying value ECL Coverage
GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD
movement 3,090.2 42.9 1.39 1,251.6 17.1 1.37
Qualitative
measures 1,277.6 7.5 0.59 1,125.0 7.4 0.66
30 days past
due backstop 49.3 0.5 1.01 37.0 0.5 1.35
Total 4,417.1 50.9 1.15 2,413.6 25.0 1.04
-------------- -------------- ---- -------------- ---- --------
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.
24. Impairment of financial assets
The charge/(credit) for impairment of financial assets in the
Consolidated Statement of Comprehensive Income comprises:
2022 2021
GBPm GBPm
Write-offs in year 2.1 6.7
Increase/(decrease) in ECL provision 27.7 (11.1)
29.8 (4.4)
------------------------------------- ---- ------
25. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Consolidated
Statement of Financial Position:
Gross amount
of recognised
financial Contracts subject to master netting agreements not
assets / Net amount of financial assets / (liabilities) presented offset in the Consolidated Statement of Financial Cash collateral paid / (received) not offset in the Net
(liabilities) in the Consolidated Statement of Financial Position Position Consolidated Statement of Financial Position amount
GBPm GBPm GBPm GBPm GBPm
At 31
December
2022
Derivative
assets:
Interest
rate risk
hedging 888.1 888.1 (104.9) (545.7) 237.5
Derivative
liabilities:
Interest
rate risk
hedging (106.6) (106.6) 104.9 206.9 205.2
At 31
December
2021
Derivative
assets:
Interest
rate risk
hedging 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
Derivative assets and liabilities include an initial margin of
GBP198.6m with swap counterparties.
Included within the Group's derivative assets is GBP203.4m
(2021: GBP48.7m) relating to derivative contracts not covered by
master netting agreements on which no cash collateral has been
paid.
25. Derivatives (continued)
The table below profiles the maturity of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Total Less than 3 3 - 12 More than 5
nominal months months 1 - 5 years years
GBPm GBPm GBPm GBPm GBPm
At 31
December
2022
Derivative
assets 15,662.6 464.8 3,400.3 11,590.5 207.0
Derivative
liabilities 9,518.0 1,503.0 6,001.0 1,789.0 225.0
25,180.6 1,967.8 9,401.3 13,379.5 432.0
------------ ----------- ----------- ----------- ------------ -----------
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
------------ ----------- ----------- ----------- ------------ -----------
The Group has 916 (2021: 841) derivative contracts with an
average fixed rate of 1.34% (2021: 0.34%).
26. Hedge accounting
2022 2021
GBPm GBPm
Hedged assets
Current hedge relationships (827.9) (190.9)
Swap inception adjustment 44.1 (26.2)
Cancelled hedge relationships (5.2) 78.2
Fair value adjustments on hedged assets (789.0) (138.9)
--------------------------------------------- ------- -------
Hedged liabilities
Current hedge relationships 58.0 19.6
Swap inception adjustment (2.3) 3.3
Cancelled hedge relationships (0.6) (1.4)
De-designated hedge relationships - (1.8)
Fair value adjustments on hedged liabilities 55.1 19.7
--------------------------------------------- ------- -------
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 securitisation
activities, legacy long-term fixed rate mortgages (c. 25 years at
origination) and during 2021 IBOR transition.
26. Hedge accounting (continued)
The tables below analyse the Group's portfolio hedge accounting
for fixed rate loans and advances to customers:
2022 2021
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 14,493.8 14,667.7 12,364.3 12,550.2
Cumulative fair value adjustments of hedged item/fair
value of hedging instrument (827.9) 833.2 (190.9) 187.4
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness
for the period (620.6) 621.9 (297.8) 298.9
Cumulative fair value on cancelled hedge relationships (5.2) - 78.2 -
In the Consolidated Statement of Financial Position, GBP854.3m
(2021: GBP187.7m) of hedging instruments were recognised within
derivative assets; and GBP21.1m (2021: GBP0.3m) within derivative
liabilities.
The movement in cancelled hedge relationships is as follows:
2022 2021
Hedged assets GBPm GBPm
At 1 January 78.2 84.6
New cancellations(1) (49.3) 33.5
Amortisation (34.1) (39.9)
At 31 December (5.2) 78.2
----------------------- ------ ------
1. Following the securitisation of mortgages during the year and
LIBOR swaps transferred to SONIA swaps through the IBOR transition
during 2021, 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.
26. Hedge accounting (continued)
The tables below analyse the Group's portfolio hedge accounting
for fixed rate amounts owed to retail depositors:
2022 2021
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal value of hedging
instrument 9,167.3 9,180.0 6,386.0 6,390.0
Cumulative fair value adjustments of hedged item/fair
value of hedging instrument 58.0 (67.9) 19.6 (18.5)
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness
for the period 33.0 (42.4) 27.4 (26.1)
In the Consolidated Statement of Financial Position, GBP2.4m
(2021: GBP0.3m) of hedging instruments were recognised within
derivative assets; and GBP70.3m (2021: GBP18.8m) within derivative
liabilities.
27. Other assets
2022 2021
GBPm GBPm
Falling due within one year:
Prepayments 7.8 7.1
Other assets 1.8 0.9
Falling due more than one year:
Prepayments 5.4 2.2
15.0 10.2
-------------------------------- ---- ----
28. Deferred taxation asset
Losses IFRS 9
carried Accelerated Share-based transitional
forward depreciation payments adjustments Others(1) Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 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
Profit or loss
(charge)/credit(2) - (0.5) 0.5 (0.1) 1.6 1.5
Tax taken directly
to OCI - - - - 0.1 0.1
Tax taken directly
to equity - - (0.9) - - (0.9)
At 31 December 2022 0.5 - 4.6 0.6 0.6 6.3
------------------- ------- ------------ ----------- ------------ --------- -----
1. Others includes deferred taxation assets recognised on financial assets
classified as FVOCI, derivatives and short-term timing differences.
2. Includes GBP0.3m in respect of prior year deferred tax.
In 2022, the profit or loss credit for deferred tax includes a
credit of GBP0.2m from the corporation tax rate change (2021:
credit of GBP0.4m).
As at 31 December 2022, the Group had GBP3.5m (2021: 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.
As at 31 December 2022 deferred tax assets of GBP2.3m (2021:
GBP3.0m) of are expected to be utilised within 12 months and
GBP4.0m (2021: GBP2.6m) utilised after 12 months.
29. Property, plant and equipment
Right of use assets
Freehold Equipment
land and Leasehold and Property Other
buildings improvements fixtures leases leases Total
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2021 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
Additions(1) 3.5 0.1 2.9 0.9 3.5 10.9
Disposals and
write-offs(2) - - (1.7) (0.3) (0.1) (2.1)
Foreign
exchange
difference - - 0.1 - - 0.1
At 31 December
2022 20.0 3.0 16.5 13.8 4.6 57.9
-------------- --------- ------------ --------- -------- --------- -----
Depreciation
At 1 January
2021 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
Charged in
year 0.2 0.2 3.0 1.6 0.2 5.2
Disposals and
write-offs(2) - - (1.7) (0.3) (0.1) (2.1)
At 31 December
2022 1.7 1.2 8.9 4.9 0.3 17.0
-------------- --------- ------------ --------- -------- --------- -----
Net book value
At 31 December
2022 18.3 1.8 7.6 8.9 4.3 40.9
-------------- --------- ------------ --------- -------- --------- -----
At 31 December
2021 15.0 1.9 7.6 9.6 1.0 35.1
1. Additions include property leases modifications of GBP0.5m
(2021: GBP0.4m) of right of use assets.
2. In 2022, the Group wrote off fully depreciated assets of
GBP2.1m. During 2021 the Group disposed of a property for proceeds
of GBP2.0m and wrote off fully depreciated assets of GBP2.9m.
3. 2021 includes GBP0.6m of impairment on property sold during
the year which is included in note 12 Integration costs.
30. Intangible assets
Computer
Development software and Assets arising on
costs licences Combination(2) Total
GBPm GBPm GBPm GBPm
Cost
At 1 January 2021 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
Additions 0.1 1.7 - 1.8
Disposals and
write-offs(1) - (3.6) (1.9) (5.5)
At 31 December 2022 3.8 14.1 21.5 39.4
--------------------- ----------- ------------- -------------------- -----
Amortisation
At 1 January 2021 0.1 9.1 12.8 22.0
Charged in year 0.5 3.2 5.8 9.5
Impairment 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
Charged in year 0.7 3.2 4.3 8.2
Disposals and
write-offs(1) - (3.6) (1.9) (5.5)
At 31 December 2022 1.3 8.4 17.7 27.4
--------------------- ----------- ------------- -------------------- -----
Net book value
At 31 December 2022 2.5 5.7 3.8 12.0
At 31 December 2021 3.1 7.2 8.1 18.4
1. During the year the Group wrote off fully amortised assets.
2. Assets arising on Combination comprise broker relationships of GBP2.0m (2021: GBP5.0m), technology of GBP0.4m (2021: GBP1.9m), brand name of GBP0.3m (2021: GBP0.8m) and banking licence of nil (2021: GBP0.4m). The carrying value of the intangible assets are reviewed each reporting period, no impairment reversal (2021: GBP3.1m impairment reversal) 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.
31. Amounts owed to credit institutions
2022 2021
GBPm GBPm
BoE TFSME 4,232.0 4,203.1
BoE ILTR 300.9 -
Commercial repo 10.2 0.5
Loans from credit institutions 0.1 0.6
4,543.2 4,204.2
Cash collateral and margin received 549.7 115.4
5,092.9 4,319.6
------------------------------------ ------- -------
32. Amounts owed to retail depositors
2022 2021
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 8,085.9 5,899.6 13,985.5 6,221.7 4,703.4 10,925.1
Variable rate
deposits 3,046.3 2,724.0 5,770.3 3,517.7 3,083.6 6,601.3
11,132.2 8,623.6 19,755.8 9,739.4 7,787.0 17,526.4
--------------------- -------- ------- -------- ------- ------- --------
33. Amounts owed to other customers
2022 2021
GBPm GBPm
Fixed rate deposits 100.9 50.3
Variable rate deposits 12.2 42.3
113.1 92.6
-----
34. Debt securities in issue
2022 2021
GBPm GBPm
Asset-backed loan notes at amortised cost 265.9 460.3
Amount due for settlement after 12 months 265.9 460.3
265.9 460.3
----- -----
The asset-backed loan notes are secured on fixed and variable
rate mortgages and are redeemable in part from time to time, but
such redemptions are mainly from 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.
Where the Group owns the call rights for a transaction, it may
repurchase the asset-backed loan notes on any interest payment date
on or after the call dates, or on 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 2022, notes were issued through the following
funding vehicles:
2022 2021
GBPm GBPm
CMF 2020-1 plc 141.8 199.8
Canterbury Finance No.3 plc 21.0 76.9
Canterbury Finance No.4 plc 103.1 183.6
265.9 460.3
---------------------------- ----- -----
35. Lease liabilities
2022 2021
GBPm GBPm
At 1 January 10.7 11.7
New leases 0.9 0.7
Lease termination - (0.1)
Lease repayments (1.9) (1.9)
Interest accruals 0.2 0.3
At 31 December 9.9 10.7
------------------ -----
During the year, the Group incurred expenses of GBP0.3m (2021:
GBP0.2m) in relation to short-term leases.
36. Other liabilities
2022 2021
GBPm GBPm
Falling due within one year:
Accruals 28.0 23.2
Deferred income 0.6 0.9
Other creditors 10.1 5.5
38.7 29.6
----------------------------- ---- ----
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 reduced its provision to less
than GBP0.1m as at 31 December 2022 (2021: GBP0.3m).
The Group has released its provision for conduct related
exposures of GBP1.2m following completion of an internal
review.
An analysis of the Group's FSCS and other provisions is
presented below:
2022 2021
ECL on ECL on
Other undrawn Other undrawn
regulatory loan regulatory loan
FSCS provisions facilities Total FSCS provisions facilities Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.5 0.4 2.0 0.1 1.5 0.2 1.8
(Credit)/charge (0.1) (1.5) - (1.6) - - 0.2 0.2
At 31 December - - 0.4 0.4 0.1 1.5 0.4 2.0
---------------- ----- ---------- ---------- ----- ---- ---------- ---------- -----
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
GBPm
At 1 January 2021 48.3
Profit or loss credit (8.5)
At 31 December 2021 39.8
Profit or loss credit (17.5)
At 31 December 2022 22.3
----------------------
In 2022, the profit or loss credit includes GBP4.7m impact of
the corporation tax rate change (2021: a debit of GBP5.6m).
As at 31 December 2022 deferred tax liabilities of GBP5.6m
(2021: GBP17.5m) are expected to be due within 12 months and
GBP16.7m (2021: GBP22.3m) due after 12 months.
39. Subordinated liabilities
The Group's outstanding subordinated liabilities are summarised
below:
2022 2021
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022 (LIBOR +2%) - 0.1
Fixed rate:
Subordinated liabilities 2024 (7.45%) - 10.2
- 10.3
--------------------------------------------------- ---- ----
The table below shows a reconciliation of the Group's
subordinated liabilities during the year:
2022 2021
GBPm GBPm
At 1 January 10.3 10.5
Repayment of debt (10.3) (0.2)
At 31 December - 10.3
-------------------- ------ -----
During the year the fixed rate subordinated liabilities were
fully repaid at a premium of GBP0.7m, which is recognised in
interest payable and similar charges.
The LIBOR linked subordinated liabilities were redeemed in
September 2022.
40. Perpetual Subordinated Bonds
2022 2021
GBPm GBPm
Sterling PSBs (4.6007%) 15.2 15.2
The bonds are listed on the London Stock Exchange.
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
liabilities classified as financing activities within the
Consolidated Statement of Cash Flows:
Amounts owed
to credit Debt Subordinated
institutions securities in liabilities
(see note issue (see (see note PSBs (see
31) note 34) 39) note 40) Total
GBPm GBPm GBPm GBPm GBPm
(Restated)(1)
At 1 January
2021 3,570.2 421.9 10.5 37.6 4,040.2
Cash
movements:
Principal
drawdowns(1) 4,747.6 195.6 - - 4,943.2
Principal
repayments (4,113.7) (159.5) (0.2) (22.0) (4,295.4)
Interest paid (4.4) (1.6) (0.8) (1.6) (8.4)
Non-cash
movements:
Interest
charged 4.5 3.9 0.8 1.2 10.4
At 31
December
2021(1) 4,204.2 460.3 10.3 15.2 4,690.0
Cash
movements:
Principal
drawdowns 429.5 - - - 429.5
Principal
repayments (120.5) (193.6) (10.1) - (324.2)
Interest paid (34.8) (8.5) (1.3) (0.7) (45.3)
Non-cash
movements:
Interest
charged 64.8 7.7 1.1 0.7 74.3
At 31
December
2022 4,543.2 265.9 - 15.2 4,824.3
------------- ------------- ------------- ------------- ------------- ---------
1. 2021 figures restated see note 1 b) for further details.
42. Share capital
Number of
shares
issued and Nominal value Premium
Ordinary shares fully paid GBPm GBPm
At 1 January 2021 447,312,780 1,359.8 -
Capital reduction of GBP3.04 nominal value shares
to GBP0.01 nominal value shares - (1,355.3) -
Shares issued under OSBG employee share plans 1,315,075 - 0.7
At 31 December 2021 448,627,855 4.5 0.7
Shares cancelled under repurchase programme (20,671,224) (0.2) -
Shares issued under OSBG employee share plans 1,911,994 - 1.7
At 31 December 2022 429,868,625 4.3 2.4
-------------------------------------------------- ------------ ------------- -------
The Group's share repurchase programme commenced on 18 March
2022, and allowed the Group to repurchase a maximum of 44,799,505
shares, restricted by a total cost of GBP100m. The programme
completed during the year and 20,671,224 shares, representing 4.6%
of the issued share capital, have been repurchased and cancelled at
an average price of GBP4.84 per share and a total cost of GBP100m
excluding transaction costs.
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 other reserves are as follows:
2022 2021
GBPm GBPm
Share-based payment 13.2 13.4
Capital redemption & transfer (1,355.1) (1,355.3)
Own shares (2.2) (3.5)
FVOCI 0.3 0.6
Foreign exchange (1.3) (1.1)
AT1 securities 150.0 150.0
(1,195.1) (1,195.9)
------------------------------ --------- ---------
43. Other reserves (continued)
Capital redemption and transfer reserve
The capital redemption reserve represents the shares cancelled
through the Group's share repurchase programme.
On 27 November 2020, a new ultimate parent company was inserted
into the Group, being OSBG. The share capital generated from
issuing 447,304,198 nominal shares at GBP3.04 per share, replacing
the nominal shares of GBP0.01 in OSB previously recognised in share
capital at the consolidation level, created a transfer reserve of
GBP1,355.3m.
Own shares
The Company has adopted the look-through approach for the EBT,
including the EBT within the Company. As at 31 December 2022, the
EBT held 442,568 OSBG shares of nominal value GBP0.4m (2021:
848,221 OSBG shares of nominal value GBP0.8m). The Group and
Company show these shares as a deduction from equity, being the
cost at which the shares were acquired of GBP2.2m (2021:
GBP3.5m).
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
On 5 October 2021, OSBG issued AT1 securities. AT1 securities
comprise GBP150.0m of Fixed Rate Resetting Perpetual Subordinated
Contingent Convertible Securities that qualify as AT1 capital under
CRD IV. The securities will be subject to full conversion into
ordinary shares of OSBG in the event that the Group's Common Equity
Tier 1 (CET1) capital ratio falls below 7%. 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. OSBG
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. OSBG 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 2022 (2021: nil).
b) The Group's minimum lease commitments under operating leases not subject to IFRS 16 are summarised in the table below:
2022 2021
GBPm GBPm
Land and buildings: due within:
One year 0.3 -
Two to five years 0.3 -
0.6 -
-------------------------------- ---- ----
1. Undrawn loan facilities:
2022 2021
GBPm GBPm
OSB mortgages 741.6 706.4
CCFS mortgages 455.1 434.5
Asset finance 15.5 14.4
1,212.2 1,155.3
--------------- ------- -------
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.
1. The Group did not have any issued financial guarantees as at 31 December
2022 (2021: nil).
45. Risk management
Overview
Financial instruments form the vast majority of the Group'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 TFSME and ILTR, supported by debt securities, 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.
45. Risk management (continued)
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.
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.
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.
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.
The change, during the period and cumulatively, in the fair
value of investments in debt securities and loans and advances to
customers at FVOCI and FVTPL that is attributable to changes in
credit risk is not material.
46. Risk management (continued)
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 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. The
collateral value is determined by indexing against House Price
Index data.
2022
OSB CCFS Total
Gross Capped Gross Capped Gross Capped
carrying collateral carrying collateral carrying collateral
amount held amount held amount held
GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,346.8 10,320.4 8,375.5 8,374.4 18,722.3 18,694.8
Stage 2(1) 2,509.7 2,508.5 1,907.4 1,907.1 4,417.1 4,415.6
Stage 3 349.7 319.2 156.0 156.0 505.7 475.2
Stage 3
(POCI) 38.5 37.5 44.5 44.4 83.0 81.9
13,244.7 13,185.6 10,483.4 10,481.9 23,728.1 23,667.5
---------- -------- ---------- --------- ---------- --------- ----------
1. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the Risk review.
2021
OSB CCFS Total
Gross Capped Gross Capped Gross Capped
carrying collateral carrying collateral carrying collateral
amount held amount held amount held
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
---------- -------- ---------- --------- ---------- --------- ----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands.
45. Risk management (continued)
The Group uses indexed loan to value (LTV) ratios to assess the
quality of the uncapped collateral held. Property values are
updated to reflect changes in the HPI. A breakdown of loans and
advances to customers by indexed LTV is as follows:
2022 2021
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,768.8 914.7 3,683.5 16 2,293.3 428.2 2,721.5 13
50% - 60% 2,770.7 1,361.1 4,131.8 17 1,935.3 490.1 2,425.4 11
60% - 70% 4,647.5 3,561.7 8,209.2 35 4,179.0 1,241.9 5,420.9 26
70% - 80% 2,150.7 4,277.3 6,428.0 26 2,887.7 6,100.7 8,988.4 43
80% - 90% 548.3 365.5 913.8 4 513.2 844.4 1,357.6 6
90% - 100% 181.3 2.5 183.8 1 77.8 1.5 79.3 -
>100% 177.4 0.6 178.0 1 171.0 - 171.0 1
Total
loans
before
provisions 13,244.7 10,483.4 23,728.1 100 12,057.3 9,106.8 21,164.1 100
---------- -------- -------- -------- --- -------- ------- -------- ---
The table below shows the LTV banding for the OSB segments' two
major lending streams:
2022 2021
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,301.4 1,467.4 2,768.8 21 1,007.6 1,285.7 2,293.3 19
50% - 60% 2,497.2 273.5 2,770.7 21 1,693.7 241.6 1,935.3 16
60% - 70% 4,386.0 261.5 4,647.5 36 3,903.0 276.0 4,179.0 35
70% - 80% 1,977.1 173.6 2,150.7 16 2,647.7 240.0 2,887.7 24
80% - 90% 418.1 130.2 548.3 4 452.8 60.4 513.2 4
90% - 100% 167.3 14.0 181.3 1 66.2 11.6 77.8 1
>100% 172.9 4.5 177.4 1 165.1 5.9 171.0 1
Total
loans
before
provisions 10,920.0 2,324.7 13,244.7 100 9,936.1 2,121.2 12,057.3 100
---------- -------- ----------- -------- --- ------- ----------- -------- ---
45. Risk management (continued)
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
2022
Residential
Buy-to-Let Commercial development Funding lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,137.6 114.7 16.1 33.0 1,301.4
50% - 60% 2,324.1 112.8 57.2 3.1 2,497.2
60% - 70% 4,111.4 164.4 110.2 - 4,386.0
70% - 80% 1,741.5 235.6 - - 1,977.1
80% - 90% 232.8 151.6 - 33.7 418.1
90% - 100% 77.1 63.8 - 26.4 167.3
>100% 130.5 38.4 1.0 3.0 172.9
Total loans
before
provisions 9,755.0 881.3 184.5 99.2 10,920.0
------------- ---------- ---------- -------------- ------------- --------
2021
Residential
Buy-to-Let Commercial development Funding 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
-------------- ---------- ---------- -------------- ------------- -------
The tables below show the LTV analysis of the OSB Residential
sub-segment:
2022 2021
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% 1,357.6 109.8 - 1,467.4 1,173.3 111.8 0.6 1,285.7
50% - 60% 238.1 35.4 - 273.5 189.8 51.8 - 241.6
60% - 70% 242.9 18.6 - 261.5 240.2 35.8 - 276.0
70% - 80% 168.3 5.3 - 173.6 221.3 18.7 - 240.0
80% - 90% 128.8 1.4 - 130.2 56.5 3.9 - 60.4
90% - 100% 13.4 0.6 - 14.0 10.3 1.3 - 11.6
>100% 3.8 0.7 - 4.5 4.5 1.4 - 5.9
Total
loans
before
provisions 2,152.9 171.8 - 2,324.7 1,895.9 224.7 0.6 2,121.2
---------- ------- ------ ------- ------- ------- ------ ------- -------
45. Risk management (continued)
The table below shows the LTV analysis of the four CCFS
sub-segment:
2022
Second charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 308.6 498.3 62.9 44.9 914.7 9
50% - 60% 799.5 501.8 29.9 29.9 1,361.1 13
60% - 70% 2,587.6 924.2 25.6 24.3 3,561.7 34
70% - 80% 3,613.8 622.9 26.9 13.7 4,277.3 41
80% - 90% 215.1 146.8 2.4 1.2 365.5 3
90% - 100% 0.2 0.8 1.5 - 2.5 -
>100% - 0.1 0.5 - 0.6 -
Total loans
before
provisions 7,524.8 2,694.9 149.7 114.0 10,483.4 100
------------- ---------- ----------- -------- ------------- -------- ---
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
------------- ---------- ----------- -------- -------------- ------- ---
45. 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 review.
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.
At 31 At 31
Number of December Number of December
accounts 2022 accounts 2021
Forbearance type 2022 GBPm 2021 GBPm
Interest-only
switch 70 12.2 159 18.6
Interest rate
reduction 91 7.5 437 8.1
Term extension 53 2.9 271 16.6
Payment deferral 194 34.0 499 43.0
Voluntary-assisted
sale 5 1.2 7 0.8
Payment concession
(reduced monthly
payments) 55 12.0 51 12.1
Capitalisation of
interest 27 9.0 65 1.1
Full or partial
debt forgiveness 359 9.6 1,078 22.6
Total 854 88.4 2,567 122.9
------------------- ------------ ------------- ------------- -------------
Loan type
First charge
owner-occupier 217 27.8 424 34.8
Second charge
owner-occupier(1) 460 8.9 1,931 38.7
Buy-to-Let 107 37.1 160 34.6
Commercial 70 14.6 52 14.8
Total 854 88.4 2,567 122.9
------------------- ------------ ------------- ------------- -------------
1. Through 2021 and the first quarter of 2022, 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.
45. Risk management (continued)
Geographical analysis by region
An analysis of loans, excluding asset finance leases, by region
is provided below:
2022 2021
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
East Anglia 453.5 1,136.4 1,589.9 7 361.8 967.1 1,328.9 6
East
Midlands 609.9 691.6 1,301.5 6 543.8 555.8 1,099.6 5
Greater
London 5,559.3 3,293.0 8,852.3 38 4,983.7 3,052.6 8,036.3 39
Guernsey 21.5 - 21.5 - 26.3 - 26.3 -
Jersey 75.6 - 75.6 - 99.3 - 99.3 -
North East 169.8 274.5 444.3 2 153.9 244.4 398.3 2
North West 906.6 921.8 1,828.4 7 762.3 755.0 1,517.3 7
Northern
Ireland 10.0 - 10.0 - 10.9 - 10.9 -
Scotland 36.9 261.3 298.2 1 35.2 226.0 261.2 1
South East 2,802.8 1,681.5 4,484.3 19 2,792.6 1,452.4 4,245.0 20
South West 893.7 659.6 1,553.3 7 825.5 544.3 1,369.8 7
Wales 297.5 284.7 582.2 2 272.1 240.6 512.7 2
West
Midlands 908.9 761.3 1,670.2 7 706.9 629.8 1,336.7 7
Yorks and
Humberside 335.5 517.7 853.2 4 366.8 438.8 805.6 4
Total loans
before
provisions 13,081.5 10,483.4 23,564.9 100 11,941.1 9,106.8 21,047.9 100
----------- -------- -------- -------- --- -------- ------- -------- ---
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 and are
aligned with Capital models to generate the risk grades which are
then 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 following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage. The assessment of
whether credit risk has increased significantly since initial
recognition is performed for each reporting period for the life of
the loan. Loans and advances to customers initially booked on very
low PDs and graded as excellent quality loans can experience a SICR
and therefore be moved to Stage 2. Such loans may still be graded
as excellent quality, if they meet the overall criteria.
45. Risk management (continued)
During 2022, the Group developed Capital models as part of the
IRB programme. As a result, the disclosures provided below are now
aligned to internal Capital models and Rating systems. The 2021
figures have been updated to reflect the revised alignment with
Capital models which, compared to 2021 annual report disclosures,
has resulted in a reduction of 11% from OSB segment's Excellent
quality, a 6% increase in Good, a 3% increase in Satisfactory and a
2% increase in Lower. CCFS segment figures remain largely aligned
with minor movements across segments.
PD PD
Stage 3 lower upper
Stage 1 Stage 2 Stage 3 (POCI) Total range range
2022 GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 4,136.6 470.6 - - 4,607.2 - 0.3
Good 5,848.5 1,248.4 - - 7,096.9 0.3 2.0
Satisfactory 331.8 374.2 - - 706.0 2.0 7.4
Lower 29.9 416.5 - - 446.4 7.4 100.0
Impaired - - 349.7 - 349.7 100.0 100.0
POCI - - - 38.5 38.5 100.0 100.0
CCFS
Excellent 5,800.2 910.1 - - 6,710.3 - 0.3
Good 2,394.2 668.2 - - 3,062.4 0.3 2.0
Satisfactory 151.4 143.9 - - 295.3 2.0 7.4
Lower 29.7 185.2 - - 214.9 7.4 100.0
Impaired - - 156.0 - 156.0 100.0 100.0
POCI - - - 44.5 44.5 100.0 100.0
18,722.3 4,417.1 505.7 83.0 23,728.1
------------- -------- ------- ------- ------- -------- ------- -------
PD PD
Stage 3 lower upper
Stage 1 Stage 2 Stage 3 (POCI) Total range range
2021 GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 3,949.2 159.6 - - 4,108.8 - 0.3
Good 6,045.0 486.8 - - 6,531.8 0.3 2.0
Satisfactory 435.9 237.2 - - 673.1 2.0 7.4
Lower 72.6 260.2 - - 332.8 7.4 100.0
Impaired - - 365.6 - 365.6 100.0 100.0
POCI - - - 45.2 45.2 100.0 100.0
CCFS
Excellent 5,102.2 443.2 - - 5,545.4 - 0.3
Good 2,468.5 487.5 - - 2,956.0 0.3 2.0
Satisfactory 96.2 171.5 - - 267.7 2.0 7.4
Lower 18.8 167.6 - - 186.4 7.4 100.0
Impaired - - 99.1 - 99.1 100.0 100.0
POCI - - - 52.2 52.2 100.0 100.0
18,188.4 2,413.6 464.7 97.4 21,164.1
------------- -------- ------- ------- ------- -------- ------- -------
45. Risk management (continued)
The tables below show the Group's other financial assets and
derivatives by credit risk rating grade. The credit grade is based
on the external credit rating of the counterparty; AAA to AA- are
rated Excellent; A+ to A- are rated Good; and BBB+ to BBB- are
rated Satisfactory.
Excellent Good Satisfactory Total
2022 GBPm GBPm GBPm GBPm
Investment securities 412.9 - - 412.9
Loans and advances to credit
institutions 2,923.2 435.4 7.1 3,365.7
Derivative assets 400.1 488.0 - 888.1
3,736.2 923.4 7.1 4,666.7
------------------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
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
------------------------------------- --------- ----- ------------ -------
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 GBP3,496.9m (2021: GBP2,926.0m).
The tables below show the industry sector of the Group's loans
and advances to credit institutions and investment securities:
2022 2021
GBPm % GBPm %
BoE(1) 2,869.3 76 2,555.9 76
Other banks 496.4 13 287.7 9
Central government 149.8 4 252.1 8
Securitisation 263.1 7 239.3 7
Total 3,778.6 100 3,335.0 100
---------------------- ------- --- ------- ---
1. Balances with the BoE include GBP62.8m (2021: GBP59.5m) held in the cash
ratio deposit.
45. Risk management (continued)
The tables below show the geographical exposure of the Group's
loans and advances to credit institutions and investment
securities:
2022 2021
GBPm % GBPm %
United Kingdom 3,765.7 100 3,328.0 100
India 12.9 - 7.0 -
Total 3,778.6 100 3,335.0 100
------------------ ------- --- ------- ---
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.
For further information on credit risk, see Risk review.
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 call accounts
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. The tables below analyse the financial assets
and liabilities of the Group based on the contractual maturity on
the remaining period at balance sheet date. .
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 show the maturity profile for the Group's
financial assets and liabilities based on contractual maturities at
the reporting date:
More
Carrying Less than 3 - 12 1 - 5 than 5
amount On demand 3 months months years years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 19,755.8 6,770.7 2,632.4 7,807.7 2,545.0 -
Amounts owed
to credit
institutions 5,092.9 - 191.4 310.3 4,218.9 372.3
Amounts owed
to other
customers 113.1 - 29.7 76.5 6.9 -
Derivative
liabilities 106.6 - 7.5 46.3 43.8 9.0
Debt
securities
in issue 265.9 - 0.3 - 265.6 -
Lease
liabilities 9.9 - 0.4 1.3 7.6 0.6
Subordinated
liabilities - - - - - -
PSBs 15.2 - - - 15.2 -
Total
liabilities 25,359.4 6,770.7 2,861.7 8,242.1 7,103.0 381.9
------------- -------- --------- --------- ---------- ---------- --------
Financial
asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and
advances to
credit
institutions 3,365.7 3,104.0 71.4 - - 190.3
Investment
securities 412.9 0.5 144.8 22.1 245.5 -
Loans and
advances to
customers 23,612.7 2.3 223.8 421.8 1,341.6 21,623.2
Derivative
assets 888.1 - 2.7 55.5 828.2 1.7
Total assets 28,279.8 3,107.2 442.7 499.4 2,415.3 21,815.2
------------- -------- --------- --------- ---------- ---------- --------
Cumulative
liquidity
gap (3,663.5) (6,082.5) (13,825.2) (18,512.9) 2,920.4
45. Risk management (continued)
More
Carrying Less than 3 - 12 1 - 5 than 5
amount On demand 3 months months years 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
45. Risk management (continued)
Liquidity risk -- undiscounted contractual cash flows
The following tables provide an analysis of the Group's gross
contractual undiscounted cash flows, derived using interest rates
and contractual maturities at the reporting date and excluding
impacts of early payments or non-payments:
Gross
Carrying inflow/ Up to 3 3 - 12 1 - 5 More than
amount outflow months months years 5 years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 19,755.8 20,083.0 9,566.2 7,911.0 2,605.8 -
Amounts owed
to credit
institutions 5,092.9 5,459.8 227.1 410.9 4,449.5 372.3
Amounts owed
to other
customers 113.1 113.1 29.7 76.5 6.9 -
Derivative
liabilities 106.6 103.9 16.2 39.1 46.7 1.9
Debt
securities
in issue 265.9 277.3 34.4 64.5 178.4 -
Lease
liabilities 9.9 11.4 0.5 1.5 8.8 0.6
Subordinated
liabilities - - - - - -
PSBs 15.2 16.1 0.3 0.3 15.5 -
Total
liabilities 25,359.4 26,064.6 9,874.4 8,503.8 7,311.6 374.8
------------- --------- -------- --------- --------- --------- ---------
Off-balance
sheet loan
commitments 1,212.2 1,212.2 1,212.2 - - -
Financial
asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and
advances to
credit
institutions 3,365.7 3,365.7 3,175.4 - - 190.3
Investment
securities 412.9 444.3 148.2 30.2 265.9 -
Loans and
advances to
customers 23,612.7 57,940.1 430.7 1,657.2 8,028.9 47,823.3
Derivative
assets 888.1 820.5 76.9 259.4 484.6 (0.4)
Total assets 28,279.8 62,571.0 3,831.6 1,946.8 8,779.4 48,013.2
------------- --------- -------- --------- --------- --------- ---------
45. Risk management (continued)
Gross
Carrying inflow/ Up to 3 3 - 12 1 - 5 More than
amount outflow 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
------------- --------- -------- --------- --------- --------- ---------
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.
45. 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:
2022
Encumbered Unencumbered
------------------------
Pledged as Available as
collateral Other(1) collateral Other Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and
advances to
credit
institutions 237.4 174.6 2,806.5 147.2 3,365.7
Investment
securities 46.4 - 366.5 - 412.9
Loans and
advances to
customers(2) 6,705.1 - 16,424.5 483.1 23,612.7
Derivative
assets - - - 888.1 888.1
Non-financial
assets - - - (713.1) (713.1)
6,988.9 174.6 19,597.9 805.3 27,566.7
--------------- --------------- -------- --------------- ------- --------
2021
Encumbered Unencumbered
------------------------
Pledged as Available as
collateral Other(1) collateral Other 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(2) 6,373.7 - 2,746.3 11,960.3 21,080.3
Derivative
assets - - - 185.7 185.7
Non-financial
assets - - - (69.6) (69.6)
6,595.4 107.5 5,612.8 12,216.2 24,531.9
--------------- --------------- -------- -------------- -------- --------
1. Represents assets that are not pledged but that the Group believes it is restricted from using to secure funding for legal or other reasons.
2. Unencumbered loans and advances to customers classified as other are restricted for use as collateral as they are; registered outside of UK (Jersey and Guernsey), not secured by immovable property or are non-performing.
45. 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:
2022 2021
GBPm GBPm
Unencumbered balances with central banks 2,806.5 2,496.4
Unencumbered cash and balances with other banks 147.2 139.8
Other cash and cash equivalents 0.4 0.5
Unencumbered investment securities 366.5 369.6
3,320.6 3,006.3
------------------------------------------------ ------- -------
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 and in
fixed rate retail deposits. Exposure is mitigated on a continuous
basis through the use of natural offsets between mortgages and
savings with a similar tenor, interest rate 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 pipeline take up. Expected prepayments
are monitored and modelled on a regular basis based upon historical
analysis. 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. The table
below shows the maximum decreases to net interest income under
these scenarios after taking into account the derivatives:
45. Risk management (continued)
2022 2021
GBPm GBPm
OSB 13.5 9.9
CCFS 1.9 1.1
15.4 11.0
Exposure for earnings at risk as at 31 December 2022 is measured
by the impact of a +/-100bps parallel shift in interest rates on
the expected profitability of the Group in the next 12 months. The
risk appetite limit is 4% of full year net interest income. The
table below shows the maximum decreases after taking into account
the derivatives:
2022 2021
GBPm GBPm
OSB(1) 7.5 0.5
CCFS(1,2) 8.8 (0.4)
16.3 0.1
-----
1. Exposure for earnings at risk as at 31 December 2021 was 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
was 2% of full year net interest income.
2. Increases for CCFS 2021 due to product floors earnings increases in both
the +50bps and -50bps scenarios.
Exposure for earnings at risk measured by the impact of a
+/-100bps parallel shift in interest rates on the expected
profitability of the Group in the next 3 years. The risk appetite
limit is 4% of full year net interest income.
2022 2021(1)
GBPm GBPm
OSB 26.2 -
CCFS 24.1 -
50.3 -
-------
1. Not measured during 2021.
The Group is also exposed to basis risk. Basis risk is the risk
of loss from an adverse divergence in interest rates. It arises
where assets and liabilities reprice from different variable rate
indices. These indices may be market rates (e.g. bank base rate or
SONIA) or administered (e.g. the Group's SVR, other discretionary
variable rates, or that received on call accounts with other
banks).
45. Risk management (continued)
The Group measures basis risk using the impact of four scenarios
on net interest income over a one-year period including movements
such as diverging base, overnight and term 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 2.5% of full year net interest income. The table below
shows the maximum decreases to net interest income at 31 December
2022 and 2021:
2022 2021
GBPm GBPm
OSB 5.8 3.2
CCFS 4.5 3.8
10.3 7.0
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in
respect of its Indian operations. A 5% increase in exchange rates
would result in a GBP0.7m (2021: GBP0.4m) effect in profit or loss
and GBP0.5m (2021: GBP0.5m) in equity.
Structured entities
The structured entities consolidated within the Group at 31
December 2022 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 plc, Canterbury Finance No.5 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 2021 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 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 19
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.
45. Risk management (continued)
During 2022 the Group received GBP2.6m interest income (2021:
GBP1.8m) and GBP4.3m servicing income (2021: GBP4.4m) from
unconsolidated structured entities.
1. Financial instruments and fair values
1. Financial assets and financial liabilities
The following table sets out the classification of financial
instruments in the Consolidated Statement of Financial
Position:
2022
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.4 0.4
Loans and
advances to
credit
institutions 18 - - - 3,365.7 3,365.7
Investment
securities 19 0.5 - 149.8 262.6 412.9
Loans and
advances to
customers 20 14.6 - - 23,598.1 23,612.7
Derivative
assets 25 - 888.1 - - 888.1
Other assets(1) 27 - - - 1.8 1.8
15.1 888.1 149.8 27,228.6 28,281.6
--------------- ---- ---------- ----------- ----- ----------- ----------
Liabilities
Amounts owed to
retail
depositors 32 - - - 19,755.8 19,755.8
Amounts owed to
credit
institutions 31 - - - 5,092.9 5,092.9
Amounts owed to
other
customers 33 - - - 113.1 113.1
Debt securities
in issue 34 - - - 265.9 265.9
Derivative
liabilities 25 - 106.6 - - 106.6
Other
liabilities(2) 36 - - - 38.1 38.1
Subordinated
liabilities 39 - - - - -
PSBs 40 - - - 15.2 15.2
- 106.6 - 25,281.0 25,387.6
--------------- ---- ---------- ----------- ----- ----------- ----------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
46. Financial instruments and fair values (continued)
2021
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and
advances to
credit
institutions 18 - - - 2,843.6 2,843.6
Investment
securities 19 0.7 - 167.6 323.1 491.4
Loans and
advances to
customers 20 17.7 - - 21,062.6 21,080.3
Derivative
assets 25 - 185.7 - - 185.7
Other assets(1) 27 - - - 0.9 0.9
18.4 185.7 167.6 24,230.7 24,602.4
--------------- ---- ---------- ----------- ----- ----------- ----------
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 25 - 19.7 - - 19.7
Other
liabilities(2) 36 - - - 28.8 28.8
Subordinated
liabilities 39 - - - 10.3 10.3
PSBs 40 - - - 15.2 15.2
- 19.7 - 22,453.2 22,472.9
--------------- ---- ---------- ----------- ----- ----------- ----------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
The Group has no non-derivative financial assets or financial
liabilities classified as held for trading.
1. Financial instruments and fair values (continued)
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:
2022 2021
Estimated Estimated fair
Carrying value fair value Carrying value value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and
advances to
credit
institutions 3,365.7 3,365.7 2,843.6 2,843.6
Investment
securities 262.6 260.5 323.1 323.8
Loans and
advances to
customers 23,598.1 22,746.0 21,062.6 21,079.5
Other assets(1) 1.8 1.8 0.9 0.9
27,228.6 26,374.4 24,230.7 24,248.3
--------------- -------------- ------------- -------------- --------------
Liabilities
Amounts owed to
retail
depositors 19,755.8 19,693.0 17,526.4 17,524.9
Amounts owed to
credit
institutions 5,092.9 5,092.9 4,319.6 4,319.6
Amounts owed to
other
customers 113.1 113.1 92.6 92.6
Debt securities
in issue 265.9 265.9 460.3 460.3
Other
liabilities(2) 38.1 38.1 28.8 28.8
Subordinated
liabilities - - 10.3 10.6
PSBs 15.2 14.0 15.2 14.7
25,281.0 25,217.0 22,453.2 22,451.5
--------------- -------------- ------------- -------------- --------------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
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.
46. Financial instruments and fair values (continued)
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 ECL. 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.
Other assets
Other assets disclosed in the table above exclude prepayments
and the fair value is considered to be equal to carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated
by discounting future cash flows at current market rates of
interest. Retail deposits at variable rates and deposits payable on
demand are considered to be at current market rates and as such
fair value is estimated to be equal to carrying value.
Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE 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.
Other liabilities
Other liabilities disclosed in the table above exclude deferred
income and the fair value is considered to be equal 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. Financial instruments and fair values (continued)
1. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Consolidated
Statement of Financial Position grouped into Levels 1 to 3 based on
the degree to which the fair value is observable:
Carrying Principal
amount amount Level 1 Level 2 Level 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Investment
securities 150.3 150.5 149.8 - 0.5 150.3
Loans and
advances to
customers 14.6 17.7 - - 14.6 14.6
Derivative
assets 888.1 15,662.6 - 888.1 - 888.1
1,053.0 15,830.8 149.8 888.1 15.1 1,053.0
Financial
liabilities
Derivative
liabilities 106.6 9,518.0 - 106.6 - 106.6
Carrying Principal
amount amount Level 1 Level 2 Level 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
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.
46. Financial instruments and fair values (continued)
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value in the
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
amount amount Level 1 Level 2 Level 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and
advances to
credit
institutions 3,365.7 3,360.9 - 3,365.7 - 3,365.7
Investment
securities 262.6 262.1 - 260.5 - 260.5
Loans and
advances to
customers 23,598.1 23,646.2 - 2,515.0 20,231.0 22,746.0
Other assets(1) 1.8 1.8 - 1.8 - 1.8
27,228.6 27,271.4 - 6,143.4 20,231.0 26,374.4
--------------- ---------- ---------- ------- -------- -------- --------
Financial
liabilities
Amounts owed to
retail
depositors 19,755.8 19,620.8 - 5,770.3 13,922.7 19,693.0
Amounts owed to
credit
institutions 5,092.9 5,057.8 - 5,092.9 - 5,092.9
Amounts owed to
other
customers 113.1 112.1 - - 113.1 113.1
Debt securities
in issue 265.9 265.4 - 265.9 - 265.9
Other
liabilities(2) 38.1 38.1 - 38.1 - 38.1
Subordinated
liabilities - - - - - -
PSBs 15.2 15.0 14.0 - - 14.0
25,281.0 25,109.2 14.0 11,167.2 14,035.8 25,217.0
--------------- ---------- ---------- ------- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
46. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal
amount amount Level 1 Level 2 Level 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
Other assets(1) 0.9 0.9 - 0.9 - 0.9
24,230.7 24,244.6 - 6,491.8 17,756.5 24,248.3
--------------- ---------- ---------- ------- -------- -------- --------
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
Other
liabilities(2) 28.8 28.8 - 28.8 - 28.8
Subordinated
liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
22,453.2 22,394.1 14.7 11,410.0 11,026.8 22,451.5
--------------- ---------- ---------- ------- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
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 GBP4.4m (2021: GBP5.2m).
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
2022 GBPm GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to
customers 13,244.7 10,416.3 81.7 23,742.7
Expected credit losses (103.2) (28.0) 1.2 (130.0)
Loans and advances to customers 13,141.5 10,388.3 82.9 23,612.7
Capital expenditure 7.6 0.7 - 8.3
Depreciation and amortisation 6.2 3.4 3.8 13.4
Profit or loss for the year
Net interest income/(expense) 460.7 308.4 (59.2) 709.9
Other income 8.9 46.2 10.4 65.5
Total income/(expense) 469.6 354.6 (48.8) 775.4
Impairment of financial assets (22.3) (8.4) 0.9 (29.8)
Contribution to profit 447.3 346.2 (47.9) 745.6
Administrative expenses (130.9) (73.1) (3.8) (207.8)
Provisions 1.6 - - 1.6
Integration costs (6.8) (1.1) - (7.9)
Profit/(loss) before taxation 311.2 272.0 (51.7) 531.5
Taxation(1) (70.1) (70.2) 18.8 (121.5)
Profit/(loss) for the year 241.1 201.8 (32.9) 410.0
----------------------------------- --------
1. The taxation on Combination credit includes release of deferred taxation
on CCFS Combination relating to the unwind of the deferred tax
liabilities recognised on the fair value adjustments of the CCFS assets
and liabilities at the acquisition date of GBP17.5m and the release of
other deferred tax assets on Combination adjustments of GBP1.3m.
48. Operating segments (continued)
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
Impairment of financial assets (3.5) 8.4 (0.5) 4.4
Contribution to profit 420.0 264.1 (50.7) 633.4
Administrative expenses (97.9) (63.8) (4.8) (166.5)
Provisions (0.3) 0.1 - (0.2)
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) (76.0) (51.8) 8.5 (119.3)
Profit/(loss) for the year 241.6 147.6 (43.9) 345.3
------------------------------------ -------- ------- ----------- --------
1. The tax 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.
49. Country by country reporting(CBCR)
CBCR was introduced through Article 89 of CRD IV, aimed at the
banking and capital markets industry.
The name, nature of activities and geographic location of the
Group's companies are presented below:
Jurisdiction Country Name Activities
UK(1) England OSB GROUP PLC Commercial banking
OneSavings Bank plc
5D Finance Limited
Broadlands Finance Limited
Charter Court Financial
Services Group Plc
Charter Court Financial
Services Limited
Charter Mortgages Limited
Easioption Limited
Exact Mortgage Experts
Limited
Guernsey Home Loans Limited
Heritable Development
Finance Limited
Inter Bay Financial I
Limited
Inter Bay Financial II
Limited
InterBay Asset Finance
Limited
Interbay Funding, Ltd
Interbay Group Holdings
Limited
Interbay Holdings Ltd
Interbay ML, Ltd
Jersey Home Loans Limited
Prestige Finance Limited
Reliance Property Loans
Limited
Rochester Mortgages Limited
Guernsey Guernsey Home Loans Limited
Jersey Jersey Home Loans Limited
UK England Canterbury Finance No. 2 Special purpose vehicle
plc
Canterbury Finance No. 3
plc
Canterbury Finance No. 4
plc
Canterbury Finance No. 5
plc
CMF 2020-1 plc
UK England WSE Bourton Road Limited Land lease investment
India India OSB India Private Limited Back office processing
------------ -------- ---------------------------
1. Guernsey Home Loans Limited (Guernsey) and Jersey Home Loans Limited
(Jersey) are incorporated in Guernsey and Jersey respectively, but are
considered to be located in the UK as they are managed and controlled in
the UK with no permanent establishments in Guernsey or Jersey.
19. Country by country reporting (continued)
Other disclosures required by the CBCR directive are provided
below:
2022 UK India Consolidation(2) Total
Average number of employees 1,274 622 - 1,896
Turnover(1) , GBPm 775.1 13.6 (13.3) 775.4
Profit/(loss) before tax, GBPm 531.2 2.2 (1.9) 531.5
Corporation tax paid, GBPm 142.0 0.5 - 142.5
2021 UK India Consolidation(2) Total
Average number of employees 1,220 535 - 1,755
Turnover(1) , GBPm 628.9 9.6 (9.5) 629.0
Profit/(loss) before tax, GBPm 464.4 1.2 (1.0) 464.6
Corporation tax paid, GBPm 117.0 0.3 - 117.3
1. Turnover represents total income before impairment of financial and intangible assets, regulatory provisions and operating costs, but after net interest income, gains and losses on financial instruments and other operating income.
2. Relates to a management fee from Indian subsidiaries to OneSavings Bank plc for providing back office processing.
The tables below reconcile tax charged and tax paid during the
year.
UK India Total
2022 GBPm GBPm GBPm
Tax charge 121.0 0.5 121.5
Effects of:
Other timing differences 18.7 - 18.7
Tax outside of profit or loss (0.9) - (0.9)
Prior year tax paid during the year 1.0 - 1.0
Prior year tax included within tax charge 0.9 - 0.9
Tax in relation to future periods prepaid 1.3 - 1.3
Tax paid 142.0 0.5 142.5
----- ----- -----
UK India Total
2021 GBPm GBPm GBPm
Tax charge 118.9 0.4 119.3
Effects of:
Other timing differences 9.6 (0.1) 9.5
Tax outside of profit or loss (1.3) - (1.3)
Current period tax paid in prior years (9.1) - (9.1)
Tax in relation to future periods prepaid (1.1) - (1.1)
Tax paid 117.0 0.3 117.3
----- ----- -----
50. Adjustments for non-cash items and changes in operating assets and liabilities
2022 2021
GBPm GBPm
(Restated)(1)
Adjustments for non-cash items:
Depreciation and amortisation 13.4 14.5
Interest on investment securities (6.8) (2.5)
Integration cost - 0.6
Interest on subordinated liabilities 1.1 0.8
Interest on PSBs 0.7 1.2
Interest on securitised debt 7.7 3.9
Interest on financing debt 68.7 5.3
Impairment charge/(credit) on loans 29.8 (4.4)
Impairment credit on intangible assets acquired on
Combination - (3.1)
Gain on sale of financial instruments - (4.0)
Administrative expenses 1.3 -
Provisions (1.6) 0.2
Interest on lease liabilities 0.2 0.3
Fair value gains on financial instruments (58.9) (29.5)
Share-based payments 8.1 6.7
Total adjustments for non-cash items 63.7 (10.0)
---------------------------------------------------- --------- -------------
Changes in operating assets and liabilities:
(Increase)/decrease in loans and advances to credit
institutions (204.6) 98.7
Increase in loans and advances to customers (2,563.1) (1,844.0)
Increase in amounts owed to retail depositors 2,229.4 923.3
Increase in cash collateral and margin received(1) 434.3 115.4
Net increase in other assets (4.7) (1.1)
Net increase in derivatives and hedged items 59.1 3.6
Net increase in amounts owed to other customers 16.6 18.9
Net increase in other liabilities 9.1 1.7
Exchange differences on working capital (0.3) (0.1)
Total changes in operating assets and liabilities(1) (24.2) (683.6)
---------------------------------------------------- --------- -------------
1. 2021 figures restated see note 1 b) for further details.
51. Events after the reporting date
The Board has authorised a share repurchase of up to GBP150.0m
of shares in the market from 17 March 2023. The Company has
authority to make such purchases under a resolution approved by
shareholders at the AGM on 11 May 2023. Any purchases made under
this programme will be announced to the market each day in line
with regulatory requirements.
52. Controlling party
As at 31 December 2022 there was no controlling party of the
ultimate parent company of the Group, OSB GROUP PLC.
53. 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 Group other than as described below.
The Directors and Group Executive team are considered to be key
management personnel.
Directors' remuneration is disclosed in note 10 and in the
Directors' Remuneration Report. The Group Executive team are all
employees of OSB, the table below shows their aggregate
remuneration:
2022 2021
GBP'000 GBP'000
Short-term employee benefits 4,000 5,144
Post-employment benefits 62 44
Share-based payments 2,667 2,414
6,729 7,602
----------------------------- ------- -------
Key management personnel and connected persons held deposits
with the Group of GBP2.1m (2021: GBP0.9m).
54. Capital management
The Group's capital management approach is to provide a
sufficient capital base to cover business risks and support future
business development. The Group remained, throughout the year,
compliant with its capital requirements as set out by the PRA, the
Group's primary prudential supervisor.
The Group manages and reports its capital at a number of levels
including Group level and for the two regulated banking entities
within the Group, on an individual consolidation and on an
individual basis. The capital position of the two regulated banking
entities are not separately disclosed.
The Group's capital management is based on the three 'pillars'
of Basel II.
Under Pillar 1, the Group calculates its minimum capital
requirements based on 8% of risk-weighted assets.
Under Pillar 2, the Group, and its regulated entities, complete
an annual self-assessment of risks known as the 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 Group applies 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.
Pillar 3 requires firms to publish a set of disclosures which
allow market participants to assess information on the Group's
capital, risk exposures and risk assessment process. The Group's
Pillar 3 disclosures can be found on the Group's website.
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.
54. Capital management (continued)
The PRA issued, on 30(th) November 2022, a consultation paper on
the implementing Basel 3.1 in the UK. The Group has taken account
of this in planning for future capital requirements.
The ultimate responsibility for capital adequacy rests with the
Board of Directors. The Group's ALCO is responsible for the
management of the capital process within the risk appetite defined
by the Board, including approving policy, overseeing internal
controls and setting internal limits over capital ratios.
The Group actively manages its capital position and reports 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.
The Group's Pillar 1 capital information is presented below:
(Unaudited) (Unaudited)
2022 2021
GBPm GBPm
CET1 capital
Called up share capital 4.3 4.5
Share premium, capital contribution and share-based
payment reserve 15.6 14.1
Retained earnings 3,389.4 3,215.1
Transfer reserve (1,355.1) (1,355.3)
Other reserves (3.2) (4.0)
Total equity attributable to ordinary shareholders 2,051.0 1,874.4
Foreseeable dividends(1) (144.0) (94.7)
IFRS 9 transitional adjustment(2) 1.4 2.9
COVID-19 ECL transitional adjustment(3) 25.9 19.0
Deductions from CET1 capital
Prudent valuation adjustment(4) (1.0) (1.0)
Intangible assets (12.0) (18.4)
Deferred tax asset (0.6) (0.5)
CET1 capital 1,920.7 1,781.7
----------- -----------
AT1 capital
AT1 securities 150.0 150.0
Total Tier 1 capital 2,070.7 1,931.7
----------- -----------
Total regulatory capital 2,070.7 1,931.7
Risk-weighted assets (unaudited) 10,494.7 9,101.6
1. 2022 includes special dividend of GBP50.3m (GBP50.0m announced by the
Board rounded up on a pence per share basis totals GBP50.3m).
2. The regulatory capital includes a GBP1.4m add-back under IFRS 9
transitional arrangements. This represents 25.0% of the IFRS 9
transitional adjustment booked directly to retained earnings of GBP5.9m.
3. The COVID-19 ECL transitional adjustment relates to 75% of the Group's
increase in stage 1 and stage 2 ECL following the impacts of COVID-19 and
for which transitional rules are being adopted for regulatory capital
purposes.
4. The Group has adopted the simplified approach under the Prudent Valuation
rules, recognising a deduction equal to sum of absolute value equal to
0.1% of fair value assets and liabilities excluding offsetting
fair-valued assets and liabilities.
54. Capital management (continued)
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2022 2021
GBPm GBPm
At 1 January 1,781.7 1,566.0
Movement in retained earnings 174.3 1,606.5
Share premium from Sharesave Scheme vesting 1.7 0.7
Movement in other reserves 0.6 (1,349.7)
Movement in foreseeable dividends (49.3) (29.8)
IFRS 9 transitional adjustment (1.5) (2.0)
COVID-19 ECL transitional adjustment 6.9 (12.0)
Movement in prudent valuation adjustment - (0.6)
Net decrease in intangible assets 6.4 2.2
Movement in deferred tax asset for carried forward
losses (0.1) 0.4
At 31 December 1,920.7 1,781.7
--------------------------------------------------- ----------- ------------
2022 2021
Note GBPm GBPm
Assets
Investments in subsidiaries and intercompany loans 2 1,590.7 1,582.6
Current taxation asset - 0.3
Total assets 1,590.7 1,582.9
--------------------------------------------------- ---- -------
Liabilities
Intercompany loans 2 0.8 0.6
Other liabilities - 0.2
0.8 0.8
Equity
Share capital 3 4.3 4.5
Share premium 3 2.4 0.7
Retained earnings 1,359.3 1,358.4
Other reserves 4 223.9 218.5
1,589.9 1,582.1
Total equity and liabilities 1,590.7 1,582.9
--------------------------------------------------- ---- ------- -------
The profit after tax for the year ended 31 December 2022 of OSBG
was GBP240.8m (2021: GBP87.0m). 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 below form an integral part of the Company financial
statements.
The financial statements were approved by the Board of Directors
on 16 March 2023 and were signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 11976839
Capital
redemption
and Share-based
Share Share transfer Own payment AT1 Retained
capital premium reserve(1) shares(2) reserve securities earnings Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2021 1,359.8 - 65.7 (4.0) 0.4 - 4.0 1,425.9
Profit for
the year - - - - - - 87.0 87.0
Dividend paid - - - - - - (86.7) (86.7)
Share-based
payments - 0.7 - - 5.9 - 0.9 7.5
Issuance of
AT1
securities - - - - - 150.0 - 150.0
Transactions
costs on
issuance of
AT1
securities - - - - - - (1.6) (1.6)
Own shares(2) - - - 0.5 - - (0.5) -
Capital
reduction (1,355.3) - - - - - 1,355.3 -
At 31
December
2021 4.5 0.7 65.7 (3.5) 6.3 150.0 1,358.4 1,582.1
Profit for
the year - - - - - - 240.8 240.8
Dividend paid - - - - - - (133.1) (133.1)
Share-based
payments - 1.7 - - 3.9 - 4.2 9.8
Own shares(2) - - - 1.3 - - (1.3) -
Coupon paid
on AT1
securities - - - - - - (9.0) (9.0)
Share
repurchase (0.2) - 0.2 - - - (100.7) (100.7)
At 31
December
2022 4.3 2.4 65.9 (2.2) 10.2 150.0 1,359.3 1,589.9
------------- --------- ------- ---------- --------- ----------- ---------- -------- -------
1. Includes Capital redemption reserve of GBP0.2m (2021: nil) and Transfer
reserve of GBP65.7m (2021: GBP65.7m).
2. The Company has adopted look-through accounting (see note 1 to the
Group's consolidated financial statements) and recognised the EBT within
OSBG.
2022 2021
GBPm GBPm
Cash flows from operating activities
Profit before taxation 240.8 86.7
Adjustments for non-cash items:
Administrative expenses 1.3 -
Changes in operating assets and liabilities:
Net (decrease)/increase in other liabilities (0.2) 0.2
Change in intercompany loans(1) 0.5 0.6
Cash generated in operating activities 242.4 87.5
Cash flows from investing activities
Change in investments in subsidiaries - (150.0)
Cash used in investing activities - (150.0)
Cash flows from financing activities
Share repurchase(2) (102.0) -
Dividend paid (133.1) (86.7)
Coupon paid on AT1 securities (9.0) -
Issuance of AT1 securities - 148.4
Proceeds from issuance of shares under employee SAYE
scheme 1.7 0.8
Cash (used)/generated from financing activities (242.4) 62.5
------------------------------------------------------ -------
Net increase in cash and cash equivalents - -
Cash and cash equivalents at the beginning of the - -
year
Cash and cash equivalents at the end of the year(3) - -
Movement in cash and cash equivalents - -
1. Includes GBP0.3m of current taxation asset surrendered to OSB.
2. Includes GBP100.0m for shares repurchased, GBP0.7m transaction costs and
GBP1.3m success fee.
3. The Company's bank balance is swept to OneSavings Bank plc daily
resulting in a nil balance.
1. Basis of preparation
The separate financial statements of the Company are presented
as required by the Companies Act 2006. As permitted by that Act,
the separate financial statements have been prepared in accordance
with IFRSs as adopted by UK, and are presented in Pounds
Sterling.
The financial statements have been prepared on the historical
cost basis. 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
Company is Pounds Sterling, which is the currency of the primary
economic environment in which the Company operates.
The principal accounting policies adopted are the same as those
set out in note 1 to the Group's consolidated financial statements,
aside from accounting policy 1 z), Share-based payments. For the
Company, the cost of the awards are recognised on a straight-line
basis to investment in subsidiaries (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.
There are no critical judgements and estimates that apply to the
Company.
1. Investments in subsidiaries and intercompany loans
The Company holds an investment in ordinary shares of
GBP1,440.7m (2021: GBP1,432.6m) and in AT1 securities of GBP90.0m
(2021: GBP90.0m) in its direct subsidiary, OneSavings Bank plc
(OSB). The Company also holds an investment in AT1 securities of
GBP60.0m (2021: GBP60.0m) in an indirect subsidiary, Charter Court
Financial Services Limited.
Investment in subsidiaries Intercompany loans payable
GBPm GBPm
At 1 January 2021 1,425.9 -
Additions(1) 156.7 (1.4)
Repayments - 0.8
At 31 December 2021 1,582.6 (0.6)
Additions(1) 8.1 (2.1)
Repayments - 1.9
At 31 December 2022 1,590.7 (0.8)
-------------------- -------------------------- --------------------------
1. Additions in investment in subsidiaries include GBP8.1m relating to
share-based payments (2021: includes purchase of AT1 securities of
GBP90.0m issued by OSB and GBP60.0m issued by Charter Court Financial
Services Limited; and GBP6.7m relating to share-based payments).
The transactions with OSB during the year include GBP2.1m of
additions in relation to costs on shares repurchased funded by OSB.
Repayments of GBP1.9m comprise GBP1.6m of cash received from
issuing shares under SAYE and GBP0.3m of tax losses surrendered to
OSB (2021: additions comprised GBP1.4m transaction costs for the
issuance of AT1 securities funded by OSB and repayments of GBP0.8m
comprised cash received from issuing shares under SAYE).
Investments in subsidiaries are financial assets and
intercompany loans are financial liabilities, all carried at
amortised cost. Intercompany loans are payable on demand and no
interest is charged on these loans.
1. Investments in subsidiaries and intercompany loans (continued)
A list of the Company's direct and indirect subsidiaries as at
31 December 2022 is shown below:
Direct investments Activity Registered office Ownership
Mortgage lending and
OneSavings Bank plc deposit taking Reliance House 100%
Indirect investments Activity Registered office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Mortgage
Broadlands Finance administration
Limited services Charter Court 100%
Canterbury Finance No.2 Special purpose
plc vehicle Churchill Place -
Canterbury Finance No.3 Special purpose
plc vehicle Churchill Place -
Canterbury Finance No.4 Special purpose
plc vehicle Churchill Place -
Canterbury Finance No.5 Special purpose
plc vehicle Churchill Place -
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Charter Court Financial Mortgage lending and
Services Limited deposit taking Charter Court 100%
Mortgage
Charter Mortgages administration and
Limited analytical services Charter Court 100%
Special purpose
CMF 2020-1 plc vehicle Churchill Place -
Easioption Limited Holding company Reliance House 100%
Exact Mortgage Experts
Limited Group service company Charter Court 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%
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 Group Holdings
Limited Holding company Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
Jersey Home Loans
Limited Mortgage provider Reliance House 100%
Jersey Home Loans
Limited (Jersey) Mortgage provider Jersey 100%
OSB India Private
Limited Back office processing India 100%
Prestige Finance Mortgage originator
Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
WSE Bourton Road
Limited Land lease investment OSB House 100%
Rochester Mortgages
Limited Mortgage provider Reliance House 100%
1. Investments in subsidiaries and intercompany loans (continued)
A list of the Company's direct and indirect subsidiaries as at
31 December 2021 is shown below:
Direct investments Activity Registered office Ownership
Mortgage lending and
OneSavings Bank plc deposit taking Reliance House 100%
Indirect investments Activity Registered office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Mortgage
Broadlands Finance administration
Limited services Charter Court 100%
Canterbury Finance No.2 Special purpose
plc vehicle Churchill Place -
Canterbury Finance No.3 Special purpose
plc vehicle Churchill Place -
Canterbury Finance No.4 Special purpose
plc vehicle Churchill Place -
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Charter Court Financial Mortgage lending and
Services Limited deposit taking Charter Court 100%
Mortgage
Charter Mortgages administration and
Limited analytical services Charter Court 100%
Special purpose
CMF 2020-1 plc vehicle Churchill Place -
CML Warehouse Number 2 Special purpose
Limited vehicle Churchill Place -
Easioption Limited Holding company Reliance House 100%
Exact Mortgage Experts
Limited Group service company Charter Court 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%
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 Group Holdings
Limited Holding company Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
Jersey Home Loans
Limited Mortgage provider Reliance House 100%
Jersey Home Loans
Limited (Jersey) Mortgage provider Jersey 100%
OSB India Private
Limited Back office processing India 100%
Prestige Finance Mortgage originator
Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages
Limited Mortgage provider Reliance House 100%
All investments are in the ordinary share capital of each
subsidiary.
1. Investments in subsidiaries and intercompany loans (continued)
OSB India Private Limited is owned 70.28% by OneSavings Bank
plc, 29.72% by Easioption Limited and 0.001% by Reliance Property
Loans Limited.
SPVs 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. The location of the
entities listed above are disclosed in note 49 to the Group's
consolidated financial statements.
The investment is reviewed annually for indicators of
impairment. If impairment indicators are identified an impairment
review of the investment is conducted which will quantify if the
carry value is in excess of the recoverable amount or an impairment
has occurred. In determining recoverable amount the fair value less
costs to sell and the value in use are assessed, with the value in
use being an estimate of the present value of future cash flows
generated by the investment.
The following are the registered offices of the
subsidiaries:
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
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
OSB House -- Quayside, Chatham Maritime, Chatham, England, ME4
4QZ
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4
4ET
1. Share capital
Number of
shares
issued and Nominal value Premium
fully paid GBPm GBPm
At 1 January 2021 447,312,780 1,359.8 -
Capital reduction of GBP3.04 nominal value shares
to GBP0.01 nominal value shares - (1,355.3) -
Shares issued under employee share plans 1,315,075 - 0.7
At 31 December 2021 448,627,855 4.5 0.7
Share cancelled under repurchase programme (20,671,224) (0.2) -
Shares issued under employee share plans 1,911,994 - 1.7
At 31 December 2022 429,868,625 4.3 2.4
-------------------------------------------------- ------------ ------------- -------
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.
1. Other reserves
The Company's distributable reserves are disclosed in note 43 of
the Group's consolidated financial statements.
The Company's other reserves are as follows:
2022 2021
GBPm GBPm
Share-based payment 10.2 6.3
Capital redemption and transfer 65.9 65.7
Own shares (2.2) (3.5)
AT1 securities 150.0 150.0
223.9 218.5
-------------------------------- ----- -----
Capital redemption and transfer reserve
The capital redemption reserve represents the shares cancelled
through the Group's share repurchase programme.
The transfer reserve represents the difference between the net
assets of the Group at the point of insertion of OSBG as the listed
holding company and the fair value of the newly issued share
capital of OSBG.
For own shares and AT1 securities see note 43 of the Group's
consolidated financial statements.
1. Directors and employees
The Company has no employees. OneSavings Bank plc provides the
Company with employee services and bears the costs, along with
other subsidiaries in the Group, associated with the Directors of
the Company. These costs are not recharged to the Company.
1. Controlling party
As at 31 December 2022 there was no controlling party of OSB
GROUP PLC.
Appendix
Key performance indicators
Underlying results for the year to 31 December 2022
and 31 December 2021 exclude exceptional items, integration
costs and other acquisition-related items. The underlying
results provide a more consistent basis for comparing
the Group's performance between financial periods.
------------------------------------------------------------
Net interest margin (NIM)
NIM is defined as net interest income as a percentage of a 13
point average(1) of interest earning assets (cash, investment
securities, loans and advances to customers and credit
institutions). It represents the margin earned on loans and
advances and liquid assets after swap expense/income and cost of
funds.
2022 2021
GBPm GBPm
Net interest income -- statutory 709.9 587.6
Add back: acquisition-related items(2) 59.2 62.9
Net interest income -- underlying 769.1 650.5
13 point average of interest earning assets -- statutory
C 25,518.8 23,207.7
13 point average of interest earning assets -- underlying
D 25,403.2 23,033.7
NIM statutory equals A/C 2.78% 2.53%
NIM underlying equals B/D 3.03% 2.82%
Cost to income ratio
The cost to income ratio is defined as administrative expenses
as a percentage of total income. It is a measure of operational
efficiency.
2022 2021
GBPm GBPm
Administrative expenses -- statutory A 207.8 166.5
Add back: acquisition-related items(2) (3.8) (4.8)
Administrative expenses -- underlying B 204.0 161.7
Total income -- statutory C 775.4 629.0
Add back: acquisition-related items(2) 48.8 50.2
Total income underlying D 824.2 679.2
Cost to income statutory equals A/C 27% 26%
Cost to income underlying equals B/D 25% 24%
Management expense ratio
The management expense ratio is defined as administrative
expenses as a percentage of a 13 point average(1) of total
assets.
2022 2021
GBPm GBPm
Administrative expenses -- statutory (as in cost to
income ratio above) A 207.8 166.5
Administrative expenses -- underlying (as in cost
to income ratio above) B 204.0 161.7
13 point average of total assets -- statutory C 25,641.5 23,382.6
13 point average of total assets -- underlying D 25,537.4 23,231.5
Management expense ratio statutory equals A/C on an 0.81% 0.71%
annualised basis 0.80% 0.70%
Management expense ratio underlying equals B/D on
an annualised basis
Loan loss ratio
The loan loss ratio is defined as impairment losses as a
percentage of a 13 point average(1) of gross loans and advances. It
is a measure of the credit performance of the loan book.
2022 2021
GBPm GBPm
Impairment losses -- statutory A 29.8 (4.4)
Add back: acquisition-related items(2) 0.9 (0.5)
Impairment losses -- underlying B 30.7 (4.9)
13 point average of gross loans -- statutory C 22,120.4 20,327.5
13 point average of gross loans -- underlying D 22,005.41 20,164.3
Loan loss ratio statutory equals A/C on an annualised 0.13% (0.02)%
basis 0.14% (0.02)%
Loan loss ratio underlying equals B/D on an annualised
basis
Return on equity (RoE)
RoE is defined as profit attributable to ordinary shareholders,
which is profit after tax and after deducting coupons on AT1
securities as a percentage of a 13 point average(1) of
shareholders' equity (excluding GBP60m of non-controlling interest
securities up to September 2021 and GBP150m of AT1 securities from
October 2021).
2022 2021
GBPm GBPm
Profit after tax - statutory 410.0 345.3
Coupons on AT1 securities - (4.7)
Coupons on non-controlling interest securities (9.0) -
Profit attributable to ordinary shareholders -- statutory
A 401.0 340.6
Add back: acquisition related items(2) 38.7 47.8
----------------------------------------------------------- ----- ---------
Profit attributable to ordinary shareholders -- underlying
B 439.7 388.4
13 point average of shareholders' equity (excluding
AT1 and non-controlling
interest securities) -- statutory C 1,943.4 1,741.1
13 point average of shareholders' equity (excluding
AT1 and non-controlling
interest securities) -- underlying D 1,869.9 1,632.4
Return on equity statutory equals A/C on an annualised
basis 21% 20%
Return on equity underlying equals B/D on an annualised
basis 24% 24%
Basic earnings per share
Basic earnings per share is defined as profit attributable to
ordinary shareholders, which is profit after tax and after
deducting coupons on AT1 securities, gross of tax, divided by the
weighted average number of ordinary shares in issue.
2022 2021
GBPm GBPm
Profit attributable to ordinary shareholders -- statutory
(as in RoE ratio above) A 401.0 340.6
Profit attributable to ordinary shareholders -- underlying
(as in RoE ratio above) B 439.7 388.4
Weighted average number of ordinary shares in issue
-- statutory C 441.5 448.1
----------------------------------------------------------- ---------- -----------
Weighted average number of ordinary shares in issue
-- underlying D 441.5 448.1
Basic earnings per share statutory equals A/C 90.8 76.0
Basic earnings per share underlying equals B/D 99.6 86.7
1. 13 point average is calculated as an average of opening
balance and closing balances for the year ended 31 December.
2. The acquisition-related items are detailed in the
reconciliation of statutory to underlying results in the Financial
review.
Calculation of 2022 final dividend
The table below shows the basis of calculation of the Company's
recommended final dividend for 2022:
2022 2021
GBPm GBPm
Statutory profit after tax 410.0 345.3
Less: coupons on non-controlling interest securities
classified as equity (9.0) (4.7)
Statutory profit attributable to ordinary shareholders 401.0 340.6
Add back: Group's integration costs 7.9 5.0
Tax on Group's integration costs (2.1) (1.3)
Add back: Group's exceptional items - 0.2
Add back: amortisation of fair value adjustment 60.4 64.5
Add back: amortisation of inception adjustment (10.4) (11.0)
Add back: amortisation of cancelled swaps (1.2) (1.6)
Add back: amortisation of intangible assets acquired 3.8 4.8
Less: Impairment reversal of intangible assets recognised
on Combination - (3.1)
Release of deferred taxation on the above amortisation
adjustments (18.8) (8.5)
Gain on sale of financial assets - (1.7)
Add back: ECL on Combination (0.9) 0.5
Underlying profit attributable to ordinary shareholders 439.7 388.4
Total dividend: 30% (2021: 30%) of underlying profit
attributable to ordinary shareholders 131.9 116.6
Less: interim dividends paid (38.3) (21.9)
Recommended final dividend 93.6 94.7
Number of ordinary shares in issue 429,868,625 448,627,855
Recommended final dividend per share (pence) 21.8 21.1
Company information
Registered office
OSB House
Quayside, Chatham Maritime
Chatham
Kent, ME4 4QZ
Registered in England, company number: 11976839
Internet
www.osb.co.uk
Auditor
Deloitte LLP
1 New Street Square
London
EC4A 3HQ
Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex, BN99 6DA
Brokers
Barclays Bank PLC
5 The North Colonnade
London, E14 4BB
RBC Europe Limited (trading as RBC Capital Markets)
100 Bishopsgate
London, EC2N 4AA
Media and Public Relations
Brunswick Group LLP
16 Lincoln's Inn Fields
London, WC2A 3ED
(END) Dow Jones Newswires
March 16, 2023 03:00 ET (07:00 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
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