OSB GROUP PLC Preliminary Results
OSB GROUP PLC
Preliminary results
For the year ended 31 December 2023
LEI: 213800ZBKL9BHSL2K459
THIS ANNOUNCEMENT CONTAINS INSIDE
INFORMATION
14 March 2024
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 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 2023.
Financial and operational highlights
The below results and KPIs reflect the impact of the
adverse effective interest rate (EIR) adjustment
- Underlying profit before tax reduced by 28% to £426.0m (2022:
£591.1m) and statutory profit before tax reduced by 30% to £374.3m
(2022: £531.5m)
- Underlying and statutory net loan book increased by 9% to
£25.7bn and £25.8bn, respectively (2022: £23.5bn and £23.6bn)
supported by organic originations of £4.7bn (2022: £5.8bn)
- Underlying and statutory net interest margin (NIM) reduced to
251bps and 231bps (2022: 303bps and 278bps respectively)
- Underlying and statutory cost to income ratios increased to 33%
and 36% (2022: 25% and 27%, respectively)
- Underlying and statutory loan loss ratios were 20bps (2022:
14bps and 13bps, respectively) largely due to the transition of
borrowers through modelled IFRS 9 impairment stages as well as a
marginal increase in arrears to 1.4% for balances greater than
three months (31 December 2022: 1.1%)
- Underlying and statutory return on equity reduced to 16% and
14% (2022: 24% and 21%, respectively) due to reduction in
profitability
- Basic earnings per share (EPS) reduced to 75.0 pence and 66.1
pence on an underlying and statutory basis (2022: 99.6 pence 90.8
pence) in line with the lower profitability
- Excluding the impact of the adverse EIR adjustment, the
underlying net loan book grew by 10%, underlying NIM would have
increased to 314bps, underlying cost to income would have been 26%,
underlying return on equity would have been 22% and underlying EPS
would have increased to 106.7 pence
- The Common Equity Tier 1 capital ratio of 16.1% and total
capital ratio of 19.5% remained strong (2022: 18.3% and 19.7%,
respectively)
- The Group issued £250m of Tier 2 notes and £300m of senior debt
in 2023, both MREL qualifying. In January 2024, the Group met its
interim MREL requirement of 22.5%, including regulatory buffers,
which comes into force in July 2024, following a further £400m
issuance of senior debt
- A new share repurchase programme of £50m over the next six
months to commence on 15 March 2024
- Total dividend of 32.0 pence (2022: 30.5 pence) including a
recommended final dividend of 21.8 pence per share, in line with
our stated desire to provide a progressive dividend per share
- April Talintyre has advised the Board that she will not be
seeking re-election at the Group Annual General Meeting on 9 May
2024 and will retire as Chief Financial Officer and Executive
Director on that date
- Victoria Hyde, the Deputy CFO will become the acting CFO,
subject to regulatory approval, whilst the ongoing process to
appoint a permanent replacement for April is completed
The table below presents KPIs on a statutory and underlying
basis including and excluding the adverse EIR adjustment:
|
Statutory |
Underlying |
FY 2023 |
as reported |
excl. EIR |
difference |
as
reported |
excl.
EIR |
difference |
Net loan book growth |
9% |
9% |
- |
9% |
10% |
(1)ppt |
|
|
|
|
|
|
|
NIM |
231bps |
303bps |
(72)bps |
251bps |
314bps |
(63)bps |
|
|
|
|
|
|
|
Cost to income ratio |
36% |
27% |
9ppt |
33% |
26% |
7ppt |
|
|
|
|
|
|
|
Manex ratio |
82bps |
81bps |
(1)bp |
81bps |
81bps |
- |
|
|
|
|
|
|
|
Pre-tax profit |
£374.3m |
£585.0m |
£(210.7)m |
£426.0m |
£607.6m |
£(181.6)m |
|
|
|
|
|
|
|
EPS |
66.1p |
102.8p |
(36.7)p |
75.0p |
106.7p |
(31.7)p |
|
|
|
|
|
|
|
RoE |
14% |
22% |
(8)ppt |
16% |
22% |
(6)ppt |
|
|
|
|
|
|
|
CET1 ratio |
16.1% |
17.3% |
(1.2)bps |
- |
- |
- |
Andy Golding, Group CEO, said:
“The Group performed well in its core market segments in 2023,
growing its share of the Buy-to-Let sub-segment to deliver 9% net
loan book growth against a backdrop of a subdued wider mortgage
market. The Group’s target professional landlords continue to
demonstrate resilience, supported by high levels of demand in the
Private Rented Sector, long-term income improvement and a reduction
in the cost of borrowing towards the end of the year. Our fair and
attractively priced savings products were popular and we grew our
retail deposits by 12% in the year.
As reported at the half-year, our financial results were
significantly impacted by the adverse effective interest rate (EIR)
adjustment, relating primarily to a shorter time spent on the
reversion rate by our Precise Mortgages customers. Since then,
their behaviour has remained broadly consistent with the c.5 months
spent on reversion rate assumption.
The Board has recommended a final dividend of 21.8 pence per
share, which together with the interim dividend of 10.2 pence per
share, results in a total ordinary dividend for the year of 32.0
pence per share in line with our stated desire to provide a
progressive dividend per share. The Group issued £250m of Tier 2
notes and £300m of senior debt in 2023, both MREL qualifying. In
January 2024, the Group met its interim MREL requirement of 22.5%,
including regulatory buffers, which comes into force in July 2024,
following a further £400m issuance of senior debt. We have also
announced a new £50m share buyback over the next six months and the
Board will consider additional shareholder returns later in the
year, subject to regulatory approval and further MREL issuance to
support growth opportunities and to meet the final Basel 3.1
requirements when known.
April Talintyre, our Chief Financial Officer, will retire at the
Group Annual General Meeting on 9 May 2024. April has been
instrumental in shaping and delivering OSB’s strategy over the last
11 years, helping steward OSB through private equity ownership into
a successful FTSE 250 listed business. She has been an excellent
and trusted support to me through the years, and I wish her well
for her retirement. The process to appoint a permanent replacement
for April, considering both external and internal candidates, is
progressing well and Victoria Hyde, the Deputy Chief Financial
Officer will become acting CFO whilst the process is completed,
subject to regulatory approval.
Our specialist market sub-segments continue to perform well and
the Group’s target professional landlords provide much needed homes
with exceptional support to the Private Rented Sector. Our
specialist residential and commercial brands have good levels of
demand as customer confidence improves.
Based on current application volumes and against the backdrop of
the subdued mortgage market, the Group expects to deliver
underlying net loan book growth of c.5% for 2024. The underlying
net interest margin is expected to be broadly flat to the 2023
underlying NIM of 251bps, reflecting the impact of a higher cost of
funds and the full year impact of some lower margin lending in
2023, due primarily to delays in mortgage pricing reflecting the
rate rises and higher swap costs. The cost of funding is expected
to increase in 2024, primarily due to the normalisation of retail
deposit spreads, the impact of planned TFSME repayment and the cost
of MREL qualifying debt issuance. We will maintain our cost
discipline and efficiency, however the underlying cost to income
ratio is expected to be broadly flat to the 2023 underlying ratio
of 33%, commensurate with the NIM guidance.
The Group remains well capitalised, with strong liquidity and a
high-quality secured loan book. We have demonstrated the strength
of our customer franchises and intermediary relationships and
continue to focus on delivering good outcomes for our stakeholders
and strong returns for our shareholders.”
Enquiries:
OSB GROUP
PLC
Brunswick Group
Alastair Pate,
Investor Relations
Robin Wrench/Simone Selzer
t: 01634
838973
t: 020 7404 5959
Results presentation
A webcast presentation for analysts will be held at 9:30am on
Thursday 14 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
672091. 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 News Service (RNS). This document is
not audited and contains certain forward-looking statements with
respect to the business, strategy and plans of OSBG, its current
goals, beliefs, intentions, strategies and expectations relating to
its future financial condition, performance and results. Such
forward-looking statements include, without limitation, those
preceded by, followed by or that include the words ‘targets’,
‘believes’, ‘estimates’, ‘expects’, ‘aims’, ‘intends’, ‘will’,
‘may’, ‘anticipates’, ‘projects’, ‘plans’, ‘forecasts’, ‘outlook’,
‘likely’, ‘guidance’, ‘trends’, ‘future’, ‘would’, ‘could’,
‘should’ or similar expressions or negatives thereof but are not
the exclusive means of identifying such statements. Statements that
are not historical 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 (including, without
limitation, the Russia-Ukraine war, the Israel-Hamas war and any
continuation and escalation of such conflicts) or hostility and
responses to those acts; geopolitical events and diplomatic
tensions; the impact of outbreaks, epidemics and pandemics or other
such events; changes in laws, regulations, taxation, ESG reporting
standards, 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 and markets 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 Annual
Report and Accounts 2023. Copies of this are available at
www.osb.co.uk and on request from OSBG.
Nothing in this document or any subsequent
discussion of this document 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 this 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
OSBG 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 OSBG is most
directly able to influence or which are relevant for an assessment
of OSBG. 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 the
Alternative performance measures section in the OSBG Annual Report
and Accounts 2023. Copies of this are available at www.osb.co.uk
and on request from OSBG.
Chief Executive’s Statement
The Group reported strong performance in its core lending and
savings franchises during 2023, with robust demand for its
specialist mortgages delivering 9% net loan book growth, despite a
challenging interest rate environment that subdued demand in the
wider mortgage market.
We grew market share in our core Buy-to-Let sub-segment and I am
proud that we remain a trusted partner for professional
multi-property landlords who provide homes in the Private Rented
Sector.
Our fair and attractively priced savings products were popular,
and we grew our retail deposits book by 12% in the year. Our debt
issuance programme was well-received by investors, and following
the January issuance of £400m of MREL qualifying debt securities,
we met the interim MREL requirement, including regulatory buffers.
As reported at the half-year, the Group’s 2023 results were
significantly impacted by the total net adverse effective interest
rate (EIR) adjustment of £181.6m on an underlying basis. This
related to the reduction in expected time spent on reversion rates
for Precise Mortgages customers in response to rapid base rate
rises and fluctuating interest rate expectations during the first
half of the year. I am pleased that since then, there has been no
material change in borrowers’ behaviour and we continue to observe
a trend consistent with our EIR assumption of c.5 months on the
reversion rate for Precise customers.
The credit quality of the book remained robust, and our strong
origination, capital and liquidity positions allow us to announce
further capital distributions. The Board has recommended a final
dividend of 21.8 pence per share, which together with the interim
dividend of 10.2 pence per share, results in a total ordinary
dividend for the year of 32.0 pence per share. In addition we have
announced a new £50m share repurchase over the next six months.
April Talintyre, our long-serving CFO will retire at the Group
Annual General Meeting on 9 May 2024. She has been instrumental in
shaping and delivering OSB’s strategy over the last 11 years,
helping steward OSB through private equity ownership into a
successful FTSE 250 listed business, as well as playing a key role
in the Group’s combination with Charter Court Financial Services in
2019. She has been an excellent and trusted support to me through
the years, helping to build one of the UK’s leading specialist
lenders. I wish her well for her retirement.
Financial performance
The Group delivered an underlying pre-tax profit of £426.0m in
2023, down 28% from £591.1m in 2022, primarily due to the adverse
EIR adjustment. The underlying basic earnings per share was 75.0
pence (2022: 99.6 pence). The underlying pre-tax profit would have
increased to £607.6m and the underlying basic earnings per share
would have improved to 106.7 pence, excluding the adverse EIR
adjustment. On a statutory basis, profit before tax decreased to
£374.3m and basic earnings per share was 66.1 pence (2022: £531.5m
and 90.8 pence, respectively).
The underlying and statutory net interest margins reduced to
251bps and 231bps respectively (2022: 303bps and 278bps), largely
due to the adverse EIR adjustment and as the benefit of the lower
cost of retail funding was offset by the impact of some lower
margin lending due primarily to delays in mortgage pricing
reflecting the rate rises and higher swap costs. The underlying net
interest margin would have been 314bps, excluding the adverse EIR
adjustment.
The Group maintained its focus on cost discipline and efficiency
during the year with the underlying and statutory management
expense ratios remaining broadly unchanged at 81bps and 82bps
respectively (2022: 80bps and 81bps, respectively). The anticipated
impact of balance sheet growth, inflation and planned investment in
people and digital solutions to enhance our customer propositions
were reflected in a 14% increase in underlying administrative
expenses to £232.9m. The underlying and statutory cost to income
ratios of 33% and 36% respectively, were impacted by the reduction
in income due to the adverse EIR adjustment and a loss on the
Group’s hedging activities compared to a gain in the prior year
(2022: 25% and 27%, respectively). Underlying cost to income would
have been 26% excluding the adverse EIR adjustment.
The Group delivered an underlying return on equity of 16% for
2023 (2022: 24%) and 14% on a statutory basis (2022: 21%), which
reflected the impact of the adverse EIR adjustment on the profit
for the year. Underlying return on equity would have been 22%
excluding the adverse EIR adjustment.
Our lending franchises
Strong demand for the Group’s lending products delivered underlying
and statutory net loan book growth of 9% in the year to £25.7bn and
£25.8bn, respectively (31 December 2022: £23.5bn and £23.6bn).
Organic originations were £4.7bn in the year (2022: £5.8bn),
despite difficult mortgage market conditions and subdued purchase
activity, demonstrating the strength of our relationships with
intermediaries, the continued professionalisation of Buy-to-Let
landlords and our long-term positioning in specialist mortgage
market sub-sectors. I am particularly pleased that our renewed
focus on lending on smaller commercial properties through the
InterBay brand led to originations of £406m, a 46% increase
from 2022.
The rising costs of living and borrowing were reflected in
subdued purchase activity across all mortgage market sectors and I
am proud that the Group’s relationship managers and underwriters
continued to work hand in hand with their broker partners, fully
utilising our bespoke capabilities to find solutions for our
borrowers. Refinancing was particularly strong in the year as
borrowers sought to lock in lower monthly repayments to avoid
further base rate rises, and as a result the proportion of
Buy-to-Let completions due to refinancing were 62% for Kent
Reliance and 48% for Precise Mortgages. There was also an
improvement in retention as we continued to engage proactively with
our borrowers offering new products, with 78% of Kent Reliance and
66% of Precise Mortgages customers choosing to refinance with the
Group within three months of their fixed rate
product ending.
The Group’s mortgage propositions continued to win industry
awards and in 2023 Kent Reliance for Intermediaries won Best
Specialist Lender from L&G Mortgage Club Awards, Precise
Mortgages was awarded Best Specialist Lender from TMA Club and the
Group was recognised as the Best Specialist Bank at the Bridging
and Commercial Awards. During the year we became signatories to the
Government’s Mortgage Charter, underlining our commitment to
provide support to residential customers.
We continued to demonstrate our leadership and commitment to the
Buy-to-Let sector through our Landlord Leaders initiative. In 2023,
we set up the Landlord Leaders Community with 31 founding members,
and in December we published the second research report that looked
at tenants’ experiences and most frequent challenges.
Credit and risk management
The high quality of the Group’s loan book was demonstrated by a
strong credit performance, with balances over three months in
arrears at 1.4% of the loan book at the end of December (31
December 2022: 1.1%). The increase in arrears was largely due to
the impact of the rising costs of living and borrowing on a small
group of borrowers, and we continue to work closely with those
needing assistance.
The Group recorded an impairment charge of £48.5m on an
underlying basis, which represented an underlying loan loss ratio
of 20bps for the year (2022: £30.7m and 14bps, respectively). The
impairment charge principally reflected changes in the risk profile
of borrowers as they transitioned through modelled IFRS 9
impairment stages and an increase in provisions for accounts with
arrears of three months or more. The statutory impairment charge
was £48.8m, equivalent to a loan loss ratio of 20bps (2022: £29.8m
and 13bps, respectively).
The weighted average loan to value (LTV) of the Group’s loan
book increased to 64% as at 31 December 2023, from 60% at the end
of 2022, largely due to negative house price inflation in the year.
The weighted average LTV of new business written by the Group
reduced to 68% from 71% in 2022, and interest coverage ratios
remained strong at 176% for OSB and 154% for CCFS, despite higher
mortgage rates, reflecting the long-term income improvement enjoyed
by professional landlords.
Multi-channel funding model
Retail deposits remained the primary source of funding for the
Group and the deposit book grew by 12% to £22.1bn by the end of
2023 (31 December 2022: £19.8bn), as we continued to offer fair and
attractively priced savings products to our customers.
We opened more than 210,000 new savings accounts in the year,
and retention rates remained very high at 91% for customers with
maturing fixed rate bonds and ISAs at Kent Reliance and 85% for
Charter Savings Bank. To supplement our savings propositions, we
maintained a strong focus on customer service, which was reflected
in Net Promoter Scores for the year of +71 for Kent Reliance and
+62 for Charter Savings Bank.
We complement retail deposits funding with our expertise in the
wholesale markets and in June we completed a £330m securitisation
of owner-occupied prime mortgages, originated by Precise Mortgages
under the CMF programme. In February 2024, we completed another
transaction, securitising £509m of Buy-to-Let mortgages under the
PMF programme. We saw an exceptional level of demand from our
growing investor base and this allowed us to achieve very
attractive pricing. We will continue to access the wholesale
markets when conditions are favourable, to benefit from
diversification of funding and support a smooth transition as we
repay drawings under the Term Funding Scheme for SMEs (TFSME). In
the year, we repaid £900m of TFSME funding with the remainder due
to be repaid by October 2025. As at 31 December 2023, the Group’s
drawings under this Bank of England facility reduced to £3.3bn (31
December 2022: £4.2bn). We have repaid a further £600m so far in
2024.
Capital management
The Group’s capital position, which reflects the £150m share
repurchase programme announced in March 2023 and the post-tax
impact of the adverse EIR adjustment, remained strong with a CET1
ratio of 16.1% as at 31 December 2023 (31 December 2022: 18.3%). We
expect to continue to operate above our 14% CET target as we wait
for clarity on the final Basel 3.1 rules, which are expected to be
published in the second quarter of 2024.
Following the January issuance of £400m of MREL qualifying debt
securities, we met the interim MREL requirement, plus regulatory
buffers, of 22.5% of risk weighted assets, under the current
standardised rules.
OSB Group has strengthened its compliance with the IRB
requirements and has reflected upon the PRAs feedback to the
industry. The Group continues to engage with the regulator ahead of
commencing the formal application process. Underlying IRB
capabilities and disciplines have become progressively more
integrated into the Group’s business planning, risk, capital, IT
and data management disciplines. In particular, enhanced IRB
capabilities have played a vital role in informing and shaping the
Group’s response to the rising costs of living and borrowing.
The Board has recommended a final dividend per share of 21.8
pence (2022: 21.8 pence), which together with the interim dividend
per share of 10.2 pence (2022: 8.7 pence), results in a total
ordinary dividend per share for the year of 32.0 pence (2022: 30.5
pence), in line with our stated desire to deliver a progressive
dividend per share.
The Board remains committed to returning excess capital to
shareholders and has today announced a new £50m share repurchase
programme over the next six months. When combined with the ordinary
dividend, the announced share repurchase represents a total return
to shareholders of £177m and demonstrates the Board’s intention to
use multiple levers to deliver shareholder returns. The Board will
consider the potential for additional capital returns later in the
year, subject to further MREL issuance to support growth
opportunities and meet the final Basel 3.1 requirements once
published, subject to regulatory approval.
Investing in our future
The Group is recognised for its efficiency and excellent customer
service, and throughout 2023 we continued to invest to remain agile
and nimble. We made progress on our digitalisation journey, which
will enable us to meet the future needs of our customers, brokers
and wider stakeholders, whilst delivering further operational
efficiencies. This investment will be a key focus going forward as
we deliver digital solutions to enhance our customer
propositions.
Our success is dependent on our 2,459 employees across the UK
and India, and we took further actions in the year to become a more
diverse and inclusive organisation. By the end of the year, we
reached our target to have 33% of women in senior management roles
in the UK and we set a new target of 40% by the end of 2026. We
also made major upgrades to all policies relating to maternity and
family benefits in the UK to support our employees who are parents
and carers.
I am pleased that in 2023, we also laid solid foundations for
achieving our 2050 net zero emissions target in our inaugural
Climate Transition Plan that will be published with the annual
report. It outlines actionable steps in reducing our operational
emissions as well as those from the housing stock we finance.
Looking forward
Our specialist market sub-segments continue to perform well,
despite the subdued mortgage market. The Group’s target
professional landlords demonstrate resilience and provide much
needed homes with exceptional support to the Private Rented Sector,
and our specialist residential and commercial brands have good
levels of demand as customer confidence improves. Our savers remain
loyal to the Group, as we offer them good value, with improving
customer NPS results. We are confident this will continue as
proposition enhancing digital solutions are delivered.
Based on current application volumes and against the backdrop of
the subdued mortgage market, the Group expects to deliver
underlying net loan book growth of c.5% for 2024.
The underlying net interest margin is expected to be broadly
flat to the 2023 underlying NIM of 251bps, reflecting the impact of
a higher cost of funds and the full year impact of some lower
margin lending in 2023, due primarily to delays in mortgage pricing
reflecting the rate rises and higher swap costs. The cost of
funding is expected to increase in 2024, primarily due to the
normalisation of retail deposit spreads, the impact of planned
TFSME repayment, and the cost of MREL qualifying debt issuance.
We will maintain our cost discipline and efficiency, however the
underlying cost to income ratio is expected to be broadly flat to
the 2023 underlying ratio of 33%, commensurate with the NIM
guidance.
The Group remains well capitalised, with strong liquidity and a
high-quality secured loan book. We have demonstrated the strength
of our customer franchises and intermediary relationships and
continue to focus on delivering good outcomes for our stakeholders
and strong returns for our shareholders.
Andy Golding
Chief Executive Officer
14 March 2024
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:
|
|
|
|
Year ended 31-Dec-2023 |
BTL/SME
£m |
Residential
£m |
Total
£m |
Gross loans and
advances to customers |
12,175.1 |
2,334.2 |
14,509.3 |
Expected credit losses |
(102.4) |
(8.7) |
(111.1) |
Net loans and
advances to customers |
12,072.7 |
2,325.5 |
14,398.2 |
|
|
|
|
Risk-weighted
assets |
6,117.9 |
1,068.4 |
7,186.3 |
|
|
|
|
Profit or loss
for the year |
|
|
|
Net interest
income |
394.4 |
79.4 |
473.8 |
Other expense |
(2.5) |
(0.6) |
(3.1) |
Total income |
391.9 |
78.8 |
470.7 |
Impairment of financial assets |
(36.9) |
(4.7) |
(41.6) |
Contribution to
profit |
355.0 |
74.1 |
429.1 |
|
|
|
|
|
|
|
|
Year ended 31-Dec-2022 |
BTL/SME
£m |
Residential
£m |
Total
£m |
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 |
OSB Buy-to-Let/SME sub-segment
Loans and advances to customers |
31-Dec-2023
£m |
31-Dec-2022
£m |
Buy-to-Let |
10,764.5 |
9,755.0 |
Commercial |
1,095.7 |
881.3 |
Residential
development |
280.8 |
184.5 |
Funding lines |
34.1 |
99.2 |
Gross
loans and advances to customers |
12,175.1 |
10,920.0 |
Expected credit losses |
(102.4) |
(95.2) |
Net loans and advances to customers |
12,072.7 |
10,824.8 |
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 supported by strong
retention and organic originations of £2,163.7m, which reduced by
5% from £2,283.8m in 2022 in a subdued mortgage market.
Net interest income in this sub-segment increased by 3% to
£394.4m (2022: £383.1m), largely reflecting growth in the loan book
and an adverse effective interest rate (EIR) adjustment of £0.1m
was recognised for the year (2022: £20.0m gain).
Other expenses were £2.5m and related to losses from the Group’s
hedging activities (2022: £7.1m gain). The impairment charge
increased to £36.9m (2022: £23.5m) primarily due to changes in the
macroeconomic outlook, model and post-model enhancements, modelled
IFRS 9 stage migration and increased arrears. Overall, the
Buy-to-Let/SME sub-segment made a contribution to profit of
£355.0m, a decrease of 3% compared with £366.7m in 2022.
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 70% (2022: 73%).1
The average book LTV in the Buy-to-Let/SME sub-segment increased to
67% (31 December 2022: 63%)1 as a result of negative
house price inflation in the year. Only 4.0% of loans in this
sub-segment exceeded 90% LTV (31 December 2022: 3.2%).
Buy-to-Let
The Buy-to-Let gross loan book increased by 10% to £10,764.5m at
the end of December 2023 (31 December 2022: £9,755.0m) benefitting
from an increase in refinance activity, as borrowers sought to lock
in lower monthly repayments in expectation of further base rate
rises. During the year, the Group’s originations decreased by 13%
in the Buy-to-Let sub-segment to £1,575.4m from £1,804.6m at the
end of 2022 as overall market segment volumes reduced
significantly.
The proportion of Kent Reliance Buy-to-Let completions
represented by refinance increased to 62% from 61% in 2022 as
purchase activity fell. In addition, there was also an upward trend
in product transfers, with 78% of existing borrowers choosing a new
product, under the Choices retention programme, within three months
of their initial rate mortgage coming to an end (2022: 72%).
The Group’s borrowers continued to favour five-year fixed rate
mortgages, which represented 74% of Kent Reliance completions in
2023 (2022: 83%), however an increasing proportion of customers
elected to take shorter-term mortgages in anticipation of falling
interest rates.
1. Buy-to-Let/SME sub-segment average weighted LTVs include Kent
Reliance and InterBay Buy-to-Let, semi-commercial and commercial
lending
Landlords continued to optimise their businesses from a tax
perspective, with 87% of Kent Reliance mortgage applications for
purchases coming from landlords borrowing via a limited company
(2022: 78%), and overall professional, multi-property landlords
represented 91% of completions by value for the Kent Reliance brand
in 2023 (2022: 86%).
Research conducted by BVA BDRC on behalf of the Group, showed
that the proportion of landlords planning to purchase properties
was low relative to historical averages, reflecting wider
macroeconomic conditions, although this increased modestly
year-on-year to 11% in the fourth quarter (Q4 2022: 9%). There was
positivity in the Group’s Landlord Leaders research which found
that 42% are optimistic about operating as a landlord in the future
while 24% have a neutral outlook. The research also found that 65%
of of landlords are considering or have already transitioned to
become incorporated entities, reflecting ongoing landlord
professionalisation.
The weighted average LTV of the Buy-to-Let book as at 31
December 2023 was 66% with an average loan size of £255k (31
December 2022: 62% and £255k). The weighted average interest
coverage ratio for Buy-to-Let originations during 2023 were 176%
(2022: 207%).
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.
The Group experienced an increased level of business following
the launch of new products in February and March. The refreshed
range of InterBay products included the reintroduction of two-year
fixed rate mortgages, lower LTV mortgages and a reduced minimum
loan size. Organic originations increased by 46% to £405.6m in 2023
(2022: £278.7m) supporting a 24% increase in the gross loan book to
£1,095.7m as at 31 December 2023 (2022: £881.3m). The Group also
expanded its bridging finance range offered by the InterBay brand
in July, relaunching products to support landlords seeking to
purchase or renovate commercial and semi-commercial properties.
The weighted average LTV of the commercial book increased to
73%, largely due to a reduction in commercial property values. The
average loan size was £410k in 2023 (2022: 69% and £375k).
InterBay Asset Finance, which predominantly targets UK SMEs and
small corporates financing business critical assets, continued to
grow adding to its high-quality portfolio with the gross carrying
amount under finance leases increasing by 36% to £222.7m as at 31
December 2023 (31 December 2022: £163.2m).
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 and Heritable continued to take an exacting approach
to approving funding for new customers.
The residential development finance gross loan book at the end
of 2023 was £280.8m, with a further £120.9m committed (31 December
2022: £184.5m and £162.2m, respectively). Total approved limits
were £566.8m, 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 2022: £502.6m).
At the end of 2023, Heritable had commitments to finance the
development of 2,709 residential units, the majority of which are
houses located outside of central London or other major cities in
England.
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 2023 were £197.1m with total gross
loans outstanding of £34.1m (31 December 2022: £274.0m and £99.2m,
respectively). During the year, the Group maintained a cautious
risk approach focusing on servicing existing customers.
OSB Residential sub-segment
|
31-Dec-2023
£m |
31-Dec-2022
£m |
First charge |
2,199.1 |
2,152.9 |
Second
charge |
135.1 |
171.8 |
Gross loans and advances to customers |
2,334.2 |
2,324.7 |
Expected credit losses |
(8.7) |
(8.0) |
Net loans and advances to customers |
2,325.5 |
2,316.7 |
This sub-segment comprises first charge mortgages to
owner-occupiers, secured against a residential home and under
shared ownership schemes.
The Residential sub-segment net loan book was £2,325.5m as at 31
December 2023, broadly flat compared with £2,316.7m in the prior
year and organic originations reduced to £342.2m in the year (2022:
£575.9m) reflecting reduced customer demand in a subdued
market.
Net interest income in the Residential sub-segment increased by
2% to £79.4m (2022: £77.6m) and this sub-segment recognised a
favourable EIR adjustment of £1.0m based on updated customer
behavioural trends (2022: £1.6m loss). Other expenses of £0.6m
(2022: £1.8m other income) related to losses from the Group’s
hedging activities and the impairment charge was £4.7m (2022: £1.2m
credit). The impairment charge was largely due to modelled IFRS 9
stage migration and increased arrears. Overall, contribution to
profit from this sub-segment reduced by 8% to £74.1m for the year
compared with £80.6m in 2022.
The average book LTV increased to 48% (31 December 2022: 45%)1
as a result of negative house price inflation, with only 2.2% of
loans with LTVs exceeding 90% (31 December 2022: 0.8%). The average
LTV of new residential origination during 2023 decreased to 62%
(2022: 64%)1 as a result of an increase in lower 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 2% in the year to
£2,199.1m from £2,152.9m at the end of 2022.
Second charge
The OSB second charge mortgage book is in run-off and managed by
Precise Mortgages. Total gross loans were £135.1m at the end of
2023 (31 December 2022: £171.8m).
1. Residential sub-segment average weighted LTVs include first
and second charge lending
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.
As at
31-Dec-2023 |
Buy-to-
Let
£m |
Residential
£m |
Bridging
£m |
Second charge
£m |
Other1,2
£m |
Total
underlying
£m |
Acquisition- related
Items3
£m |
Total
statutory
£m |
|
Gross loans and advances to customers |
7,921.5 |
3,026.0 |
333.1 |
83.0 |
13.6 |
11,377.2 |
24.3 |
11,401.5 |
|
Expected credit losses |
(29.0) |
(5.4) |
(1.2) |
(0.2) |
- |
(35.8) |
1.1 |
(34.7) |
|
Loans and advances to customers |
7,892.5 |
3,020.6 |
331.9 |
82.8 |
13.6 |
11,341.4 |
25.4 |
11,366.8 |
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets |
3,138.9 |
1,263.0 |
167.5 |
35.8 |
5.4 |
4,610.6 |
48.7 |
4,659.3 |
|
|
|
|
|
|
|
|
|
|
|
Profit or loss account
for the year ended 31-Dec-2023 |
|
|
|
|
|
|
|
Net
interest income |
127.4 |
75.2 |
8.8 |
4.8 |
24.7 |
240.9 |
(56.1) |
184.8 |
|
Other
income |
- |
- |
- |
- |
(3.8) |
(3.8) |
6.4 |
(2.6) |
|
Total income |
127.4 |
75.2 |
8.8 |
4.8 |
20.9 |
237.1 |
(49.7) |
187.4 |
|
Impairment of financial assets |
(5.0) |
(1.2) |
(0.7) |
- |
- |
(6.9) |
(0.3) |
(7.2) |
|
Contribution to profit |
122.4 |
74.0 |
8.1 |
4.8 |
20.9 |
230.2 |
(50.0) |
180.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
As at
31-Dec-2022 |
Buy-to-
Let
£m |
Residential
£m |
Bridging
£m |
Second charge
£m |
Other1, 2
£m |
Total
underlying
£m |
Acquisition- related
Items3
£m |
Total
statutory
£m |
|
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
for the year ended 31-Dec-2022 |
|
|
|
|
|
|
|
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.
|
31-Dec-2023
£m |
31-Dec-2022
£m |
Buy-to-Let |
7,921.5 |
7,468.8 |
Residential |
3,026.0 |
2,671.3 |
Bridging |
333.1 |
149.7 |
Second
charge |
83.0 |
111.9 |
Other1 |
13.6 |
14.6 |
Gross loans and advances to customers |
11,377.2 |
10,416.3 |
Expected credit losses |
(35.8) |
(28.0) |
Net loans and advances to customers |
11,341.4 |
10,388.3 |
1. Other relates to acquired loan portfolios
CCFS segment comprises Buy-to-Let mortgages secured on
residential property held for investment purposes by both
non-professional and professional landlords, residential mortgages
to owner-occupiers secured against residential properties including
those unsupported by the high street banks, short-term
bridging secured against residential property in both the regulated
and unregulated sectors and the second charge loan book which is in
run-off.
The CCFS underlying net loan book grew by 9% to £11,341.4m at
the end of 2023 (31 December 2022: £10,388.3m) supported by strong
retention and organic originations of £2,186.8m, which decreased by
26% from £2,969.4m of new business written in 2022 reflecting a
subdued mortgage market.
CCFS Buy-to-Let sub‑segment
Organic originations in the Buy-to-Let sub-segment through the
Precise Mortgages brand decreased in 2023 to £1,006.0m (2022:
£1,998.7m) reflecting the impact of the higher interest rate
environment on smaller portfolio and individual landlords. The
underlying gross Buy-to-Let loan book grew by 6% in the year to
£7,921.5m from £7,468.8m at the end of 2022 supported by strong
refinance activity.
Underlying net interest income in this sub-segment reduced to
£127.4m compared with £206.0m in the prior year, as the benefit of
loan book growth was more than offset by the underlying adverse EIR
adjustment of £139.5m (2022: £37.5m loss). The EIR adjustment
related to the expectation that Precise Mortgages customers would
spend less time on the higher reversion rate before refinancing,
based on observed customer behavioural trends.
This sub-segment recognised an impairment charge of £5.0m (2022:
£9.5m) largely due to changes in the macroeconomic outlook,
modelled IFRS 9 stage migration and increased arrears. On an
underlying basis, Buy-to-Let made a contribution to profit of
£122.4m, compared with £196.5m in the prior year, with the decline
largely due to the impact of the adverse EIR adjustment.
On a statutory basis, the Buy-to-Let sub-segment made a
contribution to profit of £82.1m (2022: £154.8m).
Refinance activity continued to represent nearly half of Precise
Mortgages completions, at 48%, as landlords sought to lock in lower
monthly repayments in expectation of further base rate rises (2022:
50%). Under the Precise Mortgages retention programme, 66% of
existing borrowers chose a new product within three months of their
initial rate mortgage coming to an end in the year (2022: 35%).
Five-year fixed rate products accounted for 67% of Precise
Mortgages completions, down from 74% in 2022, as an increasing
proportion of customers elected to take shorter-term mortgages in
anticipation of falling interest rates. Borrowing via a limited
company made up 68% of Buy-to-Let completions in 2023 (2022: 65%)
and the proportion of completions for loans for specialist property
types, including houses of multiple occupation and multi-unit
properties remained at 21%.
Research conducted by BVA BDRC in the fourth quarter of 2023 on
behalf of the Group found that over six in ten landlords that
intended to acquire new properties planned to do so within a
limited company structure, in line with an upward trend that has
been observed over a number of years, reflecting ongoing landlord
professionalisation.
The weighted average LTV of the loan book in this segment
increased to 68% due to negative house price inflation in 2023
(2022: 66%). The new lending average LTV was 71% with an average
loan size of £190k (2022: 73% and £191k, respectively). The
weighted average interest coverage ratio for Buy-to-Let origination
was 154% in 2023 (2022: 191%).
CCFS Residential sub-segment
The underlying gross loan book in CCFS’ Residential sub-segment
reached £3,026.0m by 31 December 2023, an increase of 13% from
£2,671.3m as at 31 December 2022, supported by organic originations
of £743.6m (2022: £749.4m). The Group continued to benefit from
CCFS’ expertise, with a strong focus on self-employed individuals
and those with minor adverse credit records.
Underlying net interest income reduced to £75.2m (2022: £96.0m)
as the benefit of loan book growth was more than offset by the
underlying adverse EIR adjustment of £43.0m (2022: £4.0m loss). The
EIR adjustment related to the expectation that Precise Mortgages
borrowers would spend less time on the higher reversion rate before
refinancing, based on observed customer behavioural trends. The
Residential sub-segment recorded an impairment charge of £1.2m
(2022: £1.2m credit) largely due to changes in the macroeconomic
outlook, modelled IFRS 9 stage migration and increased arrears.
Overall, on an underlying basis, the Residential sub-segment made a
contribution to profit of £74.0m, compared with £97.2m in 2022 and
£59.5m on a statutory basis (2022: £81.9m).
The average loan size in this sub-segment was £160k (31 December
2022: £147k) with an average LTV for new lending of 63% (2022: 66%)
and an increase in book LTV to 59% as a result of negative house
price inflation in the year (31 December 2022: 57%).
CCFS Bridging sub‑segment
The Group’s short-term lending offering saw continued success in
2023 as borrowers made use of its regulated and non-regulated
products to assist with chain-break finance, refurbishment works
and property conversions, while the Group’s refurbishment
Buy-to-Let proposition also remained popular. This sub-segment saw
originations of £437.2m, double the amount of £217.5m recorded in
2022 and a growth in the underlying gross loan book to £333.1m as
at 31 December 2023 (31 December 2022: £149.7m).
Underlying net interest income increased by 76% to £8.8m (2022:
£5.0m), and the impairment charge was £0.7m (2022: £0.2m) largely
due to balance sheet growth. The bridging sub-segment made a
contribution to profit of £8.1m in 2023 on an underlying basis
compared with £4.8m in 2022 and £6.9m on a statutory basis (2022:
£4.2m).
CCFS Second charge sub-segment
The second charge gross loan book reduced to £83.0m compared with
£111.9m as at 31 December 2022, as the Group no longer offers
second charge products under the Precise Mortgages brand and the
book is in run-off.
Effective interest rate adjustment overview
2023 results included a total net adverse effective interest rate
(EIR) adjustment of £210.7m on a statutory basis and £181.6m on an
underlying basis which was included in Net Interest Income. This
adjustment was equivalent to 72bps of statutory net interest margin
(NIM) and 63bps of underlying NIM.
Interest rates and volatile outlook
The Bank of England raised the UK’s Bank Base Rate (BBR) 13 times
from the start of 2022 through to 31 December 2023, as summarised
in Table 1. The interest rate outlook was also volatile across the
same period and Table 2 shows the futures implied BBR peak since 30
June 2021 by quarter.
Table
1
Table 2
Date changed |
Base rate |
|
Date |
Implied BBR peak1 |
|
% |
|
|
% |
December 2021 |
0.25 |
|
30 June 2021 |
0.70 |
February
2022 |
0.50 |
|
30 September
2021 |
0.99 |
March 2022 |
0.75 |
|
31 December
2021 |
1.37 |
May 2022 |
1.00 |
|
31 March
2022 |
2.52 |
June 2022 |
1.25 |
|
30 June 2022 |
3.09 |
August 2022 |
1.75 |
|
30 September
2022 |
5.88 |
September
2022 |
2.25 |
|
31 December
2022 |
4.74 |
November
2022 |
3.00 |
|
31 March
2023 |
4.65 |
December
2022 |
3.50 |
|
30 June 2023 |
6.29 |
February
2023 |
4.00 |
|
30 September |
5.45 |
March 2023 |
4.25 |
|
31 December
2023 |
5.28 |
May 2023 |
4.50 |
|
|
|
June 2023 |
5.00 |
|
|
|
August 2023 |
5.25 |
|
|
|
1.Bloomberg, implied peak interest rate futures pricing at the
applicable date
Impact on customer behaviour
These rapid BBR rises and fluctuating interest rate expectations
led to customer behavioural changes. Precise Mortgages (Precise)
fixed rate products were designed to revert to a rate which was
similar to the initial fixed rate and open market rates. This
encouraged borrowers to spend significant time on the variable
reversion rate before choosing a new fixed rate product or
refinancing with another lender.
Over the course of the first half of 2023, the Group observed a
step change in how long these customers were spending on the
reversion rate, in particular the attrition rate of borrowers who
historically stayed on the reversion rate for several months.
Precise customers generally contractually revert to a margin
over BBR at the end of their fixed rate term.
As BBR continued to rise, customers saw steep increases in the
BBR linked reversion rate, and as the Group continued to develop
its Precise retention programme, customers chose to refinance
earlier and spent less time on the higher reversion rate compared
to previously observed behavioural trends.
In contrast, the Kent Reliance brand has historically had a
higher reversion rate, its managed standard variable rate (SVR),
resulting in a significant rate step-up in reversion versus both
the fixed rate and open market rates. Due to this step up, Kent
Reliance has a long and well-established broker led retention
programme, Choices, to encourage borrowers to switch to a new
product quickly. Kent Reliance customers have therefore spent less
time on reversion historically than Precise customers and their
behaviour is therefore less sensitive to increasing interest
rates.
Table 3 illustrates the different way in which Precise and Kent
Reliance mortgages have reverted since 2020, by showing the
difference between the average fixed and reversion rates for
five-year fixed Buy-to-Let products when they reached the end of
their initial fixed rate term.
The table shows that the Precise Buy-to-Let five-year fixed rate
products on average reverted to a variable rate broadly consistent
with the fixed rate prior to the rapid rise in BBR. Conversely, the
Kent Reliance five-year fixed rate products have consistently had a
higher step-up in reversion providing an incentive to refinance
quickly.
Table 3
|
5 Year fixed Buy-to-Let
step up in reversion |
Precise |
Kent Reliance |
|
ppt |
ppt |
2020 |
0.1 |
1.3 |
2021 |
(0.1) |
1.7 |
2022 Q1 |
0.4 |
2.2 |
2022 Q2 |
1.1 |
3.0 |
2022 Q3 |
2.1 |
3.6 |
2022 Q4 |
3.7 |
4.5 |
2023 Q1 |
4.7 |
5.7 |
2023 Q2 |
5.6 |
6.4 |
2023 Q3 |
6.3 |
7.3 |
2023 Q4 |
6.8 |
7.4 |
The step-change in customer behavioural trends, observed over
the course of the first half of 2023, led to a decrease in the
weighted average number of months that Precise Mortgages borrowers
who reach the end of their fixed term were expected to spend on the
reversion rate before refinancing from c.17 months to c.5 months.
The weighted average number of c.5 months remained unchanged as at
31 December 2023.
Kent Reliance borrowers, who reach the end of their fixed term
were expected to spend on average 1-2 months on the reversion rate
as at 31 December 2023.
Impact of the step-change in behaviour in reversion for
Precise customers
The reduction in the expected time spent on reversion by Precise
customers from c.17 to c.5 months, resulted in an adverse
underlying EIR adjustment to the carrying value of Loans and
Advances to Customers through Net Interest Income of £182.5m in
2023, of which £178.0m was recognised in the first half.
This moved the Precise EIR asset to an EIR liability. Other
Group EIR adjustments totalled £0.9m as at 31 December
2023.
Table 4 details Precise Mortgages’ underlying EIR assets and
liabilities, with the movement in the balance sheet recognised in
Net Interest Income in each year:
Table 4
Precise Mortgages EIR |
Movement recognised through Net Interest
Income |
Net |
Underlying EIR asset/(liability) |
|
£m |
£m |
£m |
As at 31
December 2019 |
|
|
5.6 |
Recognition of interest income |
16.8 |
|
|
Behavioural adjustment |
(2.0) |
|
|
As at 31
December 2020 |
|
14.8 |
20.4 |
Recognition of interest income |
12.6 |
|
|
Behavioural adjustment |
(14.7) |
|
|
As at 31
December 2021 |
|
(2.1) |
18.3 |
Recognition of interest income |
70.6 |
|
|
Behavioural adjustment |
(41.7) |
|
|
As at 31
December 2022 |
|
28.9 |
47.3 |
Recognition of interest income |
106.9 |
|
|
Behavioural adjustment |
(182.5) |
|
|
As at 31
December 2023 |
|
75.6 |
(28.4) |
Precise has historically had an EIR asset, primarily reflecting
the expected time spent in reversion and early repayment charges
(ERC) income which moved to a liability of £28.4m as at 31 December
2023 following the adverse EIR adjustment. This liability will
unwind over the remaining life of the mortgages.
Kent Reliance had a net EIR liability of £2.6m as at 31 December
2023 (31 December 2022: £17.2m liability) due to the deferral of
net fee income outweighing the impact of expected ERC income and
time spent in reversion.
The Group’s commercial brand, InterBay, had an EIR asset of
£5.7m as at 31 December 2023 (31 December 2022: £8.8m asset)
in relation to expected ERC income and time spent in reversion.
InterBay products did not change in reversion versus the initial
fixed rate until 2022 when BBR and LIBOR replacement first exceeded
the interest rate floors used in the reversion periods for
these products.
Behavioural sensitivities
A three months’ movement in the weighted average time spent in the
reversion period for Precise is considered to be a reasonably
possible change in assumption in a sustained high interest rate
environment and an uncertain macroeconomic outlook. Applying a +/-
3 months movement in the time spent on reversion would lead to a
+/- c.£77m impact on the underlying Net Interest Income and +/-
c.£82m impact on the statutory Net Interest Income.
This sensitivity will increase/decrease as BBR rises/falls.
Sensitivity to changes in base rate
As the BBR increased throughout 2022 and 2023, using the effective
interest rate approach resulted in additional monthly net interest
income as the benefit of time spent on a reversion rate became
greater. If BBR decreases this will lead to a decrease in monthly
net interest income. If BBR were to reduce by 50bps it is estimated
that this will decrease monthly net interest income by £1.2m across
Precise and Kent Reliance Mortgages.
EIR accounting overview
In accordance with IFRS 9, the Group recognises interest income
from mortgages using the effective interest method, which aims to
recognise interest income at a consistent effective interest rate
(EIR) over the expected life of the mortgages.
The effective interest method requires that an EIR% is calculated
at origination that considers all contractual and behavioural cash
flows associated with the mortgage including fees, early redemption
charges (ERCs) and the average time the customer spends on the
reversion rate after the initial fixed rate period. This has the
effect of bringing forward expected income from the reversion
period. An EIR asset is built up over time from origination in
respect of expected ERC income and reversion income. An EIR
liability is recognised at origination in respect of deferred net
fee income.
The Group uses the latest observable trends to predict future
behaviour in reversion and assumes current interest rates for
reversion cash flows when calculating the EIR.
For Precise Mortgages products the reversion rate is generally
linked to BBR and if this remains static, there is no change to the
EIR% calculated at origination. If BBR increases, the EIR
methodology prescribes that the EIR% is recalculated immediately to
reflect the higher anticipated income in the reversion period,
which leads to higher revenue recognition over the expected
remaining life of the mortgage.
A change in customer behaviour, which emerges over time, for
example customers spending less time on the reversion rate before
refinancing, can also lead to a change in expected cash flows and
the revenue to be recognised. Generally, such a change would cause
a reduction in the anticipated total amount of interest received
from the customer over the revised expected life of the mortgage.
Similarly, an expectation of a longer period spent on the reversion
rate would lead to an increase in the anticipated total amount of
interest received over the revised, longer life of a mortgage.
The EIR% for a loan is not adjusted for behavioural changes where a
trend in customer behaviour is observed. Instead IFRS 9 requires an
immediate adjustment to the carrying value of Loans and Advances to
Customers, with a corresponding gain or loss recognised in the
income statement. This maintains the EIR% for the loan over its
remaining behavioural life.
In a rapidly rising rate environment, changes in BBR are observable
immediately and are reflected in revisions to the EIR, applied
prospectively, whereas trends in customer behaviour take more time
to emerge. This leads to use of an EIR% calculated based on cash
flows in reversion that are no longer expected, resulting in a
dynamic where a behavioural-driven adjustment, due to customers
spending less time on the reversion rate, can create an EIR
liability. This liability unwinds over the remaining expected life
of the mortgages to adjust interest accruals to actual cash
receipts. |
The Group’s retention programmes
Kent Reliance has a long and well-established broker led retention
programme, Choices, to encourage borrowers to switch to a new
product quickly rather than refinance away from the Group after a
period on the higher reversion rate. This programme has been
successful in retaining borrowers by engaging with them before the
end of their fixed rate term and offering preferential terms
compared to new customer offers to reflect the Group’s lower
processing costs. In 2023, 78% (2022: 72%) of existing borrowers
chose a new KR product within 3 months of their initial rate
mortgage coming to an end.
The Group introduced a similar proactive retention programme for
Precise borrowers in October 2022 in reaction to the BBR increases
and the resulting step-up in rates on reversion. There was a steady
improvement in retention with 66% (2022: 35%) of existing Precise
borrowers choosing a new product within 3 months of their initial
rate mortgage coming to an end in 2023. |
Financial review
Review of the Group’s performance on a statutory basis for 2023
and 2022.
|
FY 2023 |
FY 2022 |
Summary
Profit or Loss |
£m |
£m |
Net interest
income |
658.6 |
709.9 |
Net fair value
(loss)/gain on financial instruments |
(4.4) |
58.9 |
Other operating
income |
3.9 |
6.6 |
Administrative
expenses |
(234.6) |
(207.8) |
Provisions |
(0.4) |
1.6 |
Impairment of
financial assets |
(48.8) |
(29.8) |
Integration
costs |
- |
(7.9) |
Profit before
tax |
374.3 |
531.5 |
Profit after
tax |
282.6 |
410.0 |
|
FY 2023 |
FY 2022 |
Key
ratios1 |
|
|
Net interest
margin |
231bps |
278bps |
Cost to income
ratio |
36% |
27% |
Management expense
ratio |
82bps |
81bps |
Loan loss
ratio |
20bps |
13bps |
Return on
equity |
14% |
21% |
Basic earnings per
share, pence |
66.1 |
90.8 |
Ordinary dividend
per share, pence |
32.0 |
30.5 |
Special dividend
per share, pence |
- |
11.7 |
|
31-Dec-23 |
31-Dec-22 |
|
£m |
£m |
Extracts
from the Statement of Financial Position |
|
|
Loans and advances
to customers |
25,765.0 |
23,612.7 |
Retail
deposits |
22,126.6 |
19,755.8 |
Total assets |
29,589.8 |
27,566.7 |
Key ratios |
|
|
Common equity tier
1 ratio |
16.1% |
18.3% |
Total capital
ratio |
19.5% |
19.7% |
Leverage
ratio |
7.5% |
8.4% |
1. For more detail on the calculation of key ratios, see the
Appendix.
Statutory profit
The Group’s statutory profit before tax decreased by 30% to £374.3m
(2022: £531.5m) after acquisition-related items of
£51.7m1 (2022: £59.6m). The benefit of net loan book
growth was more than offset by the total net adverse statutory
effective interest rate (EIR) adjustment of £210.7m. The decrease
in statutory profit before tax was also due to a net fair value
loss on financial instruments compared with a gain in the prior
year, higher administration costs and a higher impairment
charge.
Statutory profit after tax was £282.6m in 2023, a decrease of
31% from £410.0m in the prior year and included acquisition-related
items of £37.1m1 (2022: £38.7m). The Group’s effective
tax rate increased to 24.6%2 due to higher corporation
tax rates, partially offset by a lower proportion of the profits
being subject to the bank surcharge (2022: 24.0%).
Statutory return on equity for 2023 reduced to 14% (2022: 21%)
reflecting the reduction in profitability in the year.
Statutory basic earnings per share decreased to 66.1 pence
(2022: 90.8 pence), in line with the decrease in profit after
tax.
Net interest income
Statutory net interest income decreased by 7% in 2023 to
£658.6m (2022: £709.9m), as the benefit of net loan book growth was
more than offset by the total net adverse EIR adjustment of £210.7m
on a statutory basis. The adverse EIR adjustment primarily related
to the expectation that Precise Mortgages borrowers would spend
less time on the higher reversion rate before refinancing based on
observed customer behavioural trends.
Statutory net interest margin (NIM) was 231bps compared with
278bps in the prior year, down 47bps, largely due to the adverse
EIR adjustment and as the benefit of the lower cost of retail
funding was offset by the impact of some lower margin lending due
primarily to delays in mortgage pricing reflecting the rate rises
and higher swap costs.
The total net adverse EIR adjustment accounted for 72bps of
statutory NIM for the year ended 31 December 2023.
Net fair value loss on financial
instruments
Statutory net fair value loss on financial instruments of £4.4m in
2023 (2022: £58.9m gain) included a £11.1m net loss on unmatched
swaps (2022: £57.1m gain) following a reduction in swap prices in
the fourth quarter and a gain of £2.0m (2022: £8.1m loss) in
respect of the ineffective portion of hedges.
The Group also recorded a £6.4m net gain (2022: £10.2m gain)
from the unwind of acquisition-related inception adjustments, a
£4.3m loss (2022: £1.2m gain) from the amortisation of hedge
accounting inception adjustments and a net gain of £2.6m from other
items (2022: £1.5m loss).
The net loss on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages, and was caused by a reduction in the
interest rate outlook on the SONIA forward curve in the fourth
quarter. Conversely, the net gain recognised in the prior year
reflected a step up in interest rate outlook on the SONIA yield
curve largely in response to the actions announced in the September
2022 mini budget.
The Group economically hedges its committed pipeline of
mortgages and this unrealised movement unwinds over the life of the
swaps through hedge accounting inception adjustments.
Other operating income
Statutory other operating income of £3.9m (2022: £6.6m) 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 13% to £234.6m in
2023 (2022: £207.8m) largely due to balance sheet growth and the
anticipated impact of inflation and planned investment in people
and operations, including digital solutions enhancing our customer
propositions.
The statutory management expense ratio was broadly flat at 82bps
in 2023 (2022: 81bps) reflecting the Group’s focus on cost
discipline and efficiency.
The Group’s statutory cost to income ratio increased to 36%
(2022: 27%) primarily as a result of lower income following the
adverse EIR adjustment and a net fair value loss on financial
instruments compared with a gain in the prior year.
Impairment of financial assets
The Group recorded a statutory impairment charge of £48.8m in 2023
(2022: £29.8m) representing a statutory loan loss ratio of 20bps
(2022: 13bps).
The updated forward-looking macroeconomic scenarios used in the
Group’s IFRS 9 models accounted for a £6.4m charge, while
enhancements to models and post model adjustments resulted in a net
release of £1.0m. Changes in the risk profile of borrowers as they
transitioned through modelled IFRS 9 impairment stages and loan
book growth amounted to a charge of £21.9m and an increase in
provisions relating to accounts with arrears of three months or
more amounted to a charge of £14.1m. The increase in individually
assessed provisions and other items amounted to a charge
of £7.4m.
As at 31 December 2023, the Group’s balance sheet provisions
were further reduced by write-offs of £33.6m, where loans were
written off against the related provision when the underlying
security was sold. This amount did not form part of the year end
impairment charge as it was expensed to the profit and loss when
the provisions were raised.
In the prior year, the impairment charge was largely due to the
Group’s adoption of more severe forward-looking macroeconomic
scenarios in its IFRS 9 models and post model adjustments to
account for the rising cost of living and borrowing concerns.
Integration costs
The Group ceased recognising expenses as integration costs on the
third anniversary of combination with CCFS in October 2022.
In the prior year, £7.9m of integration costs largely related to
redundancy costs and advice on the Group’s future operating
structure.
Dividend
The Board has recommended a final dividend of 21.8 pence per share
for 2023, which together with the interim dividend of 10.2 pence
per share, represents a total ordinary dividend of 32.0 pence per
share. See the Appendix for the calculation of the 2023
final dividend.
The recommended final dividend is subject to approval at the AGM
on 9 May 2024. The final dividend will be paid on 14 May 2024, with
an ex-dividend date of 4 April 2024 and a record date of 5 April
2024.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew by
9% to £25,765.0m in 2023 (31 December 2022: £23,612.7m), supported
by originations of £4.7bn in the year and strong
retention.
Total assets grew by 7% to £29,589.8m (31 December 2022:
£27,566.7m) largely due to the growth in loans and advances to
customers.
On a statutory basis, retail deposits increased by 12% to
£22,126.6m as at 31 December 2023 from £19,755.8m in the prior
year, as savers continued to choose the Group’s consistently fair
and attractively priced products.
The Group complemented its retail deposits funding with drawings
under the Bank of England’s schemes. Drawings under the Term
Funding Scheme for SMEs reduced to £3.3bn as at 31 December 2023
from £4.2bn in the prior year as the Group repaid £900m of the
funding using retail deposits and wholesale funding in the second
half of the year. Drawings under Indexed Long-Term Repo were £10.1m
(31 December 2022: £300.9m).
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 2023, OSB had £1,155.7m and CCFS had £1,514.0m
of HQLA (31 December 2022: £1,494.1m and £1,522.8m,
respectively).
The Group 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 2023, OSB had an LCR of 208% and CCFS 139% (31
December 2022: 229% and 148%, respectively) and the Group LCR was
168% (31 December 2022: 185%), 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
16.1% and a total capital ratio of 19.5% as at the end of 2023 (31
December 2022: 18.3% and 19.7%, respectively). Both ratios
reflected the impact of lower profitability in the year due to the
adverse EIR adjustment, which reduced the CET1 ratio by 1.2%, loan
book growth, foreseeable and paid dividends and the impact of the
£150m share repurchase programme completed in 2023.
The Group had a leverage ratio of 7.5% as at 31 December 2023
(31 December 2022: 8.4%). The combined Group had a Pillar 2a
requirement of 1.27% (2022: 1.27%) of risk-weighted assets
(excluding a static integration add-on of £19.5m) as at
31 December 2023.
1. See the reconciliation of statutory to underlying results
2. See note 11 to the Consolidated Financial Statements
Summary cash flow statement
|
Group
31-Dec-2023
£m |
Group
31-Dec-2022
£m |
Profit
before tax |
374.3 |
531.5 |
Net cash
generated/(used in): |
|
|
Operating
activities |
425.2 |
428.5 |
Investing
activities |
(301.2) |
63.2 |
Financing
activities |
(654.1) |
(184.3) |
Net (decrease)/increase in cash and cash equivalents |
(530.1) |
307.4 |
Cash and
cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the
year |
3,044.1
2,514.0 |
2,736.7
3,044.1 |
|
|
|
Cash flow statement
The Group’s cash and cash equivalents decreased by £530.1m during
the year to £2,514.0m as at 31 December 2023.
In 2023, loans and advances to customers increased by £2,200.5m,
primarily funded by £2,370.8m of deposits from retail customers.
The Group repaid £336.9m of cash collateral received on derivative
exposures and received £38.8m of initial margin, reflecting a
reduction in swap pricing in the fourth quarter. Cash used in
financing activities of £654.1m included financing repaid: TFSME
scheme repayments of £900m and repayments of the ILTR scheme of
£290.8m. It also included interest on financing of £205.4m and
distributions to shareholders of £185.0m of dividend payments and
£152.4m of share repurchase which were partially offset by funding
through securitisations, senior notes and subordinated liability
issuances raising £1,138.7m. Cash used in investing activities was
£301.2m.
In 2022, loans and advances to customers increased by £2,563.1m,
primarily funded by £2,229.4m of deposits from retail customers.
The Group received £434.3m of cash collateral on derivative
exposures and paid £137.5m of initial margin, reflecting new
derivatives during the year. Cash used from financing activities of
£184.3m included £300.9m drawings under the ILTR scheme offset by
£193.6m repayment of debt securities, £102.0m share repurchases,
£133.1m dividend payments and £45.3m interest on financing
liabilities. Total drawings under the Bank of England’s TFSME
scheme remained unchanged at £4.2bn. Cash generated from investing
activities was £63.2m.
Review of the Group’s performance on an underlying basis for
2023 and 2022.
Alternative performance
measures
The Group presents alternative performance measures (APMs) in this
Strategic report as Management believes they provide a more
consistent basis for comparing the Group’s performance between
financial periods.
Underlying results and KPIs for 2023
and 2022 exclude 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 2023 |
FY 2022 |
Summary
Profit or Loss |
£m |
£m |
Net interest
income |
714.7 |
769.1 |
Net fair value
(loss)/gain on financial instruments |
(10.8) |
48.5 |
Other operating
income |
3.9 |
6.6 |
Administrative
expenses |
(232.9) |
(204.0) |
Provisions |
(0.4) |
1.6 |
Impairment of
financial assets |
(48.5) |
(30.7) |
Profit before
tax |
426.0 |
591.1 |
Profit after
tax |
319.7 |
448.7 |
|
FY 2023 |
FY 2022 |
Key
ratios1 |
|
|
Net interest
margin |
251bps |
303bps |
Cost to income
ratio |
33% |
25% |
Management expense
ratio |
81bps |
80bps |
Loan loss
ratio |
20bps |
14bps |
Return on
equity |
16% |
24% |
Basic earnings per
share, pence |
75.0 |
99.6 |
|
|
|
|
31-Dec-23 |
31-Dec-22 |
|
£m |
£m |
Extracts
from the Statement of Financial Position |
|
|
Loans and advances
to customers |
25,739.6 |
23,529.8 |
Retail
deposits |
22,126.6 |
19,755.2 |
Total assets |
29,565.6 |
27,487.6 |
1. For more detail on the calculation of key ratios, see the
Appendix.
Underlying profit
The Group’s underlying profit before tax decreased by 28% to
£426.0m from £591.1m in 2022. The benefit of net loan book growth
was more than offset by the total net adverse underlying effective
interest rate (EIR) adjustment of £181.6m. The decrease in
underlying profit before tax was also due to a net fair value loss
on financial instruments compared to a gain in the prior year,
higher administration costs and a higher
impairment charge.
Underlying profit after tax was £319.7m, down 29% (2022:
£448.7m), broadly in line with the decrease in profit before tax.
The Group’s effective tax rate on an underlying basis increased to
25.0% for the year due to higher corporation tax rates, partially
offset by a lower proportion of the profits being subject to the
bank surcharge (2022: 24.3%).
On an underlying basis, return on equity for 2023 reduced to 16%
(2022: 24%), reflecting the reduction in profitability in the
year.
The underlying basic earnings per share decreased to 75.0 pence
(2022: 99.6 pence), in line with the decrease in profit after
tax.
Net interest income
Underlying net interest income decreased by 7% to £714.7m in 2023
(2022: £769.1m), as the benefit of net loan book growth was more
than offset by the total net adverse EIR adjustment of £181.6m on
an underlying basis. The adverse EIR adjustment primarily related
to the expectation that Precise Mortgages borrowers would spend
less time on the higher reversion rate before refinancing based on
observed customer behavioural trends.
The underlying net interest margin was 251bps compared with
303bps in the prior year, down 52bps, largely due to the adverse
EIR adjustment and as the benefit of the lower cost of retail
funding was offset by the impact of some lower margin lending due
primarily to delays in mortgage pricing reflecting the rate rises
and higher swap costs.
The total net adverse EIR adjustment accounted for 63bps of
underlying NIM for the year ended 31 December 2023.
Net fair value loss on financial instruments
Underlying net fair value loss on financial instruments was £10.8m
in 2023 (2022: £48.5m gain) and included a loss on unmatched swaps
of £11.1m (2022: £57.1m gain) following a fall in swap prices in
the fourth quarter and a gain of £2.0m (2022: £8.1m loss) in
respect of the ineffective portion of hedges.
The Group also recorded a £4.3m loss (2022: £1.2m gain) from the
amortisation of hedge accounting inception adjustments and a gain
of £2.6m (2022: £1.7m loss) from other items.
The net loss on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages, and was caused by a reduction in the
interest rate outlook on the SONIA forward curve in the fourth
quarter. Conversely the net gain recognised in the prior year
reflected a step up in interest rate outlook on the SONIA yield
curve largely in response to the actions announced in the September
2022 mini budget.
The Group economically hedges its committed pipeline of
mortgages and this unrealised movement unwinds over the life of the
swaps through hedge accounting inception adjustments.
Other operating income
On an underlying basis, other operating income was £3.9m in 2023
(2022: £6.6m) 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 increased by 14% to £232.9m in
2023 (2022: £204.0m), largely due to balance sheet growth and the
anticipated impact of inflation and planned investment in people
and operations, including digital solutions enhancing our customer
propositions.
The underlying management expense ratio remained broadly flat at
81bps in 2023 (2022: 80bps) reflecting the Group’s focus on cost
discipline and efficiency.
The Group’s underlying cost to income ratio increased to 33%
(2022: 25%) primarily as a result of lower income following the
adverse EIR adjustment and a net fair value loss on financial
instruments compared with a gain in the prior year.
Impairment of financial assets
The Group recorded an underlying impairment charge of £48.5m in
2023 (2022: £30.7m) representing an underlying loan loss ratio of
20bps (2022: 14bps).
The updated forward-looking macroeconomic scenarios used in the
Group’s IFRS 9 models accounted for a £6.4m charge, while
enhancements to models and post model adjustments resulted in a net
release of £1.0m. Changes in the risk profile of borrowers as they
transitioned through modelled IFRS 9 impairment stages and loan
book growth amounted to a charge of £21.9m and an increase in
provisions relating to accounts with arrears of three months or
more amounted to a charge of £14.1m. The increase in individually
assessed provisions and other items amounted to a charge
of £7.1m.
As at 31 December 2023, the Group’s balance sheet provisions
were further reduced by £33.6m, where loans were written off
against the related provision when the underlying security was
sold. This amount did not form part of the year end impairment
charge as it was expensed to the profit and loss when the
provisions were raised.
In the prior year, the impairment charge was largely due to the
Group’s adoption of more severe forward-looking macroeconomic
scenarios in its IFRS 9 models and post model adjustments to
account for the rising cost of living and borrowing concerns.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
£25,739.6m (31 December 2022: £23,529.8m) an increase of 9%,
supported by gross originations of £4.7bn in the year.
Total underlying assets grew by 8% to £29,565.6m (31 December
2022: £27,487.6m), largely due to the growth in loans and advances
to customers.
On an underlying basis, retail deposits increased by 12% to
£22,126.6m (31 December 2022: £19,755.2m) as savers continued to
choose the Group’s consistently fair and attractively priced
products.
Reconciliation of statutory to underlying results
|
|
FY 2023 |
|
|
FY 2022 |
|
|
Statutory
results
£m |
Reverse
acquisition- related items
£m |
Underlying results
£m |
Statutory results
£m |
Reverse
acquisition- related items
£m |
Underlying results
£m |
Net interest
income |
658.6 |
56.11 |
714.7 |
709.9 |
59.2 |
769.1 |
Net fair value
(loss)/gain on financial instruments |
(4.4) |
(6.4)2 |
(10.8) |
58.9 |
(10.4) |
48.5 |
Other operating income |
3.9 |
– |
3.9 |
6.6 |
– |
6.6 |
Total
income |
658.1 |
49.7 |
707.8 |
775.4 |
48.8 |
824.2 |
Administrative
expenses |
(234.6) |
1.73 |
(232.9) |
(207.8) |
3.8 |
(204.0) |
Provisions |
(0.4) |
– |
(0.4) |
1.6 |
– |
1.6 |
Impairment of
financial assets |
(48.8) |
(0.3)4 |
(48.5) |
(29.8) |
(0.9) |
(30.7) |
Integration
costs |
–
|
– |
– |
(7.9) |
7.95 |
– |
Profit before tax |
374.3 |
51.7 |
426.0 |
531.5 |
59.6 |
591.1 |
Profit
after tax |
282.6 |
37.1 |
319.7 |
410.0 |
38.7 |
448.7 |
|
|
|
|
|
|
|
Summary Balance Sheet |
|
|
|
|
|
Loans and
advances to customers |
25,765.0 |
(25.4)6 |
25,739.6 |
23,612.7 |
(82.9) |
23,529.8 |
Other financial
assets |
3,722.8 |
1.37 |
3,724.1 |
3,878.1 |
9.1 |
3,887.2 |
Other non-financial assets |
102.0 |
(0.1)8 |
101.9 |
75.9 |
(5.3) |
70.6 |
Total
assets |
29,589.8 |
(24.2) |
29,565.6 |
27,566.7 |
(79.1) |
27,487.6 |
|
|
|
|
|
|
|
Amounts owed to
retail depositors |
22,126.6 |
– |
22,126.6 |
19,755.8 |
(0.6)9 |
19,755.2 |
Other financial
liabilities |
5,272.0 |
– |
5,272.0 |
5,548.5 |
0.810 |
5,549.3 |
Other non-financial liabilities |
46.7 |
(6.3)11 |
40.4 |
61.4 |
(30.2) |
31.2 |
Total
liabilities |
27,445.3 |
(6.3) |
27,439.0 |
25,365.7 |
(30.0) |
25,335.7 |
|
|
|
|
|
|
|
Net assets |
2,144.5 |
(17.9) |
2,126.6 |
2,201.0 |
(49.1) |
2,151.9 |
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. Amortisation of intangible assets recognised on
Combination
4. Adjustment to expected credit losses on CCFS loans
on Combination
5. Reversal of integration costs related to the
Combination
6. Recognition of a fair value uplift to CCFS’ loan
book less accumulated amortisation of the fair value uplift and a
movement on credit provisions
7. Fair value adjustment to hedged assets
8. Adjustment to deferred tax asset and recognition of
acquired intangibles on Combination
9. Fair value adjustment to CCFS’ retail deposits less
accumulated amortisation
10. Fair value adjustment to hedged liabilities
11. Adjustment to deferred tax liability and other
acquisition-related adjustments
Risk review
Executive summary
The Group’s primary focus during 2023 has been to navigate the
uncertainties and risks arising from macroeconomic headwinds,
geopolitical uncertainties, continued cost of living and borrowing
challenges and changing customer and competitor behaviours. Despite
the heightened levels of uncertainty and change, the Group has
broadly maintained its risk profile within the confines of the
Board approved risk appetite.
The Group’s financial performance was impacted by the adverse
EIR adjustment which related to the expectation that Precise
Mortgages borrowers would spend less time on the higher
reversionary rate before refinancing based on observed customer
behavioural trends. Over the course of the first half of 2023, the
Group observed a step change in how long these customers were
spending on the reversion rate, in particular the attrition rate of
borrowers who historically stayed on the reversion rate for several
months. Precise customers generally contractually revert to a
margin over BBR at the end of their fixed rate term. As BBR
continued to rise, customers saw steep increases in the BBR linked
reversion rate, and as the Group continued to develop its Precise
retention programme, customers were choosing to refinance earlier
and spent less time on the higher reversion rate compared to
previously observed behavioural trends. The Group has significantly
enhanced its approach to modelling and monitoring customer
repayment behaviours.
During 2023, the Group observed an increase in arrears levels
driven by rising costs of borrowing and living, whilst the
timelines for repossessing and selling properties continued to be
elongated due to ongoing delays in the court hearing process, which
also contributed to elevated levels of late-stage arrears balances.
The Group observed lower levels of Buy-to-Let balances greater than
three months in arrears, versus UK Finance trends, with
year-on-year growth marginally lower than the UK Finance trend
observed during the year. Residential mortgage arrears trends
remained higher than UK Finance data, driven by a higher portfolio
mix of near prime customers.
The Group continued to focus on supporting customers who
experienced financial difficulties, as evidenced by the observed
year-on-year increase in forbearance measures granted. The LTV
profile of the existing loan book and accounts in arrears remains
appropriate, providing loss protection if required. Arrears levels
remain below expectations and prudent IFRS 9 provision coverage
levels have been maintained to cover for forecasted future
losses.
The Group has established a robust framework of assessing the
nature and drivers of its credit risk profile which are captured
within its Expected Credit Loss (ECL) methodology. The Group has
maintained a prudent level of credit provisions which are driven by
forward looking macroeconomic forecasts. PMAs are primarily
designed to capture the risk arising from the heightened cost of
living and borrowing by moving some accounts to into Stage 2 even
when the account is performing.
The Group remains cognisant of the impact of the cost of living
and borrowing challenges on customers experiencing financial
distress and customers with vulnerabilities. The Group have
undertaken an extensive review and enhanced activities to further
improve its approach to early assessment and management of
customers subject to financial distress or vulnerabilities to
ensure good outcomes. These enhancements are being made against the
backdrop of Consumer Duty disciplines.
The Group’s wider Enterprise Risk Management Framework (ERMF)
ensures that principal risks are subject to common good practice
standards across all phases of the risk life cycle, including
identification, assessment, management, monitoring and reporting.
The ERMF continuously evolves to reflect the Group’s underlying
risk profile. An example of this is the introduction of a focused
approach to risk disciplines in the area of model and end-user
computing, data and change risk management. The ERMF and its
sub-components are subject to continuous review and independent
assurance, as well as being leveraged to demonstrate effective
compliance with prudential and conduct regulatory
requirements.
Given the challenging and uncertain operating environment, the
Group’s performance against its Board approved risk appetite was
subject to close scrutiny by the Board and management. In
particular, the Group remains very focused on ensuring that
underlying risk trends were actively monitored and that timely
actions were taken to minimise risk and ensure that a sufficient
level of financial contingency and buffers are held. This approach
has ensured that the Group has maintained prudent levels of
provisions, funding and capital buffers.
The Group made good progress against several important
regulatory initiatives, including compliance with the Resolvability
Assessment Framework (including meeting interim MREL requirements)
and Consumer Duty. This has been achieved through collaborative
engagement with its supervisory authorities, key functional areas
and the Board. The Group successfully issued its first £300m of
MREL qualifying debt securities plus £250m Tier 2 debt securities
in 2023 followed by a further issuance of £400m of MREL qualifying
debt securities in January 2024, following which, the Group met its
interim MREL requirement, including regulatory buffers. These
issuances were supported by a credit rating upgrade during the
course of the year.
The Group is required to comply with Bank of England policy with
respect to the Resolvability Assessment Framework (RAF) which aims
to ensure qualifying firms can be resolved in an orderly fashion.
During 2023 the Group made continued progress in embedding and
enhancing existing resolution capabilities.
The Group has undertaken an extensive review of Basel 3.1
consultation documents and assessed its impact whilst being
cognisant that it is not yet finalised for UK adoption. Based on
various permutations of how the new regulation will be adopted in
the UK, the Group endeavoured to reflect its impact within its
business and capital planning processes, including within its MREL
issuance plans.
The Group continues to enhance its approach to compliance with
Internal Ratings-Based (IRB) disciplines underpinned by ongoing
self-assessment reviews against regulatory standards and emerging
guidelines. The Group has strengthened its compliance with the IRB
requirements and has reflected upon the PRAs feedback to the
industry. The Group continues to engage with the regulator ahead of
commencing the formal application process. Underlying IRB
capabilities and disciplines have become progressively integrated
into the Group’s business planning, risk, capital, IT and data
management disciplines. In particular, enhanced IRB capabilities
have played a vital role in informing and shaping the Group’s
response to the rising costs of living and borrowing.
As the Group has embarked on an extensive programme of
digitalisation for its systems architecture and underlying business
processes, the Group has leveraged its risk and governance
framework to ensure the programme of activities are subject to
active identification, monitoring and escalation of risks. Active
engagement with key stakeholders based on defined outcomes, plans
and deliverables is central to the risk and governance disciplines.
In particular, the Group is assessing the risks in the context of
various change programmes, impact on business-as-usual activities
and transition from development into production.
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 2024
A heightened level of uncertainty remains around the UK economic
outlook and the operating environment for 2024 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 utilising the Group’s new stress
testing capability and wider analytical tools to improve risk-based
pricing, balance sheet management, capital planning and stress
testing
- Continue to embed the operational risk framework across the
Group and further enhance controls testing and assurance
activity
- Continue to enhance and embed Resolvability Assessment
Framework capabilities and carry out a fire drill to test those
capabilities
- Provide assurance to ensure the FCA’s Consumer Duty rules and
requirements are further embedded as planned
- Provide oversight across the embedding of the Group’s project
to enhance the Group’s arrears management processes
- Maintain oversight of capital management including the impact
of MREL and Basel 3.1, including the implications for capital
planning and asset pricing decisions
- Further embed IRB capabilities and disciplines within wider
risk management processes
- Continue to provide second line oversight of the funding
strategy and drive enhancements to sensitivity analysis around key
liquidity drivers
- Continue to provide second line oversight of the Group’s key
change programmes, including the digitalisation of the Group.
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
facilitates 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 provides a structured mechanism to align critical
components of an effective approach to risk management, linking
overarching risk principles to day-to-day risk identification,
assessment, mitigation, and monitoring activities.
The modular construct of the ERMF provides an agile approach
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 components 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 through an integrated
and effective ERMF.
4. Risk analytics - The Group uses quantitative analysis and
statistical modelling to help improve its business decisions.
5. 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.
6. Risk data and information technology - The maintenance of
high-quality risk information, along with the Group’s data
enrichment and aggregation capabilities, are central to the Risk
function’s objectives being achieved.
7. Risk 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.
8. Risk management information and reporting – The Group
established a comprehensive suite of risk Management Information
(MI) and reports covering all principal risk types.
9. Risk governance and function organisation - Risk governance
refers to the processes and structures established by the Board to
ensure that risks are assumed and managed within the Board-approved
risk appetite, with clear delineation between risk taking,
oversight and assurance responsibilities. The Group’s risk
governance framework is structured to adhere to the ‘three lines of
defence’ model.
10. 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 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 2023, 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 Internal Capital Adequacy Assessment Process
(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 (°C) 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 through 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 coastline 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 Assessment Procedure
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 least severe (RCP 2.6) and most
severe (RCP 8.5) climate scenarios.
By the 2030s, at the Group level, the percentage of properties
predicted to experience a flood is expected to increase from 0.51%
in the least severe scenario to 0.55% in the most severe scenario.
Both scenarios represent a low proportion of the Group’s loan
portfolios.
In 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 0.46% in the most severe
scenario. The outcome of both scenarios represents a low proportion
of the Group’s loan portfolios.
There are two elements to coastal erosion risk. The first
relates to the proximity of the property to the coast. The second
depends on whether the area in which the property is located is
likely to experience coastal erosion in the future.
Both Banks have over 92% of their portfolios more than 1,000
metres from the coastline, indicating a low coastal erosion risk
across the Group.
The OSB bank entity and CCFS bank each have 31 properties within
100 metres of a coastline likely to experience erosion in the
future.
c) Energy Performance Certificate profile
The EPC profile of both Bank entities follows a similar trend to
the national average. At the Group level 0.2% of properties have an
EPC of A, 14.2% have an EPC of B, 26.4% have an EPC of C, 45.7%
have an EPC of D, 12.1% with an EPC of E and negligible percentages
in F or G ratings. Over 95% 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
3.2–5.4°C 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 0.9–2.3°C
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 a
minimum EPC grade of C 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.
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
and regulatory 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 specialist
sub-sectors of the mortgage market, can adapt 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 ongoing macroeconomic uncertainty and its potential impact on
net interest income, affordability levels, house prices and
expected credit losses continue to present risk to the Group’s
performance in 2024.
1.2 Economic environment
The economic environment in the UK is an important factor impacting
the strategic and business risk profile. A macroeconomic downturn
may impact the credit quality of the Group’s existing loan
portfolios and may influence future business strategy as the
Group’s new business proposition becomes less attractive due to
lower returns.
Mitigation
The Group’s business model as a secured lender helps limit
potential credit risk losses and supports performance through the
economic cycle. The Group continues to utilise and enhance its
stress testing capabilities to assess and minimise potential areas
of macroeconomic vulnerability.
Direction: unchanged
Macroeconomic uncertainty will continue into 2024 with an ongoing
risk to the Group’s credit risk profile, including the possibility
of further falls in house prices, and an ongoing risk that changes
to the macroeconomic environment result in changes to customer
behaviours.
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 materially
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 including complaint volumes, Net Promoter Scores,
customer satisfaction results, social media and Trustpilot
feedback.
Direction: increased
The challenging macroeconomic environment in 2023 resulted in
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 continue to influence the Group’s reputational risk
profile.
Compliance and conduct risks remain elevated due to the
requirements in continuing to meet Consumer Duty regulation and
forecasted changes in interest rates resulting in increased numbers
of customer requests.
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 Financial Support
function 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 with higher
inflation and higher interest rates impacting affordability for
accounts and increasing 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 in 2023 was influenced by the backdrop of
rapidly rising interest rates and the potential for changing
customer behaviour. The macroeconomic outlook remains
uncertain.
A continued area of focus relates to the risks arising from
downward movements in interest rates. Falling interest rates may
create a risk to net interest income based on timing mismatches
between issuance of long term mortgages versus shorter term savings
products. In addition, this could result in early repayment charge
income not offsetting early swap breakage costs.
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 2023
due to its balance sheet structure.
Direction: unchanged
Basis risk exposures were unchanged in 2023 as the Group’s
exposures are broadly SONIA linked assets funded by Bank of England
Base Rate liabilities.
5. Liquidity and funding risk
The risk that the Group, although solvent, does not have sufficient
financial resources to enable it to meet its obligations as they
fall due.
Risk appetite statement: the Group will maintain sufficient
liquidity to meet its liabilities as they fall due under normal and
stressed business conditions; this will be achieved by maintaining
strong retail savings franchises, supported by high-quality liquid
asset portfolios comprised of cash and readily-monetisable assets,
and through access to pre-arranged secured funding facilities. The
Board requirement to maintain balance sheet resources sufficient to
survive a range of severe but plausible stress scenarios is
interpreted in terms of the liquidity coverage ratio and the
Internal Liquidity Adequacy Assessment Process (ILAAP) stress
scenarios.
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 the use
of deposit aggregators.
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: decreased
The Group’s funding levels and mix remained strong throughout the
year.
In 2023, OSB and CCFS were able to attract significant flows of new
deposits and depositors, despite the volatile interest rate
environment and a competitive savings market. Both banks were able
to proactively manage retail flows around peak maturity periods
without any reliance on unplanned wholesale actions.
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 completed one securitisation deal and two capital
issuances in 2023 and has a range of wholesale funding options,
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
Term Funding Scheme for Small and Medium-sized Enterprises (TFSME)
borrowing by the Group reduced to £3.3bn at the end of 2023 from
£4.2bn in 2022, with £900m of funding repaid during the year. The
Group has 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 through its strong franchises, to replace the
TFSME borrowing gradually over the next 18 months ahead of the
maturity of this funding.
Direction: decreased
TFSME borrowing decreased during the year; however, the current
funding plan to refinance TFSME requires securitisation issuance
which is dependant on the ongoing operation of capital markets.
These markets have remained open during 2023 despite volatility
seen in 2022; however, 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. The Group manages its capital resources in a
manner which avoids excessive leverage and allows 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 Group is required to meet its interim MREL requirement from
July 2024 which ensures the Group must consider its total loss
absorbing capacity requirement in addition to its existing capital
requirements.
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 await confirmation of the final rules in relation to the
implementation of Basel 3.1 standards.
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, including MREL requirements, 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.
Following the issuance of £400m of MREL qualifying debt
securities in January 2024, the Group met its interim MREL
requirement, including regulatory buffers.
Direction: unchanged
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 higher inflation and higher interest rates.
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 operates with a suite of detective controls to ensure
services between the business and its customers operate securely
with potential threats identified and mitigated as part of its IT
risk and control assessment. This is further supported by
documented and tested procedures intended to ensure the effective
response to a security breach.
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.
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 has an ongoing programme of penetration testing in
place to drive enhancements by identifying potential areas of
risk.
7.2 Data quality
The risks resulting from data of a poor quality being captured or
data not being maintained to a good standard.
Mitigation
The Group has a suite of data governance policies and procedures
along with dedicated resources to ensure the quality of data is
maintained at an appropriate standard.
Direction: unchanged
Progress was made in 2023 to embed Group-wide governance frameworks
with further work planned for 2024 to move closer to the Group’s
target end state, including further enhancements to the Group’s
risk appetite metrics and key risk indicators.
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 2023.
The Group made progress on its digitalisation journey, which
will enable it to meet the future needs of customers, brokers and
wider stakeholders, whilst delivering further operational
efficiencies.
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 the Group’s 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 hybrid
working arrangement.
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 through its
Purpose, Vision and Values driven behaviours.
The Group has a strategic commitment to provide simple,
customer-centric products. In addition, a Product Governance
framework is established to oversee that products are designed and
maintained to deliver good customer outcomes throughout the
product lifecycle.
The Group has an embedded Conduct Risk Management Framework
which clearly defines roles and responsibilities for conduct risk
management and oversight across the Group’s three lines of
defence.
Direction: increased
During 2023, as a result of the cost of living and cost of
borrowing crisis and changing customer and competitor behaviours,
the Group’s operations experienced high volumes of customer
contact.
Throughout 2023, the Group continued to review and evolve its
approach to supporting customers, particularly those that are
vulnerable and experiencing financial difficulty, to ensure they
continue to receive the level of tailored support needed to deliver
good customer outcomes.
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 requirements that
impact 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 consumer duty requirements and increased Resolvability
Assessment Framework requirements.
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
customer harm, 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
any new conduct regulations. The Group implemented the FCA’s
Consumer Duty requirements within the required timelines.
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 customer harm 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 harm
and prevent recurrence.
Direction: increased
The retail banking sector continues to be subject to heightened
levels of regulatory focus and change, particularly in relation to
conduct and customer outcomes. The Group actively assesses its
approach and exposure to meeting current and emerging regulatory
frameworks and remains cognisant of the potential risk of legacy
decisions being subject to future supervisory focus and
attention.
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.
The Group continues to review its approach to supporting
customers experiencing financial difficulty to ensure they continue
to receive the level of tailored support needed to deliver good
customer outcomes.
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 UK
registered bank accounts. 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 screens its customers on a regular basis against
sanctions listings acting swiftly to react to any updates released
in relation to the financial sanctions regime. Given the Group’s
customer target market, it has negligible exposure to any of the
affected jurisdictions and no exposure to any specific individual
or entity contained within 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.
Direction: unchanged
The Group continues to focus primarily on the UK market with
accounts serviced from UK bank accounts.
IT security risks continue to evolve and the level of maturity
of the Group’s controls and defences continues to be enhanced
whilst being 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 to detect and prevent
exposure to fraud throughout the customer lifecycle. At the point
of origination, all new applications are subject to a range of
controls to identify and mitigate the risk of fraud. Customer
behavioural and transactional activity is closely monitored to
identify potential suspicious behaviours or trends that may be
indicative of fraud.
All controls are supported by documented fraud related 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 rules and 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 cognisant of the external fraud environment in
which it operates and, in particular, the rise in the number of
customers falling victims to elaborate scams. Whilst the Group’s
product functionality restricts the level of direct exposure to
these types of events, the Group continues to look at options where
it can educate and support its customers and help prevent them from
becoming victims of this growing threat.
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 macro-economic uncertainty
The Group’s lending activity is predominantly focused in the United
Kingdom (with a legacy book of mortgages in the Channel Islands)
and, as such, will be impacted by any risks emerging from changes
in the UK’s macroeconomic environment. Higher inflation and
changing interest rates pose risks to the Group’s loan portfolio
performance.
Mitigation
The Group has mature and robust monitoring processes and through
various stress testing activities (i.e. ad hoc, risk appetite and
ICAAP) understands how the Group performs over a variety of
macroeconomic stress scenarios and has developed a suite of early
warning indicators, which are closely monitored to identify changes
in the economic environment. The Board and management review
detailed portfolio reports to identify any changes in the Group’s
risk profile.
Climate change
Regulatory expectations and industry best practices continue to
evolve and further work is required to enhance the Group’s approach
to managing climate risk. 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 2023, the Group further embedded its approach to climate
risk management, which included enhancing 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 the PRA’s Supervisory
Statement, ‘Model risk management principles for banks’, containing
proposed expectations regarding banks’ management of model
risk.
Mitigation
The Group has IRB compliant model risk management capabilities in
place. The Group conducted an initial self-assessment against the
new rules and has plans in place to ensure alignment even
though
compliance is not compulsory. The Group has extended model risk
management disciplines across End User Developed Applications.
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.
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 Basel 3.1 regulation. 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, through membership of UK Finance, inputs into upcoming
regulatory consultations.
Risk profile performance overview
Credit risk
During 2023 the Bank of England continued to increase interest
rates to moderate the ongoing elevated levels of inflation
experienced across the United Kingdom, which in turn adversely
impacted borrower and underlying tenant affordability levels.
Increased borrowing costs resulted in subdued property purchase
activity and consequent loan demand. Unemployment levels were also
adversely impacted but remained at low levels. The Group’s prudent
risk appetite and disciplined approach to credit risk management
supported robust credit profile performance during the year.
The Group observed strong demand for its loan products and
delivered organic originations of £4.7bn during the year (2022:
£5.8bn), despite subdued demand in the wider mortgage market.
Strong levels of lending were observed across the Group’s core
Buy-to-Let and residential first charge products, with the Group’s
renewed focus on bridging and semi commercial and commercial
mortgage lending resulting in higher origination
levels versus 2022.
The Group actively manages three key credit risk pillars
including; i) the customer’s propensity to repay and (ii) the
customer or tenant’s ability to maintain payments and (iii) the
underlying collateral or security provided to support the requested
lending and its ability to absorb adverse movements in values,
providing loss protection should a repayment default event
occur.
The credit score profile of new lending remained broadly stable
throughout the year, indicating that onboarded customers had strong
ability and propensity to make payments in the future.
Buy-to-Let interest coverage ratios for new lending were
impacted by the rising cost of borrowing during the year but
remained strong at 176% for OSB and 154% for CCFS (2022: 207% OSB
and 191% CCFS), demonstrating a healthy surplus in rental income
versus the required monthly repayment amount.
Strong origination and customer retention performance resulted
in underlying and statutory net loan book growth of 9% in the year
to £25.7bn and £25.8bn respectively (31 December 2022: £23.5bn and
£23.6bn), with the portfolio mix of lending broadly comparable
year-on-year.
Credit scoring metrics for existing loan balances remained
robust, with modest increases in future probability of default and
affordability scores observed as more customers migrated into
arrears and customers’ credit profiles were adversely impacted by
the increasing costs of living and borrowing.
The Group remains a fully secured lender with prudent lending
policies and criteria coupled with property value appreciation in
prior periods, ensuring that existing lending was well positioned
to absorb observed reductions in property values during 2023.
Weighted average LTV levels increased to 63% OSB and 65% CCFS
respectively as of 31 December 2023 (31 December 2022: OSB 58% and
CCFS 63%). The weighted average LTV profile remained prudent for
the Group at 64%, an increase from 60% at the end of 2022. The
Group maintains a low level of high LTV accounts with the
percentage of loans above 90% LTV at 4% for OSB Buy-to-Let and at
2% for OSB residential (31 December 2022: 3% for Buy-to-Let and 1%
for residential).
During 2023 the Group observed an increase in arrears levels
with balances over three months in arrears increasing to 1.4% of
the loan book as at 31 December 2023 (31 December 2022: 1.1%). For
OSB bank, arrears increased to 1.6% from 1.2% at the end of 2022
while for CCFS arrears increased to 1.2% from 0.9% at the end of
2022. The increased arrears were largely driven by the rising cost
of living and cost of borrowing, as accounts reverted onto higher
product interest rates and customers absorbed the rising costs of
day-to-day living.
At the Group level Buy-to-Let arrears levels remained lower than
UK Finance Buy-to-Let arrears trends, with year-on-year growth
broadly inline. The growth in greater than three months in arrears
residential mortgage balances remained higher than UK Finance, with
arrears growth marginally higher than UK
Finance trends, reflecting the higher proportion of near prime
lending versus the predominantly prime residential mortgage lending
captured within the UK Finance data.
The timelines for repossessing and selling properties continued
to be impacted by ongoing delays in the court hearing process.
The Group actively monitors performance against a set of
internal risk appetite and early warning indicators together with
wider benchmarked external data provided by third parties,
including UK Finance. During 2023 the Group’s arrears performance
operated inside of forecasted estimates, and prudent IFRS 9
provision coverage levels continued to be held to cover for
forecasted future losses.
During 2023 the Group observed a marked increase in the number
of forbearance measures requested by customers experiencing
financial difficulty, with 1,552 requests supported during 2023
versus 854 in the prior year. Again, this was driven by the rising
costs of living and borrowing. The balance of these forbearance
measures granted as of 31 December 2023 totalled £235m versus £88m
as of 31 December 2022. The most common solutions provided were
payment deferral, interest only switch, interest rate reduction and
term extension. The largest provision of forbearance was to
residential first charge mortgage holders.
Expected Credit Losses (ECL)
Balance sheet expected credit losses increased from £130.0m to
£145.8m as at 31 December 2023. The full year statutory impairment
charge of £48.8m represented a loan loss ratio of 20bps (2022:
£29.8m charge, 13bps loan loss ratio, respectively).
A summary of the key impairment charge drivers for 2023
included:
- Macroeconomic outlook – the Group regularly updates the
collateral values of properties which act as security against the
loans extended to customers and, in 2023, the Group observed a
reduction in property values. The Group continued to receive
regular macroeconomic scenario updates from its advisers, which
were reviewed and discussed by management and the Board, along with
the probability weightings applied to each scenario. As a result,
the cumulative impact of updated collateral values and revised
scenarios was a charge of £6.4m.
- Model and staging enhancements – enhancements were made to the
Group’s models to ensure that estimates continued to reflect actual
credit performance. Prior to each reporting period the Group’s
Significant Increase in Credit Risk (SICR) logic which determines
whether accounts not in arrears should be moved to stage 2 is
reviewed. These model adjustments made to reflect recent behaviour
had a cumulative charge of £2.1m.
- Post model adjustments – the Group continued to utilise post
model adjustments (PMAs) to ensure risks not captured by the
Group’s models were assessed and appropriate provisions continued
to be held. PMAs are primarily designed to capture the risk arising
from the heightened cost of living and borrowing by moving some
accounts to into Stage 2 even when the account is performing. PMA
adjustments made within the reporting period resulted in an
impairment release of £3.1m driven by updated views on the cost of
living and borrowing as inflation levels continued to decrease and
interest rates were forecast to have peaked.
- Arrears flow – growth in stage 3 balances resulted in a charge
of £14.1m which in part was driven by (i) accounts waiting to clear
the twelve-month probation period (ii) cross contingent defaults,
where a borrower has multiple facilities and, once a minimum
proportion of exposure in default has been exceeded, all accounts
are brought into default and (iii) late stage arrears levels
continuing to be elevated due to ongoing challenges with the
process of repossessing and selling properties.
- Changes in risk profile – as the Group’s loan book continued to
grow, provisions were raised against the incremental stage 1
balances resulting in a £7.8m impairment charge. Other changes to
the Group’s credit profile, including new accounts entering stage
2, resulted in a further charge of £14.1m.
- Individually assessed provisions – the Group’s specialist real
estate management and financial support teams maintain watchlists
of loans where objective evidence of impairment exists over a given
exposure. For these specific loans, a detailed assessment of the
collateral and circumstances of the arrears are assessed. When
required, an individual impairment provision will be raised using
this updated information which replaces any modelled provisions
held. During 2023, the Group raised a number of additional
individual provisions against a small number of counterparties
which in aggregate resulted in an impairment charge of £7.4m.
- Write off and recoveries – write-offs were elevated in 2023 due
to the write-off of the funding line receivable associated with the
2020 fraud case, following the successful sale of the remaining
security in line with our write-off policy. Write-offs did not form
part of the impairment charge for the year, as they were expensed
to the profit and loss in the periods when the provisions were
raised.
Impairment coverage levels were broadly flat compared to 31
December 2022, with cost of living and cost of borrowing further
embedded within the Group’s framework and models. The reduction in
stage 3 coverage ratios was driven by the write off of previously
reported fraudulent activity cases which were
fully provisioned.
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
As at 31 December 2023 |
Gross carrying amount
£m |
Expected credit losses
£m |
Coverage
ratio
£m |
Stage 1 |
20,576.8 |
22.4 |
0.11% |
Stage 2 |
4,537.9 |
54.3 |
1.20% |
Stage 3 (+ POCI) |
782.4 |
69.1 |
8.83% |
Total |
25,897.1 |
145.8 |
0.56% |
|
|
|
|
As at 31 December 2022 |
Gross carrying amount
£m |
Expected
credit losses
£m |
Coverage
ratio
£m |
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% |
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 over which the Group is exposed to the credit
risk of the asset is also undertaken.
IFRS 9 requires firms to calculate ECL provisions 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 into
their ECL calculations.
i. How macroeconomic variables and scenarios are
selected
As part of the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral
values is established. The Group adopted an approach which utilises
four
macroeconomic scenarios. These scenarios are provided by an
industry-leading economics advisory firm, that advises management
and the Board.
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 2023
Throughout 2023, 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 the subsequent rising
interest rates used 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 elevated levels 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 remain
symmetrical, where the upside and downside scenarios carry equal
weightings, and the base case has the highest probability. Details
relating to the scenarios utilised to set the 31 December 2023 IFRS
9 provision levels are provided in the table below.
Forecast macroeconomic variables over a five-year
period
Scenario |
Probability weighting
(%) |
Economic measure |
Scenario % |
|
Year end 2023 |
Year end 2024 |
Year end 2025 |
Year end 2026 |
Year end 2027 |
Base case |
40 |
GDP |
0.4 |
0.4 |
1.5 |
2.3 |
1.5 |
Unemployment |
4.4 |
4.6 |
4.2 |
3.9 |
3.8 |
House price growth |
(2.5) |
(7.0) |
(0.8) |
5.7 |
7.0 |
CPI |
4.6 |
2.1 |
1.6 |
1.2 |
1.8 |
Bank Base Rate |
5.3 |
4.9 |
3.8 |
2.8 |
1.8 |
Upside |
30 |
GDP |
0.4 |
3.1 |
2.5 |
2.9 |
1.6 |
Unemployment |
4.4 |
4.2 |
3.9 |
3.8 |
3.7 |
House price growth |
(2.5) |
(4.7) |
1.3 |
7.1 |
6.8 |
CPI |
4.6 |
3.4 |
2.2 |
1.2 |
1.7 |
Bank Base Rate |
5.3 |
6.0 |
5.1 |
4.1 |
3.1 |
Downside |
20 |
GDP |
0.4 |
(3.2) |
0.6 |
1.9 |
1.6 |
Unemployment |
4.4 |
6.3 |
7.0 |
7.0 |
6.7 |
House price growth |
(2.5) |
(12.3) |
(5.6) |
3.4 |
7.3 |
CPI |
4.6 |
0.5 |
0.9 |
1.1 |
1.7 |
Bank Base Rate |
5.3 |
3.6 |
2.6 |
1.6 |
1.3 |
Severe downside |
10 |
GDP |
0.4 |
(6.3) |
(0.3) |
1.4 |
1.6 |
Unemployment |
4.4 |
6.7 |
7.5 |
7.6 |
7.3 |
House price growth |
(2.5) |
(16.4) |
(9.9) |
1.1 |
7.7 |
CPI |
4.6 |
-0.1 |
0.5 |
1.3 |
1.2 |
Bank Base Rate |
5.3 |
2.6 |
1.5 |
0.5 |
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 for both the borrower and the Group.
Borrowers who are experiencing financial difficulties, either
pre-arrears or in arrears, enter a consultative process 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 is 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 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 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, Pillar 2A, CRD IV buffers, Board
and management buffers) are incrementally aggregated as a
percentage of available capital (CET1 and total capital).
The Group’s interim MREL requirements will apply from July 2024
and total loss absorbing capacity will be subject to a Board
approved risk appetite. All solvency planning and reporting will
consider this new loss absorbing capacity requirement along with
the Group’s existing capital requirements.
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 CET1 and total capital ratios reduced to
16.1% and 19.5%, respectively as at 31 December 2023 (31 December
2022: 18.3% and 19.7%, respectively) but remained significantly
above risk appetite. The Group’s leverage ratio was 7.5% as at 31
December 2023 (31 December 2022: 8.4%).
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 2023, 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
further increases in the Bank of England base rate. There were
delays in the market passing base rate rises on to savers in full
and the cost of new retail funding also benefitted from widening
swap spreads in the first half, although retail savings spreads
normalised in the second half.
Swap rate increases in 2023 also led to the Group receiving a
high level of variation margin collateral on the Group’s interest
rate swaps during the year. The Group increased internal buffers to
ensure that sufficient funds were held at the Bank of England to
meet any swap margin calls that may arise if swap rates reduce. By
the end of 2023, a significant proportion of the swap collateral
movement had reversed.
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 2023,
OSB had a liquidity coverage ratio of 208% (2022: 229%) and CCFS
139% (2022: 148%), and the Group LCR was 168% (2022: 185%), all
significantly above regulatory requirements.
Market risk
The Group is exposed to 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 its OSBI
subsidiary. 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 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. 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 operational risk identification
and assessment processes are established across the Group in a
consistent manner.
A hybrid working model has been adopted across the Group, with
the exception being front-line customer-facing colleagues. 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.
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 markets 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
good customer outcomes.
On an isolated basis, incidents can result in customer harm due
to human or operational failures. Where such incidents occur, they
are thoroughly investigated and the appropriate remedial actions
are taken to address any customer harm and to prevent
recurrence.
The Group considers effective conduct risk management to be a
product of the positive behaviour of all employees, influenced by a
customer-centric culture throughout the organisation and therefore
continues to promote a strong sense of awareness
and accountability.
Throughout 2023, the Group continued to review and evolve its
approach to supporting customers, particularly those that are
vulnerable and experiencing financial difficulty, to ensure they
continue to receive the level of tailored support needed to deliver
good customer outcomes. The Group implemented the FCA’s
Consumer Duty requirements within the required timelines.
Conduct losses have remained stable with no breaches of risk
appetite reported during the last 12 months.
Financial crime risk
The Group provides 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 Group’s share price and Net
Promoter Scores.
Viability statement
The Group’s 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, the
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. 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. The Group 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.
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, and
the 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 severities. 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 Group 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-eligible debt
instruments to meet its MREL requirements. The Board assessed the
uncertainty around the quantum and phasing of MREL issuance
resulting from the ongoing Basel 3.1 consultation.
The Group successfully issued its first £300m of MREL qualifying
debt securities plus £250m Tier 2 debt securities in 2023 followed
by a further issuance of £400m of MREL qualifying debt securities
in January 2024, following which, the Group met its interim MREL
requirement, including regulatory buffers.
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 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 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:
- creating a new Group-wide stress testing tool which simulates
the performance of the loan book through macroeconomic stresses
including impacts on balances, income, losses and RWAs
- increasing the diversification of its funding profile,
supported by an 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 and will be able to continue to
operate and meet its liabilities as they fall due over this
period.
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
14 March 2024
OSB GROUP PLC
Consolidated Statement of Comprehensive
Income
for the year ended 31 December 2023
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Interest
receivable and similar income |
3 |
1,767.0 |
1,069.3 |
Interest payable and similar charges |
4 |
(1,108.4) |
(359.4) |
Net
interest income |
|
658.6 |
709.9 |
Fair value
(losses)/gains on financial instruments |
5 |
(4.4) |
58.9 |
Other operating income |
6 |
3.9 |
6.6 |
Total
income |
|
658.1 |
775.4 |
Administrative
expenses |
7 |
(234.6) |
(207.8) |
Provisions |
34 |
(0.4) |
1.6 |
Impairment of
financial assets |
21 |
(48.8) |
(29.8) |
Integration
costs |
10 |
- |
(7.9) |
Profit before taxation |
|
374.3 |
531.5 |
Taxation |
11 |
(91.7) |
(121.5) |
Profit for the year |
|
282.6 |
410.0 |
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 |
16 |
(0.2) |
0.3 |
Amounts reclassified to profit or
loss for investment
securities at FVOCI |
|
- |
(0.7) |
Tax on items in other comprehensive
expense |
|
0.1 |
0.1 |
Revaluation of
foreign operations |
|
(0.8) |
(0.2) |
Other comprehensive expense |
|
(0.9) |
(0.5) |
Total comprehensive income for the
year |
|
281.7 |
409.5 |
Dividend, pence per share |
13 |
32.0 |
42.2 |
Earnings per share, pence per share |
|
|
|
Basic |
12 |
66.1 |
90.8 |
Diluted |
12 |
65.0 |
89.8 |
The above results are derived wholly from
continuing operations.
The notes on pages 68 to 159 form part of these
accounts.
The financial statements on pages 64 to 67 were
approved by the Board of Directors on 14 March 2024.
OSB GROUP PLC
Consolidated Statement of Financial Position
As at 31 December 2023
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Assets |
|
|
|
Cash in
hand |
|
0.4 |
0.4 |
Loans and
advances to credit institutions |
15 |
2,813.6 |
3,365.7 |
Investment
securities |
16 |
621.7 |
412.9 |
Loans and
advances to customers |
17 |
25,765.0 |
23,612.7 |
Fair value
adjustments on hedged assets |
23 |
(243.5) |
(789.0) |
Derivative
assets |
22 |
530.6 |
888.1 |
Other
assets |
24 |
27.6 |
15.0 |
Current
taxation asset |
|
0.6 |
1.7 |
Deferred
taxation asset |
25 |
3.9 |
6.3 |
Property,
plant and equipment |
26 |
43.8 |
40.9 |
Intangible
assets |
27 |
26.1 |
12.0 |
Total assets |
|
29,589.8 |
27,566.7 |
Liabilities |
|
|
|
Amounts owed
to credit institutions |
28 |
3,575.0 |
5,092.9 |
Amounts owed
to retail depositors |
29 |
22,126.6 |
19,755.8 |
Fair value
adjustments on hedged liabilities |
23 |
21.9 |
(55.1) |
Amounts owed
to other customers |
30 |
63.3 |
113.1 |
Debt
securities in issue |
31 |
818.5 |
265.9 |
Derivative
liabilities |
22 |
199.9 |
106.6 |
Lease
liabilities |
32 |
11.2 |
9.9 |
Other
liabilities |
33 |
39.6 |
38.7 |
Provisions |
34 |
0.8 |
0.4 |
Deferred
taxation liability |
35 |
6.3 |
22.3 |
Senior
notes |
36 |
307.5 |
- |
Subordinated
liabilities |
37 |
259.5 |
- |
Perpetual Subordinated Bonds |
38 |
15.2 |
15.2 |
|
|
27,445.3 |
25,365.7 |
Equity |
|
|
|
Share
capital |
40 |
3.9 |
4.3 |
Share
premium |
40 |
3.8 |
2.4 |
Other equity
instruments |
41 |
150.0 |
150.0 |
Retained
earnings |
|
3,330.2 |
3,389.4 |
Other reserves |
42 |
(1,343.4) |
(1,345.1) |
Shareholders’ funds |
|
2,144.5 |
2,201.0 |
Total equity and liabilities |
|
29,589.8 |
27,566.7 |
The notes on pages 68 to 159 form part of these
accounts. The financial statements on pages 64 to 67 were approved
by the Board of Directors on 14 March 2024 and signed on its behalf
by
Andy Golding
April Talintyre
Chief Executive
Officer
Chief Financial Officer
Company number: 11976839
OSB GROUP PLC
Consolidated Statement of Changes in Equity
For the year ended 31 December
2023
|
Share capital |
Share premium |
Capital redemption and transfer
reserve1 |
Own shares2 |
Foreign exchange reserve |
FVOCI reserve |
Share-based payment reserve |
Retained earnings |
Other equity instruments |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January
2022 |
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
Additional Tier 1 (AT1) securities |
- |
- |
- |
- |
- |
- |
- |
(9.0) |
- |
(9.0) |
Dividends
paid |
- |
- |
- |
- |
- |
- |
- |
(133.1) |
- |
(133.1) |
Share-based
payments |
- |
1.7 |
- |
- |
- |
- |
(0.2) |
8.4 |
- |
9.9 |
Own
shares2 |
- |
- |
- |
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 |
Profit for the
year |
- |
- |
- |
- |
- |
- |
- |
282.6 |
- |
282.6 |
Other
comprehensive expense |
- |
- |
- |
- |
(0.8) |
(0.2) |
- |
- |
- |
(1.0) |
Tax on items in other comprehensive expense |
- |
- |
- |
- |
- |
0.1 |
- |
- |
- |
0.1 |
Total
comprehensive (expense)/income |
- |
- |
- |
- |
(0.8) |
(0.1) |
- |
282.6 |
- |
281.7 |
Coupon paid on
AT1 securities |
- |
- |
- |
- |
- |
- |
- |
(9.0) |
- |
(9.0) |
Dividends
paid |
- |
- |
- |
- |
- |
- |
- |
(185.0) |
- |
(185.0) |
Share-based
payments |
- |
1.4 |
- |
- |
- |
- |
0.6 |
5.0 |
- |
7.0 |
Own
shares2 |
- |
- |
- |
1.2 |
- |
- |
- |
(1.2) |
- |
- |
Share
repurchase |
(0.4) |
- |
0.4 |
- |
- |
- |
- |
(151.6) |
- |
(151.6) |
Tax recognised
in equity |
- |
- |
- |
- |
- |
- |
0.4 |
- |
- |
0.4 |
At 31 December 2023 |
3.9 |
3.8 |
(1,354.7) |
(1.0) |
(2.1) |
0.2 |
14.2 |
3,330.2 |
150.0 |
2,144.5 |
- Comprises Capital redemption reserve of £0.6m (2022: £0.2m) and
Transfer reserve of £(1,355.3)m (2022: £(1,355.3)m).
- The Group has adopted look-through accounting (see note 1 c))
and recognised the Employee Benefit Trust (EBT) within OSBG.
Share capital and premium is disclosed in note 40 and the
reserves are further analysed in note 42.
OSB GROUP PLC
Consolidated Statement of Cash Flows
For the year ended 31 December
2023
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Cash flows from operating activities |
|
|
|
Profit before
taxation |
|
374.3 |
531.5 |
Adjustments
for non-cash and other items |
49 |
294.0 |
63.7 |
Changes in operating assets and liabilities |
49 |
(139.5) |
(24.2) |
Cash
generated from operating activities |
|
528.8 |
571.0 |
Net tax paid |
|
(103.6) |
(142.5) |
Net
cash generated from operating activities |
|
425.2 |
428.5 |
Cash
flows from investing activities |
|
|
|
Maturity and
sales of investment securities |
|
366.3 |
663.7 |
Purchases of
investment securities |
|
(664.3) |
(596.5) |
Interest
received on investment securities |
|
22.6 |
7.7 |
Purchases of property, plant and equipment and intangible
assets |
26,27 |
(25.8) |
(11.7) |
Net
cash from investing activities |
|
(301.2) |
63.2 |
Cash
flows from financing activities |
|
|
|
Financing
received |
39 |
1,328.6 |
429.5 |
Financing
repaid |
39 |
(1,430.3) |
(324.2) |
Interest paid
on financing |
39 |
(205.4) |
(45.3) |
Share
repurchase1 |
|
(152.4) |
(102.0) |
Coupon paid on
AT1 securities |
|
(9.0) |
(9.0) |
Dividends
paid |
13 |
(185.0) |
(133.1) |
Proceeds from
issuance of shares under employee Save As You Earn (SAYE)
schemes |
|
1.4 |
1.7 |
Repayments of principal portion of lease liabilities |
|
(2.0) |
(1.9) |
Net cash from financing activities |
|
(654.1) |
(184.3) |
Net (decrease)/increase in cash and cash
equivalents |
|
(530.1) |
307.4 |
Cash
and cash equivalents at the beginning of the year |
14 |
3,044.1 |
2,736.7 |
Cash and cash equivalents at the end of the
year |
14 |
2,514.0 |
3,044.1 |
Movement in cash and cash equivalents |
|
(530.1) |
307.4 |
- Includes £150.0m (2022: £100.0m) for shares repurchased, £0.8m
(2022: £0.7m) transaction costs and £1.6m (2022: £1.3m) incentive
fee.
OSB GROUP PLC
Notes to the Consolidated Financial Statements
For the year ended 31 December 2023
- Accounting policies
- 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 £0.1m (£m). Foreign operations are included in
accordance with the policies set out in this note.
The figures shown for the year ended 31 December
2023 are not statutory accounts within the meaning of section 435
of the Companies Act 2006. The statutory accounts for the year
ended 31 December 2023 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 2022 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.
- Going concern
The Board undertakes regular rigorous
assessments of whether the Group remains a going concern
considering current and potential future 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 levels 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
utilising a range of 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 utilising the
latest economic forecasts provided by the Group’s external economic
advisers. Reverse stress tests were run to identify combinations of
adverse movements in house prices and unemployment levels which
would result in the Group breaching its minimum regulatory and
total loss absorbing capital requirements. The reverse stress
testing also considered what macroeconomic scenarios would be
required for the Group to breach its interim 18% MREL requirement
in July 2024. The Directors assessed the likelihood of those
reverse stress scenarios occurring within the next 12 months and
concluded that the likelihood is remote.
- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the Internal Liquidity Adequacy
Assessment Process (ILAAP) stress scenarios.
- The Group continues to assess the resilience of its business
operating model and supporting infrastructure in the context of the
emerging economic, business and regulatory environment. The key
areas of focus continue to be the provision of the Group’s
Important Business Services, minimising the impact of any service
disruptions on the firm’s customers or the wider financial services
industry. 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
produced it’s 2023 self-assessment report, which confirmed
compliance with regulatory expectations, and that there were no
items identified that could threaten the Group’s viability over the
going concern assessment time horizon.
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).
- Accounting policies (continued)
The Board has therefore concluded that the Group
has sufficient financial resources and expected operational
resilience 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.
- Basis of consolidation
The Group accounts include the results of the Company and all
its subsidiary undertakings. 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.
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.
The Group is not deemed to control an entity
when it exercises power over an entity in an agency capacity. In
determining whether the Group is acting as an agent, the Directors
consider the overall relationship between the Group, the investee
and other parties to the arrangement with respect to the following
factors: (i) the scope of the Group’s decision-making power; (ii)
the rights held by other parties; (iii) the remuneration to which
the Group is entitled; and (iv) the Group’s exposure to variability
of returns. The determination of control is based on the current
facts and circumstances and is continuously assessed.
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,
the Group 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
Group 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.
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.
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.
In the Company’s financial statements,
investments in subsidiary undertakings are stated at cost less
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 on page
161.
- Accounting policies (continued)
- Foreign currency translation
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.
- 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 44 at a sub-segment level to provide detailed
analysis of the Group’s core lending business.
- 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 n) 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 n) 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 portfolio 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.
- Accounting policies (continued)
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.
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 AT1 securities are recognised
directly in equity in the period in which they are paid.
- 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
accrual basis as services are provided or on the performance of a
significant act, net of VAT and similar taxes.
- Integration costs
Integration costs are items of income or expense
arising from the merger of OSB and CCFS (the Combination) 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 costs are disclosed separately within the
Consolidated Statement of Comprehensive Income and the Notes to the
Consolidated Financial Statements.
- Taxation
Income tax comprises current and deferred tax.
It is recognised in profit or loss, other comprehensive income
(OCI) or directly in equity, consistent with the recognition of
items it relates to. The Group recognises tax on coupons paid on
AT1 securities directly in profit or loss.
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
asset 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.
The Company and its UK subsidiaries are in the
same VAT group.
- Accounting policies (continued)
- Dividends
Dividends are recognised in equity in the period
in which they are paid or, if earlier, approved by
shareholders.
- 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.
- 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.
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 Software-as-a-service (SaaS) arrangement
that is determined to be a service contract is recognised as an
expense or prepayment. 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. 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 at
least 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.
- Accounting policies (continued)
Intangible assets are amortised in profit or
loss over their estimated useful lives as follows:
Software licence
3-5 year straight line
Brand
4 year straight line
Broker relationships
5 year profile
Bank licence
3
year straight line
For development costs of assets that are under
construction, no amortisation is 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 an asset is different
from previous assessments, the amortisation period is changed
accordingly.
- 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
Fixtures & fittings, computer hardware and
vehicles 5 years
Leasehold improvements
Shorter of useful life or lease term
Land, deemed to be 25% of purchase price of
buildings, is not depreciated.
- Financial instruments
- 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 directly attributable to the
acquisition or issue of a financial instrument at FVTPL are
recognised in profit or loss as incurred.
- Accounting policies (continued)
- Classification
The Group classifies financial instruments based
on the business model and the contractual cash flow characteristics
of the financial instruments. In accordance with 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 reassesses its business models each
reporting period.
The Group classifies non-derivative financial
liabilities as measured at amortised cost.
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.
The Group’s sources of debt funding are deposits
from retail customers and credit institutions, including
collateralised loan advances from the Bank of England (BoE) under
the Term Funding Scheme with additional incentives for SMEs
(TFSME), asset-backed loan notes issued through the Group’s
securitisation programmes, subordinated liabilities and senior
notes. Cash received under the TFSME is recorded in amounts owed to
credit institutions. Financial liabilities including the Sterling
Perpetual Subordinated Bonds (PSBs) and Tier 2 instruments where
the terms allow no absolute discretion over the payment of
interest.
During the year equity financial instruments
comprised own shares and AT1 securities. 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.
Accordingly, the coupons paid on AT1 securities are recognised
directly in retained earnings when paid.
- Derecognition
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.
- Accounting policies (continued)
- Offsetting
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.
- 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.
- Fair value measurement
Fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date in
the principal or, in its absence, the most advantageous market to
which the Group has access at that date.
When available, the Group measures the fair
value of an instrument using the quoted price in an active market
for that instrument. A market is regarded as active if transactions
for the asset or liability take place with sufficient frequency and
volume to provide pricing information on an ongoing basis. The
Group measures its investment securities and 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. 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.
- Accounting policies (continued)
- 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. The individual
assessments are carried out for all the loans associated with one
counterparty.
The Group estimates cash flows from these loans,
including expected interest and principal payments, rental or sale
proceeds, selling and other costs.
For all individually assessed loans, 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.
The Group applies a modelled assessment to all
loans with no individually assessed provision.
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation
of ECL are unbiased and probability weighted. 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 and absolute PD thresholds and a
suite of qualitative triggers.
- Accounting policies (continued)
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
analyse relative and absolute 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 some 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.
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 House Price Index (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 expected
scenarios, management actions and results are discussed and
approved by the Board.
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.
- Accounting policies (continued)
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.
Write-off
Loans are written off against the related
provision when the underlying security is sold and there is a
shortfall amount remaining. Subsequent recoveries of amounts
previously written off are taken through profit and loss. Accounts
that are derecognised for accounting purposes will continue to be
serviced and corresponding collection procedures are only
discontinued following approval from the Group Chief Credit
Officer.
Intercompany loans
Intercompany receivables in the Company
financial statements are assessed for ECL based on an assessment of
the PD and LGD, discounted to a net present value.
Other financial assets
Other financial assets comprise cash balances
with the BoE and other credit institutions and high grade
investment securities. The Group deems the likelihood of default
across these counterparties as low and does not recognise a
provision against the carrying balances.
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 the nominal value of £0.01
for each share cancelled.
o.
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.
- Accounting policies (continued)
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 TFSME and ILTR schemes 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 and ILTR 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 include 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.
- 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 classified on an individual basis as
amortised cost, FVOCI or FVTPL.
- Sale and repurchase agreements
Financial assets sold subject to repurchase
agreements (repo) continue to be recognised in the financial
statements if they fail the derecognition criteria of IFRS 9
described in paragraph n) 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.
- Derivative financial instruments
The Group uses derivative financial instruments
(interest rate swaps) to manage its exposure to interest rate risk.
The Group does not hold or issue derivative financial instruments
for proprietary trading.
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.
- Accounting policies (continued)
- 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.
The hedging strategy of the Group is divided
into portfolio hedges, where the hedged item is a homogenous
portfolio of assets (mortgage lending) or liabilities (savings
products), and micro hedges, where the hedged item is a distinctly
identifiable asset or liability (debt issuance). The Group applies
fair value hedge accounting for both its portfolio and micro
hedges.
- Portfolio hedges
Portfolio hedge accounting allows for hedge
effectiveness testing and accounting over an entire portfolio of
financial assets or liabilities. 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.
- Micro hedges
The Group’s micro hedging strategy entails hedge
accounting on an individual instrument-by-instrument basis, which
in some instances may be implemented through partial term fair
value hedging where the instrument may be exercised early. The
Group applies fair value micro hedge accounting to manage its
exposure to the interest rate risk arising from some of its fixed
rate debt issuances. Interest rate swaps are assigned to specific
issuances of fixed rate notes with terms that closely align with
the hedged item.
- Hedge effectiveness
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 mismatch in the swap interest rate and rate used to value
the hedged item where the swap rate is higher than the contractual
rate of the hedged item.
- Accounting policies (continued)
Where there is an effective hedge relationship
for fair value hedges, the Group recognises the change in fair
value of each hedged item in profit or loss with the cumulative
movement in their value being shown separately in the Consolidated
Statement of Financial Position as fair value adjustments on hedged
assets and liabilities. The fair value changes of both the
derivative and the hedge substantially offset each other to reduce
profit volatility.
The Group discontinues hedge accounting when the
derivative ceases through expiry, when the derivative is cancelled
or the underlying hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for
hedge accounting or is cancelled whilst still effective, including
LIBOR-linked derivatives cancelled as a result of IBOR reforms, the
fair value adjustment relating to the hedged assets or liabilities
within the hedge relationship prior to the derivative becoming
ineffective or being cancelled remains on the Consolidated
Statement of Financial Position and is amortised over the remaining
life of the hedged assets or liabilities. The rate of amortisation
over the remaining life is in line with expected income or cost
generated from the hedged assets or liabilities. Each reporting
period, the expectation is compared to actual with an accelerated
run-off applied where the two diverge by more than set
parameters.
- 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 credit rating of the swap
counterparty, time to maturity, the fair value of the swap and any
collateral arrangements.
- 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.
- 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.
- 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.
- Accounting policies (continued)
The cost of the awards is 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.
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.
- Leases
The Group’s leases are predominantly for offices
and Kent Reliance branches where the Group is a lessee. At lease
commencement date, the Group recognises the right-of-use asset and
lease liability on the statement of financial position, except for
leases of low-value assets and short-term leases of 12 month or
less are recognised directly in profit or loss on a straight-line
basis over the lease term.
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 profit or loss.
- Accounting policies (continued)
- Adoption of new standards
International financial reporting
standards issued and adopted for the first time in the year ended
31 December 2023
The 2023 financial statements incorporate the
guidance set out in Disclosure of Accounting Policies
(Amendments to IAS 1) which requires entities to disclose
‘material’ rather than ‘significant’ accounting policies.
Accordingly, Note 1 has been amended to remove general IFRS
guidance so that disclosures focus on entity-specific accounting,
areas of significant judgement or assumptions and material
transactions where the accounting required is complex.
The Group has applied the temporary exception
issued by the International Accounting Standards Board (IASB) in
May 2023 from the accounting requirements for deferred taxes in IAS
12 ‘Income Taxes’. Accordingly, the Group neither recognises nor
discloses information about deferred tax assets and liabilities
related to Pillar 2 income taxes. There were a number of other
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 2023 have
not been early adopted by the Group. The adoption of these
amendments is not expected to have a material impact on the
financial statements of the Group in future periods.
- 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 Risk review on page 48,
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. As part of the Group's
recognition of climate risk and overall ESG agenda, the Group
considers the physical risks of climate change with the removal of
the transitional risk to reflect Government's decision to postpone
the EPC Climate Bill. The transitional risk was the most
significant component of the PMA that considered properties with
lower energy efficiency likely to require investment to reach
minimum energy efficiency standards, and has such resulted in the
reduction in the PMA where the Group held £0.5m (2022: £4.4m).
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:
- 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.
- 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 assessed 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 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 £13.7m (2022: £14.6m) that is recognised
at FVTPL.
- Judgements in applying accounting policies
and critical accounting estimates (continued)
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:
- 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
£145.8m (2022: £130.0m) at the reporting date as disclosed in note
20.
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 an 8%
haircut (2022: 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 an 8% house price haircut (2022: a 10% house price haircut)
being directly applied to all exposures which not only adjust the
sale discount but the propensity to go to possession.
|
2023 |
2022 |
|
£m |
£m |
OSB |
25.6 |
28.0 |
CCFS |
11.6 |
10.7 |
Group |
37.2 |
38.7 |
The Group’s forecasts of HPI movements used in
the impairment models are disclosed in the Risk profile performance
review on page 50.
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 Group has adopted an approach which utilises
four macroeconomic scenarios. These scenarios are provided by a
reputable economics advisory firm, providing 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 on page 50.
The following tables detail the ECL scenario
sensitivity analysis with each scenario weighted at 100%
probability. The sensitivity analysis is performed without
considering the staging shifts driven by relative or absolute PD
thresholds. The purpose of using multiple economic scenarios is to
model the non-linear impact of assumptions surrounding
macroeconomic factors and ECL calculated:
- Judgements in applying accounting policies
and critical accounting estimates (continued)
As at 31-Dec-23 |
Weighted (see note 20) |
100% Base case scenario |
100% Upside scenario |
100% Downside scenario |
100% Severe downside scenario |
Total loans
before provisions, £m |
25,897.1 |
25,897.1 |
25,897.1 |
25,897.1 |
25,897.1 |
Modelled ECL,
£m |
97.2 |
76.8 |
60.5 |
138.1 |
206.8 |
Individually
assessed provisions ECL, £m |
25.1 |
25.1 |
25.1 |
25.1 |
25.1 |
Post Model Adjustments ECL, £m |
23.5 |
18.3 |
12.9 |
34.4 |
55.0 |
Total ECL, £m |
145.8 |
120.2 |
98.5 |
197.6 |
286.9 |
ECL coverage, % |
0.56 |
0.46 |
0.38 |
0.76 |
1.11 |
|
|
|
|
|
|
As at 31-Dec-22 |
|
|
|
|
|
Total loans
before provisions, £m |
23,728.1 |
23,728.1 |
23,728.1 |
23,728.1 |
23,728.1 |
Modelled ECL,
£m |
54.4 |
41.7 |
32.8 |
79.3 |
120.0 |
Individually
assessed provisions ECL1, £m |
45.8 |
45.8 |
45.8 |
45.8 |
45.8 |
Post Model Adjustments ECL1, £m |
29.8 |
20.9 |
15.5 |
46.4 |
75.2 |
Total ECL, £m |
130.0 |
108.4 |
94.1 |
171.5 |
241.0 |
ECL coverage, % |
0.55 |
0.46 |
0.40 |
0.72 |
1.02 |
- Individually assessed provisions and post model adjustments are
split out in the current year with the related sensitivity
reflected for the post model adjustments under each scenario. In
the prior year, this was included collectively as 'Non-modelled
ECL'.
- 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, a
SONIA/Base rate plus a margin for the Precise brand and a LIBOR
replacement rate/Base rate for the Interbay 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 estimating the expected
average life of a mortgage, to determine the quantum and timing of
prepayments that incur ERCs, the period over which net fee income
is recognised and the time customers spend on reversion. Estimates
are reviewed regularly, and over the first half of 2023 the Group
observed a step change in how long Precise customers were spending
on the reversion rate. As the Bank of England base rate (BBR)
continued to rise, customers saw steep increases in the BBR-linked
reversion rate. As the Group has continued to develop its Precise
retention programme, customers chose to refinance earlier and spend
less time on the higher reversion rate, compared to previously
observed behavioural trends. There was no further material change
in behaviour observed in the second half of 2023 and the total
adverse Group statutory adjustment for 2023 was £210.7m (2022:
£31.6m adverse) decreasing net interest income and loans and
advances to customers.
- Judgements in applying accounting policies
and critical accounting estimates (continued)
A three months’ movement in the weighted average
time spent in the reversion period for Precise is considered to be
a reasonably possible change in assumption in a sustained high
interest rate environment and an uncertain macroeconomic outlook.
The impact of a -/+ 3 months movement in time spent on reversion by
Precise Mortgages customers is -/+c.£82m.
As the BBR increased during 2023, the additional
monthly net interest income arising from following the effective
interest rate approach increased as the impact of time spent on a
reversion rate became greater. If BBR decreases this will lead to a
decrease in monthly net interest income. Based on the loans and
advances to customers balance as at 31 December 2023, if BBR were
to reduce by 50bps it is estimated that this would decrease monthly
net interest income by £1.2m across Precise and Kent Reliance
Mortgages.
- Interest receivable and similar income
|
2023 |
2022 |
|
£m |
£m |
At
amortised cost: |
|
|
On OSB
mortgages1 |
757.6 |
591.6 |
On CCFS
mortgages2 |
431.1 |
411.2 |
On finance
leases |
12.3 |
9.4 |
On investment
securities |
12.5 |
4.7 |
On other
liquid assets |
159.6 |
39.3 |
Amortisation
of fair value adjustments on CCFS loan book at Combination |
(57.4) |
(61.5) |
Amortisation of fair value adjustments on hedged
assets3 |
(2.6) |
(34.1) |
|
1,313.1 |
960.6 |
At
FVTPL: |
|
|
Net income on
derivative financial instruments - lending activities |
442.8 |
106.6 |
At
FVOCI: |
|
|
On investment
securities |
11.1 |
2.1 |
|
1,767.0 |
1,069.3 |
- Includes EIR behavioural related reset gains of £1.0m (2022:
£18.5m gains).
- Includes EIR behavioural related reset losses of £182.5m (2022:
£41.7m losses).
- The amortisation relates to hedged assets where the hedges were
terminated before maturity and were effective at the point of
termination.
- Interest payable and similar charges
|
2023 |
2022 |
|
£m |
£m |
At
amortised cost: |
|
|
On retail
deposits |
762.3 |
257.7 |
On BoE
borrowings |
196.5 |
64.8 |
On wholesale
borrowings |
29.9 |
3.9 |
On debt
securities in issue |
21.5 |
7.7 |
On
subordinated liabilities |
17.1 |
1.1 |
On senior
notes |
9.1 |
- |
On PSBs |
0.7 |
0.7 |
On lease
liabilities |
0.2 |
0.2 |
Amortisation
of fair value adjustments on CCFS customer deposits at
Combination |
(0.5) |
(1.0) |
Amortisation of fair value adjustments on hedged
liabilities1 |
(0.6) |
(0.8) |
|
1,036.2 |
334.3 |
At
FVTPL: |
|
|
Net expense on
derivative financial instruments - savings activities |
71.5 |
25.1 |
Net expense on
derivative financial instruments - subordinated liabilities and
senior notes |
0.7 |
- |
|
1,108.4 |
359.4 |
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 (losses)/gains on financial
instruments
|
2023 |
2022 |
|
£m |
£m |
Fair value
changes in hedged assets |
580.3 |
(620.6) |
Hedging of
assets |
(590.2) |
621.9 |
Fair value
changes in hedged liabilities |
(82.7) |
33.0 |
Hedging of liabilities |
94.6 |
(42.4) |
Ineffective
portion of hedges |
2.0 |
(8.1) |
Net
(losses)/gains on unmatched swaps |
(11.1) |
57.1 |
Amortisation
of inception adjustments1 |
(4.3) |
1.2 |
Amortisation
of acquisition-related inception adjustments2 |
6.4 |
10.2 |
Amortisation
of de-designated hedge relationships3 |
- |
(0.1) |
Fair value
movements on mortgages at FVTPL |
0.6 |
(0.9) |
Fair value
movements on loans and advances to credit institutions at
FVTPL |
0.5 |
- |
Debit and credit valuation adjustment |
1.5 |
(0.5) |
|
(4.4) |
58.9 |
- 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 on
derivative instruments previously taken out against new retail
deposits.
- 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.
- Relates to the amortisation of hedged items where hedge
accounting has been discontinued due to ineffectiveness.
- Other operating income
|
2023 |
2022 |
|
£m |
£m |
Interest
received on mortgages held at FVTPL |
0.9 |
0.6 |
Fees and
commissions receivable |
3.0 |
6.0 |
|
3.9 |
6.6 |
- Administrative expenses
|
2023 |
2022 |
|
£m |
£m |
Staff
costs |
122.2 |
109.3 |
Facilities
costs |
7.9 |
6.4 |
Marketing
costs |
5.8 |
4.5 |
Support
costs |
43.0 |
31.2 |
Professional
fees |
32.9 |
30.2 |
Other
costs |
10.9 |
12.8 |
Depreciation
(see note 26) |
6.2 |
5.2 |
Amortisation
(see note 27) |
5.7 |
8.2 |
|
234.6 |
207.8 |
Included in professional fees are amounts paid
to the Company’s auditor as follows:
|
2023 |
2022 |
|
£'000 |
£'000 |
Fees payable
to the Company's auditor for the audit of the Company's annual
accounts |
81 |
75 |
Fees payable to the Company's auditor for the audit of the accounts
of subsidiaries |
3,788 |
3,340 |
Total audit fees |
3,869 |
3,415 |
Audit-related
assurance services1 |
487 |
254 |
Other
assurance services2 |
366 |
259 |
Other
non-audit services3 |
42 |
33 |
Total non-audit fees |
895 |
546 |
Total fees payable to the Company's auditor |
4,764 |
3,961 |
- Includes review of interim financial information and profit
verifications.
- Costs comprise assurance reviews of Alternative Performance
Measures (APMs), Environmental, social and governance (ESG) and
European Single Electronic Format (ESEF) tagging (2022: assurance
reviews of APMs, ESG and ESEF tagging).
- Costs in 2023 and 2022 primarily comprise work related to the
Euro Medium Term Note (EMTN) programme.
- Administrative expenses
(continued)
Staff costs comprise the following:
|
2023 |
2022 |
|
£m |
£m |
Salaries,
incentive pay and other benefits |
101.2 |
87.3 |
Share-based
payments |
5.6 |
8.1 |
Social
security costs |
10.5 |
9.5 |
Other pension costs |
4.9 |
4.4 |
|
122.2 |
109.3 |
The average number of people employed by the
Group (including Executive Directors) during the year is analysed
below.
|
2023 |
2022 |
UK |
1,461 |
1,274 |
India |
811 |
622 |
|
2,272 |
1,896 |
- Directors' emoluments and transactions
|
2023 |
2022 |
|
£'000 |
£'000 |
Short-term
employee benefits1 |
3,207 |
3,213 |
Post-employment benefits |
114 |
109 |
Share-based
payments2 |
1,421 |
2,291 |
|
4,742 |
5,613 |
- 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.
- 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
£642k (2022: £642k) in the form of shares.
- Directors' emoluments and
transactions (continued)
The Executive Directors received a further share
award under the Performance Share Plan (PSP) with a grant date fair
value of £1,592k (2022: £1,516k) using a share price of £4.98
(2022: £5.58) (the mid-market quotation on the day preceding the
date of grant). These shares vest annually from year three in
tranches of 20 per cent, subject to performance conditions
discussed in note 9 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 2023 and 2022.
There were no outstanding loans granted in the
ordinary course of business to Directors and their connected
persons as at 31 December 2023 and 2022.
The Annual Report on Remuneration and note 9
Share-based payments provide further details on Directors’
emoluments.
- Share-based payments
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 7
Administrative expenses.
A summary of the share-based schemes operated by
the Group is set out below.
Sharesave Scheme
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
£10 and £500 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
DSBP awards are granted to Executive Directors and certain senior
managers to allow a portion of their performance bonuses to be
deferred in shares for up to three to seven years for Executive
Directors and typically 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
PSP awards are typically made annually at the discretion of the
Group Remuneration and People Committee with Executive Directors
and certain senior managers being eligible for awards. The vesting
of PSP awards is determined based on a mixture of internal
financial performance targets, risk based measures, and relative
total shareholder returns (TSR) with awards vesting in tranches up
to three to seven years.
- Share-based payments
(continued)
The performance conditions that apply to PSP
awards from 2020 are based on a combination of weighting earnings
per share (EPS) at 35%, TSR at 35%, risk-based at 15% and return on
equity (ROE) at 15%. Prior to 2020, PSP awards were based on a
combination weighting of EPS at 40%, TSR at 40% and ROE at 20%. The
PSP conditions are assessed independently. The EPS element assesses
the EPS growth rate over the performance period. For the TSR
element, the performance of the Company’s ordinary shares is
measured against the constituents of the FTSE 250 (excluding
investment trusts). The risk-based measure is assessed against the
risk management performance with regard to all relevant risks. For
the ROE element, performance is assessed based on the Group’s
underlying profit after taxation as a percentage of average
shareholders’ equity.
The share-based payment expense during the year
comprised the following:
|
2023 |
2022 |
|
£m |
£m |
Sharesave
Scheme |
0.9 |
0.6 |
Deferred Share
Bonus Plan |
3.0 |
4.2 |
Performance
Share Plan |
1.7 |
3.3 |
|
5.6 |
8.1 |
Movements in the number of share awards and
their weighted average exercise prices are set out below:
|
Sharesave Scheme |
|
Deferred Share Bonus Plan |
|
Performance
Share Plan |
|
Number |
Weighted average exercise price, £ |
|
Number |
|
Number |
At 1 January
2023 |
2,147,972 |
3.08 |
|
763,390 |
|
5,391,269 |
Granted |
1,851,510 |
2.72 |
|
652,227 |
|
2,381,500 |
Exercised/Vested |
(729,619) |
2.31 |
|
(518,524) |
|
(568,782) |
Forfeited |
(468,276) |
3.90 |
|
(1,931) |
|
(456,719) |
At 31 December 2023 |
2,801,587 |
2.91 |
|
895,162 |
|
6,747,268 |
Exercisable at: |
|
|
|
|
|
|
31 December 2023 |
200,676 |
2.31 |
|
- |
|
- |
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 |
|
- |
|
- |
- Share-based payments
(continued)
For the share-based awards granted during the
year, the weighted average grant date fair value was 275 pence
(2022: 396 pence).
The range of exercise prices and weighted
average remaining contractual life of outstanding awards are as
follows:
|
2023 |
2022 |
Exercise price |
Number |
Weighted average remaining contractual life
(years) |
Number |
Weighted average remaining contractual life (years) |
Sharesave Scheme |
|
|
|
|
229 - 429
pence (2022: 229 - 429 pence) |
2,801,587 |
2.3 |
2,147,972 |
1.8 |
Deferred Share Bonus Plan |
|
|
|
|
Nil |
895,162 |
1.1 |
763,390 |
0.9 |
Performance Share Plan |
|
|
|
|
Nil |
6,747,268 |
2.5 |
5,391,269 |
2.7 |
|
10,444,017 |
2.3 |
8,302,631 |
2.3 |
Sharesave Scheme
|
|
2023 |
2022 |
2021 |
2020 |
2019 |
2018 |
2017 |
Contractual
life, years |
|
3 |
3 |
3 |
3 |
5 |
3 |
5 |
5 |
5 |
Share price at
issue, £ |
|
3.40 |
5.36 |
5.13 |
2.86 |
2.86 |
3.32 |
3.32 |
4.19 |
3.93 |
Exercise
price, £ |
|
2.72 |
4.29 |
3.96 |
2.29 |
2.29 |
2.65 |
2.65 |
3.35 |
3.15 |
Expected
volatility, % |
|
46.5 |
31.4 |
37.9 |
57.6 |
57.6 |
31.9 |
31.9 |
16.5 |
17.3 |
Risk-free
rate, % |
|
4.8 |
5.3 |
1.3 |
0.1 |
0.2 |
0.8 |
0.8 |
1.4 |
1.2 |
Dividend
yield, % |
|
9.9 |
7.3 |
4.5 |
3.3 |
3.3 |
4.8 |
4.8 |
4.4 |
4.1 |
Grant date fair value, £ |
|
0.85 |
0.68 |
1.46 |
1.22 |
1.34 |
0.90 |
0.91 |
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.
- Risk-free rate – based on long-term Government bonds.
- Dividend yield – based on the average dividend yield across
external analyst reports for the quarter prior to scheme grant
date.
- Share-based payments
(continued)
Deferred Share Bonus Plan
|
|
|
|
|
|
|
|
2020 |
2019 |
2017 |
Contractual life, years |
|
|
|
|
|
|
3 |
3 |
5 |
Mid-market share price, £ |
|
|
|
|
|
|
2.58 |
3.96 |
4.04 |
Attrition rate, % |
|
|
|
|
|
|
- |
8.4 |
11.8 |
Dividend yield, % |
|
|
|
|
|
|
5.6 |
4.7 |
4.0 |
Grant date fair value, £ |
|
|
|
|
|
|
2.21 |
3.47 |
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
Non-market performance conditions also 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 the portion of awards that is
subject to market conditions (i.e. the relative TSR element of the
PSP) is determined at the grant date using a Monte Carlo model.
The inputs into the models are as follows:
|
|
|
|
|
|
2023 |
2022 |
2021 |
2020 |
2019 |
Contractual
life, years |
|
|
|
|
|
3-7 |
3-7 |
3-7 |
3-7 |
3 |
Mid-market share price, £ |
|
|
|
|
5.01 |
5.58 |
4.94 |
2.58 |
3.96 |
Attrition
rate, % |
|
|
|
|
|
6 |
6.9 |
12.8 |
7.3 |
8.4 |
Expected
volatility, % |
|
|
|
|
|
35.4 |
37.4 |
59.5 |
43.9 |
26.8 |
Dividend
yield, % |
|
|
|
|
|
8.7 |
4.7 |
3.8 |
5.6 |
4.7 |
Vesting rate -
TSR % |
|
|
|
|
|
62.7 |
32.3 |
40.8 |
27.8 |
44.9 |
Grant date fair value, £ |
|
|
|
|
|
3.08 |
4.64 |
4.26 |
2.06 |
3.47 |
- Integration costs
|
2023 |
2022 |
|
£m |
£m |
Consultant
fees |
- |
4.9 |
Staff
costs |
- |
3.0 |
|
- |
7.9 |
At Combination in October 2019, the Group
announced a quantified financial benefits statement for meaningful
cost synergies to be achieved by the third anniversary of the
Combination. Following the third anniversary in October 2022, the
Group ceased recognising expenses as integration related.
The 2022 consultant fees related to advice on
the Group’s future operating structure and staff costs related to
personnel who had left the Group through the transition of
operations to the new operating model.
- 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:
|
2023 |
2022 |
|
£m |
£m |
Corporation
tax |
105.7 |
141.4 |
Corporation
taxation - prior year adjustments |
(0.4) |
(0.9) |
Total current tax |
105.3 |
140.5 |
|
|
|
Deferred tax |
|
|
Deferred
taxation |
0.7 |
(1.2) |
Deferred
taxation - prior year adjustments |
- |
(0.3) |
Release of
deferred tax on CCFS Combination1 |
(14.3) |
(17.5) |
Total deferred tax |
(13.6) |
(19.0) |
|
|
|
Total tax charge |
91.7 |
121.5 |
- 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 £(14.3)m (2022: £(17.5)m which included £(4.7)m from the
bank surcharge decrease).
- Taxation (continued)
The charge for taxation on the Group's profit
before taxation differs from the charge based on the weighted
average standard rate of UK Corporation Tax of 23.5% (2022: 19%) as
follows:
|
2023 |
2022 |
|
£m |
£m |
Profit before taxation |
374.3 |
531.5 |
Profit
multiplied by the standard rate of UK Corporation Tax 23.5% (2022:
19%) |
88.0 |
101.0 |
Bank
surcharge1 |
8.4 |
30.2 |
Taxation effects of: |
|
|
Expenses not
deductible for taxation purposes |
0.3 |
0.5 |
Securitisation
profits not taxable2 |
(2.5) |
(2.2) |
Timing
differences on capital items |
(0.8) |
(0.4) |
Utilisation of
brought forward tax losses |
(0.3) |
(0.3) |
Tax
adjustments in respect of share based payments |
0.4 |
0.3 |
Fair value
adjustments on acquisition amounts3 |
14.3 |
14.0 |
Adjustments in
respect of earlier years |
(0.4) |
(0.9) |
Tax on coupon
paid on AT1 securities4 |
(2.1) |
(1.7) |
Total current tax charge |
105.3 |
140.5 |
|
|
|
Movements in
deferred taxes |
0.7 |
(0.8) |
Deferred
taxation - prior year adjustments |
- |
(0.3) |
Release of
deferred taxation on CCFS Combination3 |
(14.3) |
(12.8) |
Impact of
deferred tax rate change |
- |
(5.1) |
Total tax charge |
91.7 |
121.5 |
1. Tax charge for the two
banking entities of £9.6m (2022: £34.3m) offset by the tax impact
of unwinding CCFS Combination items of £2.2m (2022: £4.1m).
2. Securitisation companies are taxed in
accordance with the Taxation of Securitisation Companies Regulation
2006, such that they are subject to tax on their retained profits
rather than their tax adjusted profit before tax.
3. The unwinding of the fair value adjustments of
the CCFS assets and liabilities acquired as part of the CCFS
combination are not deductible for tax purposes. A deferred tax
liability has been recognised in relation to these amounts which is
released as they unwind.
4. The Group has issued AT1 capital instruments
that are classified as Hybrid Capital Instruments (‘HCI’) for tax
purposes. The coupons paid under HCI are deductible under UK tax
legislation despite being charged to equity.
Factors affecting tax charge for the year
From 1 April 2023, the corporation tax rate in
the UK increased from 19% to 25%, the bank surcharge rate decreased
from 8% to 3% and the bank surcharge allowance (the level of
taxable profits above which are subject to the surcharge) increased
from £25m to £100m. Therefore, for year ended 31 December 2023 the
main rate of corporation tax is 23.5%, the bank surcharge rate is
4.25% and the bank surcharge allowance is £81.3m.
- Taxation (continued)
The effective tax rate for the year ended 31
December 2023, excluding the impact of adjustments in respect of
earlier years and the deferred tax rate change, was 24.6% (2022:
24.0%). This is higher than the standard rate of UK corporation
tax, principally due to the impact of the bank surcharge payable by
the two banking entities, offset by the impact of swap movements in
securitisation companies that are not subject to tax, and
deductions available for the coupon paid on AT1 instruments that
are charged to equity.
Factors that may affect future tax
charges
During 2022, the UK Government confirmed its
intention to implement the OECD Inclusive Framework Pillar 2 rules
in the UK, including a Qualified Domestic Minimum Top-Up Tax rule.
This legislation, which was enacted in 2023, will seek to ensure
that UK headed multinational groups pay a minimum tax rate of 15
per cent on UK and overseas profits arising after 31 December 2023.
Given the headline tax rates in the countries that the Group
operates in, and the nature of the Group’s business in those
countries, these rules are not currently expected to have any
impact on the Group.
- 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:
|
2023 |
2022 |
|
£m |
£m |
Statutory profit after tax |
282.6 |
410.0 |
Less: Coupon
on AT1 securities classified as equity |
(9.0) |
(9.0) |
Statutory profit attributable to ordinary
shareholders |
273.6 |
401.0 |
|
2023 |
2022 |
Weighted average number of shares, millions |
|
|
Basic |
414.2 |
441.5 |
Dilutive impact of share-based payment schemes |
7.0 |
5.1 |
Diluted |
421.2 |
446.6 |
Earnings per share, pence per share |
|
|
Basic |
66.1 |
90.8 |
Diluted |
65.0 |
89.8 |
- Dividends
|
2023 |
2022 |
|
£m |
Pence per share |
£m |
Pence per share |
Final dividend
for the prior year |
93.8 |
21.8 |
94.8 |
21.1 |
Special
dividend for the prior year |
50.3 |
11.7 |
- |
- |
Interim
dividend for the current year |
40.9 |
10.2 |
38.3 |
8.7 |
|
185.0 |
|
133.1 |
|
The Directors recommend a final dividend of
£85.7m, 21.8 pence per share (2022: £93.7m, 21.8 pence per share)
payable on 14 May 2024 with an ex-dividend date of 4 April 2024 and
a record date of 5 April 2024. This dividend is not reflected in
these financial statements as it is subject to approval by
shareholders at the AGM on 9 May 2024.
No special dividend has been announced (2022:
£50.3m, 11.7 pence per share).
If the final dividend is approved this will make
up the total dividend for 2023 of £126.6m, 32.0 pence per share
(2022: £182.0m, 42.2 pence per share).
A summary of the Company’s distributable reserves is shown
below:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
Retained
earnings |
|
|
1,358.6 |
1,359.3 |
Own
shares1 |
|
|
(1.0) |
(2.2) |
Distributable reserves |
|
|
1,357.6 |
1,357.1 |
- Own Shares comprises own shares held in the Group’s EBT of
£1.0m (2022: £2.2m) 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.
- Cash and cash equivalents
The following table analyses the cash and cash
equivalents disclosed in the Consolidated Statement of Cash
Flows:
|
2023 |
2022 |
|
£m |
£m |
Cash in
hand |
0.4 |
0.4 |
Unencumbered
loans and advances to credit institutions |
2,513.6 |
2,953.7 |
Investment
securities |
- |
90.0 |
|
2,514.0 |
3,044.1 |
- Loans and advances to credit institutions
|
2023 |
2022 |
|
£m |
£m |
Unencumbered: |
|
|
BoE call
account |
2,256.3 |
2,806.5 |
Call
accounts |
92.2 |
73.2 |
Cash held in
special purpose vehicles (SPVs)1 |
147.8 |
63.8 |
Term
deposits |
17.3 |
10.2 |
Encumbered: |
|
|
BoE cash ratio
deposit |
69.6 |
62.8 |
Cash held in
SPVs1 |
31.8 |
111.8 |
Cash margin
given |
198.6 |
237.4 |
|
2,813.6 |
3,365.7 |
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 is 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.
16. Investment securities
|
2023 |
2022 |
|
£m |
£m |
Held
at amortised cost: |
|
|
RMBS loan
notes |
325.4 |
262.6 |
Less: Expected credit losses |
- |
- |
|
325.4 |
262.6 |
Held
at FVOCI: |
|
|
UK Sovereign debt1 |
296.0 |
149.8 |
|
|
|
Held
at FVTPL: |
|
|
RMBS loan
notes |
0.3 |
0.5 |
|
621.7 |
412.9 |
- In 2022, includes £90.0m of UK Treasury bills which had a
maturity of less than three months from date of acquisition.
At 31 December 2023, the Group had no RMBS
held at FVOCI or FVTPL or at amortised cost (2022: £11.5m held at
amortised cost) sold under repos.
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.
- Investment securities
(continued)
The credit risk on investment securities held at
amortised cost has not significantly increased since initial
recognition and are categorised as stage 1. At 31 December 2023,
the Group had no ECL (2022: less than £0.1m).
Movements during the year in investment
securities held by the Group are analysed as follows:
|
2023 |
2022 |
|
£m |
£m |
At 1
January |
412.9 |
491.4 |
Additions1 |
664.3 |
686.5 |
Disposals and maturities2 |
(456.3) |
(764.4) |
Movement in accrued interest |
1.0 |
(0.9) |
Changes in fair value |
(0.2) |
0.3 |
At 31 December |
621.7 |
412.9 |
- In 2023 there were additions of £233.9m of UK Treasury bills
which had a maturity of less than three months from date of
acquisition (2022: £90.0m).
- Disposals and maturities includes £323.9m of UK Treasury bills
which had a maturity of less than three months from date of
acquisition (2022: £100.0m).
At 31 December 2023, investment securities
included investments in unconsolidated structured entities (see
note 44) of £100.7m notes in PMF 2020-1B (2022: £100.7m notes in
PMF 2020-1B). The investments represent the maximum exposure to
loss from unconsolidated structured entities.
- Loans and advances to customers
|
2023 |
2022 |
|
£m |
£m |
Held
at amortised cost: |
|
|
Loans and
advances (see note 18) |
25,674.4 |
23,564.9 |
Finance leases
(see note 19) |
222.7 |
163.2 |
|
25,897.1 |
23,728.1 |
Less: Expected credit losses (see note 20) |
(145.8) |
(130.0) |
|
25,751.3 |
23,598.1 |
Held
at FVTPL: |
|
|
Residential
mortgages |
13.7 |
14.6 |
|
25,765.0 |
23,612.7 |
- Loans and advances
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
OSB |
CCFS |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
Gross carrying amount |
|
|
|
|
|
|
Stage 1 |
11,048.7 |
9,313.8 |
20,362.5 |
10,188.4 |
8,375.5 |
18,563.9 |
Stage 2 |
2,712.6 |
1,819.3 |
4,531.9 |
2,508.9 |
1,907.4 |
4,416.3 |
Stage 3 |
491.9 |
217.2 |
709.1 |
345.7 |
156.0 |
501.7 |
Stage 3
(POCI) |
33.4 |
37.5 |
70.9 |
38.5 |
44.5 |
83.0 |
|
14,286.6 |
11,387.8 |
25,674.4 |
13,081.5 |
10,483.4 |
23,564.9 |
The mortgage loan balances pledged as collateral for liabilities
are:
|
2023 |
2022 |
|
£m |
£m |
BoE under
TFSME and ILTR |
6,092.4 |
6,439.7 |
Securitisation |
841.7 |
265.4 |
|
6,934.1 |
6,705.1 |
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 2023, the
percentage of the Group’s gross loans and advances to customers
that are encumbered was 27% (2022: 28%).
- 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 |
|
£m |
£m |
£m |
£m |
£m |
At 1 January
2022 |
18,078.9 |
2,412.1 |
459.5 |
97.4 |
21,047.9 |
Originations1 |
5,829.6 |
- |
- |
- |
5,829.6 |
Repayments and
write-offs2 |
(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 |
(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 |
Originations1 |
4,561.7 |
- |
- |
- |
4,561.7 |
Acquisitions3 |
175.8 |
- |
- |
- |
175.8 |
Repayments and
write-offs2 |
(2,041.6) |
(447.2) |
(127.1) |
(12.1) |
(2,628.0) |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
1,534.7 |
(1,520.4) |
(14.3) |
- |
- |
- To
Stage 2 |
(2,299.0) |
2,347.5 |
(48.5) |
- |
- |
- To Stage 3 |
(133.0) |
(264.3) |
397.3 |
- |
- |
At 31 December 2023 |
20,362.5 |
4,531.9 |
709.1 |
70.9 |
25,674.4 |
- Originations include further advances and drawdowns on existing
commitments.
- Repayments and write-offs include customer redemptions and
£33.6m (2022: £2.1m) of write-offs during the year.
- The Group repurchased £175.8m of own originated UK residential
and buy to let mortgages from deconsolidated SPVs at par.
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 £0.3m at 31
December 2023 (2022: £0.8m).
As at 31 December 2023 £126.7m of loans and
advances (2022: £110.0m) are in a probation period before they can
move out of Stage 3, see note 1 n) for further details.
Where a borrower has multiple facilities, all
facilities are considered in default when a minimum threshold of
the borrower’s exposure has been classified as defaulted. As at 31
December 2023 £55.7m of loans and advances are in this category of
default (2022: £32.1m).
- Finance leases
The Group provides asset finance lending through
InterBay Asset Finance Limited.
|
2023 |
2022 |
|
£m |
£m |
Gross
investment in finance leases, receivable |
|
|
Less than one
year |
83.6 |
60.7 |
Between one
and two years |
68.6 |
49.5 |
Between two
and three years |
51.7 |
36.0 |
Between three
and four years |
31.4 |
23.4 |
Between four
and five years |
12.0 |
9.9 |
More than five years |
2.3 |
1.3 |
|
249.6 |
180.8 |
Unearned
finance income |
(26.9) |
(17.6) |
Net investment in finance leases |
222.7 |
163.2 |
Net
investment in finance leases, receivable |
|
|
Less than one
year |
71.7 |
52.4 |
Between one
and two years |
60.4 |
44.4 |
Between two
and three years |
47.1 |
33.2 |
Between three
and four years |
29.7 |
22.3 |
Between four
and five years |
11.6 |
9.6 |
More than five years |
2.2 |
1.3 |
|
222.7 |
163.2 |
The Group has recognised £3.0m of ECLs on
finance leases as at 31 December 2023 (2022: £4.8m).
- Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
|
2023 |
2022 |
|
ECL provision |
Weighting |
Weighted ECL provision |
ECL provision |
Weighting |
Weighted ECL provision |
|
£m |
% |
£m |
£m |
% |
£m |
Scenarios |
|
|
|
|
|
|
Upside |
60.5 |
30 |
18.2 |
32.8 |
30 |
9.8 |
Base case |
76.8 |
40 |
30.7 |
41.7 |
40 |
16.7 |
Downside
scenario |
138.1 |
20 |
27.6 |
79.3 |
20 |
15.9 |
Severe downside scenario |
206.8 |
10 |
20.7 |
120.0 |
10 |
12.0 |
Total weighted
provisions |
|
|
97.2 |
|
|
54.4 |
Other
Provisions: |
|
|
|
|
|
|
Individually
assessed provisions |
|
|
25.1 |
|
|
45.8 |
Post model
adjustments |
|
|
23.5 |
|
|
29.8 |
Total provision |
|
|
145.8 |
|
|
130.0 |
- Expected credit losses
(continued)
The Group continued to recognise the increases
in credit risk due to the cost of living and cost of borrowing
stresses caused by high inflation and increases in interest rates.
As a result, the Group held £9.4m (2022: £16.0m) of ECL in PMA
for risks not sufficiently accounted for in the IFRS 9 framework.
The approach to quantify the PMA for the cost of living estimated
an increase in PD by analysing the effect of the increases in
living costs, such as household 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
living PMA has reduced since 31 December 2022, reflecting the
inflation peak has been observed and forecasts are for decreases in
inflation.
The cost of borrowing PMA specifically
identified those that are more at risk of default due to coming to
the end of an initial interest rate in the near future, causing a
payment increase through either a new product or reverting onto a
variable rate, and becoming a higher affordability risk. This is
used to apply an additional stress on the PD which in some cases
results in a stage 2 criteria trigger. The PMA has reduced since 31
December 2022, reflecting that both the inflation and interest rate
peaks are considered to have been observed and forecasts are for
decreases.
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 £10.0m
(2022: £8.7m) as a PMA. Whilst the Group expects the process delays
to reduce in time, a PMA is held against all accounts to reflect an
extended time to sale in line with most recent observations whilst
considering the Land Registry’s strategic plan to increase
automation in 2024/2025 to remove the backlog.
As part of the Group's recognition of climate
risk and overall ESG agenda, the Group considers the physical risks
of climate change with the removal of the transitional risk to
reflect Government’s decision to postpone the EPC Climate Bill. The
transitional risk was the most significant component of the PMA
that considered properties with lower energy efficiency likely to
require investment to reach minimum energy efficiency standards,
and has such resulted in the reduction in the PMA where the Group
held £0.5m (2022: £4.4m).
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
recognising a PMA of £1.1m (2022: £0.7m).
In addition to the above PMAs, the Group has
identified accounts within the OSB second charge portfolio whereby
the arrears balances, fees and other charges will be written off.
An ECL of £2.5m (2022: nil) has been recognised for the expected
losses.
The Group’s ECL by segment and IFRS 9 stage is
shown below:
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
OSB |
CCFS |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
Stage 1 |
15.8 |
6.6 |
22.4 |
5.9 |
1.3 |
7.2 |
Stage 2 |
39.2 |
15.1 |
54.3 |
35.3 |
15.6 |
50.9 |
Stage 3 |
55.1 |
11.6 |
66.7 |
60.5 |
7.8 |
68.3 |
Stage 3
(POCI) |
1.0 |
1.4 |
2.4 |
1.5 |
2.1 |
3.6 |
|
111.1 |
34.7 |
145.8 |
103.2 |
26.8 |
130.0 |
- Expected credit losses
(continued)
The tables below show the movement in the ECL by
IFRS 9 stage during the year. ECLs on originations and acquisitions
reflect the IFRS 9 stage of loans originated or acquired during the
year as at 31 December and not the date of origination.
Re-measurement of loss allowance relates to existing loans which
did not redeem during the year and includes the impact of loans
moving between IFRS 9 stages.
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3 (POCI) |
Total |
|
£m |
£m |
£m |
£m |
£m |
At 1 January
2022 |
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 |
Originations |
10.2 |
- |
- |
- |
10.2 |
Acquisitions |
1.2 |
- |
- |
- |
1.2 |
Repayments and
write-offs |
(0.6) |
(4.1) |
(39.7) |
(0.7) |
(45.1) |
Re-measurement
of loss allowance |
(9.7) |
30.1 |
29.9 |
0.2 |
50.5 |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
13.0 |
(12.4) |
(0.6) |
- |
- |
- To
Stage 2 |
(0.8) |
2.2 |
(1.4) |
- |
- |
- To
Stage 3 |
(0.2) |
(6.7) |
6.9 |
- |
- |
Changes in assumptions and model parameters |
2.1 |
(5.7) |
3.3 |
(0.7) |
(1.0) |
At 31 December 2023 |
22.4 |
54.3 |
66.7 |
2.4 |
145.8 |
The table below shows the stage 2 ECL balances by transfer
criteria:
|
2023 |
2022 |
|
Carrying value |
ECL |
Coverage |
Carrying value |
ECL |
Coverage |
|
£m |
£m |
% |
£m |
£m |
% |
Criteria: |
|
|
|
|
|
|
Relative/absolute PD movement |
4,343.5 |
53.2 |
1.22 |
3,090.2 |
42.9 |
1.39 |
Qualitative
measures |
139.3 |
0.8 |
0.57 |
1,277.6 |
7.5 |
0.59 |
30 days past due
backstop |
55.1 |
0.3 |
0.54 |
49.3 |
0.5 |
1.01 |
Total |
4,537.9 |
54.3 |
1.20 |
4,417.1 |
50.9 |
1.15 |
- Expected credit losses
(continued)
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.
- Impairment of financial assets
The charge for impairment of financial assets in
the Consolidated Statement of Comprehensive Income comprises:
|
2023 |
2022 |
|
£m |
£m |
Write-offs in
year |
33.6 |
2.1 |
Increase in
ECL provision |
15.2 |
27.7 |
|
48.8 |
29.8 |
The charge for provisions of £48.8m (2022:
£29.8m) shown in the Consolidated Statement of Comprehensive Income
also includes a £4.6m credit (2022: nil) in respect of insurance
recoveries.
- 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 assets /
(liabilities) |
Net amount of financial assets / (liabilities) presented in
the Consolidated Statement of Financial Position |
Contracts subject to master netting agreements not offset
in the Consolidated Statement of Financial Position |
Cash collateral paid / (received) not offset in the
Consolidated Statement of Financial Position |
Net amount |
|
£m |
£m |
£m |
£m |
£m |
At 31
December 2023 |
|
|
|
|
|
Derivative
assets: |
|
|
|
|
|
Interest rate risk hedging |
530.6 |
530.6 |
(45.7) |
(212.8) |
272.1 |
Derivative
liabilities: |
|
|
|
|
|
Interest rate risk hedging |
(199.9) |
(199.9) |
45.7 |
216.1 |
61.9 |
|
|
|
|
|
|
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 |
- Derivatives (continued)
Derivative assets and liabilities include an
initial margin of £198.4m with swap counterparties
(2022: £198.6m). Margin is posted daily in respect of
derivatives transacted with swap counterparties.
Included within the Group’s derivative assets is
£112.0m (2022: £203.4m) relating to derivative contracts not
covered by master netting agreements on which no cash collateral
has been paid.
The table below profiles the maturity of nominal
amounts for interest rate risk hedging derivatives based on
contractual maturity:
|
Total nominal |
Less than 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
|
£m |
£m |
£m |
£m |
£m |
At 31
December 2023 |
|
|
|
|
|
Derivative
assets |
17,568.6 |
812.3 |
8,181.3 |
8,560.0 |
15.0 |
Derivative
liabilities |
8,913.6 |
1,148.0 |
2,300.0 |
5,108.6 |
357.0 |
|
26,482.2 |
1,960.3 |
10,481.3 |
13,668.6 |
372.0 |
|
|
|
|
|
|
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 |
The Group has 944 (2022: 916) derivative
contracts with an average fixed rate of 2.70% (2022: 1.34%).
- Hedge accounting
|
2023 |
2022 |
|
£m |
£m |
Hedged
assets |
|
|
Current hedge
relationships |
(253.1) |
(827.9) |
Swap inception
adjustment |
40.4 |
44.1 |
Cancelled
hedge relationships |
(30.8) |
(5.2) |
Fair value adjustments on hedged assets |
(243.5) |
(789.0) |
Hedged
liabilities |
|
|
Current hedge
relationships |
(22.2) |
58.0 |
Swap inception
adjustment |
0.3 |
(2.3) |
Cancelled
hedge relationships |
- |
(0.6) |
Fair value adjustments on hedged liabilities |
(21.9) |
55.1 |
The swap inception adjustment relates to hedge
accounting adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against
the mortgage pipeline and on derivative instruments previously
taken out against new retail deposits.
- Hedge accounting (continued)
De-designated hedge relationships relate to
hedge accounting adjustments on failed hedge accounting
relationships. These adjustments are amortised over the remaining
lives of the original hedged items.
Cancelled hedge relationships predominantly
represent the unamortised fair value adjustment for interest rate
risk hedges that have been cancelled and replaced due to IBOR
transition, securitisation activities and legacy long-term fixed
rate mortgages (c. 25 years at origination).
The tables below analyse the Group’s portfolio
hedge accounting for fixed rate loans and advances to
customers:
|
2023 |
2022 |
|
Hedged item |
Hedging instrument |
Hedged item |
Hedging instrument |
Loans and advances to customers |
£m |
£m |
£m |
£m |
Carrying
amount of hedged item/nominal value of hedging instrument |
15,390.4 |
15,425.6 |
14,493.8 |
14,667.7 |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(253.1) |
312.7 |
(827.9) |
833.2 |
Changes in the
fair value adjustment of hedged item/hedging instrument used for
recognising the hedge ineffectiveness for the period |
580.3 |
(590.5) |
(620.6) |
621.9 |
Cumulative fair value on cancelled hedge relationships |
(30.8) |
- |
(5.2) |
- |
In the Consolidated Statement of Financial
Position, £469.9m (2022: £854.3m) of hedging instruments were
recognised within derivative assets; and £157.2m (2022: £21.1m)
within derivative liabilities.
The movement in cancelled hedge relationships is
as follows:
|
|
|
2023 |
2022 |
Hedged assets |
|
|
£m |
£m |
At 1
January |
|
|
(5.2) |
78.2 |
New
cancellations1 |
|
|
(23.0) |
(49.3) |
Amortisation |
|
|
(2.6) |
(34.1) |
At 31 December |
|
|
(30.8) |
(5.2) |
- The new cancellations are predominately from securitisation of
mortgages during the year where, the Group cancels swaps which were
effective prior to the event, replacing with new swaps within SPV
structures, with the designated hedge moved to cancelled hedge
relationships to be amortised over the original life of the
swap.
- Hedge accounting (continued)
The tables below analyse the Group’s portfolio
hedge accounting for fixed rate amounts owed to retail
depositors:
|
2023 |
2022 |
|
Hedged item |
Hedging instrument |
Hedged item |
Hedging instrument |
Customer deposits |
£m |
£m |
£m |
£m |
Carrying
amount of hedged item/nominal value of hedging instrument |
8,955.5 |
8,947.0 |
9,167.3 |
9,180.0 |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(6.7) |
16.9 |
58.0 |
(67.9) |
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness for the
period |
(67.2) |
78.8 |
33.0 |
(42.4) |
In the Consolidated Statement of Financial
Position, £40.3m (2022: £2.4m) of hedging instruments were
recognised within derivative assets; and £23.4m (2022: £70.3m)
within derivative liabilities.
The table below analyses the Group’s ‘micro’
hedge accounting for fixed rate senior notes and subordinated
liabilities:
|
2023 |
2022 |
|
Hedged item |
Hedging instrument |
Hedged item |
Hedging instrument |
Senior notes and subordinated liabilities |
£m |
£m |
£m |
£m |
Carrying
amount of hedged item/nominal value of hedging instrument |
365.0 |
365.0 |
- |
- |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(15.5) |
15.6 |
- |
- |
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness for the
period |
(15.5) |
15.8 |
- |
- |
The Group has elected to partially hedge the
senior notes up to the optional redemption date which reflects
management’s expectations about the exercise of the call option. In
the Consolidated Statement of Financial Position, £15.6m (2022:
nil) of hedging instruments were recognised within derivative
assets.
- Other assets
|
2023 |
2022 |
|
£m |
£m |
Falling due within one year: |
|
|
Prepayments |
9.9 |
7.8 |
Other
assets |
11.9 |
1.8 |
|
|
|
Falling due more than one year: |
|
|
Prepayments |
5.8 |
5.4 |
|
27.6 |
15.0 |
- Deferred taxation asset
|
Losses carried forward |
Accelerated depreciation |
Share-based payments |
IFRS 9 transitional adjustments |
Others1 |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January
2022 |
0.5 |
0.5 |
5.0 |
0.7 |
(1.1) |
5.6 |
Profit or loss
(charge)/credit2 |
- |
(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 |
Profit or loss
(charge)/credit |
(0.2) |
(0.6) |
0.2 |
(0.1) |
- |
(0.7) |
Transferred
from deferred tax liability3 |
- |
- |
- |
- |
(1.7) |
(1.7) |
Tax taken
directly to OCI |
- |
- |
- |
- |
0.1 |
0.1 |
Tax taken
directly to equity |
- |
- |
(0.1) |
- |
- |
(0.1) |
At 31 December 2023 |
0.3 |
(0.6) |
4.7 |
0.5 |
(1.0) |
3.9 |
- Others includes deferred taxation assets recognised on
financial assets classified as FVOCI, derivatives and short-term
timing differences.
- In 2023 there was no prior year deferred tax (2022 £0.3m).
- £1.7m relating to other deferred tax assets, and previously
shown within the Deferred tax liability (see Note 35) has been
transferred to the Deferred tax asset.
In 2022, the profit or loss credit for deferred
tax includes a credit of £0.2m from the corporation tax rate
change.
As at 31 December 2023, the Group had £3.5m
(2022: £3.5m) 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 2023 deferred tax assets of
£2.0m (2022: £2.3m) are expected to be utilised within
12 months and £1.8m (2022: £4.0m) utilised after 12
months.
- Property, plant and equipment
|
Freehold land and buildings |
Leasehold improvements |
Equipment and fixtures |
Right of use assets |
Total |
|
Property leases |
Other leases |
|
£m |
£m |
£m |
£m |
£m |
£m |
Cost |
|
|
|
|
|
|
At 1 January
2022 |
16.5 |
2.9 |
15.2 |
13.2 |
1.2 |
49.0 |
Additions1 |
3.5 |
0.1 |
2.9 |
0.9 |
3.5 |
10.9 |
Disposals and
write-offs2 |
- |
- |
(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 |
Additions1 |
0.3 |
- |
5.7 |
2.0 |
1.2 |
9.2 |
Disposals and write-offs2 |
- |
- |
(3.3) |
- |
(0.1) |
(3.4) |
Foreign exchange difference |
- |
- |
(0.1) |
- |
- |
(0.1) |
At 31 December 2023 |
20.3 |
3.0 |
18.8 |
15.8 |
5.7 |
63.6 |
Depreciation |
|
|
|
|
|
|
At 1 January
2022 |
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-offs2 |
- |
- |
(1.7) |
(0.3) |
(0.1) |
(2.1) |
At 31 December 2022 |
1.7 |
1.2 |
8.9 |
4.9 |
0.3 |
17.0 |
Charged in year |
0.3 |
0.3 |
3.5 |
1.9 |
0.2 |
6.2 |
Disposals and write-offs2 |
- |
- |
(3.3) |
- |
(0.1) |
(3.4) |
At 31 December 2023 |
2.0 |
1.5 |
9.1 |
6.8 |
0.4 |
19.8 |
Net
book value |
|
|
|
|
|
|
At 31 December 2023 |
18.3 |
1.5 |
9.7 |
9.0 |
5.3 |
43.8 |
At 31 December 2022 |
18.3 |
1.8 |
7.6 |
8.9 |
4.3 |
40.9 |
1. Additions include property
leases modifications of £0.5m (2022: £0.5m) and other leases
modifications of £1.5m (2022: nil) of right of use assets.
2. During the year the Group derecognised fully
depreciated assets.
- Intangible assets
|
Development
costs1 |
Computer
software and
licences |
Assets arising on Combination2 |
Total |
|
£m |
£m |
£m |
£m |
Cost |
|
|
|
|
At 1 January
2022 |
3.7 |
16.0 |
23.4 |
43.1 |
Additions |
0.1 |
1.7 |
- |
1.8 |
Disposals and
write-offs3 |
- |
(3.6) |
(1.9) |
(5.5) |
At 31 December 2022 |
3.8 |
14.1 |
21.5 |
39.4 |
Additions |
19.1 |
0.7 |
- |
19.8 |
Transfer during the year |
(2.2) |
2.2 |
- |
- |
Disposals and write-offs3 |
- |
(3.4) |
(0.1) |
(3.5) |
At 31 December 2023 |
20.7 |
13.6 |
21.4 |
55.7 |
|
|
|
|
|
Amortisation |
|
|
|
|
At 1 January
2022 |
0.6 |
8.8 |
15.3 |
24.7 |
Charged in
year |
0.7 |
3.2 |
4.3 |
8.2 |
Disposals and
write-offs3 |
- |
(3.6) |
(1.9) |
(5.5) |
At 31 December 2022 |
1.3 |
8.4 |
17.7 |
27.4 |
Charged in year |
0.7 |
2.8 |
2.2 |
5.7 |
Disposals and write-offs3 |
- |
(3.4) |
(0.1) |
(3.5) |
At 31 December 2023 |
2.0 |
7.8 |
19.8 |
29.6 |
|
|
|
|
|
Net book value |
|
|
|
|
At 31 December 2023 |
18.7 |
5.8 |
1.6 |
26.1 |
At 31 December 2022 |
2.5 |
5.7 |
3.8 |
12.0 |
1. Increase in development costs is largely
due to the modernisation project.
2. Assets arising on
Combination include broker relationships of £0.7m (2022: £2.0m),
technology of nil (2022: £0.4m), brand names of nil (2022: £0.3m)
and £0.4m development costs relating to IRB costs.
3. During the year the Group derecognised fully
amortised assets.
The Directors have considered the carrying value
of intangible assets and determined that there are no indications
of impairment at the year end.
- Amounts owed to credit institutions
|
2023 |
2022 |
|
£m |
£m |
BoE TFSME |
3,352.0 |
4,232.0 |
BoE ILTR |
10.1 |
300.9 |
Commercial
repo |
0.1 |
10.2 |
Loans from credit institutions |
- |
0.1 |
|
3,362.2 |
4,543.2 |
Cash
collateral and margin received |
212.8 |
549.7 |
|
3,575.0 |
5,092.9 |
- Amounts owed to retail depositors
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
OSB |
CCFS |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
Fixed rate
deposits |
8,846.6 |
7,493.9 |
16,340.5 |
8,085.9 |
5,899.6 |
13,985.5 |
Variable rate
deposits |
3,399.9 |
2,386.2 |
5,786.1 |
3,046.3 |
2,724.0 |
5,770.3 |
|
12,246.5 |
9,880.1 |
22,126.6 |
11,132.2 |
8,623.6 |
19,755.8 |
- Amounts owed to other customers
|
2023 |
2022 |
|
£m |
£m |
Fixed rate
deposits |
58.8 |
100.9 |
Variable rate deposits |
4.5 |
12.2 |
|
63.3 |
113.1 |
- Debt securities in issue
|
2023 |
2022 |
|
£m |
£m |
Asset-backed loan notes at amortised cost |
818.5 |
265.9 |
|
|
|
Amount due for
settlement within 12 months |
109.5 |
- |
Amount due for settlement after 12 months |
709.0 |
265.9 |
|
818.5 |
265.9 |
The asset-backed loan notes are secured on fixed
and variable rate mortgages and are redeemable in part from time to
time, but such redemptions are 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 own the call rights for a
transaction, they 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 2023, notes were issued through the following
funding vehicles:
|
2023 |
2022 |
|
£m |
£m |
Canterbury
Finance No.3 plc |
- |
21.0 |
Canterbury
Finance No.4 plc |
167.5 |
103.1 |
CMF 2020-1
plc |
109.5 |
141.8 |
CMF 2023-1
plc |
291.3 |
- |
Keys Warehouse
No.1 Limited |
250.2 |
- |
|
818.5 |
265.9 |
- Lease liabilities
|
2023 |
2022 |
|
£m |
£m |
At 1
January |
9.9 |
10.7 |
New
leases |
3.3 |
0.9 |
Lease
repayments |
(2.2) |
(1.9) |
Interest
accruals |
0.2 |
0.2 |
At 31 December |
11.2 |
9.9 |
During the year, the Group incurred expenses of
£0.1m (2022: £0.3m) in relation to short-term leases.
- Other liabilities
|
2023 |
2022 |
|
£m |
£m |
Falling due within one year: |
|
|
Accruals |
26.5 |
28.0 |
Deferred
income |
0.4 |
0.6 |
Other
creditors |
12.7 |
10.1 |
|
39.6 |
38.7 |
- 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 £85k for single account holders
and £170k 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 released its £1.5m provision for
conduct related exposures in 2022 following completion of an
internal review.
An analysis of the Group’s FSCS and other
provisions is presented below:
|
2023 |
2022 |
|
FSCS |
Other regulatory provisions |
ECL on undrawn loan facilities |
Total |
FSCS |
Other regulatory provisions |
ECL on undrawn loan facilities |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1
January |
- |
- |
0.4 |
0.4 |
0.1 |
1.5 |
0.4 |
2.0 |
Charge/(credit) |
- |
- |
0.4 |
0.4 |
(0.1) |
(1.5) |
- |
(1.6) |
At 31 December |
- |
- |
0.8 |
0.8 |
- |
- |
0.4 |
0.4 |
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. In addition, the Group has reviewed and is
enhancing its collections processes and how mortgage customers in
arrears are managed and undertaking a retrospective review of the
Group’s application of forbearance measures and associated outcomes
for certain cohorts of customers. It is not possible to reliably
predict or estimate the outcome of the retrospective review and
therefore its financial effect, if any, on the Group.
- 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 |
|
£m |
At 1 January
2022 |
39.8 |
Profit or loss credit1 |
(17.5) |
At 31 December
2022 |
22.3 |
Profit or loss
credit |
(14.3) |
Transfer to
Deferred tax asset2 |
(1.7) |
At 31 December 2023 |
6.3 |
- In 2022, the profit or loss credit includes £4.7m impact of the
corporation tax rate changes.
- £1.7m relating to other deferred tax assets, and previously
shown within the Deferred tax liability has been transferred to the
Deferred tax asset (see Note 25).
As at 31 December 2023 deferred tax liabilities
of £3.8m (2022: £5.6m) are expected to be due within 12 months and
£2.5m (2022: £16.7m) due after 12 months.
- Senior notes
During the current financial year, the Group issued senior notes
amounting to £300m under the planned MREL qualifying debt issuance
as follows:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
Fixed
rate: |
|
|
|
|
Senior notes 2028 (9.5%) |
|
|
307.5 |
- |
The senior notes comprise fixed rate notes
denominated in pounds sterling and are listed on the official list
of the FCA and admitted to trading on the main market of the London
Stock Exchange plc.
The principal terms of the senior notes are as
follows:
- Interest: Interest on the senior notes is
fixed at an initial rate until the reset date (7 September 2027).
If the senior notes are not redeemed prior to the reset date, the
interest rate will be reset and fixed based on a benchmark gilt
rate plus a spread of 4.985%.
- Redemption: The Issuer may redeem the senior
notes in whole (but not in part) in its sole discretion on 7
September 2027. Optional redemption may also take place for certain
regulatory or tax reasons. Any optional redemption requires the
prior consent of the PRA.
- Ranking: The senior notes constitute direct,
unsubordinated and unsecured obligations of OSBG and rank at least
pari passu, without any preference, among themselves as
senior notes. The notes rank behind the claims of depositors, but
in priority to holders of Tier 1 and Tier 2 capital as well as
equity holders of OSBG.
- Senior notes(continued)
The table below shows a reconciliation of the Group’s senior
notes during the year.
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
At 1
January |
|
|
- |
- |
Addition1 |
|
|
298.4 |
- |
Movement in
accrued interest |
|
|
9.1 |
- |
At 31 December |
|
|
307.5 |
- |
1. Addition includes £1.6m towards
transaction costs which has been amortised through the EIR of the
loan notes.
37. Subordinated liabilities
The Group’s outstanding subordinated liabilities are summarised
below:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
Fixed
rate: |
|
|
|
|
Subordinated liabilities 2033 (9.993%) |
|
|
259.5 |
- |
All subordinated liabilities are denominated in
pounds sterling and are listed on the official list of the FCA and
admitted to trading on the main market of the London Stock Exchange
plc.
The principal terms of the subordinated debt
liabilities are as follows:
- Interest: Interest on the notes is fixed at an
initial rate until the reset date (27 July 2028). If the notes are
not redeemed prior to the reset date, the interest rate will be
reset and fixed based on a benchmark gilt rate plus a spread of
6.296%.
- Redemption: The Issuer may redeem the Tier 2
notes in whole (but not in part) in its sole discretion on any day
from (and including) 27 April 2028 to (and including) 27 July 2028
(the reset date) as specified in the terms of the agreement.
Optional redemption may also take place for certain regulatory or
tax reasons. Any optional redemption requires the prior consent of
the PRA.
- Ranking: The notes constitute direct,
unsecured and subordinated obligations of OSBG and rank at least
pari passu, without any preference, among themselves as Tier 2
capital. The notes rank behind the claims of depositors and other
unsecured and unsubordinated creditors, but rank in priority to
holders of Tier 1 capital and of equity of OSBG.
- Subordinated liabilities
(continued)
The table below shows a reconciliation of the Group’s
subordinated liabilities during the year:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
At 1
January |
|
|
- |
10.3 |
Addition1 |
|
|
248.7 |
- |
Movement in
accrued interest |
|
|
10.8 |
- |
Repayment of
debt |
|
|
- |
(10.3) |
At 31 December |
|
|
259.5 |
- |
- Addition includes £1.3m towards transaction costs which has
been amortised through the EIR of the loan notes.
In 2022 the fixed rate subordinated liabilities
were fully repaid at a premium of £0.7m, which was recognised in
interest payable and similar charges.
The LIBOR linked subordinated liabilities were redeemed in
September 2022.
- Perpetual Subordinated Bonds
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
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.
- Reconciliation of cash flows from 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 institutions (see note
28) |
Debt securities in issue (see note 31) |
Senior notes (see note 36) |
Subordinated liabilities (see note 37) |
PSBs (see note 38) |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January 2022 |
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 |
Cash
movements: |
|
|
|
|
|
|
Principal
drawdowns |
189.9 |
591.6 |
298.4 |
248.7 |
- |
1,328.6 |
Principal
repayments |
(1,390.2) |
(40.1) |
- |
- |
- |
(1,430.3) |
Interest
paid |
(178.0) |
(20.4) |
- |
(6.3) |
(0.7) |
(205.4) |
Non-cash movements: |
|
|
|
|
|
|
Interest
charged |
197.3 |
21.5 |
9.1 |
17.1 |
0.7 |
245.7 |
At 31 December 2023 |
3,362.2 |
818.5 |
307.5 |
259.5 |
15.2 |
4,762.9 |
- Share capital
Ordinary shares |
Number of shares issued and fully paid |
Nominal value
£m |
Premium
£m |
At 1 January 2022 |
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 |
Shares cancelled under repurchase
programme |
(38,243,031) |
(0.4) |
- |
Shares issued under OSBG employee share
plans |
1,562,087 |
- |
1.4 |
At 31 December 2023 |
393,187,681 |
3.9 |
3.8 |
The Group’s share repurchase programme commenced
on 17 March 2023 (2022: 18 March 2022), and allowed the Group to
repurchase a maximum of 43,024,375 shares (2022: 44,799,505
shares), restricted by a total cost of £150.0m (2022: £100.0m). The
programme completed during the year and 38,243,031 shares
(2022: 20,671,224), representing 8.9% (2022: 4.6%) of the
issued share capital, have been repurchased and cancelled at an
average price of £3.92 (2022: £4.84) per share and a total cost of
£150.0m (2022: £100.0m) 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.
- Other equity instruments
The Group’s other equity instruments are as follows:
|
2023 |
2022 |
Additional Tier 1 securities |
£m |
£m |
6%
Perpetual subordinated contingent convertible securities |
150.0 |
150.0 |
AT1 Securities
On 5 October 2021, OSBG issued AT1 securities. AT1 securities
comprise £150.0m 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. AT1 securities which were previously presented within
‘other reserves’ have been re-presented as ‘other equity
instruments.
- Other reserves
The Group’s other reserves are as follows:
|
2023 |
2022 |
|
£m |
£m |
Share-based
payment |
14.2 |
13.2 |
Capital
redemption & transfer |
(1,354.7) |
(1,355.1) |
Own
shares |
(1.0) |
(2.2) |
FVOCI |
0.2 |
0.3 |
Foreign
exchange |
(2.1) |
(1.3) |
|
(1,343.4) |
(1,345.1) |
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 £3.04 per
share, replacing the nominal shares of £0.01 in OSB previously
recognised in share capital at the consolidation level, created a
transfer reserve of £1,355.3m.
Own shares
The Company has adopted the look-through approach for the EBT,
including the EBT within the Company. As at 31 December 2023, the
EBT held 188,106 OSBG shares (2022: 442,568 OSBG shares). The Group
and Company show these shares as a deduction from equity, being the
cost at which the shares were acquired of £1.0m (2022: £2.2m).
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.
- Financial commitments and guarantees
- The Group had £0.1m of contracted capital expenditure
commitments not provided for as at 31 December 2023 (2022:
nil).
- The Group’s minimum lease commitments under leases for
low-value assets and short-term leases of 12 months or less are
summarised in the table below:
|
2023 |
2022 |
|
£m |
£m |
Land and
buildings: due within: |
|
|
One year |
0.2 |
0.3 |
Two to five
years |
0.2 |
0.3 |
|
0.4 |
0.6 |
- Undrawn loan facilities:
|
2023 |
2022 |
|
£m |
£m |
OSB
mortgages |
580.2 |
741.6 |
CCFS
mortgages |
391.8 |
455.1 |
Asset
finance |
27.4 |
15.5 |
|
999.4 |
1,212.2 |
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.
- The Group did not have any issued financial
guarantees as at 31 December 2023 (2022: nil).
- 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
instruments
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,
subordinated debts, wholesale and other funding. Equity instruments
include own shares and AT1 securities meeting the equity
classification criteria. The Group’s main activity is mortgage
lending; it raises funds or invests in particular types of
financial assets to meet customer demand and manage the risks
arising from its operations. The Group does not trade in financial
instruments for speculative purposes.
The Group uses derivative instruments to manage
its financial risks. Derivatives are used by the Group solely to
reduce (hedge) the risk of loss arising from changes in market
rates. The Group only uses interest rate swaps. Derivatives are not
used for speculative purposes.
- Risk management (continued)
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 on pages 38 to 49.
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.
- 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.
|
2023 |
|
OSB |
CCFS |
Total |
|
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
|
£m |
£m |
£m |
£m |
£m |
£m |
Stage 1 |
11,263.0 |
11,228.7 |
9,313.8 |
9,313.8 |
20,576.8 |
20,542.5 |
Stage 2 |
2,718.6 |
2,717.0 |
1,819.3 |
1,818.6 |
4,537.9 |
4,535.6 |
Stage 3 |
494.3 |
488.8 |
217.2 |
217.2 |
711.5 |
706.0 |
Stage 3
(POCI) |
33.4 |
33.0 |
37.5 |
37.4 |
70.9 |
70.4 |
|
14,509.3 |
14,467.5 |
11,387.8 |
11,387.0 |
25,897.1 |
25,854.5 |
|
2022 |
|
OSB |
CCFS |
Total |
|
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
|
£m |
£m |
£m |
£m |
£m |
£m |
Stage 1 |
10,346.8 |
10,320.4 |
8,375.5 |
8,374.4 |
18,722.3 |
18,694.8 |
Stage 2 |
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 |
The Group’s main form of collateral held is
property, based in the UK and the Channel Islands.
- 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:
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
|
OSB |
CCFS |
Total |
|
|
£m |
£m |
£m |
% |
£m |
£m |
£m |
% |
Band |
|
|
|
|
|
|
|
|
0% - 50% |
2,454.7 |
1,105.5 |
3,560.2 |
14 |
2,768.8 |
914.7 |
3,683.5 |
16 |
50% - 60% |
2,275.8 |
1,454.5 |
3,730.3 |
14 |
2,770.7 |
1,361.1 |
4,131.8 |
17 |
60% - 70% |
4,414.4 |
3,244.0 |
7,658.4 |
30 |
4,647.5 |
3,561.7 |
8,209.2 |
35 |
70% - 80% |
3,822.1 |
5,000.9 |
8,823.0 |
34 |
2,150.7 |
4,277.3 |
6,428.0 |
26 |
80% - 90% |
1,045.7 |
573.2 |
1,618.9 |
6 |
548.3 |
365.5 |
913.8 |
4 |
90% -
100% |
222.0 |
8.8 |
230.8 |
1 |
181.3 |
2.5 |
183.8 |
1 |
>100% |
274.6 |
0.9 |
275.5 |
1 |
177.4 |
0.6 |
178.0 |
1 |
Total loans before provisions |
14,509.3 |
11,387.8 |
25,897.1 |
100 |
13,244.7 |
10,483.4 |
23,728.1 |
100 |
The table below shows the LTV banding for the
OSB segments’ two major lending streams:
|
2023 |
2022 |
|
BTL/SME |
Residential |
Total |
|
BTL/SME |
Residential |
Total |
|
OSB |
£m |
£m |
£m |
% |
£m |
£m |
£m |
% |
Band |
|
|
|
|
|
|
|
|
0% - 50% |
1,078.1 |
1,376.6 |
2,454.7 |
17 |
1,301.4 |
1,467.4 |
2,768.8 |
21 |
50% - 60% |
2,027.5 |
248.3 |
2,275.8 |
16 |
2,497.2 |
273.5 |
2,770.7 |
21 |
60% - 70% |
4,181.4 |
233.0 |
4,414.4 |
30 |
4,386.0 |
261.5 |
4,647.5 |
36 |
70% - 80% |
3,616.9 |
205.2 |
3,822.1 |
26 |
1,977.1 |
173.6 |
2,150.7 |
16 |
80% - 90% |
826.3 |
219.4 |
1,045.7 |
7 |
418.1 |
130.2 |
548.3 |
4 |
90% -
100% |
174.8 |
47.2 |
222.0 |
2 |
167.3 |
14.0 |
181.3 |
1 |
>100% |
270.1 |
4.5 |
274.6 |
2 |
172.9 |
4.5 |
177.4 |
1 |
Total loans before provisions |
12,175.1 |
2,334.2 |
14,509.3 |
100 |
10,920.0 |
2,324.7 |
13,244.7 |
100 |
- Risk management (continued)
The tables below show the LTV analysis of the
OSB BTL/SME sub-segment:
|
2023 |
|
Buy-to-Let |
Commercial |
Residential development |
Funding lines |
Total |
OSB |
£m |
£m |
£m |
£m |
£m |
Band |
|
|
|
|
|
0% - 50% |
968.1 |
93.4 |
8.2 |
8.4 |
1,078.1 |
50% - 60% |
1,857.3 |
106.6 |
61.1 |
2.5 |
2,027.5 |
60% - 70% |
3,800.3 |
169.7 |
210.5 |
0.9 |
4,181.4 |
70% - 80% |
3,271.4 |
323.6 |
- |
21.9 |
3,616.9 |
80% - 90% |
596.0 |
230.3 |
- |
- |
826.3 |
90% -
100% |
68.7 |
106.1 |
- |
- |
174.8 |
>100% |
202.7 |
66.0 |
1.0 |
0.4 |
270.1 |
Total loans before provisions |
10,764.5 |
1,095.7 |
280.8 |
34.1 |
12,175.1 |
|
2022 |
|
Buy-to-Let |
Commercial |
Residential development |
Funding lines |
Total |
OSB |
£m |
£m |
£m |
£m |
£m |
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 |
The tables below show the LTV analysis of the
OSB Residential sub-segment:
|
2023 |
2022 |
|
First charge |
Second charge |
Total |
First charge |
Second charge |
Total |
OSB |
£m |
£m |
£m |
£m |
£m |
£m |
Band |
|
|
|
|
|
|
0% - 50% |
1,292.6 |
84.0 |
1,376.6 |
1,357.6 |
109.8 |
1,467.4 |
50% - 60% |
219.9 |
28.4 |
248.3 |
238.1 |
35.4 |
273.5 |
60% - 70% |
218.3 |
14.7 |
233.0 |
242.9 |
18.6 |
261.5 |
70% - 80% |
199.5 |
5.7 |
205.2 |
168.3 |
5.3 |
173.6 |
80% - 90% |
218.1 |
1.3 |
219.4 |
128.8 |
1.4 |
130.2 |
90% -
100% |
46.8 |
0.4 |
47.2 |
13.4 |
0.6 |
14.0 |
>100% |
3.9 |
0.6 |
4.5 |
3.8 |
0.7 |
4.5 |
Total loans before provisions |
2,199.1 |
135.1 |
2,334.2 |
2,152.9 |
171.8 |
2,324.7 |
- Risk management (continued)
The table below shows the LTV analysis of the
four CCFS sub-segment:
|
2023 |
|
Buy-to-Let |
Residential |
Bridging |
Second charge lending |
Total |
|
CCFS |
£m |
£m |
£m |
£m |
£m |
% |
Band |
|
|
|
|
|
|
0% - 50% |
360.3 |
573.9 |
138.1 |
33.2 |
1,105.5 |
10 |
50% - 60% |
838.1 |
527.7 |
66.8 |
21.9 |
1,454.5 |
13 |
60% - 70% |
2,365.6 |
782.7 |
79.9 |
15.8 |
3,244.0 |
28 |
70% - 80% |
4,098.0 |
849.2 |
43.4 |
10.3 |
5,000.9 |
44 |
80% - 90% |
271.7 |
296.0 |
2.3 |
3.2 |
573.2 |
5 |
90% -
100% |
3.5 |
3.3 |
2.0 |
- |
8.8 |
- |
>100% |
- |
0.3 |
0.6 |
- |
0.9 |
- |
Total loans before provisions |
7,937.2 |
3,033.1 |
333.1 |
84.4 |
11,387.8 |
100 |
|
2022 |
|
Buy-to-Let |
Residential |
Bridging |
Second charge lending |
Total |
|
CCFS |
£m |
£m |
£m |
£m |
£m |
% |
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 |
- 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 on page
54.
A summary of the forbearance measures undertaken
during the year is shown below. The balances disclosed reflect the
year-end balance of the accounts where a forbearance measure was
undertaken during the year.
|
Number of accounts |
At 31 December 2023 |
Number of accounts |
At 31 December 2022 |
Forbearance type |
2023 |
£m |
2022 |
£m |
Interest-only
switch |
384 |
62.9 |
70 |
12.2 |
Interest rate
reduction |
290 |
36.5 |
91 |
7.5 |
Term
extension |
164 |
15.6 |
53 |
2.9 |
Payment
deferral |
459 |
89.9 |
194 |
34.0 |
Voluntary-assisted sale |
- |
- |
5 |
1.2 |
Payment
concession (reduced monthly payments) |
112 |
22.9 |
55 |
12.0 |
Capitalisation
of interest |
17 |
2.4 |
27 |
9.0 |
Full or
partial debt forgiveness |
126 |
4.5 |
359 |
9.6 |
Total |
1,552 |
234.7 |
854 |
88.4 |
|
|
|
|
|
Loan type |
|
|
|
|
First charge
owner-occupier |
880 |
116.5 |
217 |
27.8 |
Second charge
owner-occupier |
252 |
6.9 |
460 |
8.9 |
Buy-to-Let |
279 |
79.2 |
107 |
37.1 |
Commercial |
141 |
32.1 |
70 |
14.6 |
Total |
1,552 |
234.7 |
854 |
88.4 |
- Risk management (continued)
Geographical analysis by
region
An analysis of loans, excluding asset finance
leases, by region is provided below:
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
|
OSB |
CCFS |
Total |
|
Region |
£m |
£m |
£m |
% |
£m |
£m |
£m |
% |
East
Anglia |
480.1 |
1,236.2 |
1,716.3 |
7 |
453.5 |
1,136.4 |
1,589.9 |
7 |
East
Midlands |
723.4 |
774.7 |
1,498.1 |
6 |
609.9 |
691.6 |
1,301.5 |
6 |
Greater
London |
6,185.6 |
3,416.4 |
9,602.0 |
37 |
5,559.3 |
3,293.0 |
8,852.3 |
38 |
Guernsey |
18.2 |
- |
18.2 |
- |
21.5 |
- |
21.5 |
- |
Jersey |
67.8 |
- |
67.8 |
- |
75.6 |
- |
75.6 |
- |
North
East |
195.7 |
299.6 |
495.3 |
2 |
169.8 |
274.5 |
444.3 |
2 |
North
West |
983.4 |
1,031.0 |
2,014.4 |
8 |
906.6 |
921.8 |
1,828.4 |
7 |
Northern
Ireland |
9.4 |
- |
9.4 |
- |
10.0 |
- |
10.0 |
- |
Scotland |
61.1 |
298.1 |
359.2 |
1 |
36.9 |
261.3 |
298.2 |
1 |
South
East |
2,907.8 |
1,834.0 |
4,741.8 |
18 |
2,802.8 |
1,681.5 |
4,484.3 |
19 |
South
West |
959.4 |
751.2 |
1,710.6 |
7 |
893.7 |
659.6 |
1,553.3 |
7 |
Wales |
327.4 |
315.0 |
642.4 |
3 |
297.5 |
284.7 |
582.2 |
2 |
West
Midlands |
992.6 |
851.0 |
1,843.6 |
7 |
908.9 |
761.3 |
1,670.2 |
7 |
Yorks and
Humberside |
374.7 |
580.6 |
955.3 |
4 |
335.5 |
517.7 |
853.2 |
4 |
Total loans before provisions |
14,286.6 |
11,387.8 |
25,674.4 |
100 |
13,081.5 |
10,483.4 |
23,564.9 |
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.
- Risk management (continued)
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.
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3
(POCI) |
Total |
PD lower range |
PD upper range |
2023 |
£m |
£m |
£m |
£m |
£m |
% |
% |
OSB |
|
|
|
|
|
|
|
Excellent |
4,609.0 |
257.1 |
- |
- |
4,866.1 |
- |
0.3 |
Good |
6,062.0 |
1,397.6 |
- |
- |
7,459.6 |
0.3 |
2.0 |
Satisfactory |
543.1 |
505.9 |
- |
- |
1,049.0 |
2.0 |
7.4 |
Lower |
48.9 |
558.0 |
- |
- |
606.9 |
7.4 |
100.0 |
Impaired |
- |
- |
494.3 |
- |
494.3 |
100.0 |
100.0 |
POCI |
- |
- |
- |
33.4 |
33.4 |
100.0 |
100.0 |
CCFS |
|
|
|
|
|
|
|
Excellent |
6,204.6 |
633.1 |
- |
- |
6,837.7 |
- |
0.3 |
Good |
2,934.3 |
653.7 |
- |
- |
3,588.0 |
0.3 |
2.0 |
Satisfactory |
168.2 |
213.5 |
- |
- |
381.7 |
2.0 |
7.4 |
Lower |
6.7 |
319.0 |
- |
- |
325.7 |
7.4 |
100.0 |
Impaired |
- |
- |
217.2 |
- |
217.2 |
100.0 |
100.0 |
POCI |
- |
- |
- |
37.5 |
37.5 |
100.0 |
100.0 |
|
20,576.8 |
4,537.9 |
711.5 |
70.9 |
25,897.1 |
|
|
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3
(POCI) |
Total |
PD lower range |
PD upper range |
2022 |
£m |
£m |
£m |
£m |
£m |
% |
% |
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 |
|
|
- 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 |
2023 |
£m |
£m |
£m |
£m |
Investment
securities |
621.7 |
- |
- |
621.7 |
Loans and
advances to credit institutions |
2,446.7 |
357.7 |
9.2 |
2,813.6 |
Derivative
assets |
239.7 |
290.9 |
- |
530.6 |
|
3,308.1 |
648.6 |
9.2 |
3,965.9 |
|
|
|
|
|
|
Excellent |
Good |
Satisfactory |
Total |
2022 |
£m |
£m |
£m |
£m |
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 |
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 £3,848.3m (2022: £3,496.9m).
The tables below show the industry sector of the
Group’s loans and advances to credit institutions and investment
securities:
|
|
|
|
2023 |
2022 |
|
|
|
|
£m |
% |
£m |
% |
BoE1 |
|
|
|
2,325.9 |
68 |
2,869.3 |
76 |
Other
banks |
|
|
|
487.7 |
14 |
496.4 |
13 |
Central government |
|
|
296.0 |
9 |
149.8 |
4 |
Securitisation |
|
|
|
325.7 |
9 |
263.1 |
7 |
Total |
|
|
|
3,435.3 |
100 |
3,778.6 |
100 |
- Balances with the BoE include £69.6m (2022: £62.8m) held in the
cash ratio deposit.
- Risk management (continued)
The tables below show the geographical exposure
of the Group’s loans and advances to credit institutions and
investment securities:
|
|
|
|
2023 |
2022 |
|
|
|
|
£m |
% |
£m |
% |
United
Kingdom |
|
|
|
3,418.0 |
99 |
3,765.7 |
100 |
India |
|
|
|
17.3 |
1 |
12.9 |
- |
Total |
|
|
|
3,435.3 |
100 |
3,778.6 |
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 please
refer to page 50.
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 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.
- 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:
|
Carrying amount |
On demand |
Less than 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
2023 |
£m |
£m |
£m |
£m |
£m |
£m |
Financial liability by type |
|
|
|
|
|
|
Amounts owed
to retail depositors |
22,126.6 |
4,220.7 |
6,119.6 |
9,110.9 |
2,675.4 |
- |
Amounts owed
to credit institutions |
3,575.0 |
- |
106.4 |
10.0 |
3,458.6 |
- |
Amounts owed
to other customers |
63.3 |
- |
45.1 |
18.2 |
- |
- |
Derivative
liabilities |
199.9 |
- |
6.0 |
18.9 |
164.9 |
10.1 |
Debt
securities in issue |
818.5 |
- |
- |
- |
818.5 |
- |
Lease
liabilities |
11.2 |
- |
0.4 |
1.7 |
7.9 |
1.2 |
Senior
notes |
307.5 |
- |
9.0 |
- |
298.5 |
- |
Subordinated
liabilities |
259.5 |
- |
10.7 |
- |
248.8 |
- |
PSBs |
15.2 |
- |
- |
15.2 |
- |
- |
Total liabilities |
27,376.7 |
4,220.7 |
6,297.2 |
9,174.9 |
7,672.6 |
11.3 |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
- |
- |
- |
- |
Loans and
advances to credit institutions |
2,813.6 |
2,623.7 |
19.7 |
- |
128.8 |
41.4 |
Investment
securities |
621.7 |
- |
101.2 |
301.7 |
218.8 |
- |
Loans and
advances to customers |
25,765.0 |
- |
249.6 |
469.1 |
1,383.1 |
23,663.2 |
Derivative
assets |
530.6 |
- |
6.6 |
79.4 |
444.6 |
- |
Total assets |
29,731.3 |
2,624.1 |
377.1 |
850.2 |
2,175.3 |
23,704.6 |
Cumulative liquidity gap |
|
(1,596.6) |
(7,516.7) |
(15,841.4) |
(21,338.7) |
2,354.6 |
- Risk management (continued)
|
Carrying amount |
On demand |
Less than 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
2022 |
£m |
£m |
£m |
£m |
£m |
£m |
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) |
(6,082.6) |
(13,825.2) |
(18,512.9) |
2,920.4 |
- 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:
|
Carrying amount |
Gross inflow/ outflow |
Up to 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
2023 |
£m |
£m |
£m |
£m |
£m |
£m |
Financial liability by type |
|
|
|
|
|
|
Amounts owed
to retail depositors |
22,126.6 |
22,453.2 |
10,385.4 |
9,313.9 |
2,753.9 |
- |
Amounts owed
to credit institutions |
3,575.0 |
3,888.6 |
106.4 |
122.1 |
3,660.1 |
- |
Amounts owed
to other customers |
63.3 |
63.3 |
45.1 |
18.2 |
- |
- |
Derivative
liabilities |
199.9 |
195.7 |
2.3 |
4.7 |
186.1 |
2.6 |
Debt
securities in issue |
818.5 |
1,048.4 |
151.5 |
103.4 |
793.5 |
- |
Lease
liabilities |
11.2 |
12.6 |
0.4 |
1.7 |
8.3 |
2.2 |
Senior
notes |
307.5 |
414.1 |
14.3 |
14.3 |
385.5 |
- |
Subordinated
liabilities |
259.5 |
368.7 |
12.5 |
12.5 |
343.7 |
- |
PSBs |
15.2 |
15.6 |
0.3 |
15.3 |
- |
- |
Total liabilities |
27,376.7 |
28,460.2 |
10,718.2 |
9,606.1 |
8,131.1 |
4.8 |
Off-balance
sheet loan commitments |
999.4 |
999.4 |
999.4 |
- |
- |
- |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
0.4 |
- |
- |
- |
Loans and
advances to credit institutions |
2,813.6 |
2,813.6 |
2,643.4 |
- |
128.8 |
41.4 |
Investment
securities |
621.7 |
678.9 |
106.4 |
320.0 |
252.5 |
- |
Loans and
advances to customers |
25,765.0 |
66,593.7 |
561.8 |
1,931.8 |
9,532.1 |
54,568.0 |
Derivative
assets |
530.6 |
540.7 |
99.1 |
247.5 |
193.6 |
0.5 |
Total assets |
29,731.3 |
70,627.3 |
3,411.1 |
2,499.3 |
10,107.0 |
54,609.9 |
- Risk management (continued)
|
Carrying amount |
Gross inflow/ outflow |
Up to 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
2022 |
£m |
£m |
£m |
£m |
£m |
£m |
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 |
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.
- 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:
|
2023 |
|
|
Encumbered |
Unencumbered |
|
|
Pledged as collateral |
Other1 |
Available as collateral |
Other |
Total |
|
£m |
£m |
£m |
£m |
£m |
Cash in
hand |
- |
- |
0.4 |
- |
0.4 |
Loans and
advances to credit institutions |
198.6 |
101.4 |
2,256.3 |
257.3 |
2,813.6 |
Investment
securities |
27.1 |
- |
594.6 |
- |
621.7 |
Loans and
advances to customers2 |
6,934.1 |
- |
17,808.8 |
1,022.1 |
25,765.0 |
Derivative
assets |
- |
- |
- |
530.6 |
530.6 |
Non-financial
assets |
- |
- |
- |
(141.5) |
(141.5) |
|
7,159.8 |
101.4 |
20,660.1 |
1,668.5 |
29,589.8 |
|
2022 |
|
|
Encumbered |
Unencumbered |
|
|
Pledged as collateral |
Other1 |
Available as collateral |
Other |
Total |
|
£m |
£m |
£m |
£m |
£m |
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 customers2 |
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 |
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.
- 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:
|
2023 |
2022 |
|
£m |
£m |
Unencumbered
balances with central banks |
2,256.3 |
2,806.5 |
Unencumbered
cash and balances with other banks |
257.3 |
147.2 |
Other cash and
cash equivalents |
0.4 |
0.4 |
Unencumbered
investment securities |
594.6 |
366.5 |
|
3,108.6 |
3,320.6 |
Market risk
Market risk is the risk of an adverse change in
the Group’s income or the Group’s net worth arising from movement
in interest rates, exchange rates or other market prices. Market
risk exists, to some extent, in all the Group’s businesses. The
Group recognises that the effective management of market risk is
essential to the maintenance of stable earnings and preservation of
shareholder value.
Interest rate risk
The primary market risk faced by the Group is
interest rate risk. Interest rate risk is the risk of loss from
adverse movement in the overall level of interest rates. It arises
from mismatches in the timing of repricing of assets and
liabilities, both on and off-balance sheet. The Group does not run
a trading book or take speculative interest rate positions and
therefore all interest rate risk resides in the banking book
(interest rate risk in the banking book (IRRBB)). IRRBB is most
prevalent in mortgage lending 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
tenure, 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. The earnings at risk excludes the EIR accounting
impact of lower base rates in reversion that is shown as a separate
sensitivity in note 2: Judgements in applying accounting policies
and critical accounting estimates.
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:
- Risk management (continued)
|
2023 |
2022 |
|
£m |
£m |
OSB |
2.3 |
13.5 |
CCFS |
1.8 |
1.9 |
|
4.1 |
15.4 |
Exposure for earnings at risk as at 31 December
2023 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:
|
2023 |
2022 |
|
£m |
£m |
OSB |
6.5 |
7.5 |
CCFS |
9.2 |
8.8 |
|
15.7 |
16.3 |
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.
|
2023 |
2022 |
|
£m |
£m |
OSB |
24.6 |
26.2 |
CCFS |
25.6 |
24.1 |
|
50.2 |
50.3 |
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).
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 2023 and 2022:
|
2023 |
2022 |
|
£m |
£m |
OSB |
7.7 |
5.8 |
CCFS |
4.8 |
4.5 |
|
12.5 |
10.3 |
- Risk management (continued)
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 £0.9m (2022: £0.7m) effect in
profit or loss and £0.6m (2022: £0.5m) in equity.
Structured entities
The structured entities consolidated within the
Group at 31 December 2023 were Canterbury Finance No.2 plc,
Canterbury Finance No.3 plc, Canterbury Finance No.4 plc,
Canterbury Finance No.5 plc, CMF 2020-1 plc, CMF 2023-1 plc and
Keys Warehouse No.1 Limited. 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 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.
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 16 and servicing the structured entities’
mortgage portfolios.
The Group has not provided any support to the
unconsolidated structured entities listed and has no obligation or
intention to do so.
During 2023 the Group received £5.3m interest
income (2022: £2.6m) and £2.6m servicing income (2022: £4.3m) from
unconsolidated structured entities.
- Financial instruments and fair values
- Financial assets and financial
liabilities
The following table sets out the classification
of financial instruments in the Consolidated Statement of Financial
Position:
|
|
2023 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
|
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
15 |
10.7 |
- |
- |
2,802.9 |
2,813.6 |
Investment
securities |
16 |
0.3 |
- |
296.0 |
325.4 |
621.7 |
Loans and
advances to customers |
17 |
13.7 |
- |
- |
25,751.3 |
25,765.0 |
Derivative
assets |
22 |
- |
530.6 |
- |
- |
530.6 |
Other
assets1 |
24 |
- |
- |
- |
11.9 |
11.9 |
|
|
24.7 |
530.6 |
296.0 |
28,891.9 |
29,743.2 |
Liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
29 |
- |
- |
- |
22,126.6 |
22,126.6 |
Amounts owed
to credit institutions |
28 |
- |
- |
- |
3,575.0 |
3,575.0 |
Amounts owed
to other customers |
30 |
- |
- |
- |
63.3 |
63.3 |
Debt
securities in issue |
31 |
- |
- |
- |
818.5 |
818.5 |
Derivative
liabilities |
22 |
- |
199.9 |
- |
- |
199.9 |
Other
liabilities2 |
33 |
- |
- |
- |
39.2 |
39.2 |
Senior
notes |
36 |
- |
- |
- |
307.5 |
307.5 |
Subordinated
liabilities |
37 |
- |
- |
- |
259.5 |
259.5 |
PSBs |
38 |
- |
- |
- |
15.2 |
15.2 |
|
|
- |
199.9 |
- |
27,204.8 |
27,404.7 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- Financial instruments and fair
values (continued)
|
|
2022 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
|
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
15 |
- |
- |
- |
3,365.7 |
3,365.7 |
Investment
securities |
16 |
0.5 |
- |
149.8 |
262.6 |
412.9 |
Loans and
advances to customers |
17 |
14.6 |
- |
- |
23,598.1 |
23,612.7 |
Derivative
assets |
22 |
- |
888.1 |
- |
- |
888.1 |
Other
assets1 |
24 |
- |
- |
- |
1.8 |
1.8 |
|
|
15.1 |
888.1 |
149.8 |
27,228.6 |
28,281.6 |
Liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
29 |
- |
- |
- |
19,755.8 |
19,755.8 |
Amounts owed
to credit institutions |
28 |
- |
- |
- |
5,092.9 |
5,092.9 |
Amounts owed
to other customers |
30 |
- |
- |
- |
113.1 |
113.1 |
Debt
securities in issue |
31 |
- |
- |
- |
265.9 |
265.9 |
Derivative
liabilities |
22 |
- |
106.6 |
- |
- |
106.6 |
Other
liabilities2 |
33 |
- |
- |
- |
38.1 |
38.1 |
Subordinated
liabilities |
37 |
- |
- |
- |
- |
- |
PSBs |
38 |
- |
- |
- |
15.2 |
15.2 |
|
|
- |
106.6 |
- |
25,281.0 |
25,387.6 |
- Balance excludes prepayments.
- Balance excludes deferred income.
The Group has no non-derivative financial assets or financial
liabilities classified as held for trading.
- Financial instruments and fair
values (continued)
- 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:
|
2023 |
2022 |
|
Carrying value |
Estimated fair value |
Carrying value |
Estimated fair value |
|
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
0.4 |
0.4 |
Loans and
advances to credit institutions |
2,802.9 |
2,802.9 |
3,365.7 |
3,365.7 |
Investment
securities |
325.4 |
325.2 |
262.6 |
260.5 |
Loans and
advances to customers |
25,751.3 |
24,900.0 |
23,598.1 |
22,746.0 |
Other
assets1 |
11.9 |
11.9 |
1.8 |
1.8 |
|
28,891.9 |
28,040.4 |
27,228.6 |
26,374.4 |
Liabilities |
|
|
|
|
Amounts owed
to retail depositors |
22,126.6 |
22,125.4 |
19,755.8 |
19,693.0 |
Amounts owed
to credit institutions |
3,575.0 |
3,575.0 |
5,092.9 |
5,092.9 |
Amounts owed
to other customers |
63.3 |
63.3 |
113.1 |
113.1 |
Debt
securities in issue |
818.5 |
818.5 |
265.9 |
265.9 |
Other
liabilities2 |
39.2 |
39.2 |
38.1 |
38.1 |
Senior
notes |
307.5 |
309.1 |
- |
- |
Subordinated
liabilities |
259.5 |
246.0 |
- |
- |
PSBs |
15.2 |
14.4 |
15.2 |
14.0 |
|
27,204.8 |
27,190.9 |
25,281.0 |
25,217.0 |
- Balance excludes prepayments.
- 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.
- 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, ILTR
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.
Senior notes, Subordinated liabilities
and PSBs
The senior notes, subordinated liabilities and PSBs are listed on
the London Stock Exchange with fair value being the quoted market
price at the reporting date.
- Financial instruments and fair
values (continued)
- Fair value classification
The Group classifies fair value measurements
using a fair value hierarchy that reflects the significance of the
inputs used in making the measurements. 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 amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
2023 |
£m |
£m |
£m |
£m |
£m |
£m |
Financial assets |
|
|
|
|
|
|
Loans and
advances to credit institutions |
10.7 |
10.1 |
- |
10.7 |
- |
10.7 |
Investment
securities |
296.3 |
300.3 |
296.0 |
- |
0.3 |
296.3 |
Loans and
advances to customers |
13.7 |
16.3 |
- |
- |
13.7 |
13.7 |
Derivative assets |
530.6 |
17,568.6 |
- |
530.6 |
- |
530.6 |
|
851.3 |
17,895.3 |
296.0 |
541.3 |
14.0 |
851.3 |
Financial liabilities |
|
|
|
|
|
|
Derivative liabilities |
199.9 |
8,913.6 |
- |
199.9 |
- |
199.9 |
|
Carrying amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
2022 |
£m |
£m |
£m |
£m |
£m |
£m |
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 |
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.
- 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 amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
2023 |
£m |
£m |
£m |
£m |
£m |
£m |
Financial assets |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
- |
0.4 |
- |
0.4 |
Loans and
advances to credit institutions |
2,802.9 |
2,785.8 |
- |
2,802.9 |
- |
2,802.9 |
Investment
securities |
325.4 |
323.7 |
- |
325.2 |
- |
325.2 |
Loans and
advances to customers |
25,751.3 |
25,928.2 |
- |
2,112.9 |
22,787.1 |
24,900.0 |
Other
assets1 |
11.9 |
11.9 |
- |
11.9 |
- |
11.9 |
|
28,891.9 |
29,050.0 |
- |
5,253.3 |
22,787.1 |
28,040.4 |
Financial liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
22,126.6 |
21,766.3 |
- |
5,786.2 |
16,339.2 |
22,125.4 |
Amounts owed
to credit institutions |
3,575.0 |
3,524.8 |
- |
3,575.0 |
- |
3,575.0 |
Amounts owed
to other customers |
63.3 |
61.6 |
- |
- |
63.3 |
63.3 |
Debt
securities in issue |
818.5 |
818.2 |
- |
818.5 |
- |
818.5 |
Other
liabilities2 |
39.2 |
39.2 |
- |
39.2 |
- |
39.2 |
Senior
notes |
307.5 |
300.0 |
- |
309.1 |
- |
309.1 |
Subordinated
liabilities |
259.5 |
250.0 |
- |
246.0 |
- |
246.0 |
PSBs3 |
15.2 |
15.0 |
- |
14.4 |
- |
14.4 |
|
27,204.8 |
26,775.1 |
- |
10,788.4 |
16,402.5 |
27,190.9 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- The Group has reviewed the trading frequency of the PSBs and
determined there is insufficient frequency and volume to provide
pricing information on an ongoing basis in the market and have
therefore categorised as level 2 fair value (2022: level 1).
- Financial instruments and fair
values (continued)
|
|
|
Estimated fair value |
|
Carrying amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
2022 |
£m |
£m |
£m |
£m |
£m |
£m |
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
assets1 |
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
liabilities2 |
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. 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 £4.9m (2022: £4.4m).
- Operating segments
The Group segments its lending business and
operates under two segments in line with internal reporting to the
Board:
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 |
2023 |
£m |
£m |
£m |
£m |
Balances at the reporting date |
|
|
|
|
Gross loans
and advances to customers |
14,509.3 |
11,377.2 |
24.3 |
25,910.8 |
Expected credit losses |
(111.1) |
(35.8) |
1.1 |
(145.8) |
Loans and
advances to customers |
14,398.2 |
11,341.4 |
25.4 |
25,765.0 |
Capital
expenditure |
25.6 |
0.2 |
- |
25.8 |
Depreciation
and amortisation |
6.9 |
3.3 |
1.7 |
11.9 |
Profit
or loss for the year |
|
|
|
|
Net
interest income/(expense) |
473.8 |
240.9 |
(56.1) |
658.6 |
Other (expense)/income |
(3.1) |
(3.8) |
6.4 |
(0.5) |
Total
income/(expense) |
470.7 |
237.1 |
(49.7) |
658.1 |
Impairment of financial assets |
(41.6) |
(6.9) |
(0.3) |
(48.8) |
Contribution to profit |
429.1 |
230.2 |
(50.0) |
609.3 |
Administrative
expenses |
(132.5) |
(100.4) |
(1.7) |
(234.6) |
Provisions |
(0.3) |
(0.1) |
- |
(0.4) |
Profit/(loss) before taxation |
296.3 |
129.7 |
(51.7) |
374.3 |
Taxation1 |
(75.6) |
(30.7) |
14.6 |
(91.7) |
Profit/(loss) for the year |
220.7 |
99.0 |
(37.1) |
282.6 |
- 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 £14.3m and
the release of other deferred tax assets on Combination adjustments
of £0.3m.
- Operating segments (continued)
|
OSB |
CCFS |
Combination |
Total |
2022 |
£m |
£m |
£m |
£m |
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 |
Taxation1 |
(70.1) |
(70.2) |
18.8 |
(121.5) |
Profit/(loss) for the year |
241.1 |
201.8 |
(32.9) |
410.0 |
- 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 £17.5m and
the release of other deferred tax assets on Combination adjustments
of £1.3m.
- 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 |
UK1 |
England |
OSB GROUP
PLC |
Holding company |
|
|
OneSavings
Bank plc |
Mortgage lending and deposit
taking |
|
|
5D Finance
Limited |
Mortgage servicer and provider |
|
|
Broadlands
Finance Limited |
Mortgage administration services |
|
|
Charter Court
Financial Services Group Plc |
Intermediate holding company |
|
|
Charter Court
Financial Services Limited |
Mortgage lending and deposit
taking |
|
|
Charter Mortgages
Limited |
Mortgage administration and analytical
services |
|
|
Easioption
Limited |
Intermediate holding company |
|
|
Exact Mortgage
Experts Limited |
Group service company |
|
|
Guernsey Home
Loans Limited |
Mortgage provider |
|
|
Heritable
Development Finance Limited |
Mortgage originator and servicer |
|
|
Inter Bay
Financial I Limited |
Intermediate holding company |
|
|
InterBay Asset
Finance Limited |
Asset finance and mortgage
provider |
|
|
Interbay
Funding, Ltd |
Mortgage servicer |
|
|
Interbay ML,
Ltd |
Mortgage provider |
|
|
Jersey Home
Loans Limited |
Mortgage provider |
|
|
Prestige
Finance Limited |
Mortgage originator and servicer |
|
|
Reliance
Property Loans Limited |
Mortgage provider |
|
|
Rochester
Mortgages Limited |
Mortgage provider |
|
Guernsey |
Guernsey Home
Loans Limited |
Mortgage provider |
|
Jersey |
Jersey Home Loans Limited |
Mortgage provider |
UK |
England |
Canterbury
Finance No. 2 plc |
Special purpose vehicle |
|
|
Canterbury
Finance No. 3 plc |
|
|
Canterbury
Finance No. 4 plc |
|
|
Canterbury
Finance No. 5 plc |
|
|
CMF 2020-1
plc |
|
|
CMF 2023-1
plc |
|
|
Keys Warehouse No.1 Limited |
UK |
England |
WSE
Bourton Road Limited |
Land lease investment |
India |
India |
OSB
India Private Limited |
Back office processing |
- 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.
- Country by country reporting
(continued)
Other disclosures required by the CBCR directive
are provided below:
2023 |
UK |
India |
Consolidation2 |
Total |
Average number
of employees |
1,461 |
811 |
- |
2,272 |
Turnover1, £m |
657.3 |
18.7 |
(17.9) |
658.1 |
Profit/(loss)
before tax, £m |
373.5 |
3.1 |
(2.3) |
374.3 |
Corporation tax paid, £m |
102.8 |
0.8 |
- |
103.6 |
|
|
|
|
|
|
|
|
|
|
2022 |
UK |
India |
Consolidation2 |
Total |
Average number
of employees |
1,274 |
622 |
- |
1,896 |
Turnover1, £m |
775.1 |
13.6 |
(13.3) |
775.4 |
Profit/(loss)
before tax, £m |
531.2 |
2.2 |
(1.9) |
531.5 |
Corporation tax paid, £m |
142.0 |
0.5 |
- |
142.5 |
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 to Indian
subsidiaries from OneSavings Bank plc for providing back office
processing.
The tables below reconcile tax charged and tax
paid during the year.
|
|
UK |
India |
Total |
2023 |
|
£m |
£m |
£m |
Tax charge |
90.9 |
0.8 |
91.7 |
Effects of: |
|
|
|
Other timing differences |
13.6 |
- |
13.6 |
Tax outside of profit or loss |
(0.5) |
- |
(0.5) |
Prior year tax included within tax charge |
0.4 |
- |
0.4 |
Tax in relation to future periods prepaid |
(1.6) |
- |
(1.6) |
Tax paid |
102.8 |
0.8 |
103.6 |
|
|
UK |
India |
Total |
2022 |
|
£m |
£m |
£m |
Tax charge |
121.0 |
0.5 |
121.5 |
Effects of: |
|
|
|
Other timing differences |
19.0 |
- |
19.0 |
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 |
1.0 |
- |
1.0 |
Tax paid |
|
142.0 |
0.5 |
142.5 |
- Adjustments for non-cash items and changes in
operating assets and liabilities
|
2023 |
2022 |
|
£m |
£m |
Adjustments for non-cash and other items: |
|
|
Depreciation
and amortisation |
11.9 |
13.4 |
Interest on
investment securities |
(23.6) |
(6.8) |
Interest on
subordinated liabilities |
17.1 |
1.1 |
Interest on
PSBs |
0.7 |
0.7 |
Interest on
securitised debt |
21.5 |
7.7 |
Interest on
senior notes |
9.1 |
- |
Interest on
financing debt |
197.3 |
68.7 |
Impairment
charge on loans |
48.8 |
29.8 |
Administrative
expenses |
0.8 |
1.3 |
Provisions |
0.4 |
(1.6) |
Interest on
lease liabilities |
- |
0.2 |
Fair value
losses/(gains) on financial instruments |
4.4 |
(58.9) |
Share-based
payments |
5.6 |
8.1 |
Total adjustments for non-cash and other
items |
294.0 |
63.7 |
Changes in operating assets and liabilities: |
|
|
Decrease/(increase) in loans and advances to credit
institutions |
112.5 |
(204.6) |
Increase in
loans and advances to customers |
(2,200.5) |
(2,563.1) |
Increase in
amounts owed to retail depositors |
2,370.8 |
2,229.4 |
(Decrease)/increase in cash collateral and margin received |
(336.9) |
434.3 |
Net increase
in other assets |
(12.6) |
(4.7) |
Net
(decrease)/increase in derivatives and hedged items |
(23.2) |
59.1 |
Net
(decrease)/increase in amounts owed to other customers |
(49.8) |
16.6 |
Net increase
in other liabilities |
0.9 |
9.1 |
Exchange
differences on working capital |
(0.7) |
(0.3) |
Total changes in operating assets and
liabilities |
(139.5) |
(24.2) |
- Controlling party
As at 31 December 2023 there was no controlling
party of the ultimate parent company of the Group, OSB GROUP
PLC.
- 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 8
and in the Directors’ Remuneration Report. The Group Executive team
are all employees of OSB, the table below shows their aggregate
remuneration:
|
|
|
|
|
2023 |
2022 |
|
|
|
|
|
£'000 |
£'000 |
Short-term employee benefits |
|
|
|
4,451 |
4,000 |
Post-employment benefits |
|
|
|
62 |
62 |
Share-based payments |
|
|
|
1,291 |
2,667 |
|
|
|
|
|
5,804 |
6,729 |
Key management personnel and connected persons
held deposits with the Group of £2.3m (2022: £2.1m).
- 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 III.
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 and also sets capital buffers for the
Group.
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.
- Capital management (continued)
On 30 November 2022, the PRA issued 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) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
CET1
capital |
|
|
Called up
share capital |
3.9 |
4.3 |
Share premium,
capital contribution and share-based payment reserve |
18.0 |
15.6 |
Retained
earnings |
3,330.2 |
3,389.4 |
Transfer
reserve |
(1,354.7) |
(1,355.1) |
Other reserves |
(2.9) |
(3.2) |
Total equity
attributable to ordinary shareholders |
1,994.5 |
2,051.0 |
Foreseeable
dividends1 |
(85.7) |
(144.0) |
IFRS 9
transitional adjustment2 |
- |
1.4 |
COVID-19 ECL
transitional adjustment3 |
23.8 |
25.9 |
Deductions from CET1 capital |
|
|
Prudent
valuation adjustment4 |
(0.5) |
(1.0) |
Intangible
assets |
(26.1) |
(12.0) |
Deferred tax asset |
(0.3) |
(0.6) |
CET1 capital |
1,905.7 |
1,920.7 |
AT1
capital |
|
|
AT1 securities |
150.0 |
150.0 |
Total Tier 1 capital |
2,055.7 |
2,070.7 |
Tier 2
capital |
|
|
Tier 2
securities |
250.0 |
- |
Total Tier 2 capital |
250.0 |
- |
Total regulatory capital |
2,305.7 |
2,070.7 |
Risk-weighted assets (unaudited) |
11,845.6 |
10,494.7 |
1. 2022 includes special
dividend of £50.3m (£50.0m announced by the Board rounded up on a
pence per share basis totals £50.3m)
2. The IFRS 9 transitional arrangements expired at 31 December
2022
3. The COVID-19 ECL transitional adjustment relates to 50% of
the Group’s increase in stage 1 and stage 2 ECL following the
impacts of COVID-19 and for which transitional rules were 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 relevant fair value assets and
liabilities.
52. Capital management
(continued)
The movement in CET1 during the year was as
follows:
|
(Unaudited) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
At 1
January |
1,920.7 |
1,781.7 |
Movement in
retained earnings |
(59.2) |
174.3 |
Share premium
from Sharesave Scheme vesting |
1.4 |
1.7 |
Movement in
other reserves |
1.3 |
0.6 |
Movement in
foreseeable dividends |
58.3 |
(49.3) |
IFRS 9
transitional adjustment |
(1.4) |
(1.5) |
COVID-19 ECL
transitional adjustment |
(2.1) |
6.9 |
Movement in
prudent valuation adjustment |
0.5 |
- |
Net
(increase)/decrease in intangible assets |
(14.1) |
6.4 |
Movement in
deferred tax asset for carried forward losses |
0.3 |
(0.1) |
At 31 December |
1,905.7 |
1,920.7 |
The Group’s minimum requirements for own funds
and eligible liabilities (MREL) information is presented below:
|
(Unaudited) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
Total
regulatory capital |
2,305.7 |
2,070.7 |
Eligible liabilities |
300.0 |
- |
Total own funds and eligible liabilities |
2,605.7 |
2,070.7 |
On 7 September 2023, the Group issued £300
million of senior unsecured callable notes through OSB Group PLC
which, while not included in total regulatory capital, is eligible
to meet MREL.
The Group has been granted a preferred
resolution strategy of a single point of entry bail-in at the
holding company level by the PRA and was initially given an interim
MREL requirement of 18% of RWAs plus regulatory buffers, and an
end-state MREL of the higher of:
- two times the sum of Pillar 1 and Pillar 2A plus regulatory
buffers; or
- if subject to a leverage ratio, two times the applicable
requirement plus regulatory buffers.
The interim and end-state deadlines for the
requirements are July 2024 and July 2026 respectively.
- Events after the reporting date
On 16 January 2024 the Group issued senior notes
amounting to £400m under the £3bn EMTN programme of OSBG. The EMTN
programme is used as part of the Group’s capital management and
funding activities.
The Board has authorised a share repurchase of
up to £50.0m of shares in the market from 15 March 2024. Any
purchases made under this programme will be announced to the market
each day in line with regulatory requirements.
OSB GROUP PLC
Company Statement of Financial Position
As at 31 December 2023
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Assets |
|
|
|
Investments in
subsidiaries and intercompany loans |
2 |
2,160.1 |
1,590.7 |
Current
taxation asset |
|
0.1 |
- |
Total assets |
|
2,160.2 |
1,590.7 |
Liabilities |
|
|
|
Intercompany
loans |
2 |
- |
0.8 |
Senior
notes |
3 |
307.5 |
- |
Subordinated
liabilities |
4 |
259.5 |
- |
|
|
567.0 |
0.8 |
Equity |
|
|
|
Share
capital |
6 |
3.9 |
4.3 |
Share
premium |
6 |
3.8 |
2.4 |
Other equity
instruments |
7 |
150.0 |
150.0 |
Retained
earnings |
|
1,358.6 |
1,359.3 |
Other reserves |
8 |
76.9 |
73.9 |
Shareholders’ funds |
|
1,593.2 |
1,589.9 |
Total equity and liabilities |
|
2,160.2 |
1,590.7 |
The profit after tax for the year ended 31
December 2023 of OSBG was £343.0m (2022: £240.8m). As permitted by
section 408 of the Companies Act 2006, no separate Statement of
Comprehensive Income is presented in respect of the Company.
The notes on pages 161 to 167 form an integral part of the
Company financial statements.
The financial statements were approved by the
Board of Directors on 14 March 2024 and were signed on its behalf
by:
Andy Golding
April Talintyre
Chief Executive
Officer
Chief Financial Officer
Company number: 11976839
OSB GROUP PLC
Company Statement of Changes in Equity
For the year ended 31 December 2023
|
Share capital |
Share premium |
Capital redemption and transfer
reserve1 |
Own shares2 |
Share-based payment reserve |
Other equity instruments |
Retained earnings |
Total |
|
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January
2022 |
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
shares2 |
- |
- |
- |
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 |
Profit for the
year |
- |
- |
- |
- |
- |
- |
343.0 |
343.0 |
Dividend
paid |
- |
- |
- |
- |
- |
- |
(185.0) |
(185.0) |
Share-based
payments |
- |
1.4 |
- |
- |
1.4 |
- |
3.1 |
5.9 |
Own
shares2 |
- |
- |
- |
1.2 |
- |
- |
(1.2) |
- |
Coupon paid on
AT1 securities |
- |
- |
- |
- |
- |
- |
(9.0) |
(9.0) |
Share
repurchase |
(0.4) |
- |
0.4 |
- |
- |
- |
(151.6) |
(151.6) |
At 31 December 2023 |
3.9 |
3.8 |
66.3 |
(1.0) |
11.6 |
150.0 |
1,358.6 |
1,593.2 |
- Includes Capital redemption reserve of £0.6m (2022: £0.2m) and
Transfer reserve of £65.7m (2022: £65.7m).
- The Company has adopted look-through accounting (see note 1 to
the Group’s consolidated financial statements) and recognised the
EBT within OSBG.
OSB GROUP PLC
Company Statement of Cash Flows
For the year ended 31 December 2023
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Cash
flows from operating activities |
|
|
|
Profit before
taxation |
|
342.9 |
240.8 |
Adjustments for non-cash and other items: |
|
|
|
Interest on
subordinated liabilities |
|
17.1 |
- |
Interest on
senior notes |
|
9.1 |
- |
Administrative
expenses |
|
0.8 |
1.3 |
Changes in operating assets and liabilities: |
|
|
|
Net decrease
in other liabilities |
|
- |
(0.2) |
Change in intercompany loans1 |
|
(565.7) |
0.5 |
Cash
(used)/generated in operating activities |
|
(195.8) |
242.4 |
Cash
flows from investing activities |
|
|
|
Change in investments in subsidiaries |
|
- |
- |
Net
cash from investing activities |
|
- |
- |
Cash
flows from financing activities |
|
|
|
Issuance of
subordinated liabilities |
5 |
248.7 |
- |
Issuance of
senior notes |
5 |
298.4 |
- |
Interest paid
on financing |
5 |
(6.3) |
- |
Share
repurchase2 |
|
(152.4) |
(102.0) |
Dividend
paid |
|
(185.0) |
(133.1) |
Coupon paid on
AT1 securities |
|
(9.0) |
(9.0) |
Proceeds from issuance of shares under employee SAYE scheme |
1.4 |
1.7 |
Net cash from financing activities |
|
195.8 |
(242.4) |
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
year3 |
|
- |
- |
Movement in cash and cash equivalents |
|
- |
- |
|
|
|
|
Cash
flows from operating activities include: |
|
|
|
Dividends received from subsidiary4 |
|
335.0 |
233.1 |
- Includes less than £0.1m (2022: £0.3m) of current taxation
asset surrendered to OSB.
- Includes £150.0m (2022: £100.0m) for shares repurchased, £0.8m
(2022: £0.7m) transaction costs and £1.6m (2022: £1.3m) success
fee.
- The Company's bank balance is swept to OneSavings Bank plc
daily resulting in a nil balance.
- The Company’s principal activity is to hold the investment in
its wholly-owned subsidiary, OneSavings Bank plc. Dividends
received are treated as operating income.
OSB GROUP PLC
Notes to the Company Financial Statements
For the year ended 31 December 2023
- 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 IFRS as adopted by the 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 £0.1m (£m). 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 w),
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.
- Investments in subsidiaries and intercompany
loans
The Company holds an investment in ordinary
shares of £1,445.0m (2022: £1,440.7m) and in AT1 securities of
£90.0m (2022: £90.0m) in its direct subsidiary, OneSavings Bank plc
(OSB). The Company also holds an investment in AT1 securities of
£60.0m (2022: £60.0m) in an indirect subsidiary, Charter Court
Financial Services Limited. The investment in shares and AT1
securities are carried at cost.
|
Investment in subsidiaries |
Intercompany loans (payable)/ receivable |
|
£m |
£m |
At 1 January
2022 |
1,582.6 |
(0.6) |
Additions1 |
8.1 |
(2.1) |
Repayments |
- |
1.9 |
At 31 December 2022 |
1,590.7 |
(0.8) |
Additions1 |
4.3 |
571.3 |
Repayments |
- |
(5.4) |
At 31 December 2023 |
1,595.0 |
565.1 |
- Additions in investment in subsidiaries include £4.3m relating
to share-based payments (2022: includes £8.1m relating to
share-based payments).
The transactions with subsidiaries comprise a
subordinated liabilities issuance of £250m, a senior notes issuance
of £300m, £19.6m of accrued interest movement on subordinated
liabilities and senior notes and £1.7m of cash received from
issuing shares under SAYE. Repayments include £2.4m of share
repurchase costs, issuance cost of £1.6m and £1.3m on senior notes
and subordinated liabilities respectively funded by OSB (2022:
£2.1m of additions in relation to costs on shares repurchased
funded by OSB and repayments of £1.9m comprised £1.6m cash received
from issuing shares under SAYE and £0.3m of tax losses surrendered
to OSB).
- Investments in subsidiaries and intercompany
loans (continued)
Investments in AT1 securities are financial
assets and intercompany loans are financial liabilities.
Intercompany loans payable are payable on demand and no interest is
charged on these loans. Intercompany loans receivable includes
subordinated liabilities and senior notes issued by subsidiaries.
The rates and other terms and conditions are same as the Company’s
external issued senior notes and subordinated liabilities. For
details refer note 3 and note 4.
A list of the Company’s direct and indirect
subsidiaries as at 31 December 2023 is shown below:
Direct investments |
Activity |
Registered office |
Ownership |
OneSavings Bank plc |
Mortgage lending and deposit
taking |
Reliance House |
100% |
|
|
|
|
Indirect investments |
Activity |
Registered office |
Ownership |
5D Finance
Limited |
Mortgage servicer
and provider |
Reliance
House |
100% |
Broadlands
Finance Limited |
Mortgage
administration services |
Charter
Court |
100% |
Canterbury
Finance No.2 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.3 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.4 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.5 plc |
Special purpose vehicle |
Churchill
Place |
- |
Keys Warehouse
No.1 Limited |
Special purpose vehicle |
Churchill
Place |
- |
Charter Court
Financial Services Group Plc |
Holding
company |
Charter
Court |
100% |
Charter Court
Financial Services Limited |
Mortgage lending
and deposit taking |
Charter
Court |
100% |
Charter Mortgages
Limited |
Mortgage
administration and analytical services |
Charter
Court |
100% |
CMF 2020-1
plc |
Special purpose vehicle |
Churchill
Place |
- |
CMF 2023-1
plc |
Special purpose 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 Finance Limited |
Mortgage
originator and servicer |
Reliance
House |
100% |
Inter Bay
Financial I Limited |
Holding
company |
Reliance
House |
100% |
InterBay Asset
Finance Limited |
Asset finance and
mortgage provider |
Reliance
House |
100% |
Interbay Funding,
Ltd |
Mortgage
servicer |
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
Limited |
Mortgage
originator and servicer |
Reliance
House |
100% |
Reliance Property
Loans Limited |
Mortgage
provider |
Reliance
House |
100% |
Rochester
Mortgages Limited |
Mortgage
provider |
Reliance
House |
100% |
WSE Bourton Road Limited |
Land lease investment |
OSB House |
100% |
- 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 |
OneSavings Bank plc |
Mortgage lending and deposit
taking |
Reliance House |
100% |
|
|
|
|
Indirect investments |
Activity |
Registered office |
Ownership |
5D Finance
Limited |
Mortgage
servicer |
Reliance
House |
100% |
Broadlands
Finance Limited |
Mortgage
administration services |
Charter
Court |
100% |
Canterbury
Finance No.2 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.3 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.4 plc |
Special purpose vehicle |
Churchill
Place |
- |
Canterbury
Finance No.5 plc |
Special purpose vehicle |
Churchill
Place |
- |
Charter Court
Financial Services Group Plc |
Holding
company |
Charter
Court |
100% |
Charter Court
Financial Services Limited |
Mortgage lending
and deposit taking |
Charter
Court |
100% |
Charter Mortgages
Limited |
Mortgage
administration and analytical services |
Charter
Court |
100% |
CMF 2020-1
plc |
Special purpose 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 Finance Limited |
Mortgage
originator 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 Limited |
Asset finance and
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
Limited |
Mortgage
originator 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% |
All investments are in the ordinary share
capital of each subsidiary.
- 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 48
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 carrying 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, 10th Floor, London,
E14 5HU
Guernsey – 1st Floor, Tudor House, Le Bordage, St Peter
Port, Guernsey, GY1 1DB
India – Salarpuria Magnificia No. 78, 9th &
10th 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
- Senior notes
During the current financial year, the Company issued senior
notes amounting to £300m under the planned MREL qualifying debt
issuance as follows
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
Fixed
rate: |
|
|
|
|
Senior notes 2028 (9.5%) |
|
|
307.5 |
- |
The senior notes comprise fixed rate notes
denominated in pounds sterling and are listed on the official list
of the FCA and admitted to trading on the main market of the London
Stock Exchange plc.
The principal terms of the senior notes are as
follows:
- Interest: Interest on the senior notes is
fixed at an initial rate until the reset date (7 September 2027).
If the senior notes are not redeemed prior to the reset date, the
interest rate will be reset and fixed based on a benchmark gilt
rate plus a spread of 4.985%.
- Redemption: The Issuer may redeem the senior
notes in whole (but not in part) in its sole discretion on 7
September 2027. Optional redemption may also take place for certain
regulatory or tax reasons. Any optional redemption requires the
prior consent of the PRA.
- Senior notes (continued)
- Ranking: The senior notes constitute direct,
unsubordinated and unsecured obligations of OSBG and rank at least
pari passu, without any preference, among themselves as
senior notes. The notes rank behind the claims of depositors, but
in priority to holders of Tier 1 and Tier 2 capital as well as
equity holders of OSBG.
The table below shows a reconciliation of the Company’s senior
notes during the year.
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
At 1
January |
|
|
- |
- |
Addition1 |
|
|
298.4 |
- |
Movement in
accrued interest |
|
|
9.1 |
- |
At 31 December |
|
|
307.5 |
- |
1. Addition includes £1.6m towards transaction costs which
has been amortised through the EIR of the loan notes
4. Subordinated liabilities
The Company’s outstanding subordinated liabilities are
summarised below:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
Fixed
rate: |
|
|
|
|
Subordinated liabilities 2033 (9.993%) |
|
|
259.5 |
- |
All subordinated liabilities are denominated in
pounds sterling and are listed on the official list of the FCA and
admitted to trading on the main market of the London Stock Exchange
plc.
The principal terms of the subordinated debt
liabilities are as follows:
- Interest: Interest on the notes is fixed at an
initial rate until the reset date (27 July 2028). If the notes are
not redeemed prior to the reset date, the interest rate will be
reset and fixed based on a benchmark gilt rate plus a spread of
6.296%.
- Redemption: The Issuer may redeem the Tier 2
notes in whole (but not in part) in its sole discretion on any day
from (and including) 27 April 2028 to (and including) 27 July 2028
(the reset date) as specified in the terms of the agreement.
Optional redemption may also take place for certain regulatory or
tax reasons. Any optional redemption requires the prior consent of
the PRA.
- Ranking: The notes constitute direct,
unsecured and subordinated obligations of OSBG and rank at least
pari passu, without any preference, among themselves as Tier 2
capital. The notes rank behind the claims of depositors and other
unsecured and unsubordinated creditors, but rank in priority to
holders of Tier 1 capital and of equity of OSBG.
OSB GROUP PLC
Notes to the Company Financial Statements
For the year ended 31 December 2023
- Subordinated liabilities
(continued)
The table below shows a reconciliation of the Company’s
subordinated liabilities during the year:
|
|
|
2023 |
2022 |
|
|
|
£m |
£m |
At 1
January |
|
|
- |
- |
Addition1 |
|
|
248.7 |
- |
Movement in
accrued interest |
|
|
10.8 |
- |
At 31 December |
|
|
259.5 |
- |
1. Addition includes £1.3m towards
transaction costs which has been amortised through the EIR of the
loan notes.
5. Reconciliation of cash flows from financing
activities
The tables below show a reconciliation of the Company’s
liabilities classified as financing activities within the Company
Statement of Cash Flows:
|
Senior notes
(see note 3) |
Subordinated liabilities (see note 4) |
Total |
|
£m |
£m |
£m |
At 1 January
2023 |
- |
- |
- |
Cash
movements: |
|
|
|
Principal
drawdowns |
298.4 |
248.7 |
547.1 |
Interest
paid |
- |
(6.3) |
(6.3) |
Non-cash movements: |
|
|
|
Interest
charged |
9.1 |
17.1 |
26.2 |
At 31 December 2023 |
307.5 |
259.5 |
567.0 |
- Share capital
|
Number of shares issued and fully paid |
Nominal value
£m |
Premium
£m |
At 1 January 2022 |
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 |
Share cancelled under repurchase
programme |
(38,243,031) |
(0.4) |
- |
Shares issued under employee share
plans |
1,562,087 |
- |
1.4 |
At 31 December 2023 |
393,187,681 |
3.9 |
3.8 |
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.
- Other equity instruments
The Company’s other equity instruments are as follows:
|
2023 |
2022 |
Additional Tier 1 securities |
£m |
£m |
6%
Perpetual subordinated contingent convertible securities |
150.0 |
150.0 |
For AT1 securities see note 41 of the Group’s
consolidated financial statements.
- Other reserves
The Company’s other reserves are as follows:
|
2023 |
2022 |
|
£m |
£m |
Share-based
payment |
11.6 |
10.2 |
Capital
redemption and transfer |
66.3 |
65.9 |
Own
shares |
(1.0) |
(2.2) |
|
76.9 |
73.9 |
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 see note 42 of the Group’s
consolidated financial statements.
- 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.
- Risk management
The principal financial risks that the Company
is exposed to, as a holding company for its subsidiaries, are those
that its subsidiaries are exposed to. These risks are managed at
Group level, through the Group’s risk governance framework
reporting to the Group Risk Committee. For further information see
note 44 of the Group’s consolidated financial statements.
- Controlling party
As at 31 December 2023 there was no controlling
party of OSB GROUP PLC.
Key performance indicators
Underlying results for the year to 31
December 2023 and 31 December 2022 exclude 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
average1 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.
|
2023
£m |
2022
£m |
Net interest
income – statutory |
658.6 |
709.9 |
Add back: acquisition-related items2 |
56.1 |
59.2 |
Net interest income – underlying |
714.7 |
769.1 |
|
|
|
13 point average
of interest earning assets – statutory C |
28,549.4 |
25,518.8 |
13 point average
of interest earning assets – underlying D
|
28,498.3 |
25,403.2 |
NIM statutory
equals A/C |
2.31% |
2.78% |
NIM underlying
equals B/D |
2.51% |
3.03% |
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.
|
2023
£m |
2022
£m |
Administrative
expenses – statutory A |
234.6 |
207.8 |
Add back: acquisition-related items2 |
(1.7) |
(3.8) |
Administrative expenses – underlying B |
232.9 |
204.0 |
|
|
|
Total income –
statutory C |
658.1 |
775.4 |
Add back: acquisition-related items2 |
49.7 |
48.8 |
Total income underlying D |
707.8 |
824.2 |
Cost to income statutory equals A/C |
36% |
27% |
Cost to income underlying equals B/D
33%
25%
Management expense ratio
The management expense ratio is defined as administrative expenses
as a percentage of a 13 point average1 of total
assets.
|
2023
£m |
2022
£m |
Administrative
expenses – statutory (as in cost to income ratio above) A |
234.6 |
207.8 |
Administrative
expenses – underlying (as in cost to income ratio above) B |
232.9 |
204.0 |
13 point average of total assets – statutory C |
28,767.1
|
25,641.5 |
13 point average
of total assets – underlying D
Management expense ratio statutory equals A/C on an annualised
basis
Management expense ratio underlying equals B/D on an annualised
basis |
28,719.7
0.82%
0.81%
|
25,537.4
0.81%
0.80% |
Loan loss ratio
The loan loss ratio is defined as impairment losses as a percentage
of a 13 point average1 of gross loans and advances. It
is a measure of the credit performance of the loan book.
|
2023
£m |
2022
£m |
Impairment losses
– statutory A |
48.8 |
29.8
|
Add back: acquisition-related items2 |
(0.3) |
0.9 |
Impairment losses – underlying B |
48.5 |
30.7 |
13 point average of gross loans – statutory C
13 point average of gross loans – underlying D
Loan loss ratio statutory equals A/C on an annualised basis
Loan loss ratio underlying equals B/D on an annualised basis
|
24,855.0
24,804.9
0.20%
0.20%
|
22,120.4
22,005.4
0.13%
0.14% |
OSB GROUP PLC
Appendix
For the year ended 31 December 2023
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, gross of tax, as a percentage
of a 13 point average1 of
shareholders’ equity (excluding £150m of AT1 securities).
|
2023
£m |
2022
£m |
Profit after tax
– statutory |
282.6 |
410.0 |
Coupons on AT1
securities |
(9.0) |
(9.0) |
Profit attributable to ordinary shareholders – statutory A
Add back: acquisition related items2 |
273.6
37.1 |
401.0
38.7 |
Profit attributable to ordinary shareholders – underlying B |
310.7 |
439.7 |
13 point average of shareholders’ equity (excluding AT1 interest
securities)
– statutory C
1,964.1
1,943.4
13 point average of shareholders’ equity (excluding AT1 interest
securities)
– underlying D
1,929.9
1,869.9
Return on equity statutory equals A/C on an annualised
basis
14%
21%
Return on equity underlying equals B/D on an annualised basis
16%
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.
|
2023
£m |
2022
£m |
Profit
attributable to ordinary shareholders – statutory (as in RoE ratio
above) A |
273.6 |
401.0 |
Profit
attributable to ordinary shareholders – underlying (as in RoE ratio
above) B |
310.7 |
439.7 |
Weighted average number of ordinary shares in issue – statutory
C |
414.2 |
441.5 |
Weighted average number of ordinary shares in issue – underlying
D
414.2
441.5
Basic earnings per share statutory equals A/C
66.1
90.8
Basic earnings per share underlying equals B/D
75.0
99.6
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 2023 final dividend
The table below shows the basis of calculation of the Company’s
recommended final dividend for 2023:
|
2023
£m |
2022
£m |
Statutory
profit after tax |
282.6 |
410.0 |
Less: coupons on AT1 securities classified as equity |
(9.0) |
(9.0) |
Statutory profit attributable to ordinary shareholders |
273.6 |
401.0 |
Add back:
Group’s integration costs |
- |
7.9 |
Tax on Group’s
integration costs |
- |
(2.1) |
Add back:
amortisation of fair value adjustment |
56.8 |
60.4 |
Add back:
amortisation of inception adjustment |
(6.4) |
(10.4) |
Add back:
amortisation of cancelled swaps |
(0.7) |
(1.2) |
Add back:
amortisation of intangible assets acquired |
1.7 |
3.8 |
Release of
deferred taxation on the above amortisation adjustments |
(14.6) |
(18.8) |
Add back: ECL on Combination |
0.3 |
(0.9) |
Underlying profit attributable to ordinary shareholders |
310.7 |
439.7 |
|
|
|
Total
dividend: 41% (2022: 30%) of underlying profit attributable to
ordinary shareholders |
126.6 |
131.9 |
Less: interim dividends paid |
(40.9) |
(38.3) |
Recommended
final dividend |
85.7 |
93.6 |
|
|
|
Number of ordinary shares in issue |
393,187,681 |
429,868,625 |
Recommended final dividend per share (pence) |
21.8 |
21.8 |
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
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100 Bishopsgate
London, EC2N 4AA
Media and Public Relations
Brunswick Group LLP
16 Lincoln’s Inn Fields
London, WC2A 3ED
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