OneSavingsBank plc - 2023 Annual Report and Accounts
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc - 2023 Annual Report
and Accounts
In fulfilment of its obligations under section
4.1.3 and 6.3.5(1) of the Disclosure Guidance and Transparency
Rules, OneSavings Bank plc (the "Company") hereby
releases the unedited full text of its 2023 Annual Report and
Accounts for the year ended 31 December 2023.
The document is now available on the Company's
website at:
www.osb.co.uk
A copy of the above document has been submitted to the
National Storage Mechanism and will shortly be available for
inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Enquiries:
OSB GROUP PLC
Dionne Mortley-Forde
Group Head of Company Secretariat
t: 01634 848 944
Investor relations
Alastair Pate
Group Head of Investor Relations
Email: osbrelations@osb.co.uk
t: 01634 838 973
Brunswick
Robin Wrench/Simone Selzer
t: 020 7404 5959
About OSB GROUP PLC
OSB began trading as a bank on 1 February 2011 and was admitted
to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc
(CCFS) and its subsidiary businesses. On 30 November 2020, OSB
GROUP PLC became the listed entity and holding company for the OSB
Group. The Group provides specialist lending and retail savings and
is authorised by the Prudential Regulation Authority, part of the
Bank of England, and regulated by the Financial Conduct Authority
and Prudential Regulation Authority. The Group reports under two
segments, OneSavings Bank and Charter Court Financial Services.
OneSavings Bank
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England’s Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise and
best-of-breed automated technology and systems, ensuring efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is currently provided by securitisation programmes and the Bank of
England’s Term Funding Scheme with additional incentives for
SMEs.
OneSavings Bank plc
Annual Report and Financial Statements
For the Year Ended 31 December 2023
Company Number: 07312896
OneSavings Bank plc
Company Information
Company
Information |
2 |
Strategic
Report |
3 |
Directors’
Report |
63 |
Statement of
Directors’ Responsibilities in respect of the Strategic Report, the
Directors' Report and the Financial Statements |
69 |
Independent
Auditor’s Report |
70 |
Statement of
Comprehensive Income |
85 |
Statement of
Financial Position |
86 |
Statement of
Changes in Equity |
87 |
Statement of Cash
Flows |
89 |
Notes to the
Financial Statements |
90 |
DIRECTORS |
Kalvinder Atwal
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
April Talintyre
Simon Walker
David Weymouth |
|
|
COMPANY SECRETARY |
Jason Elphick |
|
|
REGISTERED OFFICE |
Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom |
|
|
REGISTERED NUMBER |
07312896 (England and
Wales) |
|
|
AUDITOR |
Deloitte LLP |
|
Statutory Auditor |
|
Birmingham
United Kingdom |
OneSavings Bank plc
Strategic Report
For the Year Ended 31 December 2023
The Directors present their Annual Report,
including the Strategic Report, Directors’ Report and Statement of
Directors’ Responsibilities, together with the audited Consolidated
Financial Statements and Auditor’s Report for the year ended 31
December 2023.
OneSavings Bank plc (the Company or OSB) is a
wholly-owned subsidiary of OSB GROUP PLC (OSBG). The Group
comprises OSB and its subsidiaries; the OSB Group comprises OSBG
and its subsidiaries.
Our business model
The Group is a leading specialist mortgage
lender, primarily focused on carefully selected sub-segments of the
UK mortgage market. Our specialist lending is predominantly
supported by our Kent Reliance and Charter Savings Bank (CSB)
retail savings franchises. Our purpose is to help our customers,
colleagues and communities prosper.
Resources and relationships
Brands and heritage
We have a family of specialist lending brands
targeting selected segments of the mortgage market which are
underserved by large UK banking institutions. We have
well-established savings franchises through Kent Reliance, with its
160-year heritage, and the CSB brand.
Colleagues
Our team of highly skilled employees possess
expertise and in-depth knowledge of the lending, property, capital
and savings markets, underwriting and risk assessment, and customer
management.
Infrastructure
We benefit from cost and efficiency advantages
provided by our wholly-owned subsidiaries, OSB India, as well as
credit expertise and mortgage administration services provided by
Charter Court Financial Services (CCFS).
Relationships with intermediaries and
customers
Our strong and deep relationships with the
mortgage intermediaries that distribute our products continue to
win us industry recognition.
Capital strength
We have a strong common equity tier one (CET1)
ratio and capability to generate capital through profitability.
Our business model
explained
The Group operates its lending business through
two segments: OSB and CCFS.
OneSavings Bank
Through our brands we tailor our lending
proposition to the specific needs of our borrowers. Under our Kent
Reliance and Interbay brands all of our loans are underwritten by
experienced and skilled underwriters, supported by technology to
reduce the administrative burden on underwriters and mortgage
intermediaries. We refer to scorecards and bureau data to support
our skilled underwriter loan assessments. We consider each loan on
its own merits, responding quickly and flexibly to offer the best
solution for each of our customers. No case is too complex for us,
and for those borrowers with more tailored or larger borrowing
requirements, our Transactional Credit Committee meets three times
each week, demonstrating our responsiveness to customer needs.
Buy-to-Let/Small and Medium Enterprises
(SME) sub-segments
Buy-to-Let
We provide loans to limited companies and
individuals, secured on residential property held for investment
purposes. We target experienced and professional landlords or high
net worth individuals with established and extensive property
portfolios.
Commercial mortgages
We provide loans to limited companies and
individuals, secured on commercial and semi-commercial properties
held for investment purposes or for owner-occupation.
Residential development
We provide development loans to small and medium
sized developers of residential property.
Funding lines
We provide loans to non-bank finance companies
secured against portfolios of financial assets, principally
mortgages.
Asset finance
We provide loans under hire purchase, leasing
and refinancing arrangements to UK SMEs and small corporates to
finance business-critical assets.
Residential sub-segment
First charge
We provide loans to individuals, secured by a
first charge against their residential home. Our target customers
include those with a high net worth and complex income streams, and
near-prime borrowers. We are also experts in shared ownership,
lending to first-time buyers and key workers buying a property in
conjunction with a housing association.
Our business model explained (continued)
Charter Court Financial
Services
Specialist lending business
Our Precise Mortgages brand uses an automated
underwriting platform to manage mortgage applications and to
deliver a rapid decision in principle, based on rigorous lending
policy rules and credit scores. The platform is underpinned by
extensive underwriting expertise, enabling identification of new
niches and determining appropriate lending parameters. It allows
for consistent underwriting within the Group’s risk appetite. Quick
response times help the Group to compete for the ‘first look’ at
credit opportunities, while a robust manual verification process
further strengthens the disciplined approach to credit risk.
Buy-to-Let
We provide products to professional and
non-professional landlords with good quality credit histories,
through a wide product offering, including personal and limited
company ownership.
Residential
We provide a range of competitive products to
prime borrowers and complex prime borrowers, including
self-employed, as well as near-prime borrowers.
Bridging
We focus on lending to customers with short-term
cash flow needs, for example, to cover light refurbishments, home
improvements, auction purchases and to ‘bridge’ delays in obtaining
mortgages and ‘chain breaks’.
Second charge
Second charge products under the Precise
Mortgage brand were withdrawn in the first half of 2022 and are no
longer available to new customers.
Retail savings
The Group is predominantly funded by retail
savings deposits sourced through two brands: Kent Reliance and
Charter Savings Bank.
Kent Reliance is an award-winning retail savings
franchise with over 160 years of heritage and nine branches in the
South East of England. It also takes deposits via post, telephone
and online, while CSB, a multi award-winning retail savings bank,
offers its products online.
Both Banks have a wide range of savings
products, including easy access, fixed term bonds, cash ISAs and
business savings accounts. CSB and Kent Reliance have diversified
their retail funding sources through pooled funding platforms with
a range of products offered, including easy access, longer term
bonds and non-retail deposits.
In 2023, our savings products received industry
recognition: Charter Savings Bank won Best Overall Savings Provider
for the sixth year running from Personal Finance Awards and ISA
Provider of the Year from Moneyfacts Consumer Awards. Moneynet
Personal Finance Awards named Kent Reliance as Best Fixed Rate
Savings Provider.
Our business model explained (continued)
Kent Reliance’s proposition for savers is
simple: to offer consistently good-value savings products that meet
customer needs for cash savings and loyalty rates for existing
customers.
CSB’s philosophy is to maintain and develop its
award-winning business, offering competitively priced savings
products. Operating with an agile, nimble approach, CSB can respond
quickly to the funding requirements of the business.
Our securitisation
platforms
The Group accesses the securitisation market to
provide attractive long-term wholesale funding to complement its
retail deposit franchise and to optimise its funding mix.
Securitisations also provide efficient access to commercial and
central bank repo facilities.
The Group’s strategy is to be fleet-of-foot and
dynamic rather than deterministic with its securitisation issuance
plans. This enables it to maximise opportunities with repeat
issuances during periods of buoyant market activity and to use
other funding when the market is less favourable.
The Group is a programmatic issuer of
high-quality prime residential mortgage-backed securities through
the Precise Mortgage Funding (PMF), Charter Mortgage Funding (CMF)
and Canterbury Finance securitisation programmes. OSB has also
issued three deals of owner-occupied and Buy-to-Let acquired
mortgages via Rochester Financing since 2013.
In 2023, the Group issued its second Simple,
Transparent and Standardised securitisation, CMF 2023-1, a publicly
marketed transaction that securitised c.£330m of mortgage loans,
and issued c.£300m of AAA rated senior bonds. In total, the Group
has completed 23 securitisations worth more than £11.4bn since
2013.
The Group also uses a secured warehouse facility
which provides access to funding on a contingent basis secured on a
portfolio of residential mortgages. £250m of this facility was
drawn at the year end.
Unique operating model
Customer service
The Group operates customer service functions in
multiple locations across the UK including Chatham, Wolverhampton,
Fareham, London and Fleet. These, together with our wholly-owned
subsidiary OSB India, help us deliver on our aim of putting
customers first.
The Group has proven collections capabilities
and expertise in case management and supporting customers in
financial difficulty.
This offers valuable insights into, as well as
the opportunity to learn from, the performance of mortgage loan
products. We have deep credit expertise through strong data
analytical capabilities.
We deliver cost efficiencies through excellent
process design and management. We have strong IT security and
continue to invest in enhancing our digital offering as customer
demand changes.
Our business model explained (continued)
OSB India
OSB India (OSBI) is a wholly-owned subsidiary
based in Bangalore and Hyderabad, India.
OSBI puts customer service at the heart of
everything it does and we reward our colleagues based on the
quality of service they provide to customers, demonstrated by our
excellent customer Net Promoter Score (NPS).
At OSBI, we employ highly talented and motivated
colleagues at a competitive cost. We benchmark our processes
against industry best practice, challenging what we do and
eliminating customer pain points as they arise. We continue to
invest in developing skills that enable highly efficient service
management, matching those to business needs both in India and the
UK.
Various functions are also supported by OSBI,
including Support Services, Operations, IT, Finance and Human
Resources. We have a one team approach between the UK and India.
The employee turnover in India improved considerably in the year
with the regretted attrition rate to 12% for 2023 demonstrating
strong culture and the Company’s compelling employee
proposition.
OSBI operates a fully paperless office – all
data and processing are in the UK.
Environmental, social and governance
(ESG)
We operate in a sustainable way with relevant
ESG matters at the heart of all everything we do.
As a specialist lender, we have been long aware
of our responsibilities and the positive impact we can make in
society through our activities.
We will be publishing our Climate Transition
Plan with the annual report where we laid foundations for
progressing towards Net Zero by the 2050 target. The Company
strives to create a more diverse and inclusive workplace, and in
the year, we reached our target of having 33% women in senior
management roles in the UK and made enhancements to maternity and
family benefits. We also donated over £288k to charitable causes in
the year.
Relationships with our key
stakeholders
Building strong relationships with all of our
stakeholders through regular engagement and open dialogue is
fundamental to achieving the Group’s purpose to help our customers,
colleagues and communities prosper. Our relationships with our
stakeholders are central to the Group’s strategy and culture; and
are embedded in the Board’s responsibilities.
We outline below how the Group and its Directors
engaged with key stakeholders, and in doing so, discharged their
duties under section 172 of the Companies Act 2006.
Relationships with our key
stakeholders (continued)
Colleagues
Our colleagues are our key asset and our success
to date have been driven by the 2,459 talented individuals we
employ.
We have always favoured interactive
communication between management and our colleagues through regular
town hall meetings, informal sessions with management and
opportunities to ask questions anonymously directly to the Chief
Executive Officer (CEO), with the questions and responses available
on the intranet. These methods of engagement proved popular with
employees and have contributed to many initiatives that were
undertaken by the business during the year, including enhancements
to UK Family Benefits.
Board engagement with colleagues
The Group has adopted a combination of methods for engaging with
its workforce, including the establishment of a formal Workforce
Advisory Forum (Our Voice) and a designated Non-Executive Director
(NED) for the people. In May 2023, Sarah Hedger replaced Mary
McNamara as the Chair of the Group Remuneration and People
Committee and the Board appointed People Champion, responsible for
representing the workforce at Board and Committee level. Sarah is a
permanent member of Our Voice where she engages directly with
employee representatives and gains an insight into employee
concerns, morale and culture.
Our Voice is represented by a broad range of
employees. Their views support the Board’s decision-making and
provides additional points of reflection when determining metrics
around strategic performance and the Executive Director
remuneration, culture and governance. The areas of discussion at
Our Voice meetings in 2023 focused on employee end of year ratings
and policies, UK employee benefits, employee share schemes,
employee morale and updates from the OSB India team. Employee are
encouraged to be open and honest in their feedback at each
meeting.
The Board also reviewed the results of the
annual Best Companies to Work For survey. 86.4% of UK employees
responded to the survey in 2023 demonstrating a high level of
engagement. Following the results of the survey, the Group received
a 2-star accreditation which means that it was recognised as an
‘Outstanding’ company to work for. The Board and Group Executive
Committee reviewed the results, considered the key themes that had
emerged from the responses and discussed what steps could be taken
to capitalise on the positive themes and also address areas for
improvement. The Board is also exploring opportunities for
receiving more diverse metrics in relation to employee engagement
surveys. OSB India participates in a separate engagement survey and
was officially certified a ‘Great Place to Work’ for a seventh
consecutive year in 2023.
The Board and its Committees also received
regular updates on matters impacting employees from senior
management and the Group’s HR function. The Group Nomination and
Governance Committee oversees the Group’s talent management
initiatives and senior management succession planning.
Relationships with our key
stakeholders (continued)
Finally, the Board, through the Group Audit
Committee has oversight of the Group’s whistleblowing activity, and
the Group Remuneration and People Committee reviews and approves
the Group’s gender pay gap reporting and its commitment to the
Women in Finance Charter.
The Board monitors the effectiveness of its
methods of engaging with employees and adapts them where
necessary.
Outcomes following engagement
- Completed an extensive review of the UK family benefits package
including significant enhancements to the Maternity, Adoption and
Parental leave policies.
- The Board approved the new People and Culture Strategy which
sets out a range of initiatives to be progressed over the next
three years.
- The Board explored opportunities to receive a more diverse
range of metrics around employee engagement.
- Approved a higher salary increase for over 80% of employees in
2023 in light of the high rate of inflation. This was focused
towards less senior employees.
Customers
We pride ourselves on building strong, long-term
relationships with our customers. Our continued commitment to
providing excellent service to borrowers and savers and delivering
good outcomes for our customers remained a priority in 2023.
We offered our savers an opportunity to let us
know how we are doing whenever they call or interact with the Banks
by listening to their views and acting upon what they tell us.
Customer feedback is collected throughout the year and satisfaction
scores produced as a result. During 2023, there was an increase in
the savings and broker NPS compared to 2022.
Board engagement with customers
The Board’s engagement with customers is indirect and Directors are
kept informed of customer-related matters through regular reports,
feedback and research. Satisfaction scores and retention rates,
together with the number of complaints and resolution times, form
part of the management and Board monthly reporting packs, ensuring
the visibility of our customers’ experiences. Customer satisfaction
scores and customer outcomes are also used as part of the Executive
remuneration assessment, and form the basis of new initiatives and
actions which continually improve customer experience.
During 2023, the Board had its annual deep dive
on the customer experience focusing on customer performance,
vulnerable customers and customer complaints.
Relationships with our key
stakeholders (continued)
A key focus for the Board was ensuring that the
new Financial Conduct Authority (FCA) Consumer Duty requirements
were embedded across the Group. Simon Walker as our Consumer Duty
Champion and the Board received regular updates and assurance
around the implementation of the Consumer Duty Programme throughout
2023, the embedding of which will continue in 2024.
Customers and intermediaries may be consulted when the business is
considering the launch of a new product to ensure it meets their
needs and any concerns raised are addressed.
Outcomes following engagement with
customers
- A Customer and Product Committee was established to ensure
customer outcomes remain at the heart of the Group’s product
proposition.
- Simon Walker, Group Risk Committee chair, was appointed the
Board’s Consumer Duty Champion.
- Conducted all-employee training and Consumer Duty roadshows to
support with embedding the Group’s Consumer Duty programme.
The savings NPS for Kent Reliance in 2023 was
+71 (2022: +64), for Charter Savings Bank was 62 (2022: +61) and
for OSB and CCFS broker NPS +57 (2022: OSB +37, CCFS +39).
Intermediaries
Our lending products, with the exception of
funding lines and residential development loans, are distributed
via mortgage brokers. Mortgage brokers are vital to our success; it
is important for us to understand the challenges they face and what
they are trying to achieve in terms of serving their customers, so
we can adapt the way in which we support them, to provide an even
better service.
How the Board has engaged with
intermediaries
The Board’s engagement with intermediaries is indirect and
Directors are kept informed of intermediary-related matters through
regular updates at Board meetings. Broker and borrower satisfaction
scores are tracked on a regular basis, along with details of all
complaints, and are reviewed by the Board and management
monthly.
We pride ourselves in providing unique and
consistent lending propositions across all lending brands, which
fulfil our goal of making it easier for intermediaries to serve
their customers, our borrowers. Regular engagement with the broker
community extends beyond our propositions and enables us to
continuously enhance the service we provide, with our business
development managers working closely with intermediaries to discuss
cases and help to obtain swift and reliable decisions.
The Group’s Sales teams participated in 259
physical and virtual intermediary events during 2023 and 44
hospitality events. The events are an opportunity for the Sales
team to interact with brokers, discuss their requirements and keep
up to date with industry developments.
Outcomes following engagement with
intermediaries
- The Board reviewed the trends in NPS scores for intermediary
brokers.
- Early exposure to the development of our digitalisation
platform.
In 2023, the Group’s representatives
participated in over 259 physical and virtual events with brokers
to understand their evolving requirements and to keep up to date
with industry developments. We used this understanding to continue
to improve our customer propositions and the Group’s efforts were
recognised in the improved broker NPS of +57 for both OSB and CCFS
in 2023 (2022: OSB +37 and CCFS +39).
Relationships with our key
stakeholders (continued)
Suppliers
Our business is supported by a large number of
suppliers, which allows the Group to provide high standards of
service to our customers.
Board engagement with suppliers
The Board does not interact directly with the Group’s suppliers;
however, during the year the Board maintained oversight of key
supplier relationships, including engagement between the Group
Audit Committee and the external auditor. The Board also considered
the risks associated with suppliers and the framework for assurance
and oversight of key supplier relationships.
Supplier payment practice reports are published
on a six-monthly basis and approved and signed by the CFO and Chief
Operating Officer on behalf of the main operating entities. The
Group enters into standard terms with suppliers, which include
terms requiring payment within 30 days of the invoice date
following receipt of a valid invoice. Over 97% of all invoices are
paid within 30 days in line with the standard payment period for
qualifying contracts. The average time taken to pay invoices ranges
from five to nine days across the Group. The maximum contractual
payment period agreed varies between 30 days to 45 days. There have
been no changes to the standard payment terms in the reporting
period.
Any complaints received in respect of invoice
payments are considered as part of the dispute resolution process.
During the year, the Group did not deduct any sums from payments
under qualifying contracts as a charge for remaining on a supplier
list.
We are committed to complying with both the law
and best practice in respect of Modern Slavery, workforce rights
and the environment. We expect our suppliers to share that
commitment by complying with our Vendor Code of Conduct and
Ethics.
The Group’s Modern Slavery and Human Trafficking
Statement is reviewed and approved on an annual basis by the Board
and can be found on our website at www.osb.co.uk.
ESG is being embedded into every aspect of our
business and part of doing so is to ensure that our suppliers share
similar values and aspirations to our own.
During 2023, our suppliers and business partners
were asked to complete a questionnaire in order for us to
understand how they are addressing topics such
as climate change, Diversity, Equity and Inclusion and Modern
Slavery and to identify areas of focus in the future. We understand
that organisations will be at various stages of their own ESG and
sustainability journey and we continue to encourage and
support our suppliers with their transition to an ESG strategy that
aligns to the Group’s ambitions.
Outcomes following engagement with
suppliers
The Group engaged with suppliers to understand their aspirations ad
approach towards ESG and to ensure that they are aligned with the
Group’s ESG Strategy.
Relationships with our key
stakeholders (continued)
Regulators
The Board recognises the importance of having an
open and continuous dialogue with all of our regulators, as well as
other government bodies, trade associations and UK Finance.
Board engagement with Regulators
The Board and Group Executive Committee maintains a proactive
dialogue with the Prudential Regulation Authority (PRA) and FCA.
Engagement typically takes the form of regular and ad hoc meetings
attended by both members of the Board and Group Executives, as well
as subject matter experts.
The Board and its Committees receive regular
updates in respect of the broader regulatory developments and
compliance considerations. The PRA was invited to and attended one
Board meeting during 2023, presenting their Periodic Summary for
the year. The regulator is also given the opportunity to discuss
thematic areas with the Board including operational resilience and
integration of IT related matters in the overall risk management
framework.
The Group regularly interacts with the Bank of
England and His Majesty’s Revenue & Customs (HMRC), amongst
others, helping the Group’s alignment with the relevant regulatory
frameworks and developments in the financial services
industry.
Outcomes following engagement
- Meetings held with regulators during the year covered, amongst
other topics, operational resilience, integration of IT related
matters in the overall risk management framework and the Group’s
strategic plans. These are all areas that have been considered by
the Board in its meetings.
- Agreed the Group/s approach to future engagement with the
regulator.
Communities
The Group partners with national and local
charities, which offer employees the chance to make a difference
both nationwide and closer to home.
The Board engagement with
communities
The Board and management actively encourage and fully support
engagement with our local communities to make a positive impact.
Giving something back to our community is important to all of us,
whether it is through volunteering, fundraising or efforts that
help protect our environment, and aligns with the Group’s Values.
Our nominated charity partners are chosen by employees with the aim
of making a meaningful impact to these charities and to the lives
of those that the charities help.
Outcomes following engagement with
communities
- Charities, organisations and good causes benefitted by £288k
from donations, employee fundraising, and the annual donation
linked to the Demelza Children’s Savings Account offered under the
Kent Reliance brand.
Relationships with our key
stakeholders (continued)
Environment
Sustainability remains an important topic for
the Board and management. The Group operates under the highest
governance and ethical standards and is focused on reducing its
impact on the environment.
The Board and management are mindful of the
impact of social and environmental change on our business and
stakeholders and regularly promote awareness of such issues among
our employees, as well as adhering to our plan to become a greener
organisation and comply with enhanced regulation and
disclosures.
The Board is responsible for approving the
Group’s ESG Strategy and ESG Operating Framework which sets out how
the Group will monitor ESG matters that are material to the Group’s
Purpose, Vision, Values and Stakeholder expectations. The Board
oversees an environmentally friendly culture and ensures that the
business is ready to respond to the growing impact of climate
change on the Group’s activities in line with its Stewardship
value.
Section 172 statement
The Directors are bound by their duties under
section 172(1)(a) to (f) of the Companies Act 2006 and the manner
in which these have been discharged; in particular their duty to
act in the way they consider, in good faith, promotes the success
of the Company for the benefit of its shareholders as a whole.
Pages 119 to 125 in the Corporate Governance Report in the OSB
Group’s Annual Report demonstrates how the Board has engaged with
the Group’s key stakeholders (customers, intermediaries,
colleagues, shareholders, suppliers, regulators and the local
communities in which we are located). Examples of strategic
decisions which have impacted the Group’s key stakeholders are set
out below. Pages 7 to 12 and those that follow, set out examples of
how Directors complied with the requirements of section 172 during
the year.
Decision making
The Board recognises that considering our stakeholders in key
business decisions is fundamental to our ability to deliver the
Group’s strategy in line with our long-term values and operating
the business in a sustainable way. Balancing the needs and
expectations of our key stakeholders is essential to achieving our
purpose of helping our customers, colleagues and communities
prosper.
Section 172 statement
(continued)
Key strategic decisions in the
year
People and Culture Strategy
During the year the Board approved the People
and Culture Strategy which sets out the Group’s ambition to be a
number one employer of choice. The strategy includes a range of
initiatives to be progressed over the course of the next three
years and aims to develop a culture of embracing change and new
ways of working.
Employees are able to engage directly with the
CEO via the “Ask Andy” online portal and a key theme this year was
improving the employee family benefits package. Following
consideration of employee views, the Group Executive Committee
approved enhancements to the UK employee family benefits offering
which have received positive feedback from colleagues.
Effective Interest Rate (EIR)
adjustment
The Board supported the adverse effective
interest rate adjustment in the first half of the year on the
Precise Brand which reflected the mortgages product design, impact
on customer behaviour and the IFRS 9 accounting treatment.
Customer Experience and Consumer
Duty
During the year the Board oversaw the embedding
of the Consumer Duty programme across the Group. The Group Risk
Committee Chair was appointed as the Consumer Duty Champion to
support the Board’s oversight in relation to delivering good
outcomes for customers, particularly, those who require additional
support.
As part of the embedding process a number of
enhancements have been made across the Group including all-employee
training and Consumer Duty roadshows.
The Board continued to monitor the evolution of
customer reporting and enhancements to the management information
presented to the Board to ensure it has the appropriate information
in order to assess performance against the Consumer Duty
principles, as well as the ongoing monitoring of good customer
outcomes.
Digitalisation Programme
The Board received regular updates in relation
to the Group’s digitisation journey and enhancing digital solutions
to enable us to meet the needs of our customers, brokers and wider
stakeholders, whilst delivering further operational efficiencies.
Enhancing the customer proposition through digitisation will be a
key focus for the Board in the coming years.
Market review
The UK housing and mortgage
market
Housing market activity was constrained during
2023, primarily by affordability pressures generated through the
higher cost of living and borrowing. As a result, property
transactions and mortgage completions both fell. However product
transfers increased, as borrowers reaching the end of their initial
term sought to lock in their monthly repayments to protect against
further interest rate rises .
Inflationary prices which began in 2022 carried
on into 2023 with prices rising by 10.1% in 12 months to January
2023.
The Bank of England implemented five successive
increases in the base rate in 2023, with the objective of reducing
inflation towards its 2.0% target. Overall, the base rate rose to
5.25% by August 2023 an increase of 1.75% from the start of the
year.
The BOE’s response contributed to an easing of
CPI inflation which fell steadily throughout 2023, leading the
Monetary Policy Committee to vote to hold rates steady at the final
three meetings of the year in September, November and December,
with CPI of 4.0% at the end of the year.
Mortgage interest rates increased significantly
following the Government’s mini-budget in September 2022 and higher
rates persisted throughout 2023 with some moderation through the
early part of the year. The average rate on a new two-year fixed
rate mortgage at 75% loan to value fell from 5.14% in January 2023
to 4.60% in April according to the Bank of England, before rising
again during a period of volatile interest rate swap pricing,
hitting a peak of 6.22% in July. Mortgage rates then eased to the
end of the year, with the average two-year fixed rate product
offered at 5.03% in December 2023.House prices also continued to
increase in the first half of the year, despite weakening demand,
before turning negative from July onwards. UK house prices fell by
1.4% in the 12 months to December 2023.
The combination of these factors greatly
suppressed overall activity in the housing and mortgage markets,
with the number of residential property transactions in the UK
falling by 19% to 1.02m in 2023 (2022: 1.26m).
The number of approvals for new mortgages
falling by 30%to 1.02m (2022: 1.46m) and total UK gross mortgage
lending falling by 29% to £224bn in 2023 (2022: £313bn).
The UK savings market
Savings balances in the UK reduced by 0.9% in
2023 to close the year at £2,182.2bn, compared to growth of 3.1% a
year earlier, as cost of living pressures weighed on households’
disposable income.
Consumer preference pivoted in favour of term savings accounts over
instant access and current accounts, with term deposits and cash
ISA balances increasing by 36.3% and 16.3% respectively during the
year. This performance is a marked shift to the declining balances
reported in these product types in 2022, as higher interest rates
motivated consumers to lock into term savings in 2023.
Pricing on one-year fixed term accounts
increased from an average of 3.64% in 2022 to a peak of 5.45% in
2023, reflecting a higher SONIA yield curve and signs of increasing
competition in the second half of the year. At the end of December
2023, 1,918 savings products were promoted in the market, which
represented a step-up from the 1,690 accounts advertised a year
earlier.
The Bank of England base rate increased by
175bps during the year. The majority of this benefit was passed
through to savers with interest rates on instant access savings
products increasing by an average of 161bps in 2023.
Market review (continued)
The Group’s lending
sub-segments
Buy-to-Let
Buy-to-Let gross advances totalled £29.0bn in
2023, a 49% decrease from £57.2bn in 2022, reflecting affordability
concerns, with rising borrowing costs and pressures stemming from
higher energy prices and increasing maintenance costs. UK
Buy-to-Let mortgage balances outstanding fell by 0.2% to £301bn
during the year, and it is evident that a limited number of
landlords have chosen to exit the market. However, it is likely
that this activity was more concentrated towards amateur landlords
with single properties or small portfolios. Research conducted by
BVA BDRC on behalf of the Group showed that single property
landlords were the least likely to make a profit, the least likely
to acquire new properties and the most likely to exit the private
rented sector in the next 12 months. The research also showed that
of all landlords who planned to purchase new properties in the next
12 months, the majority (63%) planned to do so within a limited
company structure. This illustrates that professional,
multi-property landlords that form the Group’s customer base will
play an increasing role in the sector’s future.
Data collected by RICS shows that the private
rented sector still has a critical role to play in the provision of
housing in the UK. RICS members reported increasing tenant demand
in every survey since mid-2020, with supply remaining weak. This
was also the case in 2023, as evidenced by a decline in landlord
instructions coming to market, further magnifying supply and demand
imbalance.
This imbalance exerted growing pressure on rents
during 2023. The ONS reports that rents on the existing rental
stock increased by 6.2% in the 12 months to December 2023, while
Rightmove reported that asking rents for newly let properties
increased by 9.2% in Q4 2023 compared to a year earlier. Research
conducted by BVA BDRC suggests that over half (51%) of landlords
plan to increase rents in the next six months, with most suggesting
an increase is necessary to cover the running costs of the
property.
Residential
According to UK Finance, total Residential loans
to homeowners reached £186bn in 2023, a decrease of 26% from £250bn
in 2022. Within this total, purchase activity declined by 28% to
£121bn (2022: £168bn) while remortgaging fared slightly better,
down 21% to £65bn (2022: £82bn).
Refinancing volumes during the year were likely
dampened by the growing popularity of product transfers within an
existing lender which are not included in gross lending totals.
This trend was in part driven by the Mortgage Charter, under which
signatory lenders agreed to allow customers who are approaching the
end of their fixed rate term the opportunity to lock in a new fixed
rate product up to six months in advance. Product transfers
totalled £240bn in 2023, a 21% year-on-year increase (2022:
£198bn), and represented 78% of all regulated refinancing activity
during the year (2022: 69%).
Commercial
There was a sense of confidence in commercial
property during the first half of 2023, supported by stable of
slightly increasing capital and rental values. This positive
momentum reversed in some segments during the second half of the
year, with declines becoming more pronounced in the fourth quarter.
Data for ‘all property’ showed capital values fell by 3.9% in 2023,
with varying degrees of impact across commercial property
sub-categories.
Market review (continued)
UK office investment remained at low levels
throughout 2023 and the traditional end-of-year surge in activity
did not materialise. According to CoStar Research, annual office
investment stood at £8.8bn, a 14-year low and less than half the
ten-year annual average of £23.7bn. The reduction in trading was
most pronounced for higher-value properties. Prices fell as a
result of weak investor sentiment, higher borrowing costs and
rising vacancies as hybrid working continued. In response to this,
cash-rich investors have been entering the market seeking high
quality offices in desirable locations or, in some cases, seeing an
opportunity to capitalise on the increasing occupier preference for
energy efficient offices by retrofitting older buildings.
Investor sentiment towards the retail sector has
generally deteriorated in recent years amid multiple lockdowns and
a wave of store closures and company administrations. There were
however, some pockets in good high street locations in affluent
commuter towns and established market towns that are bucking this
trend. Average yields increased at the end of 2023, with retail
property trading at a big discount to industrial properties in a
complete reversal from a decade earlier. Rising interest rates,
inflationary pressures and faltering retail sales made retail
property appear less attractive and financing more difficult to
secure, with the last two quarters of the year representing the
weakest for investment in the last three years. Overall, retail
leasing demand continued to decline in the second half of 2023.
The strong levels of occupier and investor
demand for industrial property, witnessed through the height of the
pandemic, faded in 2023, amid higher inflation and interest rates.
However, the sector continued to benefit from structural factors
such as e-commerce, supply chain reconfiguration and the push
towards net zero carbon emissions. Although occupiers scaled back
growth plans which weighed on take up, vacancies remained
relatively low at 4.1% nationally. Industrial properties with the
highest energy-efficiency ratings posted stronger rental growth
than their lower rated or unrated counterparts. Sector-wide rental
growth rates eased from record levels as vacancies increased and
occupiers faced growing cost pressures.
Residential development
A lower level of activity in the residential
development sector reflected the subdued wider housing market as
developers reduced the number and scale of projects in response to
the higher cost of financing and lower demand from homebuyers. New
build completions were 9% lower in Q3 2023 than Q3 2022, whilst new
build starts were down 47%.
Demand for new properties remained relatively
resilient for housing that was affordable to local populations, in
contrast to the broader market. However, as mortgage pricing began
to fall towards the end of the year there was anecdotal evidence of
increased activity in the new build sector.
Key performance indicators
(KPIs)
Throughout the Strategic report the Key
performance indicators (KPIs) are presented on a statutory and an
underlying basis.
Management believes that the underlying results
and the underlying KPIs provide a more consistent basis for
comparing the Group’s performance between financial periods.
Underlying KPIs exclude integration costs and other
acquisition-related items.
For a reconciliation of statutory results to
underlying results, see page 28.
1. Gross new lending
Statutory £4.7bn (2022: £5.8bn)
Definition - Gross new lending is defined as
gross new organic lending before redemptions.
2023 performance:
Gross new lending decreased 20% in the year and reflecting subdued
mortgage market due to rising interest rates and affordability
pressures.
2. Loan loss ratio
Statutory 20bps (2022: 13bps)
Underlying 20bps (2022: 14bps)
Definition - Loan loss ratio is defined as
impairment losses expressed as a percentage of a 13 point average
of gross loans and advances. It is a measure of the credit
performance of the loan book.
2023 performance:
Statutory and underlying loan loss ratios increased in the year
largely due to updated macroeconomic scenarios, changes in the risk
profile of borrowers as they transitioned through modelled IFRS 9
impairment stages, loan book growth and an increase in balances in
arrears of three months or more.
3. Net interest margin
(NIM)
Statutory 231bps (2022: 278bps)
Underlying 251bps (2022: 303bps)
Definition - NIM is defined as net interest
income as a percentage of a 13 point average of interest earning
assets (cash, investment securities, loans and advances to
customers and credit institutions). It represents the margin earned
on loans and advances and liquid assets after swap expense/income
and cost of funds.
2023 performance:
Both statutory and underlying NIM reduced in 2023, largely due to
the adverse EIR adjustment and as the benefit of the lower cost of
retail funding was partially offset by the impact of lower
mortgage lending during a period of extreme swap spread
volatility.
Key performance indicators
(continued)
4. Cost to income ratio
Statutory 36% (2022: 27%)
Underlying 33% (2022: 25%)
Definition - Cost to income ratio is defined as
administrative expenses as a percentage of total income. It is a
measure of operational efficiency.
2023 performance:
Statutory and underlying cost to income ratios increased in 2023
primarily as a result of lower income due to the adverse EIR
adjustment and a net fair value loss on financial instruments
compared with a gain in the prior year.
5. Management expense ratio
Statutory 82bps (2022: 81bps)
Underlying 81bps (2022: 80bps)
Definition – Management expense ratio is defined
as administrative expenses as a percentage of a 13 point average of
total assets. It is a measure of operational efficiency.
2023 performance:
Statutory and underlying management expense ratios remained broadly
flat in the year demonstrating the Group’s focus on cost discipline
and efficiency.
6. Return on equity
Statutory 19% (2022: 20%)
Underlying 20% (2022: 23%)
Definition - Return on equity (RoE) is defined
as profit attributable to ordinary shareholders, which is profit
after tax and after deducting coupons on AT1 securities, gross of
tax, as a percentage of a 13 point average of shareholders’ equity
(excluding £150m of AT1 securities).
2023 performance:
The lower statutory and underlying return on equity reflected the
reduction in profitability due to the adverse EIR adjustment.
7. OSB solo CRD IV Common Equity Tier 1
capital ratio
The PRA has granted the Company a waiver to
comply with the Capital Requirements Regulation (CRR) as an
individual consolidation which includes the Company and
subsidiaries except for the offshore servicing entity OSBI, Special
Purpose Vehicles (SPVs) relating to securitisations and the CCFS
entities acquired in October 2019, defined as OSB solo.
OSB solo 16.9% (2022: 18.4%)
Definition
This is defined as CET1 capital as a percentage of risk-weighted
assets (calculated on a standardised basis) and is a measure of the
capital strength of the Company.
2023 performance:
The CET1 ratio remained strong, although reduced marginally as
capital generation from profitability in the year as a result of
the adverse EIR adjustment loan book growth, foreseeable and paid
dividends and the impact of the £150m share repurchase programme
completed in 2023.
Key performance indicators (continued)
8. Savings customer satisfaction – Net
Promoter Score
OSB +71 (2022: +64)
CCFS +62 (2022: +61)
Definition - The NPS measures customers’
satisfaction with services and products. It is based on customer
responses to the question of whether they would recommend us to a
friend. The response scale is 0 for absolutely not to 10 for
definitely yes. Based on the score, a customer is a detractor
between 0 and 6, a passive between 7 and 8 and a promoter between 9
and 10. Subtracting the percentage of detractors from promoters
gives an NPS of between -100 and +100.
2023 performance:
Savings customer NPS increased due to fair savings products
offering and excellent customer service.
Financial review
Summary statutory results for 2023 and
2022
|
For the year ended
31 December
2023 |
For the year ended
31 December
2022 |
Summary Profit or Loss |
£m |
£m |
Net interest
income |
658.9 |
709.9 |
Net fair value
gain on financial instruments |
(4.4) |
58.9 |
Gain on sale
of financial instruments |
- |
– |
Other
operating income |
3.9 |
6.6 |
Administrative
expenses |
(233.8) |
(206.5) |
Provisions |
(0.4) |
1.6 |
Impairment of
financial assets |
(48.8) |
(29.8) |
Impairment of
intangible assets |
- |
– |
Integration
costs |
- |
(7.9) |
Exceptional
items |
- |
– |
Profit before
taxation |
375.4 |
532.8 |
Profit after
taxation |
283.6 |
411.3 |
|
|
|
Key
ratios |
|
|
Net interest
margin |
231bps |
278bps |
Cost to income
ratio |
36% |
27% |
Management
expense ratio |
82bps |
81bps |
Loan loss
ratio |
20bps |
13bps |
Return on
equity |
19% |
20% |
|
|
|
|
As at
31 December
2023 |
As at
31 December
2022 |
Extracts from the Statement of Financial Position |
£m |
£m |
Loans and
advances to customers |
25,765.0 |
23,612.7 |
Retail
deposits |
22,126.6 |
19,755.8 |
Total
assets |
29,594.2 |
27,567.5 |
|
|
|
Financial Review
(continued)
Statutory Profit
The Group’s statutory profit before tax
decreased by 30% to £375.4m (2022: £532.8m) after
acquisition-related items of £51.7m (2022: £59.6m). The benefit of
net loan book growth was more than offset by the total net adverse
statutory effective interest rate 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 £283.6m in 2023,
a decrease of 31% from £411.3m in the prior year, and included
acquisition related items of £37.1m (2022: £38.7m).
The Group’s effective tax rate increased to
24.6% 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 was 19%
(2022: 20%).
Net Interest Income
Statutory net interest income decreased by 7% in
2023 to £658.9m (2022: £709.9m), as the benefit of the net loan
book growth was more than offset by the adverse EIR adjustment of
£210.7m on a statutory basis.
Statutory net interest margin (NIM) was 231bps
compared to 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 partially offset by the impact of some lower
margin lending during a period of extreme swap spread volatility.
The total net adverse EIR adjustment accounted for 72bps of
statutory NIM for the year ended 31 December 2023.
Net fair value gain 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 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 gain unwinds
over the life of the swaps through hedge accounting inception
adjustments.
Financial review
(continued)
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 £233.8m in 2023 (2022: £206.5m) largely due to the balance
sheet growth and the anticipated impact of inflation and planned
investment in people and operations, including digital solutions
and enhancing our customer propositions.
The statutory management expense ratio was
unchanged 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 are written off against the related provision when the
underlying security is 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.
Financial review
(continued)
Integration costs
The Group ceased recognising expenses as the 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.
Balance sheet growth
On a statutory basis, net loans and advances to
customers grew by 9% to £25,765.0m in 2023 (2022: £23,612.7m),
supported by originations of £4.7bn in the year and strong
retention.
Total assets also grew by 7% to £29,594.2m
(2022: £27,567.5m), 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 the 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 as at 31 December 2023
reduced to £3.3bn as at 31 December 2023 as the Group repaid £900m
of the funding using retail deposits and wholesale funding in the
second half of the year (31 December 2022: £4.2bn). The company
repaid £450m. Drawings under the Index Long-Term Repo scheme were
£10.1m (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 (2022: £1,494.1m and £1,522.8m, respectively).
Financial review
(continued)
OSB and CCFS also held portfolios of
unencumbered prepositioned Bank of England level B and C eligible
collateral in the Bank of England Single Collateral Pool.
As at 31 December 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 OSB solo capital position remained strong
with a CET1 capital ratio of 16.9% as at 31 December 2023
(2022: 18.4%).
Summary cash flow statement
|
For the year ended
31 December
2023 |
For the year ended
31 December
2022 |
Profit
before tax |
375.4 |
532.8 |
Net cash
generated/(used in): |
|
|
Operating
activities |
421.3 |
428.2 |
Investing
activities |
(301.2) |
63.2 |
Financing activities |
(650.2) |
(184.0) |
Net increase in
cash and cash equivalents |
(530.1) |
307.4 |
Cash and cash equivalents at the beginning of the
period |
3,044.1 |
2,736.7 |
Cash and cash equivalents at the end of the
period |
2,514.0 |
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
on derivative exposures and received £38.8m of initial margin,
reflecting a reduction in swap pricing in the fourth quarter. Cash
used from financing activities of £650.2m included finance repaid:
TFSME scheme repayments of £450m 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
£335.0m of share repurchase which were partially offset by funding
through securitisations, senior notes and subordinated liability
issuances raising £1,141.6m. Cash used in investing activities was
£301.2m.
In 2022, loans and advances to customers
increased by £2,563.1m during the year, partially 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 £184.0m 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.
Financial review
(continued)
Summary of underlying results for 2023
and 2022
|
|
|
|
For the year ended
31 December
2023 |
For the year ended
31 December
2022 |
Summary Profit or Loss |
£m |
£m |
Net interest
income |
715.0 |
769.1 |
Net fair value
(loss)/gain on financial instruments |
(10.8) |
48.5 |
Gain on sale
of financial instruments |
– |
– |
Other
operating income |
3.9 |
6.6 |
Administrative
expenses |
(232.1) |
(202.7) |
Provisions |
(0.4) |
1.6 |
Impairment of
financial assets |
(48.5) |
(30.7) |
Profit before
taxation |
427.1 |
592.4 |
Profit after
taxation |
320.7 |
450.0 |
|
|
|
Key
ratios |
|
|
Net interest
margin |
251bps |
303bps |
Cost to income
ratio |
33% |
25% |
Management
expense ratio |
81bps |
80bps |
Loan loss
ratio |
20bps |
14bps |
Return on
equity |
20% |
23% |
|
|
|
Extracts from the Statement of Financial
Position |
As at
31 December
2023 |
As at
31 December
2022 |
£m |
£m |
Loans and
advances |
25,739.6 |
23,529.8 |
Retail
deposits |
22,126.6 |
19,755.2 |
Total
assets |
29,570.0 |
27,488.4 |
Alternative
performance measures
The Group presents alternative performance measures (APMs) in this
Strategic report as Management believe they provide a more
consistent basis for comparing the Group’s performance between
financial periods.
Underlying results for
2023 and 2022 exclude integration costs and other
acquisition-related items. A reconciliation of statutory to
underlying results is disclosed on page 28.
APMs reflect an
important aspect of the way in which operating targets are defined
and performance is monitored by the Board. However, any APMs in
this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well.
Financial review
(continued)
Underlying profit
The Group’s underlying profit before tax
decreased by 28% to £427.1m from £592.4m in 2022. The benefit of
net loan book growth was more than offset by the adverse underlying
effective interest rate 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 £320.7m, down
29% (2022: £450.0m), 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 was 20% (2022: 23%).
Net interest income
Underlying net interest income decreased by 7%
to £715.0m in 2023 (2022: £769.1m), as the benefit of net loan book
growth was more than offset by the 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 reversionary rate
before refinancing based on observed customer behavioural
trends.
The underlying net interest was 251bps compared
to 303bps in the prior year, down 52bps, largely due to the adverse
EIR adjustment and as a benefit of the lower cost of retail funding
was partially offset by the impact of tighter mortgage margins due
to the volatile mortgage swap spreads. The adverse EIR adjustment
accounted for 63bps of underlying NIM for the year ended 31
December 2023.
Net fair value gain on financial
instruments
Underlying net fair value loss on financial
instruments of £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, a gain of £2.0m (2023:
£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.
Financial review
(continued)
Administrative
expenses
Underlying administrative expenses were up 15%
to £232.1m in 2023 (2022: £202.7m), largely due to the balance
sheet growth and anticipated impact of inflation and planned
investment in people and operations, including digital solutions
and enhancing our customer propositions.
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.
The underlying management expense ratio remained
broadly flat at 81bps in 2023 (2022: 80bps) reflecting the Group’s
focus on cost discipline and efficiency.
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 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
the 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 are
written off against the related provision when the underlying
security is 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 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 £29,570.0m
(31 December 2022: £27,488.4m), 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.
The Group complemented its retail deposits
funding with drawings under the Bank of England’s schemes. Drawings
under the Term Funding Scheme for SMEs (TFSME) reduced to £3.3bn as
at 31 December 2023 as the Group repaid £900m of the funding using
retail deposits and wholesale funding in the second half of the
year (2022: £4.2bn). The company repaid £450m. Drawings under the
Index Long-Term Repo scheme were £10.1m (2022: £300.9m).
Financial review
(continued)
Reconciliation of statutory to underlying
results
|
2023 |
|
2022 |
|
|
Statutory
results
£m |
Reverse
acquisition- related and exceptional items
£m |
Underlying results
£m |
|
Statutory results
£m |
Reverse
acquisition-related and exceptional items
£m |
Underlying results
£m |
Net interest income |
658.9 |
56.1 |
715.0 |
|
709.9 |
59.21 |
769.1 |
|
Net
fair value gain/(loss) on financial instruments |
(4.4) |
(6.4) |
(10.8) |
|
58.9 |
(10.4)2 |
48.5 |
|
Other operating income |
3.9 |
- |
3.9 |
|
6.6 |
– |
6.6 |
|
Total income |
658.4 |
49.7 |
708.1 |
|
775.4 |
48.8 |
824.2 |
|
Administrative expenses |
(233.8) |
1.7 |
(232.1) |
|
(206.5) |
3.84 |
(202.7) |
|
Provisions |
(0.4) |
- |
(0.4) |
|
1.6 |
– |
1.6 |
|
Impairment of financial assets |
(48.8) |
0.3 |
(48.5) |
|
(29.8) |
(0.9)5 |
(30.7) |
|
Integration costs |
- |
- |
- |
|
(7.9) |
7.97 |
– |
|
Profit before tax |
375.4 |
51.7 |
427.1 |
|
532.8 |
59.6 |
592.4 |
|
Profit after tax |
283.6 |
37.1 |
320.7 |
|
411.3 |
38.7 |
450.0 |
|
|
|
|
|
|
|
|
|
|
Summary Balance Sheet |
|
|
|
|
Summary Balance Sheet |
|
|
Loans and advances to customers |
25,765.0 |
(25.4) |
25,739.6 |
|
23,612.7 |
(82.9)9 |
23,529.8 |
|
Other financial assets |
3,722.8 |
1.3 |
3,724.1 |
|
3,878.9 |
9.110 |
3,888.0 |
|
Other non-financial assets |
106.4 |
(0.1) |
106.3 |
|
75.9 |
(5.3)11 |
70.6 |
|
Total assets |
29,594.2 |
(24.2) |
29,570.0 |
|
27,567.5 |
(79.1) |
27,488.4 |
|
Amounts owed to retail depositors |
22,126.6 |
- |
22,126.6 |
|
19,755.8 |
(0.6)12 |
19,755.2 |
|
Other financial liabilities |
5,274.6 |
- |
5,274.6 |
|
5,548.5 |
0.813 |
5,549.3 |
|
Other non-financial liabilities |
46.7 |
(6.3) |
40.4 |
|
61.4 |
(30.2)14 |
31.2 |
|
Total liabilities |
27,447.9 |
(6.3) |
27,441.6 |
|
25,365.7 |
(30.0) |
25,335.7 |
|
Net assets |
2,146.3 |
(17.9) |
2,128.4 |
|
2,201.8 |
(49.1) |
2,152.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Amortisation of the net fair value uplift to CCFS’ mortgage
loans and retail deposits on Combination
2. Inception adjustment on CCFS’ derivative assets and liabilities
on Combination
3. 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
Progress was made in 2023 against the Group’s
strategic risk management objectives for the year, including the
priority areas set out in the Annual Report and Accounts for the
year ended 31 December 2022.
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 driven by rising cost of borrowing and living, whilst the
timelines for repossessing and selling properties continued to be
elongated due to ongoing delays in court hearings process, which
also contributed to elevated levels of late-stage arrear 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 IFRS9 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 levels 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.
Risk review (continued)
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
Resolution Assessment Framework (including meeting MREL
requirements) and Consumer Duty. This has been achieved through
collaborative engagement with its supervisory authorities, key
functional areas and the Board. OSBG successfully issued its first
£300m of MREL qualifying debt securities plus £250m Tier 2 debt
securities in 2023 followed by a further £400m MREL issuance in
January 2024, following which the Group has met its interim MREL
requirement in advance of the July 2024 deadline. These issuances
were supported by a credit rating upgrade during the course of the
year.
The ongoing delivery of planned enhancements to
the Group’s operational resilience and continuity capabilities
remains a key area of focus. The Group’s programme of work to
ensure appropriate capabilities and processes are in place to
facilitate an orderly resolution of the Group completed as planned,
including the successful completion of a resolution scenario fire
drill which walked selected Board members and senior management
through the core steps of the resolution timeline.
The Group has 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.
Risk review (continued)
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 master fire drill to test those.
-
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 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 to
keeping pace with the evolving nature of the risk profile and
underlying drivers. The ERMF and its core modular components are
subject to periodic review and approval by the Board and its
relevant Committees.
Risk review (continued)
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 enterprise strategic risk management
framework.
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 the
risk controls and mitigants.
The Internal Audit function provides independent
assurance to the Board and its Committees as to the effectiveness
of the systems and controls and the level of adherence to internal
policies and regulatory requirements. The Board also commissions
third party subject matter expert reviews and reports in relation
to issues and areas requiring deeper technical assessment and
guidance.
Risk review (continued)
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 ICAAP, the Risk function engaged with a third party
to provide detailed climate change assessments at a collateral
level for the Group’s loan portfolios. The data was in turn
utilised to conduct profiling and financial risk assessments.
a) Climate scenarios considered
The standard metric for assessing climate change risk is the global
greenhouse gas concentration as measured by Representative
Concentration Pathway (RCP) levels. The four levels adopted by the
Intergovernmental Panel for Climate Change for its fifth assessment
report (AR5) in 2014 are:
Risk review (continued)
Emissions scenario
Scenario |
Change in temperature (°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 via the shrink
or swell of clay.
-
Coastal erosion - increased storm surge and rising sea levels will
increase the rate of erosion.
For each of the physical perils and climate
scenarios detailed above, a decade by decade prediction, from the
current year to 2100 on the likelihood of each was provided.
For flood and subsidence, the likelihood took
the form of a probability that a flood or subsidence event would
occur over the next ten years. For coastal erosion the distance of
the property to the coastline is provided by scenario and
decade.
All peril impacts are calculated at the property
level to a one metre accuracy. This resolution is essential because
flood and subsidence risk factors can vary considerably between
neighbouring properties.
In addition to the physical perils, the current
Energy Performance Certificate (EPC) of each property was
considered to allow for an assessment of transitional risk due to
policy change. EPC ratings are based on a Standard Energy Procedure
(SAP) calculation which uses a methodology to determine the energy
performance of properties by considering factors such as
construction materials, heating systems, insulation and air
leakage.
Both the OSB and CCFS portfolios were profiled
against each of the perils detailed under the best (RCP 2.6) and
worst (RCP 8.5) climate scenarios.
By the 2030’s, 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 2030’s, 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.
Risk review (continued)
Both Banks have over 92% of their portfolios
more than 1000 metres from the coastline, indicating a very low
coastal erosion risk across the Group.
The OSB bank entity and CCFS bank entity has 31
properties within 100 metres of the 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 41% of properties have an
EPC of C or better, 46% have an EPC of D, 12% with an EPC of E and
negligible percentages in F or G. 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 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 EPC A, B and C grades where possible. We
considered this risk for Buy-to-Let accounts only.
d) Analysis outcome
The physical risks currently present an immaterial ECL or capital
risk to the Group. The sensitivity to transitional risk is larger
than that of physical risk, although still very small.
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 niche
sub-sectors, 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.
Principal risks and uncertainties
(continued)
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 subsegments.
2. Reputational risk
The potential risk of the Group’s reputation
being affected due to factors such as unethical practices, adverse
regulatory actions, customer or broker dissatisfaction and
complaints or negative/adverse publicity.
Reputational risk can arise from a variety of
sources and is a second order risk – the crystallisation of any
principal risk can lead to a reputational risk impact.
Risk appetite statement: The Group has a very
low appetite for reputational risks. The Group will not conduct its
business or engage with stakeholders in a manner that could
adversely impact its reputation or franchise value. The Group
recognises that reputational risk is a consequence of other risks
materialising and in turn seeks to actively manage all risks within
Board-approved risk appetite levels. The Group strives to protect
and enhance its reputation at all times.
2. 1 Deterioration of reputation
Potential loss of trust and confidence that our stakeholders place
in us as a responsible and fair provider of financial services.
Mitigation
Culture and commitment to treating customers fairly and being open
and transparent in communication with key stakeholders. Established
processes in place to proactively identify and manage potential
sources of reputational risk. Review of relevant Management
Information 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.
Principal risks and
uncertainties (continued)
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.
Principal risks and
uncertainties (continued)
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.
Principal risks and uncertainties
(continued)
4. Market risk
Potential loss due to changes in market prices
or values.
Risk appetite statement: The Group actively
manages market risk arising from structural interest rate
positions. The Group does not seek to take a significant interest
rate position or a directional view on interest rates and it limits
its mismatched and basis risk exposures.
4.1 Interest rate risk
The risk of loss from adverse movement in the overall level of
interest rates. It arises from mismatches in the timing of
repricing of assets and liabilities, both on and off balance sheet.
It includes the risks arising from imperfect hedging of exposures
and the risk of customer behaviour driven by interest rates, e.g.
early redemption.
Mitigation
The Group’s Treasury function actively hedges to match the timing
of cash flows from assets and liabilities.
Direction: unchanged
Interest rate risk remained unchanged in 2023 was influenced by the
backdrop of rapidly rising interest rates and the potential for
changing customer behaviour. The macroeconomic outlook remains
uncertain.
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.
Principal risks and uncertainties
(continued)
5. Liquidity and funding
risk
The risk that the Group, although solvent, does
not have sufficient financial resources to enable it to meet its
obligations as they fall due.
Risk appetite statement: The Group will maintain
sufficient liquidity to meet its liabilities as they fall due under
normal and stressed business conditions; this will be achieved by
maintaining strong retail savings franchises, supported by
high-quality liquid asset portfolios comprised of cash and
readily-monetisable assets, and through access to pre-arranged
secured funding facilities. The Board requirement to maintain
balance sheet resources sufficient to survive a range of severe but
plausible stress scenarios is interpreted in terms of the liquidity
coverage ratio and the ILAAP stress scenarios.
5.1 Retail funding stress
As the Group is primarily funded by retail deposits, a retail run
could put it in a position where it could not meet its financial
obligations.
Increased competition for retail savings driving
up funding costs, adversely impacting retention levels and
profitability.
Mitigation
The Group’s funding strategy is focused on a highly stable retail
deposit franchise. The Group’s large number of depositors provides
diversification, where a high proportion of balances are covered by
the FSCS protection scheme, largely mitigating the risk of a retail
run.
In addition, the Group performs in-depth
liquidity stress testing and maintains a liquid asset portfolio
sufficient to meet obligations under stress. The Group holds
prudential liquidity buffers to manage funding requirements under
normal and stressed conditions.
The Group has further diversified its retail
channels by 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 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 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.
Principal risks and uncertainties
(continued)
The Group completed one securitisation in 2023 and two capital
issuances in 2023 and has a range of wholesale funding options
available outside retained securitisation, including Bank of
England facilities, for which collateral has been
prepositioned.
Direction: unchanged
The Group’s range of wholesale funding options available, including
repo or sale of retained notes or collateral upgrade trades
remained broadly unchanged.
5. 3 Refinancing of TFSME
Current Term Funding Scheme for Small and Medium-sized Enterprises
(TFSME) borrowing by the Group reduced to £3.3bn at the end of 2023
from £4.2bn in 2022, with £900m of funding repaid during the year
with the remainder due to be repaid by October 2025.
Mitigation
The Group has other wholesale options available to it, including
securitisation programmes and repo or sale of held notes, as well
as retail funding via its strong franchises, to replace the TFSME
borrowing gradually over the next 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 significant securitisation
issuance. These markets have seen 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 us flexibility in raising capital.
6.1 Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and
unexpected losses which can result in the Group’s capital
requirements increasing, or capital resources being depleted, such
that it no longer meets the solvency ratios as mandated by the PRA
and Board risk appetite.
The 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 and plans
and undertakes stress testing analysis to subject its solvency
ratios to extreme but plausible scenarios.
The Group also holds prudent levels of capital buffers based on
CRD IV requirements and expected balance sheet growth.
Principal risks and
uncertainties (continued)
The Group engages actively with regulators,
industry bodies and advisers to keep abreast of potential changes
and provides feedback through the consultation process.
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 and completeness
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.
Principal risks and
uncertainties (continued)
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.
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 good 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 its ability to recover
from an incident.
The Group has established a site in Hyderabad to
ensure that, in the event of an operational incident in Bangalore,
services can be maintained.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and impact
of an IT failure, the risks remain, in particular due to new 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.
Principal risks and
uncertainties (continued)
8.1 Conduct risk
The risk that the Group fails to meet its expectations with respect
to conduct risk.
Mitigation
The Group’s culture is clearly defined and monitored via its
Purpose, Vision and Values driven behaviours.
The Group has a strategic commitment to provide
simple, customer-centric products. In addition, a Product
Governance framework is established to oversee the 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 define 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
change that impacts the Group.
Risk appetite statement: The Group views ongoing
conformance with regulatory rules and standards across all the
jurisdictions in which it operates as a critical facet of its risk
culture. The Group has a very low appetite to assume regulatory
risk, which could result in poor customer outcomes, customer
detriment, regulatory sanctions, financial loss or damage to its
reputation. The Group will proactively monitor for and will not
tolerate any systemic failure to comply with applicable laws,
regulations or codes of conduct relevant to its business.
The Group acknowledges that regulatory rules and
standards are subject to interpretation and subsequent translation
into internal policies and procedures. The Group interprets
requirements to ensure adherence with the intended purpose and
spirit of the regulation whilst being cognisant of commercial
considerations and good customer outcomes. To minimise regulatory
risk, the Group proactively engages with its regulators in a
transparent manner, participates in industry forums and seeks
external advice to validate its interpretations, where
appropriate.
9.1 Prudential regulatory changes
The Group continues to see a high volume of key compliance
regulatory changes that impact its business activities. These
include the consumer duty requirements and increased Resolvability
Assessment Framework requirements.
Principal risks and
uncertainties (continued)
Mitigation
The Group has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are
managed by structured programmes overseen by the Project Management
team and sponsored at Executive level.
The Group has proactively sought external expert
opinions to support interpretation of the requirements and
validation of its response, where required.
Direction: unchanged
The Group 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,
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
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 detriment due to human and/or operational
failures. Where such incidents occur, they are thoroughly
investigated, and the appropriate remedial actions are taken to
address any customer detriment and prevent recurrence.
Direction: increased
The 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.
Principal risks and
uncertainties (continued)
10. Financial crime risk
The risk of financial or reputational loss
resulting from inadequate systems and controls to mitigate the
risks from financial crime.
Risk appetite statement: To minimise financial
crime risk the Group will design and maintain robust systems and
controls to identify, assess, manage and report any activity
(internal or external in nature) which exposes the Group to
financial crime risk in the form of money laundering, human
trafficking, terrorist financing, sanctions breaches, bribery,
corruption and fraud. The Group recognises the need to continuously
review its systems and controls to ensure that they are aligned to
the nature and scale of financial crime risk it is exposed to on a
current and forward looking basis.
10.1 Financial crime risk
The risk of financial or reputational loss resulting from a failure
to implement systems and controls to manage the risk from money
laundering, terrorist financing, sanctions, bribery, corruption and
cyber-crime.
Mitigation
The Group operates in a low-risk environment providing relatively
simple products to UK domiciled customers serviced through a UK
registered bank account. The Group has an established screening
programme that is deployed at the point of origination and on a
regular basis throughout the customer lifecycle. Where applicable,
enhanced due diligence is applied to ensure that any increase in
risk is appropriately managed and any activity remains within risk
appetite.
The Group has a horizon scanning programme that
identifies changes to money laundering regulations and any other
financial crime related legislation to ensure that we comply with
all regulatory obligations.
The Group 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, the level
of maturity of the Group’s controls and defences continue 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 in order to detect and
prevent the exposure to fraud through the customer lifecycle. At
the point of origination, all new applications are subject to a
range of controls to identify and mitigate fraud. Customer
behavioural and transactional activity is monitored to identify
potential suspicious behaviours or trends that may be indicative of
fraud.
Principal risks and
uncertainties (continued)
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 aware 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 macroeconomic uncertainty
The Group’s lending activity is predominantly focused in the United
Kingdom (with a legacy back-book of mortgages in the Channel
Islands) and, as such, will be impacted by any risks emerging from
changes in the macroeconomic environment. 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 via
various stress testing activities (i.e. ad hoc, risk appetite and
Internal Capital Adequacy Assessment Process (ICAAP)) understands
how the Group performs over a variety of macroeconomic stress
scenarios and has developed a suite of early warning indicators,
which are closely monitored to identify changes in the economic
environment. The Board and management review detailed portfolio
reports to identify any changes in the Group’s risk profile.
Climate change
As the focus on climate change intensifies, both the physical risks
and the transitional risks associated with climate change continue
to grow. Climate change risks include:
-
Physical risks which relate to specific weather events, such as
storms and flooding, or to longer-term shifts in the climate, such
as rising sea levels. These risks could include adverse movements
in the value of certain properties that are in coastal and
low-lying areas, or located in areas prone to increased subsidence
and heave.
-
Transitional risks may arise from the adjustment towards a
low-carbon economy, such as tightening energy efficiency standards
for domestic and commercial buildings. These risks could include a
potential adverse movement in the value of properties requiring
substantial updates to meet future energy performance
requirements.
-
Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
Mitigation
During 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.
Principal risks and uncertainties
(continued)
Model risk
The risk of financial loss, adverse regulatory outcomes,
reputational damage or customer detriment resulting from
deficiencies in the development, application or ongoing operation
of models and ratings systems.
The Group also notes changes in industry best
practice with respect to model risk management including a PRA
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.
Credit risk
The Group’s prudent credit risk appetite ensures
that loan portfolios are positioned to perform well in both benign
and stressed macroeconomic environments.
The Group delivered 9% net loan book growth in
2023 despite difficult mortgage market conditions and subdued
purchase activity.
Weighted average LTV of the loan book increased
for OSB and CCFS to 63% and 65% respectively as at 31 December 2023
(31 December 2022: OSB 58% and CCFS 63%). The weighted average LTV
profile remains 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).
The Group’s net loan balances being greater than
three months in arrears increased to 1.4% as at 31 December 2023
(31 December 2022: 1.1%).
Risk profile performance
overview (continued)
Solo bank interest coverage ratios for
Buy-to-Let loans remained strong during 2023 at 176% for OSB and
154% for CCFS (2022: 207% OSB and 191% CCFS).
Expected Credit Losses
Balance sheet expected credit losses increased from £130m 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:
- – 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.
- 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.
b.
Model and staging enhancements – enhancements were made to the
Group’s models to ensure that estimates continued to reflect actual
credit profile 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.
c. 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. 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 are forecast to have peaked.
e. Changes in risk
profile – as the Group’s loan book continued to grow, provisions
had to be 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.
f.
Individually assessed provisions – the Group’s specialist real
estate management and collections servicing 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.
g. 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.
Risk profile performance overview
(continued)
The Group continued to closely monitor
impairment coverage levels in the year.
Impairment coverage levels were broadly flat
from 31 December 2023, with cost of living and cost of borrowing
further embedded within the Group’s framework and models. 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 |
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 |
|
|
|
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 with 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 in 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.
Risk profile performance
overview (continued)
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 subsequent
rising interest rates to control inflation levels. The Group
undertook a detailed analysis to assess the portfolio risks and
consider whether these were adequately accounted for in the IFRS 9
models and frameworks and identified a number of areas requiring
post-model adjustments, most notably to account for the increased
credit risk from the heightened cost of living and cost of
borrowing resulting in 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
|
Probability weighting (%) |
|
Scenario % |
Scenario |
Economic measure |
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 |
-2.8 |
-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 |
downside |
|
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 |
Risk profile performance overview
(continued)
Forbearance
Where a borrower experiences financial difficulty, which impacts
their ability to service their financial commitments under the loan
agreement, forbearance may be used to achieve an outcome which is
mutually beneficial to both the borrower and the Group.
Borrowers who are experiencing financial
difficulties 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 will be a shortfall in the
amount required to redeem the Group’s charge, in which case
repayment of the shortfall may be agreed over a period of time,
subject to an affordability assessment; or where possession has
been taken by the Group, and on the subsequent sale where there has
been a shortfall loss.
-
Arrangement to pay: where an arrangement is made with the borrower
to repay an amount above the contractual monthly payment, which
will repay arrears over a period of time.
-
Promise to pay: where an arrangement is made with the borrower to
defer payment or pay a lump sum at a later date.
-
Bridging loans which are more than 30 days past their maturity
date. Repayment is rescheduled to receive a balloon or bullet
payment at the end of the term extension, where the institution can
duly demonstrate future cash-flow availability.
Risk profile performance
overview (continued)
The Group aims to proactively identify and
manage forborne accounts, utilising external credit reference
bureau information to analyse probability of default and customer
indebtedness trends over time, feeding pre-arrears watch-list
reports. Watch-list cases are in turn carefully monitored and
managed as appropriate.
Fair value of collateral
methodology
The Group ensures that security valuations are reviewed on an
ongoing basis for accuracy and appropriateness. Commercial
properties are subject to quarterly indexing using Commercial Real
Estate (CRE) data. Residential properties are indexed at least
quarterly, using House Price Index data.
Solvency risk
The Group maintains an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various
capital requirements (Pillar 1, CRD IV buffers, Board and
management buffers) are incrementally aggregated as a percentage of
available capital (CET1 and total capital).
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 OSB solo fully-loaded CET1 and total capital
ratios under CRD IV reduced to 16.9% and 20.3%, respectively as at
31 December 2023 (31 December 2022: 18.4% and 20.0%,
respectively).
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 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.
Risk profile performance
overview (continued)
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 has
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. 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 proactively 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 the OSBI business. This is minimised by pre-funding a
number of months in advance and regularly monitoring GBP/INR rates.
Wholesale counterparty risk is measured on a daily basis and
constrained by counterparty risk limits.
Operational risk
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 the operational risk
identification and assessment processes are established across the
Group in a consistent manner.
Risk profile performance
overview (continued)
A hybrid working model has been adopted across
the Group, with the exception being front-line customer-facing
colleagues, following the return to the office after the COVID-19
pandemic. With a high number of employees working and accessing
systems from home, the risk of a cyber-attack has heightened.
Whilst IT security risks continue to evolve, work continues to
enhance the level of maturity of the Group’s controls and defences,
supported by dedicated IT security experts. The Group’s ongoing
penetration testing continues to drive enhancements by identifying
potential areas of risk.
Regulatory and compliance
risk
The Group is committed to the highest standards of regulatory
conduct and aims to minimise breaches, financial costs and
reputational damage associated with non-compliance.
The Group has an established Compliance function
which actively identifies, assesses and monitors adherence with
current regulation and the impact of emerging regulation.
In order to minimise regulatory risk, the Group
maintains a proactive relationship with key regulators, engages
with industry bodies such as UK Finance and seeks external expert
advice. The Group also assesses the impact of forthcoming
regulation on itself and the market in which it operates, and
undertakes robust assurance assessments from within the Risk and
Compliance functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the
market sub-segments in which it operates to be a fundamental part
of its strategy and a key driver to sustainable profitability and
growth. The Group does not tolerate any systemic failure to deliver
fair customer outcomes.
On an isolated basis, incidents can result in
detriment owing to human and/or operational failures. Where such
incidents occur, they are thoroughly investigated and the
appropriate remedial actions are taken to address any customer
detriment and to prevent recurrence.
The Group considers effective conduct risk
management to be a product of the positive behaviour of all
employees, influenced by the customer-centric culture throughout
the organisation and therefore continues to promote a strong sense
of awareness and accountability.
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.
Risk profile performance
overview (continued)
Strategic and business risk
The Board has clearly articulated the Group’s strategic vision and
business objectives supported by performance targets. The Group
does not intend to undertake any medium to long-term strategic
actions, which would put the Group’s strategic or financial
objectives at risk.
To deliver against its strategic objectives and
business plan, the Group has adopted a sustainable business model
based on a focused approach to core niche market sub-segments where
its experience and capabilities give it a clear competitive
advantage.
The Group remains focused on delivering against
its core strategic and financial objectives, against a highly
competitive and uncertain backdrop.
Reputational risk
Reputational risk can arise from a variety of sources and is a
second order risk – the crystallisation of another principal risk
can lead to a reputational risk impact.
The Group monitors reputational risk through
tracking media coverage, customer satisfaction scores, the share
price and Net Promoter Scores.
Non-Financial and Sustainability
Information Statement
The requirements of sections 414CA and 414CB of the Companies Act
2006 relating to non-financial and sustainability reporting are
addressed in this section and further details can be found in
OSBG’s annual report and accounts.
We have a range of policies and guidance that
support key outcomes for all our stakeholders. Performance against
our strategic non-financial performance measures is one indicator
of the effectiveness and outcomes of policies and statements. The
Group’s policies and statements include, but are not limited to,
those summarised in the table below.
Environmental matters
Environmental policy
Our Environmental policy embodies the Group’s commitment to
meeting or exceeding all relevant environmental obligations,
reducing our impact and achieving our ambition of net zero
greenhouse gas emissions (GHG) no later than 2050.
The policy is supported by our Environmental Management System
(EMS) which is certified to ISO14001:2015 and covers our UK
corporate real estate and, in 2023, extended to the Kent Reliance
branch network. The EMS ensures the Group knows where it impacts
the environment and that effective
controls are in place to manage risk and drive improvement,
covering topics such as legislation, energy use, waste management
and water use.
Our Environmental, Social and Governance Metrics
Policy
The policy sets out the non-financial performance indicators
which include ethical, sustainability and corporate governance
considerations that are reported to relevant Committees. These
metrics have been determined to be important to the Group’s
stakeholders and ESG strategy and commitments.
The Board recognises its responsibility for providing oversight
of the ESG Strategy (see Three Lines of Defence table) and for
setting the vision on how we conduct business, enhance stakeholder
value and fulfil our regulatory obligations.
Non-Financial and Sustainability Information
Statement (continued)
Employee Matters
Our Group Diversity, Equity and Inclusion Policy
The policy sets out the Group’s commitment to promoting equality
of opportunity, providing an inclusive workplace and eliminating
any unfair treatment or unlawful discrimination.
We recognise the benefits that diversity brings to the business.
2023 saw a significant uplift in diversity, equity and inclusion
(DE&I) activity across the Group, with an increased level of
employee communications and events enhancing awareness and
celebrating our differences. These events were often aligned with
the dates of national events such as Pride, Black History Month,
National Inclusion Week and International Women’s Day, with related
activities being coordinated by the internal Our Diversity Network
made up of passionate volunteers.
We continued to capture diversity data about our UK colleagues
within the Group’s HR system and c.80% of colleagues submitted some
or all of their data across the broad range of diversity
categories, enabling us to build an increasingly clear picture of
the diverse nature of our UK workforce and areas which are
under-represented.
Just over 9% of our UK employees work under a
formal flexible working arrangement relating to part-time hours and
over 100 additional employees compress their full-time working
hours. At the end of 2023, around 56% of our UK workforce was
female as were 47% of employees who joined during the year. In OSB
India, females constituted just over 40% of all employees, with
around 45% of starters being female. In addition, 27% of our Group
Executive Committee were female.
Group Whistleblowing policy
Our Group Whistleblowing policy aims to foster an environment
where all employees and concerned parties feel encouraged to report
any serious wrongdoing promptly.
Whistleblowing cases are handled with fairness and consistency,
prioritising the protection of individual whistleblowers. Regular
Whistleblowing Reports are presented to the Group Audit Committee,
and an Annual Whistleblowing Report is provided to the Board. There
is a designated Non-Executive Director whistleblowing champion.
Group Health and Safety policy
Our Group Health and Safety policy delineates our approach and
statutory responsibilities, ensuring compliance with legislation to
safeguard employees, customers and all impacted by our operations.
It prioritises providing a secure environment for everyone
involved. We uphold a stringent stance on compliance, regularly
testing a range of controls to ensure their efficiency, all subject
to independent oversight. The health and safety working group
convenes biannually to review policy objectives, reporting any
pertinent issues to operational risk.
Non-Financial Information Statement
(continued)
Social Matters
Modern Slavery Statement and Code of Ethics
Our Modern Slavery Statement and Vendor Code of Conduct and
Ethics articulate our actions to combat modern slavery and human
trafficking risks within our operations and supply chains.
The UK Vendor Code of Conduct and Ethics (UK VCCE) is
distributed at new vendor engagements and annually to existing
vendors, encompassing provisions on our values, diversity and
inclusion, human rights and breach reporting procedures.
To address the highest modern slavery risks in our supply chain,
Indian operations, and employment processes, our Vendor Management
team rigorously tests key controls within the Vendor Management
Risk Assessment Matrix.
Robust breach reporting procedures are in place, with no
reportable incidents in this financial year.
Group Vendor Management and Outsourcing policy
Our Group Vendor Management and Outsourcing policy establishes
essential requirements, enabling efficient management of
third-party relationships whilst ensuring compliance with
regulatory obligations. It provides a framework for diligent
engagement and due diligence in overseeing
potential and contracted third parties.
The monthly Vendor Management Committee ensures compliance with
the policy and assesses the performance of key third parties.
Regular reporting to the Group Risk Committee and annual updates to
the Board provide assurance. Recognising the significance of robust
relationships with third parties and potential reputational risks,
we actively monitor their adherence to our standards to fulfil our
obligations to stakeholders.
The Vendor Management Team engage with vendors identified as
carrying an increased inherent ESG risk through surveys.
The surveys seek to determine awareness of ESG issues and the
controls in place to manage them.
Lending policy
The Lending policy establishes responsible lending parameters
aligned with our credit risk appetite and set criteria. Approval
for policy changes rests with the Group Credit Committee,
escalating material changes to the Group Risk Committee. Credit
Quality Assurance acts as a second line of defence, monitoring
policy adherence through risk-based sampling.
Control mechanisms, including system parameters and underwriting
processes, prevent breaches of lending parameters. Our
affordability approach reflects recent cost of living changes,
ensuring an updated assessment of a customer’s
creditworthiness.
Group Complaint Handling policy
The Group Complaint Handling policy aligns with regulatory
expectations, emphasising a customer-centric approach. We
investigate complaints diligently and impartially, supported by
adequately trained employees. The process ensures accessibility for
all customers, including those in vulnerable circumstances,
offering a tailored service and equal opportunities to raise
concerns.
Complaint performance data is integrated into management
information for Management Committees and the Board, supporting
informed decision-making.
Non-Financial Information Statement
(continued)
Group Customer Vulnerability policy
Our Group Customer Vulnerability policy establishes standards
and an approach for identifying and supporting vulnerable
customers, ensuring consistently fair outcomes throughout the
Group.
Regular reviews by the Vulnerable Customer Review Committee
involve case studies, monitoring best practices across diverse
customer journeys and sharing insights with various customer-facing
and second line functions.
Group Arrears Management and Forbearance policy
The Group Arrears Management and Forbearance policy prioritises
fair treatment of customers facing financial difficulties,
proactively engaging with those showing signs of potential
distress.
Monitoring arrears rates occurs monthly through the Group Credit
Committee, ensuring senior management oversight of trends and
mitigating credit risk associated with potential losses from
ineffective customer account management. Reviewing the forbearance
and collection toolkit ensures adequate support for customers
facing financial strain due to increased mortgage payments.
Group Data Protection policy
Our Group Data Protection policy establishes adequate policies
and procedures for compliance with the UK General Data Protection
Regulation (GDPR) and the Data Protection Act 2018. It delineates
necessary steps for processing personal data.
Respecting and safeguarding the privacy and security of personal
information is fundamental, and we consider robust privacy
practices integral to corporate governance and accountability.
The Group Data Protection Officer reports biannually to the
Group Executive Committee and the Board, ensuring compliance with
legal requirements and the Data protection policy.
Group Anti-Bribery and Corruption policy
Our Anti-Bribery and Corruption policy dictates our commitment
to conducting business honestly and ethically, maintaining a
zero-tolerance stance against bribery and corruption. It serves as
a guideline for employees, contractors, and third-party service
providers to ensure ethical conduct in compliance with local laws
across our operational jurisdictions.
This policy is an integral part of our Group Financial Crime
Risk Management Framework, subject to an annual review and approval
by the Group Audit Committee. Mandatory anti-bribery and corruption
training is part of the broader financial crime training for all
employees, whilst its requirements are integrated into our Vendor
management and outsourcing policy.
Conflicts of Interest policy
Our Conflicts of Interest policy prioritises identifying and
managing conflicts whilst striving to prevent them where feasible.
It undergoes an annual review by the Group Executive Committee and
is integrated into mandatory financial crime training for all
employees, and is woven into our Vendor Management and Outsourcing
Policy, ensuring a comprehensive approach.
Group Compliance function oversees the conflicts of interest
register, reviewed quarterly by the Group Conduct Risk Management
Committee and annually by the Group Nomination and Governance
Committee for Executives and Directors.
No material issues or breaches of this policy occurred in
2023.
Non-Financial Information Statement
(continued)
Fraud policy
Our Fraud policy ensures compliance with legal requirements,
establishing controls to mitigate fraud risk. It fosters a
zero-tolerance approach to fraud whilst acknowledging its
possibility in business operations.
Mandatory fraud awareness training is part of our annual
financial crime training for employees.
A dedicated Group financial crime team investigates potential
fraud incidents and takes recovery actions, when necessary, with
various committees regularly monitoring and reviewing fraud
reporting.
Anti-money Laundering and Counter Terrorist and Financing
policy
The Group’s Anti-money Laundering and Counter Terrorist
Financing policy outlines the responsibilities of senior
management, the Money Laundering and Reporting Officer (MLRO) and
all colleagues. It mandates integrity from every individual, with
zero tolerance for breaches of anti-money
laundering or counter terrorist financing legislation.
Mandatory anti-money laundering and counter terrorist financing
training for all employees aligns with our broader financial crime
risk management approach.
Acknowledging inherent risk exposure as a financial services
provider, senior management reviews key risk and performance
indicators, providing management information for visibility into
our exposure to financial crime.
Group Operational Resilience policy
Our Group Operational Resilience policy outlines the approach
and expectations of the Group in establishing and enhancing
resilience levels, recognising operational resilience as a focal
point.
The policy details the Group’s adherence to relevant UK
regulatory requirements (e.g. the Financial Conduct Authority
and Prudential Regulation Authority) and alignment with industry
standards. This includes the March 2021 published FCA and PRA
policies on operational resilience,
mandating firms to adopt a proactive approach to preventing service
disruption and ensuring robust planning and testing for effective
response to disruptive incidents.
This Strategic report was approved by the Board and signed on
its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
09 April 2024
OneSavings Bank plc
Directors’ Report
For the Year Ended 31 December 2023
The Directors present their Report, together
with the audited Financial Statements and Auditor’s Report, for the
year ended 31 December 2023.
Information presented in other
sections
Information relating to future developments,
principal risks and uncertainties and engagement with suppliers,
customers and others has been included in the Strategic Report.
Information on financial instruments including
financial risk management objectives and policies including, the
policy for hedging the exposure of the Group to price risk, credit
risk, liquidity risk and cash flow risk can be found in the Risk
review on pages 29 to 58.
Details on how the Company has complied with
section 172 can be found throughout the Strategic and Directors’
Reports and on pages 13 and 14.
Results
The results for the year are set out in the
Statement of Comprehensive Income on page 85.
Directors
The Directors who served during the year and to
the date of this report were as follows:
Graham Allatt (resigned 11 May 2023)
Kalvinder Atwal (appointed on 7 February 2023)
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara (resigned 11 May 2023)
April Talintyre
Simon Walker
David Weymouth
April Talintyre will be retiring and step down
from the Board on the 9th May 2024.
None of the Directors had any interest either
during or at the end of the year in any material contract or
arrangement with the Company.
Directors’ indemnities
The Articles provide, subject to the provisions
of UK legislation, an indemnity for Directors and Officers of the
Group in respect of liabilities they may incur in the discharge of
their duties or in the exercise of their powers, including any
liabilities relating to the defence of any proceedings brought
against them, which relate to anything done or omitted, or alleged
to have been done or omitted, by them as Officers or employees of
the Group. Directors’ and Officers’ Liability Insurance cover is in
place for all Directors and Officers.
Independent Auditor’s Report to the Members of
OneSavings Bank plc (continued)
For the Year Ended 31 December 2023
Equal opportunities
The Group is committed to applying its Group
Diversity, Equity and Inclusion Policy at all stages of recruitment
and selection. Short-listing, interviewing and selection will
always be conducted without regard to gender, gender reassignment,
sexual orientation, marital or civil partnership status, colour,
race, nationality, ethnic or national origins, religion or belief,
age, pregnancy or maternity leave or trade union membership. Any
candidate with a disability will not be excluded unless it is clear
that the candidate is unable to perform a duty that is intrinsic to
the role, having taken into account reasonable adjustments.
Reasonable adjustments to the recruitment process will be made to
ensure that no applicant is disadvantaged because of disability.
Line Managers conducting recruitment interviews will ensure that
the questions they ask job applicants are not in any way
discriminatory or unnecessarily intrusive. This commitment also
applies to existing employees, with the necessary adjustments made,
where there is a change in circumstances.
Employee engagement
Employees are kept informed of developments
within the business and in respect of their employment through a
variety of means, such as employee meetings, briefings and the
intranet. Employee involvement is encouraged and views and
suggestions are taken into account when planning new products and
projects.
The Sharesave ‘save as you earn’ Scheme is an
all-employee share option scheme which is open to all UK-based
employees. The Sharesave Scheme allows employees to purchase
options by saving a fixed amount of between £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 (options
granted prior to 2021 have a lower limit of £5 and only three-year
schemes will be offered from 2021 onwards). The Sharesave Scheme
has been in operation since June 2014 and options are granted
annually, with the exercise price set at a 20% discount of the
share price on the date of grant.
The Workforce Advisory Forum (known as OurVoice)
is in place to gather the views of the workforce to enable the
Board and Group Executive Committee to consider a broadly
representative range of stakeholder perspectives to guide strategic
decisions for the future of the Group. OurVoice consists of
volunteer representatives (of which there are 33 in total) from
each of the various business areas and locations, as well as
permanent members including a designated NED, Sarah Hedger (with
effect from 11 May 2023); a member of the Group Executive
Committee, Jason Elphick; and a representative from HR Management.
Other NEDs and members of the Group Executive Committee are invited
to attend meetings throughout the year and do so on a regular
basis. Mary McNamara was the previous designated NED with
responsibility for OurVoice until her retirement from the Board on
11 May 2023.
Members of the Board are keen to engage with our
employees across all locations and find the experience of visiting
our branches and offices within the UK and India invaluable.
Four OurVoice meetings were held during 2023,
with employee representatives encouraged to engage with employees
within their nominated business areas and across all Group
locations in advance of each meeting in order to identify topics
impacting the workforce and which it is felt should be brought to
the attention of the Board and Group Executive Committee. A number
of items were considered and discussed by OurVoice, including the
2023 Bonus and Salary increase, 2023 Best Companies survey results
and the governance of pay within the Group. Updates on the employee
engagement networks were also considered including ESG and
Diversity, Equity and Inclusion initiatives. The permanent members
of OurVoice were particularly interested in feedback from the
workforce in respect of employee morale, employee engagement.
The Group is committed to creating a great place
to work, by fostering a truly inclusive culture where everyone can
bring their true selves to work. Our Diversity, Equity and
Inclusion Specialist has developed the Group’s Diversity and
Inclusion Strategy in line with the Respect Others value in 2023.
Our Employee Engagement Network, Our Diversity, brings together a
broad mix of colleagues from the UK and India, with a passion for
driving our DE&I agenda.
The 2023 Diversity, Equity and Inclusion
calendar has enabled the network to create and host a range of
activities, aimed at raising awareness and providing resources, to
support conversations relating to gender, ethnicity,
faith/religion, disability, sexual orientation, identity,
socio-economic background, and health and wellbeing. This year has
seen a range of activity delivered with Group-wide contribution and
engagement, such as colleague storytelling. Q&A panel
discussions, face to face/online interactive sessions, external
speaker and e-learning modules, that elevate the conversation
around DE&I across the Group.
Political donations
Neither the Company nor any of its subsidiaries
made any political donations this year.
Going concern statement
The Board undertakes regular rigorous
assessments of whether the Group 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 PRA.
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.
The role and structure of the
Board
The Board of Directors (the Board) is
responsible for the long-term success of the Company for the
benefit of its shareholders Through its leadership and effective
corporate governance, the Board focuses on setting Group strategy
generating value for shareholders and maintaining a sustainable and
profitable business, underpinned by a robust risk management
framework.
The Board is responsible for setting the tone
from the top in relation to conduct, culture and values, for
ensuring continuing commitment to treating customers fairly,
carrying out business honestly and openly and preventing bribery,
corruption, fraud or the facilitation of tax evasion.
The Board operates in accordance with the
Company’s Articles of Association (the Articles) and its own
written terms of reference. The Board has established an Audit and
a Risk Committee, which each have their own terms of reference and
are reviewed at least annually. Details of each Committee’s
activities during 2023 are shown below.
The Board retains specific powers in relation to
the approval of the Group’s strategic aims, policies and other
matters, which must be approved by it under legislation or the
Articles. These powers are set out in the Board’s written terms of
reference and Matters Reserved to the Board which are reviewed at
least annually.
The Board met 9 times during the year. The Board
has a formal meeting schedule with ad hoc meetings called as and
when circumstances require. There is an annual calendar of agenda
items to ensure that all matters are given due consideration and
are reviewed at the appropriate point in the regulatory and
financial cycle.
Roles of the Chairman, Chief Executive
Officer and Senior Independent Director
The roles of Board Chair and CEO are distinct
and held by David Weymouth and Andy Golding respectively. There is
a clear division of responsibilities, which has been agreed by the
Board and is formalised in a schedule of responsibilities for each.
The Senior Independent Director and the Non-Executives role and
responsibilities have also been clearly established.
The Chair, who was independent on appointment,
leads the Board’s overall effectiveness and direction of the Group
by ensuring the appropriate balance of skills, experience and
development so that it can focus on the key issues affecting the
business. He also leads the Board to ensure that it acts
effectively.
Noël Harwerth assumes the role of Senior Independent Director
(SID). The SID’s role is to act as a sounding board for the Chair,
another point of contact for other non-executive directors and an
alternative route of communication to shareholders when other
channels of engagement have not been successful. She also leads the
annual appraisal on Chair performance.
Balance and independence
The effectiveness of the Board and its
Committees in discharging their duties is essential for the success
of the Company. In order to operate effectively, the Board and its
Committees comprise a balance of skills, experience, independence
and knowledge to encourage constructive debate and challenge to the
decision-making process.
Audit Committee
The primary role of the Committee is to assist
the Board in overseeing the systems of internal control and
external financial reporting. The Committee’s specific
responsibilities are set out in its terms of reference, which are
reviewed at least annually. The Audit Committee is chaired by Rajan
Kapoor, the other members are Noël Harwerth, Sarah Hedger and Simon
Walker. The Committee met eight times during 2023; all members
attended these meetings, except Graham Allatt who attended two
meetings. Graham Allatt ceased to be a member of the Committee on
11 May 2023. The Committee considered, on behalf of the Board,
whether the 2023 Annual Report and Accounts taken as a whole are
fair, balanced and understandable and, whether the disclosures are
appropriate. Further details on the activities of the Committee are
set out in OSBG annual report and accounts.
Risk Committee
The primary objective of the Committee is to
support the Board in discharging its risk oversight and governance
responsibilities. The Committee’s specific responsibilities are set
out in its terms of reference, which are reviewed at least
annually. The Committee is chaired by Simon Walker, the other
members are Noël Harwerth and Rajan Kapoor. The Committee met seven
times during 2023. Noël Harwerth attended six meetings. Further
details on the activities of the Committee are set out in the OSBG
annual report and accounts.
Environment
Environmental matters are considered in the
Strategic report above.
Internal Control
The Board retains ultimate responsibility for
setting the Company’s risk appetite and ensuring that there is an
effective Risk Management Framework to maintain levels of risk
within the risk appetite. The Board regularly reviews its
procedures for identifying, evaluating and managing risk,
acknowledging that a sound system of internal control should be
designed to manage rather than eliminate the risk of failure to
achieve business objectives.
Key information in respect of the Group’s ERMF
and objectives and processes for mitigating risks, including
liquidity risk, are set out in detail on pages 29 to 35.
Auditor
Deloitte LLP was appointed as auditor for the
year and has indicated its willingness to continue in office as
auditor. A resolution to re-appoint Deloitte as external auditor
will be presented at the Company’s Annual General Meeting.
Each of the persons who is a director at the
date of approval of this Annual Report confirms that:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole; and
- the Strategic Report and Directors’ Report includes a fair
review of the development and performance of the business and the
position of the Company and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
- so far as the Director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
- the Director has taken all the steps that they ought to have
taken as a director in order to make themselves aware of any
relevant audit information and to establish that the Company's
auditor is aware of that information.
This confirmation is given and should be
interpreted in accordance with the provisions of s418 of the
Companies Act 2006.
This report was approved by the Board on 09
April 2024 and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
OneSavings Bank plc
Statement of Directors’ Responsibilities in respect of the
Strategic Report, the Directors’ Report and the Financial
Statements
For the Year Ended 31 December 2023
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 that period. In preparing
each of the Group and parent Company financial statements, the
Directors are required to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable, relevant and
reliable;
- state whether they have been prepared in accordance with IFRSs
as adopted by the UK;
- assess the Group and parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping
adequate accounting records that are sufficient to show and explain
the parent Company’s transactions and disclose with reasonable
accuracy at any time the financial position of the parent Company
and the Group enabling them to ensure that the financial statements
comply with the Companies Act 2006. They are responsible for such
internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them
to safeguard the assets of the Group and to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the
Directors are also responsible for preparing a Strategic Report and
Directors’ Report that complies with that law and those
regulations.
The Directors are responsible for the
maintenance and integrity of the corporate and financial
information included on the Company’s website. Legislation in the
UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Approved by the Board and signed on its behalf
by:
Jason Elphick
Group General Counsel and Company Secretary
09 April 2024
Independent Auditor’s Report to the Members of
OneSavings Bank plc
For the Year Ended 31 December 2023
Report on the audit of the Financial
Statements
- Opinion
In our opinion:
- the financial statements of OneSavings Bank plc (the parent
company) and its subsidiaries (the Group) give a true and fair view
of the state of the Group’s and of the parent company’s affairs as
at 31 December 2023 and of the Group’s profit for the year then
ended;
- the Group financial statements have been properly prepared in
accordance with United Kingdom adopted international accounting
standards;
- the parent company financial statements have been properly
prepared in accordance with United Kingdom adopted international
accounting standards and as applied in accordance with the
provisions of the Companies Act 2006; and
- the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
We have audited the financial statements which
comprise:
-
the Consolidated Statement of Comprehensive Income;
-
the consolidated and parent company Statements of Financial
Position;
-
the consolidated and parent company Statements of Changes in
Equity;
-
the consolidated and parent company Statements of Cash Flow;
and
-
the related notes 1 to 52.
The financial reporting framework that has been
applied in their preparation is applicable law and United Kingdom
adopted international accounting standards and, as regards the
parent company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
- Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further
described in the auditor’s responsibilities for the audit of the
financial statements section of our report.
We are independent of the Group and the parent
company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK,
including the Financial Reporting Council’s (the FRC’s) Ethical
Standard as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements. The non-audit services provided to the Group
and parent company for the year are disclosed in note 7 to the
financial statements. We confirm that we have not provided any
non-audit services prohibited by the FRC’s Ethical Standard to the
Group or the parent company.
We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our
opinion.
- Summary of our audit approach
Key audit matters
The key audit matters that we identified in the
current year were:
- loan impairment provisions; and
- effective interest rate income recognition.
Within this report, key audit matters are identified as
follows:
|
Newly identified |
|
Increased level of risk |
|
Similar level of risk |
|
Decreased level of risk |
Materiality
The materiality that we used for the Group
financial statements was £20.3m which was determined by reference
to profit before tax and net assets.
Scoping
Our Group audit scope focused primarily on three
subsidiaries subject to a full scope audit. The subsidiaries
selected for a full scope audit were OneSavings Bank plc, Charter
Court Financial Services Limited and Interbay ML Ltd. These three
subsidiaries account for 98% of the Group’s interest receivable and
similar income, 95% of the Group’s profit before tax, 97% of the
Group’s total assets and 99% of the Group’s total liabilities. All
audit work was performed by the Group engagement team.
Significant changes in our approach
In the prior year, our key audit matter in
respect of effective interest rate (EIR) income recognition
included estimating EIRs in respect of the Kent Reliance
portfolios. The Group’s income recognition on these portfolios is
less sensitive to changes in customer prepayment behaviour relative
to our audit materiality. This area no longer features in our EIR
income recognition key audit matter which focuses on the Charter
Court Financial Services Limited Precise portfolios.
- Conclusions relating to going
concern
In auditing the financial statements, we have
concluded that the directors’ use of the going concern basis of
accounting in the preparation of the financial statements is
appropriate.
Our evaluation of the directors’ assessment of
the Group’s and parent company’s ability to continue to adopt the
going concern basis of accounting included:
-
We obtained and read management’s going concern assessment, which
included consideration of the Group’s operational resilience, in
order to understand, challenge and evidence the key judgements made
by management;
-
We obtained an understanding of relevant controls around
management’s going concern assessment;
-
We obtained management’s income statement, balance sheet and
capital and liquidity forecasts and assessed key assumptions,
including climate risk considerations, for reasonableness and their
projected impact on capital and liquidity ratios, particularly with
respect to loan book growth and potential credit losses;
-
Supported by our in-house prudential risk specialists, we read the
most recent ICAAP and ILAAP submissions, assessed management’s
capital and liquidity projections, assessed the results of
management’s capital reverse stress testing, evaluated key
assumptions and methods used in the capital reverse stress testing
model and tested the mechanical accuracy of the capital reverse
stress testing model;
-
We read correspondence with regulators to understand the capital
and liquidity requirements imposed by the Group’s regulators, and
evidence any changes to those requirements;
-
We met with the Group’s lead regulator, the Prudential Regulation
Authority, and discussed their views on existing and emerging risks
to the Group and considered whether these were reflected
appropriately in management’s forecasts and stress tests;
-
We assessed the historical accuracy of forecasts prepared by
management;
-
We assessed the impact of the ongoing economic uncertainty,
including how further rises in living and borrowing costs may
impact potential credit losses; and
-
We evaluated the Group’s disclosures on going concern against the
requirements of IFRS and in view of the FRC guidance.
Based on the work we have performed, we have not
identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast significant
doubt on the Group's and parent company’s ability to continue as a
going concern for a period of at least twelve months from when the
financial statements are authorised for issue.
Our responsibilities and the responsibilities of
the directors with respect to going concern are described in the
relevant sections of this report.
- Key audit matters
Key audit matters are those matters that, in our
professional judgement, were of most significance in our audit of
the financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or not
due to fraud) that we identified. These matters included those
which had the greatest effect on: the overall audit strategy, the
allocation of resources in the audit; and directing the efforts of
the engagement team.
These matters were addressed in the context of
our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on
these matters.
5.1. Loan
impairment provisions
Refer to the judgements in applying accounting policies and
critical accounting estimates on page 106 and Note 19 on page
129. |
Key audit matter description |
IFRS 9 requires loan impairment provisions to be recognised on an
expected credit loss (ECL) basis. The estimation of ECL provisions
in the Group’s loan portfolios is inherently uncertain and requires
significant judgements and estimates. We therefore consider this to
be a key audit matter due to the risk of fraud or error in respect
of the Group’s ECL provisions. ECL provisions as at 31 December
2023 were £145.8m (2022: £130.0m), which represented 0.56% (2022:
0.54%) of loans and advances to customers. ECL provisions are
calculated both for individually assessed loans and collectively on
a portfolio basis which require the use of statistical models
incorporating forward looking macroeconomic scenarios,
probabilities of default (PD), exposures at default and assumptions
on the recoverability of customers’ outstanding balances.
The uncertain economic environment continues to increase the
complexity in estimating ECL, particularly with regards to
determining appropriate forward looking macroeconomic scenarios and
identifying customers who have experienced significant increases in
credit risk. Additionally, higher cost of living, rising borrowing
costs and increasing arrears have increased the degree of
subjectivity in estimating PDs.
We identified four specific areas in relation to ECL that require
significant judgement or relate to assumptions to which the overall
ECL provision is particularly sensitive.
-
Significant increase in credit risk (SICR): The assessment of
whether there has been a significant increase in credit risk
between the date of initial recognition of the exposure and 31
December 2023. There is a risk that the Group’s staging criteria
does not capture SICR or are applied incorrectly.
-
Macroeconomic scenarios: As set out on page 51, the Group sources
economic forecasts from a third-party economics expert and then
applies judgement to determine which scenarios to select and the
probability weightings to assign. The Group considered four
probability weighted scenarios, including base, upside, downside
and severe downside scenarios. The key economic variables used
within the macroeconomics model were determined to be the house
price index (HPI) and unemployment. The estimation of these
variables involves a high degree of subjectivity and estimation
uncertainty.
-
Post model adjustment (PMA):As set out on page 50, the Group has
assessed how costs of living and rising interest rates may impact
customers’ behaviour in the future and has continued to recognise a
cost of living and cost of borrowing PMA to reflect the impact on
the customers’ affordability. The calculation of this PMA is
inherently judgemental as it requires assessment of the extent of
risks not captured in the expected credit loss provision
models.
-
Propensity to go into possession following default (PPD) and forced
sale discount (FSD) assumptions: PPD measures the likelihood that a
defaulted loan will progress into repossession. FSD measures the
difference in sale proceeds between a sale under normal conditions
and sale at auction. The loss given default (LGD) by loan assumed
in the ECL provision calculation is highly sensitive to the PPD and
FSD assumptions.
|
How the scope of our audit responded to the key audit
matter |
We obtained an understanding of the relevant financial controls
over the ECL provision with particular focus on controls over
significant assumptions and judgements used in the ECL
determination.
To challenge the Group’s SICR criteria, we:
-
Evaluated the Group’s SICR policy and assessed whether it complies
with IFRS 9;
-
Assessed the quantitative and qualitative thresholds used in the
SICR assessment by reference to standard validation metrics
including the proportion of transfers to stage two driven solely by
being 30 days past due, the volatility of loans in stage two and
the proportion of loans that spend little or no time in stage two
before moving to stage three;
-
On a sample basis, tested the completeness and accuracy of the data
used in applying the quantitative and qualitative criteria in the
SICR assessment to assess whether loans were assigned to the
correct stage;
-
Supported by our credit risk specialists, performed a review of
changes to the computer codes used to perform the SICR assessment
compared to the prior year;
-
As part of our testing of the application of the SICR criteria
within the ECL model and with support from our credit risk
specialists, we independently reperformed the Group’s staging
assessment across all three stages using our in-house analytics
tool; and
-
Performed an independent assessment for a sample of loan accounts
which exited forbearance, to determine whether they had been
appropriately allocated to the correct stage.
To challenge the Group’s macroeconomic scenarios and the
probability weightings applied we:
-
Agreed the macroeconomics scenarios used in the ECL model to
reports prepared by the third-party economics expert;
-
Assessed the competence, capability and objectivity of the
third-party economics expert;
-
Supported by our economic specialists, assessed and challenged the
scenarios considered and the probability weightings assigned to
them in light of the economic environment as at 31 December
2023;
-
With the involvement of our economic specialists challenged the
Group’s economic outlook by reference to other available economic
outlook data;
-
Compared the appropriateness of selected macroeconomic variables
(HPI and unemployment) and the four probability weightings used in
the macroeconomics model to those used by peer lenders;
-
Supported by our credit risk specialists, assessed the model
methodology and performed a review of changes to the computer code
used in the macroeconomics model which applies the scenarios to the
relevant ECL components compared to the prior year; and
-
Supported by our credit risk specialists, assessed the performance
of the macroeconomic model to confirm whether the economic
variables previously selected were still appropriate through
considering the modelled macroeconomic results relative to those
observed in historical recessions.
To challenge the Group’s cost of living and cost of borrowing PMA,
we:
- Supported by our credit risk specialists, assessed whether the
risks were already captured within the ECL models and determined
the extent of risks to be captured by the PMA;
- Evaluated the methodology , including key assumptions and
reviewed the computer codes used to determine the PMA; and
- Tested the completeness, accuracy and relevance of the data
used on a sample basis.
To challenge the Group’s PPD and FSD assumptions, we:
-
Supported by our credit risk specialists, performed a full review
of the computer codes in the LGD models compared to the prior
year;
-
Recalculated the PPD rates observed on defaulted loans and compared
them to the rates used by the Group in the ECL models;
-
Recalculated the FSD observed on recent property sales on defaulted
loans and compared them to the rates used by the Group in the ECL
models;
-
Considered the findings raised in the Group’s model monitoring and
validation exercise and assessed the impact on the year-end
provision; and
-
Performed a stand back test to consider potential contradictory
evidence and assessed the appropriateness of PPD and FSD
assumptions by comparison to industry peers.
|
Key observations |
We are satisfied that the SICR criteria and PPD and FSD assumptions
in determining the ECL provision were reasonable. We observed that
the macroeconomic scenarios selected by the directors and the
probability weightings applied generate an appropriate portfolio
loss distribution. We determined that the methodology assumptions
used in determining the Group’s cost of living and cost of
borrowing PMA were reasonable.
Overall, we determined that the loan impairment provisions were
appropriately stated as at 31 December 2023. |
5.2.
Effective interest rate income recognition
Refer to the judgements in applying accounting policies and
critical accounting estimates on page 106, the accounting policy on
page 92 and Notes 3 and 4 on page 109 and 110. |
Key audit matter description |
In accordance with the requirements of IFRS 9, directly
attributable fees, discounts, incentives and commissions on a
constant yield basis (effective interest rate, EIR) are required to
be spread over the expected life of the loan assets. EIR is complex
and the Group’s approach to determining the EIR involves the use of
models and significant estimation in determining the behavioural
life of loan assets. Given the complexity and judgement involved in
accounting for EIR and given that revenue recognition is an area
susceptible to fraud, there is an opportunity for management to
manipulate the amount of interest income reported in the financial
statements.
The Group’s net interest income for the year ended 31 December 2023
was £658.6m (2022: £709.9m).
EIR adjustments arise from revisions to estimated cash receipts or
payments for loan assets that occur for reasons other than a
movement in market interest rates or credit losses. They result in
an adjustment to the carrying amount of the loan asset, with the
adjustment recognised in the income statement in interest
receivable and similar income. As the EIR adjustments reflect
changes to the timing and volume of forecast customer redemptions,
they are inherently judgemental.
The level of judgement exercised is increased where there is
limited availability of historical repayment information. For the
Precise loan portfolios, the EIR adjustments are sensitive to
changes in the behavioural life curves. As set out on page 108,
changes in the modelled behavioural life of these portfolios during
the year resulted in an interest income loss of £208.5m (2022:
£38.8M loss). The EIR adjustments have increased as a result of the
rising interest rate environment in 2023 which accelerated customer
prepayments of Precise loans compared to those originally modelled.
The current economic environment continues to increase uncertainty
with regards to forecasting expected behavioural lives and
prepayment rates. We therefore considered there to be an increased
level of risk in respect of this key audit matter in the current
year. |
How the scope of our audit responded to the key audit
matter |
We obtained an understanding of the relevant controls over EIR,
focusing on the calculation and review of EIR adjustments and the
determination of prepayment curves.
For the Precise portfolio, where the EIR adjustments were most
significant and sensitive to changes in behavioural life, with the
involvement of our analytics and modelling specialists, we ran the
loan data for all products through our own independent EIR model,
using the behavioural life curves derived by the Group. We compared
our calculation of the EIR adjustment required to the amount
recorded by the Group.
A number of key assumptions are made to estimate the expected
future behaviour of customers including consideration of recently
observed behaviour. For these assumptions, we independently
challenged the appropriateness of the assumptions considering the
rising rate environment that has been experienced in the UK over
the last year, economic forecasts of future interest rates and
trends in customer behaviour observed in recent months. With the
involvement of our analytics and modelling specialists, we
independently derived a behavioural life curve using the Group’s
actual loan data over recent years, incorporating those assumptions
that we considered reasonable. We used these curves in our own
independent EIR model to calculate the EIR adjustments. We compared
this output to the amounts recorded by the Group.
We also tested the completeness and accuracy of a sample of inputs
into the EIR model for originated loans. |
Key observations |
We determined that the EIR models and assumptions used are
appropriate and that net interest income for the period is
appropriately stated. |
6.
Our application of materiality
6.1.
Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we
determined materiality for the financial statements as a whole as
follows:
|
Group financial statements |
Parent company financial statements |
Materiality |
£20.3m (2022: £21.6m) |
£17.9m (2022: £15.8m) |
Basis for determining materiality |
We determined materiality for the Group to be approximately 1% of
net assets of £2,146.3m which equates to 5.4% of statutory profit
before tax of £375.4m. The basis of materiality is consistent with
prior year.
|
We determined materiality for the parent company by reference to 1%
of net assets. This is consistent with prior year. |
Rationale for the benchmark applied |
Consistent with the prior year, we considered both net assets and a
profit before tax based measure as benchmarks for determining
materiality.
We determined net assets to be the most relevant and stable
benchmark to determine materiality. |
The parent company is principally a holding company and we have
therefore determined net assets to be the most relevant benchmark
to determine materiality. |
6.2.
Performance materiality
We set performance materiality at a level lower than materiality to
reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole.
|
Group financial statements |
Parent company financial statements |
Performance materiality |
60% (2022: 70%) of Group materiality |
60% (2022: 60%) of parent company materiality |
Basis and rationale for determining performance
materiality |
Group performance materiality was set at 60% of Group materiality
(2022: 70%). In determining performance materiality, we considered
a number of factors, including: our understanding of the control
environment; our understanding of the business; and the number of
uncorrected misstatements identified in the prior year.
|
6.3. Error
reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of £1.0m (2022: £1.1m),
as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the
Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
7.
An overview of the scope of our audit
7.1.
Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls and
assessing the risks of material misstatement at the Group
level.
Our Group audit scope focused primarily on three
subsidiaries: the two main banking entities OneSavings Bank plc and
Charter Court Financial Services Limited, as well as Interbay ML
Ltd, another significant lending subsidiary. These three
subsidiaries were significant components and subject to a full
scope audit (2022: three significant components subject to a full
scope audit). They represent 98% (2022: 97%) of the Group’s
interest receivable and similar income, 95% (2022: 94%) of profit
before tax, 97% (2022: 98%) of total assets and 99% (2022: 99%) of
total liabilities. The subsidiaries were selected to provide an
appropriate basis of undertaking audit work to address the risks of
material misstatement including those identified as key audit
matters above. Our audits of each of the subsidiaries were
performed using lower levels of materiality based on their size
relative to the Group. The materialities used for each subsidiary
audit ranged from £3.8m to £17.9m (2022: £6.6m to £17.9m).
We tested the Group’s consolidation process and
carried out analytical procedures to confirm that there were no
significant risks of material misstatement in the aggregated
financial information of the remaining subsidiaries not subject to
a full scope audit or specified audit procedures.
7.2. Our
consideration of the control environment
We identified the key IT systems relevant to the
audit to be those used in financial reporting, lending and savings
areas. For these systems, with the involvement of our IT
specialists, we obtained a understanding of relevant general IT
controls.
Where deficiencies were identified in the
control environment, including deficiencies in IT controls, our
risk assessment procedures included an assessment of those
deficiencies to determine the impact on our audit plan. Where we
were unable to identify or test mitigating controls, we adopted a
non-controls reliance approach and performed additional substantive
procedures. As a result of deficiencies identified in internal IT
access controls across the Group, we amended our planned audit
procedures to adopt a non-controls reliance approach over lending
and related interest income, and deposit balances and related
interest expense.
7.3. Our
consideration of climate-related risks
In planning our audit, we have considered the
impact of climate change on the Group’s operations and impact on
its financial statements. The Group has set out its commitments,
aligned with the goals of the Paris Climate Accord, to be a net
zero bank by 2050. Further information is provided in the Group’s
Environment, Social and Governance report on page 7. The Group sets
out its assessment of the potential impact of climate change on ECL
on page 49 of the Risk Management section of the Annual Report and
the potential impact on the financial statements in note 19 on page
129.
In conjunction with our climate risk
specialists, we have held discussions with the Group to
understand:
-
- the process for identifying affected operations, including the
governance and controls over this process, and the subsequent
effect on the financial reporting for the Group; and
- the long-term strategy to respond to climate change risks as
they evolve.
Our audit work has involved:
-
- challenging the completeness of the physical and transition
risks identified and considered in the Group’s climate risk
assessment and the conclusion that there is no material impact of
climate change risk on current year financial reporting;
- with the involvement of our credit risk specialists, assessing
management’s approach to the incorporation and quantification of
climate change risks within a PMA in the ECL provision, which
included:
- assessing
management’s selected climate pathway used in order to quantify the
potential impact of physical risks on the Group’s loan book and in
particular how the underlying property may be impacted as a result;
and
-
assessing the relevance of the data used in the assessment.
-
assessing disclosures in the Annual Report, and challenging the
consistency between the financial statements and the remainder of
the Annual Report.
- Other information
The other information comprises the information
included in the Annual Report, other than the financial statements
and our auditor’s report thereon. The directors are responsible for
the other information contained within the Annual Report.
Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
Our responsibility is to read the other
information and, in doing so, consider whether the other
information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit, or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or
apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial
statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact.
We have nothing to
report in this regard.
- Responsibilities of directors
As explained more fully in the directors’
responsibilities statement, the directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the
directors are responsible for assessing the Group’s and the parent
company’s ability to continue as a going concern, disclosing as
applicable, matters related to going concern and using the going
concern basis of accounting unless the directors either intend to
liquidate the Group or the parent company or to cease operations,
or have no realistic alternative but to do so.
- Auditor’s responsibilities for the audit of
the Financial Statements
Our objectives are to obtain reasonable
assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect
a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities
for the audit of the financial statements is located on the
FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This
description forms part of our auditor’s report.
- Extent to which the audit was considered
capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances
of non-compliance with laws and regulations. We design procedures
in line with our responsibilities, outlined above, to detect
material misstatements in respect of irregularities, including
fraud. The extent to which our procedures are capable of detecting
irregularities, including fraud is detailed below.
-
-
1.
Identifying and assessing potential risks related to
irregularities
In identifying and assessing risks of material
misstatement in respect of irregularities, including fraud and
non-compliance with laws and regulations, we considered the
following:
-
the nature of the industry and sector, control environment and
business performance including the design of the Group’s
remuneration policies, key drivers for directors’ remuneration,
bonus levels and performance targets;
-
the Group’s own assessment of the risks that irregularities may
occur either as a result of fraud or error that was approved by the
Board;
-
results of our enquiries of management, internal audit, the
directors and the Audit Committee about their own identification
and assessment of the risks of irregularities, including those that
are specific to the Group’s sector;
-
any matters we identified having obtained and reviewed the Group’s
documentation of their policies and procedures relating to:
- identifying, evaluating and complying with laws and regulations
and whether they were aware of any instances of
non-compliance;
- detecting and responding to the risks of fraud and whether they
have knowledge of any actual, suspected or alleged fraud;
- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations;
-
the matters discussed among the audit engagement team and relevant
internal specialists, including tax, valuations, real estate, IT,
climate risk, prudential risk, economics, financial instruments,
share based payments, credit risk and analytics and modelling
specialists regarding how and where fraud might occur in the
financial statements and any potential indicators of fraud.
As a result of these procedures, we considered
the opportunities and incentives that may exist within the
organisation for fraud and identified the greatest potential for
fraud in the following areas: loan impairment provisions and
effective interest rate income recognition. In common with all
audits under ISAs (UK), we are also required to perform specific
procedures to respond to the risk of management override.
We also obtained an understanding of the legal
and regulatory frameworks that the Group operates in, focusing on
provisions of those laws and regulations that had a direct effect
on the determination of material amounts and disclosures in the
financial statements. The key laws and regulations we considered in
this context included the UK Companies Act, Listing Rules and tax
legislation.
In addition, we considered provisions of other
laws and regulations that do not have a direct effect on the
financial statements but compliance with which may be fundamental
to the Group’s ability to operate or to avoid a material penalty.
These included the Group’s prudential regulatory requirements and
capital, liquidity and conduct requirements.
-
-
2.
Audit response to risks identified
As a result of performing the above, we
identified loan impairment provisions and effective interest rate
income recognition as key audit matters related to the potential
risk of fraud. The key audit matters section of our report explains
the matters in more detail and also describes the specific
procedures we performed in response to those key audit matters.
In addition to the above, our procedures to
respond to risks identified included the following:
-
reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with provisions of
relevant laws and regulations described as having a direct effect
on the financial statements;
-
enquiring of management, the Audit Committee and in-house and
external legal counsel concerning actual and potential litigation
and claims;
-
performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
-
reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence with
the Prudential Regulation Authority, the Financial Conduct
Authority and HMRC; and
-
in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making
accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions
that are unusual or outside the normal course of business.
We also communicated relevant identified laws
and regulations and potential fraud risks to all engagement team
members including internal specialists and significant component
audit teams, and remained alert to any indications of fraud or
non-compliance with laws and regulations throughout the audit.
Report on other legal and regulatory
requirements
- Opinions on other matters prescribed by the
Companies Act 2006
In our opinion, based
on the work undertaken in the course of the audit:
- the information given in the strategic report and the
directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
- the strategic report and the directors’ report have been
prepared in accordance with applicable legal requirements.
In the light of the
knowledge and understanding of the Group and the parent company and
their environment obtained in the course of the audit, we have not
identified any material misstatements in the strategic report or
the directors’ report.
- Matters on which we are required to report
by exception
-
1.
Adequacy of explanations received and accounting
records
Under the Companies Act 2006 we are required to
report to you if, in our opinion:
-
we have not received all the information and explanations we
require for our audit; or
-
adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
-
the parent company financial statements are not in agreement with
the accounting records and returns.
We have nothing to
report in respect of these matters.
-
-
2.
Directors’ remuneration
Under the Companies Act 2006 we are also
required to report if in our opinion certain disclosures of
directors’ remuneration have not been made.
We have nothing to
report in respect of these matters.
- Other matters which we are required to
address
-
1.
Auditor tenure
Following the recommendation of the Audit
Committee, we were appointed by the shareholders of the Group on 9
May 2019 to audit the Group Financial Statements for the year
ending 31 December 2019 and subsequent financial periods. The
period of total uninterrupted engagement including previous
renewals and reappointments of the firm is five years, covering the
years ending 31 December 2019 to 31 December 2023.
-
-
2.
Consistency of the audit report with the additional report
to the audit committee
Our audit opinion is consistent with the
additional report to the Audit Committee we are required to provide
in accordance with ISAs (UK).
- Use of our report
This report is made solely to the company’s
members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we
might state to the company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s
members as a body, for our audit work, for this report, or for the
opinions we have formed.
As required by the Financial Conduct Authority
(FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.15R – DTR
4.1.18R, these financial statements will form part of the
Electronic Format Annual Financial Report filed on the National
Storage Mechanism of the FCA in accordance with DTR 4.1.15R- DTR
4.1.18R. This auditor’s report provides no assurance over whether
the Electronic Format Annual Financial Report has been prepared in
compliance with DTR 4.1.15R – DTR 4.1.18R. We have been engaged to
provide assurance on whether the Electronic Format Annual Financial
Report has been prepared in compliance with DTR 4.1.15R- DTR
4.1.18R and will publicly report separately to the members on
this.
Alexander Morton, FCA (Senior statutory
auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
09 April 2024
OneSavings Bank plc
Statement of Comprehensive Income
For the Year Ended 31 December 2023
|
|
Group |
Group |
|
|
2023 |
2022 |
|
Note |
£m |
£m |
Interest
receivable and similar income |
3 |
1,767.0 |
1,069.3 |
Interest payable and similar charges |
4 |
(1,108.1) |
(359.4) |
Net
interest income |
|
658.9 |
709.9 |
Fair value
(losses)/gains on financial instruments |
5 |
(4.4) |
58.9 |
Other operating income |
6 |
3.9 |
6.6 |
Total
income |
|
658.4 |
775.4 |
Administrative
expenses |
7 |
(233.8) |
(206.5) |
Provisions |
34 |
(0.4) |
1.6 |
Impairment of
financial assets |
20 |
(48.8) |
(29.8) |
Integration costs |
10 |
- |
(7.9) |
Profit
before taxation |
|
375.4 |
532.8 |
Taxation |
11 |
(91.8) |
(121.5) |
Profit for the year |
|
283.6 |
411.3 |
Other
comprehensive expense |
|
|
|
Items
which may be reclassified to profit or loss: |
|
|
|
Fair value
changes on financial instruments measured at fair value through
other comprehensive income (FVOCI): |
|
|
|
Arising in the year |
15 |
(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 |
|
282.7 |
410.8 |
The above results are derived wholly from
continuing operations.
The notes on pages 90 to 214 form part of these
accounts.
The financial statements on pages 85 to 214 were
approved by the Board of Directors on 09 April 2024.
OneSavings Bank plc
Statement of Financial Position
As at 31 December 2023
|
|
Group |
Group |
Company |
Company |
|
|
2023 |
2022 |
2023 |
2022 |
|
Note |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
Cash in
hand |
|
0.4 |
0.4 |
0.4 |
0.4 |
Loans and
advances to credit institutions |
14 |
2,813.6 |
3,365.7 |
1,002.7 |
1,506.1 |
Investment
securities |
15 |
621.7 |
412.9 |
396.2 |
211.4 |
Loans and
advances to customers |
16 |
25,765.0 |
23,612.7 |
11,432.2 |
10,531.9 |
Fair value
adjustments on hedged assets |
22 |
(243.5) |
(789.0) |
(11.6) |
(200.8) |
Derivative
assets |
21 |
530.6 |
888.1 |
180.8 |
234.0 |
Other
assets |
23 |
27.6 |
15.0 |
19.4 |
13.1 |
Current
taxation asset |
|
0.5 |
1.7 |
- |
2.6 |
Deferred
taxation asset |
24 |
3.9 |
6.3 |
3.8 |
4.1 |
Deemed loan
assets |
17 |
- |
- |
- |
31.2 |
Property,
plant and equipment |
25 |
43.8 |
40.9 |
22.6 |
20.9 |
Intangible
assets |
26 |
26.1 |
12.0 |
23.8 |
6.5 |
Investments in
subsidiaries and intercompany loans |
27 |
4.5 |
0.8 |
3,667.7 |
3,242.5 |
Total assets |
|
29,594.2 |
27,567.5 |
16,738.0 |
15,603.9 |
Liabilities |
|
|
|
|
|
Amounts owed
to credit institutions |
28 |
3,575.0 |
5,092.9 |
2,018.3 |
2,568.5 |
Amounts owed
to retail depositors |
29 |
22,126.6 |
19,755.8 |
12,246.5 |
11,132.2 |
Fair value
adjustments on hedged liabilities |
22 |
21.9 |
(55.1) |
11.8 |
(33.7) |
Amounts owed
to other customers |
30 |
63.3 |
113.1 |
0.5 |
0.5 |
Debt
securities in issue |
31 |
818.5 |
265.9 |
- |
- |
Derivative
liabilities |
21 |
199.9 |
106.6 |
123.8 |
63.8 |
Lease
liabilities |
32 |
11.2 |
9.9 |
3.4 |
3.6 |
Other
liabilities |
33 |
39.6 |
38.7 |
25.8 |
23.9 |
Provisions |
34 |
0.8 |
0.4 |
0.4 |
0.1 |
Current
taxation liability |
|
- |
- |
10.9 |
- |
Deferred
taxation liability |
35 |
6.3 |
22.3 |
- |
- |
Deemed loan
liabilities |
17 |
- |
- |
25.3 |
- |
Intercompany
loans |
27 |
- |
- |
24.7 |
33.3 |
Senior
notes |
36 |
309.0 |
- |
226.6 |
- |
Subordinated
liabilities |
37 |
260.6 |
- |
156.4 |
- |
Perpetual subordinated bonds |
38 |
15.2 |
15.2 |
15.2 |
15.2 |
|
|
27,447.9 |
25,365.7 |
14,889.6 |
13,807.4 |
Equity |
|
|
|
|
|
Share
capital |
40 |
4.5 |
4.5 |
4.5 |
4.5 |
Other equity
instruments |
41 |
150.0 |
150.0 |
90.0 |
90.0 |
Retained
earnings |
|
1,979.5 |
2,035.0 |
1,741.6 |
1,690.9 |
Other reserves |
42 |
12.3 |
12.3 |
12.3 |
11.1 |
|
|
2,146.3 |
2,201.8 |
1,848.4 |
1,796.5 |
Total equity and liabilities |
|
29,594.2 |
27,567.5 |
16,738.0 |
15,603.9 |
The profit after tax for the year ended 31
December 2023 of OneSavings Bank plc as a company was £386.8m
(2022: £335.9m). 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 90 to 214 form part of these
accounts. The financial statements on pages 85 to 214 were approved
by the Board of Directors on 09 April 2024 and signed on its behalf
by
Andy Golding
April Talintyre
Chief Executive
Officer
Chief Financial Officer
Company number: 07312896
OneSavings Bank plc
Statement of Changes in Equity
For the Year Ended 31 December 2023
|
Share capital |
Capital contribution |
Foreign exchange reserve |
FVOCI reserve |
Share-based payment reserve |
Retained earnings |
Other equity instruments |
Total |
Group |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1
January 2022 |
4.5 |
1.7 |
(1.1) |
0.6 |
11.7 |
1,857.4 |
150.0 |
2,024.8 |
Profit for the
year |
- |
- |
- |
- |
- |
411.3 |
- |
411.3 |
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) |
- |
411.3 |
- |
410.8 |
Coupon paid on
Additional Tier 1 (AT1) securities |
- |
- |
- |
- |
- |
(9.0) |
- |
(9.0) |
Dividends
paid |
- |
- |
- |
- |
- |
(233.1) |
- |
(233.1) |
Share-based
payments |
- |
(1.7) |
- |
- |
1.6 |
8.4 |
- |
8.3 |
At 31 December 2022 |
4.5 |
- |
(1.3) |
0.3 |
13.3 |
2,035.0 |
150.0 |
2,201.8 |
Profit for the
year |
- |
- |
- |
- |
- |
283.6 |
- |
283.6 |
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) |
- |
283.6 |
- |
282.7 |
Coupon paid on
AT1 securities |
- |
- |
- |
- |
- |
(9.0) |
- |
(9.0) |
Dividends
paid |
- |
- |
- |
- |
- |
(335.0) |
- |
(335.0) |
Share-based
payments |
- |
- |
- |
- |
0.5 |
4.9 |
- |
5.4 |
Tax recognised
in equity |
- |
- |
- |
- |
0.4 |
- |
- |
0.4 |
At 31 December 2023 |
4.5 |
- |
(2.1) |
0.2 |
14.2 |
1,979.5 |
150.0 |
2,146.3 |
Share capital is disclosed in note 40 and the reserves are
further analysed in note 42.
OneSavings Bank plc
Statement of Changes in Equity (continued)
For the Year Ended 31 December 2023
|
Share capital |
FVOCI reserve |
Share-based payment reserve |
Retained earnings |
Other equity instruments |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
At 1
January 2022 |
4.5 |
- |
9.4 |
1,587.6 |
90.0 |
1,691.5 |
Profit for the
year |
- |
- |
- |
335.9 |
- |
335.9 |
Other
comprehensive income |
- |
0.3 |
- |
- |
- |
0.3 |
Tax on items in other comprehensive income |
- |
(0.1) |
- |
- |
- |
(0.1) |
Total
comprehensive income |
- |
0.2 |
- |
335.9 |
- |
336.1 |
Coupon paid on
AT1 securities |
- |
- |
- |
(5.4) |
- |
(5.4) |
Dividends
paid |
- |
- |
- |
(233.1) |
- |
(233.1) |
Share-based
payments |
- |
- |
1.5 |
5.9 |
- |
7.4 |
At 31 December 2022 |
4.5 |
0.2 |
10.9 |
1,690.9 |
90.0 |
1,796.5 |
Profit for the
year |
- |
- |
- |
386.8 |
- |
386.8 |
Other
comprehensive expense |
- |
(0.2) |
- |
- |
- |
(0.2) |
Tax on items in other comprehensive expense |
- |
0.1 |
- |
- |
- |
0.1 |
Total
comprehensive (expense)/income |
- |
(0.1) |
- |
386.8 |
- |
386.7 |
Coupon paid on
AT1 securities |
- |
- |
- |
(5.4) |
- |
(5.4) |
Dividends
paid |
- |
- |
- |
(335.0) |
- |
(335.0) |
Share-based
payments |
- |
- |
0.9 |
4.3 |
- |
5.2 |
Tax recognised
in equity |
- |
- |
0.4 |
- |
- |
0.4 |
At 31 December 2023 |
4.5 |
0.1 |
12.2 |
1,741.6 |
90.0 |
1,848.4 |
Share capital is disclosed in note 40 and the reserves are
further analysed in note 42.
OneSavings Bank plc
Statement of Cash Flows
For the Year Ended 31 December 2023
|
|
Group |
Group |
Company |
Company |
|
|
2023 |
2022 |
2023 |
2022 |
|
Note |
£m |
£m |
£m |
£m |
Cash
flows from operating activities |
|
|
|
|
|
Profit before
taxation |
|
375.4 |
532.8 |
446.9 |
387.3 |
Adjustments
for non-cash and other items |
48 |
292.9 |
62.4 |
153.1 |
68.6 |
Changes in operating assets and liabilities |
48 |
(143.4) |
(24.5) |
(402.4) |
276.6 |
Cash
generated in operating activities |
|
524.9 |
570.7 |
197.6 |
732.5 |
Net tax paid |
|
(103.6) |
(142.5) |
(46.3) |
(54.0) |
Net
cash generated in operating activities |
|
421.3 |
428.2 |
151.3 |
678.5 |
Cash
flows from investing activities |
|
|
|
|
|
Maturity and
sales of investment securities |
|
366.3 |
663.7 |
317.5 |
451.0 |
Purchases of
investment securities |
|
(664.3) |
(596.5) |
(592.0) |
(556.4) |
Interest
received on investment securities |
|
22.6 |
7.7 |
16.3 |
3.0 |
Investments in
subsidiaries |
|
- |
- |
- |
(3.2) |
Purchases of property, plant and equipment and intangible
assets |
25,26 |
(25.8) |
(11.7) |
(24.4) |
(7.2) |
Net
cash from investing activities |
|
(301.2) |
63.2 |
(282.6) |
(112.8) |
Cash
flows from financing activities |
|
|
|
|
|
Financing
received |
39 |
1,331.5 |
429.5 |
578.7 |
120.0 |
Financing
repaid |
39 |
(1,430.3) |
(324.2) |
(597.2) |
(304.1) |
Interest paid
on financing |
39 |
(205.4) |
(45.3) |
(107.7) |
(25.5) |
Coupon paid on
AT1 securities |
|
(9.0) |
(9.0) |
(5.4) |
(5.4) |
Dividends
paid |
12 |
(335.0) |
(233.1) |
(335.0) |
(233.1) |
Repayments of principal portion of lease liabilities |
32 |
(2.0) |
(1.9) |
(0.7) |
(0.8) |
Net cash from financing activities |
|
(650.2) |
(184.0) |
(467.3) |
(448.9) |
Net (decrease)/increase in cash and cash
equivalents |
|
(530.1) |
307.4 |
(598.6) |
116.8 |
Cash
and cash equivalents at the beginning of the year |
13 |
3,044.1 |
2,736.7 |
1,449.1 |
1,332.3 |
Cash and cash equivalents at the end of the
year |
13 |
2,514.0 |
3,044.1 |
850.5 |
1,449.1 |
Movement in cash and cash equivalents |
|
(530.1) |
307.4 |
(598.6) |
116.8 |
OneSavings Bank plc
Notes to the Financial Statements
For the Year Ended 31 December 2023
1. Accounting policies
The principal accounting policies applied in the
preparation of the financial statements for the Group and the
Company are set out below.
a) Basis of preparation
The financial statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
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 n) vi.).
The financial statements are presented in pounds
sterling. All amounts in the financial statements have been rounded
to the nearest £0.1m (£m).
b) 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.
- Accounting policies (continued)
The Group’s financial projections demonstrate
that the Group has sufficient capital and liquidity to continue to
meet its regulatory capital requirements as set out by the
Prudential Regulation Authority (PRA).
The Board has therefore concluded that the Group
has sufficient 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.
c) 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.
d) 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.
- Accounting policies (continued)
e) Segmental reporting
IFRS 8 requires operating segments to be
identified on the basis of internal reports and components of the
Group which are regularly reviewed by the chief operating decision
maker to allocate resources to segments and to assess their
performance. For this purpose, the chief operating decision maker
of the Group is the Board of Directors.
The Group provides loans and asset finance
within the UK and the Channel Islands only.
The Group segments its lending business and
operates under two segments:
- OneSavings Bank (OSB)
- Charter Court Financial Services (CCFS)
The Group has disclosed relevant risk management
tables in note 44 at a sub-segment level to provide detailed
analysis of the Group’s core lending business.
f) Interest income and
expense
Interest income and interest expense for all
interest-bearing financial instruments measured at amortised cost
and FVOCI are recognised in profit or loss using the effective
interest rate (EIR) method. The EIR is the rate which discounts the
expected future cash flows, over the expected life of the financial
instrument, to the net carrying value of the financial asset or
liability.
Interest income on financial assets categorised
as stage 1 or 2 are recognised on a gross basis, with interest
income on stage 3 assets recognised net of expected credit losses
(ECL). 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.
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.
- Accounting policies (continued)
g) Fees and commissions
Fees and commissions which are an integral part
of the EIR of a financial instrument are recognised as an
adjustment to the EIR and recorded in interest income. The Group
includes early redemption charges within the EIR.
Fees received on mortgage administration
services and mortgage origination activities, which are not an
integral part of the EIR, are recorded in other operating income
and accounted for in accordance with IFRS 15 Revenue from Contracts
with Customers, with income recognised when the services are
delivered and the benefits are transferred to clients and
customers.
Other fees and commissions are recognised on the
accrual basis as services are provided or on the performance of a
significant act, net of VAT and similar taxes.
h) 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.
i) 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.
j) Dividends
Dividends are recognised in equity in the period
in which they are paid or, if earlier, approved by
shareholders.
Dividend income from investments is recognised
when the shareholders’ rights to receive payment have been
established.
k) Cash and cash
equivalents
For the purposes of the Consolidated Statement
of Cash Flows, cash and cash equivalents comprise cash,
non-restricted balances with credit institutions and highly liquid
financial assets with maturities of less than three months from
date of acquisition, 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.
- Accounting policies (continued)
l) Intangible
assets
Purchased software and costs directly associated
with the development of computer software are capitalised as
intangible assets where the software is a unique and identifiable
asset controlled by the Group and will generate future economic
benefits. Costs to establish technological feasibility or to
maintain existing levels of performance are recognised as an
expense. The Group only recognises internally generated intangible
assets if all of the following conditions are met:
- an asset is being created that can be identified after
establishing the technical and commercial feasibility of the
resulting product;
- it is probable that the asset created will generate future
economic benefits; and
- the development cost of the asset can be measured
reliably.
Subsequent expenditure on an internally
generated intangible asset, after its purchase or completion, is
recognised as an expense in the period in which it is incurred.
Where no internally generated intangible asset can be recognised,
development expenditure is recognised as an expense in the period
in which it is incurred.
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.
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
- Accounting policies (continued)
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.
m) Property, plant and equipment
Property, plant and equipment comprise freehold
land and buildings, major alterations to office premises, computer
equipment and fixtures measured at cost less accumulated
depreciation. These assets are reviewed for impairment annually,
and if they are considered to be impaired, are written down
immediately to their recoverable amounts.
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.
n) 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.
- 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.
- Accounting policies (continued)
- 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.
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.
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.
- Accounting policies (continued)
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
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.
p) Deemed
loan
Mortgage assets remain on the Company’s balance
sheet for securitisation transactions where the Company retains
substantially all the risks and rewards of the assets. The Company
recognises a deemed loan position for consideration received or
transferred. In each subsequent reporting period the deemed loan
position is updated to incorporate repayments of principal on notes
held by third parties, movements in liquidity and other cash
reserves held by the securitisation vehicle, and expenses incurred
on the securitisation arrangement. The expense recognised includes
interest payments on notes held by external parties, interest
payments paid/received on the swap, and servicing and other third
party costs as they are incurred.
q) Investment securities
Investment securities include securities held
for liquidity purposes (UK treasury bills, UK Gilts and Residential
Mortgage-Backed Securities (RMBS)). These assets are
non-derivatives that are classified on an individual basis as
amortised cost, FVOCI or FVTPL.
r) 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.
- Accounting policies (continued)
s) 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.
t) 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 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 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.
u) 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.
v) 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.
- Accounting policies (continued)
w) 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.
x) Share-based payments
Equity-settled share-based payments to employees
providing services are measured at the fair value of the equity
instruments at the grant date in accordance with IFRS 2. The fair
value excludes the effect of non-market-based vesting
conditions.
The cost of the awards 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.
- Accounting policies (continued)
y) 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 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.
z) 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.
2. Judgements in applying
accounting policies and critical accounting estimates
In preparing these financial statements, the
Group has made judgements, estimates and assumptions which affect
the reported amounts within the current and future financial years.
Actual results may differ from these estimates.
As set out in Strategic report 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
19.
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 51.
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 19) |
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.
3. Interest receivable and
similar income
|
Group |
Group |
|
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.
4. Interest payable and similar
charges
|
Group |
Group |
|
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 |
16.9 |
1.1 |
On senior
notes |
9.0 |
- |
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) |
|
1,035.9 |
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 |
- |
|
1,108.1 |
359.4 |
- 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
|
Group |
Group |
|
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.
6. Other operating
income
|
Group |
Group |
|
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 |
7. Administrative
expenses
|
Group |
Group |
|
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 |
32.1 |
28.9 |
Other
costs |
10.9 |
12.8 |
Depreciation
(see note 25) |
6.2 |
5.2 |
Amortisation
(see note 26) |
5.7 |
8.2 |
|
233.8 |
206.5 |
Included in professional fees are amounts paid
to the Company’s auditor as follows:
|
Group |
Group |
|
2023 |
2022 |
|
£'000 |
£'000 |
Fees payable
to the Company's auditor for the audit of the Company's annual
accounts1 |
1,589 |
1,405 |
Fees payable to the Company's auditor for the audit of the accounts
of subsidiaries1 |
2,199 |
1,936 |
Total audit fees |
3,788 |
3,341 |
Audit-related
assurance services2 |
487 |
254 |
Other
assurance services3 |
102 |
70 |
Other
non-audit services4 |
42 |
33 |
Total non-audit fees |
631 |
357 |
Total fees payable to the Company's auditor |
4,419 |
3,698 |
Fees payable to the Company’s auditor for the
audit of the Company’s annual accounts has been re-categorised to
£1,405k from £669k with fees payable to the Company’s auditor for
the audit of the accounts of subsidiaries re-categorised to £1,936k
from £2,672k.
- Includes review of interim financial information and profit
verifications.
- Costs comprise assurance reviews of European Single Electronic
Format (ESEF) tagging and Q3 validation (2022: assurance reviews of
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:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Salaries,
incentive pay and other benefits |
101.2 |
87.3 |
64.9 |
53.4 |
Share-based
payments |
5.6 |
8.1 |
5.0 |
7.3 |
Social
security costs |
10.5 |
9.5 |
7.9 |
6.6 |
Other pension costs |
4.9 |
4.4 |
3.5 |
3.0 |
|
122.2 |
109.3 |
81.3 |
70.3 |
The average number of people employed by the
Group and Company (including Executive Directors) during the year
is analysed below.
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
UK |
1,461 |
1,274 |
1,012 |
777 |
India |
811 |
622 |
- |
- |
|
2,272 |
1,896 |
1,012 |
777 |
8. Directors' emoluments and
transactions
|
Company |
Company |
|
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.
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 OSB GROUP PLC Annual Report on
Remuneration.
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 highest paid Director employed by the
Company received emoluments of £2,181k (2022: £2,991k) and payments
in respect of personal pension plans of £70k (2022: £67k) in the
year.
The OSB GROUP PLC Annual Report on Remuneration
and note 9 Share-based payments provide further details on
Directors’ emoluments.
9. 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.
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.
- Share-based payments
(continued)
The share-based payment expense during the year
comprised the following:
|
Group |
Group |
|
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 |
|
- |
|
- |
For the share-based awards granted during the
year, the weighted average grant date fair value was 275 pence
(2022: 396 pence).
- Share-based payments
(continued)
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 OSBG’s share price post
insertion, and the OSB share price prior to insertion. Prior to
this the Group used the FTSE 350 diversified financials volatility
as insufficient history was available for the OSBG’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.
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 |
- Share-based payments
(continued)
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 |
10. Integration costs
|
Group |
Group |
|
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.
11. Taxation
The Group publishes its tax strategy on its
corporate website. The table below shows the components of the
Group’s tax charge for the year:
|
Group |
Group |
|
2023 |
2022 |
|
£m |
£m |
Corporation
tax |
105.8 |
141.4 |
Corporation
taxation - prior year adjustments |
(0.4) |
(0.9) |
Total current tax |
105.4 |
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 |
91.8 |
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:
|
Group |
Group |
|
2023 |
2022 |
|
£m |
£m |
Profit before taxation |
375.4 |
532.8 |
Profit
multiplied by the standard rate of UK Corporation Tax 23.5% (2022:
19%) |
88.2 |
101.2 |
Bank
surcharge1 |
8.4 |
30.2 |
Taxation effects of: |
|
|
Expenses not
deductible for taxation purposes |
0.1 |
0.3 |
Securitisation
profits not taxable2 |
(2.5) |
(2.2) |
Timing
differences on capital items |
(0.3) |
(0.1) |
Utilisation of
brought forward tax losses |
(0.3) |
(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 |
105.4 |
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 |
91.8 |
121.5 |
- 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).
- 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.
- 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.
- 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.
12. Dividends
During the year, the Company paid the following
dividends:
|
Company |
Company |
|
2023 |
2022 |
|
£m |
Pence per share |
£m |
Pence per share |
Dividends paid
to fund OSBG's share repurchase programme |
150.0 |
33.5 |
100.0 |
22.4 |
Interim
dividend for the current year |
185.0 |
41.4 |
133.1 |
29.8 |
|
335.0 |
|
233.1 |
|
The Directors do not recommend a final dividend
(2022: nil).
13. Cash and cash equivalents
The following table analyses the cash and cash
equivalents disclosed in the Statement of Cash Flows:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Cash in
hand |
0.4 |
0.4 |
0.4 |
0.4 |
Unencumbered
loans and advances to credit institutions |
2,513.6 |
2,953.7 |
850.1 |
1,358.7 |
Investment
securities |
- |
90.0 |
- |
90.0 |
|
2,514.0 |
3,044.1 |
850.5 |
1,449.1 |
14. Loans and advances to credit
institutions
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Unencumbered: |
|
|
|
|
BoE call
account |
2,256.3 |
2,806.5 |
819.9 |
1,328.2 |
Call
accounts |
92.2 |
73.2 |
29.9 |
29.5 |
Cash held in
special purpose vehicles (SPVs)1 |
147.8 |
63.8 |
0.3 |
1.0 |
Term
deposits |
17.3 |
10.2 |
- |
- |
Encumbered: |
|
|
|
|
BoE cash ratio
deposit |
69.6 |
62.8 |
41.4 |
37.8 |
Cash held in
SPVs1 |
31.8 |
111.8 |
2.4 |
- |
Cash margin
given |
198.6 |
237.4 |
108.8 |
109.6 |
|
2,813.6 |
3,365.7 |
1,002.7 |
1,506.1 |
- 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.
15. Investment securities
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Held
at amortised cost: |
|
|
|
|
RMBS loan
notes |
325.4 |
262.6 |
99.9 |
61.1 |
Less: Expected credit losses |
- |
- |
- |
- |
|
325.4 |
262.6 |
99.9 |
61.1 |
Held
at FVOCI: |
|
|
|
|
UK Sovereign debt1 |
296.0 |
149.8 |
296.0 |
149.8 |
|
|
|
|
|
Held
at FVTPL: |
|
|
|
|
RMBS loan notes |
0.3 |
0.5 |
0.3 |
0.5 |
|
621.7 |
412.9 |
396.2 |
211.4 |
- In 2022, includes £90.0m of UK Treasury bills which had a
maturity of less than three months from date of acquisition.
- Investment securities
(continued)
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.
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 and Company are analysed as
follows:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
At 1
January |
412.9 |
491.4 |
211.4 |
16.2 |
Additions1 |
664.3 |
686.5 |
592.0 |
646.4 |
Disposals and maturities2 |
(456.3) |
(764.4) |
(407.5) |
(451.0) |
Movement in accrued interest |
1.0 |
(0.9) |
0.5 |
(0.5) |
Changes in fair value |
(0.2) |
0.3 |
(0.2) |
0.3 |
At 31 December |
621.7 |
412.9 |
396.2 |
211.4 |
- 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 include £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.
16. Loans and advances to customers
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Held
at amortised cost: |
|
|
|
|
Loans and
advances (see note 17) |
25,674.4 |
23,564.9 |
11,512.0 |
10,613.5 |
Finance leases (see note 18) |
222.7 |
163.2 |
- |
- |
|
25,897.1 |
23,728.1 |
11,512.0 |
10,613.5 |
Less: Expected credit losses (see note 19) |
(145.8) |
(130.0) |
(79.8) |
(81.6) |
|
25,751.3 |
23,598.1 |
11,432.2 |
10,531.9 |
Held
at FVTPL: |
|
|
|
|
Residential
mortgages |
13.7 |
14.6 |
- |
- |
|
25,765.0 |
23,612.7 |
11,432.2 |
10,531.9 |
17. Loans and advances
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
OSB |
CCFS |
Total |
Group |
£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 |
|
|
|
|
|
2023 |
2022 |
Company |
|
|
|
|
£m |
£m |
Gross carrying amount |
|
|
|
|
|
|
Stage 1 |
|
|
|
|
8,533.7 |
7,939.0 |
Stage 2 |
|
|
|
|
2,519.3 |
2,353.1 |
Stage 3 |
|
|
|
|
429.3 |
286.9 |
Stage 3
(POCI) |
|
|
|
|
29.7 |
34.5 |
|
|
|
|
|
11,512.0 |
10,613.5 |
- Loans and advances (continued)
The mortgage loan balances pledged as collateral for liabilities
are:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
BoE under
TFSME and ILTR |
6,092.4 |
6,439.7 |
4,095.2 |
3,295.2 |
Securitisation |
841.7 |
265.4 |
168.3 |
124.6 |
|
6,934.1 |
6,705.1 |
4,263.5 |
3,419.8 |
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%).
The Company adopts a net accounting approach for
retained interests in securitisation transactions that are
consolidated into the Group, disclosing the net amount as a deemed
loan asset/(liability). The table below shows the breakdown of the
Company’s deemed loan balance.
|
Company |
Company |
|
2023 |
2022 |
|
£m |
£m |
General
Reserve fund |
42.3 |
55.9 |
Loan notes
held externally |
(168.3) |
(124.1) |
Amount owed
from SPVs |
100.7 |
99.4 |
|
(25.3) |
31.2 |
As at 31 December 2023, the Company had £428.4m
(2022: £1,079.6m) of the retained loan notes sold under repos or
pledged as collateral.
- Loans and advances
(continued)
The tables 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 |
Group |
£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.
- Loans and advances
(continued)
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3 (POCI) |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
At 1
January 2022 |
8,220.7 |
984.5 |
294.0 |
41.0 |
9,540.2 |
Originations1 |
2,343.3 |
- |
- |
- |
2,343.3 |
Repayments and
write-offs2 |
(1,084.5) |
(128.7) |
(50.3) |
(6.5) |
(1,270.0) |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
440.4 |
(422.6) |
(17.8) |
- |
- |
- To
Stage 2 |
(1,930.1) |
1,969.6 |
(39.5) |
- |
- |
- To
Stage 3 |
(50.8) |
(49.7) |
100.5 |
- |
- |
At 31 December 2022 |
7,939.0 |
2,353.1 |
286.9 |
34.5 |
10,613.5 |
Originations1 |
1,791.7 |
- |
- |
- |
1,791.7 |
Acquisitions3 |
92.5 |
- |
- |
- |
92.5 |
Repayments and
write-offs2 |
(702.3) |
(188.4) |
(90.2) |
(4.8) |
(985.7) |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
785.6 |
(775.8) |
(9.8) |
- |
- |
- To
Stage 2 |
(1,283.4) |
1,312.3 |
(28.9) |
- |
- |
- To
Stage 3 |
(89.4) |
(181.9) |
271.3 |
- |
- |
At 31 December 2023 |
8,533.7 |
2,519.3 |
429.3 |
29.7 |
11,512.0 |
- Originations include further advances and drawdowns on existing
commitments.
- Repayments and write-offs include customer redemptions and
£26.8m (2022: £1.4m) of write-offs during the year.
- The Company repurchased £92.4m 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) for the Group and £0.3m for the Company
(2022: £0.6m).
As at 31 December 2023 £126.7m of loans and
advances (2022: £110.0m) for the Group and £76.3m for the Company
(2022: £65.3m) 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 for the Group and £46.3m
for the Company are in this category of default (2022: £32.1m).
18. Finance leases
The Group provides asset finance lending through
InterBay Asset Finance Limited.
|
Group |
Group |
|
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).
19. 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 |
Group |
£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 |
|
2023 |
2022 |
|
ECL provision |
Weighting |
Weighted ECL provision |
ECL provision |
Weighting |
Weighted ECL provision |
Company |
£m |
% |
£m |
£m |
% |
£m |
Scenarios |
|
|
|
|
|
|
Upside |
30.6 |
30 |
9.2 |
17.6 |
30 |
5.3 |
Base case |
39.5 |
40 |
15.7 |
22.9 |
40 |
9.2 |
Downside
scenario |
73.2 |
20 |
14.6 |
45.6 |
20 |
9.1 |
Severe downside scenario |
110.9 |
10 |
11.1 |
70.5 |
10 |
7.1 |
Total weighted
provisions |
|
|
50.6 |
|
|
30.7 |
Non-modelled provisions: |
|
|
|
|
|
|
Individually
assessed provisions |
|
|
14.0 |
|
|
33.9 |
Post model
adjustments |
|
|
15.2 |
|
|
17.0 |
Total provision |
|
|
79.8 |
|
|
81.6 |
- 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) and the Company
£5.7m (2022: £8.2m), 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) and the Company £6.2m, 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) and the Company £0.4m, of PMA.
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) and the Company £0.4m
(2022: £0.3m).
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) for the Group and the Company has been
recognised for the expected losses.
The ECL by segment and IFRS 9 stage is shown
below:
|
2023 |
2022 |
|
OSB |
CCFS |
Total |
OSB |
CCFS |
Total |
Group |
£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)
|
|
|
|
|
2023 |
2022 |
Company |
|
|
|
|
£m |
£m |
Stage 1 |
|
|
|
|
8.5 |
1.8 |
Stage 2 |
|
|
|
|
35.3 |
31.7 |
Stage 3 |
|
|
|
|
35.2 |
46.8 |
Stage 3
(POCI) |
|
|
|
|
0.8 |
1.3 |
|
|
|
|
|
79.8 |
81.6 |
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 |
Group |
£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 |
- Expected credit losses
(continued)
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3 (POCI) |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
At 1
January 2022 |
6.1 |
12.1 |
43.6 |
2.0 |
63.8 |
Originations |
3.8 |
- |
- |
- |
3.8 |
Repayments and
write-offs |
(0.5) |
(1.5) |
(3.8) |
(0.1) |
(5.9) |
Re-measurement
of loss allowance |
(7.8) |
13.7 |
10.4 |
(0.7) |
15.6 |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
4.4 |
(3.9) |
(0.5) |
- |
- |
- To
Stage 2 |
(1.4) |
2.8 |
(1.4) |
- |
- |
- To
Stage 3 |
- |
(1.1) |
1.1 |
- |
- |
Changes in assumptions and model parameters |
(2.8) |
9.6 |
(2.6) |
0.1 |
4.3 |
At 31
December 2022 |
1.8 |
31.7 |
46.8 |
1.3 |
81.6 |
Originations |
4.2 |
- |
- |
- |
4.2 |
Acquisitions |
0.8 |
- |
- |
- |
0.8 |
Repayments and
write-offs |
(0.1) |
(2.4) |
(32.7) |
(0.2) |
(35.4) |
Re-measurement
of loss allowance |
(5.2) |
18.3 |
14.9 |
0.2 |
28.2 |
Transfers: |
|
|
|
|
|
- To
Stage 1 |
7.1 |
(6.6) |
(0.5) |
- |
- |
- To
Stage 2 |
(0.4) |
1.1 |
(0.7) |
- |
- |
- To
Stage 3 |
- |
(4.8) |
4.8 |
- |
- |
Changes in
assumptions and model parameters |
0.3 |
(2.0) |
2.6 |
(0.5) |
0.4 |
At 31 December 2023 |
8.5 |
35.3 |
35.2 |
0.8 |
79.8 |
The table below shows the stage 2 ECL balances by transfer
criteria:
|
2023 |
2022 |
|
Carrying value |
ECL |
Coverage |
Carrying value |
ECL |
Coverage |
Group |
£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)
|
2023 |
2022 |
|
Carrying value |
ECL |
Coverage |
Carrying value |
ECL |
Coverage |
Company |
£m |
£m |
% |
£m |
£m |
% |
Criteria: |
|
|
|
|
|
|
Relative/absolute PD movement |
2,430.6 |
34.9 |
1.44 |
1,692.3 |
26.9 |
1.59 |
Qualitative
measures |
54.0 |
0.2 |
0.37 |
631.2 |
4.5 |
0.71 |
30 days past
due backstop |
34.7 |
0.2 |
0.58 |
29.6 |
0.3 |
1.01 |
Total |
2,519.3 |
35.3 |
1.40 |
2,353.1 |
31.7 |
1.35 |
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.
20. Impairment of financial assets
The charge for impairment of financial assets in
the Statement of Comprehensive Income comprises:
|
Group |
Group |
|
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 Statement of Comprehensive Income also
includes a £4.6m credit (2022: nil) in respect of insurance
recoveries.
21. Derivatives
The table below reconciles the gross amount of
derivative contracts to the carrying balance shown in the Statement
of Financial Position:
|
Gross amount of recognised financial assets /
(liabilities) |
Net amount of financial assets / (liabilities) presented in
the Statement of Financial Position |
Contracts subject to master netting agreements not offset
in the Statement of Financial Position |
Cash collateral paid / (received) not offset in the
Statement of Financial Position |
Net amount |
Group |
£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 |
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.
- Derivatives (continued)
|
Gross amount of recognised financial assets /
(liabilities) |
Net amount of financial assets / (liabilities) presented in
the Statement of Financial Position |
Contracts subject to master netting agreements not offset
in the Statement of Financial Position |
Cash collateral paid / (received) not offset in the
Statement of Financial Position |
Net amount |
Company |
£m |
£m |
£m |
£m |
£m |
At 31
December 2023 |
|
|
|
|
|
Derivative
assets: |
|
|
|
|
|
Interest
rate risk hedging |
180.8 |
180.8 |
(121.6) |
(56.3) |
2.9 |
Derivative liabilities: |
|
|
|
|
|
Interest rate risk hedging |
(123.8) |
(123.8) |
121.6 |
115.8 |
113.6 |
At 31 December 2022 |
|
|
|
|
|
Derivative
assets: |
|
|
|
|
|
Interest rate risk hedging |
234.0 |
234.0 |
(63.2) |
(173.4) |
(2.6) |
Derivative
liabilities: |
|
|
|
|
|
Interest rate risk hedging |
(63.8) |
(63.8) |
63.2 |
79.4 |
78.8 |
Derivative assets and liabilities include an
initial margin of £108.7m with swap counterparties (2022:£79.2).
Margin is posted daily in respect of derivatives transacted with
swap counterparties.
- Derivatives (continued)
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 |
Group |
£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 |
624.1 |
4,056.6 |
10,849.9 |
132.0 |
Derivative
liabilities |
9,518.0 |
1,503.0 |
6,001.0 |
1,869.0 |
145.0 |
|
25,180.6 |
2,127.1 |
10,057.6 |
12,718.9 |
277.0 |
The Group has 944 (2022: 916) derivative
contracts with an average fixed rate of 2.70% (2022: 1.34%).
|
Total nominal |
Less than 3 months |
3 - 12 months |
1 - 5 years |
More than 5 years |
Company |
£m |
£m |
£m |
£m |
£m |
At 31
December 2023 |
|
|
|
|
|
Derivative
assets |
6,591.0 |
90.0 |
3,630.0 |
2,871.0 |
- |
Derivative
liabilities |
4,821.0 |
440.0 |
1,320.0 |
2,766.0 |
295.0 |
|
11,412.0 |
530.0 |
4,950.0 |
5,637.0 |
295.0 |
|
|
|
|
|
|
At 31 December 2022 |
|
|
|
|
|
Derivative
assets |
4,628.0 |
50.0 |
1,526.0 |
3,012.0 |
40.0 |
Derivative
liabilities |
5,158.0 |
650.0 |
3,270.0 |
1,198.0 |
40.0 |
|
9,786.0 |
700.0 |
4,796.0 |
4,210.0 |
80.0 |
The Company has 201 (2022: 123) derivative
contracts with an average fixed rate of 3.61% (2022: 2.17%).
22. Hedge accounting
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Hedged
assets |
|
|
|
|
Current hedge
relationships |
(253.1) |
(827.9) |
(10.0) |
(204.0) |
Swap inception
adjustment |
40.4 |
44.1 |
13.1 |
17.8 |
Cancelled
hedge relationships |
(30.8) |
(5.2) |
(14.7) |
(14.6) |
Fair value adjustments on hedged assets |
(243.5) |
(789.0) |
(11.6) |
(200.8) |
Hedged
liabilities |
|
|
|
|
Current hedge
relationships |
(22.2) |
58.0 |
(12.8) |
34.8 |
Swap inception
adjustment |
0.3 |
(2.3) |
1.0 |
(1.1) |
Cancelled
hedge relationships |
- |
(0.6) |
- |
- |
Fair value adjustments on hedged liabilities |
(21.9) |
55.1 |
(11.8) |
33.7 |
The swap inception adjustment relates to hedge
accounting adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against
the mortgage pipeline and on derivative instruments previously
taken out against new retail deposits.
De-designated hedge relationships 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).
- Hedge accounting (continued)
The tables below analyse the Group’s and
Company’s portfolio hedge accounting for fixed rate loans and
advances to customers:
|
Group 2023 |
Group 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 |
(590.2) |
(620.6) |
621.9 |
Cumulative fair value on cancelled hedge relationships |
(30.8) |
- |
(5.2) |
- |
In the 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.
|
Company 2023 |
Company 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 |
5,718.3 |
5,713.0 |
4,114.0 |
4,006.0 |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(10.0) |
50.0 |
(204.0) |
199.3 |
Changes in the
fair value adjustment of hedged item/hedging instrument used for
recognising the hedge ineffectiveness for the period |
193.8 |
(194.0) |
(177.5) |
177.0 |
Cumulative fair value on cancelled hedge relationships |
(14.7) |
- |
(14.6) |
- |
The cumulative fair value adjustments of the
hedging instrument comprise £152.1m (2022: £216.4m) recognised
within derivative assets, and £102.1m (2022: £17.1m) recognised
within derivative liabilities.
- Hedge accounting (continued)
The movement in cancelled hedge relationships is
as follows:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
Hedged assets |
£m |
£m |
£m |
£m |
At 1
January |
(5.2) |
78.2 |
(14.6) |
53.1 |
New
cancellations1 |
(23.0) |
(49.3) |
- |
(49.4) |
Amortisation |
(2.6) |
(34.1) |
(0.1) |
(18.3) |
At 31 December |
(30.8) |
(5.2) |
(14.7) |
(14.6) |
- 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.
The tables below analyse the Group’s and
Company’s portfolio hedge accounting for fixed rate amounts owed to
retail depositors:
|
Group 2023 |
Group 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 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.
- Hedge accounting (continued)
|
Company 2023 |
Company 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 |
4,841.6 |
4,829.0 |
5,199.7 |
5,200.0 |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(2.4) |
7.0 |
34.8 |
(42.5) |
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness for the
period |
(36.6) |
45.7 |
24.7 |
(32.5) |
The cumulative fair value adjustments of the
hedging instrument comprise £26.4m (2022: £0.6m) recognised within
derivative assets and £19.4m (2022: £43.1m) recognised within
derivative liabilities.
The tables below analyse the Group’s and
Company’s ‘micro’ hedge accounting for fixed rate senior notes and
subordinated liabilities:
|
Group 2023 |
Group 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 and the Company 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 Statement of Financial Position, £15.6m (2022:
nil) for the Group and £10.6m (2022: nil) for the Company of
hedging instruments were recognised within derivative assets.
- Hedge accounting (continued)
|
Company 2023 |
Company 2022 |
|
Hedged item |
Hedging instrument |
Hedged item |
Hedging instrument |
Senior notes |
£m |
£m |
£m |
£m |
Carrying
amount of hedged item/nominal value of hedging instrument |
220.0 |
220.0 |
- |
- |
Cumulative
fair value adjustments of hedged item/fair value of hedging
instrument |
(10.4) |
10.6 |
- |
- |
Changes in the fair value adjustment of hedged item/hedging
instrument used for recognising the hedge ineffectiveness for the
period |
(10.4) |
10.8 |
- |
- |
23. Other assets
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Falling due
within one year: |
|
|
|
|
Prepayments |
9.9 |
7.8 |
7.4 |
6.1 |
Other
assets |
11.9 |
1.8 |
6.4 |
2.0 |
|
|
|
|
|
Falling due
more than one year: |
|
|
|
|
Prepayments |
5.8 |
5.4 |
5.6 |
5.0 |
|
27.6 |
15.0 |
19.4 |
13.1 |
24. Deferred taxation asset
|
Losses carried forward |
Accelerated depreciation |
Share-based payments |
IFRS 9 transitional adjustments |
Others1 |
Total |
Group |
£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.
- Deferred taxation asset
(continued)
|
Accelerated depreciation |
Share-based payments |
IFRS 9 transitional adjustments |
Unpaid bonus |
Others1 |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
At 1
January 2022 |
0.3 |
4.1 |
0.3 |
0.2 |
- |
4.9 |
Profit or loss
(charge)/credit |
(0.4) |
0.6 |
(0.1) |
(0.2) |
0.1 |
- |
Tax taken
directly to OCI |
- |
- |
- |
- |
(0.1) |
(0.1) |
Tax taken
directly to equity |
- |
(0.7) |
- |
- |
- |
(0.7) |
At 31 December 2022 |
(0.1) |
4.0 |
0.2 |
- |
- |
4.1 |
Profit or loss
(charge)/credit |
(0.8) |
0.3 |
- |
0.1 |
- |
(0.4) |
Tax taken
directly to OCI |
- |
- |
- |
- |
0.1 |
0.1 |
At 31 December 2023 |
(0.9) |
4.3 |
0.2 |
0.1 |
0.1 |
3.8 |
- Others includes deferred taxation assets recognised on
financial assets classified as FVOCI, derivatives and short-term
timing differences.
As at 31 December 2023 deferred tax assets of
£1.6m (2022: £1.9m) are expected to be utilised within 12 months
and £2.1m (2022: £2.2m) utilised after 12 months.
25. Property, plant and equipment
23 |
11 |
14 |
12 |
8 |
7 |
7 |
|
Freehold land and buildings |
Leasehold improvements |
Equipment and fixtures |
Right of use assets |
Total |
|
Property leases |
Other leases |
Group |
£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 |
- 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.
- During the year the Group derecognised fully depreciated
assets.
- Property, plant and equipment
(continued)
|
Freehold land and buildings |
Leasehold improvements |
Equipment and fixtures |
Right of use assets |
Total |
|
Property leases |
Other leases |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
Cost |
|
|
|
|
|
|
At 1 January
2022 |
8.7 |
2.4 |
8.0 |
5.6 |
0.1 |
24.8 |
Additions1 |
3.5 |
0.1 |
2.2 |
0.4 |
- |
6.2 |
Disposals and write-offs2 |
- |
- |
(1.6) |
(0.3) |
(0.1) |
(2.0) |
At 31 December
2022 |
12.2 |
2.5 |
8.6 |
5.7 |
- |
29.0 |
Additions1 |
0.6 |
- |
4.1 |
0.5 |
- |
5.2 |
Disposals and write-offs2 |
- |
- |
(1.8) |
- |
- |
(1.8) |
At 31 December 2023 |
12.8 |
2.5 |
10.9 |
6.2 |
- |
32.4 |
Depreciation |
|
|
|
|
|
|
At 1 January
2022 |
1.1 |
0.7 |
4.1 |
1.6 |
- |
7.5 |
Charged in
year |
0.1 |
0.2 |
1.6 |
0.7 |
- |
2.6 |
Disposals and
write-offs2 |
- |
- |
(1.6) |
(0.3) |
(0.1) |
(2.0) |
At 31 December 2022 |
1.2 |
0.9 |
4.1 |
2.0 |
(0.1) |
8.1 |
Charged in year |
0.1 |
0.3 |
2.2 |
0.8 |
0.1 |
3.5 |
Disposals and write-offs2 |
- |
- |
(1.8) |
- |
- |
(1.8) |
At 31 December 2023 |
1.3 |
1.2 |
4.5 |
2.8 |
- |
9.8 |
|
|
|
|
|
|
|
Net
book value |
|
|
|
|
|
|
At 31 December 2023 |
11.5 |
1.3 |
6.4 |
3.4 |
- |
22.6 |
At 31 December 2022 |
11.0 |
1.6 |
4.5 |
3.7 |
0.1 |
20.9 |
- Additions include property leases modifications of £0.5m (2022:
nil) and other leases modifications of £1.5m (2022: nil) of right
of use assets.
- During the year the Group derecognised fully depreciated
assets.
26. Intangible assets
|
Development
costs1 |
Computer
software and
licences |
Assets arising on Combination2 |
Total |
Group |
£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 |
- Increase in development costs is largely due to the
modernisation project.
- 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.
- 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.
- Intangible assets
(continued)
|
Development
costs |
Computer software and licences |
Total |
Company |
£m |
£m |
£m |
Cost |
|
|
|
At 1 January
2022 |
1.4 |
14.2 |
15.6 |
Additions |
0.1 |
1.3 |
1.4 |
Disposals and write-offs1 |
- |
(3.3) |
(3.3) |
At 31 December
2022 |
1.5 |
12.2 |
13.7 |
Additions |
19.0 |
0.7 |
19.7 |
Transfer during the year |
(2.2) |
2.2 |
- |
Disposals and write-offs1 |
- |
(3.1) |
(3.1) |
At 31 December 2023 |
18.3 |
12.0 |
30.3 |
|
|
|
|
Amortisation |
|
|
|
At 1 January
2022 |
- |
7.9 |
7.9 |
Charged in
year |
- |
2.6 |
2.6 |
Disposals and
write-offs1 |
- |
(3.3) |
(3.3) |
At 31 December 2022 |
- |
7.2 |
7.2 |
Charged in year |
- |
2.4 |
2.4 |
Disposals and write-offs1 |
- |
(3.1) |
(3.1) |
At 31 December 2023 |
- |
6.5 |
6.5 |
|
|
|
|
Net book value |
|
|
|
At 31 December 2023 |
18.3 |
5.5 |
23.8 |
At 31 December 2022 |
1.5 |
5.0 |
6.5 |
- During the year the Company derecognised fully amortised
assets.
-
27. Investments in subsidiaries, intercompany
loans and transactions with related parties
The Group
The balance between the Group and its ultimate
parent at the reporting date is summarised in the table below:
|
|
Intercompany loans receivable |
Intercompany loans receivable |
|
|
2023 |
2022 |
Group |
|
£m |
£m |
At 1
January |
|
0.8 |
0.6 |
Additions |
|
5.4 |
2.1 |
Repayments |
|
(1.7) |
(1.9) |
At 31 December |
|
4.5 |
0.8 |
The transactions with OSBG during the year
include additions in relation to costs on shares repurchased of
£2.4m, issuance cost of £1.6m and £1.3m on senior notes and
subordinated liabilities respectively funded by the Company.
Repayments comprise £1.7m of cash received on behalf of OSBG from
issuing shares under SAYE (2022: additions comprised £2.1m
additions in relation to costs on shares repurchased funded by the
Company. Repayments of £1.9m comprise £1.6m of cash received on
behalf of OSBG from issuing shares under SAYE and £0.3m of tax
losses surrendered to the Company).
The Company
The balances between the Company, its parent and
its subsidiaries at the reporting date are summarised in the table
below:
|
Investment in subsidiaries |
Intercompany loans receivable |
Intercompany loans payable |
Company |
£m |
£m |
£m |
At 1 January
2022 |
708.9 |
2,387.5 |
(33.2) |
Additions |
3.2 |
177.3 |
(2.7) |
Repayments |
- |
(33.1) |
2.6 |
Impairment |
(1.3) |
- |
- |
At 31 December
2022 |
710.8 |
2,531.7 |
(33.3) |
Additions |
- |
441.3 |
(0.1) |
Repayments |
- |
(16.1) |
8.7 |
At 31 December 2023 |
710.8 |
2,956.9 |
(24.7) |
The Group and the Company assesses intercompany
loans receivable for impairment. The Company recognised no
impairment in investment in subsidiaries during the year (2022:
£1.3m impairment). In 2022, the investment in Prestige Finance
Limited (PFL) has been impaired down to PFL’s share capital value
following the cessation of trade in PFL. The investment in Interbay
Group Holdings Limited (IGHL) impaired down to the net asset value
as IGHL is being considered for dissolution.
Investments in subsidiaries are financial assets
and intercompany loans are financial assets and liabilities, all
carried at amortised cost.
- Investments in subsidiaries, intercompany
loans and transactions with related parties
(continued)
A list of the Company’s direct subsidiaries for
2023 is shown below:
At 31
December 2023 |
|
Registered office |
|
Direct investments |
Activity |
Ownership |
Charter Court
Financial Services Group Plc1 |
Holding
company |
Charter
Court |
100% |
Easioption
Limited |
Holding
company |
Reliance
House |
100% |
Guernsey Home
Loans Limited |
Mortgage
provider |
Reliance
House |
100% |
Guernsey Home
Loans Limited (Guernsey) |
Mortgage
provider |
Guernsey |
100% |
Heritable
Development Finance Limited |
Mortgage
originator and servicer |
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% |
- Charter Court Financial Services Group Plc name changed post
year end to CCFSG Holdings Limited.
The Company holds ordinary shares in all its
direct subsidiaries.
OSB India Private Limited is owned 70.28% by the Company, 29.72%
by Easioption Limited and 0.001% by Reliance Property Loans
Limited.
- Investments in subsidiaries,
intercompany loans and transactions with related parties
(continued)
A list of the Company’s indirect subsidiaries
for 2023 is shown below:
At 31
December 2023 |
|
Registered office |
|
Indirect investments |
Activity |
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 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 |
- |
Exact Mortgage
Experts Limited |
Group service
company |
Charter
Court |
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% |
All investments in subsidiaries are of ordinary shares.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the
Group’s consolidated financial statements.
All of the above investments are reviewed
annually for impairment. Based on assessment of the future cash
flows of each entity no impairment has been recognised.
- Investments in subsidiaries,
intercompany loans and transactions with related parties
(continued)
A list of the Company’s direct subsidiaries for 2022 is shown
below:
At 31 December
2022 |
|
|
|
Direct investments |
Activity |
Registered Office |
Ownership |
Charter Court
Financial Services Group Plc |
Holding
company |
Charter
Court |
100% |
Easioption
Limited |
Holding
company |
Reliance
House |
100% |
Guernsey Home
Loans Limited |
Mortgage
provider |
Reliance
House |
100% |
Guernsey Home
Loans Limited (Guernsey) |
Mortgage
provider |
Guernsey |
100% |
Heritable
Development Finance Limited |
Mortgage
originator and servicer |
Reliance
House |
100% |
Interbay Group
Holdings Limited |
Holding
company |
Reliance
House |
100% |
Jersey Home Loans
Limited |
Mortgage
provider |
Reliance
House |
100% |
Jersey Home Loans
Limited (Jersey) |
Mortgage
provider |
Jersey |
100% |
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, intercompany
loans and transactions with related parties
(continued)
A list of the Company’s indirect subsidiaries
for 2022 is shown below:
At 31 December
2022 |
|
|
|
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 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 |
- |
Exact Mortgage
Experts Limited |
Group service
company |
Charter
Court |
100% |
Inter Bay
Financial I Limited |
Holding
company |
Reliance
House |
100% |
Inter Bay
Financial II Limited |
Holding
company |
Reliance
House |
100% |
InterBay Asset
Finance Limited |
Asset finance and
mortgage provider |
Reliance
House |
100% |
Interbay Funding,
Ltd |
Mortgage
servicer |
Reliance
House |
100% |
Interbay Holdings
Ltd |
Holding
company |
Reliance
House |
100% |
Interbay ML, Ltd |
Mortgage provider |
Reliance House |
100% |
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
Great St. Helen's, London – 35 Great St. Helen’s, London, EC3A
6AP
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
- Investments in subsidiaries,
intercompany loans and transactions with related parties
(continued)
During the year the Group issued £250.0m of
subordinated liabilities and £300m of senior notes to OSBG.
Included within this was £150m of subordinated liabilities and
£220m of senior notes issued by the Company to OSBG. For further
details see note 36 for senior notes and 37 for subordinated
liabilities.
The transactions between the Company, its parent and its
subsidiaries are disclosed below:
|
2023 |
2022 |
|
Charged by/(to) the Company during the year |
Balance due to/(by) the Company |
Charged by/(to) the Company during the year |
Balance due to/(by) the Company |
|
£m |
£m |
£m |
£m |
Parent Company |
|
|
|
|
OSB GROUP
PLC |
- |
4.4 |
- |
0.8 |
Direct investments |
|
|
|
|
Easioption
Limited |
- |
0.5 |
- |
0.5 |
Guernsey Home
Loans Limited |
0.3 |
6.1 |
0.1 |
6.8 |
Guernsey Home
Loans Limited (Guernsey) |
0.5 |
11.4 |
0.2 |
12.3 |
Heritable
Development Finance Limited |
(2.0) |
(0.7) |
(1.9) |
(1.2) |
Jersey Home Loans
Limited |
- |
0.9 |
- |
1.0 |
Jersey Home Loans
Limited (Jersey) |
3.0 |
63.4 |
1.3 |
69.4 |
OSB India Private
Limited |
(17.9) |
11.5 |
(13.3) |
9.1 |
Prestige Finance
Limited |
- |
0.2 |
- |
(0.2) |
Reliance Property
Loans Limited |
0.1 |
2.1 |
- |
2.4 |
Interbay Group
Holdings Limited |
- |
- |
- |
(0.9) |
WSE Bourton Road
Limited |
- |
0.8 |
- |
- |
Indirect investments |
|
|
|
|
Charter Court
Financial Services Limited |
50.9 |
25.1 |
19.4 |
(0.7) |
Exact Mortgage
Experts Limited |
(0.3) |
3.0 |
(0.4) |
2.5 |
Charter Mortgages
Limited |
- |
(0.3) |
- |
(0.4) |
Broadlands
Finance Limited |
- |
(0.2) |
- |
(0.1) |
5D Finance
Limited |
1.6 |
33.2 |
0.6 |
39.4 |
Inter Bay
Financial I Limited |
0.8 |
18.1 |
0.3 |
20.0 |
Inter Bay
Financial II Limited |
- |
- |
- |
(5.6) |
InterBay Asset
Finance Limited |
9.5 |
223.0 |
2.8 |
169.6 |
Interbay Funding,
Ltd |
(1.0) |
(23.5) |
(0.4) |
(24.2) |
Interbay ML, Ltd |
117.3 |
2,553.2 |
36.1 |
2,197.9 |
|
162.8 |
2,932.2 |
44.8 |
2,498.4 |
28. Amounts owed to credit institutions
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
BoE TFSME |
3,352.0 |
4,232.0 |
1,957.0 |
2,395.0 |
BoE ILTR |
10.1 |
300.9 |
5.0 |
- |
Commercial
repo |
0.1 |
10.2 |
- |
0.1 |
Loans from credit institutions |
- |
0.1 |
- |
- |
|
3,362.2 |
4,543.2 |
1,962.0 |
2,395.1 |
Cash
collateral and margin received |
212.8 |
549.7 |
56.3 |
173.4 |
|
3,575.0 |
5,092.9 |
2,018.3 |
2,568.5 |
29. Amounts owed to retail depositors
The table below shows the Group’s retail depositors by operating
segment, where the OSB segment also represents the Company’s retail
depositors:
|
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 |
30. Amounts owed to other customers
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Fixed rate
deposits |
58.8 |
100.9 |
0.5 |
0.5 |
Variable rate deposits |
4.5 |
12.2 |
- |
- |
|
63.3 |
113.1 |
0.5 |
0.5 |
31. Debt securities in issue
|
|
|
Group |
Group |
|
|
|
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 |
- Debt securities in issue
(continued)
The asset-backed loan notes are secured on fixed
and variable rate mortgages and are redeemable in part from time to
time, but such redemptions are 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:
|
|
|
Group |
Group |
|
|
|
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 |
32. Lease liabilities
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
At 1
January |
9.9 |
10.7 |
3.6 |
3.9 |
New
leases |
3.3 |
0.9 |
0.5 |
0.4 |
Lease
repayments |
(2.2) |
(1.9) |
(0.8) |
(0.8) |
Interest
accruals |
0.2 |
0.2 |
0.1 |
0.1 |
At 31 December |
11.2 |
9.9 |
3.4 |
3.6 |
During the year, the Group incurred expenses of
£0.1m (2022: £0.3m) in relation to short-term leases.
33. Other liabilities
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Falling due
within one year: |
|
|
|
|
Accruals |
26.5 |
28.0 |
16.5 |
18.6 |
Deferred
income |
0.4 |
0.6 |
0.4 |
0.6 |
Other
creditors |
12.7 |
10.1 |
8.9 |
4.7 |
|
39.6 |
38.7 |
25.8 |
23.9 |
34. 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 and Company’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 |
Group |
£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 |
- Provisions and contingent
liabilities (continued)
|
2023 |
2022 |
|
FSCS |
Other regulatory provisions |
ECL on undrawn loan facilities |
Total |
FSCS |
Other regulatory provisions |
ECL on undrawn loan facilities |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
At 1
January |
- |
- |
0.1 |
0.1 |
0.1 |
1.4 |
0.4 |
1.9 |
Charge/(credit) |
- |
- |
0.3 |
0.3 |
(0.1) |
(1.4) |
(0.3) |
(1.8) |
At 31 December |
- |
- |
0.4 |
0.4 |
- |
- |
0.1 |
0.1 |
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.
35. Deferred taxation liability
The deferred tax liability recognised on the
Combination relates to the timing differences of the recognition of
assets and liabilities at fair value, where the fair values will
unwind in future periods in line with the underlying asset or
liability. The deferred tax liability has been measured using the
relevant rates for the expected periods of utilisation.
|
|
|
|
|
CCFS Combination |
Group |
|
|
|
|
£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 24).
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.
36. Senior notes
During the current financial year, the Group and
the Company issued senior notes amounting to £300m under the
planned MREL qualifying debt issuance. The Group’s and Company’s
outstanding senior notes are summarised below:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Fixed
rate: |
|
|
|
|
Senior notes 2028 (9.5%) |
309.0 |
- |
226.6 |
- |
The senior notes are structured with identical
terms to the OSB GROUP PLC (OSBG) external senior notes issuance
and 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 the Group 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 Group.
The table below shows a reconciliation of the Group’s and the
Company’s senior notes during the year.
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
At 1
January |
- |
- |
- |
- |
Addition |
300.0 |
- |
220.0 |
- |
Movement in
accrued interest |
9.0 |
- |
6.6 |
- |
At 31 December |
309.0 |
- |
226.6 |
- |
37. Subordinated liabilities
The Group’s and Company’s outstanding
subordinated liabilities are summarised below:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Fixed
rate: |
|
|
|
|
Subordinated liabilities 2033 (9.993%) |
260.6 |
- |
156.4 |
- |
All subordinated liabilities are denominated in
pounds sterling and are unlisted.
The subordinated debt liabilities are structured
with identical principal terms to the OSBG external Tier 2 debt
issuance and 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 the Group 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 the Group.
The table below shows a reconciliation of the
Group’s and Company’s subordinated liabilities during the year:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
At 1
January |
- |
10.3 |
- |
10.3 |
Addition |
250.0 |
- |
150.0 |
- |
Movement in
accrued interest |
10.6 |
- |
6.4 |
- |
Repayment of
debt |
- |
(10.3) |
- |
(10.3) |
At 31 December |
260.6 |
- |
156.4 |
- |
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.
38. Perpetual Subordinated Bonds
|
|
|
Group and Company |
Group and Company |
|
|
|
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.
39. Reconciliation of cash flows from financing
activities
The tables below show a reconciliation of the
Group’s and Company’s liabilities classified as financing
activities within the Statement of Cash Flows:
|
Amounts owed to credit 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 |
Group |
£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 |
300.0 |
250.0 |
- |
1,331.5 |
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 |
9.0 |
16.9 |
0.7 |
245.4 |
At 31 December 2023 |
3,362.2 |
818.5 |
309.0 |
260.6 |
15.2 |
4,765.5 |
- Reconciliation of cash flows from financing
activities (continued)
|
Amounts owed to credit institutions
(see note 28) |
Deemed Loans
(see note 17) |
Senior notes
(see note 36) |
Subordinated liabilities
(see note 37) |
PSBs
(see note 38) |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
At 1 January 2022 |
2,378.6 |
142.8 |
- |
10.3 |
15.2 |
2,546.9 |
Cash
movements: |
|
|
|
|
|
|
Principal
drawdowns |
120.0 |
- |
- |
- |
- |
120.0 |
Principal
repayments |
(120.0) |
(174.0) |
- |
(10.1) |
- |
(304.1) |
Interest
paid |
(19.4) |
(4.1) |
- |
(1.3) |
(0.7) |
(25.5) |
Non-cash movements: |
|
|
- |
|
|
|
Interest charged |
35.9 |
4.1 |
- |
1.1 |
0.7 |
41.8 |
At 31
December 2022 |
2,395.1 |
(31.2) |
- |
- |
15.2 |
2,379.1 |
Cash
movements: |
|
|
|
|
|
|
Principal
drawdowns |
152.2 |
56.5 |
220.0 |
150.0 |
- |
578.7 |
Principal
repayments |
(597.2) |
- |
- |
- |
- |
(597.2) |
Interest
paid |
(98.5) |
(4.8) |
- |
(3.7) |
(0.7) |
(107.7) |
Non-cash movements: |
|
|
|
|
|
|
Interest charged |
110.4 |
4.8 |
6.6 |
10.1 |
0.7 |
132.6 |
At 31 December 2023 |
1,962.0 |
25.3 |
226.6 |
156.4 |
15.2 |
2,385.5 |
40. Share capital
Ordinary shares of £0.01 each |
Number of shares authorised and fully paid |
Nominal value
£m |
Premium
£m |
At 31 December 2022 and 2023 |
447,304,198 |
4.5 |
- |
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.
41. Other equity instruments
The Group’s other equity instruments are as follows:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
Additional Tier 1 securities |
£m |
£m |
£m |
£m |
6%
Perpetual subordinated contingent convertible securities |
150.0 |
150.0 |
90.0 |
90.0 |
AT1 Securities
On 5 October 2021, OSBG issued in total £150.0m of new AT1
securities, £90.0m issued by the Company and £60.0m issued by
Charter Court Financial Services Limited. 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.
42. Other reserves
The Group’s and Company’s other reserves are as
follows:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Distributable: |
|
|
|
|
Share-based
payment |
14.2 |
13.3 |
12.2 |
10.9 |
FVOCI |
0.2 |
0.3 |
0.1 |
0.2 |
Foreign
exchange |
(2.1) |
(1.3) |
- |
- |
|
12.3 |
12.3 |
12.3 |
11.1 |
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.
43. 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:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Land and
buildings: due within: |
|
|
|
|
One year |
0.2 |
0.3 |
0.1 |
0.1 |
Two to five
years |
0.2 |
0.3 |
- |
- |
|
0.4 |
0.6 |
0.1 |
0.1 |
- Undrawn loan facilities:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
OSB
mortgages |
580.2 |
741.6 |
504.3 |
559.1 |
CCFS
mortgages |
391.8 |
455.1 |
- |
- |
Asset
finance |
27.4 |
15.5 |
- |
- |
|
999.4 |
1,212.2 |
504.3 |
559.1 |
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).
44. Risk management
Overview
Financial instruments form the vast majority of
the Group's and Company's assets and liabilities. The Group manages
risk on a consolidated basis and risk disclosures that follow are
provided on this basis.
Types of financial
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.
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 29 to
58.
- Risk management (continued)
Credit risk
Credit risk is the risk that losses may arise as
a result of the Group’s borrowers or market counterparties failing
to meet their obligations to repay.
The Group has adopted the Standardised Approach
for assessment of credit risk regulatory capital requirements. This
approach considers risk weightings as defined under Basel II and
Basel III principles.
The classes of financial instruments to which
the Group is most exposed are loans and advances to customers,
loans and advances to credit institutions, cash in the BoE call
account, call and current accounts with other credit institutions
and investment securities. The maximum credit risk exposure equals
the total carrying amount of the above categories plus off-balance
sheet undrawn committed mortgage facilities.
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.
Credit risk – loans and
advances to customers
Credit risk associated with mortgage lending is
largely driven by the housing market and level of unemployment. A
recession and/or high interest rates could cause pressure within
the market, resulting in rising levels of arrears and
repossessions.
All loan applications are assessed with
reference to the Group's Lending Policy. Changes to the policy are
approved by the Group Risk Committee, with mandates set for the
approval of loan applications.
The Group Credit Committee and ALCO regularly
monitor lending activity, taking appropriate actions to reprice
products and adjust lending criteria in order to control risk and
manage exposure. Where necessary and appropriate, changes to the
Lending Policy are recommended to the Group Risk Committee.
The following tables show the Group’s and
Company’s maximum exposure to credit risk and the impact of
collateral held as security, capped at the gross exposure amount,
by impairment stage. Capped collateral excludes the impact of
forced sale discounts and costs to sell. 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 |
Group |
£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 |
- Risk management (continued)
|
2022 |
|
OSB |
CCFS |
Total |
|
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
Gross carrying amount |
Capped collateral held |
Group |
£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.
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 |
|
Group |
£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 |
- Risk management (continued)
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 |
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 |
- Risk management (continued)
|
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)
The table below shows the LTV banding for the
Company’s segments’ two major lending streams:
|
2023 |
2022 |
|
BTL/SME |
Residential |
Total |
|
BTL/SME |
Residential |
Total |
|
Company |
£m |
£m |
£m |
% |
£m |
£m |
£m |
% |
Band |
|
|
|
|
|
|
|
|
0% - 50% |
771.2 |
1,321.5 |
2,092.7 |
18 |
919.9 |
1,398.4 |
2,318.3 |
22 |
50% - 60% |
1,630.0 |
241.9 |
1,871.9 |
16 |
1,978.5 |
267.2 |
2,245.7 |
21 |
60% - 70% |
3,484.8 |
230.0 |
3,714.8 |
33 |
3,695.1 |
259.7 |
3,954.8 |
37 |
70% - 80% |
2,842.1 |
202.5 |
3,044.6 |
26 |
1,485.8 |
172.3 |
1,658.1 |
16 |
80% - 90% |
469.6 |
215.6 |
685.2 |
6 |
224.9 |
130.2 |
355.1 |
3 |
90% -
100% |
34.5 |
46.2 |
80.7 |
1 |
47.4 |
13.8 |
61.2 |
1 |
>100% |
20.3 |
1.8 |
22.1 |
- |
19.3 |
1.0 |
20.3 |
- |
Total loans before provisions |
9,252.5 |
2,259.5 |
11,512.0 |
100 |
8,370.9 |
2,242.6 |
10,613.5 |
100 |
The tables below show the LTV analysis of the
Company’s BTL/SME sub-segment:
|
2023 |
|
Buy-to-Let |
Commercial |
Residential development |
Funding lines |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
Band |
|
|
|
|
|
0% - 50% |
747.2 |
7.4 |
8.2 |
8.4 |
771.2 |
50% - 60% |
1,565.2 |
1.2 |
61.1 |
2.5 |
1,630.0 |
60% - 70% |
3,275.6 |
0.5 |
207.8 |
0.9 |
3,484.8 |
70% - 80% |
2,820.2 |
- |
- |
21.9 |
2,842.1 |
80% - 90% |
469.6 |
- |
- |
- |
469.6 |
90% -
100% |
34.5 |
- |
- |
- |
34.5 |
>100% |
15.4 |
3.5 |
1.0 |
0.4 |
20.3 |
Total loans before provisions |
8,927.7 |
12.6 |
278.1 |
34.1 |
9,252.5 |
- Risk management
(continued)
|
2022 |
|
Buy-to-Let |
Commercial |
Residential development |
Funding lines |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
Band |
|
|
|
|
|
0% - 50% |
861.9 |
8.9 |
16.1 |
33.0 |
919.9 |
50% - 60% |
1,916.8 |
1.4 |
57.2 |
3.1 |
1,978.5 |
60% - 70% |
3,585.4 |
- |
109.7 |
- |
3,695.1 |
70% - 80% |
1,485.8 |
- |
- |
- |
1,485.8 |
80% - 90% |
191.2 |
- |
- |
33.7 |
224.9 |
90% -
100% |
21.0 |
- |
- |
26.4 |
47.4 |
>100% |
11.8 |
3.5 |
1.0 |
3.0 |
19.3 |
Total loans before provisions |
8,073.9 |
13.8 |
184.0 |
99.2 |
8,370.9 |
The tables below show the LTV analysis of the
Company’s Residential sub-segment:
|
2023 |
2022 |
|
First charge |
Second charge |
Total |
First charge |
Second charge |
Total |
Company |
£m |
£m |
£m |
£m |
£m |
£m |
Band |
|
|
|
|
|
|
0% - 50% |
1,237.5 |
84.0 |
1,321.5 |
1,288.6 |
109.8 |
1,398.4 |
50% - 60% |
213.5 |
28.4 |
241.9 |
231.8 |
35.4 |
267.2 |
60% - 70% |
215.3 |
14.7 |
230.0 |
241.1 |
18.6 |
259.7 |
70% - 80% |
196.8 |
5.7 |
202.5 |
167.0 |
5.3 |
172.3 |
80% - 90% |
214.3 |
1.3 |
215.6 |
128.8 |
1.4 |
130.2 |
90% -
100% |
45.8 |
0.4 |
46.2 |
13.2 |
0.6 |
13.8 |
>100% |
1.2 |
0.6 |
1.8 |
0.3 |
0.7 |
1.0 |
Total loans before provisions |
2,124.4 |
135.1 |
2,259.5 |
2,070.8 |
171.8 |
2,242.6 |
- 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 pages
29 to 58.
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.
Group |
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)
Company |
Number of accounts |
At 31 December 2023 |
Number of accounts |
At 31 December 2022 |
Forbearance type |
2023 |
£m |
2022 |
£m |
Interest-only
switch |
103 |
17.5 |
43 |
4.8 |
Interest rate
reduction |
177 |
19.2 |
83 |
6.5 |
Term
extension |
3 |
0.2 |
2 |
- |
Payment
deferral |
186 |
40.6 |
92 |
15.5 |
Voluntary-assisted sale |
- |
- |
5 |
1.3 |
Payment
concession (reduced monthly payments) |
44 |
7.5 |
24 |
5.9 |
Capitalisation |
14 |
0.7 |
26 |
1.3 |
Full or
partial debt forgiveness |
122 |
4.0 |
351 |
8.6 |
Total |
649 |
89.7 |
626 |
43.9 |
|
|
|
|
|
Loan type |
|
|
|
|
First charge
owner-occupier |
292 |
38.9 |
110 |
13.5 |
Second charge
owner-occupier |
230 |
5.6 |
452 |
8.5 |
Buy-to-Let |
127 |
45.2 |
64 |
21.9 |
Total |
649 |
89.7 |
626 |
43.9 |
- Risk management (continued)
Geographical analysis by
region
An analysis of loans, excluding asset finance
leases, by region is provided below:
|
Group |
Group |
|
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 |
- Risk management
(continued)
|
|
|
Company |
Company |
|
|
|
2023 |
2022 |
Region |
|
|
£m |
% |
£m |
% |
East
Anglia |
|
|
398.9 |
3 |
375.6 |
4 |
East
Midlands |
|
|
596.9 |
5 |
501.4 |
5 |
Greater
London |
|
|
4,949.6 |
44 |
4,491.2 |
42 |
North
East |
|
|
165.1 |
1 |
137.0 |
1 |
North
West |
|
|
768.3 |
7 |
702.4 |
7 |
Northern
Ireland |
|
|
9.3 |
- |
10.0 |
- |
Scotland |
|
|
52.4 |
- |
31.8 |
- |
South
East |
|
|
2,400.4 |
21 |
2,353.2 |
22 |
South
West |
|
|
798.1 |
7 |
740.2 |
7 |
Wales |
|
|
265.7 |
2 |
237.9 |
2 |
West
Midlands |
|
|
803.0 |
7 |
760.4 |
7 |
Yorks and
Humberside |
|
|
304.3 |
3 |
272.4 |
3 |
Total loans before provisions |
|
11,512.0 |
100 |
10,613.5 |
100 |
Approach to measurement of credit
quality
The Group categorises the credit quality of
loans and advances to customers into internal risk grades based on
the 12 month PD calculated at the reporting date. The PDs include a
combination of internal behavioural and credit bureau
characteristics and are aligned with Capital models to generate the
risk grades which are then further grouped into the following
credit quality segments:
- Excellent quality – where there is a very high likelihood the
asset will be recovered in full with a negligible or very low risk
of default.
- Good quality – where there is a high likelihood the asset will
be recovered in full with a low risk of default.
- Satisfactory quality – where the assets demonstrate a moderate
default risk.
- Lower quality – where the assets require closer monitoring and
the risk of default is of greater concern.
The following tables disclose the credit risk
quality ratings of loans and advances to customers by IFRS 9 stage.
The assessment of whether credit risk has increased significantly
since initial recognition is performed for each reporting period
for the life of the loan. Loans and advances to customers initially
booked on very low PDs and graded as excellent quality loans can
experience a SICR and therefore be moved to Stage 2. Such loans may
still be graded as excellent quality, if they meet the overall
criteria.
- Risk management
(continued)
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3
(POCI) |
Total |
PD lower range |
PD upper range |
Group 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 |
Group 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)
|
Stage 1 |
Stage 2 |
Stage 3 |
Stage 3
(POCI) |
Total |
PD lower range |
PD upper range |
Company 2023 |
£m |
£m |
£m |
£m |
£m |
% |
% |
Excellent |
4,364.0 |
257.1 |
- |
- |
4,621.1 |
- |
0.3 |
Good |
3,787.1 |
1,332.0 |
- |
- |
5,119.1 |
0.3 |
2.0 |
Satisfactory |
335.3 |
425.1 |
- |
- |
760.4 |
2.0 |
7.4 |
Lower |
47.3 |
505.1 |
- |
- |
552.4 |
7.4 |
100.0 |
Impaired |
- |
- |
429.3 |
- |
429.3 |
100.0 |
100.0 |
POCI |
- |
- |
- |
29.7 |
29.7 |
100.0 |
100.0 |
|
8,533.7 |
2,519.3 |
429.3 |
29.7 |
11,512.0 |
|
|
Company 2022 |
|
|
|
|
|
|
|
Excellent |
3,936.9 |
470.6 |
- |
- |
4,407.5 |
- |
0.3 |
Good |
3,686.0 |
1,146.2 |
- |
- |
4,832.2 |
0.3 |
2.0 |
Satisfactory |
287.1 |
342.8 |
- |
- |
629.9 |
2.0 |
7.4 |
Lower |
29.0 |
393.5 |
- |
- |
422.5 |
7.4 |
100.0 |
Impaired |
- |
- |
286.9 |
- |
286.9 |
100.0 |
100.0 |
POCI |
- |
- |
- |
34.5 |
34.5 |
100.0 |
100.0 |
|
7,939.0 |
2,353.1 |
286.9 |
34.5 |
10,613.5 |
|
|
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 |
Group 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 |
Group 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 |
- Risk management
(continued)
|
Excellent |
Good |
Satisfactory |
Total |
Company 2023 |
£m |
£m |
£m |
£m |
Investment
securities |
396.2 |
- |
- |
396.2 |
Loans and
advances to credit institutions |
925.3 |
77.4 |
- |
1,002.7 |
Derivative
assets |
77.0 |
103.8 |
- |
180.8 |
|
1,398.5 |
181.2 |
- |
1,579.7 |
|
Excellent |
Good |
Satisfactory |
Total |
Company 2022 |
£m |
£m |
£m |
£m |
Investment
securities |
211.4 |
- |
- |
211.4 |
Loans and
advances to credit institutions |
1,409.6 |
96.5 |
- |
1,506.1 |
Derivative
assets |
114.9 |
119.1 |
- |
234.0 |
|
1,735.9 |
215.6 |
- |
1,951.5 |
Credit risk – loans and
advances to credit institutions and investment
securities
The Group holds treasury instruments in order to
meet liquidity requirements and for general business purposes. The
credit risk arising from these investments is closely monitored and
managed by the Group’s Treasury function. In managing these assets,
Group Treasury operates within guidelines laid down in the 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:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
% |
£m |
% |
£m |
% |
£m |
% |
BoE1 |
2,325.9 |
68 |
2,869.3 |
76 |
861.3 |
62 |
1,366.0 |
80 |
Other
banks |
487.7 |
14 |
496.4 |
13 |
141.4 |
10 |
140.1 |
8 |
Central
government |
296.0 |
9 |
149.8 |
4 |
296.0 |
21 |
149.8 |
8 |
Securitisation |
325.7 |
9 |
263.1 |
7 |
100.2 |
7 |
61.6 |
4 |
Total |
3,435.3 |
100 |
3,778.6 |
100 |
1,398.9 |
100 |
1,717.5 |
100 |
- Balances with the BoE include £69.6m (2022: £62.8m) of Group
and £41.4m (2022: £37.8m) of the Company 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:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
% |
£m |
% |
£m |
% |
£m |
% |
United
Kingdom |
3,418.0 |
99 |
3,765.7 |
100 |
1,398.9 |
100 |
1,717.5 |
100 |
India |
17.3 |
1 |
12.9 |
- |
- |
- |
- |
- |
Total |
3,435.3 |
100 |
3,778.6 |
100 |
1,398.9 |
100 |
1,717.5 |
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 pages 38 to 39.
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:
Group |
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 |
309.0 |
- |
9.0 |
- |
300.0 |
- |
Subordinated
liabilities |
260.6 |
- |
10.7 |
- |
249.9 |
- |
PSBs |
15.2 |
- |
- |
15.2 |
- |
- |
Total liabilities |
27,379.3 |
4,220.7 |
6,297.2 |
9,174.9 |
7,675.2 |
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) |
(21,341.3) |
2,352.0 |
- Risk management
(continued)
Group |
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 |
- |
- |
- |
0.9 |
9.0 |
Subordinated
liabilities |
- |
- |
- |
- |
- |
- |
PSBs |
15.2 |
- |
- |
- |
15.2 |
- |
Total liabilities |
25,359.4 |
6,770.7 |
2,861.3 |
8,240.8 |
7,096.3 |
390.3 |
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) |
(6,082.1) |
(13,823.5) |
(18,504.5) |
2,920.4 |
- Risk management
(continued)
Company |
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 |
12,246.5 |
3,116.0 |
4,087.9 |
3,946.1 |
1,096.5 |
- |
Amounts owed
to credit institutions |
2,018.3 |
- |
85.2 |
5.0 |
1,928.1 |
- |
Amounts owed
to other customers |
0.5 |
- |
0.5 |
- |
- |
- |
Derivative
liabilities |
123.8 |
- |
5.0 |
14.4 |
94.3 |
10.1 |
Lease
liabilities |
3.4 |
- |
0.1 |
0.4 |
2.9 |
- |
Senior
notes |
226.6 |
- |
6.6 |
- |
220.0 |
- |
Subordinated
liabilities |
156.4 |
- |
6.4 |
- |
150.0 |
- |
PSBs |
15.2 |
- |
- |
15.2 |
- |
- |
Total liabilities |
14,790.7 |
3,116.0 |
4,191.7 |
3,981.1 |
3,491.8 |
10.1 |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
- |
- |
- |
- |
Loans and
advances to credit institutions |
1,002.7 |
958.8 |
2.5 |
- |
- |
41.4 |
Investment
securities |
396.2 |
- |
100.1 |
196.6 |
99.5 |
- |
Loans and
advances to customers |
11,432.2 |
- |
112.0 |
135.6 |
410.2 |
10,774.4 |
Derivative
assets |
180.8 |
- |
4.2 |
41.5 |
135.1 |
- |
Total assets |
13,012.3 |
959.2 |
218.8 |
373.7 |
644.8 |
10,815.8 |
Cumulative liquidity gap |
|
(2,156.8) |
(6,129.7) |
(9,737.1) |
(12,584.1) |
(1,778.4) |
- Risk management
(continued)
Company |
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 |
11,132.2 |
5,319.1 |
955.8 |
3,695.8 |
1,161.5 |
- |
Amounts owed
to credit institutions |
2,568.5 |
- |
173.4 |
0.3 |
2,394.8 |
- |
Amounts owed
to other customers |
0.5 |
- |
0.5 |
- |
- |
- |
Derivative
liabilities |
63.8 |
- |
4.1 |
24.0 |
29.8 |
5.9 |
Lease
liabilities |
3.6 |
- |
0.2 |
0.5 |
2.8 |
0.1 |
Subordinated
liabilities |
- |
- |
- |
- |
- |
- |
PSBs |
15.2 |
- |
- |
- |
15.2 |
- |
Total liabilities |
13,783.8 |
5,319.1 |
1,134.0 |
3,720.6 |
3,604.1 |
6.0 |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
- |
- |
- |
- |
Loans and
advances to credit institutions |
1,506.1 |
1,468.3 |
- |
- |
- |
37.8 |
Investment
securities |
211.4 |
0.5 |
139.9 |
9.9 |
61.1 |
- |
Loans and
advances to customers |
10,531.9 |
- |
98.0 |
99.9 |
362.7 |
9,971.3 |
Derivative
assets |
234.0 |
- |
0.8 |
22.5 |
210.2 |
0.5 |
Total assets |
12,483.8 |
1,469.2 |
238.7 |
132.3 |
634.0 |
10,009.6 |
Cumulative liquidity gap |
|
(3,849.9) |
(4,745.2) |
(8,333.5) |
(11,303.6) |
(1,300.0) |
- 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:
Group |
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 |
309.0 |
414.1 |
14.3 |
14.3 |
385.5 |
- |
Subordinated
liabilities |
260.6 |
368.7 |
12.5 |
12.5 |
343.7 |
- |
PSBs |
15.2 |
15.6 |
0.3 |
15.3 |
- |
- |
Total liabilities |
27,379.3 |
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)
Group |
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 |
- Risk management (continued)
Company |
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 |
12,246.5 |
12,317.9 |
7,222.5 |
3,988.9 |
1,106.5 |
- |
Amounts owed
to credit institutions |
2,018.3 |
2,201.1 |
85.2 |
81.1 |
2,034.8 |
- |
Amounts owed
to other customers |
0.5 |
0.5 |
0.5 |
- |
- |
- |
Derivative
liabilities |
123.8 |
133.0 |
5.1 |
4.3 |
121.0 |
2.6 |
Lease
liabilities |
3.4 |
3.2 |
0.2 |
0.5 |
2.2 |
0.3 |
Senior
notes |
226.6 |
303.7 |
10.5 |
10.5 |
282.7 |
- |
Subordinated
liabilities |
156.4 |
221.2 |
7.5 |
7.5 |
206.2 |
- |
PSBs |
15.2 |
15.6 |
0.3 |
15.3 |
- |
- |
Total liabilities |
14,790.7 |
15,196.2 |
7,331.8 |
4,108.1 |
3,753.4 |
2.9 |
Off-balance
sheet loan commitments |
504.3 |
504.3 |
504.3 |
- |
- |
- |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
0.4 |
- |
- |
- |
Loans and
advances to credit institutions |
1,002.7 |
1,002.6 |
961.2 |
- |
- |
41.4 |
Investment
securities |
396.2 |
421.6 |
101.9 |
204.4 |
115.3 |
- |
Loans and
advances to customers |
11,432.2 |
33,403.7 |
199.3 |
882.1 |
4,516.0 |
27,806.3 |
Derivative
assets |
180.8 |
191.0 |
25.2 |
87.6 |
78.2 |
- |
Total assets |
13,012.3 |
35,019.3 |
1,288.0 |
1,174.1 |
4,709.5 |
27,847.7 |
- Risk management (continued)
Company |
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 |
11,132.2 |
11,326.5 |
6,431.9 |
3,712.8 |
1,181.8 |
- |
Amounts owed
to credit institutions |
2,568.5 |
2,751.0 |
190.4 |
50.9 |
2,509.7 |
- |
Amounts owed
to other customers |
0.5 |
0.5 |
0.5 |
- |
- |
- |
Derivative
liabilities |
63.8 |
67.3 |
3.9 |
30.5 |
31.0 |
1.9 |
Lease
liabilities |
3.6 |
3.9 |
0.2 |
0.6 |
3.0 |
0.1 |
Subordinated
liabilities |
- |
- |
- |
- |
- |
- |
PSBs |
15.2 |
16.1 |
0.3 |
0.3 |
15.5 |
- |
Total liabilities |
13,783.8 |
14,165.3 |
6,627.2 |
3,795.1 |
3,741.0 |
2.0 |
Off-balance
sheet loan commitments |
559.1 |
559.1 |
559.1 |
- |
- |
- |
Financial asset by type |
|
|
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
0.4 |
- |
- |
- |
Loans and
advances to credit institutions |
1,506.1 |
1,506.1 |
1,468.3 |
- |
- |
37.8 |
Investment
securities |
211.4 |
211.7 |
140.7 |
10.0 |
61.0 |
- |
Loans and
advances to customers |
10,531.9 |
26,949.1 |
158.8 |
764.1 |
3,457.4 |
22,568.8 |
Derivative
assets |
234.0 |
252.7 |
4.4 |
72.9 |
175.8 |
(0.4) |
Total assets |
12,483.8 |
28,920.0 |
1,772.6 |
847.0 |
3,694.2 |
22,606.2 |
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:
|
Group |
|
|
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 |
- |
- |
- |
(137.1) |
(137.1) |
|
7,159.8 |
101.4 |
20,660.1 |
1,672.9 |
29,594.2 |
|
Group |
|
|
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 |
- |
- |
- |
(712.3) |
(712.3) |
|
6,988.9 |
174.6 |
19,597.9 |
806.1 |
27,567.5 |
- Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
- 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)
|
Company |
|
|
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 |
108.8 |
43.8 |
819.9 |
30.2 |
1,002.7 |
Investment
securities |
27.1 |
- |
369.1 |
- |
396.2 |
Loans and
advances to customers2 |
4,263.5 |
- |
6,757.7 |
411.0 |
11,432.2 |
Derivative
assets |
- |
- |
- |
180.8 |
180.8 |
Non-financial
assets |
- |
- |
- |
3,725.7 |
3,725.7 |
|
4,399.4 |
43.8 |
7,947.1 |
4,347.7 |
16,738.0 |
|
Company |
|
|
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 |
109.6 |
37.8 |
1,328.2 |
30.5 |
1,506.1 |
Investment
securities |
34.8 |
- |
176.6 |
- |
211.4 |
Loans and
advances to customers2 |
3,419.8 |
- |
6,989.2 |
122.9 |
10,531.9 |
Derivative
assets |
- |
- |
- |
234.0 |
234.0 |
Non-financial
assets |
- |
- |
- |
3,120.1 |
3,120.1 |
|
3,564.2 |
37.8 |
8,494.4 |
3,507.5 |
15,603.9 |
- Represents assets that are not pledged but that the Company
believes it is restricted from using to secure funding for legal or
other reasons.
- Unencumbered loans and advances to customers classified as
other are restricted for use as collateral as they are; 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:
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Unencumbered
balances with central banks |
2,256.3 |
2,806.5 |
819.9 |
1,328.2 |
Unencumbered
cash and balances with other banks |
257.3 |
147.2 |
30.2 |
30.5 |
Other cash and
cash equivalents |
0.4 |
0.4 |
0.4 |
0.4 |
Unencumbered
investment securities |
594.6 |
366.5 |
369.1 |
176.6 |
|
3,108.6 |
3,320.6 |
1,219.6 |
1,535.7 |
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.
- Risk management
(continued)
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:
|
2023 |
2022 |
Group |
£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 |
Group |
£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).
- Risk management (continued)
The Group measures basis risk using the impact
of four scenarios on net interest income over a one-year period
including movements such as diverging base, overnight and term
SONIA rates. Historical data is used to calibrate the severity of
the scenarios to the Group’s risk appetite. The Board has set a
limit on basis risk exposure of 2.5% of full year net interest
income. The table below shows the maximum decreases to net interest
income at 31 December 2023 and 2022:
|
2023 |
2022 |
Group |
£m |
£m |
OSB |
7.7 |
5.8 |
CCFS |
4.8 |
4.5 |
|
12.5 |
10.3 |
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.
- Risk management (continued)
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 15 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.
45. Financial instruments and fair
values
- Financial assets and financial
liabilities
The following table sets out the classification
of financial instruments in the Statement of Financial
Position:
|
|
2023 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
Group |
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
14 |
10.7 |
- |
- |
2,802.9 |
2,813.6 |
Investment
securities |
15 |
0.3 |
- |
296.0 |
325.4 |
621.7 |
Loans and
advances to customers |
16 |
13.7 |
- |
- |
25,751.3 |
25,765.0 |
Derivative
assets |
21 |
- |
530.6 |
- |
- |
530.6 |
Other
assets1 |
23 |
- |
- |
- |
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 |
21 |
- |
199.9 |
- |
- |
199.9 |
Other
liabilities2 |
33 |
- |
- |
- |
39.2 |
39.2 |
Senior
notes |
36 |
- |
- |
- |
309.0 |
309.0 |
Subordinated
liabilities |
37 |
- |
- |
- |
260.6 |
260.6 |
PSBs |
38 |
- |
- |
- |
15.2 |
15.2 |
|
|
- |
199.9 |
- |
27,207.4 |
27,407.3 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- Financial instruments and fair
values (continued)
|
|
2022 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
Group |
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
14 |
- |
- |
- |
3,365.7 |
3,365.7 |
Investment
securities |
15 |
0.5 |
- |
149.8 |
262.6 |
412.9 |
Loans and
advances to customers |
16 |
14.6 |
- |
- |
23,598.1 |
23,612.7 |
Derivative
assets |
21 |
- |
888.1 |
- |
- |
888.1 |
Other
assets1 |
23 |
- |
- |
- |
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 |
21 |
- |
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.
- Financial instruments and fair
values (continued)
|
|
2023 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
Company |
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
14 |
- |
- |
- |
1,002.7 |
1,002.7 |
Investment
securities |
15 |
0.3 |
- |
296.0 |
99.9 |
396.2 |
Loans and
advances to customers |
16 |
- |
- |
- |
11,432.2 |
11,432.2 |
Derivative
assets |
21 |
- |
180.8 |
- |
- |
180.8 |
Other
assets1 |
23 |
- |
- |
- |
6.4 |
6.4 |
|
|
0.3 |
180.8 |
296.0 |
12,541.6 |
13,018.7 |
Liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
29 |
- |
- |
- |
12,246.5 |
12,246.5 |
Amounts owed
to credit institutions |
28 |
- |
- |
- |
2,018.3 |
2,018.3 |
Amounts owed
to other customers |
30 |
- |
- |
- |
0.5 |
0.5 |
Derivative
liabilities |
21 |
- |
123.8 |
- |
- |
123.8 |
Other
liabilities2 |
33 |
- |
- |
- |
25.4 |
25.4 |
Senior
notes |
36 |
- |
- |
- |
226.6 |
226.6 |
Subordinated
liabilities |
37 |
- |
- |
- |
156.4 |
156.4 |
PSBs |
38 |
- |
- |
- |
15.2 |
15.2 |
|
|
- |
123.8 |
- |
14,688.9 |
14,812.7 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- Financial instruments and fair
values (continued)
|
|
2022 |
|
|
Designated FVTPL |
Mandatorily FVTPL |
FVOCI |
Amortised cost |
Total carrying amount |
Company |
Note |
£m |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
|
|
Cash in
hand |
|
- |
- |
- |
0.4 |
0.4 |
Loans and
advances to credit institutions |
14 |
- |
- |
- |
1,506.1 |
1,506.1 |
Investment
securities |
15 |
0.5 |
- |
149.8 |
61.1 |
211.4 |
Loans and
advances to customers |
16 |
- |
- |
- |
10,531.9 |
10,531.9 |
Derivative
assets |
21 |
- |
234.0 |
- |
- |
234.0 |
Other
assets1 |
23 |
- |
- |
- |
2.0 |
2.0 |
|
|
0.5 |
234.0 |
149.8 |
12,101.5 |
12,485.8 |
Liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
29 |
- |
- |
- |
11,132.2 |
11,132.2 |
Amounts owed
to credit institutions |
28 |
- |
- |
- |
2,568.5 |
2,568.5 |
Amounts owed
to other customers |
30 |
- |
- |
- |
0.5 |
0.5 |
Derivative
liabilities |
21 |
- |
63.8 |
- |
- |
63.8 |
Other
liabilities2 |
33 |
- |
- |
- |
23.3 |
23.3 |
Subordinated
liabilities |
37 |
- |
- |
- |
- |
- |
PSBs |
38 |
- |
- |
- |
15.2 |
15.2 |
|
|
- |
63.8 |
- |
13,739.7 |
13,803.5 |
- 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 Statement of Financial Position:
|
2023 |
2022 |
|
Carrying value |
Estimated fair value |
Carrying value |
Estimated fair value |
Group |
£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 |
24,836.6 |
23,598.1 |
22,746.0 |
Other
assets1 |
11.9 |
11.9 |
1.8 |
1.8 |
|
28,891.9 |
27,977.0 |
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 |
309.0 |
309.1 |
- |
- |
Subordinated
liabilities |
260.6 |
246.0 |
- |
- |
PSBs |
15.2 |
14.4 |
15.2 |
14.0 |
|
27,207.4 |
27,190.9 |
25,281.0 |
25,217.0 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- Financial instruments and fair
values (continued)
|
2023 |
2022 |
|
Carrying value |
Estimated fair value |
Carrying value |
Estimated fair value |
Company |
£m |
£m |
£m |
£m |
Assets |
|
|
|
|
Cash in
hand |
0.4 |
0.4 |
0.4 |
0.4 |
Loans and
advances to credit institutions |
1,002.7 |
1,002.7 |
1,506.1 |
1,506.1 |
Investment
securities |
99.9 |
100.4 |
61.1 |
60.9 |
Loans and
advances to customers |
11,432.2 |
11,106.8 |
10,531.9 |
10,170.4 |
Other
assets1 |
6.4 |
6.4 |
2.0 |
2.0 |
|
12,541.6 |
12,216.7 |
12,101.5 |
11,739.8 |
Liabilities |
|
|
|
|
Amounts owed
to retail depositors |
12,246.5 |
12,251.3 |
11,132.2 |
11,095.3 |
Amounts owed
to credit institutions |
2,018.3 |
2,018.3 |
2,568.5 |
2,568.5 |
Amounts owed
to other customers |
0.5 |
0.5 |
0.5 |
0.5 |
Other
liabilities2 |
25.4 |
25.4 |
23.3 |
23.3 |
Senior
notes |
226.6 |
226.7 |
- |
- |
Subordinated
liabilities |
156.4 |
147.6 |
- |
- |
PSBs |
15.2 |
14.4 |
15.2 |
14.0 |
|
14,688.9 |
14,684.2 |
13,739.7 |
13,701.6 |
- 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.
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.
- Financial instruments and fair
values (continued)
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 Statement of Financial Position
grouped into Levels 1 to 3 based on the degree to which the fair
value is observable:
Group |
Carrying amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
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 |
Group |
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 |
Company |
Carrying amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
2023 |
£m |
£m |
£m |
£m |
£m |
£m |
Financial assets |
|
|
|
|
|
|
Investment
securities |
296.3 |
300.3 |
296.0 |
- |
0.3 |
296.3 |
Derivative assets |
180.8 |
6,591.0 |
- |
180.8 |
- |
180.8 |
|
477.1 |
6,891.3 |
296.0 |
180.8 |
0.3 |
477.1 |
|
|
|
|
|
|
|
Derivative liabilities |
123.8 |
4,821.0 |
- |
123.8 |
- |
123.8 |
- Financial instruments and fair
values (continued)
Company |
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 |
Derivative assets |
234.0 |
4,628.0 |
- |
234.0 |
- |
234.0 |
|
384.3 |
4,778.5 |
149.8 |
234.0 |
0.5 |
384.3 |
Financial liabilities |
|
|
|
|
|
|
Derivative liabilities |
63.8 |
5,158.0 |
- |
63.8 |
- |
63.8 |
Level 1: Fair values that are
based entirely on quoted market prices (unadjusted) in an actively
traded market for identical assets and liabilities that the Group
has the ability to access. Valuation adjustments and block
discounts are not applied to Level 1 instruments. Since valuations
are based on readily available observable market prices, this makes
them most reliable, reduces the need for management judgement and
estimation and also reduces the uncertainty associated with
determining fair values.
Level 2: Fair values that are
based on one or more quoted prices in markets that are not active
or for which all significant inputs are taken from directly or
indirectly observable market data. These include valuation models
used to calculate the present value of expected future cash flows
and may be employed either when no active market exists or when
there are no quoted prices available for similar instruments in
active markets.
Level 3: Fair values for which
any one or more significant input is not based on observable market
data and the unobservable inputs have a significant effect on the
instrument’s fair value. Valuation models that employ significant
unobservable inputs require a higher degree of management judgement
and estimation in determining the fair value. Management judgement
and estimation are usually required for the selection of the
appropriate valuation model to be used, determination of expected
future cash flows on the financial instruments being valued,
determination of the probability of counterparty default and
prepayments, determination of expected volatilities and
correlations and the selection of appropriate discount rates.
- 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 Statement of Financial Position grouped into Levels 1
to 3 based on the degree to which the fair value is observable:
|
|
|
Estimated fair value |
Group |
Carrying amount |
Principal amount |
Level 1 |
Level 2 |
Level 3 |
Total |
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 |
22,723.7 |
24,836.6 |
Other
assets1 |
11.9 |
11.9 |
- |
11.9 |
- |
11.9 |
|
28,891.9 |
29,050.0 |
- |
5,253.3 |
22,723.7 |
27,977.0 |
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 |
309.0 |
300.0 |
- |
309.1 |
- |
309.1 |
Subordinated
liabilities |
260.6 |
250.0 |
- |
246.0 |
- |
246.0 |
PSBs3 |
15.2 |
15.0 |
- |
14.4 |
- |
14.4 |
|
27,207.4 |
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 |
Group |
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 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- Financial instruments and fair
values (continued)
|
|
|
Estimated fair value |
Company |
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 |
1,002.7 |
1,000.1 |
- |
1,002.7 |
- |
1,002.7 |
Investment
securities |
99.9 |
99.3 |
- |
100.4 |
- |
100.4 |
Loans and
advances to customers |
11,432.2 |
11,544.3 |
- |
1,507.2 |
9,599.6 |
11,106.8 |
Other
assets1 |
6.4 |
6.4 |
- |
6.4 |
- |
6.4 |
|
12,541.6 |
12,650.5 |
- |
2,617.1 |
9,599.6 |
12,216.7 |
Financial liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
12,246.5 |
12,037.6 |
- |
3,400.0 |
8,851.3 |
12,251.3 |
Amounts owed
to credit institutions |
2,018.3 |
1,989.3 |
- |
2,018.3 |
- |
2,018.3 |
Amounts owed
to other customers |
0.5 |
0.5 |
- |
- |
0.5 |
0.5 |
Other
liabilities2 |
25.4 |
25.4 |
- |
25.4 |
- |
25.4 |
Senior
notes |
226.6 |
220.0 |
- |
226.7 |
- |
226.7 |
Subordinated
liabilities |
156.4 |
150.0 |
- |
147.6 |
- |
147.6 |
PSBs3 |
15.2 |
15.0 |
- |
14.4 |
- |
14.4 |
|
14,688.9 |
14,437.8 |
- |
5,832.4 |
8,851.8 |
14,684.2 |
- Balance excludes prepayments.
- Balance excludes deferred income.
- The Company 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 |
Company |
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 |
1,506.1 |
1,504.0 |
- |
1,506.1 |
- |
1,506.1 |
Investment
securities |
61.1 |
61.0 |
- |
60.9 |
- |
60.9 |
Loans and
advances to customers |
10,531.9 |
10,668.1 |
- |
1,740.9 |
8,429.5 |
10,170.4 |
Other
assets1 |
2.0 |
2.0 |
- |
2.0 |
- |
2.0 |
|
12,101.5 |
12,235.5 |
- |
3,310.3 |
8,429.5 |
11,739.8 |
Financial liabilities |
|
|
|
|
|
|
Amounts owed
to retail depositors |
11,132.2 |
11,052.0 |
- |
3,046.3 |
8,049.0 |
11,095.3 |
Amounts owed
to credit institutions |
2,568.5 |
2,551.4 |
- |
2,568.5 |
- |
2,568.5 |
Amounts owed
to other customers |
0.5 |
0.5 |
- |
- |
0.5 |
0.5 |
Other
liabilities2 |
23.3 |
23.3 |
- |
23.3 |
- |
23.3 |
Subordinated
liabilities |
- |
- |
- |
- |
- |
- |
PSBs |
15.2 |
15.0 |
14.0 |
- |
- |
14.0 |
|
13,739.7 |
13,642.2 |
14.0 |
5,638.1 |
8,049.5 |
13,701.6 |
- Balance excludes prepayments.
- 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).
47. 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) |
474.1 |
240.9 |
(56.1) |
658.9 |
Other (expense)/income |
(3.1) |
(3.8) |
6.4 |
(0.5) |
Total
income/(expense) |
471.0 |
237.1 |
(49.7) |
658.4 |
Impairment of financial assets |
(41.6) |
(6.9) |
(0.3) |
(48.8) |
Contribution to profit |
429.4 |
230.2 |
(50.0) |
609.6 |
Administrative
expenses |
(131.7) |
(100.4) |
(1.7) |
(233.8) |
Provisions |
(0.3) |
(0.1) |
- |
(0.4) |
Profit/(loss) before taxation |
297.4 |
129.7 |
(51.7) |
375.4 |
Taxation1 |
(75.7) |
(30.7) |
14.6 |
(91.8) |
Profit/(loss) for the year |
221.7 |
99.0 |
(37.1) |
283.6 |
- 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 |
(129.6) |
(73.1) |
(3.8) |
(206.5) |
Provisions |
1.6 |
- |
- |
1.6 |
Integration costs |
(6.8) |
(1.1) |
- |
(7.9) |
Profit/(loss) before taxation |
312.5 |
272.0 |
(51.7) |
532.8 |
Taxation1 |
(70.1) |
(70.2) |
18.8 |
(121.5) |
Profit/(loss) for the year |
242.4 |
201.8 |
(32.9) |
411.3 |
- 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.
-
48. Adjustments for non-cash items and changes in
operating assets and liabilities
|
Group |
Group |
Company |
Company |
|
2023 |
2022 |
2023 |
2022 |
|
£m |
£m |
£m |
£m |
Adjustments for non-cash and other items: |
|
|
|
|
Depreciation
and amortisation |
11.9 |
13.4 |
5.9 |
5.2 |
Interest on
investment securities |
(23.6) |
(6.8) |
(16.8) |
(2.5) |
Interest on
subordinated liabilities |
16.9 |
1.1 |
10.1 |
1.1 |
Interest on
PSBs |
0.7 |
0.7 |
0.7 |
0.7 |
Interest on
securitised debt |
21.5 |
7.7 |
4.8 |
4.1 |
Interest on
senior notes |
9.0 |
- |
6.6 |
- |
Interest on
financing debt |
197.3 |
68.7 |
110.4 |
38.4 |
Impairment
charge on loans |
48.8 |
29.8 |
26.1 |
19.1 |
Impairment on
investment in subsidiaries |
- |
- |
- |
1.3 |
Provisions |
0.4 |
(1.6) |
0.3 |
(1.8) |
Interest on
lease liabilities |
- |
0.2 |
- |
0.1 |
Fair value
losses/(gains) on financial instruments |
4.4 |
(58.9) |
- |
(4.4) |
Share-based
payments |
5.6 |
8.1 |
5.0 |
7.3 |
Total adjustments for non-cash and other
items |
292.9 |
62.4 |
153.1 |
68.6 |
Changes in operating assets and liabilities: |
|
|
|
|
Decrease/(increase) in loans and advances to credit
institutions |
112.5 |
(204.6) |
(5.2) |
(74.2) |
Increase in
loans and advances to customers |
(2,200.5) |
(2,563.1) |
(926.4) |
(1,074.6) |
Increase in
intercompany balances |
(4.0) |
(0.2) |
(433.2) |
(146.0) |
Increase in
amounts owed to retail depositors |
2,370.8 |
2,229.4 |
1,114.3 |
1,392.8 |
(Decrease)/increase in cash collateral and margin received |
(336.9) |
434.3 |
(117.1) |
131.3 |
Net increase
in other assets |
(12.5) |
(4.7) |
(6.2) |
(4.8) |
Net
(decrease)/increase in derivatives and hedged items |
(23.2) |
59.1 |
(30.5) |
53.2 |
Net
(decrease)/increase in amounts owed to other customers |
(49.8) |
16.6 |
- |
(7.7) |
Net increase
in other liabilities |
0.9 |
9.0 |
1.9 |
6.6 |
Exchange
differences on working capital |
(0.7) |
(0.3) |
- |
- |
Total changes in operating assets and
liabilities |
(143.4) |
(24.5) |
(402.4) |
276.6 |
49. Controlling party
OSB GROUP PLC is the ultimate parent and
controlling party preparing consolidated financial statements as
the largest group of which the Company is a member. Copies of
OSBG’s financial statements may be obtained from the Company
Secretary at the registered office: OSB House, Quayside, Chatham
Maritime, Chatham, Kent, ME4 4QZ.
50. Transactions with key management
personnel
All related party transactions were made on
terms equivalent to those that prevail in arm’s length
transactions. During the year, there were no related party
transactions between the key management personnel and the Company
other than as described below.
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 on page 147 of the OSB
Group’s Annual Report. The Group Executive team are all employees
of OSB, the table below shows their aggregate remuneration:
|
Group |
Group |
|
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).
51. Capital management
The Company's capital management approach is to
provide a sufficient capital base to cover business risks and
support future business development. The Company remained,
throughout the year, compliant with its capital requirements as set
out by the PRA, the Group's primary prudential supervisor.
The Company manages and reports its capital on
an individual consolidation basis (OSB solo) which includes the
Company and subsidiaries except for the offshore servicing entity
OSBI, SPVs relating to securitisations and the CCFS entities
acquired in October 2019.
The Company’s capital management is based on the
three ‘pillars’ of Basel III.
Under Pillar 1, the Company calculates its
minimum capital requirements based on 8% of risk-weighted
assets.
Under Pillar 2, the Company, 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 Company.
Pillar 3 requires firms to publish a set of
disclosures which allow market participants to assess information
on the Company’s capital, risk exposures and risk assessment
process. The Company’s Pillar 3 disclosures can be found on the
Company’s website.
On 30 November 2022, the PRA issued a
consultation paper on the implementing Basel 3.1 in the UK. The
Company has taken account of this in planning for future capital
requirements.
The ultimate responsibility for capital adequacy
rests with the Board of Directors. ALCO is responsible for the
management of the capital process within the risk appetite defined
by the Board, including approving policy, overseeing internal
controls and setting internal limits over capital ratios.
The regulated entities actively manage their
capital position and 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.
- Capital management (continued)
The OSB solo Pillar 1 capital information is
presented below:
|
(Unaudited) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
CET1
capital |
|
|
Called up
share capital |
4.5 |
4.5 |
Share premium,
capital contribution and share-based payment reserve |
13.1 |
12.2 |
Retained
earnings |
1,836.7 |
1,826.0 |
Other reserves |
(1.9) |
(1.1) |
Total equity
attributable to ordinary shareholders |
1,852.4 |
1,841.6 |
Foreseeable
dividends1 |
(46.8) |
(79.1) |
IFRS 9
transitional adjustment2 |
- |
0.7 |
COVID-19 ECL
transitional adjustment3 |
17.5 |
18.9 |
Solo
consolidation adjustments |
(12.2) |
(13.6) |
Deductions from CET1 capital |
- |
|
Investment in
subsidiary |
(528.9) |
(533.0) |
Prudent
valuation adjustment4 |
(0.3) |
(0.3) |
Intangible
assets |
(23.9) |
(6.6) |
Deferred tax asset |
(0.3) |
(0.6) |
CET1 capital |
1,257.5 |
1,228.0 |
AT1
capital |
|
|
AT1 securities |
90.0 |
90.0 |
Total Tier 1 capital |
1,347.5 |
1,318.0 |
Tier 2
capital |
|
|
Subordinated debt and PSBs |
165.0 |
15.0 |
Total Tier 2 capital |
165.0 |
15.0 |
Total regulatory capital |
1,512.5 |
1,333.0 |
Risk-weighted assets (unaudited) |
7,452.8 |
6,660.5 |
- 2022 includes a special dividend of £30.3m (in support of the
£50.0m announced by the OSBG Board rounded up on a pence per share
basis to £50.3m). .
- The IFRS 9 transitional arrangements expired 31 December
2022.
- The COVID-19 ECL transitional adjustment relates to 50% of OSB
solo’s increase in stage 1 and stage 2 ECL following the impacts of
COVID-19 and for which transitional rules are being adopted for
regulatory capital purposes.
- OSB solo has adopted the simplified approach under the Prudent
Valuation rules, recognising a deduction equal to sum of absolute
value to 0.1% of fair value assets and liabilities excluding
fair-valued assets and liabilities.
- Capital management (continued)
The movement in CET1 during the year was as
follows:
|
(Unaudited) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
At 1
January |
1,228.0 |
1,140.4 |
Movement in
retained earnings |
10.7 |
86.5 |
Movement in
other reserves |
0.1 |
1.4 |
Movement in
investment in subsidiary |
4.1 |
5.5 |
Movement in
foreseeable dividends |
32.3 |
(6.0) |
Movement in
solo consolidation adjustment |
1.4 |
(6.8) |
IFRS 9
transitional adjustment |
(0.7) |
(0.7) |
COVID-19 ECL
transitional adjustment |
(1.4) |
6.8 |
Movement in
prudent valuation adjustment |
- |
(0.3) |
Net
(increase)/decrease in intangible assets |
(17.3) |
1.3 |
Movement in
deferred tax asset for carried forward losses |
0.3 |
(0.1) |
At 31 December |
1,257.5 |
1,228.0 |
The OSB solo minimum requirements for own funds
and eligible liabilities (MREL) information is presented below:
|
(Unaudited) 2023 |
(Unaudited) 2022 |
|
£m |
£m |
Total
regulatory capital |
1,512.5 |
1,333.0 |
Eligible liabilities |
200.0 |
- |
Total own funds and eligible liabilities |
1,712.5 |
1,333.0 |
On 7 September 2023, the Group issued £300.0
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.
52. Events after the reporting date
On 16 January 2024 OSBG 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 OSBG Board has authorised a share repurchase
of up to £50.0m of shares in the market from 15 March 2024
supported by the Group. Any purchases made under this programme
will be announced to the market each day in line with regulatory
requirements.
The Directors of OneSavings Bank plc have proposed an interim
dividend of £85.7m in relation to profits for the year ended 31
December 2023 as its contribution to the proposed OSBG dividends.
There is no final dividend proposed.
Victoria Hyde is appointed to the board of OSB as Chief
Financial Officer (CFO) and Executive Director, subject to
regulatory approval, with effect from 10 May 2024. Victoria will
succeed April Talintyre. April will step down from the board at the
OSBG Group’s Annual General Meeting on 9 May 2024.
AGM |
Annual General Meeting |
IRB |
Internal Ratings-Based approach to credit risk |
ALCO |
Group Assets and Liabilities Committee |
ISA |
Individual Savings Account |
BoE |
Bank of England |
KRFI |
Kent Reliance for Intermediaries |
CCFS |
Charter Court Financial Services |
KRPS |
Kent Reliance Provident Society Limited |
CEO |
Chief Executive Officer |
LCR |
Liquidity Coverage Ratio |
CET1 |
Common Equity Tier 1 |
LGD |
Loss Given Default |
CFO |
Chief Financial Officer |
LIBOR |
London Interbank Offered Rate |
CRD IV |
Capital Requirements Directive and Regulation |
LTIP |
Long-Term Incentive Plan |
CRO |
Chief Risk Officer |
LTV |
Loan to value |
DSBP |
Deferred Share Bonus Plan |
NIM |
Net Interest Margin |
EAD |
Exposure at Default |
NPS |
Net Promoter Score |
ECL |
Expected Credit Loss |
OSB |
OneSavings Bank plc |
EIR |
Effective Interest Rate |
OSBG |
OSB GROUP PLC |
EPS |
Earnings Per Share |
PD |
Probability of Default |
EU |
European Union |
PPD |
Propensity to go to Possession Given Default |
FCA |
Financial Conduct Authority |
PRA |
Prudential Regulation Authority |
FRC |
Financial Reporting Council |
PSBs |
Perpetual Subordinated Bonds |
FSCS |
Financial Services Compensation Scheme |
PSP |
Performance Share Plan |
FSD |
Forced Sale Discount |
RMBS |
Residential Mortgage-Backed Securities |
FTSE |
Financial Times Stock Exchange |
RoE |
Return on equity |
HMRC |
Her Majesty’s Revenue and Customs |
RWA |
Risk weighted assets |
HPI |
House Price Index |
SAYE |
Save As You Earn or Sharesave |
IAS |
International Accounting Standards |
SDLT |
Stamp Duty Land Tax |
IBOR |
Interbank Offered Rate |
SICR |
Significant Increase in Credit Risk |
ICAAP |
Internal Capital Adequacy Assessment Process |
SID |
Senior Independent Director |
ICR |
Interest Coverage Ratio |
SME |
Small and Medium Enterprises |
IFRS |
International Financial Reporting Standards |
SONIA |
Sterling Overnight Index Average |
ILAAP |
Internal Liquidity Adequacy Assessment Process |
SRMF |
Strategic Risk Management Framework |
ILTR |
Index Long-Term Repo |
TFS |
Term Funding Scheme |
IPO |
Initial Public Offering |
TFSME |
Term Funding Scheme with additional incentives |
|
|
|
for SMEs |
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