TIDMPAG
RNS Number : 7557U
Paragon Banking Group PLC
07 December 2021
RNS Announcement
Paragon Banking Group PLC
7 December 2021
Record profits underpinned by strong lending and margin
growth
Paragon Banking Group PLC ('Paragon' or 'the Group'), the
specialist lender and banking group, today announces its full year
results for the year ended 30 September 2021
Nigel Terrington, Chief Executive of Paragon said:
"We have delivered an outstanding performance in 2021, which is
testament to the strength of our operating model, the quality of
our customer base and the capability and adaptability of our
people.
"Every lending business in the Group has this year made
excellent progress, and at over GBP2.6 billion, aggregate new
lending now comfortably exceeds pre-pandemic levels. We have made
huge strides on the funding side, growing retail deposits by 18.4%
at attractive rates, and have delivered significant digital
improvements as part of the Group's cloud-based strategy.
"We delivered strong earnings growth with a 62% increase in
profits to GBP194 million, an 81.1% increase in earnings per share
and a total dividend for the year of 26.1 pence. This performance
allowed us to return an additional GBP38 million through a buyback,
and we still ended the year with stronger capital ratios, including
CET1 at 15.4%.
"These results validate our longstanding strategy to concentrate
on specialist lending markets where we add value for our customers
with complex requirements.
"We enter 2022 with strong pipelines at near record levels,
improved margins and the capital to continue to invest in and grow
our business, as well as deliver additional returns for
shareholders via a new buyback programme and materially increasing
our full year dividend. We remain confident in our outlook and are
on track with our plans to become the UK's leading
technology-enabled specialist bank."
Financial highlights
-- Underlying profit increased by 61.8% to GBP194.2 million (2020: GBP120.0 million)
-- Statutory profit before tax increased by 80.5% to GBP213.7 million (2020: GBP118.4 million)
-- Impairment coverage reduced to 49 basis points reflecting
strong credit performance (2020: 64 basis points). Model overlays
broadly maintained
-- Reported EPS up 81.1% to 65.2p (2020: 36.0p), underlying EPS up 62.5% to 59.3p (2020: 36.5p)
-- Full year dividend of 26.1p (2020: 14.4p)
-- Capital ratios remain strong after accruing for the dividend;
CET1 ratio at 15.4% (30 September 2020: 14.3%)
-- Net interest margin of 239 basis points up from 224 basis points in 2020
-- Return on Tangible Equity increased to 16.2% on a statutory
basis, 14.7% on an underlying basis
-- 2022 share buyback of up to GBP50 million announced (in
addition to remaining GBP2.2 million from the 2021 buyback)
Operational highlights
-- Excellent operational capability sustained throughout the
pandemic, delivering record new lending volumes and new delivery
systems
-- Strong lending growth in core divisions:
o Mortgage Lending advances up 29.4% to GBP1.63 billion,
year-end buy-to-let pipeline exceeds GBP1 billion
o Commercial Lending advances up 22.9% to GBP0.97 billion,
year-end development finance pipeline up 63.2% to GBP0.37
billion
-- Retail deposits grew 18.4% to GBP9.3 billion (2020: GBP7.9 billion) at attractive rates
-- Accessed GBP2.75 billion under the SME Term Funding Scheme ('TFSME') by 30 September 2021
-- First UK Green Tier-2 bond issued
-- LIBOR transition successfully delivered
-- Phase 2 of IRB application ongoing, good progress made
For further information, please contact:
Paragon Banking Group PLC Headland Consultancy
Nigel Terrington, Chief Executive paragon@headlandconsultancy.com
Richard Woodman, Chief Financial Lucy Legh/Del Jones
Officer
0121 712 2505 020 3805 4822
The Group will be holding a call for sell-side analysts on 7
December 2021 at 9:30am, a recording of which will be available on
the Group's website at www.paragonbankinggroup.co.uk/investors from
2:30pm that day. The presentation material will be available on the
website from 7:00am on the same day.
Cautionary statement
Your attention is drawn to the cautionary statement set out at
the end of this document.
Introduction
The Group has delivered record profits and an outstanding
operational performance reflecting the strength of its franchise,
the resilience of its operating platform and the commitment and
professionalism of its people.
The Group's business model has been designed, using its
extensive through-the-cycle experience, to be resilient in its
operational performance and to maintain a strong balance sheet.
Having developed an effective working approach at the onset of the
crisis, the business was well placed to deal with the changing
Covid conditions, particularly over the winter months, maintaining
new business activities and paying close attention to the needs of
our customers, employees and business partners as the situation
developed.
This testing period brought out the best in our people and has
given us the opportunity to demonstrate the strong fundamentals of
the Group as we continue to generate improved returns and higher
growth rates.
Despite the operational challenges the lockdowns brought, we
have strengthened our franchise by building stronger relationships
with customers, intermediaries and other business partners.
Alongside this, we have delivered a number of key technology
developments during the year. We also have an active change
programme in progress, designed to optimise customer journeys,
operational efficiencies and data and control needs across the
business. The delivery of these, together with accessing the
capacity and efficiencies they bring, will form a core part of our
strategy in continuing to drive strong growth in a prudent manner
in the UK's specialist financial services markets.
Financial performance
The Group delivered a strong financial performance reflecting
the improvements in the UK economy and strong underlying trading. A
combination of strong loan growth, improving net interest margins,
tight cost control and a reversal of some of the Covid-related
impairments enabled underlying profits to increase by 61.8% to
GBP194.2 million.
Impairments for expected credit losses fell materially from
their 2020 level, ending 2021 with a GBP4.7 million write-back
compared to the GBP48.3 million charge in 2020. Notwithstanding
this impairment volatility, pre-provision profits were up 12.6% on
their 2020 level at GBP189.5 million. With the credit for
impairments in the year, and strong fair value gains reflecting
yield curve movements, overall reported profits before tax were
80.5% higher than their 2020 equivalent at GBP213.7 million.
Basic earnings per share were 59.3 pence on an underlying basis
and 65.2 pence on a statutory basis. We continue to operate with a
40% dividend pay-out policy, which results in a dividend for the
year of 26.1 pence, reflecting the strong underlying performance,
impairment releases and fair value movements.
Trading performance
The Mortgage Lending and Commercial Lending divisions have each
outperformed expectations during 2021, delivering strong new
business flows, low arrears and finishing the period with record
pipelines.
In Mortgage Lending, where we celebrated 25 years of serving the
Private Rented Sector ('PRS'), we have continued to see strong
demand from professional landlords, who generated 97% of new
buy-to-let completions in the year. Total buy-to-let completions
exceeded GBP1.6 billion in the year, generating an 8% increase in
balances to GBP11.4 billion. Strong house price inflation and
stable arrears have created a lower impairment requirement
year-on-year and the portfolio remains conservatively leveraged
with an average loan to value ('LTV') of 61.2% and only 1.9% of the
portfolio having an LTV over 80%. The pipeline at the year end
exceeded GBP1 billion, boding well for continued strong flows into
the new financial year. With our half-year results we announced the
cessation of lending on second charge mortgages, with the business
being unattractive at our chosen risk appetite. All employees were
offered redeployment in the wider business, with only six choosing
the alternative of voluntary redundancy.
New business flows in Commercial Lending exceeded GBP0.97
billion, up 22.9% on their 2020 levels and above their 2019
equivalent. The growth was strongest in development finance, where
new advances rose 32.5%, year-on-year, reflecting the continued
high demand for residential property development in the UK and the
Group's investment in expanding the relationship team. The
development finance year end pipeline was up 63.2% from its
equivalent level in 2020. SME lending saw a 17.0% increase in
origination flows, but these remain below the pre-Covid equivalent
given sector-wide challenges and the broad take-up of
government-backed loans under the CBILS, BBLS and RLS during the
year. However, growth was strongest in the longer-term,
asset-secured part of the operation. The new portal delivered
during the year leaves the business well placed to seize
opportunities going forward as this sector recovers. Motor Finance
volumes were broadly flat year on year, but this disguises a strong
second-half recovery and strong momentum being carried through to
2022. Finally, our structured lending team has now refocused its
attentions from account management to business development, driving
portfolio growth and adding new facilities during the second half
of the year.
Capital and funding
The past year has seen a material change in our funding
structure, with our savings proposition delivering an 18.4% growth
in balances at attractive rates. System enhancements during the
year enabled increased levels of deposits to be sourced from third
party platforms, while the SME savings market was accessed for the
first time. During March 2021 we became the first UK bank to
successfully issue a Green Tier-2 Bond, at a coupon of almost 3%
less than the bond it was replacing. We have also refinanced the
majority of our legacy securitisation structures, substantially
repaid borrowings under the Bank of England Term Funding Scheme
('TFS') and drawn further on the Term Funding Scheme with
additional incentives for SMEs ('TFSME'). Overall, the Group's cost
of funds has dropped by 39 basis points from its 2020 level.
The refinancing of the legacy securitisation removed over GBP400
million of derivative assets from the Group's balance sheet against
which regulatory capital had previously been carried, reducing
capital requirements. The refinancing also facilitated the
transition of the bulk of the Group's London Interbank Offered Rate
('LIBOR')-linked loan exposures to a Term SONIA basis. For all
remaining LIBOR-linked assets an exit strategy is in place and the
Group's remaining LIBOR-linked liabilities were either transitioned
during the financial year, or a transition methodology has been
agreed with the relevant counterparties.
With the strong capital position at the half-year, the Group
declared an interim dividend in line with its guidance (being one
half of the previous year's final dividend) and also announced a
share buyback of up to GBP40 million, with GBP37.5 million
(excluding costs) being utilised by the year end. This programme
will be completed in the early part of the new financial year, and
in December 2021 the Board authorised a further buy-back programme
of up to GBP50.0 million, acknowledging the Group's continuing
capital strength
We also benefitted from revised total capital requirements
following the regular supervisory review undertaken by the PRA in
late 2020. This saw our total capital requirement ('TCR') fall from
10.8% to 8.9% and contributed to a continued strong surplus over
regulatory requirements at 30 September.
The Group submitted its buy-to-let Phase 2 IRB application
modules to the PRA during the year. The process remains protracted,
but we continue to receive constructive engagement from the PRA. In
addition to further phases of the buy-to-let accreditation, our
preparations to submit an IRB application for our development
finance business, which represents the next stage in the IRB
roadmap are well advanced.
Business model developments
Key developments during the year include the completion and
roll-out of our Commercial Lending portal and the introduction of
auto-decisioning to SME lending. We have also developed a new
digital system for our surveyors, established a single payment
platform across our banking relationships and implemented Mambu, a
cloud-based core banking module, for managing our portfolio of
savings platform relationships. Complementing these completed
developments, our teams are actively managing process improvements
in our Mortgage Lending division, embedding Mambu into development
finance, reviewing post-completion systems across the Group and
broadening the scope of our savings proposition to support
additional future capacity.
People
Our people have made a remarkable effort during the past year,
working flexibly to support the business and showing great agility
as the operating and working environment has changed. Against this
backdrop, the wellbeing of our people has been a primary
consideration for the Board and has been demonstrated through
numerous initiatives and regular engagement to ensure that
effective feedback and communications were maintained throughout
the year.
Our 2021 employee survey demonstrated exceptional levels of
engagement, with an engagement score of 87% and an employee NPS of
+24 , where +21 is the industry norm. 95% of our people agreed that
they are proud to say that they work at Paragon.
I am pleased to confirm that the Group has also met all its
diversity targets under the Women in Finance Charter, set in 2017,
while the Group's EDI network, designed to ensure Paragon is a
fully inclusive employer, was launched in the year. The new network
has already contributed to a number of Group initiatives in this
area.
Having spent much of the year with a working-from-home focus,
the Group is now undertaking a series of hybrid working pattern
trials, designed to optimise the efficiency, control, flexibility
and wellbeing features of our longer-term operating model.
Sustainability
Climate change and sustainability considerations have been at
the heart of our efforts during 2021. Against a backdrop of
creating the appropriate focus and governance around the Group, we
launched the first green capital bond to be issued by a UK bank in
March 2021, to replace our existing Tier-2 bond. The establishment
of the Green Bond Framework and associated deployment commitments
reflect the importance of the sustainability agenda within the
Group.
A new Sustainability Committee was established in the year.
Products to promote more energy-efficient properties have been
launched in both the buy-to-let mortgage and development finance
areas. Our motor finance operation began lending on electric
vehicles after the year end, following substantial preparatory work
during the year. There has also been material board engagement
regarding the actions the Group needs to take to support the UK's
path to net-zero by 2050.
Internally the Group relocated its London operations to more
energy-efficient premises, reducing its carbon footprint while
affirming its commitment to office-based working and the City as a
physical venue for doing business.
The requirements of the Taskforce on Climate-related Financial
Disclosures ('TCFD') become binding on the Group in 2022. Our
disclosures for 2021 are materially enhanced and substantially meet
these standards, and we have signed up as a TCFD supporter.
Alongside the annual report and accounts we are publishing our
first separate sustainability report, the Responsible Business
Report, which will be accessible via the Group's website.
Outlook
Despite the challenging environment, Paragon leaves its 2021
year with strong lending pipelines, an increasingly diversified
funding structure and strong capital resources to continue to take
advantage of opportunities going forward, both organic and
potentially through further acquisitions, if appropriate. We are
accelerating our investment in technology, enhancing our customer
proposition while preserving the key specialisms that are embedded
within our operating model. Careful consideration of impairment
coverage levels leaves us appropriately provisioned in the event of
future macro-economic volatility or idiosyncratic examples of
Covid-related scarring amongst our customers. With a CET1 ratio of
15.4% and good progress being made with our IRB applications, our
capital position remains strong, supporting further growth and
returns to stakeholders.
MANAGEMENT REPORT
This section reviews the activities of the Group in the year
under these headings
Business review Funding Capital Financial results Operations
Lending and Deposit taking and Regulatory capital, Results for the year Systems, people,
performance for each other sources of liquidity and sustainability and
business line finance distributions risk
---------------------- ---------------------- --------------------- -----------------------
1 2 3 4 5
---------------------- ---------------------- --------------------- -----------------------
1 BUSINESS REVIEW
The Group reports its results analysed between three segments,
based on product type, origination, and servicing capabilities.
This organisational and management structure has been in place
throughout the year.
New business advances and investments in the year, together with
the year-end loan balances, by division, are summarised below:
Advances in the Net loan balances
year at the year end
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Mortgage Lending 1,630.0 1,259.7 11,608.7 10,819.5
Commercial Lending 971.5 790.8 1,568.8 1,514.8
Idem Capital - - 225.1 297.1
-------- -------- --------- ---------
2,601.5 2,050.5 13,402.7 12,631.4
-------- -------- --------- ---------
The Group's total loan balance increased by 6.1% in the year
following a 3.7% increase in the preceding twelve months. This
highlights the Group's ability to continue to pursue its strategy
despite the economic impacts of Covid through the last eighteen
months. Total advances increased 26.9% as the economy bounced back
from the pandemic and exceeded the pre-pandemic levels of 2019,
despite lockdowns and other Covid-related restrictions continuing
to impact during the year.
1.1 MORTGAGE LING
The Group's Mortgage Lending division principally provides
buy-to-let mortgages secured on UK residential property to
specialist landlords. The buy-to-let mortgage sector celebrated its
25th anniversary in the year and the Group was one of the first
lenders in this market. This gives the Group an unparalleled
understanding of this form of mortgage and the landlord customer
base it targets.
During the period the Group also offered loans to smaller
landlords and limited numbers of owner-occupied first and second
charge mortgages on residential property. However, during the year
it withdrew from the second charge market entirely, to increase its
buy-to-let focus. In all its offerings, the Group targets niche
markets where its focus on detailed case-by-case underwriting and
its robust and informed approach to property risk differentiate it
from both mass market and other specialist lenders.
Housing and mortgage market
During the year the housing market in the UK continued to be
affected by the Covid pandemic and the associated relief schemes
including payment holidays, effective prohibitions on some forms of
enforcement action and the continuing availability of stamp duty
holidays, which were extended until June 2021. While the period
over which payment holidays were available was extended, the
maximum relief was capped at six months and the immediate impact of
such holidays began to reduce as borrowers reached their maximum
allocation. Lockdowns and social distancing requirements at various
points in the year also put practical constraints on the operation
of the housing market.
Activity in the residential property market recovered in the
year, boosted by the stamp duty holiday. Transactions for the year
reported by HMRC, at 1,562,000, were 58.3% higher than the 987,000
in the previous year. In their September 2021 Residential Market
Survey, RICS noted positive activity levels in the market and a
stable outlook for property sales.
Despite the year beginning with a pessimistic outlook for
property prices from some forecasters, house prices saw strong
growth in the period, with the Nationwide House Price Index
recording a year-on-year increase of 10.0% to September 2021. RICS
forecast continuing growth in the short to medium term, with demand
outstripping supply, however, Nationwide amongst other forecasts
remain cautious as to the medium-term outlook as reliefs unwind,
and the Group continues to position itself conservatively.
New mortgage lending in the market was strong in the year, with
the Bank of England reporting new approvals of GBP317.3 billion in
the year ended 30 September 2021, a 31.0% increase on the GBP242.3
billion reported for the previous financial year and a higher value
than any year since 2007. Particularly high volumes were seen in
the months leading up to June 2021, when stamp duty reliefs began
to be withdrawn.
At 30 September 2021 the UK Finance ('UKF') survey of mortgage
market arrears and possessions reported arrears remaining at
historically low levels, despite the phasing out of continuing
availability of Covid reliefs. Indeed, in a significant number of
cases, customers had been able to reduce arrears during the
pandemic. Possessions remained very low, with the majority relating
to cases already in serious difficulties before the onset of Covid.
Based on its research, UKF concluded that the availability of
payment holidays fulfilled the purpose of enabling borrowers to
stay out of arrears through the pandemic.
The Private Rented Sector ('PRS') and the buy-to-let mortgage
market
Specialist landlords form the largest part of the Group's target
market. Such landlords typically let out four or more properties,
run their portfolio as a business and have a high level of personal
day-to-day involvement.
The Group considers that the experience of its customers, their
level of involvement and the diversification of their income
streams across properties make them less vulnerable to cash flow
shocks in the event of a downturn and better able to cope when
faced with an adverse economic situation. This has proved to be the
case in the Covid pandemic to date, with customers engaging quickly
to manage any risks they faced.
The Group is amongst a small number of specialist lenders
addressing this sector, which is underserved by many of the larger
lenders. Some constraint in supply was seen during the pandemic,
with certain non-bank lenders withdrawing from the market, although
by the end of the year most had resumed activity.
New issuance of buy-to-let mortgages followed the trend in the
wider property and mortgage markets. New advances reported by UKF,
at GBP45.1 billion for the year ended 30 September 2021, were 14.8%
higher than for the previous year (2020: GBP39.3 billion). This
included a 86.3% increase in house purchase activity with an 8.4%
reduction in remortgage activity. Some of this increase was driven
by an increase in the number of amateur landlords, seeking
investments offering returns not available elsewhere, but the
activity amongst professionals was also strong.
In the lettings market RICS' September 2021 UK Residential
Market Survey reported rising tenant demand coupled with a scarcity
of new landlord instructions driving an increase in rents. ARLA
Propertymark, in its September 2021 PRS Report, identified 75% of
tenants as having experienced year-on-year increases in rent (2020:
58%) while RICS members continue to predict, on average, rent
increases of 3% over the coming year. This continuing demand will
benefit affordability and cash flows for the Group's landlord
customers.
Landlord confidence measures reached a five-year high in the
third quarter of the 2021 calendar year. Independent research
carried out for the Group reported that on all five measures of
confidence surveyed: rental yields, capital gains expectations, the
future of their own business, the prospects for the sector as a
whole and the UK financial markets more generally, optimism was
higher than at any time since 2016. Larger landlords were
particularly confident about prospects for their businesses, with
56% feeling 'good' or 'very good'.
The proportion of landlords in the survey reporting increasing
tenant demand had reached the highest level since the survey began,
with six out of ten landlords reporting rising tenant demand, and
30% reporting significant increases. Only 2% of landlords in the
survey reported missing a mortgage payment, and only one of the
landlords surveyed anticipated missing one in the next three to six
months.
Demand for HMO ('house in multiple occupancy') lets remained
strong. Despite concerns as to whether student demand might be
particularly affected by the effects of Covid, this did not
transpire in the year, with strong lettings even where lectures
were being delivered online.
The UKF analysis of arrears and possessions also provided
analysis of buy-to--let cases, showing a similar picture to the
wider mortgage market, with a significant uptake of payment
holidays serving to keep arrears and possessions low, even after
these reliefs had expired.
All these factors provide a strong indication of the current
strength of the buy-to-let mortgage market and the opportunities
for the Group going forward.
Mortgage Lending activity
The Group's new mortgage lending activity during the year is set
out below.
2021 2020
GBPm GBPm
Originated assets
Specialist buy-to-let 1,562.2 1,119.0
Non-specialist buy-to-let 52.2 86.4
-------- --------
Total buy-to-let 1,614.4 1,205.4
Owner-occupied 1.5 0.3
Second charge 14.1 54.0
-------- --------
1,630.0 1,259.7
-------- --------
Total mortgage originations in the Group increased by 29.4%,
following a 19.7% fall in the preceding year. Activity exceeded the
GBP1,564.4 million of new advances achieved in 2019, before the
Covid outbreak, demonstrating the impact of real growth, rather
than just a Covid bounce-back on the Group's mortgage business.
Buy-to-let
Advances continue to be focused on specialist buy-to-let, the
main focus of the division's activity. New lending of these
products increased by 39.6% following the 14.9% fall in the 2020
financial year. The GBP1,562.2 million of completions was also
22.8% higher than the result for 2019, prior to the pandemic,
demonstrating the strength of the Group's proposition.
Specialist buy-to-let comprised 95.8% of the division's
advances, reflecting the sharpening of focus on this area. Other
mortgage lending remains modest in comparison, with advances
declining by 51.8%, in large part due to the Group's exit from the
non-core second charge market during the year. The new business
pipeline, being the loans passing through the underwriting process,
stood at a record GBP1,008.1 million at the year-end, 8.8% higher
than a year earlier (2020: GBP926.7 million), providing a strong
platform for growth into the 2022 financial year.
The Group sources the majority of its new buy-to-let lending
through specialist intermediaries, and it continues to invest to
ensure the service offered to them is excellent. During the year
the Group's regular surveys of its intermediaries showed 91% were
satisfied with the ease of obtaining a response from the Group
(2020: 91%), delivering a NPS at offer stage of +43 (2020: +56).
Two thirds (66%) of brokers dealing with the Group rated its
service as better than that provided by other lenders (2020: 68%).
Paragon Mortgages was also named as 'Best Professional Buy-to-let
Lender' at the 2021 Your Mortgage awards - the ninth time it has
won this title.
During the period the business launched a long-term, in-depth,
end-to-end transformation programme to restructure processes and
enhance systems, increase the effectiveness of the operation and
upgrade the offering to both customers and intermediaries. This
represents a significant commitment of time and resources to the
future of the business, with enhancements starting to come online
from the 2022 financial year.
The Group understands the potential for climate change to impact
its mortgage business and seeks to mitigate risk through careful
consideration of the properties on which it will lend. It also
continues to develop systems and refine data to allow its overall
position to be measured and the behaviour of its security portfolio
under climate-related stresses to be better understood.
During the year the Group launched its first range of green
buy-to-let mortgages. These market-leading products have a maximum
80% loan-to-value ratio and offer, lower interest rates for energy
efficient properties with EPC ratings of C or higher. While
initially limited to certain property types, this lending was
extended to all properties within the Group's lending criteria in
October 2021.
The UK Government has identified the provision of more energy
efficient housing as a prime objective in its response to climate
change, with EPC levels being set as one of the principal
benchmarks to be used. It has announced a target of upgrading as
many homes as possible in the PRS to an EPC rating of C or higher.
In order to achieve this, there is an expectation that lenders will
set minimum quality thresholds, and advantage customers with more
energy efficient properties, as is the case with the Group's green
mortgage products.
The Group has also designated EPC grades as a principal metric
for evaluating climate change risk in its mortgage book and has
continued to develop systems to analyse this data and to ensure
that it has reliable and up-to-date information on as much of its
book as possible, including legacy cases. It is unfortunate that
some public information sources are not currently configured in a
way which easily facilitates in-life monitoring and analysis or
allows customers in need of support in improving their properties
to be identified.
The Group's latest analysis identified EPC grades for 88.3% of
its mortgage book by value at 30 September 2021 (2020: 85.1%). Of
these 98.4% were graded E or higher (2020: 98.1%) with 37.6% rated
A, B or C (2020: 37.7%). The year-on-year movements are principally
a result of refining the data, with 39.7% of new originations in
the year having one of the top three grades (94.2% coverage).
The Group's advances volumes on green buy-to-let lending, which
have increased by 27.7% in the year, are set out below.
2021 2020
GBPm GBPm
EPC rated A or B 134.3 112.7
EPC rated C 443.4 339.8
Total rated A to C 577.7 452.5
------ ------
Coverage (England and Wales) 93% 94%
------ ------
While the Group monitors EPC performance it is also conscious of
the need to avoid unintended consequences by focussing lending on
this. While upgrading existing properties is beneficial to overall
emissions, the demolition and replacement of properties may be less
so.
The Group also monitors the potential physical risks to security
values arising from climate change. This includes assessing a
property's flood risk as part of the underwriting process. At 30
September 2021, approximately 2.5% by number of properties securing
the Group's buy-to-let mortgages in England and Wales were
considered to be at medium or high risk of flooding from the sea or
rivers, based on data from the Environment Agency (2020: 2.2%).
The Group continues to refine and develop its use of both
internal and external data to manage climate change risk. However,
it recognises the important part that the development of reliable
and easily accessible information sources by the UK authorities
must play in quantifying these exposures. It would therefore
welcome any initiatives by the UK Government to enhance national
reporting as part of its own response to climate change.
The business is currently working with the Green Finance
Institute on a number of industry initiatives to develop standards
for mortgage products which would encourage energy and carbon
efficiency for the future, and this work continues to inform the
development of the Group's own buy-to-let product range. Given that
RICS has highlighted cost as one of the principal barriers to
energy efficiency improvements in residential property, the
provision of financial solutions will be key to the achievement of
climate goals.
Other lending
Other first and second charge mortgage lending is ancillary to
the Group's main buy--to--let focus and is carefully managed to
ensure that only lending with appropriate risks which provides an
acceptable return on capital is undertaken.
Lending in the Group's second charge mortgage operation was
scaled back in summer 2020 in response to Covid, with people
transferred to provide support to other business areas, and lending
remaining low in the first half of the year. The Group took this
opportunity to review the long-term strategic potential of second
charge lending in light of its capital requirements and the Group's
overall risk appetite and announced its withdrawal from this market
in May 2021. Completions in the year were GBP14.1 million compared
to GBP54.0 million in 2020.
The Group's exposure to first charge residential lending is
strictly limited, given the yields available in this market at
acceptable levels of risk, and a limited demand for products where
its specialist approach is cost-effective and adds value. The
opportunities for the Group in this area principally relate to
complex propositions, which will arise on an opportunistic basis,
including lending to the existing professional landlord customer
base.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
2021 2020
GBPm GBPm
Post-2010 assets
First charge buy-to-let 7,379.0 6,202.5
First charge owner-occupied 35.6 51.2
Second charge 148.1 182.6
--------- ---------
7,562.7 6,436.3
Legacy assets
First charge buy-to-let 4,045.3 4,381.3
First charge owner-occupied 0.7 1.9
--------- ---------
11,608.7 10,819.5
--------- ---------
At 30 September 2021, the total net mortgage portfolio was 7.3%
higher than at the start of the financial year, reflecting strong
lending and retention performance in spite of the on-going impacts
of Covid. The balance of post-2010 buy-to-let lending grew by 19.0%
and it now represents 63.6% of the division's total loan assets
(2020: 57.3%).
The annualised redemption rate on buy-to-let mortgage assets, at
6.9% (2020: 6.6%), has continued at a low level, partly due to the
continued seasoning of five-year fixed rate loans, partly to
customers adopting a cautious approach to remortgaging during
Covid, but also as a result of the Group's strategic initiatives to
retain customers whose mortgage accounts reach the end of their
fixed rate period.
Covid-related payment holidays were granted on 13,503 of the
Group's buy-to-let accounts which were still live at the year end,
representing 19.9% of the book by number. 5,165 of these holidays
were extended (7.6%), but all of them had expired by 30 September
2021.
Arrears on the buy-to-let book increased in the year to 0.21%
(2020: 0.15%), although part of the increase is attributable to the
suppression of arrears by payment holidays at the previous year
end. Arrears on post-2010 lending were at 0.09% (2020: 0.03%).
Despite the small increases, these arrears remain very low compared
to the national buy-to-let market, with UKF reporting arrears of
0.45% across the buy-to-let sector at 30 September 2021 (2020:
0.52%).
While the principal credit metrics for the buy-to-let mortgage
portfolio have remained positive throughout the year, the extent to
which these have been influenced by UK Government interventions,
such as furlough payments and other income support, underpinning
tenant rental payments, funding from government-backed loan schemes
accessed by landlords and the stamp duty holiday, cannot be
established from data available. Therefore, the long-term prospects
for the book, as these initiatives begin to be withdrawn, remains
subject to a significant level of uncertainty.
The Group's buy-to-let underwriting is focussed on the credit
quality and financial capability of its customers, underpinned by a
robust assessment of the available security. This approach relies
on a detailed and thorough assessment of the value and suitability
of the property as security and this approach to valuation,
including the use of a specialist in-house valuation team, provides
it with significant security in the face of economic stress.
The loan-to-value coverage in its buy-to-let book, at 61.2%
(2020: 65.8%) represents significant security, enhanced over the
year by the generally rising levels of house prices. Levels of
interest cover and stressed affordability in the portfolio remain
substantial, leaving customers well placed to develop their
businesses going forward.
Second charge arrears increased to 1.18% from 0.62% in the year,
reflecting the increased seasoning and size of the portfolio and
the effect of payment holidays on the 2020 measure. Of the live
second charge accounts at the year end 470, representing 17.9% of
the book by number, had been given payment holidays during the
pandemic, with 256 of those extended (9.8%). No payment holidays
remained in place at the year end.
The Group's receiver of rent process for buy-to-let assets helps
to reduce the level of losses by giving direct access to the rental
flows from the underlying properties, while allowing tenants to
stay in their homes. The Group's receiver of rent team was able to
manage tenant rental flows and occupancy levels through the various
pandemic restrictions in the year, to ensure good outcomes for
customers and their tenants. At the year end 553 properties were
managed by a receiver on the customer's behalf, a reduction of
11.2% since 2020 (2020: 623 properties). Almost all these cases
currently relate to pre-2010 lending, with cases being resolved on
a long-term basis.
Outlook
The division's operations were affected by Covid in the year,
however, the buy-to-let mortgage portfolio continued to grow, with
strong credit performance, despite the circumstances. The year-end
pipeline was at record levels, signposting strong completions into
the new financial year. In the wider market, transactions are
increasing, tenant demand is strong and rental projections are
encouraging, with positive landlord and broker sentiment.
These combine to provide an outlook for the Mortgage Lending
business in which it should be able to accelerate out of the
pandemic and generate high quality assets and returns for the
Group, while contributing to the development and renewal of the
nation's housing stock.
1.2 COMMERCIAL LING
The Group's Commercial Lending division includes four key
specialist business streams lending to, or through, commercial
organisations, mostly on a secured basis. This division had been a
major source of growth within the Group before the impact of Covid
and remains a focus for growth going forward.
The four business lines address:
-- SME lending, providing leasing for business assets and
unsecured cash flow lending for professional services firms,
amongst other products
-- Development finance, funding smaller, mostly residential, property development projects
-- Structured lending, providing finance for niche non-bank lenders
-- Motor finance, focussed on specialist parts of the sector
Each of these businesses is led by a managing director,
supported by a specialist team with a strong understanding of their
market. The principal competitors for each of the business lines
are small banks and non-bank lenders. The Group operates
principally in markets where the largest lenders have little
presence, creating both a credit availability issue for customers
and significant opportunities for the Group.
The Group's strategy for Commercial Lending is to target niches
(either product types or customer groups) where its skill sets and
customer service culture can be best applied, and its capital
effectively deployed to optimise the relationship between growth,
risk and return.
The SME sector has been the focus of government-mandated support
programmes throughout the pandemic including payment reliefs from
lenders, VAT deferral schemes and the provision of loans under the
Coronavirus Business Interruption Loan Scheme ('CBILS'),
Coronavirus Large Business Interruption Loan Scheme ('CLBILS')
Bounce Back Loan Scheme ('BBLS') and Recovery Loan Scheme ('RLS').
These reliefs have resulted in significant increases in cash
balances held in the sector, which makes long-term prospects more
difficult to gauge.
During the period the Group has continued to enhance operational
functionality in this area, developing technological solutions and
investing in systems, particularly focussing on administration
systems for SME lending and development finance. These enhancements
should provide benefits for both customer service and in the
procuration processes, enabling potential customers or their
brokers to access appropriate finance solutions more easily and
efficiently, while providing the Group with the information needed
to support increasingly technologically advanced decision-making
and the adoption of an IRB capital model for this business.
The division continues to develop its approach to green
financing, where funding can be deployed in support of more climate
conscious business activities, such as supporting local authorities
in replacing refuse collection fleets with greener vehicles. Work
is also in progress to classify the environmental impacts of
lending in accordance with the UK's Green Taxonomy, although the
Group's lending connected to 'brown' industries (those with a high
environmental impact) has already been assessed as low.
Commercial Lending activity
The Commercial Lending segment saw a 22.9% increase in new
business during the year following the 18.3% reduction in 2020.
Development finance continued its growth trajectory while SME
lending also grew, particularly in its longer term asset finance
product lines. Motor finance operated at a reduced level through
the early part of the year, but returned strongly to the market in
the spring.
The new lending activity in the segment during the year is set
out below, analysed by principal business line. As the structured
lending business comprises revolving credit facilities, the net
movement in the period is shown.
2021 2020
GBPm GBPm
Development finance 510.4 385.3
SME lending 336.9 288.0
Structured lending 24.0 7.6
Motor finance 100.2 109.9
------ ------
971.5 790.8
------ ------
The impact of this new business has been to increase the Group's
overall Commercial Lending exposure by 3.6% in the year to
GBP1,568.8 million (2020: GBP1,514.8 million).
Development finance
The continuing growth of the Group's development finance
business saw it reach the milestone of GBP1.5 billion of total
lending over the last three years, with 13,000 new homes financed
in that time. Enhancements to the product range and the expansion
of the relationship team continued throughout the current year,
which alongside an active market, helped drive volumes higher.
The Group's target customer is a small to medium-sized developer
of UK residential property. Projects currently in progress have an
average development value of GBP7.8 million against which the Group
has extended average facilities of GBP5.0 million, giving a
substantial level of security cover. These projects are generally
focussed on the more liquid parts of the residential market (houses
and smaller blocks of flats), avoiding developments with high unit
values.
The development finance business remained robust throughout the
period, although Covid-related restrictions and supply chain issues
meant that many projects progressed more slowly than they might
have done in normal times, especially in the first half of the
year. This, however created an element of pent-up demand moving
into the second half with advances, pipeline and enquiries
strengthening as the year progressed. Market sentiment appears
positive with developers generally optimistic about the future,
despite the short-term supply issues.
While the business has been historically concentrated in the
English Home Counties, with 63.6% of balances at the year end
located in London and the South East (2020: 67.0%), the Group's
strategic objective is to lend more widely across the UK. Central
London property hot-spots have generally been avoided with
approximately 4% of the balance located in this area.
During the year the product range was expanded to include
finance for projects in the GBP0.4 million to GBP1.0 million range,
widening its potential market to include smaller, growing
developers as they expand their businesses as well as expanding
options for existing customers. It also reintroduced lending of up
to 70% of total development value, suspended in response to the
pandemic, for the highest quality propositions. Together these will
expand the range of projects the business is able to consider.
Following the end of the year, the business launched a Green
Homes Initiative to promote the development of energy efficient
properties, by halving exit fees if EPC ratings of A are achieved
on 80% or more of units within a development, incentivising
developers to meet the demand for greener properties and to support
the UK's net zero target.
The Group's customers have remained resilient through the Covid
pandemic with delays minimised and completed projects being taken
to market. To safeguard its investments, the Group engages
independent monitoring surveyors to review progress and costs on a
regular basis through the build phase of each project.
The volume of new proposals being received increased steadily
during the second half of the year, with the increased amounts of
undrawn approvals, at record levels at the year end, providing a
springboard for the beginning of the new the financial year.
Undrawn amounts on live facilities at 30 September 2021 at GBP500.4
million were 31.4% higher than at the previous year end (2020:
GBP380.9 million) while the post-offer pipeline of GBP298.6 million
was 74.1% higher (2020: GBP171.5 million).
During the year, the business invested in both people and
systems, while increasing its national and regional coverage with
the recruitment of experienced specialist relationship directors
and portfolio managers. These initiatives will support the further
growth and broadening of the business going forward. The Group has
also made progress on the development of an IRB capital model for
this business, which should reduce the cost of capital in the
longer term, as well as enhancing capital discipline.
The performance of the development finance business through the
pandemic has demonstrated the attractiveness of the proposition
going forward. The demand for new housing in the UK shows no sign
of reducing and smaller developers, who have historically struggled
with credit availability, will be needed if the country's needs are
to be met. Sentiment in the market appears positive entering the
new financial year and the Group's business model, its investment
in systems and people and the developments in its product range
mean it is well-placed to support the aspirations of its developer
customers and to help support housing provision across the UK.
SME lending
The SME lending business continued to perform well in the face
of Covid-related constraints throughout the financial year,
although certain business lines were particularly affected by
either reduced economic activity, logistical difficulties in
equipment sourcing, payment deferrals reducing the need for finance
or the availability of cost-effective CBILS and BBLS funding.
Lending strengthened considerably in the second half of the year,
with the growth in longer term asset-backed lending particularly
encouraging for income.
Research carried out for the Group during the second half of the
year suggested that 92% of UK SMEs were confident about their
ability to bounce back from Covid, while 22% had already seen their
turnover return to pre-Covid levels. Cash flow was identified as
the principal issue for most SMEs, with UK Government support
accessed by the majority. Levels of available cash remained the
principal concern for SMEs looking forward.
This confidence in the sector led to a 17.0% growth In the
Group's SME lending advances in the year, although the performance
varied across product types. Generally all lines reported a
stronger second half, with the UK economy opening up and business
confidence beginning to increase.
In the division's core asset leasing business volumes increased
by 19.3% to GBP198.2 million, excluding government-backed balances
(2020: GBP166.1 million), with business levels strengthening
towards the end of the period. This reflects the performance of the
asset finance market in general, with the Finance and Leasing
Association ('FLA') reporting depressed volumes through the winter
months and business picking up through the summer. Investment in
operating leases has also continued with GBP13.0 million of assets
acquired in the period (2020: GBP12.9 million).
The Group continued to advance loans under the UK
Government-sponsored British Business Bank's CBILS and BBLS
programmes to support SMEs potentially affected by the Covid
pandemic, until those schemes closed for new applications in March
2021. The Group has been authorised to take part in the follow-on
RLS programme and began lending under the scheme in the second half
of the year. RLS loans have the benefit of an 80% government
guarantee (after the proceeds of any business assets are applied
for leasing balances), but unlike CBILS lending, customers will be
required to meet interest payments from the outset of the loan.
The existing RLS scheme closes for new offers from 31 December
2021 and will be replaced by a scheme with a 70% government
guarantee. The Group expects to use these schemes to provide
support to SME customers until 30 June 2022, the currently expected
end date of the schemes. The Group's lending in this area has been
primarily focussed on its existing customers, and the majority of
both BBILS and RLS lending has been on asset-secured products.
During the year GBP64.2 million was advanced under schemes
backed by a government guarantee (2020: GBP25.9 million), of which
GBP50.4 million was asset leasing business. The Group continues to
closely monitor the portfolio for any adverse indications,
particularly at the point at which customers, rather than the
Government, are expected to commence payments.
Short-term lending to professional services firms outside the
government supported schemes fell by 21.6% to GBP62.0 million
(2020: GBP79.1 million). Despite this fall in volumes, this
represents a recovery in the second half to the year following
twelve months of very low volumes during the pandemic. This
resulted from both the deferral of tax balances, where customers
had customarily taken out short-term loans to spread the impact,
and of the wide availability of cheap CBILS and BBLS lending in the
market. The second half of the year saw the impact of these factors
diminishing and lending moving back towards pre-Covid levels with
the underlying requirement for finance remaining for the longer
term.
The Group has continued to invest in system improvements to
create efficiency gains in this business throughout the year
despite the pandemic. Enhancements to the new lending process were
rolled out in April, offering improvements for customers and
brokers including the launch of a new finance broker portal,
providing enhanced functionality, in response to extensive research
amongst the broker community.
The finance broker portal, which provides significant benefits
in terms of process automation and response speed was rolled out to
a larger population following the year end and the reengineering
programme will continue into the new financial year, enhancing
controls, operational agility and the customer experience.
With the FLA quarterly industry outlook survey showing 90% of
providers expecting new business growth in the next twelve months,
growing confidence in the customer base, a strengthening new
business pipeline and system developments coming on line, the Group
is optimistic for the future prospects for the business.
Structured lending
The Group's structured lending exposure has seen an increased
level of activity in the year, with several new facilities agreed,
diversifying the business' exposures and the overall balance
increasing.
Structured lending facilities generally fund non-bank lenders of
various kinds providing the Group with increased product
diversification. The facilities are constructed to provide a buffer
for the Group in the event of default in the ultimate customer
population. The Group's experienced account managers have received
regular reporting on the performance of the security assets, and
they maintained a high level of contact with the Group's customers
throughout the Covid crisis to safeguard its position.
The Group has a number of well-progressed additional facilities
in the pipeline, with an expectation of more drawings in the new
financial year. These include new asset classes, spreading the risk
inherent in such lending. The Group continues to actively seek new
opportunities in this field, with a particular interest in
facilities linked to green initiatives.
Motor finance
The Group's motor finance business is a focussed operation
targeting propositions which are not addressed by mass-market
lenders, including specialist makes and vehicle types, such as
light commercial vehicles, motorhomes and caravans.
During the first part of the year the Group operated tighter
lending criteria and temporarily diverted resources from the new
business teams in the area to support the wider Group's customer
servicing requirements through the pandemic, including the
provision of payment reliefs. In the second half the Group
relaunched its proposition with a renewed focus as dealerships
began to open and market activity increased.
Following the year end the operation extended its lending
criteria to include battery electric cars for the first time,
following consultation with dealers and brokers. This will help to
support the UK's move away from petrol and diesel powered
vehicles.
The Group's advances in the year reflect this operational
strategy, with GBP100.2 million of completions in the year, a
broadly similar level to the GBP109.9 million achieved in 2020.
However, this represents a significant post-Covid recovery with
GBP71.4 million of advances in the second half of the year,
compared to GBP28.8 million in the first half and GBP35.1 million
in the second half of 2020. This returns completions to the level
seen in the first half of 2020, before the outbreak when advances
of GBP74.8 million were made.
This Group's performance follows the trajectory of the wider
motor finance market, with the FLA reporting falling volumes until
February 2021, before a recovery beginning to take hold in
March.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
2021 2020
GBPm GBPm
Asset leasing 468.7 478.0
Professions finance 33.1 22.3
CBILS, BBLS and RLS 83.8 25.2
Invoice finance 20.9 13.5
Unsecured business lending 10.3 15.0
-------- --------
Total SME lending 616.8 554.0
Development finance 608.2 609.0
Structured lending 118.9 94.9
Motor finance 224.9 256.9
-------- --------
1,568.8 1,514.8
-------- --------
Credit quality in the development finance book has been good,
and the overall performance of the projects has been in line with
expectations, with the pandemic having no significant impact on the
disposal of completed developments. Accounts are regularly
monitored and graded on a case-by-case basis by the Credit Risk
function. At 30 September 2021 only one account had been identified
as at risk of loss, a long standing legacy case. While the impact
of Covid on development finance projects has been limited to issues
relating to the progress of some projects, rather than credit
concerns, the Group recognises the potential impact of increased
economic uncertainty and execution risk on its portfolio.
The average loan to gross development value for the portfolio at
the year end, a measure of security cover, was 61.7% (2020: 63.1%),
which gives the Group a substantial buffer if any project
encounters problems. No new serious credit issues arose during the
financial year and a number of problem cases identified in prior
periods were resolved.
Credit performance in the division's finance leasing portfolios
generally remains relatively stable, with arrears in asset leasing
at 0.27% and motor finance at 2.30% (2020: 1.75% and 1.76%
respectively), however there have been a small number of cases
where serious credit issues have been identified and the sector is
expected to display more volatile credit performance as government
support initiatives unwind.
Of the division's live motor finance accounts at 30 September
2021, 1,507 cases (9.5%) had been granted payment holidays during
the course of the pandemic with 312 (2.0% of cases) of those
holidays extended. None of these payment holidays remained in place
at the year end.
In SME lending 2,570 of the live accounts at 30 September 2021
had been granted payment holidays with 316 of those extended, of
which 28 remained in place at the year end.
The majority of CBILS and BBLS lending remained in its initial
twelve-month period where interest payments were met by the UK
Government throughout the financial year. Payments from customers
began to fall due in the second half of the financial year on a
limited number of accounts in the first tranches on lending, and
the Group has appropriate systems, processes and resource in place
to deal with any issues as they arise. Of the guaranteed portfolio,
GBP5.0 million (2020: GBP4.6 million) comprises fully guaranteed
BBLS loans.
With the exception of a small number of irregularly submitted
applications, where claims have been submitted under the guarantee
scheme, the Group has yet to encounter any serious credit issues
with its CBILS and BBLS portfolios. Any emerging payment behaviours
will be kept under close scrutiny.
In the structured lending business, the Group carefully monitors
the performance of the underlying asset pool on a monthly basis, to
ensure its security remains adequate. The Group relies on its data
monitoring and verification processes to ensure that these reviews
are able to detect any credit issues. Performance in the year has
been in line with expectations, with generally improved metrics
across the book and only one loan remaining in IFRS 9 Stage 2 at
the year end.
Outlook
The Group's Commercial Lending division has emerged from Covid
well placed for future growth. Work to develop products, systems
and services has been ongoing throughout the pandemic and the year
ended with increased pipelines and building momentum.
With sentiment largely positive in the division's customer base,
and new, green product ranges launched in the new year, the Group
is optimistic for its prospects in the Commercial Lending
space.
1.3 IDEM CAPITAL
The Idem Capital segment contains the Group's acquired loan
portfolios, together with its pre-2010 legacy consumer accounts.
These include mostly second charge and unsecured consumer loans.
The division's success rests on understanding assets, strong
analytics, advanced servicing capabilities and the efficient use of
funding.
When considering portfolios for acquisition the Group currently
focusses on specialist loan portfolios which might augment its own
organic origination activities. This model is essentially
opportunistic and the flow of appropriate opportunities to the
market is both limited and sporadic, even in a normal economic
environment.
The Group carefully considers the capital requirements for any
potential acquisition, particularly where the asset types offered
require relatively large amounts of regulatory capital to be held.
It also evaluates the potential for conduct risk issues to arise in
portfolios which may contain more vulnerable customers. The Group
will only pursue transactions where it considers that its wider
capabilities in specialist administration and funding can provide a
real benefit and where the projected return is attractive in
comparison to the other opportunities for the deployment of its
capital.
The Idem Capital back book includes consumer lending portfolios
where customers may have historically rescheduled their debt
repayments and its processes aim to generate fair outcomes for all
customers, recognising any vulnerabilities. This aim has formed a
principal focus in the Group's response to Covid in respect of such
customers.
New business
Although the UK loan portfolio market remained active in the
period, the impact of Covid continued to depress activity levels,
and complicated the pricing and execution of potential deals,
discouraging vendors from coming to market.
During the period, no portfolio acquisitions were completed
(2020: none) although the division undertook a limited number of
reviews of opportunities that were ultimately not progressed.
The main focus of the business in the year was the careful
management of its existing books and ensuring that appropriate
processes and systems are in place to address the Covid outbreak
with customers, many of whom were already identified as vulnerable
or who had developed vulnerabilities as a result of the ongoing
pandemic.
Performance
The value of the loan balances in the segment are set out below,
analysed by business line.
2021 2020
GBPm GBPm
Second charge mortgage loans 133.6 171.9
Unsecured consumer loans 87.2 109.7
Motor finance 4.3 15.5
------ ------
225.1 297.1
------ ------
Balances in the segment have continued to decline as outstanding
amounts are collected on existing portfolios, with no additions in
the period. Cash flows remained strong across all books, despite
the on-going effects of Covid on consumers. This level of
collections resulted in the 120 month Estimated Remaining
Collections ('ERC'), a measure of future expected cash flows, on
acquired consumer assets falling to GBP245.2 million at 30
September 2021 (2020: GBP313.7 million).
Arrears on the segment's secured lending business have risen to
24.3% (2020: 18.8%). These arrears levels remain higher than the
average for the sector, but this reflects the seasoning of the
balances, while the continuing upward trend reflects the redemption
of performing accounts. This book contains a significant number of
accounts which are currently making full monthly payments but had
missed payments at some point in the past, inflating the arrears
rate. Average arrears for secured lending of 8.6% at 30 September
2021 were reported by the FLA (2020: 8.4%).
Of the division's live secured lending accounts at 30 September
2021, 1,270 cases (14.1%) had been granted payment holidays during
the course of the pandemic with 578 (6.4% of cases) of those
holidays extended. In the motor finance portfolio 463 live cases
(15.6%) had received a payment holiday with 136 (4.6%) having been
extended. No payment holidays remained in place at the year
end.
None of the live Idem Capital loan portfolios were regarded as
materially underperforming at the year end, with cash generation
continuing to hold up. The Group monitors actual cash receipts from
acquired portfolios against those forecast in the pre-purchase
evaluation of the portfolio. Up to 30 September 2021 these
collections were 109.8% of those forecast to that point (2020:
109.8%).
The Group continues to invest in systems and people to ensure
that Idem Capital customers receive an efficient and effective
service which delivers fair outcomes. Given the nature of the
books, particular attention is given to providing training and
establishing processes to ensure that vulnerable customers are
identified, and their needs are addressed.
Outlook
The Group's strategy for the Idem Capital business is to
consider only those opportunities which would enhance its overall
positioning, provide attractive returns and represent a productive
use of capital. These will be essentially opportunistic, and there
is no volume target.
In the meantime, the division will continue to focus on its
commitment to providing appropriate outcomes for its existing
customers as it has done throughout the Covid pandemic and ensuring
any vulnerability issues are carefully addressed.
2 FUNDING
The Group is principally funded by retail deposits but also
accesses a variety of other funding sources. This maintains an
adaptable and sustainable funding position as the business and its
operating environment develop. The Group is therefore able to
access cost-effective funding despite issues in any particular
funding market, as well as raising funding for strategic
initiatives on a timely basis.
Throughout the period the Group raised the majority of its new
funding through the retail deposit market, where demand for deposit
products has remained strong, with consumers trending towards
saving rather than spending in the year, either through increased
prudence or merely through the reduction in 'big-ticket' spending
opportunities caused by lockdowns and other Covid-related measures.
It has also continued to draw on the Bank of England TFSME scheme
to support its lending to SME customers.
The Group's funding at 30 September 2021 is summarised as
follows:
2021 2020 2019
GBPm GBPm GBPm
Retail deposit balances 9,300.4 7,856.6 6,391.9
Securitised and warehouse funding 1,246.0 3,928.3 5,206.9
Central bank facilities 2,819.0 1,854.4 994.4
Tier 2 and retail bonds 386.1 446.6 446.1
--------- --------- ---------
Total on balance sheet funding 13,751.5 14,085.9 13,039.3
Off balance sheet central bank facilities - - 109.0
Other off balance sheet liquidity facilities 150.0 150.0 -
--------- --------- ---------
13,901.5 14,235.9 13,148.3
--------- --------- ---------
The Group's retail deposit balance grew by 18.4% in the year to
GBP9,300.4 million (2020: GBP7,856.6 million), representing over
two thirds (67.6%) of balance sheet funding (2020: 55.8%), with
wholesale borrowings continuing to reduce over the year.
At 30 September 2021 the proportion of easy access deposits,
which are repayable on demand, was 24.1% of total on-balance sheet
funding (2020: 16.8%). This increase is partly a result of market
sentiment with savers reluctant to commit funds to term deposits in
a low rate environment, and partly as a result of the Group's
maturing liquidity policy. This percentage remains low compared to
the rest of the banking sector and can be expected to rise going
forward.
With the generally uncertain economic outlook, the Group has
maintained a cautious approach to liquidity in the period. Some
loosening of policy took place in the period in response to the
gradual opening up of the UK economy, but at the end of the year
the Group still had GBP1,236.5 million of cash available for
liquidity and other purposes (2020: GBP1,701.1 million). The
Group's contingent liquidity policy will be kept under review as
the ultimate outcome of the Covid crisis becomes clearer and
longer-term trends become more evident, but the Group intends to
maintain a conservative approach.
The Group's long-term funding strategy, following the granting
of its banking licence in 2014, has been to move to using retail
deposits as its primary funding source, using the debt markets on
an opportunistic basis for additional funding requirements.
The Group's response to the withdrawal of LIBOR, due at the end
of the calendar year, is well progressed. While LIBOR had been the
principal benchmark rate used by the Group, a transition to other,
risk-free rates, notably rates linked to SONIA, has been ongoing
for more than two years.
No new LIBOR-linked derivative contracts have been entered into
since February 2020 and remaining LIBOR-linked derivatives will
transition to SONIA in accordance with the International Swaps and
Derivatives Association ('ISDA') protocol. Meanwhile, all the
Group's LIBOR-linked borrowings have either been retired,
transitioned or have an agreed transition process in place.
A transition process for the Group's principal LIBOR-linked
asset class, legacy buy-to-let mortgages, was communicated to
customers and completed in the second half of the year. Other
LIBOR-linked assets have either been transitioned, have an agreed
transition methodology or are expected to fall due before the LIBOR
transition data. Overall, the Group considers that it is well
placed to meet the withdrawal deadline of 31 December 2021.
2.1 RETAIL FUNDING
The Group considers the retail deposit market to be a reliable,
scalable and cost-effective source of funding, which has remained
fully functional throughout the Covid crisis. The Group's offering
has been centred on sterling household deposits, although it began
to access the SME sterling deposit market in the year.
A variety of products are offered, including term deposits, ISAs
and easy access accounts and accesses the market through a variety
of in-house and external channels. The proposition is based on
competitive rates and value for money, combined with the Group's
strong customer service ethic and the protection provided to
depositors by the Financial Services Compensation Scheme
('FSCS').
The retail deposit market in the UK is large, deep and well
developed. During the year UK household savings balances reported
by the Bank of England continued to increase with balances at 30
September 2021 reaching GBP1,402.5 billion (2020: GBP1,287.9
billion), an increase of 8.9% in the year. This has resulted from
increased saving by consumers during the pandemic and has also
depressed market interest rates. Some of this increase may be
reversed as the UK economy returns to a more normal footing, but as
a small participant the Group is less likely to be affected by this
than larger banks and building societies.
The Group's retail deposit franchise has continued to perform
strongly in the year with a reduced funding cost, reflecting the
improvements, increased channels to market and downward market
pressures on rates.
Savings accounts at the financial year end are analysed
below.
Average interest rate Proportion of deposits
2021 2020 2021 2020
% % % %
Fixed rate deposits 1.25% 1.69% 58.8% 63.3%
Variable rate deposits 0.42% 0.72% 41.2% 36.7%
----------- ----------- ------------ -----------
All balances 0.91% 1.34% 100.0% 100.0%
----------- ----------- ------------ -----------
The average initial term of fixed rate deposits was 26 months
(2020: 27 months). Market savings rates in the year have remained
at historically low levels, with the Bank of England quoting
average interest rates at 30 September 2021 for new 2-year fixed
rate deposits at 0.46% (2020: 0.48%) and for instant access
balances at 0.10% (2020: 0.07%).
During the year the Group has grown its business both through a
focus on its in-house channel and through expanding its offering
across other third party platforms. Significant infrastructure
investment in the Group's new Mambu platform has enabled the number
of external channels where the Group has a presence to be expanded
while embedding a strong control environment, providing an
effective and efficient service and offering future digital
optionality.
Offerings through these channels, which include investment
platforms and savings marketplaces operated by digital banks,
provide access to a different customer demographic to the Group's
mainstream customers. This more diversified sourcing offers
enhanced opportunities to manage inflows and costs. The Group has
added three new relationships in the period, including one with
Aviva Savings, bringing the total to seven. These channels now
represent around 12% of the total deposit base and the system
investment in the year gives the Group capacity to expand further
in this area.
The Group regards the quality of its customer service as a vital
component of its savings market strategy and conducts insight
surveys throughout the customer journey. In this research 88% of
customers opening a savings account with the Group in the year who
provided data, stated that they would 'probably' or 'definitely'
take a second product (2020: 88%). The NPS in the same survey was
+58, similar to that in the previous year (2020: +61).
When customers with maturing savings balances in the year were
surveyed, 89% stated that they would 'probably' or 'definitely'
consider taking out a replacement product with the Group (2020:
90%) with a NPS at maturity of +52, slightly increased from the
2020 financial year (2020: +50).
These positive responses demonstrate the quality of the Group's
customer interaction operations, which support its efforts to
retain customers and deposits in the current active and competitive
market. This has been enhanced in the year with additional
functionality on the Group's website, such as automated password
rests, introduced in response to customer feedback.
This level of customer satisfaction is also demonstrated by the
Group's continuing success in industry awards. During the year
awards won included 'Best Internet Account Provider' at the 2021
Moneyfacts Awards, 'Best Cash ISA Provider' at the 2021 YourMoney
awards, 'ISA Provider of the Year' at the 2020 MoneyAge awards,
'Best Notice Savings Provider' at the 2021 Moneynet awards, 'Best
Easy Access Savings Provider' and 'Best Easy Access Cash ISA
Provider' in the MoneyComms 2021 Top Performers list and 'Best Cash
ISA Provider' in the 2021 Savings Champion Awards.
Both aspects of the Group's savings infrastructure, its
outsourced deposit administration system and its infrastructure
supporting external savings platforms, continue to provide a solid
and scalable operating model for the business. Service standards
and customer satisfaction have been maintained despite the effects
of ongoing Covid restrictions, and servicing resources have
continued to develop with the business.
The retail deposit funding stream provides a stable principal
funding base for the Group's operations where volumes and rates can
be effectively and flexibly managed. The operation will continue to
develop on a strategic basis, expanding its offerings, addressing
wider demographics and expanding its presence on third party
platforms. This increasing diversification and the FSCS guarantee
are likely to reduce the potential for liquidity impacts and the
Group's profiling of its target customers suggests they may be more
resilient than average in the event of future economic
stresses.
2.2 CENTRAL BANK FACILITIES
The Bank of England Term Funding scheme for SMEs ('TFSME')
continued to be available throughout the year to support lenders in
providing credit to SME customers through the Covid pandemic. The
Group has continued to draw on these funds to support its lending,
particularly in its SME lending and development finance
businesses.
During the year the Group's drawings under TFSME increased to
GBP2,750.0 million (2020: GBP910.0 million). As TFSME provides
funding at or very close to base rate, it is a particularly
cost-effective form of borrowing for lenders which, like the Group,
wish to support their SME customers through the economic
uncertainties of the pandemic. Shortly after the year end the Group
repaid and redrew all of its TFSME borrowings, extending the
maturities.
Drawings under the Bank of England's original Term Funding
Scheme ('TFS') which were due to mature in the current financial
year began to be retired early during the period, improving the
maturity profile of the Group's borrowings. At 30 September 2021
the remaining TFS borrowings provide GBP69.0 million of the Group's
funding (2020: GBP944.4 million), but will be repaid in the early
part of the new financial year. The Group retains access to other
Bank of England funding channels but did not utilise them in the
year.
The Group expects to continue to make use of these facilities
going forward, in accordance with the objectives of the schemes.
Where using them is appropriate and cost-effective, mortgage loans
pre-positioned with the Bank of England are available to act as
collateral for future drawings, if and when required. This provides
access to potential liquidity or funding of up to GBP1,424.2
million (2020: GBP684.0 million).
2.3 WHOLESALE FUNDING
The Group's wholesale funding includes securitisation funding,
warehouse bank debt and retail and Tier--2 corporate bonds, which
are each accessed from time to time as appropriate. The Group's
Long-Term Issuer Default Rating was affirmed at BBB by Fitch in
March 2021, with the outlook upgraded from negative to stable,
reversing the change which was applied to all the major UK banks
during 2020 as a result of the Covid crisis.
During the year capital markets remained active, with activity
in most areas of funding. The securitisation markets remained open,
but with most volume driven by those lenders without access to
central bank facilities.
Wholesale pricing has been attractive for issuers, with strong
demand for new issuance. Against this backdrop the Group issued a
GBP150.0 million Tier-2 Green Bond in March 2021. This was the
first issuance certified under the Group's Green Bond Framework,
approved in March 2021, which sets out how the proceeds of the bond
will be applied, and which is available on the Group's website at
www.paragonbankinggroup.co.uk.
The new bond carries an interest rate of 4.375%, fixed for five
years, and will count in full towards tier 2 capital for a five
year period. It was rated BB+ by Fitch on issue. This interest rate
represents a considerable saving on the Group's previous Tier-2
bond, issued in 2016, which bore interest at 7.25% per annum.
The majority of the Group's GBP150.0 million 2016 Tier-2 Bond
was acquired by the Group in a tender process during March 2021.
The remainder was redeemed at the call date in September 2021.
These bond transactions reduce overall funding costs and place
the Group's tier 2 capital position on a longer-term footing, as
well as accessing the green bond market.
Historically the Group has been one of the principal issuers of
UK residential mortgage backed securities ('RMBS'), however its
reliance on this funding source has been significantly reduced over
recent years, with the most recent issuance held internally rather
than issued in the market.
The Group's four mature legacy securitisation transactions were
refinanced during the period. An agreement was also reached in the
period to transition the only other LIBOR-linked deal, Paragon
Mortgages (No. 25) PLC, from its interest payment date in February
2022. These transactions benefit the Group's overall long-term
funding position by releasing cash collateral; removing
LIBOR-linked liabilities ahead of transition; crystallising
derivative positions, thereby reducing the Group's TRE for capital
purposes; and releasing loan assets for use in creating eligible
securities which can be used to access TFSME and other forms of
funding.
A fully-retained securitisation transaction, Paragon Mortgages
(No. 28) PLC, was completed in the year. In this transaction
GBP703.1 million of rated notes were issued to group companies, to
be used as collateral in other funding transactions, such as TFSME.
This repeats the structure of Paragon Mortgages (No. 27) PLC,
issued in 2020.
The Group renegotiated its GBP400.0 million warehouse funding
facility during the period reducing the interest margin from 1.05%
above LIBOR to 0.60% above LIBOR. This facility is used to provide
standby capability, particularly in the event of market disruption
elsewhere, where funds need to be deployed rapidly or as an
alternative to retail deposit funding for liquidity purposes. After
the year end this facility was extended to GBP450.0 million and the
interest rate was transitioned to 0.50% over SONIA. These changes
will make this funding more cost effective and practical going
forward.
The Group's retail bond issued in 2013 was repaid at maturity in
December 2020. The Group also entered into sale and repurchase
transactions from time to time, to ensure it retains access to this
channel for liquidity purposes.
Overall, these initiatives reduced the Group's dependency on
legacy securitisation debt, lowered funding costs, facilitated
LIBOR transition, and increased average remaining maturities for
its other borrowings. This demonstrates the adaptability of the
Group's wholesale funding activities and the Group will continue to
access all these funding sources on a strategic and opportunistic
basis as appropriate.
2.4 FUNDING OUTLOOK
The year has seen growth in the Group's savings franchise, while
the tenor of its wholesale and central bank borrowings has been
extended, with the average cost of funding reduced and the green
finance market accessed for the first time.
This has been consistent with the Group's funding strategy,
developing and enhancing its access to funding sources while
maintaining its principal focus on the retail savings market. The
Group is well placed to maintain this diverse, robust and adaptable
strategy going forward, which will support the needs of its
developing business into the future.
Further information on all the above borrowings is given in note
15
3 CAPITAL
The Group's capital policy is designed to provide appropriate
returns to shareholders, preserve the strength of its balance
sheet, maintain strong regulatory capital and liquidity positions
to safeguard its depositors and to ensure sufficient capital is
available to meet strategic objectives in opportunities going
forward. The safeguarding of this capital strength has been a
fundamental objective of the Group's ongoing Covid response.
This enabled the Group to return to a more normal approach to
capital and distributions in the year ended 30 September 2021, with
an interim dividend declared and share buy-backs undertaken. The
Group's position was also enhanced by a favourable result from the
most recent regulatory review of its capital position, which
reduced its requirement to hold regulatory capital.
For regulatory purposes the Group's capital comprises
shareholders' equity and its Tier-2 green bond. It has no
outstanding Additional Tier 1 ('AT1') issuance, but has the
capacity to issue such securities, if considered appropriate, under
an authority granted by shareholders at the 2021 Annual General
Meeting ('AGM'), which will be proposed for renewal at the 2022
meeting.
3.1 REGULATORY CAPITAL
The Group continued to maintain strong regulatory capital ratios
throughout the year, with capital balances having grown as a result
of its prudent approach to capital management through the Covid
pandemic. During the period the PRA conducted a supervisory review
of the Group's capital requirements, based on the Internal Capital
Adequacy Assessment Process ('ICAAP') analysis. The results of this
review were very positive, with the regulator significantly
reducing its capital requirement based on its assessment of the
Group's risk exposures and management systems.
The Group is subject to supervision by the Prudential Regulation
Authority ('PRA') on a consolidated basis, as a group containing an
authorised bank. As part of this supervision, the regulator will
issue a Total Capital Requirement ('TCR') setting an amount of
regulatory capital, defined under the international Basel III
rules, currently implemented through the EU Capital Requirements
Regulation and Directive regime ('CRD IV'), which was transposed to
the PRA Rulebook as part of the Brexit arrangements.
The TCR includes elements determined based on the Group's total
risk exposure together with fixed elements, and is held in order to
safeguard depositors in the event of severe losses being incurred
by the Group.
As a matter of strategy, the Group maintains strong capital and
leverage ratios. It was granted transitional relief on the adoption
of IFRS 9, along with most other banks, with additional relief
granted in 2020 for the impact on capital of provisions created in
response to the Covid pandemic.
The PRA requires firms to disclose capital measures both on the
regulatory basis and as if these reliefs had not been given,
referred to as the 'fully loaded' basis. The Group's principal
capital measures, CET1 and Total Regulatory Capital ('TRC') are set
out below on both bases.
Regulatory basis Fully loaded
basis
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Capital
CET1 capital 1,055.8 991.2 1,026.1 948.9
Total Regulatory Capital
('TRC') 1,205.8 1,141.2 1,176.1 1,098.9
Requirement
TCR 604.2 749.6 601.8 745.3
As the value of IFRS 9 reliefs will taper over time, the
difference between measures on the regulatory and fully loaded
bases will narrow and eventually converge.
The Group's CET1 capital comprises its equity shareholders'
funds, adjusted as required by the CRD IV rules and can be used for
all capital purposes. TRC, in addition, includes tier-2 capital
representing the Tier 2 Bonds. This tier 2 capital can be used to
meet up to 25% of the Group's TCR. The increase in capital over the
year is a result of the positive trading performance, which
outweighed the impact of dividend payments and share buy-backs in
the period.
The TCR is specific to the Group and is set by the regulator,
based on its supervisory reviews. The reduction in TCR on both the
regulatory and fully loaded bases shown above has arisen
principally as a result of the successful outcome of the most
recent review process.
This saw the TCR on both bases reduced to 8.9% of TRE from 10.8%
of TRE at 30 September 2020, compared to the minimum TCR allowed
under the Basel III framework of 8.0%. This represents a
significant benefit to the Group's capital management and reflects
the maturity of the Group's systems for the management of capital
and risk.
CET1 capital must also cover the CRD IV buffers, the
Counter-Cyclical ('CCyB') and Capital Conservation ('CCoB')
buffers. These apply to all firms and are based on a percentage of
total risk exposure. The CCoB remained at 2.5%, its long-term rate,
throughout the year (2020: 2.5%), while the UK CCyB remained at
0.0% (2020: 0.0%), having been reduced from 1.0% during 2020 as a
regulatory response to the pandemic. However, it has been stated by
the Financial Policy Committee of the Bank of England that the
long-term standard rate of the CCyB will be 2.0% and this
requirement for additional capital in the future has been factored
into the Group's capital planning.
CET1 capital required to cover CRD IV buffers therefore reduced
to GBP170.9 million at the year end on the regulatory basis (2020:
GBP173.7 million).
Further buffers may be set by the PRA on a firm-by-firm basis
but cannot be disclosed.
The Group's capital ratios, after allowing for the proposed
dividend for the year, are set out below.
Basic Fully loaded
2021 2020 2021 2020
CET1 ratio 15.4% 14.3% 15.1% 13.7%
Total capital ratio 17.6% 16.4% 17.3% 15.9%
UK leverage ratio 7.5% 7.1% 7.3% 6.8%
All of the Group's capital ratios show strong improvement over
the period, despite the resumption of distributions to
shareholders. This reflects the trading profits, including a
reduction in Covid-based impairment provisions, a gain on the
pension scheme liability and reductions in risk weighted asset
values following the repackaging of legacy securitisations.
The Basel Committee on Banking Supervision ('BCBS') has set the
implementation date for its revisions to the Basel III framework as
1 January 2023. This is, however, subject to those revisions being
enacted in the relevant jurisdiction. Following the UK's exit from
the EU, these rules are expected to be enacted for UK banks through
the PRA Rulebook. The PRA has also launched a more extensive
consultation on its approach to regulating non-systemically
important banks without international activities. The Group is
monitoring these developments and will respond through its capital
planning as appropriate.
The Group submitted the second stage of its application for the
accreditation of its IRB approach to buy-to-let credit risk for
capital adequacy purposes to the PRA in March 2021. The project
continues to progress to plan, and work continues into the new
financial year on both the buy-to-let portfolio and on development
finance lending, which represents the next step in the Group's IRB
roadmap.
3.2 LIQUIDITY
It is Group policy to hold sufficient liquidity in the business
to meet cash requirements in the short and long term, as well as to
provide a buffer under stress. There is also a regulatory
requirement to hold liquidity in Paragon Bank. This policy has a
consequent effect on the Group's operational capital and funding
requirements.
The Board regularly reviews liquidity risk appetite and closely
monitors a number of key internal and external measures. The most
significant of these, which are calculated for the Paragon Bank
regulatory group on a basis which is standardised across the
banking industry, are the Liquidity Coverage Ratio ('LCR') and Net
Stable Funding Ratio ('NSFR').
The LCR measures short-term resilience and compares available
highly liquid assets to forecast short-term outflows, calculated
according to a prescribed formula, with a 30 day horizon. The
monthly average of the Bank's LCR for the period was 165.6%
compared to 173.7% during the 2020 financial year. The reduction is
a liquidity policy response to the reduction in Covid-related
impacts to the business and in the wider economy.
The NSFR is a longer-term measure of liquidity with a one year
horizon, supporting the management of balance sheet maturities. At
30 September 2021 the Bank's NSFR stood at 119.6% (30 September
2020: 114.7%), reflecting the strengthening of the overall funding
and capital position over the year.
3.3 DIVIDS AND DISTRIBUTION POLICY
The Group's distribution policy over recent years has been based
on the objective of enhancing shareholder returns on a sustainable
basis, while protecting the capital base. In order to achieve this,
its stated policy has been to distribute 40% of consolidated
earnings to shareholders in ordinary circumstances, achieving a
dividend cover ratio of approximately 2.5 times. It has also
undertaken buy-backs of shares in the market from time to time as
part of its management of overall capital, where these enhance
shareholder value.
The Group managed its capital cautiously through the pandemic
and accumulated a capital and cash surplus over its requirements,
including its regulatory requirements, to the level that it was
considered appropriate to resume distributions to its shareholders,
both in the form of dividends, and in a share buy-back, addressing
the needs of different investor groups.
An interim dividend for the year of 7.2 pence per share (2020:
nil pence per share) was paid in July 2021 and the Board is
proposing, subject to approval at the AGM on 2 March 2022, a final
dividend for the year of 18.9 pence per share (2020: 14.4p per
share). This would give a total dividend of 26.1 pence per share
(2020: 14.4p per share). This dividend would be in line with the
stated policy, giving a dividend cover of 2.50 times (2020: 2.50
times).
The 81.3% increase in total dividend from 2021 reflects the
increase in group earnings, including the impact of Covid-related
impairment provisions made in 2020 reversing in the current year,
which effectively deferred dividend to 2021. The 2021 dividend is
also inflated by the high level of fair value gains in the year,
which would not necessarily be repeated in a future year. Care must
therefore be taken in extrapolating future dividend levels from the
current year dividend alone.
The directors have considered the distributable reserves and
available resources of the Company and concluded that such the
proposed dividend is appropriate.
In addition, the Board authorised a buy-back of up to GBP40.0
million of shares in the market, initially to be held in treasury.
The Group has the authority to make such purchases under a
resolution approved by shareholders at the AGM in February 2021.
GBP37.5 million (excluding costs) was expended during the year on
the buy-back programme, and it is the Board's intention to complete
the programme following the announcement of the annual results.
As part of its review of the Group's capital and dividend policy
following the completion of its annual results and the financial
forecasts for the coming period, the Board concluded that a further
buy-back programme of up the GBP50.0 million, initially to be held
in treasury, was appropriate, and this will commence following the
completion of the initial GBP40.0 million. In this way, the Group
seeks to balance the expectations of different investor groups,
while maintaining a strong capital position.
Any purchases made under either of these programmes will be
announced through the Regulatory News Service ('RNS') of the London
Stock Exchange on the day of the transaction.
The Board has affirmed the existing dividend policy going
forward, subject to an assessment of prevailing conditions at the
time, but noted that, given the unusual factors affecting the 2021
distribution, any interim dividend declared for 2022 would not
necessarily bear the normal relation to the preceding final
distribution.
3.4 CAPITAL OUTLOOK
The Group's current and forecast capital position is kept under
regular review, in light of the level and form of capital demanded
by current business, regulatory and economic conditions, as well as
the Group's strategic objectives.
The capital and liquidity position of the Group had strengthened
through the year. The Group's operations increased the capital
balance, the Tier-2 issuance has been replaced at a lower cost and
the positive result of the regulatory review of the Group's capital
management systems has resulted in a lowering of the minimum
capital requirement.
The Group ends the year well capitalised, even after the
resumption of distributions to shareholders in the form of
dividends and buy-backs, and allowing for the return of CCyB
requirements and withdrawal of IFRS 9 reliefs in the longer term.
This position is both prudent and sustainable and helps ensure the
viability of the business for the benefit of all stakeholders.
4 FINANCIAL RESULTS
The Group's trading performance before impairment charges in the
year ended 30 September 2021 highlights the level of progress
towards its strategic objectives, in spite of the impact of the
Covid pandemic on the UK economy and the necessary steps taken to
address this. Income and margins both increased, generally in line
with expectations.
As the UK economy began to open up towards the end of the year,
and the level of the effectiveness of the UK's vaccination
programme became evident, the assumptions underlying the Group's
impairment provisioning were revisited, resulting in a release of
provision. However the Group remains well provided in the face of
what remains an uncertain economic outlook.
These factors leave the Group's results significantly improved,
year-on-year, with underlying profit (Appendix A) for the year, at
GBP194.2 million, 61.8% higher than for the preceding twelve months
(2020: GBP120.0 million), with a provision release of GBP4.7
million (2020: charge of GBP48.3 million), unwinding some of the
previous year's Covid-related impacts. On the statutory basis,
which also includes the impact of fair value gains on hedging,
profit before tax increased 80.5% to GBP213.7 million, the largest
pre-tax profit the Group has ever recorded (2020: GBP118.4
million).
Earnings per share increased by 81.1% to 65.2 pence (2020: 36.0
pence) on the statutory basis, and by 62.5% to 59.3 pence excluding
the effect of the fair value gains (2020: 36.5 pence) (Appendix
A).
4.1 CONSOLIDATED RESULTS
CONSOLIDATED RESULTS
For the year ended 30 September 2021
2021 2020
GBPm GBPm
Interest receivable 484.2 491.7
Interest payable and similar charges (173.7) (213.6)
-------- --------
Net interest income 310.5 278.1
Net leasing income 3.5 3.0
Other income 10.9 14.0
-------- --------
Total operating income 324.9 295.1
Operating expenses (135.4) (126.8)
Provisions for losses 4.7 (48.3)
-------- --------
194.2 120.0
Fair value net gains / (losses) 19.5 (1.6)
-------- --------
Operating profit being profit on
ordinary activities before taxation 213.7 118.4
Tax charge on profit on ordinary
activities (49.2) (27.1)
-------- --------
Profit on ordinary activities after
taxation 164.5 91.3
-------- --------
2021 2020
Dividend - rate per share for the
year 26.1p 14.4p
Basic earnings per share 65.2p 36.0p
Diluted earnings per share 63.0p 35.6p
-------- --------
Income
The Group's total operating income in the year increased by
10.1% to GBP324.9 million (2020: GBP295.1 million). Net interest
income increased in the year by 11.7% to GBP310.5 million (2020:
GBP278.1 million). Part of this increase was a result of growth in
the average loan book in the year, 4.9% higher at GBP13,017.0
million (2020: GBP12,408.7 million) (Appendix B), but the business
also generated a 15 basis point increase in net interest margin
('NIM') for the year.
NIM in the year ended 30 September 2021 was 239 basis points
(2020: 224 basis points) (Appendix B). Each of the Group's segments
showed improved NIM in the period as a result of yield management
activities in the business areas, coupled with tighter funding
costs. Excluding the impact of the declining Idem Capital business,
NIM increased by 19 basis points, from 209 basis points in 2020, to
228 basis points in the current year.
The progression of the Group's NIM, including and excluding the
Idem Capital division, over the past five years is set out
below.
Total Excluding
Idem Capital
Basis points Basis points
Year ended 30 September
2021 239 228
2020 224 209
2019 229 192
2018 219 153
2017 213 141
------------- --------------
Other operating income was GBP14.4 million for the year, with
the reduction from the GBP17.0 million reported in 2020 principally
representing a reduction in income from non-core servicing
contracts.
Costs
The Group's operating expenses for the year were GBP135.4
million, increasing by 6.8% year-on-year (2020: GBP126.8 million).
The majority of the increase is attributable to charges for
share-based payments (including related National Insurance 'NI'
provision) which increased by GBP8.7 million, following a low
charge in 2020 when Covid impacted on vesting expectations and
depressed the Group's share price, on which the NI provision
calculation is based.
The Group's average number of employees increased to 1,426 for
the period, an increase of 2.9% over 2020 (2020: 1,385), generating
an increase in non-share-based employment costs of 3.0%.
Costs unrelated to employment reduced in the year. The
administration cost of the Group's outsourced savings deposits is
determined by reference to the balance outstanding and increased by
GBP0.5 million in the year, as a result of the 18.4% year-on-year
growth in the Group's savings balance. These increases were offset
by reductions in other areas, including travel and accommodation
and office running costs, which reflect the direct impacts of the
pandemic and of the associated lockdowns through much of the
year.
Despite the impact of Covid, the Group has continued to invest
in the development of systems to improve customer service and
operational efficiency. Significant improvements were delivered to
capabilities in the retail deposit business and new functionality
was introduced to the SME lending business.
Much of the Group's IT systems and infrastructure development is
carried out by its experienced in-house resource, and the Group has
therefore tended to capitalise less software than might be seen
elsewhere in the sector, with more costs being taken immediately to
profit. During the period GBP0.7 million of software was
capitalised (2020: GBP1.0 million).
The Group's IRB project made further progress through the
period, with the second stage of the application for buy-to-let
submitted in March 2021. Costs for the year include expenditure of
around GBP1.3 million on this project, relating to both internal
resources and external advice.
The progress of the Group's cost:income ratio over the last five
years is set out below.
Underlying Idem excluded Statutory
% % %
Year ended 30 September
2021 41.7 42.8 41.7
2020 43.0 44.9 43.0
2019 42.1 48.5 40.7
2018 40.6 54.2 37.8
2017 40.5 55.6 40.5
----------- -------------- ----------
Cost:income reduced in the year as a result of income rising
faster than costs, as described above.
The Group considers that the ongoing management of costs is key
to the achievement of its operational strategy and seeks to enhance
cost-effectiveness from efficiencies and scale, with targeted
investment in people and systems. However, the costs of these
investments, coupled with new business initiatives and increasing
regulatory expectations mean that the achievement of a sustainably
lower ratio is a longer-term goal.
Impairment provisions
The Group's Expected Credit Loss ('ECL') evaluation at the year
end has resulted in a net release of impairment provision for the
year of GBP4.7 million (2020: charge of GBP48.3 million). This
movement arises from a careful consideration of the factors
impacting the Group's loan portfolio, including the progress and
impact of the Covid pandemic, both generally and on particular
customers, and requires a significant exercise of judgment.
The progress of the impairment charge and cost of risk in the
three years since the introduction of IFRS 9 in 2019 is set out
below.
(Release) Cost of
/ charge risk
GBPm %
Year ended 30 September
2021 (4.7) (0.04)
2020 48.3 0.39
2019 8.0 0.07
---------- --------
The high level of provisions in 2020 arose as the initial impact
of the Covid pandemic was recognised, attempting to represent a
weighted average expected loss based on many plausible outcomes of
significantly varying severity. This exercise was skewed by the
natural asymmetry of provision for secured lending - increased
stress will, on average, increase loss more than decreased stress
reduces it.
The ongoing development of the pandemic since 30 September 2020
has differed, to a greater or lesser degree, from the scenarios
advanced by commentators at the year end, but has generally been
more benign, particularly following the rollout of the UK
vaccination programme.
To date, little of the provision established at the previous
year end has been utilised in writing off defaulted accounts, nor
have arrears or enforcement actions generally seen significant
increases. However, credit issues, some significant, have been
identified with a small number of customers and the Group remains
cautious on the future prospects of those loans for which provision
is being carried. Support schemes from the UK Government, including
furlough support to households and businesses, remain in place and,
as at 30 September 2021, levels of CBILS and BBLS loans where
customers have so far been required to make repayments have been
low. This means that significant uncertainty as to the future
behaviour of both directly and indirectly supported customers still
exists.
At 30 September 2021, therefore, the Group had to consider
whether sufficient hard evidence of both customer performance and a
sustainable improvement in UK macro-economic conditions was
available to justify a reduction in provision levels, and whether
factors existed that suggested that its statistical impairment
models might not be able to fully interpret current economic
conditions.
Payment holidays and outcomes
The Group offered payment relief to a significant number of its
customers during the initial period of the pandemic. Most of these
came to an end before the previous year end on 30 September 2020,
but some continued into the current financial year. By 30 September
2021, the number of the Group's customers remaining on these
arrangements was minimal, with the requirement to make monthly
payment arrangements back in place.
The post-relief behaviour in the Group's principal class,
buy-to-let mortgages, at 31 October 2021 is summarised in the table
below. This highlights, separately for accounts which did not
receive payment holidays, those which received a single three month
relief and those which had extended relief, the relative change
between the October 2021 arrears position and the 29 February 2020,
pre-Covid position.
No relief Single relief only Extended relief Total
------------ -------------------
GBP billion GBP billion GBP billion GBPbillion
Balance 9.24 1.39 0.74 11.37
Proportion 81.2% 12.2% 6.6% 100.0%
% with arrears deterioration 0.3% 0.8% 5.2% 0.7%
% with arrears improvement 0.4% 0.9% 7.1% 0.9%
------------ ------------------- ---------------- -----------
Payment holiday status (31 October 2021)
Whilst the overwhelming majority of accounts which had been
granted relief have since returned to a fully paying status, there
has been materially more arrears volatility amongst those loans
where extensions were granted, both worsening and improving. This
generally increased level of volatility for the portfolio has
resulted in management identifying such accounts as, on the whole,
riskier than average and transferring accounts with extended
payment holidays from Stage 1 to Stage 2 for impairment
purposes.
Performance across the books has been generally strong, with
arrears metrics and loss experience broadly in line with
pre-pandemic experience, while external credit measures, such as
credit bureau information have also remained positive. However, due
to government interventions and lender forbearance across the
sector, it is unclear whether these measures are fully
representative of underlying credit quality.
From the Group's customer surveys and interactions with its
customers it is clear that while many customers may have taken
payment reliefs for precautionary reasons, these accounts may have
been able to perform due to external support. Examples of this
might include tenants of buy-to-let landlords accessing furlough
payments to meet rent demands and SME customers using drawings
under CBILS and BBLS schemes to meet day-to-day payments. These
reliefs would still have an impact at the end of the financial
year, but have a limited time scale and the current level of
performance may not be fully representative of the true underlying
credit position.
As a result, management have maintained the approach of
critically assessing the outputs of business-as-usual provisioning
methodologies to ensure all elements of credit quality in the
portfolio are adequately addressed. This approach has been taken
throughout the Covid crisis and has resulted in substantial
overlays to model outputs.
Multiple economic scenarios and impacts
While there is somewhat more consensus on the likely direction
than at the previous year end, the setting of economic scenarios
for the purposes of IFRS 9 remains complex. The broad thrust of
economic data for the UK over the past six months has been
positive, but this has been in a period where government
interventions have continued and there is continuing uncertainty
over the direction the economy will take once these begin to be
withdrawn, with potentially radically different medium term
outcomes.
The approach to setting economic scenarios for IFRS 9 impairment
at 30 September 2021 is broadly aligned to that used at the half
year. The Group has adopted a two-part approach
-- the three main scenarios, central, upside and downside, were
derived as they would be at a 'normal' year end with the central
scenario based on public forecasts and the upside and downside
scenarios more benign or severe variants of this. This follows the
general sentiment towards the UK economy, assuming a continuation
of the easing of Covid restrictions and no significant impact from
a new wave of infections.
-- The severe scenario has been set to represent a potential
negative outturn, either for the economy, for the pandemic, or for
both. This is largely based on the Bank of England's stress testing
scenarios, but with a less optimistic outlook on house prices, the
variable which has the most significant impact on the value of the
Group's ECLs. This scenario models a radically different future
course for the UK, which is plausible and potentially has a very
different impact on the Group's customers.
The weightings applied to each scenario have been held at those
used at both 30 September 2020 and 31 March 2021, in the light of
the continuing economic uncertainty described above. The forecast
economic assumptions within each scenario, and the weightings
applied, are set out in more detail in note 11.
To illustrate the impact of these scenarios, the impairment
provision at 30 September 2021 before post--model adjustments
('PMA's) has been recalculated, weighting each of the central
scenario and the severe scenario at 100%, with the results shown
below.
Provision before Cover ratio
PMAs
GBPm
Weighted average 46.0 0.34%
----------------- ------------
Central scenario 33.3 0.25%
----------------- ------------
Severe scenario 86.7 0.64%
----------------- ------------
The level of provisions calculated by the Group's models are
lower than might be expected, given the economic conditions. The
Group has therefore considered the extent to which this is due to
weaknesses in the modelling approach, and should be corrected by
PMAs.
Post-model adjustments
It is important to note that the impairment model focusses
principally on the impact of future economic changes on the
portfolio. Where accounts are currently only being kept from
defaulting by external short-term support measures they may still
default when these are removed, despite an improved economic
climate. The models may also fail to fully allow for longer-term
damage caused to particular industries or customers' businesses by
the pandemic.
It is also clear that positive movements in economic indicators
such as house prices, unemployment and UK Gross Domestic Product
('GDP'), both in actual and forecast terms have had a positive
impact on the modelled outputs for cases benefitting from support
measures without any broader evidence of improvement in the
underlying credit quality of the customer balances being
available.
Therefore the Group applies PMAs, based on its experience and
its understanding of current customer positions, to allow for the
potential for losses in such cases not being identified by the
modelling approach.
In order to size the requirement for PMAs across the loan book
the Group has considered, on a portfolio-by-portfolio basis the
extent to which modelled provisions diverge from long-run
experience and the appropriateness of such differences given the
underlying economic environment at the period end. All available
external information on general customer performance was analysed
and the impact of the potential take-up of government support and
other reliefs was assessed. The Group also considered whether there
were any issues of post-Covid scarring applying to any particular
industry.
Notwithstanding this data analysis, the Group considered the
potential for apparently well-performing accounts to default, for
the reasons set out above, applying the market understanding and
credit judgement of its experienced team. The SME lending business
was a particular area of focus, given the prevalence of CBILS /
BBLS funding in the customer base and the identification of
potential credit issues on certain large exposures.
The PMAs generated by this process, analysed by division are set
out below.
2021 2020
GBPm GBPm
Mortgage Lending 8.9 14.0
Commercial Lending 10.2 5.8
Idem Capital 0.3 -
------ ------
19.4 19.8
------ ------
These broader assessments were then allocated amongst accounts,
focussing on higher risk segments, or accounts where sufficient
data existed to identify any. Any accounts identified as at
significant risk by the PMA process were restaged
appropriately.
The PMAs described above align the overall reported provision
with current loss expectations, given the inherent uncertainties on
a macro and micro level and based on the Group's internal
monitoring of credit risk and customer contact metrics. The Group
maintains a cautious approach and will require evidence as to
customer behaviour once government interventions are scaled back,
before moving scenario weightings to more normal levels and
revising PMA methodologies so that actual emergent behaviour is
reflected.
Ratios and trends
The impact of the economic scenarios adopted, together with PMAs
adopted to address uncertainties over the future performance of
accounts, particularly those which may have had payment relief or
other government-backed support during the pandemic, has resulted
in the overall provision amounts and coverage ratios set out
below.
2021 2020 2019
GBPm GBPm GBPm
Calculated provision 46.0 62.0 41.9
PMAs 19.4 19.8 -
------ ------ ------
Total 65.4 81.8 41.9
------ ------ ------
Cover ratio
Mortgage lending 0.30% 0.44% 0.26%
Commercial lending 1.74% 1.85% 0.73%
Idem lending 1.27% 1.62% 1.12%
------ ------ ------
Total 0.49% 0.64% 0.34%
------ ------ ------
These ratios demonstrate the movement in the Group's overall
provisioning back towards more normal levels, without yet reaching
the 0.34% coverage ratio seen pre-pandemic at 30 September 2019.
The extent to which coverage levels revert to these levels will
depend on future performance of the UK economy and on the emergence
of reliable evidence on the underlying credit quality of the
Group's loan assets.
Fair value movements
The fair value movements reported in the profit and loss account
are a consequence of the impact of market movements in spot and
forward interest rates on valuations of derivatives held as part of
the Group's hedging strategy. While all these instruments are part
of economic hedging relationships, their accounting treatment can
result in the recognition of substantial gains or losses,
especially in periods of market fluctuation. However, the Group
remains appropriately hedged.
Movements in rates in 2021 led to a gain of GBP19.5 million
being recognised. While this is of far greater magnitude than the
GBP1.6 million charge recognised in the year ended 30 September
2020, it is comparable in size to the charge of GBP15.1 million
recognised during 2019. These fair value movements reflect non-cash
items and revert to zero over the lives of the instruments
involved. This, and the volatility of the balance, leads the Group
to consistently exclude this item from its measures of underlying
results.
Tax
The effective tax rate applied to the Group's profits has
increased marginally from 22.9% in 2020 to 23.0% during 2021. While
the standard tax rate applying to the Group remained at 19.0%, the
proportion of Group profits arising in Paragon Bank and
consequently attracting the banking surcharge, increased. This
caused the impact of the surcharge on the effective rate to
increase from 338 basis points to 454 basis points in the current
year, with other timing differences representing the reconciling
item to the actual charge.
The effective tax rates for both the current and preceding year
have been impacted by legislation for changes in future tax rates
enacted in each period, impacting on the carrying value of the
Group's deferred tax assets and liabilities.
While the Group's future profitability will be affected by the
increase in the basic rate of UK corporation tax to 25% legislated
for in the year, the proposed reduction in the bank surcharge to 3%
and the increase in the profit threshold at which it applies to
GBP100.0 million should reduce the divergence of the Group's
effective rate of tax from the standard rate.
Results
Profit before tax for the year was 80.5% higher than in 2020 at
GBP213.7 million (2020: GBP118.4 million), representing the Group's
highest ever annual profit. Profit after tax increased 80.2% to
GBP164.5 million (2020: GBP91.3 million).
Basic earnings per share for 2021 were 65.2 pence (2020: 36.0
pence) and the diluted measure was 63.0 pence per share (2020: 35.6
pence), driven by both the increase in profit and share buy-backs
in the year.
This result increased consolidated equity to GBP1,241.9 million
(2020: GBP1,156.0 million), representing a tangible net asset value
of GBP4.34 per share (2020: GBP3.90 per share) and a net asset
value on the statutory basis of GBP5.03 per share (2020: GBP4.57
per share) (Appendix D).
4.2 ASSETS AND LIABILITIES
SUMMARY BALANCE SHEET
30 September 2021
2021 2020 2019
GBPm GBPm GBPm
Investment in customer loans
Mortgage Lending 11,608.7 10,819.5 10,344.1
Commercial Lending 1,568.8 1,514.8 1,452.1
Idem Capital 225.2 297.1 389.9
--------- --------- ---------
13,402.7 12,631.4 12,186.1
Derivative financial assets 44.2 463.3 592.4
Cash 1,360.1 1,925.0 1,225.4
Intangible assets 170.5 170.1 171.1
Other assets 159.5 315.7 220.5
--------- --------- ---------
Total assets 15,137.0 15,505.5 14,395.5
--------- --------- ---------
Equity 1,241.9 1,156.0 1,108.6
Retail deposits 9,300.4 7,856.6 6,391.9
Other borrowings 4,451.4 6,229.7 6,648.4
Derivative financial liabilities 43.9 132.4 80.5
Pension deficit 10.3 20.4 34.5
Other liabilities 89.1 110.4 131.6
--------- --------- ---------
Total equity and liabilities 15,137.0 15,505.5 14,395.5
--------- --------- ---------
The Group's loan portfolio grew by 6.1% during 2021, with growth
in both Mortgage Lending and Commercial Lending. Balances in the
Idem Capital division continued to pay down. More detail on these
movements is given in Section 1. This increase, together with the
Group's liquidity and capital policy, determines its funding
requirements and hence the level of its liabilities.
Funding structure and cash resources
The Group's funding reduced by 2.0% during the year, despite the
growth in the business, in response to the Group's cautious
relaxation of the liquidity strategy put in place in response to
the pandemic and the refinancing of its legacy securitisation
transactions. The proportion represented by retail deposits
increased to 67.6% in accordance with the Group's long-term funding
strategy (2020: 55.8%). The Group's cash balance reduced by
GBP564.9 million, partly due to a GBP100.1 million reduction in
cash held in securitisation vehicles, following the collapse of
schemes in the year, and partly due to liquidity policy. Movements
in funding balances are discussed in more detail in Section 2.
Derivatives
The largest part of the movements in the derivative financial
asset balance reflects the retirement of the remaining Group's
currency denominated floating rate notes during the year and the
consequent settlement of their related hedging instruments. The
value of these swaps in the 2020 balance sheet was GBP445.3
million. These movements do not impact the Group's results.
Derivative assets used for interest rate hedging increased by
GBP24.3 million, while derivative liabilities decreased by GBP88.3
million, mostly as a result of volatility in the year in market
interest rate movements. These were largely offset by a GBP104.2
million decrease in the hedging adjustment on loans to customers,
included in sundry assets above, and a GBP13.4 million reduction in
the adjustment on retail deposits, included in sundry
liabilities.
Pension obligations
The International Accounting Standard ('IAS') 19 valuation of
the Group's defined benefit pension scheme deficit reduced by
GBP10.1 million in the period. The principal factor in this
reduction was the better than expected performance of the scheme
assets, as world markets began to recover from losses suffered in
the early stages of the pandemic. The deficit at 30 September 2021
stood at GBP10.3 million (2020: GBP20.4 million).
The Group's pension arrangements were restructured in the year
to limit future exposure. However this has no impact on obligations
already accrued, or their valuation.
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004 to
measure scheme liabilities. On this basis, the deficit at 30
September 2021 was estimated at GBP1.0 million, a reduction of
GBP8.7 million in the period (2020: GBP9.7 million), representing a
99.4% funding level (2020: 93.9%).
Other assets and liabilities
Sundry assets have decreased by GBP156.2 million over the year.
This reduction arose principally as a result of hedging
transactions by movements in swap rates which generated the
GBP104.2 million movement in fair value hedging referred to above
and generated a GBP66.9 million decrease in Credit Support Annex
('CSA') collateral deposits as a result of the increased value of
derivative liabilities.
Other movements included the recognition of a current tax
liability, rather than last year's asset of GBP5.7 million, with
payments on account in the year, based on the 2020 profit, being
less than the calculated tax payable; an increase of GBP8.6 million
in mandatory CRD deposits at the Bank of England, which are
calculated based on the size of the Group's deposit base; and a
GBP4.3 million increase in property, plant and equipment, mostly
related to the recognition of a right of use ('RoU') asset in
respect of the lease on the Group's new London office.
Within sundry liabilities, which reduced by GBP21.3 million, the
reduction in the fair value adjustment of GBP13.4 million, as
referred to above, and an GBP11.8 million reduction in accrued
investment interest payable resulting from reduced interest rates,
are offset by the GBP1.4 million tax creditor.
4.3 SEGMENTAL RESULTS
The underlying operating profits of the three segments described
in the Lending Review in Section A4.1 are detailed fully in note 2
and are summarised below.
2021 2020
GBPm GBPm
Segmental profit
Mortgage Lending 213.8 154.3
Commercial Lending 75.7 45.9
Idem Capital 17.1 19.6
-------- -------
306.6 219.8
Unallocated central costs and other one-off
items (112.4) (99.8)
-------- -------
194.2 120.0
-------- -------
The Group's central administration and funding costs,
principally the costs of service areas, establishment costs and
bond interest have not been allocated.
Mortgage Lending
The Mortgage Lending division continued to perform strongly,
with a strong lending performance, a reduction in the proportion of
older, lower yielding assets and the Group's tighter overall
funding costs combining to deliver a 15 basis point improvement in
segmental NIM.
With the average mortgage book increasing by 6.0% in the year,
this delivered a 15.4% increase in net interest to GBP219.2 million
(2020: GBP190.0 million).
The Group's mortgage accounts continued to perform well in the
year, generating a provision release of GBP5.9 million (2020:
charge of GBP25.8 million). Despite this release, coverage levels
remain in excess of pre-Covid levels, in response to the
uncertainties still prevalent in the UK economy.
Overall these factors drove a 38.6% increase in segment profit
for the year, to GBP213.8 million (2020: GBP154.3 million).
Commercial Lending
The contribution to profit of the Commercial Lending segment for
the year was GBP75.7 million, rising by 64.9% year-on-year (2020:
GBP45.9 million), with the improvement generated by improved NIM
and a reduced provision charge.
The average loan balance increased by 3.9% in the year, but
within this there were important mix changes, with the average
development finance balance increasing by 9.1% and structured
lending by 16.8%. Government-backed loans, where margins are low,
had increased to form 5.3% of the portfolio by the year end.
The combination of these changes and tighter funding costs
across the Group saw divisional NIM increase from 5.53% to 6.13%,
delivering a 15.1% increase in net interest for the year to GBP94.5
million (2020: GBP82.1 million).
The impairment charge for the division reduced to GBP2.9 million
(2020: GBP21.7 million). While the majority of accounts in the
segment have continued to perform satisfactorily, provisions have
not yet been returned to pre-Covid levels of cover, particularly in
the SME lending business. As discussed under 'Impairment' above,
many SME customers will potentially have been in receipt of CBILS
and BBLS funds or other government support for their business
operations. It is therefore too early to conclude that the current
positive performance is sustainable in the long-term as the impact
of these interventions fades. At the same time, a limited number of
SME lending cases with serious credit issues have already been
identified and appropriately provided for.
Idem Capital
The acquired Idem Capital loan portfolios continued to run off
through the year, with no new transactions completed. As a result
the average loan balance fell by 24.0%, following the trend of the
previous year. Net interest decreased by 22.6%, to GBP20.2 million
(2020: GBP26.1 million), as a consequence of this reduction.
While annualised NIM improved in the year to 7.74% (2020:
7.60%), reversing the long-term decline in NIM is this segment,
this was principally a result of a Covid related interest
adjustment in 2020 which depressed the margin in that period. On an
underlying basis NIM in the segment continues to move down as
higher margin portfolios pay off more rapidly than lower margin
secured assets.
The performance of the division's portfolios in the year has
been satisfactory, with cash flows in line with expectations. As a
result of this and the improving economic outlook an impairment
provision write back of GBP1.7 million was recognised (2020: charge
of GBP0.8 million).
Overall, these factors restricted the decline in the segment
profit to 12.8%, with a contribution of GBP17.1 million to the
Group result (2020: GBP19.6 million).
5 OPERATIONS
Throughout the pandemic, while the Group's business has
inevitably been impacted by the impact of the virus on its people,
customers and other stakeholders, and by the changing official
guidance and levels of restrictions imposed in the UK, its priority
has been to maintain business--as--usual, as far as possible. This
has largely been achieved and has played a large part in both
delivering the outstanding results for the period and in ensuring
the Group is well placed to take advantage of the recovering
economy.
It is still too early to say how the experiences of the pandemic
will impact both the Group's business model and the way it operates
in the longer term, but, with most of the Group's people returning
to its offices for at least part of the week by the end of the
year, the process of developing working models for the future is
well in hand.
5.1 OPERATIONS
The Group employs almost 1,450 people, with the majority
normally based in its Solihull offices. However, from the onset of
the Covid pandemic approximately 90% of employees worked from
home.
As a result, the Group was able to continue to provide a full
service to customers, intermediaries and other business partners
throughout the various lockdowns, while at the same time continuing
to develop the business and address issues arising from the
pandemic, particularly in dealing with the transition of customers
from payment reliefs back to normal payment profiles.
For the vast majority of employees, working from home continued
until September 2021 when hybrid working pilots were introduced.
New hires during the period predominantly joined the Group working
from home, with technology-enabled induction and training plans
providing them with the support they needed to start their new
roles. All employees are now trialling flexible, hybrid ways of
working.
The Group is proud that it has been able to continue to develop
the business through new systems, processes and products despite
the restrictions on contact, rather than simply mark time until the
pandemic is concluded.
Instead, the year has seen the Group complete or progress a
significant number of technological, operational and regulatory
projects. While long-term projects to provide better technology for
the development finance, SME lending and savings operations
continued in the period, other important projects included
enhancing the Group's cyber-security, developing its operational
resilience capabilities, putting in place contingency plans in case
of negative interest rates and preparing for the transition of
LIBOR-linked customer accounts to alternative reference rates.
Overall, the year saw more projects delivered than most recent
comparable time periods.
The Group continues to envisage that its office hubs will remain
important to ensure that its culture and identity can continue to
grow, that collaboration is encouraged and that its peoples' sense
of belonging is nurtured. To that end it was pleased to sign a
lease during the period on a new, more energy efficient, central
London base, bringing together its City-based staff, replacing two
existing locations, and providing a venue to interface with
stakeholders in the capital.
The Group has demonstrated agility and flexibility in how its
resources have been deployed throughout the pandemic, with
short-term secondments being introduced to support operational
volumes resulting from initiatives such as payment holidays.
Throughout the pandemic the Group's strategy has focussed on
customer outcomes, particularly for more vulnerable customers and
it was very pleasing that the Group's Financial Ombudsman Service
('FOS') complaints data shows no significant increase in the
period. The number of complaint cases reported to FOS in the six
months ended 30 June 2021, the most recent reporting period, was 50
with an uphold rate of 34.0% while the number for the six months
ended 31 December 2020 was 60, with an uphold rate of 43.3%.
Overall, the Group is very pleased with the way that its people
and infrastructure have continued to respond to the challenges
posed by the pandemic.
5.2 GOVERNANCE
Through most of the year the Group continued to operate on a
pandemic footing, with board and committee meetings being held
remotely. However in June 2021, at its annual offsite strategy
conference, the Board was able to meet in person for the first time
since March 2020 and resumed physical board meetings in September
2021.
The impact of the pandemic on all the Group's stakeholders has
continued to be an area of significant focus for the Board and the
Group's ongoing response has been thoroughly reviewed. The Group's
2021 AGM was held in February on a closed basis, in accordance with
UK Government guidance and the Board was disappointed that
shareholders could not be given the opportunity to attend in
person. However, arrangements were made to allow shareholders to
view the meeting online and they were encouraged to participate in
the meeting by completing and returning their proxy voting forms.
The Board is hopeful that the 2022 AGM, due to be held in March,
can be conducted on a more normal basis.
Throughout the year ended 30 September 2021 the Group continued
to comply with the principles and provisions of the UK Corporate
Governance Code ('the Code'). The Group adopted the 'comply and
explain' approach under Provision 19 of the code to extend the
Chair's tenure past nine years for succession planning purposes and
to ensure the appointment of a suitable replacement Chair, as set
out below.
Board of Directors
Fiona Clutterbuck's nine-year term on the Board came to an end
in September 2021 since she was first appointed in 2012. However,
the Board and Nomination Committee considered Fiona's
re-appointment beyond nine years and agreed that, in the interests
of succession planning purposes and to ensure a smooth transition
of duties to Fiona's successor, her appointment be extended to
September 2022. Fiona will therefore stand for re-election at the
Annual General Meeting in March 2022. A search process, led by Hugo
Tudor, the Senior Independent Director, is taking place and the
results will be communicated to stakeholders once the process is
complete.
As announced in the Group's 2020 year end results announcement,
Finlay Williamson stepped down from the Board on 31 December 2020.
Peter Hill, who was appointed to the Board on 27 October 2020,
assumed the role of Risk and Compliance Committee Chair from 31
December 2020.
Peter Hill was appointed to the Board following a robust search
and selection process. He was Chief Executive Officer of Leeds
Building Society, one of the UK's largest building societies, from
2011 until his retirement in 2019, having previously worked in a
number of senior management positions within the society. Peter is
currently a non-executive director of Pure Retirement Limited and
chair of its risk committee and is also chair of the board at
Mortgage Brain. He brings with him a wealth of experience in
financial services and a proven track record in risk oversight,
gained during his executive and non-executive career.
As at 30 September 2021, the Board has three female directors,
including the Chair of the Board, out of a total of eight board
members, forming 37.5% of the Board.
A4.5.3 MANAGEMENT AND PEOPLE
The Group employs almost 1,450 people and during the period
headcount has grown by 3.6% (1.4% 2020), largely driven by the
creation of new roles in customer facing and risk and compliance
functions.
People and development
During the period the Group's priority has continued to be the
wellbeing of employees and ensuring that they were provided with
adequate support as the pandemic continued. The Group's Wellbeing
team has played an important role in helping employees with their
mental, physical, financial, and emotional wellbeing over the year
through numerous initiatives. Wellbeing pulse surveys ensured that
the Group continually monitored and responded to how employees were
coping with the pandemic and feedback continued to reflect that
employees were pleased with the quality and frequency of
communications and how the Group was responding to the ongoing
situation.
No employees were placed on furlough or made redundant as a
result of Covid, and no use was made of the UK Government
Coronavirus Job Retention Scheme in the year.
The Group conducted an employee engagement survey in June 2021,
its first since December 2017; this produced a very strong set of
positive indicators, including an overall engagement score of 87%
(2017: 81%) and an employee net promoter score of +24 (2017: -3,
industry norm: +21).
Retention of employees continues to remain high, with the
attrition rate of 8.6% (2020: 10.4%) continuing to track below the
national average. These high levels of retention are further
bolstered by 57% of employees achieving over 5 years' service, 13%
achieving over 20 years with the Group and 5% achieving over 30
years' service.
Employees continued to show flexibility during the year with
many undertaking secondments to different areas of the business to
ensure that the Group continued to meet the needs of its customers.
Although the decision was made to close the Second Charge Mortgage
business in the year, all 26 affected employees were offered
alternative roles, with only a small number deciding to take
voluntary redundancy.
The Group maintains its accreditation from the UK Living Wage
Foundation and minimum pay continues to meet the levels set by the
Foundation, while holiday entitlement for all employees was
enhanced during the year.
A new performance management approach was rolled-out, removing
the need for a formal annual appraisal and replacing this with more
frequent and timely conversations about performance throughout the
year. This not only supports individual performance and personal
development, but also helps the Group to effectively manage rising
talent and fulfil its succession planning objectives.
The third cohort of the Group's senior leadership development
launched this year with a further nine delegates. The programme is
aimed at developing those identified as successors for the
executive management team and their direct reports. During this
year two members of this programme from previous cohorts secured
promotions within the Group. To support the Group's wider training
objectives, a new learning management system, Learn Amp was
launched in February. This hosts internally designed content
alongside relevant subscription material to ensure there is a
broad, yet relevant range of learning available for all employees
to access.
Equality and diversity
The Group made significant progress on its diversity and
inclusion strategy during the year. Richard Rowntree, Managing
Director - Mortgages, has taken on the role of executive sponsor
for equality, diversity and inclusion ('EDI') and sponsors the
Group's EDI Network which was launched in October 2020. The Network
has had a significant impact in a short space of time and has been
involved in the launch of a number of training offerings to all
employees, including new EDI eLearning, a new 'Inclusive Workplace'
course and an 'Inclusive Leadership' course for all managers.
The Network also worked with Human Resources to run a diversity
data capture campaign in September 2021. 63% of employees completed
a diversity profile on the HR management system and the collation
of this data from employees provides the Group with an enhanced
ability to monitor and improve the diversity of the workforce going
forward.
The Group has made further important commitments to improving
the diversity of its workforce by signing up to Business in the
Community's Race at Work Charter and becoming accredited as a
Disability Confident employer. These commitments complement the
pledge the Group previously made to HM Treasury's Women in Finance
Charter in 2016.
The Group is pleased to report that is has now achieved each of
its targets set under the Women in Finance Charter in 2017, which
focussed on female and ethnic minority representation in the
workforce and management. The Group is currently considering the
next phase of this initiative.
Details of progress against our targets can be found below.
Measure Target Sep 2021 Status
Female representation in senior management * 35% 38.7% Achieved
------ -------- --------
Females in workforce 50% 52.5% Achieved
------ -------- --------
Females as a percentage of employees receiving management career development and
leadership
training 50% 52% Achieved
------ -------- --------
Managers from an ethnic minority background 10% 13.4% Achieved
------ -------- --------
Workforce on flexible working 10% 24.0% Achieved
------ -------- --------
Flexible working on a part time basis 50% 73.6% Achieved
------ -------- --------
* Senior management is defined using the FTSE Women Leaders
definition, while the ethnicity measure is based on those employees
who self-identified.
To support its efforts to improve gender equality the Group has
continued to participate in the 'Women Ahead 30% Club'
cross-company mentoring scheme. This programme has proven popular
with both mentors and mentees and a similar scheme is being piloted
for employees from ethnic minorities over the coming year.
The Group welcomes the increasing interest in the diversity and
inclusion agenda from all its stakeholders and has participated in
the recent FCA Diversity and Inclusion survey.
Remuneration policy
The PRA remuneration rules applicable to the Group changed with
effect from 1 October 2021, as the Group qualifies as a
Proportionality Level 2 ('Level 2') bank from that date, bringing
it within the scope of more onerous rules. This is a result both of
the reduction in the asset threshold defining a Level 2 bank from
GBP15 billion to GBP13 billion, announced by the PRA in December
2020, and of the development of the rules themselves in response to
Capital Requirements Directive V ('CRD V').
A full gap analysis was performed against the updated rules,
with affected employees being identified and remuneration
arrangements appropriately adjusted. The majority of the
significant changes required to remuneration policies were
prospectively approved at the 2020 AGM, with more minor changes
approved by the Remuneration Committee in the period.
The Group has also taken steps to assess the status of the small
number of off-payroll workers in the business and made necessary
changes to ensure the Group does not enter into engagements with
workers who are paid through personal service companies and similar
arrangements and fall within IR35 status for tax purposes, avoiding
the complexities of such arrangements.
5.4 SUSTAINABILITY
Sustainability, including resilience in the face of climate
change risks, is core to the Group's strategy: to focus on
specialist markets, delivering long-term sustainable growth and
returns through a low risk and robust business model.
Sustainability influences every aspect of the Group's business and
means:
-- Reducing the impact of the Group's operations on the environment
-- Ensuring that the Group has a positive effect on our stakeholders and communities
-- Delivering sustainable lending through the design of products
offered and the choices of sectors in which to operate
The Group intends to publish a Responsible Business Report, its
first sustainability report, in December 2021, providing more
detailed information on its sustainability initiatives.
Climate change
Climate change is designated as a principal risk within the
Group's Risk Management Framework. Information and measures on
climate change risks are considered at board level and the Group's
responses are considered within the Board's overall strategy. These
risks fall into two main groups:
-- Physical risks (which arise from weather-related events)
-- Transitional risks (which come from the adoption of a low-carbon economy)
The Group has an internal Climate Change Forum, sponsored at
executive level and containing representation from across the
business, to share information on initiatives within business areas
and to help develop the Group's overall response.
During the year the first issuance was made under the Group's
Green Bond Framework, which was published in the year and which
reflects the Group's commitment to embed sustainability throughout
its strategy, operations, and product offerings including funding
and capital raising activities. This was the first issue of a green
capital instrument by a bank in the UK. The Sustainability
Committee, established in the year under the oversight of the
Executive Committee, is responsible for the Framework.
Developments in sustainable products and climate-related
exposures are discussed in the relevant business reviews.
While the Group is not required to report on climate change risk
and exposures under the TCFD framework until its 2022 year end, it
has signed up as a TCFD supporter, and the disclosures made in
respect of the year have been organised using TCFD as a
template.
Social engagement
Despite the difficulties for fund-raisers created by the
pandemic, the Group's Charity Committee raised over GBP43,000 for
Macmillan Cancer Support, the Group's chosen charity for the 2020
calendar year. For the 2021 calendar year the Group is supporting
the Alzheimer's Society with GBP22,000 raised by September
2021.
The Group has begun to restart its community and volunteering
initiatives as pandemic restrictions cease, with employees looking
forward to reengaging as soon as possible.
5.4 RISK
The effective management of risk remains crucial to the
achievement of the Group's strategic objectives. It operates a risk
governance framework designed around a formal three lines of
defence model (business areas, risk and compliance function and
internal audit) supervised at board level.
Inevitably the ongoing impacts of the pandemic have, and
continue to be, a priority for the Group and the longer-term
implications are still unclear. The Group continues to monitor
closely the economic impacts, changes to lending profiles, business
volumes and customer credit risk as the immediate restrictions
necessitated by the pandemic are released. It is recognised that
the wider pandemic is still a global challenge and the possibility
of further waves and subsequent lockdowns may pose further issues
during the coming months.
However, given the work done over the last 18 months the Group
feels it is well-placed to respond to any further Covid-related
disruption. The Group's risk management framework has provided a
robust mechanism to ensure that new risks are promptly identified,
assessed, managed and appropriately overseen from a risk governance
perspective.
The Group continues to focus on specific risk issues that have
arisen as a direct result of the pandemic. These include:
-- Ensuring a Covid-safe return to office-based working and in
the longer-term trialling more flexible and hybrid ways of working
which are core to the strategy of attracting and retaining highly
skilled employees, through a Group-wide pilot scheme
-- Continuing oversight of the impacts of government schemes and
initiatives implemented during the onset of Covid which
necessitated rapid deployment of resources and innovation in
processes. A small number of remaining payment holidays continue to
be managed and where appropriate forbearance solutions necessitated
through Covid are tailored to individual customer circumstances and
that are aligned to regulatory guidance and expectation
-- Continuing oversight of risks related to the provision of
government-backed lending schemes to support businesses through
Covid. Given the effective implementation of process changes and
underwriting decisions the Group is positioned well to support any
further government lending programmes of this nature
Whilst Covid has clearly dominated the risk landscape since
early 2020, the Group has successfully continued to evolve and
embed its risk management framework. Good progress has been made in
further developing its ability to manage all categories of risk
through the maturing ERMF.
The evolution of the Group's risk framework remains a core
priority and ongoing work is being undertaken to ensure it remains
effective and proportionate in line with the Group's strategic
aspirations. Significant recruitment has been undertaken during the
year to bolster capability, external benchmarking has been
undertaken to validate work undertaken and future plans, and a
detailed roadmap for further development over the next 18 months
has been agreed. Good progress has already been made in line with
these commitments.
Despite the pervasive impact of the pandemic, the Group has
identified and focussed on a number of non-Covid related strategic
risk issues including:
-- Strategy, operational and conduct-related risk implications
of the changes in product design, funding and operations required
to transition all LIBOR-linked customers to an alternative rate
following the withdrawal of LIBOR in December 2021
-- Further embedding operational resilience capabilities which
have proven to be critical in handling the Covid situation.
Importantly, lessons learned from the handling of the pandemic have
been incorporated into the operational resilience framework
together with continued refinement of the overarching approach in
line with regulatory expectation
-- Addressing the impact of climate change on managing financial
risks and considering this as part of the wider ESG agenda across
the Group
-- Continuing to develop advanced models and embed the
overarching model risk framework to enhance credit risk management
and support the Group's IRB application process
-- The impact of issues relating to defective cladding on
high-risk buildings where these form the security for mortgage
loans. Underwriting guidelines continue to be reviewed to ensure
these remain in line with emerging best practice
-- Enhancing stress testing procedures to ensure the robustness
of capital and liquidity positions
-- Ensuring effective cyber-security controls and a robust data
protection approach particularly as these evolve in response to
changing working practices
The Group continues to review its exposure to emerging
developments in the Brexit process as further clarity is received
as to future dealings with the EU. However, the end of the
transition period on 31 December 2020 caused no immediate impact to
the Group. Whilst the Group does not have operations outside the UK
it has continued to review the capital, liquidity and operational
implications of the stresses which might be caused by the process.
In particular, it has continued to monitor the issues related to
the supply of essential goods which are causing shortages in a
number of sectors. Whilst the Group is not directly affected by
these issues at present the Board is keeping the situation under
ongoing review as supply issues in areas such as building materials
and IT equipment could impact the Group's operations.
The principal challenges in the risk environment faced by the
Group during the coming year and moving forward into 2023 and
beyond include:
-- Management of risks arising from changes introduced in
response to Covid. With the ending of payment reliefs and the wider
economic impacts of the crisis beginning to emerge, there will be a
need to ensure appropriate treatment of ongoing arrears and the
position of affected customers. Key to this will be ensuring that
the treatment of customers is fair and conduct principles remain at
the forefront of all interactions
-- Addressing an increasing level of regulatory compliance
standards, where the Group is committed to ensuring it remains
compliant in all areas of its business. Particular focus in the
Group is on ensuring that it meets regulatory expectations in
respect of its anti-money laundering and wider financial crime
control frameworks following the publication of the Dear CEO letter
in May 2021
-- Risks associated with climate change remain an ever-present
challenge. The UK Government has confirmed its goal of net zero
carbon by 2050 in November 2020 and the Group, and the rest of the
financial services industry, have a vital role to play in that
commitment. As global strategies continue to be refined the Group
is looking to ensure both its operational impacts, and the impact
of its lending activities, explicitly consider climate change risk
as a core strategic driver
5.5 REGULATION
Paragon Bank is authorised by the PRA and regulated by the PRA
and the FCA. The Group is subject to consolidated supervision by
the PRA and a number of its subsidiaries are authorised and
regulated by the FCA. As a result, current and projected regulatory
changes continue to pose a significant risk for the Group. The
impact and pace of change necessitated through the ongoing
programme of revisions to the Basel supervisory regime continue to
pose a significant risk for the Group. These together with other
potential regulatory changes to the business are closely monitored
through the comprehensive governance and control structures in
place.
Since March 2020, the impact of Covid has largely driven the
priorities of both UK and European regulators. The Group has
continued to respond effectively to these ongoing challenges
despite short consultation and implementation periods. All
regulatory publications have been considered by the Group, any
implications identified and required changes implemented within an
appropriate timeframe. Over the last few months the Group has
experienced data requests from the FCA on arrears and forbearance
increasing in both scale and frequency. The Group continues to
respond to these requests, and to focus controls on the delivery of
fair customer outcomes.
In addition to requirements introduced in response to Covid, the
following developments currently in progress have the greatest
potential impact on the Group:
-- The Bank of England published a Consultation Paper ('CP')
setting out proposed changes to the Minimum Requirement for Own
Funds and Eligible Liabilities ('MREL') on 22 July 2021. The CP
builds on the Discussion Paper published in December 2020 and
factors in the responses it received from impacted banks and
building societies. On 3 December 2021 the Bank of England
published a Statement of Policy based upon this consolidation.
Although the Group is not currently subject to MREL requirements,
given its potential for growth it may be required to issue MREL
eligible instruments at some point in the future.
-- The Bank of England MPC confirmed in February 2021 that
negative interest rates still form part of its monetary policy
toolkit. In response, the PRA issued a 'Dear CEO' letter requesting
firms initiate the implementation of tactical solutions to process
zero and negative rates by August 2021. The Group has undertaken
the analysis which confirmed that it is well-placed to meet any
operational requirements should rates fall to zero or below
-- The FCA's issued its consultation on "A New Consumer Duty" in
May 2021. This seeks to set higher expectations for the standard of
care provided to customers and will result in new rules relating to
communications, products and services, customer service and price
and value. The Group will continue to engage with UKF throughout
the consultation period to ensure adequate preparation prior to the
new rules coming into force
-- The treatment of vulnerable customers continues to be a
strong focus for the FCA, with further guidance having been
finalised in February 2021. The Group continues to take its
responsibilities in this regard seriously. Significant work
continues to be undertaken to revise existing procedures, controls
and training provisions to meet regulatory and industry
expectations
-- The FCA, PRA and Bank of England published their final rules
and guidance on building operational resilience in financial
services on 29 March 2021. As expected, this did not differ
significantly from consultation papers and considerable work had
already been undertaken by the Group to adhere to the draft
proposals. Good progress has been made against the roadmap and the
Group is well-positioned to meet the March 2022 policy
implementation deadline including setting of impact tolerances,
embedding a scenario testing approach and undertaking a
self-assessment against the regulatory framework
-- The Group continues to work towards embedding its approach to
managing climate-related financial risks by the end of 2021 in line
with the PRA expectations. A detailed plan of work has been
developed which reflects regulatory and wider requirements and will
continue to be refined as new thinking emerges. Managing the
impacts of climate change is seen as a key strategic priority for
the Group and significant effort has been made during 2021 to
incorporate climate risk considerations within the Group's ERMF.
The improved Governance which now includes the Sustainability
Committee alongside the existing executive level risk committees
ensures comprehensive consideration across all aspects of the
business and ensure the Group is well-positioned to address the
emerging challenges
Certain regulations applying in the financial services sector
only affect entities over a certain size, which the Group might
meet within its current planning horizon. The Group considers
whether and when these regulations might apply to it in light of
the growth implicit in its business plans and puts appropriate
arrangements in place to ensure it would be able to comply at that
point.
The Group continues to monitor the impact of Brexit on its
operations, but the longer-term regulatory changes are still
unclear. With the extension of the temporary transitional powers
for the regulators until 31 March 2022 by HM Treasury, regulatory
obligations for firms generally remain the same. The Bank of
England has commenced the consultation process for the
incorporation of the prudential regulation regime previously set
out in European legislation into the PRA Rulebook.
However, further clarity has yet to be provided as to how the
regulatory landscape may evolve post March 2022. It is expected
that the majority of requirements will be directly transcribed
although the PRA has indicated it is willing to depart from EU text
where this may enhance regulatory oversight in the UK.
The governance and risk management framework within the Group
continues to be developed to ensure that the impacts of all new
regulatory requirements are clearly understood and mitigated as far
as possible. Regular reports on key regulatory developments are
received at both executive and board risk committees.
Overall, the Group considers that it is well placed to address
all the regulatory changes to which it is presently exposed.
PRINCIPAL RISKS
We have identified a number of principal risks, arising from
both the environment in which we operate and our business model,
which could impact our ability to achieve our strategic
priorities.
Capital
Insufficient capital to operate effectively and meet minimum requirements
Liquidity and funding
Insufficient financial resources to enable us to meet our obligations as they fall due
Market
Changes in the net value of, or net income arising from, our assets and liabilities from adverse
movements in market prices
Credit
Financial loss arising from a borrower or counterparty failing to meet their financial obligations
Model
Making incorrect decisions based on the output of internal models
Reputational
Failing to meet the expectations and standards of our stakeholders
Strategic
Changes to business model or environmental factors may lead to an inappropriate or obsolete
strategy or strategic plan
Climate change
Financial risks arising through climate change impacting the Group and our strategy
Conduct
Poor behaviours or decision making leading to failure to achieve fair outcomes for customers
Operational
Resulting from Inadequate or failed internal procedures, people, systems or external events
Th Group has Enterprise Risk Management Framework ('ERMF') in place to ensure that these risks
are monitored and managed in accordance with the Group's risk appetite.
DIRECTORS' RESPONSIBILITIES
The following statement of directors' responsibilities in
respect of financial statements is included in the Annual Report
and Accounts of the Group for the year ended 30 September 2021.
The directors are responsible for preparing this Annual Report,
including the consolidated and company financial statements in
accordance with applicable law and regulations.
Company law requires the directors to prepare consolidated
financial statements for the Group and separate financial
statements for the Company in respect of each financial year. In
respect of the financial statements for the year ended 30 September
2021, that law includes the Companies Act 2006 ('the Companies
Act'). That law requires the directors to prepare the consolidated
financial statements in accordance with IFRS in conformity with the
requirements of the Companies Act and they have also elected to
prepare the financial statements of the Company on the same
basis.
In addition the UK Disclosure and Transparency Rules ('DTR') of
the FCA requires that the consolidated financial statements for the
current year are prepared in accordance with IFRS adopted pursuant
to EU Regulation (EC) No 1606/2002 (the 'IAS Regulation') as it
applies in the EU.
IAS 1 - 'Presentation of Financial Statements' requires that
financial statements present fairly for each financial year the
Company's financial position, financial performance and cash flows.
This requires the faithful representation of the effects of
transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting
Standards Board's ('IASB') 'Framework for the Preparation and
Presentation of Financial Statements'. In virtually all
circumstances, a fair presentation will be achieved by compliance
with all applicable IFRS.
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 Company and the
Group's profit or loss for the year. In preparing each of the
consolidated and company financial statements the directors are
also required to:
-- select suitable accounting policies and apply them consistently
-- make judgements and estimates that are reasonable, relevant and reliable
-- state whether the consolidated and company financial
statements have been prepared in accordance with IFRS in conformity
with the requirements of the Companies Act
-- state whether the consolidated financial statements have been
prepared in accordance with IFRS as adopted by the EU pursuant to
the IAS Regulation
-- assess the ability of the Group and the Company to continue
as a going concern, disclosing, as applicable, matters related to
going concern
-- use the going concern basis of accounting unless they intend
to liquidate the Company and / or the Group or to cease operation
or they have no realistic alternative to doing so
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
-- provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance
The directors are responsible for keeping adequate accounting
records for the Company that are sufficient to record and explain
its transactions, disclose with reasonable accuracy at any time its
financial position and enable them to ensure that its financial
statements comply with the requirements of the Companies Act.
They are responsible for the implementation of such internal
control processes as they deem necessary to enable the preparation
of financial statements which are free from material misstatements,
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 the preparation of a strategic report, directors'
report, directors' remuneration report and corporate governance
statement, which comply 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 (www.paragonbankinggroup.co.uk). Legislation in
the UK governing the preparation and dissemination of financial
statements differs from legislation in other jurisdictions.
Confirmation by the Board of Directors
The Board of Directors currently comprises
F S Clutterbuck (Chair of the B A Ridpath (Non-executive director)
Board)
N S Terrington (CEO) G H Yorston (Non-executive director)
R J Woodman (CFO) A C M Morris (Non-executive
director)
H R Tudor (SID) P A Hill (Non-executive director)
Each of the directors named above confirms that, to the best of
their knowledge:
-- The financial statements, prepared in accordance with
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and of the Group taken as a whole
-- The Directors' Report, including those other sections of the
Annual Report incorporated by reference, comprises a management
report for the purposes of the DTR, and includes a fair review of
the development and performance of the business and the
consolidated position of the Group taken as a whole, together with
a description of the principal risks and uncertainties that it
faces
-- The Annual Report (including the consolidated and company
financial statements), taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group's position, performance, business
model and strategy
Approved by the Board of Directors as the persons responsible
within the Company
Signed on behalf of the Board
MARIUS VAN NIEKERK
Company Secretary
7 December 2021
PRELIMINARY FINANCIAL INFORMATION
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the year ended 30 September 2021
2021 2021 2020 2020
Note GBPm GBPm GBPm GBPm
Interest receivable 3 484.2 491.7
Interest payable and
similar charges 4 (173.7) (213.6)
--------- ---------
Net interest income 310.5 278.1
Other leasing income 20.4 19.2
Related costs (16.9) (16.2)
------- -------
Net operating lease income 3.5 3.0
Other income 5 10.9 14.0
------- -------
Other operating income 14.4 17.0
--------- ---------
Total operating income 324.9 295.1
Operating expenses (135.4) (126.8)
Provisions for losses 11 4.7 (48.3)
--------- ---------
Operating profit before
fair value items 194.2 120.0
Fair value net gains
/ (losses) 6 19.5 (1.6)
--------- ---------
Operating profit being
profit on ordinary activities
before taxation 213.7 118.4
Tax charge on profit
on ordinary activities 7 (49.2) (27.1)
--------- ---------
Profit on ordinary activities
after taxation for the
financial year 164.5 91.3
--------- ---------
2021 2020
Note
Earnings per share
* basic 8 65.2p 36.0p
* diluted 8 63.0p 35.6p
--------- ---------
The results for the current and preceding years relate entirely
to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2021
2021 2021 2020 2020
Note GBPm GBPm GBPm GBPm
Profit for the year 164.5 91.3
------- -------
Other comprehensive income
Items that will not be reclassified
subsequently to profit or
loss
Actuarial gain / (loss)
on pension scheme 17 8.2 (7.4)
Tax thereon (0.9) 2.1
------ -------
7.3 (5.3)
Items that may be reclassified
subsequently to profit or
loss
Cash flow hedge (losses)
taken to equity 12 (3.0) (0.6)
Tax thereon 0.5 0.1
------ -------
(2.5) (0.5)
------- -------
Other comprehensive income
/ (expenditure) for the
year net of tax 4.8 (5.8)
------- -------
Total comprehensive income
for the year 169.3 85.5
------- -------
CONSOLIDATED BALANCE SHEET
30 September 2021
2021 2020 2019
Note GBPm GBPm GBPm
Assets
Cash - central banks 9 1,142.0 1,637.1 816.4
Cash - retail banks 9 218.1 287.9 409.0
Loans to customers 10 13,408.2 12,741.1 12,250.3
Derivative financial
assets 12 44.2 463.3 592.4
Sundry assets 69.2 128.0 92.8
Current tax assets - 5.7 -
Deferred tax assets 14.4 6.2 6.2
Property, plant and equipment 70.4 66.1 57.3
Intangible assets 13 170.5 170.1 171.1
--------- --------- ---------
Total assets 15,137.0 15,505.5 14,395.5
--------- --------- ---------
Liabilities
Short term bank borrowings 0.3 0.4 1.0
Retail deposits 14 9,297.4 7,867.0 6,395.8
Derivative financial
liabilities 12 43.9 132.4 80.5
Asset backed loan notes
('Notes') 15 516.0 3,270.5 4,419.4
Secured bank borrowings 15 730.0 657.8 787.5
Retail bond issuance 15 237.1 296.8 296.5
Corporate bond issuance 15 149.0 149.8 149.6
Central bank facilities 15 2,819.0 1,854.4 994.4
Sundry liabilities 16 90.7 100.0 112.7
Current tax liabilities 1.4 - 15.2
Retirement benefit obligations 17 10.3 20.4 34.5
--------- --------- ---------
Total liabilities 13,895.1 14,349.5 13,287.1
--------- --------- ---------
Called up share capital 18 262.5 261.8 261.6
Reserves 19 1,056.1 932.0 887.3
Own shares 20 (76.7) (37.8) (40.5)
--------- --------- ---------
Total equity 1,241.9 1,156.0 1,108.4
--------- --------- ---------
Total liabilities and
equity 15,137.0 15,505.5 14,395.5
--------- --------- ---------
Approved by the Board of Directors on 7 December 2021.
Signed on behalf of the Board of Directors
N S Terrington R J Woodman
Chief Executive Chief Financial Officer
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2021
2021 2020
Note GBPm GBPm
Net cash generated by operating
activities 22 878.1 1,028.7
Net cash (utilised) by investing
activities 23 (4.3) (2.8)
Net cash (utilised) by financing
activities 24 (1,438.6) (325.7)
---------- --------
Net (decrease) / increase in
cash and cash equivalents (564.8) 700.2
Opening cash and cash equivalents 1,924.6 1,224.4
---------- --------
Closing cash and cash equivalents 1,359.8 1,924.6
---------- --------
Represented by balances within:
Cash 9 1,360.1 1,925.0
Short term bank borrowings (0.3) (0.4)
---------- --------
1,359.8 1,924.6
---------- --------
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2021
Year ended 30 September 2021
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 164.5 - 164.5
Other
comprehensive
income - - - - (2.5) 7.3 - 4.8
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - (2.5) 171.8 - 169.3
Transactions
with owners
Dividends paid
(note 21) - - - - - (54.6) - (54.6)
Own shares
purchased - - - - - - (42.2) (42.2)
Exercise of
share awards 0.7 1.4 - - - (3.3) 3.3 2.1
Charge for
share based
remuneration - - - - - 8.9 - 8.9
Tax on share
based
remuneration - - - - - 2.4 - 2.4
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year 0.7 1.4 - - (2.5) 125.2 (38.9) 85.9
Opening equity 261.8 68.7 50.3 (70.2) 2.5 880.7 (37.8) 1,156.0
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing equity 262.5 70.1 50.3 (70.2) - 1,005.9 (76.7) 1,241.9
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Year ended 30 September 2020
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 91.3 - 91.3
Other
comprehensive
income - - - - (0.5) (5.3) - (5.8)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - (0.5) 86.0 - 85.5
Transactions
with owners
Dividends paid
(note 21) - - - - - (35.9) - (35.9)
Own shares
purchased - - - - - - (5.2) (5.2)
Exercise of
share awards 0.2 0.4 - - - (7.7) 7.9 0.8
Charge for
share based
remuneration - - - - - 2.7 - 2.7
Tax on share
based
remuneration - - - - - (0.3) - (0.3)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year 0.2 0.4 - - (0.5) 44.8 2.7 47.6
Opening equity 261.6 68.3 50.3 (70.2) 3.0 835.9 (40.5) 1,108.4
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing equity 261.8 68.7 50.3 (70.2) 2.5 880.7 (37.8) 1,156.0
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2021
1. GENERAL INFORMATION
The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 30
September 2019, 30 September 2020 or 30 September 2021, but is
derived from those statutory accounts, which have been reported on
by the Company's auditors. Statutory accounts for the years ended
30 September 2019 and 30 September 2020 have been delivered to the
Registrar of Companies and those for the year ended 30 September
2021 will be delivered to the Registrar following the Company's
Annual General Meeting. The reports of the auditors in each case
were unqualified, did not draw attention to any matters by way of
emphasis and did not contain an adverse statement under sections
498(2) or 498(3) of the Companies Act 2006.
Copies of the Annual Report and Accounts for the year ended 30
September 2021 will be distributed to shareholders in due course.
Copies of this announcement can be obtained from the Company
Secretary, Paragon Banking Group PLC at 51 Homer Road, Solihull,
West Midlands, B91 3QJ and on the Group's website at
www.paragonbankinggroup.co.uk.
These financial statements are presented in pounds sterling,
which is the currency of the economic environment in which the
Group operates.
The remaining notes to the accounts are organised into four
sections:
-- Analysis - providing further analysis and information on the
amounts shown in the primary financial statements
-- Employment costs - providing information on employee and key
management remuneration arrangements including share schemes and
pension arrangements
-- Capital and Financial Risk - providing information on the
Group's management of operational and regulatory capital and its
principal financial risks
-- Basis of preparation - providing details of the Group's
accounting policies and of how they have been applied in the
preparation of the financial statements
NOTES TO THE FINANCIAL INFORMATION - ANALYSIS
For the year ended 30 September 2021
The notes set out below give more detailed analysis of the
balances shown in the primary financial statements and further
information on how they relate to the operations, results and
financial position of the Group.
2. SEGMENTAL INFORMATION
The Group analyses its operations, both for internal management
reporting and external financial reporting, on the basis of the
markets from which its assets are generated. The segments used are
described below:
-- Mortgage Lending, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's equipment leasing
activities, development finance, structured lending and other
offerings targeted towards SME customers, together with its motor
finance business
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
Dedicated financing and administration costs of each of these
businesses are allocated to the segment. Shared central costs are
not allocated between segments, nor is income from central cash
balances or the carrying costs of unallocated savings balances.
Loans to customers and operating lease assets are allocated to
segments as are dedicated securitisation funding arrangements and
their related cross-currency basis swaps and cash balances.
All the Group's operations are conducted in the UK, all revenues
arise from external customers and there are no inter-segment
revenues. No customer contributes more than 10% of the revenue of
the Group.
Financial information about these business segments, prepared on
the same basis as used in the consolidated accounts of the Group,
is shown below.
Year ended 30 September 2021
Mortgage Commercial Idem Unallocated Total Segments
Lending Lending Capital Items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 345.8 114.2 22.7 1.5 484.2
Interest payable (126.6) (19.7) (2.5) (24.9) (173.7)
--------- ----------- --------- ------------ ---------------
Net interest income 219.2 94.5 20.2 (23.4) 310.5
Other operating
income 6.1 8.0 0.3 - 14.4
--------- ----------- --------- ------------ ---------------
Total operating
income 225.3 102.5 20.5 (23.4) 324.9
Operating expenses (17.4) (23.9) (5.1) (89.0) (135.4)
Provisions for
losses 5.9 (2.9) 1.7 - 4.7
--------- ----------- --------- ------------ ---------------
213.8 75.7 17.1 (112.4) 194.2
--------- ----------- --------- ------------ ---------------
Year ended 30 September 2020
Mortgage Commercial Idem Unallocated Total Segments
Lending Lending Capital Items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 344.9 112.9 30.4 3.5 491.7
Interest payable (154.9) (30.8) (4.3) (23.6) (213.6)
--------- ----------- --------- ------------ ---------------
Net interest income 190.0 82.1 26.1 (20.1) 278.1
Other operating
income 6.5 9.9 0.6 - 17.0
--------- ----------- --------- ------------ ---------------
Total operating
income 196.5 92.0 26.7 (20.1) 295.1
Operating expenses (16.4) (24.4) (6.3) (79.7) (126.8)
Provisions for
losses (25.8) (21.7) (0.8) - (48.3)
--------- ----------- --------- ------------ ---------------
154.3 45.9 19.6 (99.8) 120.0
--------- ----------- --------- ------------ ---------------
The segmental profits disclosed above reconcile to the Group
results as shown below.
2021 2020
GBPm GBPm
Results shown above 194.2 120.0
Fair value items 19.5 (1.6)
------ ------
Operating profit 213.7 118.4
------ ------
The assets of the segments listed above are:
2021 2020 2019
GBPm GBPm GBPm
Mortgage Lending 11,732.0 11,488.2 11,279.9
Commercial Lending 1,608.1 1,554.3 1,488.4
Idem Capital 225.2 297.1 389.9
--------- --------- ---------
Total segment assets 13,565.3 13,339.6 13,158.2
Unallocated assets 1,571.7 2,165.9 1,237.3
--------- --------- ---------
Total assets 15,137.0 15,505.5 14,395.5
--------- --------- ---------
An analysis of the Group's loan assets by type and segment is
shown in note 10.
3. Interest receivable
2021 2020
GBPm GBPm
Interest receivable in respect
of
Loans and receivables 440.0 440.4
Finance leases 40.4 44.3
Factoring income 2.3 2.4
------ ------
Interest on loans to customers 482.7 487.1
Other interest receivable 1.5 4.6
------ ------
Total interest on financial
assets 484.2 491.7
------ ------
The above interest arises from:
2021 2020
GBPm GBPm
Financial assets held at amortised
cost 443.8 447.4
Finance leases 40.4 44.3
------ ------
484.2 491.7
------ ------
4. Interest payable and similar charges
Note 2021 2020
GBPm GBPm
On retail deposits 120.5 129.7
On asset backed loan notes 17.9 42.2
On bank loans and overdrafts 6.6 5.4
On corporate bonds 9.3 10.9
On retail bonds 15.4 18.5
On central bank facilities 2.2 4.5
On repurchase agreements 0.1 -
------ ------
Total interest on financial
liabilities 172.0 211.2
On pension scheme deficit 17 0.3 0.4
Discounting on contingent
consideration 0.3 0.4
Discounting on lease liabilities 0.2 0.2
Other finance costs 0.9 1.4
------ ------
173.7 213.6
------ ------
All interest payable on financial liabilities relates to
financial liabilities carried at amortised cost.
5. OTHER INCOME
2021 2020
GBPm GBPm
Loan account fee income 5.1 5.7
Broker commissions 1.9 1.7
Third party servicing 3.5 5.0
Other income 0.4 1.6
----- -----
10.9 14.0
----- -----
All loan account fee income arises from financial assets held at
amortised cost.
6. FAIR VALUE NET Gains / (losses)
2021 2020
GBPm GBPm
Ineffectiveness of fair value hedges
Portfolio hedges of interest rate
risk
Deposit hedge (0.3) 0.2
Loan hedge 6.6 0.1
------ ------
6.3 0.3
Ineffectiveness of cash flow hedges - -
Other hedging movements 9.9 (2.9)
Net gains / (losses) on other derivatives 3.3 1.0
------ ------
19.5 (1.6)
------ ------
The fair value net gain / (loss) represents the accounting
volatility on derivative instruments which are matching risk
exposures on an economic basis, generated by the requirements of
IAS 39. Some accounting volatility arises on these items due to
accounting ineffectiveness on designated hedges, or because hedge
accounting has not been adopted or is not achievable on certain
items. The losses and gains are primarily due to timing differences
in income recognition between the derivative instruments and the
economically hedged assets and liabilities. Such differences will
reverse over time and have no impact on the cash flows of the
Group.
7. Tax charge on profit on ordinary activities
Income tax for the year ended 30 September 2021 is charged at an
effective rate of 23.0% (2020: 22.9%), representing the best
estimate of the annual effective rate of income tax expected for
the full year, applied to the pre-tax income of the period.
The standard rate of corporation tax in the UK applicable to the
Group in the year was 19.0% (2020: 19.0%), based on currently
enacted legislation. During the year ended 30 September 2020,
legislation was substantively enacted reversing the reduction in
the tax rate to 17.0% which had been due to come into effect from
April 2020. The effects of the increases in the standard rate for
the year ended 30 September 2020 from 18.0% to 19.0%, and the
expected rate in subsequent years from 17.0% to 19.0% on deferred
tax balances were accounted for in the year ended 30 September
2020.
During the current financial year, the UK Government enacted
legislation increasing the standard rate of corporation tax in the
UK to 25.0% from April 2023. The impact of this change on deferred
tax balances has been accounted for in these accounts.
The increase in the effective rate of tax is principally
attributable to the increased proportion of the Group's profit
earned in its banking subsidiary, Paragon Bank PLC, and therefore
subject to the banking surcharge.
8. Earnings per share
Earnings per ordinary share is calculated as follows:
2021 2020
Profit for the year (GBPm) 164.5 91.3
------ ------
Basic weighted average number of ordinary
shares ranking for dividend during the year
(m) 252.3 253.6
Dilutive effect of the weighted average
number of share options and incentive plans
in issue during the year (m) 8.9 2.5
------ ------
Diluted weighted average number of ordinary
shares ranking for dividend during the year
(m) 261.2 256.1
------ ------
Earnings per ordinary share - basic 65.2p 36.0p
- diluted 63.0p 35.6p
------ ------
9. Cash and CASH EQUIVALENTS
'Cash and Cash Equivalents' includes current bank balances,
money market placements and fixed rate sterling term deposits with
London banks, and balances with the Bank of England. It is analysed
as set out below.
2021 2020 2019
GBPm GBPm GBPm
Deposits with the Bank of
England 1,142.0 1,637.1 816.4
-------- -------- --------
Balances with central banks 1,142.0 1,637.1 816.4
-------- -------- --------
Deposits with other banks 218.1 287.9 409.0
-------- -------- --------
Balances with other banks 218.1 287.9 409.0
-------- -------- --------
Cash and cash equivalents 1,360.1 1,925.0 1,225.4
-------- -------- --------
Not all of the Group's cash is immediately available for its
general purposes, including liquidity management. Cash received in
respect of loan assets funded through warehouse facilities and
securitisations is not immediately available, due to the terms of
those arrangements.
Cash held by the Trustee of the Group's employee share ownership
plan ('ESOP') may only be used to invest in the shares of the
Company, pursuant to the aims of that plan.
The total consolidated 'Cash and Cash Equivalents' balance may
be analysed as shown below:
2021 2020 2019
GBPm GBPm GBPm
Available cash 1,236.5 1,701.1 872.1
Securitisation cash 123.3 223.4 353.1
ESOP cash 0.3 0.5 0.2
-------- -------- --------
1,360.1 1,925.0 1,225.4
-------- -------- --------
Cash and cash equivalents are classified as Stage 1 exposures
(see note 11) for the purposes of impairment provisioning. The
probabilities of default have been assessed to be so low as to
require no significant impairment provision.
10. loans to customers
Note 2021 2020 2019
GBPm GBPm GBPm
Loans to customers 13,402.7 12,631.4 12,186.1
Fair value adjustments
from portfolio hedging 5.5 109.7 64.2
--------- --------- ---------
13,408.2 12,741.1 12,250.3
--------- --------- ---------
The Group's loans to customers at 30 September 2021, analysed
between the segments described in note 2 are as follows:
Mortgage Commercial Idem Total
Lending Lending Capital
GBPm GBPm GBPm GBPm
At 30 September 2021
First mortgages 11,460.6 - - 11,460.6
Consumer loans 148.1 - 220.9 369.0
Motor finance - 224.9 4.3 229.2
Asset finance - 468.7 - 468.7
Development finance - 608.2 - 608.2
Other commercial loans - 267.0 - 267.0
--------- ----------- --------- ---------
Loans to customers 11,608.7 1,568.8 225.2 13,402.7
--------- ----------- --------- ---------
At 30 September 2020
First mortgages 10,636.9 - - 10,636.9
Consumer loans 182.6 - 281.6 464.2
Motor finance - 256.9 15.5 272.4
Asset finance - 478.0 - 478.0
Development finance - 609.0 - 609.0
Other commercial loans - 170.9 - 170.9
--------- ----------- --------- ---------
Loans to customers 10,819.5 1,514.8 297.1 12,631.4
--------- ----------- --------- ---------
At 30 September 2019
First mortgages 10,172.5 - - 10,172.5
Consumer loans 171.6 - 352.3 523.9
Motor finance - 281.3 37.6 318.9
Asset finance - 492.2 - 492.2
Development finance - 506.5 - 506.5
Other commercial loans - 172.1 - 172.1
--------- ----------- --------- ---------
Loans to customers 10,344.1 1,452.1 389.9 12,186.1
--------- ----------- --------- ---------
11. IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
This note sets out information on the Group's impairment
provisioning under IFRS 9 for the loans to customers balances set
out in note 10, including both finance leases, accounted for under
IFRS 16, and loans held at amortised cost, accounted for under IFRS
9, as both groups of assets are subject to the IFRS 9 impairment
requirements.
The disclosures are set out under the following headings:
-- Basis of provision
-- Impairments by stage and division
-- Movements in impairment provision in the year
-- Impairments charged to income
-- Economic inputs to provision calculations
-- Sensitivity analysis
(a) Basis of provision
IFRS 9 requires that impairment is evaluated on an ECL basis.
ECLs are based on an assessment of the probability of default
('PD') and LGD, discounted to give a net present value. The
estimation of ECL should be unbiased and probability weighted,
considering all reasonable and supportable information, including
forward-looking economic assumptions and a range of possible
outcomes. The provision may be based on either twelve month or
lifetime ECL, dependent on whether an account has experienced a
significant increase in credit risk ('SICR').
The Group's process for determining its provisions for
impairments is summarised below. This includes:
i. The methods used for the calculation of ECL
ii. How it defines SICR
iii. How it defines default
iv. How it identifies which loans are credit impaired, as defined by IFRS 9
v. How the ECL estimation process is monitored and controlled
vi. How the Group develops and enhances the models it uses in the ECL estimation process
vii. How the Group uses PMA's to ensure all elements of credit
risk are fully addressed
i) Calculation of expected credit loss ('ECL')
For the majority of the Group's loan assets, the ECL is
generated using statistical models applied to account data to
generate PD and LGD components.
PD on both a twelve month and lifetime basis is estimated based
on statistical models for the Group's most significant asset
classes. The PD calculation is a function of current asset
performance, customer information and future economic assumptions.
The structure of the models was derived through analysis of
correlation in historic data, which identified which current and
historical customer attributes and external economic variables were
predictive of future loss. PD measures are calculated for the full
contractual lives of loans with the models deriving probabilities
that, at a given future date, a loan will be in default, performing
or closed. The Group utilised all reasonably available information
in its possession for this exercise.
LGD for each account is derived by calculating a value for
exposure at the point of default (which will include consideration
of future interest, account charges and receipts) and reducing this
for security values, net of likely costs of recovery. These
calculations allow for the Group's potential case management
activities. This evaluation includes the potential impact of
economic conditions at the time of any future default or
enforcement. The derivation of the significant assumptions used in
these calculations is discussed below.
In certain asset classes a fully modelled approach is not
possible. This is generally where there are few assets in the
class, where there is insufficient historical data on which to base
an analysis or where certain measures, such as days past due are
not useful (including cases where the loan agreement does not
require regular payments of pre-determined amounts). In these
cases, which represent a small proportion of the total portfolio,
alternative approaches are adopted. These rely on internal credit
monitoring practices and professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the
Group will always consider whether the process generates sufficient
provision for particular loans, especially large exposures, and
will provide additional amounts as appropriate.
In certain asset classes a fully modelled approach is not
possible. This is generally where there are few assets in the
class, where there is insufficient historical data on which to base
an analysis or where certain measures, such as days past due are
not useful (such as accounts where the loan agreement does not
require regular payments of pre-determined amounts). In these
cases, which represent a small proportion of the total portfolio,
alternative approaches are adopted. These rely on internal credit
monitoring practices and professional credit judgement.
Notwithstanding the mechanical procedures discussed above, the
Group will always consider whether the process generates sufficient
provision for particular loans, especially large exposures, and
will provide additional amounts as appropriate.
In extreme or unprecedented economic conditions, such as the
Covid pandemic, it is likely that mechanical models will be less
predictive of outcomes as the historical data used for modelling
will be insufficiently representative of present conditions. In
these circumstances, management carefully review all outputs to
ensure provision is adequate.
At 30 September 2021 the impact of reduced economic activity in
the UK from the Covid crisis had not yet been evidenced in customer
credit performance and defaults, due to the lagging effect of
government policy interventions. Where customers were given payment
reliefs, arrears and adverse credit indicators were not recorded by
the Group or other lenders, meaning that both internal credit
metrics and external credit bureau data might not accurately
reflect the customer's credit position leading to modelled PDs
being underestimated.
During the year the trend of economic performance has been
generally upward, albeit from a low level, meaning that the
principal economic indicators are more positive than at 30
September 2020, though still more depressed than pre-Covid levels.
The economic forecasts indicate continued recovery, but this upward
trend will reduce calculated probabilities of default, even where
the absolute levels of metrics remain low and where underlying
credit issues on accounts have not emerged, which may result in
rising defaults as government support initiatives unwind.
These factors have led management to conclude that in the
current economic conditions, the Group's models do not fully
represent loss expectations, and PMA's have been made to compensate
for these weaknesses.
ii) Significant Increase in Credit Risk ('SICR')
Under IFRS 9, SICR is not defined solely by account performance,
but on the basis of the customer's overall credit position, and
this evaluation should include consideration of external data. The
Group's aim is to define SICR to correspond, as closely as
possible, to that population of accounts which are subject to
enhanced administrative and monitoring procedures operationally.
The Group assesses SICR in its modelled portfolios primarily on the
basis of the relative difference in an account's lifetime PD
between origination and the reporting date. The levels of
difference required to qualify as an SICR may differ between
portfolios and will depend, to some extent, on the level of risk
originally perceived and are monitored on an ongoing basis to
ensure that this calibrates with actual experience.
It should be noted that the use of the current PD, which
includes external factors such as credit bureau data, means that
all relevant information in the Group's hands concerning the
customers' present credit position is included in the evaluation,
as well as the impact of future economic expectations.
For non-modelled portfolios, the SICR assessment is based on the
credit monitoring position of the account in question and for all
portfolios a number of qualitative indicators which provide
evidence of SICR have been considered.
In determining whether an account has an SICR in the Covid
environment the granting of Covid--related reliefs, including
payment holidays and similar arrangements, may mean that an SICR
may exist without this being reflected in either arrears
performance or credit bureau data. The Group has accepted the
advice of UK regulatory bodies that the grant of initial Covid
relief did not, of itself, indicate an SICR, but has carefully
considered internal credit and customer data to determine whether
there might be any accounts with SICR not otherwise identified by
the process.
When reviewing the subsequent payment patterns of accounts that
have been granted Covid-related reliefs, it has been evident that
there is higher payment volatility (both in terms of account
improvement and deterioration) in these cases, particularly in
cases where an extension to the payment holiday has been granted.
This indicates an increased credit risk, though the impact is not
significant in scale in all cases. As a result of this analysis the
accounts of customers who have been granted extended payment
reliefs have been placed in Stage 2, regardless of other
indicators. This aligns the Group's approach to regulatory guidance
which suggested that while initial payment reliefs should not
automatically be taken as an indication of an SICR, an extension to
such a relief was more likely to be so.
The effect of this override is to transfer accounts with gross
balances of GBP599.8m (2020: GBP576.3m) to Stage 2. The additional
provision on transfer is included within PMAs.
This overall approach remains consistent with that taken at 30
September 2020. In reviewing account performance during the current
year the Group has not yet identified any positive evidence which
would cause it to begin to unwind this position. It will be
reviewed going forward as other government economic interventions
are scaled back and the post-relief credit characteristics of such
accounts become more evident.
iii) Definitions of default
As the IFRS 9 definition of ECL is based on PD, default must be
defined for this purpose. The Group's definitions of default for
its various portfolios are broadly aligned to its internal
operational procedures and the regulatory definitions of default
used internally. In particular the Group's receiver of rent cases
are defined as defaulted for modelling purposes as the behaviour of
the case after that point is significantly influenced by internal
management decisions.
IFRS 9 provides a rebuttable presumption that an account is in
default when it is 90 days overdue, and this was used as the basis
of the Group's definition. A combination of qualitative and
quantitative measures were used in developing the definitions.
These include account management activities and internal
statuses.
iv) Credit Impaired loans
IFRS 9 defines a credit impaired account as one where an account
has suffered one or more events which have had a detrimental effect
on future cash flows. It is thus a backward-looking definition,
rather than one based on future expectations.
Credit impaired assets are identified either through
quantitative measures or by operational status. Designations of
accounts for regulatory capital purposes are also taken into
account. Assets may also be assigned to Stage 3 if they are
identified as credit impaired as a result of management review
processes.
All loans which are in the process of enforcement, from the
point where this becomes the administration strategy, are
classified as credit impaired.
Loans are retained in Stage 3 for three months after the point
where they cease to exhibit the characteristics of default. After
this point, they may move to Stage 2 or Stage 1 depending on
whether an SICR trigger remains.
All default cases are considered to be credit impaired,
including all receiver of rent cases and all cases with at least
one payment more than 90 days overdue, even where such cases are
being managed in the expectation of realising all of the carrying
balance.
In order to provide better information for users, additional
analysis of credit impaired accounts has been presented below
distinguishing between probationary accounts, receiver of rent
accounts, accounts subject to realisation / enforcement procedures
and long term managed accounts, all of which are treated as credit
impaired. While other indicators of default are in use, the
categories shown account for the overwhelming majority of Stage 3
cases.
v) Monitoring of ECL estimation processes
The Group's ECL models are compiled on the basis of the analysis
of relevant historical data. Before a model is adopted for use its
operations and outputs are examined to ensure that it is expected
to be appropriately predictive and, if it is an updated model,
expected to be more predictive than any existing model. Before a
new model is adopted the changes and impacts will be considered by
the CFO, alongside any advice from the Group's independent model
review functions.
The performance of all models is reviewed on an ongoing basis,
by senior finance and risk management, including the CFO.
Monitoring packs comparing actual and predicted loss levels are
produced at regular intervals, set on the basis of the materiality
of each model. The continuing appropriateness of model assumptions
is also reviewed as part of this process.
Models are revisited on a regular basis to ensure that they
continue to reflect the most recent data as the available
information increases over time.
On a monthly basis all model outputs, model overlays and
provisions calculated for non-modelled books are reviewed by senior
finance management including the CFO in conjunction with the latest
credit risk operational and economic metrics to ensure that the
impairment provision by assets type remains appropriate. This
exercise will be the subject of particular focus at the year end
and the half year.
This information is summarised for the Audit Committee on a
biannual basis, and they have regard to this data in forming their
conclusions on the appropriateness of provisioning levels.
vi) Model development
The models used by the Group are updated from time to time to
allow for changes in the business, developments in best practice
and the availability of additional data with the passing of time.
During the year ended 30 September 2021 a major update to the
buy-to-let PD model took place.
All revised models and model enhancements are carefully reviewed
and tested before adoption, and are subject to a governance process
for their approval.
As a result of the reanalysis of updated historical data, the
economic inputs identified as most predictive of future PD
performance were changed, with the UK unemployment rate being
substituted for UK GDP in the model as the indicator of general UK
economic activity levels.
The impacts of the adoption of the new PD model on the
calculated provision were not significant.
vii) Post Model Adjustments ('PMA's)
Where management has identified a requirement to amend the
calculated provision as a result of either model deficiencies or
idiosyncratic behaviour in part of the portfolio, PMAs are applied
to the modelled outputs so that the ECL recognised corresponds to
expert judgement, taking into account the widest possible range of
current information, which might not be factored into the modelling
process.
In normal circumstances the Group's objective is to develop its
modelling to the point where the level of PMAs required is minimal,
but in economic conditions where previous relevant experience is
limit or non-existent, as with Covid, some form of PMA is always
likely to be necessary.
The current model behaviour and the potential for unobserved
credit issues have meant that the requirement for such adjustments
at 30 September 2021 was significant. Evidence considered by
management included internal performance data, customer feedback,
evidence on the wider economy and quantitative and qualitative data
and statements from industry, government and regulatory bodies.
These were combined to form a broad estimate of the level of
provision required across the Group.
The total amounts of PMAs provided across the Group are set out
below by segment.
2021 2020
GBPm GBPm
Mortgage Lending 8.9 14.0
Commercial Lending 11.2 5.8
Idem Capital 0.3 -
----- -----
20.4 19.8
----- -----
Other than the behaviour of extended payment relief cases noted
above, this analysis found no evidence of particular concentrations
of credit risk below portfolio level. Given this and the high level
nature of the PMA exercise the PMAs have been allocated on a broad
brush basis to individual cases.
The Group will continue to monitor the requirement for these
PMAs as the economic situation develops and the impact of
government interventions recedes.
(b) Impairments by stage and division
IFRS 9 calculations and related disclosures require loan assets
to be divided into three stages, with accounts which were credit
impaired on initial recognition representing a fourth class.
The three classes comprise: those where there has been no SICR
since advance or acquisition (Stage 1); those where there has been
an SICR (Stage 2); and loans which are impaired (Stage 3).
-- On initial recognition, and for assets where there has not
been an SICR, provisions will be made in respect of losses
resulting from the level of credit default events expected in the
twelve months following the balance sheet date
-- Where a loan has experienced an SICR, whether or not the loan
is considered to be credit impaired, provisions will be made based
on the ECLs over the full life of the loan
-- For credit impaired assets, provisions will also be made on the basis of lifetime ECLs
For assets which were 'Purchased or Originated as Credit
Impaired' ('POCI') accounts (those considered as credit impaired at
the point of first recognition), such as certain of the Group's
acquired assets in Idem Capital, the carrying valuation is based on
expected cash flows discounted by the EIR determined at the point
of acquisition.
An analysis of the Group's loan portfolios between the stages
defined above is set out below.
Stage 1 Stage 2 * Stage 3 * POCI Total
GBPm GBPm GBPm GBPm GBPm
30 September 2021
Gross loan book
Mortgage Lending 10,303.7 1,206.4 120.0 13.4 11,643.5
Commercial Lending 1,504.2 66.4 19.0 6.9 1,596.5
Idem Capital 92.5 6.3 25.3 104.0 228.1
--------- ---------- ---------- ------- ---------
Total 11,900.4 1,279.1 164.3 124.3 13,468.1
--------- ---------- ---------- ------- ---------
Impairment provision
Mortgage Lending (1.7) (10.2) (22.9) - (34.8)
Commercial Lending (12.9) (1.0) (13.6) (0.2) (27.7)
Idem Capital (0.4) (0.1) (2.4) - (2.9)
--------- ---------- ---------- ------- ---------
Total (15.0) (11.3) (38.9) (0.2) (65.4)
--------- ---------- ---------- ------- ---------
Net loan book
Mortgage Lending 10,302.0 1,196.2 97.1 13.4 11,608.7
Commercial Lending 1,491.3 65.4 5.4 6.7 1,568.8
Idem Capital 92.1 6.2 22.9 104.0 225.2
--------- ---------- ---------- ------- ---------
Total 11,885.4 1,267.8 125.4 124.1 13,402.7
--------- ---------- ---------- ------- ---------
Coverage ratio
Mortgage Lending 0.02% 0.85% 19.08% - 0.30%
Commercial Lending 0.86% 1.51% 71.58% 2.90% 1.74%
Idem Capital 0.43% 1.59% 9.49% - 1.27%
--------- ---------- ---------- ------- ---------
Total 0.13% 0.88% 23.68% 0.16% 0.49%
--------- ---------- ---------- ------- ---------
* Stage 2 and 3 balances are analysed in more detail below.
Stage 1 Stage 2 * Stage 3 * POCI Total
GBPm GBPm GBPm GBPm GBPm
30 September 2020
Gross loan book
Mortgage Lending 9,822.6 903.2 127.0 15.0 10,867.8
Commercial Lending 1,384.2 132.3 20.2 6.7 1,543.4
Idem Capital 122.9 9.9 28.9 140.3 302.0
--------- ---------- ---------- ------ ---------
Total 11,329.7 1,045.4 176.1 162.0 12,713.2
--------- ---------- ---------- ------ ---------
Impairment provision
Mortgage Lending (5.0) (12.6) (30.7) - (48.3)
Commercial Lending (17.0) (3.0) (8.2) (0.4) (28.6)
Idem Capital (0.2) (0.2) (4.5) - (4.9)
--------- ---------- ---------- ------ ---------
Total (22.2) (15.8) (43.4) (0.4) (81.8)
--------- ---------- ---------- ------ ---------
Net loan book
Mortgage Lending 9,817.6 890.6 96.3 15.0 10,819.5
Commercial Lending 1,367.2 129.3 12.0 6.3 1,514.8
Idem Capital 122.7 9.7 24.4 140.3 297.1
--------- ---------- ---------- ------ ---------
Total 11,307.5 1,029.6 132.7 161.6 12,631.4
--------- ---------- ---------- ------ ---------
Coverage ratio
Mortgage Lending 0.05% 1.40% 24.17% - 0.44%
Commercial Lending 1.23% 2.27% 40.59% 5.97% 1.85%
Idem Capital 0.16% 2.02% 15.57% - 1.62%
--------- ---------- ---------- ------ ---------
Total 0.20% 1.51% 24.65% 0.25% 0.64%
--------- ---------- ---------- ------ ---------
* Stage 2 and 3 balances are analysed in more detail below.
In terms of the Group's credit management processes, Stage 1
cases will fall within the appropriate customer servicing functions
and Stage 2 cases will be subject to account management
arrangements. Stage 3 cases will include both those subject to
recovery or similar processes and those which, though being managed
on a long-term basis, are included with defaulted accounts for
regulatory purposes. However, these broad categorisations may vary
between different product types.
POCI balances included in the Commercial Lending segment arise
principally from acquired businesses, where those assets were
identified as credit impaired at the point of acquisition when the
acquired portfolios as a whole were evaluated. Additional provision
arising on these assets post-acquisition is shown as 'Impairment
Provision' above.
Idem Capital loans include acquired consumer and motor finance
loans together with legacy (originated pre-2010) second charge
mortgage and unsecured consumer loans. Legacy assets and acquired
loans which were performing on acquisition are included in the
staging analysis above.
Acquired portfolios within the Mortgage Lending and Idem Capital
segments which were largely non-performing at acquisition, and
which were purchased at a deep discount to face value are shown as
POCI assets above. Although no provision is shown above for such
assets, the effect of the discount on purchase is included in the
gross value ensuring that the carrying value is substantially less
than the current balances due from customers and the level of cover
is considerable.
Analysis of Stage 2 loans
The table below analyses the accounts in Stage 2 between those
not more than one month in arrears where an SICR has nonetheless
been identified from other information and accounts more than one
month in arrears.
Cases which have been greater than one month in arrears in the
last three months, but which are not at the balance sheet date are
shown as 'recent arrears' in the tables below. These cases have
been analysed separately for the first time in the current
year.
Levels of Stage 2 assets increased substantially during the
early part of the Covid outbreak, and has been broadly stable over
the course of the year. The largest part of the Stage 2 balance at
30 September 2021 related to extended payment holiday accounts
transferred from Stage 1 These are shown in the < 1 month
arrears column in the table below. As fewer extensions were granted
after 30 September 2020, the rate of increase of such Stage 2 cases
has been much reduced in the period.
While the number of Stage 2 arrears accounts across the
portfolios has increased since September 2020 in the Mortgage
Lending segment as payment reliefs unwind, levels remain far lower
than those seen in September 2019 in more normal payment
conditions.
Coverage levels in Stage 2 across the portfolios have reduced
since 30 September 2020, with an improved economic outlook and
increasing security values. However, these remain higher than those
seen pre-pandemic, due to the impact of PMAs, particularly on
'<1 month arrears' cases. Coverage ratios of '> 1 < = 3
months arrears' cases have been varied due to the composition of
the relatively small balances, particularly in the Commercial
Lending and Idem Capital divisions.
< 1 month Recent > 1 <= Total
arrears arrears 3 months
arrears
GBPm GBPm GBPm GBPm
30 September 2021
Gross loan book
Mortgage Lending 1,184.8 8.0 13.6 1,206.4
Commercial Lending 61.1 0.2 5.1 66.4
Idem Capital 2.9 0.7 2.7 6.3
---------- --------- ---------- --------
Total 1,248.8 8.9 21.4 1,279.1
---------- --------- ---------- --------
Impairment provision
Mortgage Lending (9.9) (0.1) (0.2) (10.2)
Commercial Lending (0.9) - (0.1) (1.0)
Idem Capital - - (0.1) (0.1)
---------- --------- ---------- --------
Total (10.8) (0.1) (0.4) (11.3)
---------- --------- ---------- --------
Net loan book
Mortgage Lending 1,174.9 7.9 13.4 1,196.2
Commercial Lending 60.2 0.2 5.0 65.4
Idem Capital 2.9 0.7 2.6 6.2
---------- --------- ---------- --------
Total 1,238.0 8.8 21.0 1,267.8
---------- --------- ---------- --------
Coverage ratio
Mortgage Lending 0.84% 1.25% 1.47% 0.85%
Commercial Lending 1.50% - 1.96% 1.51%
Idem Capital - - 3.70% 1.59%
---------- --------- ---------- --------
Total 0.86% 1.12% 1.87% 0.88%
---------- --------- ---------- --------
< 1 month Recent > 1 <= Total
arrears arrears 3 months
arrears
GBPm GBPm GBPm GBPm
30 September 2020
Gross loan book
Mortgage Lending 879.9 5.9 17.4 903.2
Commercial Lending 113.2 10.5 8.6 132.3
Idem Capital 4.8 1.6 3.5 9.9
---------- --------- ---------- --------
Total 997.9 18.0 29.5 1,045.4
---------- --------- ---------- --------
Impairment provision
Mortgage Lending (12.0) (0.2) (0.4) (12.6)
Commercial Lending (2.5) (0.1) (0.4) (3.0)
Idem Capital (0.1) - (0.1) (0.2)
---------- --------- ---------- --------
Total (14.6) (0.3) (0.9) (15.8)
---------- --------- ---------- --------
Net loan book
Mortgage Lending 867.9 5.7 17.0 890.6
Commercial Lending 110.7 10.4 8.2 129.3
Idem Capital 4.7 1.6 3.4 9.7
---------- --------- ---------- --------
Total 983.3 17.7 28.6 1,029.6
---------- --------- ---------- --------
Coverage ratio
Mortgage Lending 1.36% 3.39% 2.30% 1.40%
Commercial Lending 2.21% 0.95% 4.65% 2.27%
Idem Capital 2.08% - 2.86% 2.02%
---------- --------- ---------- --------
Total 1.46% 1.67% 3.05% 1.51%
---------- --------- ---------- --------
Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between
those:
-- In the process of sale or other enforcement procedures ('Realisations')
-- Where a receiver of rent ('RoR') has been appointed by the
Group to manage the property on the customers' behalf
-- Which are being managed on a long-term basis and where full
recovery is possible, but which are considered to meet regulatory
default criteria at the balance sheet date ('>3 month
arrears')
-- which no longer meet regulatory default criteria but which
are being retained in Stage 3 for a probationary period
('Probation')
Where an account meets two of the criteria, it will be assigned
to the category shown first in the list above.
In these disclosures probation accounts have been analysed
separately for the first time, in order to provide better
information for users.
The impact of Covid on the number and value of Stage 3 accounts
has been limited so far. Payment reliefs have prevented arrears
being recorded and other enforcement activities have been limited
by government intervention. This particularly impacts on cases
analysed as 'realisations'.
The completion of payment relief periods has led to some
increases in > 3 month arrears cases, particularly in the
Mortgage Lending business, while credit reviews have identified at
risk cases in other areas. This increase is, however, is offset by
the continuing realisations from the receiver of rent portfolio as
long-term cases are managed out.
Coverage levels have generally reduced a little from 30
September 2020 as a result of increased security values, while
remaining substantially in excess of pre-Covid levels. The coverage
ratio for Commercial Lending is subject to fluctuations as the
number of cases is relatively low and the ratio can be
significantly influenced by individual larger cases.
Probation > 3 month RoR managed Realisations Total
arrears
GBPm GBPm GBPm GBPm GBPm
30 September 2021
Gross loan book
Mortgage Lending 7.3 20.7 80.9 11.1 120.0
Commercial Lending 0.6 11.4 - 7.0 19.0
Idem Capital 0.7 21.3 - 3.3 25.3
---------- ---------- ------------ ------------- -------
Total 8.6 53.4 80.9 21.4 164.3
---------- ---------- ------------ ------------- -------
Impairment provision
Mortgage Lending (0.3) (0.9) (17.4) (4.3) (22.9)
Commercial Lending (0.1) (10.3) - (3.2) (13.6)
Idem Capital - (1.0) - (1.4) (2.4)
---------- ---------- ------------ ------------- -------
Total (0.4) (12.2) (17.4) (8.9) (38.9)
---------- ---------- ------------ ------------- -------
Net loan book
Mortgage Lending 7.0 19.8 63.5 6.8 97.1
Commercial Lending 0.5 1.1 - 3.8 5.4
Idem Capital 0.7 20.3 - 1.9 22.9
---------- ---------- ------------ ------------- -------
Total 8.2 41.2 63.5 12.5 125.4
---------- ---------- ------------ ------------- -------
Coverage ratio
Mortgage Lending 4.11% 4.35% 21.51% 38.74% 19.08%
Commercial Lending 16.67% 90.35% - 45.71% 71.58%
Idem Capital - 4.69% - 42.42% 9.49%
---------- ---------- ------------ ------------- -------
Total 4.65% 22.85% 21.51% 41.59% 23.68%
---------- ---------- ------------ ------------- -------
Probation > 3 month RoR managed Realisations Total
arrears
GBPm GBPm GBPm GBPm GBPm
30 September 2020
Gross loan book
Mortgage Lending 6.5 12.9 86.7 20.9 127.0
Commercial Lending 3.2 11.2 - 5.8 20.2
Idem Capital 1.0 24.3 - 3.6 28.9
---------- ---------- ------------ ------------- -------
Total 10.7 48.4 86.7 30.3 176.1
---------- ---------- ------------ ------------- -------
Impairment provision
Mortgage Lending (0.3) (1.5) (20.8) (8.1) (30.7)
Commercial Lending (0.9) (4.1) - (3.2) (8.2)
Idem Capital - (2.8) - (1.7) (4.5)
---------- ---------- ------------ ------------- -------
Total (1.2) (8.4) (20.8) (13.0) (43.4)
---------- ---------- ------------ ------------- -------
Net loan book
Mortgage Lending 6.2 11.4 65.9 12.8 96.3
Commercial Lending 2.3 7.1 - 2.6 12.0
Idem Capital 1.0 21.5 - 1.9 24.4
---------- ---------- ------------ ------------- -------
Total 9.5 40.0 65.9 17.3 132.7
---------- ---------- ------------ ------------- -------
Coverage ratio
Mortgage Lending 4.62% 11.63% 23.99% 38.76% 24.17%
Commercial Lending 28.12% 36.61% - 55.17% 40.59%
Idem Capital - 11.52% - 47.22% 15.57%
---------- ---------- ------------ ------------- -------
Total 11.21% 17.36% 23.99% 42.90% 24.65%
---------- ---------- ------------ ------------- -------
The security values available to reduce exposure at default in
the calculation shown above for Stage 3 accounts are set out below.
The estimated value of the security represents, for each account,
the lesser of the valuation estimate and the exposure at default in
the central scenario. Security values are based on the most recent
valuation of the relevant asset held by the Group, indexed or
depreciated as appropriate.
2021 2020
GBPm GBPm
First mortgages 74.7 71.9
Second mortgages 15.4 17.3
Asset finance 4.7 6.7
Motor finance 2.0 1.5
----- -----
96.8 97.4
----- -----
The RoR managed accounts are being managed to ensure the optimal
resolution for landlords, tenants and lenders and this long-term,
stable situation underpinned their treatment as not impaired under
IAS 39, but the existence of the RoR arrangement causes the
accounts to be treated as defaulted for regulatory purposes. The
Group's RoR arrangements are described in more detail below.
Idem Capital balances with over three months arrears comprise
principally second charge mortgage accounts originated over ten
years ago which have been over three months in arrears for some
time. These accounts are generally making regular payments and have
significant levels of equity in the underlying property which
reduces the required provision to the value shown above. It is
expected that a high proportion of these accounts will eventually
redeem naturally, either on the sale of the property or by the
satisfaction of the amount due through instalment payments.
Buy-to-let receiver of rent cases (Stage 3)
The following table analyses the number and gross carrying value
of RoR managed accounts shown above by the date of the receivers'
appointment, illustrating this position.
30 September 30 September
2021 2020
No. GBPm No. GBPm
Managed accounts
Appointment date
2010 and earlier 333 56.3 369 62.4
2011 to 2013 56 9.1 72 12.4
2014 to 2016 24 3.3 29 4.2
2016 and later 86 12.2 46 7.7
------ ------- ------ -------
Total managed accounts 499 80.9 516 86.7
Accounts in the process of realisation 54 10.2 104 19.7
------ ------- ------ -------
553 91.1 620 106.4
------ ------- ------ -------
Receiver of rent accounts in the process of realisation at the
period end are included under that heading in the Stage 3 tables
above.
In addition to the cases analysed above, no POCI mortgage
accounts also had a receiver of rent appointed (2020: 3), making a
total of 553 (2020: 623).
(c) Movements in impairment provision in the year
The movements in the impairment provision calculated under IFRS
9, analysed by business segments, are set out below.
Mortgage Commercial Idem Total
Lending Lending Capital
GBPm GBPm GBPm GBPm
At 30 September 2020 48.3 28.6 4.9 81.8
(Released) / Provided
in period (5.9) 4.0 (1.2) (3.1)
Amounts written off (7.6) (4.9) (0.8) (13.3)
--------- ----------- --------- -------
At 30 September 2021 34.8 27.7 2.9 65.4
--------- ----------- --------- -------
At 30 September 2019 26.8 10.7 4.4 41.9
Provided in period 25.8 22.7 1.3 49.8
Amounts written off (4.3) (4.8) (0.8) (9.9)
--------- ----------- --------- -------
At 30 September 2020 48.3 28.6 4.9 81.8
--------- ----------- --------- -------
Accounts are considered to be written off for accounting
purposes if a balance remains once standard enforcement processes
have been completed, subject to any amount retained in respect of
expected salvage receipts. This has no effect on the net carrying
value, only on the amounts reported as gross loan balances and
accumulated impairment provisions.
The difference between the amount shown above and the profit and
loss account charge for the period is amounts recovered on
previously written off accounts of GBP1.6m (2020: GBP1.5m).
A more detailed analysis of these movements by IFRS 9 stage on a
consolidated basis for the year ended 30 September 2021 and 30
September 2020 is set out below.
Stage Stage Stage POCI Total
1 2 3
GBPm GBPm GBPm GBPm GBPm
Loss allowance at 30
September 2020 22.2 15.8 43.4 0.4 81.8
New assets originated
or purchased 8.1 - - - 8.1
Changes in loss allowance
Transfer to Stage 1 4.7 (2.6) (2.1) - -
Transfer to Stage 2 (1.4) 2.1 (0.7) - -
Transfer to Stage 3 (0.2) (0.7) 0.9 - -
Changes on stage transfer (3.8) 1.8 3.1 - 1.1
Changes due to credit
risk (14.6) (5.1) 7.6 (0.2) (12.3)
Write offs - - (13.3) - (13.3)
------- -------------- ------- ------ -------
Loss allowance at
30 September 2021 15.0 11.3 38.9 0.2 65.4
------- -------------- ------- ------ -------
Loss allowance at 30
September 2019 6.0 3.7 32.2 - 41.9
New assets originated
or purchased 10.2 - - - 10.2
Changes in loss allowance
Transfer to Stage 1 0.9 (0.7) (0.2) - -
Transfer to Stage 2 (1.2) 1.3 (0.1) - -
Transfer to Stage 3 (0.5) (0.4) 0.9 - -
Changes on stage transfer (0.5) 7.5 6.2 - 13.2
Changes due to credit
risk 7.3 4.4 14.3 0.4 26.4
Write offs - - (9.9) - (9.9)
------- -------------- ------- ------ -------
Loss allowance at
30 September 2020 22.2 15.8 43.4 0.4 81.8
------- -------------- ------- ------ -------
The principal movements in the impairment provision in the year
were downwards, with a more benign economic outlook reducing both
the estimated likelihood of losses and the expected loss on
defaulted cases as security values improved. However coverage
levels still remain in excess of those pre-Covid, with PMAs in
place to compensate for the potential impact of credit issues not
apparent in the data.
While less accounts have been granted payment holiday extensions
in the year than in the year ended 30 September 2020, this has
driven further transfers from Stage 1 to Stage 2. Transfers to
Stage 3 reflect principally a small number of realisation cases and
other cases identified through credit review. Write offs largely
relate to the realisation of already provided losses on cases being
worked out on a long-term basis.
In the year ended 30 September 2020 the principal factor
generating the increase in the loss allowance in the period was the
impact of the Covid crisis, which has led to increased loss
expectations across all of the Group's portfolios, primarily as a
result of the forecast deterioration in key economic variables and
their impact on the Group's customers. The broad availability of
payment holidays was also reflected, with extended payment holiday
accounts transferred to Stage 2 and PMAs made to allow for the
potential delay in the recognition of credit issues due to
reliefs.
The movements in the Loans to Customers balances in respect of
which these loss allowances have been made are set out below.
Stage Stage Stage POCI Total
1 2 3
GBPm GBPm GBPm GBPm GBPm
Balance at 30 September
2020 11,329.7 1,045.4 176.1 162.0 12,713.2
New assets originated
or purchased 2,419.4 - - - 2,419.4
Changes in staging
Transfer to Stage
1 158.5 (149.5) (9.0) - -
Transfer to Stage
2 (514.2) 519.6 (5.4) - -
Transfer to Stage
3 (23.7) (21.6) 45.3 - -
Redemptions and repayments (1,884.9) (158.6) (35.7) (53.1) (2,132.3)
Write offs - - (13.3) - (13.3)
Other changes 415.6 43.8 6.3 15.4 481.1
---------- -------- ------- ------- ----------
Balance at 30 September
2021 11,900.4 1,279.1 164.3 124.3 13,468.1
Loss allowance (15.0) (11.3) (38.9) (0.2) (65.4)
---------- -------- ------- ------- ----------
Carrying value 11,885.4 1,267.8 125.4 124.1 13,402.7
---------- -------- ------- ------- ----------
Balance at 30 September
2019 11,382.6 458.5 167.9 219.0 12,228.0
New assets originated
or purchased 2,071.4 - - - 2,071.4
Changes in staging
Transfer to Stage
1 202.3 (200.1) (2.2) - -
Transfer to Stage
2 (846.2) 849.2 (3.0) - -
Transfer to Stage
3 (42.6) (20.5) 63.1 - -
Redemptions and repayments (1,488.3) (54.1) (42.0) (78.1) (1,662.5)
Write offs - - (9.9) - (9.9)
Other changes 50.5 12.4 2.2 21.1 86.2
---------- -------- ------- ------- ----------
Balance at 30 September
2020 11,329.7 1,045.4 176.1 162.0 12,713.2
Loss allowance (22.2) (15.8) (43.4) (0.4) (81.8)
---------- -------- ------- ------- ----------
Carrying value 11,307.5 1,029.6 132.7 161.6 12,631.4
---------- -------- ------- ------- ----------
Other changes includes interest and similar charges
(d) Economic inputs to provision calculations
Impairment provision under IFRS 9 is calculated on a
forward-looking ECL basis, based on expected economic conditions in
multiple internally coherent scenarios. While the provision
calculation is intended to address all possible future economic
outcomes, the Group, in common with most other lenders, uses a
small number of differing scenarios as representatives of this
universe of potential outturns.
The Group uses four distinct economic scenarios chosen to
represent the range of possible outcomes and allow for the impact
of economic asymmetry in the calculations. Each scenario comprises
a number of economic parameters and while models for different
portfolios may not use all of the variables, the set, as a whole,
is defined for the Group and must be consistent.
As the Group does not have an internal economics function, in
developing its economic scenarios it considers analysis from
reputable external sources to form a general market consensus which
informs its central scenario. These sources include data and
forecasts produced by the Office of Budget Responsibility ('OBR')
and the PRA as well as private sector economic research bodies. The
Group also takes account of public statements from bodies such as
the Bank of England and the UK Government to inform its final
position.
The central scenario used for IFRS 9 impairment purposes is the
same scenario which forms the basis of the Group's business
planning and forecasting and will therefore generally carry the
highest probability weighting. In its September 2021 forecasting
cycle (the 'October reforecast') the Group has adopted a central
economic scenario derived using a broadly equivalent approach to
that used in September 2020, with the starting point of the
scenario updated to reflect the actual movements of economic
variables in the year. The general trend of the Group's central
forecast is consistent with the monetary forecast published by the
Bank of England in August 2021.
Compared to the central scenario adopted at 30 September 2020,
the new central forecast is broadly similar across the five year
period, but more optimistic as to short term prospects. This
2021/2022 upgrade is a result of the opening position being better
than implied in the 2020 central scenario, progress made to date in
combatting the pandemic in the UK, including the success of the
vaccination programme, and a more positive outlook from economists
generally.
The upside and downside scenarios continue to be derived from
the central scenario, as they have been in previous periods.
However, these scenarios are not as markedly different in shape as
those used at September 2020 nor as widely divergent from the
central position, with a greater level of consensus as to the shape
and timing of the post-Covid trajectory of the UK economy emerging
amongst analysts and commentors. It should be noted that the 2020
scenarios converged towards the later part of the five-year period,
as Covid impacts receded. Therefore, a less divergent starting
point for the 2021 scenarios is in line with this expectation.
The severe scenario has been derived from the stress testing
scenarios published by the Bank of England, as in previous periods.
The stress testing scenario published in January 2021 was used in
this iteration of the Group's forecasts. This is a more severe
scenario than that published for 2020. The Bank of England scenario
includes a house price projection based on a sharp decline and a
rapid bounce back, which would have a limited impact on expected
losses. As house prices have a significant impact on the Group's
modelling of losses, it was determined that the impact of a more
protracted slump, would better represent a severe downturn and the
Bank of England scenario was adjusted accordingly.
Following a review of the weightings of the different scenarios,
set against the overall potential for variability in the future
economic outlook, the Group decided to maintain the scenario
weightings used at 30 September 2020.
The weightings attached to each scenario are set out below
2021 2020
Central scenario 40% 40%
Upside scenario 10% 10%
Downside scenario 35% 35%
Severe scenario 15% 15%
----- -----
100% 100%
----- -----
The Group's economic scenarios comprise six variables based on
standard publicly available metrics for the UK. These variables
are
-- Year-on-year change in Gross Domestic Product ('GDP') as
measured by the Office of National Statistics ('ONS')
-- Year-on-year change in the House Price Index ('HPI') as
measured by the Nationwide Building Society
-- Bank Base Rate ('BBR'), as set by the Bank of England
-- Consumer Price Inflation ('CPI') rate, as measured by the ONS
-- Unemployment rate, as measured by the ONS
-- Annual change in secured lending, as measured by the Bank of
England 'mortgage advances' data series
-- Annual change in consumer credit, as measured by the Bank of
England 'unsecured advances' data series
The projected average annual values of each of these variables
in each of the first five financial years of the forecast period
are set out below.
30 September 2021
Gross Domestic Product ('GDP') (year-on-year change)
2022 2023 2024 2025 2026
Central scenario 7.2% 2.0% 1.3% 1.6% 1.9%
Upside scenario 8.6% 2.5% 2.1% 1.8% 1.9%
Downside scenario 3.9% 3.4% 2.1% 1.9% 1.9%
Severe scenario (3.7)% 8.9% 4.9% 2.6% 2.0%
House Price Index ('HPI') (year-on-year change)
2022 2023 2024 2025 2026
Central scenario (0.7)% 2.1% 2.7% 3.2% 3.0%
Upside scenario 4.0% 3.9% 4.5% 4.7% 2.6%
Downside scenario (4.9)% (5.9)% - 2.1% 2.1%
Severe scenario (10.9)% (11.6)% (7.9)% (1.8)% 0.7%
Bank Base Rate ('BBR') (rate)
2022 2023 2024 2025 2026
Central scenario 0.1% 0.1% 0.4% 0.7% 0.8%
Upside scenario 0.1% 0.5% 0.9% 1.0% 1.0%
Downside scenario 0.1% 0.1% 0.2% 0.3% 0.5%
Severe scenario - (0.1)% - - 0.1%
Consumer Price Inflation ('CPI') (rate)
2022 2023 2024 2025 2026
Central scenario 3.8% 2.3% 1.9% 2.0% 2.0%
Upside scenario 3.0% 2.1% 2.0% 2.0% 2.0%
Downside scenario 4.2% 3.0% 2.1% 2.0% 2.0%
Severe scenario 0.9% 0.4% 0.9% 1.5% 1.9%
Unemployment (rate)
2022 2023 2024 2025 2026
Central scenario 5.4% 5.1% 4.7% 4.3% 4.2%
Upside scenario 4.6% 4.3% 4.3% 4.0% 3.8%
Downside scenario 5.8% 5.5% 5.1% 4.7% 4.6%
Severe scenario 9.4% 11.5% 8.7% 5.8% 4.9%
Secured lending (annual change)
2022 2023 2024 2025 2026
Central scenario 4.4% 3.6% 3.1% 3.2% 3.3%
Upside scenario 5.3% 4.8% 4.3% 3.8% 3.8%
Downside scenario 3.3% 2.8% 2.9% 3.6% 3.9%
Severe scenario 1.5% (2.4)% (1.0)% 1.3% 2.5%
Consumer credit (annual change)
2022 2023 2024 2025 2026
Central scenario 2.6% 4.4% 5.5% 6.1% 6.2%
Upside scenario 4.3% 6.5% 7.3% 8.0% 8.3%
Downside scenario 2.3% 2.0% 2.0% 2.0% 2.3%
Severe scenario 0.6% 5.1% 1.2% 1.7% 4.0%
30 September 2020
Gross Domestic Product ('GDP') (year-on-year change)
2021 2022 2023 2024 2025
Central scenario 4.9% 5.7% 2.2% 1.5% 1.4%
Upside scenario 6.0% 5.4% 2.4% 1.5% 1.5%
Downside scenario 2.1% 9.3% 2.9% 1.3% 1.5%
Severe scenario 0.2% 9.5% 2.2% 1.4% 1.3%
House Price Index ('HPI') (year-on-year change)
2021 2022 2023 2024 2025
Central scenario (0.8)% 0.3% 4.0% 4.0% 3.8%
Upside scenario 1.3% 1.3% 3.0% 3.3% 3.8%
Downside scenario (3.5)% (7.0)% (0.1)% 3.8% 3.8%
Severe scenario (11.8)% (13.8)% (5.3)% 1.5% 3.8%
Bank Base Rate ('BBR') (rate)
2021 2022 2023 2024 2025
Central scenario 0.1% 0.1% 0.4% 0.8% 0.8%
Upside scenario 0.1% 0.4% 0.7% 0.9% 1.0%
Downside scenario 0.1% 0.1% 0.1% 0.3% 0.8%
Severe scenario 0.0% (0.2)% 0.1% 0.2% 0.6%
Consumer Price Inflation ('CPI') (rate)
2021 2022 2023 2024 2025
Central scenario 0.9% 1.7% 2.2% 2.1% 2.1%
Upside scenario 1.2% 2.1% 2.1% 2.2% 2.1%
Downside scenario 0.7% 1.3% 1.8% 2.1% 2.0%
Severe scenario (0.1)% 0.7% 1.5% 2.0% 2.0%
Unemployment (rate)
2021 2022 2023 2024 2025
Central scenario 7.1% 5.3% 5.0% 5.0% 4.4%
Upside scenario 6.3% 4.8% 4.6% 4.5% 4.1%
Downside scenario 8.2% 6.5% 5.7% 5.0% 4.8%
Severe scenario 8.5% 7.8% 7.0% 6.3% 5.5%
Secured lending (annual change)
2021 2022 2023 2024 2025
Central scenario 3.6% 3.7% 3.8% 3.9% 3.9%
Upside scenario 4.7% 4.5% 4.2% 4.1% 4.0%
Downside scenario 1.8% 2.3% 3.2% 3.7% 3.8%
Severe scenario (0.9)% 0.2% 2.3% 3.4% 3.7%
Consumer credit (annual change)
2021 2022 2023 2024 2025
Central scenario 6.0% 6.1% 6.1% 6.3% 6.3%
Upside scenario 8.7% 8.2% 7.3% 6.9% 6.7%
Downside scenario 1.8% 2.8% 4.3% 5.4% 5.7%
Severe scenario (4.6)% (2.3)% 1.6% 4.0% 4.8%
After the end of the initial five year period, the final rate or
rate of change (as appropriate) is assumed to continue into the
future in each scenario.
To illustrate the levels of non-linearity in the various
scenarios, the maximum and minimum quarterly levels for each
variable over the five year period commencing on the balance sheet
date are set out below.
30 September 2021
Central Upside Downside scenario Severe scenario
scenario scenario
Max Min Max Min Max Min Max Min
% % % % % % % %
Economic
driver
GDP 11.5 1.1 13.3 1.6 7.3 0.9 14.3 (5.9)
HPI 6.1 (4.0) 7.7 0.6 2.9 (9.8) 2.4 (16.9)
BBR 0.8 0.1 1.0 0.1 0.5 0.1 0.2 (0.1)
CPI 4.0 1.8 3.8 1.8 4.5 1.8 2.0 0.2
Unemployment 5.5 4.1 4.7 3.8 5.9 4.5 11.9 4.8
Secured lending 4.8 3.0 5.5 3.5 4.0 2.5 3.1 (2.5)
Consumer
credit 6.4 0.4 8.5 1.9 4.6 (0.1) 9.2 (8.9)
30 September 2020
Central Upside Downside scenario Severe scenario
scenario scenario
Max Min Max Min Max Min Max Min
% % % % % % % %
Economic
driver
GDP 18.0 (7.6) 18.8 (5.9) 17.8 (15.1) 20.5 (17.9)
HPI 5.0 (4.0) 4.0 0.0 4.0 (10.0) 4.0 (20.0)
BBR 0.8 0.1 1.0 0.1 1.0 0.1 0.8 (0.4)
CPI 2.4 0.6 2.3 0.7 2.3 0.2 2.3 (0.3)
Unemployment 7.6 4.0 7.0 4.0 9.0 4.5 9.0 5.3
Secured lending 3.9 3.5 4.8 4.0 3.8 1.7 3.7 (1.2)
Consumer
credit 6.3 6.0 8.8 6.7 5.7 1.5 4.8 (5.2)
The asymmetry in the models is demonstrated by comparing the
calculated impairment provision with that which would have been
produced using the Central scenario alone, 100% weighted.
2021 2020
GBPm GBPm
Calculated provision 65.4 81.8
100% weighted central scenario 52.7 67.4
----- -----
Effect of multiple economic scenarios 12.7 14.4
----- -----
Economic conditions
To illustrate the potential impact of differing future economic
scenarios on the total impairment, the provision which would be
calculated if each of the economic scenarios were 100% weighted are
shown below:
Scenario 2021 2020
Provision Difference Provision Difference
GBPm GBPm GBPm GBPm
Central 52.7 (12.7) 67.4 (14.4)
Upside 47.1 (18.3) 58.0 (23.8)
Downside 68.1 2.7 82.4 0.6
Severe Downside 106.1 40.7 134.3 52.5
---------- ----------- ---------- -----------
The weighted average of these 100% weighted provisions need not
equal the weighted average ECL due to the impact of the differing
PDs on staging. However due to the impact of post-model stage
adjustments at 30 September 2020, the effect on the PD SICR test of
100% weighting has not been taken into account in the calculations
at that date.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
The analysis below splits derivatives between those accounted
for within portfolio fair value hedges, or as cash flow hedges and
those which, despite representing an economic hedge, are not
accounted for as hedges. There were no individual interest rate
risk hedging arrangements in place either in the year ended 30
September 2021 or the preceding year.
2021 2021 2020 2020
Assets Liabilities Assets Liabilities
GBPm GBPm GBPm GBPm
Derivatives in hedge accounting
relationships
Fair value hedges
Interest rate swaps
Fixed to floating 35.9 (35.8) - (130.0)
Floating to fixed 2.8 (5.9) 14.4 -
-------- ------------- -------- -------------
38.7 (41.7) 14.4 (130.0)
-------- ------------- -------- -------------
Cash flow hedges
Cross-currency basis swaps
Dollar-sterling - - 213.2 -
Euro-sterling - - 232.1 -
-------- ------------- -------- -------------
- - 445.3 -
-------- ------------- -------- -------------
Total derivatives in hedge
accounting relationships 38.7 (41.7) 459.7 (130.0)
Other derivatives
Interest rate swaps 5.5 (2.0) 3.4 (2.4)
Currency futures - (0.2) 0.2 -
-------- ------------- -------- -------------
Total recognised derivative
assets / (liabilities) 44.2 (43.9) 463.3 (132.4)
-------- ------------- -------- -------------
All hedging relationships and strategies at 30 September 2020
described in the 2020 Group Accounts have continued in the period.
All remaining borrowings and their related swaps were paid down in
the year.
The Group's securitisation borrowings are denominated in
sterling, euros and US dollars. All currency borrowings are swapped
at inception so that they have the effect of sterling borrowings.
These swaps provide an effective hedge against exchange rate
movements, but the requirement to carry them at fair value leads,
when exchange rates have moved significantly since the issue of the
notes, to large balances for the swaps being carried in the balance
sheet. This is currently the case with both euro and US dollar
swaps, although the debit balance is compensated for by
retranslating the borrowings at the current exchange rate.
These compensating differences gave rise to the exchange
differences shown in note 22.
13. INTANGIBLE ASSETS
Intangible assets at net book value comprise:
2021 2020 2019
GBPm GBPm GBPm
Goodwill 164.4 164.4 164.4
Computer software 3.4 2.2 2.4
Other intangibles 2.7 3.5 4.3
------ ------ ------
Total assets 170.5 170.1 171.1
------ ------ ------
The balance for goodwill at 30 September 2021 shown above
includes GBP113.0m in respect of the Small and Medium sized
enterprises lending Cash Generating Unit ('CGU') and GBP49.8m in
respect of the Development Finance CGU.
(a) SME lending
The goodwill carried in the accounts relating to the SME lending
CGU was recognised on acquisitions in the years ended 30 September
2016 and 30 September 2018.
An impairment review undertaken at 30 September 2021 indicated
that no write down was required.
The recoverable amount of the SME lending CGU used in this
impairment testing is determined on a value in use basis using
pre-tax cash flow projections based on financial budgets approved
by the Board in November 2021 covering a five-year period. These
forecasts reflect the projected trajectory of the business recovery
from the Covid pandemic with the five year average growth rate
beginning to normalise following the initial bounce back phase in
2021, as well as the Group's current strategy for the business.
The key assumptions underlying the value in use calculation for
the SME lending CGU are:
-- Level of business activity, based on management expectations.
The forecast assumes a compound annual growth rate ('CAGR') for new
business over the five-year period of 13.9%, compared with 19.7%
used in the calculation at 30 September 2020. Cash flows beyond the
five-year budget are extrapolated using a constant growth rate of
1.6% (2020: 1.5%) which does not exceed the long term average
growth rates for the markets in which the business is active
Management have concluded that the levels of activity assumed
for the purpose of this forecast are reasonable, based on past
experience and the current economic environment
-- Discount rate, which is based on third party estimates of the
implied industry cost of capital. The pre-tax discount rate applied
to the cash flow projection is 13.4% (2020: 15.0%)
As an illustration of the sensitivity of this impairment test to
movements in the key assumptions, the Group has calculated that a
0% growth rate combined with a 15.0% reduction in profit levels and
a 159 basis point increase in the pre-tax discount rate would
eliminate the headroom in the projection. A 0% growth rate combined
with a 20.7% reduction in profit levels and a 125 basis point
increase in the pre-tax discount rate would generate a write down
of GBP10.0m.
In the testing carried out at 30 September 2020, a 10.0%
reduction in profit levels coupled with a 100 basis point increase
in the pre-tax discount rate would eliminate the headroom.
(b) Development finance
The goodwill carried in the accounts relating to the development
finance CGU was first recognised on a business acquisition in the
year ended 30 September 2018.
An impairment review undertaken at 30 September 2021 indicated
that no write down was required.
The recoverable amount of the development finance CGU used in
this impairment testing is determined on a value in use basis using
pre-tax cash flow projections based on financial budgets approved
by the Board in November 2021 covering a five-year period. These
forecasts show growth slower than that originally forecast for 2021
which was inflated by the impact of the initial post Covid bounce
back.
The key assumptions underlying the value in use calculation for
the development finance cash generating unit are:
-- Level of business activity, based on management expectations.
The forecast assumes a CAGR for drawdowns over the five-year period
of 13.2%, compared with 16.9% used in the calculation at 30
September 2020. Cash flows beyond the five-year budget are
extrapolated using a constant growth rate of 1.6% (2020: 1.5%)
which does not exceed the long-term average growth rate for the UK
economy
Management have concluded that the levels of activity assumed
for the purpose of this forecast are reasonable, based on past
experience and the current economic environment
-- Discount rate, which is based on third party estimates of the
implied industry cost of capital. The pre-tax discount rate applied
to the cash flow projection is 13.2% (2020: 14.2%)
Management believes any reasonably possible change in the key
assumptions above would not cause the recoverable amount of the
development finance CGU to fall below the balance sheet carrying
value. This was also the case in the testing carried out at 30
September 2020.
14. RETAIL DEPOSITS
The Group's retail deposits, held by Paragon Bank PLC, were
received from customers in the UK and are denominated in sterling.
The deposits comprise principally term deposits, and notice and
easy access accounts. The method of interest calculation on these
deposits is analysed as follows:
2021 2020 2019
GBPm GBPm GBPm
Fixed rate 5,466.0 4,975.9 4,154.4
Variable rates 3,834.4 2,880.7 2,237.5
-------- -------- --------
9,300.4 7,856.6 6,391.9
-------- -------- --------
The weighted average interest rate on retail deposits at 30
September 2021, analysed by charging method, was:
2021 2020 2019
% % %
Fixed rate 1.25 1.69 2.02
Variable rates 0.42 0.72 1.43
----- ----- -----
All deposits 0.91 1.34 1.81
----- ----- -----
The contractual maturity of these deposits is analysed
below.
2021 2020 2019
GBPm GBPm GBPm
Amounts repayable
In less than three months 789.0 565.0 466.6
In more than three months,
but not more than one year 3,105.4 2,725.6 2,088.4
In more than one year, but
not more than two years 1,580.1 1,541.6 1,158.0
In more than two years,
but not more than five years 507.4 664.8 900.9
--------- --------- --------
Total term deposits 5,981.9 5,497.0 4,613.9
Repayable on demand 3,318.5 2,359.6 1,778.0
--------- --------- --------
9,300.4 7,856.6 6,391.9
Fair value adjustments for
portfolio hedging (3.0) 10.4 3.9
--------- --------- --------
9,297.4 7,867.0 6,395.8
--------- --------- --------
15. BORROWINGS
On 12 March 2021, Fitch Ratings confirmed the Group's Long-Term
Issuer Default Rating at BBB. The outlook was upgraded from
negative to stable. It affirmed its senior unsecured debt rating at
BBB- and the rating of the 2016 GBP150.0m Tier-2 Bond at BB+.
All borrowings described in the Group Accounts for the year
ended 30 September 2020 remained in place throughout the period,
except as noted below.
Since 30 September 2020 the Group has made further drawings
under the Bank of England Term Funding Scheme for SMEs ('TFSME'),
increasing its borrowings under the scheme to GBP2,750.0m.
Borrowings of GBP875.0m under the original Bank of England Term
Funding Scheme ('TFS') which were due for settlement in the current
financial year were repaid.
During the period the Group also continued to have access to the
Indexed Long-Term Repo ('ILTR') scheme provided by the Bank of
England, but did not make any drawings.
On 25 March 2021 the Company issued GBP150.0m of Fixed Rate
Callable Subordinated Tier-2 Notes due 2031 at par. These Notes
bear interest at a rate of 4.375% per annum until 25 September 2026
after which interest will be payable at a rate which is 3.956% over
that payable on UK Government bonds of similar duration at that
time. These Notes are callable at the option of the Company between
25 June 2026 and 25 September 2026 and may be called at any time in
the event of certain tax or regulatory changes. The Notes are
unsecured and subordinated to all creditors of the Company other
than the Tier-2 Notes issued in 2016, with which they rank equally.
The Notes are rated BB+ by Fitch. The proceeds of the Notes will be
utilised in accordance with the Group's Green Bond Framework, which
is available on its investor website.
At the same time as this issuance the Group purchased GBP130.9m
of nominal value of its 2016 Tier--2 Notes by market tender for a
total consideration of GBP134.6m. These Notes were derecognised and
the premium paid taken to profit and loss as interest payable and
similar charges. The remaining Notes were redeemed at their call
date in September 2021.
In March 2021 the Group's warehouse loan facility, held by
Paragon Seventh Funding Limited was renegotiated and the margin
payable on drawings reduced to 0.60% above LIBOR from 1.05% above
LIBOR. On 8 November 2021, after the year end, revisions to the
facility were agreed extending the commitment period for an initial
13-month period with the ability to extend monthly until a
potential final maturity date of 24 November 2024. The maximum
drawing was increased to GBP450.0m and the interest rate payable
was transitioned to 0.5% above SONIA.
On 25 August 2021 an agreement was reached with the senior
noteholders of Paragon Mortgages (No. 25) PLC to transition to a
SONIA-linked basis for interest charging, effective from the
interest payment date on 15 February 2022. From that date the notes
will bear interest calculated with reference to SONIA rather than
LIBOR and the note margins will be increased by 0.12% in line with
the ISDA fallback adjustment rate. Other terms of the notes remain
unchanged. The agreement also provided for the transition of
hedging arrangements in the securitisation to a SONIA basis.
The Group's GBP60.0m retail bond was repaid in full at its due
date of 5 December 2020.
On 11 November 2020 a Group company, Paragon Mortgages (No. 28)
PLC, issued GBP703.1m of rated sterling mortgage backed floating
rate notes, analysed below, at par.
Class Fitch Moody's Interest margin Principal value
rating rating above compounded GBPm
SONIA
A AAA Aaa 0.95% 623.8
B AA Aa1 1.35% 39.7
C A Aa3 1.65% 21.6
D BBB- Baa1 1.95% 18.0
----------------
703.1
----------------
All of the above notes were retained by the Group. This gives
the Group access to additional liquidity, as described in note 57
to the 2020 Group Accounts.
Of the Group's borrowings at 30 September 2020, the following
mortgages backed floating notes were repaid
-- Paragon Mortgages (No. 11) PLC in October 2020
-- Paragon Mortgages (No. 15) PLC in December 2020
-- Paragon Mortgages (No. 13) PLC in April 2021
-- Paragon Mortgages (No. 14) PLC in June 2021.
Repayments made in respect of the Group's borrowings are shown
in note 24.
During the period agreement was reached with the holders of the
debt of Paragon Second Funding Limited to convert the reference
rate from LIBOR to SONIA on broadly similar economic terms. This
was not accounted for as a modification, as permitted by IFRS
9.
16. SUNDRY LIABILTIES
Sundry liabilities include GBP22.1m of amounts falling due after
more than one year (2020: GBP30.7m).
Total sundry liabilities include GBP7.5m in respect of deferred
consideration, of which GBP2.9m falls due after more than one year
(2020: GBP13.5m), and GBP9.5m in respect of lease liabilities
(2020: GBP5.6m), of which GBP8.0m falls due after more than one
year (2020: GBP4.1m).
17. Retirement benefit obligations
The defined benefit obligation at 30 September 2021 has been
calculated on a year-to-date basis. Since the last IAS 19 actuarial
valuation at 30 September 2020, there have been movements in
financial conditions, requiring an adjustment to the actuarial
assumptions underlying the calculation of the defined benefit
obligation at 30 September 2021. In particular, over the period
since the 30 September 2020 actuarial valuation, the discount rate
has increased by 25 basis points per annum, whereas expectations of
long-term inflation have increased by around 45 basis points, while
the performance of the Plan assets exceeded expectations.
The movements in the deficit on the defined benefit plan during
the year ended 30 September 2021 are summarised below.
2021 2020
GBPm GBPm
Opening pension deficit 20.4 34.5
Employer contributions (4.8) (24.5)
Amounts posted to profit and
loss
Service cost 1.8 2.0
Past service cost - -
Net funding cost (note 4) 0.3 0.4
Administrative expenses 0.8 0.6
Amounts posted to other comprehensive
income
Return on plan assets not
included in interest (11.0) 1.8
Experience (gain) on liabilities - (1.6)
Actuarial loss from changes
in financial assumptions 1.7 6.0
Actuarial loss from changes
in demographic assumptions 1.1 1.2
------- -------
Closing pension deficit 10.3 20.4
------- -------
Pursuant to the recovery plan agreed with the Trustee of the
pension plan, the Group has effectively granted a first charge over
its freehold head office building as security for its agreed
contributions. No account of this charge is taken in the
calculation of the above deficit.
18. Called-up share capital
The share capital of the Company consists of a single class of
GBP1 ordinary shares.
Movements in the issued share capital in the year were:
2021 2020
Number Number
Ordinary shares
At 1 October 2020 261,777,972 261,573,351
Shares issued 717,213 204,621
Shares cancelled - -
------------ ------------
At 30 September 2021 262,495,185 261,777,972
------------ ------------
During the year, the Company issued 717,213 shares (2020:
204,621) to satisfy options granted under Sharesave schemes for a
consideration of GBP2,196,934 (2020: GBP585,315).
On 24 November 2021, after the year end 12,100,834 shares, held
in treasury at 30 September 2021 were cancelled.
19. RESERVES
2021 2020 2019
GBPm GBPm GBPm
Share premium account 70.1 68.7 68.3
Capital redemption reserve 50.3 50.3 50.3
Merger reserve (70.2) (70.2) (70.2)
Cash flow hedging reserve - 2.5 3.0
Profit and loss account 1,005.9 880.7 835.9
-------- ------- -------
1,056.1 932.0 887.3
-------- ------- -------
The merger reserve arose, due to the provisions of UK company
law at the time, on a group restructuring on 12 May 1989 when the
Company became the parent entity of the Group.
20. own shares
2021 2020
GBPm GBPm
Treasury shares
At 1 October 2020 23.0 23.0
Shares purchased 37.7 -
Shares cancelled - -
------ ------
At 30 September 2021 60.7 23.0
------ ------
ESOP shares
At 1 October 2020 14.8 17.5
Shares purchased 4.5 5.2
Options exercised (3.3) (7.9)
------ ------
At 30 September 2021 16.0 14.8
------ ------
Balance at 30 September
2021 76.7 37.8
------ ------
Balance at 1 October 2020 37.8 40.5
------ ------
At 30 September 2021 the number of the Company's own shares held
in treasury was 12,100,834 (2020: 5,218,702). These shares had a
nominal value of GBP12,100,834 (2020: GBP5,218,702). These shares
do not qualify for dividends. All these shares were cancelled on 24
November 2021, after the year end.
The ESOP shares are held in trust for the benefit of employees
exercising their options under the Company's share option schemes
and awards under the Paragon PSP and Deferred Share Bonus Plan. The
trustees' costs are included in the operating expenses of the
Group.
At 30 September 2021, the trust held 3,732,324 ordinary shares
(2020: 3,636,218) with a nominal value of GBP3,732,324 (2020:
GBP3,636,218) and a market value of GBP20,359,827 (2020:
GBP12,108,606). Options, or other share-based awards, were
outstanding against all of these shares at 30 September 2021 (2020:
all). The dividends on all these shares have been waived (2020:
all).
21. equity Dividend
Amounts recognised as distributions to equity shareholders in
the Group in the period:
2021 2020 2021 2020
Per share Per share GBPm GBPm
Equity dividends on ordinary
shares
Final dividend for the previous
year 14.4p 14.2p 36.5 35.9
Interim dividend for the
current year 7.2p - 18.1 -
---------- ---------- ----- -----
21.6p 14.2p 54.6 35.9
---------- ---------- ----- -----
Amounts paid and proposed in respect of the year:
2021 2020 2021 2020
Per share Per share GBPm GBPm
Interim dividend for the
current year 7.2p - 18.1 -
Proposed final dividend
for the current year 18.9p 14.4p 46.6 36.4
---------- ---------- ----- -----
26.1p 14.4p 64.7 36.4
---------- ---------- ----- -----
The proposed final dividend for the year ended 30 September 2021
will be paid on 4 March 2022, subject to approval at the AGM, with
a record date of 28 January 2022. The dividend will be recognised
in the accounts when it is paid.
22. net cash flow from operating activities
2021 2020
GBPm GBPm
Profit before tax 213.7 118.4
Non-cash items included in profit and other
adjustments:
Depreciation of operating property, plant
and equipment 4.3 3.5
Profit on disposal of operating property, 0.1 -
plant and equipment
Amortisation of intangible assets 2.0 2.0
Movements related to asset backed loan notes
denominated in currency (442.3) (136.8)
Other non-cash movements on borrowings 2.5 1.5
Impairment losses on loans to customers (4.7) 48.3
Charge for share based remuneration 8.9 2.7
Net (increase) / decrease in operating assets:
Assets held for leasing 0.2 (3.2)
Loans to customers (766.6) (493.6)
Derivative financial instruments 419.1 129.1
Fair value of portfolio hedges 104.2 (45.5)
Other receivables 58.8 (35.6)
Net increase / (decrease) in operating liabilities:
Retail deposits 1,443.8 1,464.7
Derivative financial instruments (88.5) 51.9
Fair value of portfolio hedges (13.4) 6.5
Other liabilities (15.7) (39.1)
--------- ---------
Cash generated by operations 926.4 1,074.8
Income taxes (paid) (48.3) (46.1)
--------- ---------
878.1 1,028.7
--------- ---------
Cash flows relating to plant and equipment held for leasing
under operating leases are classified as operating cash flows.
23. net cash flow from investing activities
2021 2020
GBPm GBPm
Proceeds from sales of operating
property, plant and equipment - 0.1
Purchases of operating property,
plant and equipment (1.9) (1.9)
Purchases of intangible assets (2.4) (1.0)
------ ------
Net cash (utilised) by investing
activities (4.3) (2.8)
------ ------
24. net cash flow from financing activities
2021 2020
GBPm GBPm
Shares issued (note 18) 2.1 0.6
Dividends paid (note 21) (54.6) (35.9)
Issue of Tier 2 bond 148.9 -
Repayment of asset backed floating
rate notes (2,313.1) (1,013.3)
Repayment of Tier 2 bond (153.7) -
Repayment of retail bond (60.0) -
Movement on central bank
facilities 964.6 860.0
Movement on other bank facilities 71.9 (130.1)
Capital element of lease
payments (2.5) (2.0)
Purchase of shares (note
20) (42.2) (5.2)
Sale of shares - 0.2
---------- ----------
Net cash (utilised) by financing
activities (1,438.6) (325.7)
---------- ----------
25. RELATED PARTY TRANSACTIONS
During the year, certain non-executive directors of the Group
were beneficially interested in savings deposits made with Paragon
Bank, on the same terms as were available to members of the public.
Deposits of GBP16,000 were outstanding at the year-end (2020:
GBP301,000), and the maximum amount outstanding during the year was
GBP301,000 (2020: GBP500,000).
The Paragon Pension Plan ('the Plan') is a related party of the
Group. Transactions with the Plan are described in note 17.
The Group had no other transactions with related parties other
than key management compensation.
NOTES TO THE ACCOUNTS - CAPITAL AND FINANCIAL RISK
For the year ended 30 September 2021
The notes below describe the processes and measurements which
the Group use to manage their capital position and its exposure to
credit risk. It should be noted that certain capital measures,
which are presented to illustrate the Group's position, are not
subject to audit. Where this is the case, the relevant disclosures
are marked as such.
26. Capital management
The Group's objectives in managing capital are:
-- To ensure that the Group has sufficient capital to meet its
operational requirements and strategic objectives
-- To safeguard the Group's ability to continue as a going
concern, so that it can continue to provide returns to shareholders
and benefits for other stakeholders
-- To provide an adequate return to shareholders by pricing
products and services commensurately with the level of risk
-- To ensure that sufficient regulatory capital is available to
meet any externally imposed requirements
The Group's response to the Covid situation has been planned and
executed with the protection of its capital base and its long-term
viability as key strategic priorities.
The Group sets its target amount of capital in proportion to
risk, availability, regulatory requirements and cost. The Group
manages the capital structure and makes adjustments to it in the
light of changes in economic conditions and the risk
characteristics of the underlying assets, having particular regard
to the relative costs and availability of debt and equity finance
at any given time. In order to maintain or adjust the capital
structure the Group may adjust the amount of dividends paid to
shareholders, return capital to shareholders, issue new shares,
issue or redeem other capital instruments, such as retail or
corporate bonds, or sell assets to reduce debt.
The Group is subject to regulatory capital rules imposed by the
PRA on a consolidated basis as a group containing an authorised
bank. This is discussed further below.
(a) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision the regulator will issue an individual capital
requirement setting an amount of regulatory capital, which the
Group is required to hold in order to safeguard depositors from
loss in the event of severe losses being incurred by the Group.
This comprises variable elements based on its total risk exposure
and also fixed elements. This requirement is set in accordance with
the international Basel III rules, issued by the BCBS and currently
implemented in UK law by EU Regulation 575/2013, referred to as the
CRR. Following the UK's exit from the EU in December 2020 the PRA
launched a consultation in February 2021 which would result in the
Basel III rules being applied in the UK through the PRA
Rulebook.
The Group's regulatory capital is monitored by the Board, its
Risk and Compliance Committee and the ALCO, who ensure that
appropriate action is taken to ensure compliance with the
regulator's requirements. The future regulatory capital requirement
is also considered as part of the Group's forecasting and strategic
planning process.
The Group has elected to take advantage of the IFRS 9
transitional arrangements set out in Article 473a of the CRR, which
allow the capital impact of expected credit losses to be phased in
over a five-year period. The phase-in factors applying to
transition adjustments will allow for a 95% add back to CET1
capital and Risk Weighted Assets ('RWA') in the financial year
ended 30 September 2019, reducing to 85%, 70%, 50% and 25% for the
financial years ending in 2020 to 2023, with full recognition of
the impact on CET1 capital in the 2024 financial year.
As part of the regulatory response to Covid, Article 473a was
revised to extend the transitional arrangements for Stage 1 and
Stage 2 impairment provisions created in the financial year ended
30 September 2020 and the financial year ending 30 September 2021,
while maintaining the transitional arrangements for impairment
provisions created before the current period. In order to increase
institutions lending capacity in the short term, the EU has
determined that these additional provisions should be phased into
capital over the financial years ending 30 September 2022 to 30
September 2024, rather than recognising the reduction in capital
immediately.
These responses also allow, under paragraph 7a of the Article,
the impact of transitional adjustments to be weighted at 100% in
calculating RWA. The Group has taken advantage of this derogation
and hence the IFRS 9 adjustment to RWA is equal to the adjustment
to capital at 30 September 2021 and 30 September 2020.
Where these reliefs are taken, firms are also required to
disclose their capital positions calculated as if the relief were
not available (the 'fully loaded' basis).
The tables below demonstrate that at 30 September 2021 the
Group's regulatory capital of GBP1,205.8m (2020: GBP1,141.2m)
exceeded the amounts required by the regulator, including GBP604.2m
(2020: GBP749.6m) in respect of its Total Capital Requirement
('TCR'), which is comprised of fixed and variable elements (amounts
not subject to audit).
The total regulatory capital at 30 September 2021 on the fully
loaded basis of GBP1,176.1m (2020: GBP1,098.9m) was in excess of
the TCR of GBP601.8m (2020: GBP745.3m) on the same basis (amounts
not subject to audit).
During the year the Group's TCR reduced from 10.8% of Total Risk
Exposure ('TRE') at 30 September 2020 to 8.8% of TRE at 30
September 2021, principally as a result of the regulator's most
recent review of the Group's risk profile and exposures.
The CRR also requires firms to hold additional capital buffers,
including a Capital Conservation Buffer of 2.5% of risk weighted
assets (at 30 September 2021) (2020: 2.5%) and a Counter-Cyclical
Buffer ('CCyB'), currently 0.0% of risk weighted assets (2020:
0.0%). The long--term rate of the UK CCyB in a standard risk
environment is expected to be 2.0%. Firm specific buffers may also
be required.
The Group's regulatory capital differs from its equity as
certain adjustments are required by the regulator. A reconciliation
of the Group's equity to its regulatory capital determined in
accordance with CRD IV at 30 September 2021 is set out below.
Note Regulatory basis Fully loaded basis
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Total equity 1,241.9 1,156.0 1,241.9 1,156.0
Deductions
Proposed final
dividend 21 (46.6) (36.4) (46.6) (36.4)
IFRS 9 transitional
relief * 29.7 42.3 - -
Intangible assets 13 (170.5) (170.1) (170.5) (170.1)
Software relief 1.4 - 1.4 -
Prudent valuation
adjustments -- (0.1) (0.6) (0.1) (0.6)
--------- --------- ---------- ---------
Common Equity Tier
1 ('CET1') capital 1,055.8 991.2 1,026.1 948.9
Other tier 1 capital - - - -
--------- --------- ---------- ---------
Total Tier 1 capital 1,055.8 991.2 1,026.1 948.9
--------- --------- ---------- ---------
Corporate bond 150.0 150.0 150.0 150.0
Eligibility cap - - - -
--------- --------- ---------- ---------
Total Tier 2 capital 150.0 150.0 150.0 150.0
--------- --------- ---------- ---------
Total regulatory
capital ('TRC') 1,205.8 1,141.2 1,176.1 1,098.9
--------- --------- ---------- ---------
* Firms are permitted to phase in the impact of IFRS 9 transition as described above.
-- For capital purposes, assets and liabilities held at fair
value, such as the Group's derivatives, are required to be valued
on a more conservative basis than the market value basis set out in
IFRS 13. This difference is represented by the prudent valuation
adjustment above, calculated using the 'Simplified Approach' set
out in the CRR.
Under a relief enacted by the EU in December 2020 an amount in
respect of software assets in intangibles is added back to capital.
This is calculated in accordance with Article 36 (1) (b) of the
CRR. In July 2021 the PRA reaffirmed its view that software assets
would not absorb losses effectively in a stress. It therefore
commenced a consultation on a proposal to remove this relief with
effect from 1 January 2022.
CRD IV restricts the amount of tier 2 capital which is eligible
for regulatory purposes to 25% of TCR.
The total risk exposure amount calculated under the CRD IV
framework against which this capital is held, and the proportion of
these assets it represents, are calculated as shown below.
Regulatory basis Fully loaded basis
2021 2020 2021 2020
GBPm GBPm GBPm GBPm
Credit risk
Balance sheet assets 6,073.5 6,171.7 6,073.5 6,171.7
Off balance sheet 143.9 104.1 143.9 104.1
IFRS 9 transitional
relief 29.7 42.3 - -
--------- --------- ---------- ---------
Total credit risk 6,247.1 6,318.1 6,217.4 6,275.8
Operational risk 576.0 544.3 576.0 544.3
Market risk - - - -
Other 13.7 85.7 13.7 85.7
--------- --------- ---------- ---------
Total risk exposure
amount ('TRE') 6,836.9 6,948.1 6,807.2 6,905.8
--------- --------- ---------- ---------
Solvency ratios % % % %
CET1 15.4 14.3 15.1 13.7
TRC 17.6 16.4 17.3 15.9
--------- --------- ---------- ---------
This table is not subject to audit
The CRD IV risk weightings for credit risk exposures are
currently calculated using the Standardised Approach ('SA'). The
Basic Indicator Approach is used for operational risk.
The table below shows the calculation of the UK leverage ratio,
based on the consolidated balance sheet assets adjusted as shown.
The PRA has proposed a minimum UK leverage ratio of 3.25% for UK
firms, with retail deposits of over GBP50.0 billion. In addition,
in October 2021 the PRA stated its expectation that all other UK
firms should manage their leverage risk so that this ratio does not
ordinarily fall below 3.25%
Note 2021 2020
GBPm GBPm
Total balance sheet assets 15,137.0 15,505.5
Less: Derivative assets 12 (44.2) (463.3)
Central bank deposits 9 (1,142.0) (1,637.1)
CRDs (23.7) (15.1)
Accrued interest on sovereign - -
exposures
----------- ----------
On-balance sheet items 13,927.1 13,390.0
Less: Intangible assets 13 (170.5) (170.1)
Add back: Software relief 1.4 -
----------- ----------
Total on balance sheet exposures 13,758.0 13,219.9
----------- ----------
Derivative assets 12 44.2 463.3
Potential future exposure on
derivatives 36.3 92.3
----------- ----------
Total derivative exposures 80.5 555.6
----------- ----------
Post offer pipeline at gross
notional amount 1,380.3 949.1
Adjustment to convert to credit
equivalent amounts (1,128.3) (773.8)
----------- ----------
Off balance sheet items 252.0 175.3
----------- ----------
Tier 1 capital 1,055.8 991.2
Total leverage exposure before
IFRS 9 relief 14,090.5 13,950.8
IFRS 9 relief 29.7 42.3
----------- ----------
Total leverage exposure 14,120.2 13,993.1
----------- ----------
UK leverage ratio 7.5% 7.1%
----------- ----------
This table is not subject to audit
The fully loaded leverage ratio is calculated as follows
2021 2020
GBPm GBPm
Fully loaded Tier 1 capital 1,026.1 948.9
Total leverage exposure before
IFRS 9 relief 14,090.5 13,950.8
--------- ---------
Fully loaded UK leverage exposure 7.3% 6.8%
--------- ---------
This table is not subject to audit
The UK leverage ratio is prescribed by the PRA and differs from
the leverage ratio defined by Basel and the CRR due to the
exclusion of central bank balances from exposures.
The regulatory capital disclosures in these financial statements
relate only to the consolidated position for the Group. Individual
entities within the Group are also subject to supervision on a
standalone basis. All such entities complied with the requirements
to which they were subject during the year.
(b) Return on tangible equity ('RoTE')
RoTE is a measure of an entity's profitability used by
investors. RoTE is defined by the Group by comparing the profit
after tax for the year, adjusted for amortisation charged on
intangible assets, to the average of the opening and closing equity
positions, excluding intangible assets and goodwill.
It effectively reflects a return on equity as if all intangible
assets are eliminated immediately against reserves. As this is
similar to the approach used for the capital of financial
institutions it is widely used in the sector.
The Group's consolidated RoTE for the year ended 30 September
2021 is derived as follows:
Note 2021 2020
GBPm GBPm
Profit for the year after tax 164.5 91.3
Amortisation of intangible assets 2.0 2.0
-------- --------
Adjusted profit 166.5 93.3
-------- --------
Divided by
Opening equity 1,156.0 1,108.4
Opening intangible assets 13 (170.1) (171.1)
-------- --------
Opening tangible equity 985.9 937.3
-------- --------
Closing equity 1,241.9 1,156.0
Closing intangible assets 13 (170.5) (170.1)
-------- --------
Closing tangible equity 1,071.4 985.9
-------- --------
Average tangible equity 1,028.7 961.6
-------- --------
Return on Tangible Equity 16.2% 9.7%
-------- --------
This table is not subject to audit
(c) Dividend and distribution policy
The Company is committed to a long-term sustainable dividend
policy. Ordinarily, dividends will increase in line with earnings,
subject to the requirements of the business and the availability of
cash resources. The Board reviews the policy at least twice a year
in advance of announcing its results, taking into account the
Group's strategy, capital requirements, principal risks and the
objective of enhancing shareholder value. In determining the level
of dividend for any year, the Board expects to follow the dividend
policy, but will also take into account the level of available
retained earnings in the Company, its cash resources and the cash
and capital requirements inherent in its business plans.
The distributable reserves of the Company comprise its profit
and loss account balance (note 19) and, other than the regulatory
requirement to retain an appropriate level of capital in Paragon
Bank PLC, there are no restrictions preventing profits elsewhere in
the Group from being distributed to the parent.
Since the year ended 30 September 2018, the Company has adopted
a policy of paying out approximately 40% of its basic earnings per
share as dividend (a dividend cover ratio of around 2.5 times), in
the absence of any idiosyncratic factors which might make such a
dividend inappropriate. This policy is reviewed by the Board at
least annually. The Company considers it has access to sufficient
cash resources to pay dividends at this level and that its
distributable reserves are abundant for this purpose.
To provide greater transparency, the Board also adopted a policy
of paying an interim dividend in each year equivalent to half of
the preceding final dividend in the absence of any factors which
might make such a distribution inappropriate. After consideration
of the Group's capital position an interim dividend for the year of
7.2p per share was declared, in line with this policy (2020:
nil).
The Group's dividend and distribution decisions in the 2020
financial year were dominated by the potential impact of the Covid
pandemic. The strategic decision to build capital in response to
the inherent risks posed by the virus meant that no interim
dividend was declared for the year. However, at the 2020 year end a
dividend was declared in line with the Group's stated policy.
The appropriate level of final dividend for the current year was
considered by the Board in light of economic and regulatory
developments in the year, and the various potential paths for the
UK economy as the pandemic recedes. In particular the levels of
provision in the Group's loan portfolios and the potential for
further provision under stress were considered by the Board, along
with the capital impacts of stress testing carried out as part of
the ICAAP and forecasting processes, discounting the effects of the
current temporary reduction in regulatory buffers. On the basis of
the analysis the Board concluded that a dividend payment for the
year of around 40% of earnings, in line with policy, could be
made.
The Board will therefore propose a final dividend for the year
of 18.9p per share (2020: 14.4p per share) for approval of the 2022
AGM, making a total dividend for the year of 26.1p per share (2020:
14.4p per share).
In addition, at the time of approving the half year report in
June 2021, the Board authorised a buyback of up to GBP40.0 million
of shares in the market, initially to be held in treasury. This
programme commenced that month, and by the year end funds of
GBP37.7m (including costs) had been disbursed. This programme will
be completed following the publication of the results for the
year.
At the time of approving the final dividend for the year the
Board also authorised a further buy-back programme of GBP50.0m.
this programme will commence after the completion of the June 2021
programme and the shares purchased will initially be held in
Treasury.
The dividend cover for the year, which is subject to approval at
the forthcoming AGM, is set out below.
Note 2021 2020
Earnings per share (p) 8 65.2 36.0
Proposed dividend per share in respect
of the year (p) 21 26.1 14.4
----- -----
Dividend cover (times) 2.50 2.50
----- -----
For the purposes of dividend policy, the Group defines dividend
cover based on basic earnings per share, adjusted where considered
appropriate, and dividend per share. This is the most common
measure used by financial analysts.
The most recent policy review, in November 2021, also confirmed
the existing dividend policy would continue to apply for future
periods, subject to the impact of any future events, and the Board
will consider the appropriateness and scale of any interim dividend
in the context of the Group's results and the operating and
economic environment at the time.
27. Credit risk
Loans to customers
The Group's credit risk is primarily attributable to its loans
to customers and its business objectives rely on maintaining a
high-quality customer base and place strong emphasis on good credit
management, both at the time of acquiring or underwriting a new
loan, where strict lending criteria are applied, and throughout the
loan's life.
The Group's balance sheet loan assets at 30 September 2021 are
analysed as follows:
2021 2020
GBPm % GBPm %
Buy-to-let mortgages 11,424.3 85.2% 10,583.8 83.8%
Owner-occupied mortgages 36.3 0.3% 53.1 0.4%
--------- ------- --------- -------
Total first charge residential
mortgages 11,460.6 85.5% 10,636.9 84.2%
Second charge mortgage loans 281.7 2.1% 354.5 2.8%
--------- ------- --------- -------
Loans secured on residential
property 11,742.3 87.6% 10,991.4 87.0%
Development finance 608.2 4.5% 609.0 4.8%
--------- ------- --------- -------
Loans secured on property 12,350.5 92.1% 11,600.4 91.8%
Asset finance loans 440.5 3.3% 452.0 3.6%
Motor finance loans 229.2 1.7% 272.4 2.2%
Aircraft mortgages 28.2 0.2% 26.0 0.2%
Structured lending 118.9 0.9% 94.9 0.7%
Invoice finance 20.9 0.2% 13.5 0.1%
--------- ------- --------- -------
Total secured loans 13,188.2 98.4% 12,459.2 98.6%
Professions finance 33.1 0.3% 22.3 0.2%
RLS, CBILS and BBLS 83.8 0.6% 25.2 0.2%
Other unsecured commercial loans 10.3 0.1% 15.0 0.1%
Unsecured consumer loans 87.3 0.6% 109.7 0.9%
--------- ------- --------- -------
Total loans to customers 13,402.7 100.0% 12,631.4 100.0%
--------- ------- --------- -------
First and second charge mortgages are secured by charges over
residential properties in England and Wales, or similar Scottish or
Northern Irish securities.
Development finance loans are secured by a first charge (or
similar Scottish security) over the development property and
various charges over the build.
Asset finance loans and motor finance loans are effectively
secured by the financed asset, while aircraft mortgages are secured
by a charge on the aircraft funded.
Structured lending and invoice finance balances are effectively
secured over the assets of the customer, with security enhanced by
maintaining balances at a level less than the total amount of the
security (the advance percentage).
Professions finance are generally short term unsecured loans
made to firms of lawyers and accountants for working capital
purposes.
Loans made under the RLS, the CBILS and the BBLS have the
benefit of a guarantee underwritten by the UK Government.
Other unsecured consumer loans include unsecured loans either
advanced by Group companies or acquired from their originators at a
discount.
There are no significant concentrations of credit risk to
individual counterparties due to the large number of customers
included in the portfolios. All lending is to customers within the
UK. The total gross carrying value of the Group's loans to
customers due from customers with total portfolio exposures over
GBP10.0m is analysed below by product type.
2021 2020
GBPm GBPm
Buy-to-let mortgages 163.3 154.3
Development finance 217.9 240.0
Structured lending 108.7 72.7
Asset finance 10.4 -
------ ------
500.3 467.0
------ ------
The threshold of GBP10.0m is used internally for monitoring
large exposures.
Credit grading
An analysis of the Group's loans to customers by absolute level
of credit risk at 30 September 2021 is set out below. The analysed
amount represents gross carrying amount.
Stage 1 Stage 2 Stage 3 POCI Total
GBPm GBPm GBPm GBPm GBPm
30 September 2021
Very low risk 9,834.5 563.8 1.3 41.9 10,441.5
Low risk 1,716.9 532.2 78.5 16.3 2,343.9
Moderate risk 149.2 130.2 3.8 22.4 305.6
High risk 42.0 23.7 11.6 21.7 99.0
Very high risk 42.0 27.5 62.0 17.4 148.9
Not graded 115.8 1.7 7.1 4.6 129.2
-------- ------- ------- ----- --------
Total gross carrying amount 11,900.4 1,279.1 164.3 124.3 13,468.1
Impairment (15.0) (11.3) (38.9) (0.2) (65.4)
-------- ------- ------- ----- --------
Total loans to customers 11,885.4 1,267.8 125.4 124.1 13,402.7
-------- ------- ------- ----- --------
30 September 2020
Very low risk 8,771.2 453.3 20.8 45.9 9,291.2
Low risk 1,229.2 120.9 10.7 21.7 1,382.5
Moderate risk 742.2 184.7 12.1 32.8 971.8
High risk 285.2 143.9 50.7 32.0 511.8
Very high risk 48.3 67.9 49.9 22.9 189.0
Not graded 253.6 74.7 31.9 6.7 366.9
-------- ------- ------- ----- --------
Total gross carrying amount 11,329.7 1,045.4 176.1 162.0 12,713.2
Impairment (22.2) (15.8) (43.4) (0.4) (81.8)
-------- ------- ------- ----- --------
Total loans to customers 11,307.5 1,029.6 132.7 161.6 12,631.4
-------- ------- ------- ----- --------
Gradings above are based on credit scorecards or internally
assigned risk ratings as appropriate for the individual asset
class. These measures are calibrated across product types and used
internally to monitor the Group's overall credit risk profile
against its risk appetite.
These gradings represent current credit quality on an absolute
basis and this may result in assets in higher IFRS 9 stages with
low risk grades, especially where a case qualifies through
breaching, for example, an arrears threshold but is making regular
payments. This will apply especially to Stage 3 cases reported in
note 11, other than those shown as 'realisations'.
Examples of lower risk cases in higher IFRS 9 stages include
fully up-to-date receiver of rent cases; accounts where the
customer is in arrears on their account with the Group but up to
date on accounts with other lenders, creating an overall positive
credit rating; and accounts where the default on the Group's loan
has yet to impact on external credit score.
A small proportion of the loan book (2021: 1.0%, 2020: 2.9%) is
classed as 'not graded' above. This rating relates to loans that
have been fully underwritten at origination but where the customer
falls outside the automated assessment techniques used
post-completion.
Credit characteristics by portfolio
Loans secured on residential property
First mortgage loans have a contractual term of up to thirty
years and second charge mortgage loans up to twenty five years. In
all cases the customer is entitled to settle the loan at any point
and in most cases early settlement does take place. All customers
on these accounts are required to make monthly payments.
An analysis of the indexed LTV ratio for those loan accounts
secured on residential property by value at 30 September 2021 is
set out below. LTVs for second charge mortgages are calculated
allowing for the interest of the first charge holder, based on the
most recent first charge amount held by the Group, while for
acquired accounts the effect of any discount on purchase is allowed
for.
First charge Second charge mortgages
mortgages
2021 2020 2021 2020
% % % %
Loan to value ratio
Less than 70% 83.8 59.9 88.4 74.5
70% to 80% 14.3 35.9 8.5 16.7
80% to 90% 0.5 2.3 1.5 5.2
90% to 100% 0.3 0.4 0.6 1.2
Over 100% 1.1 1.5 1.0 2.4
------- ------ ------------ ------------
100.0 100.0 100.0 100.0
------- ------ ------------ ------------
Average LTV ratio 61.1 65.7 56.1 62.2
------- ------ ------------ ------------
Of which:
Buy-to-let 61.2 65.8
Owner-occupied 42.0 49.2
------- ------
The regionally indexed LTVs shown above are affected by changes
in house prices, with the Nationwide house price index, for the UK
as a whole, registering an annual increase of 10.0% in the year
ended 30 September 2021 (2020: 5.0%).
The geographical distribution of the Group's residential
mortgage assets by gross carrying value is set out below.
First Charge Second Charge
2021 2020 2021 2020
% % % %
East Anglia 3.3 3.2 3.3 3.3
East Midlands 5.5 5.4 6.3 6.1
Greater London 18.5 18.7 7.8 8.2
North 3.1 3.2 4.0 3.9
North West 10.3 10.4 7.4 7.4
South East 31.8 31.6 39.3 39.5
South West 8.7 8.7 8.3 8.0
West Midlands 5.5 5.4 7.1 7.3
Yorkshire and Humberside 8.1 8.4 6.0 5.9
------- ------ ------- -------
Total England 94.8 95.0 89.5 89.6
Northern Ireland 0.1 0.1 1.8 1.7
Scotland 2.0 1.7 5.2 5.2
Wales 3.1 3.2 3.5 3.5
------- ------ ------- -------
100.0 100.0 100.0 100.0
------- ------ ------- -------
Development finance
Development finance loans have an average term of 21 months
(2020: 21 months). Settlement of principal and accrued interest
takes place once the development is sold or refinanced following
its completion and the customer is not normally required to make
payments during the term of the loan. The loans are secured by a
legal charge over the site and/or property together with other
charges and warranties related to the build.
As customers are not required to make payments during the life
of the loan, arrears and past due measures cannot be used to
monitor credit risk. Instead, cases are monitored on an individual
basis against the costs and progress in the agreed development
programme by management and Credit Risk. The average loan to gross
development value ('LTGDV') ratio for the portfolio at year end, a
measure of security cover, is analysed below.
2021 2021 2020 2020
By value By number By value By number
LTGDV % % % %
50% or less 2.9 5.3 7.6 4.8
50% to 60% 27.3 20.6 22.4 13.2
60% to 65% 44.3 49.4 34.0 41.0
65% to 70% 22.8 21.9 31.3 36.1
70% to 75% 1.4 1.6 2.8 4.0
Over 75% 1.3 1.2 1.9 0.9
--------- ---------- --------- ----------
100.0 100.0 100.0 100.0
--------- ---------- --------- ----------
The average LTGDV cover at the year end was 61.7% (2020:
63.1%).
LTGDV is calculated by comparing the current expected end of
term exposure with the latest estimate of the value of the
completed development based on surveyors' reports. The focus on
residential property development within the portfolio means that
asset values will generally move in line with the UK residential
property market.
At 30 September 2021, the development finance portfolio
comprised 247 accounts (2020: 229) with a total carrying value of
GBP608.2m (2020: GBP609.0m). Of these accounts only 10 were
included in Stage 2 at 30 September 2021 (2020: seven), with no
accounts classified as Stage 3 (2020: one). In addition, account
one acquired had been classified as POCI (2020: one). An allowance
for this loss was made in the IFRS 3 fair value calculation.
The geographical distribution of the Group's development finance
loans by gross carrying value is set out below.
2021 2020
% %
East Anglia 3.6 5.1
East Midlands 6.3 5.5
Greater London 6.1 8.2
North 2.4 1.8
North West 1.1 0.4
South East 57.5 58.8
South West 13.5 14.0
West Midlands 4.8 4.0
Yorkshire and Humberside 3.5 1.1
------ ------
Total England 98.8 98.9
Northern Ireland - -
Scotland 1.2 1.1
Wales - -
------ ------
100.0 100.0
------ ------
Asset finance and motor finance
Asset and motor finance lending includes finance lease and hire
purchase arrangements, which are accounted for as finance leases
under IFRS 16. The average contractual life of the asset finance
loans was 51 months (2020: 52 months) while that of the motor
finance loans was 64 months (2020: 60 months), but it is likely
that a significant proportion of customers will choose to settle
their obligations early.
Asset finance customers are generally small or medium sized
businesses. The nature of the assets underlying the Group's asset
finance lending by gross carrying value is set out below.
2021 2020
% %
Commercial vehicles 33.4 32.0
Construction plant 34.2 33.7
Technology 7.0 6.9
Manufacturing 6.2 6.7
Print and paper 2.3 3.7
Refuse disposal vehicles 4.3 4.8
Other vehicles 4.3 3.6
Agriculture 3.1 2.9
Other 5.2 5.7
------ ------
100.0 100.0
------ ------
Motor finance loans are secured over cars, motorhomes and light
commercial vehicles and represent exposure to consumers and small
businesses.
Structured lending
The Group's structured lending division provides revolving loan
facilities to support non-bank lending businesses. Loans are made
to a Special Purpose Vehicle ('SPV') company controlled by the
customer and effectively secured on the loans made by the SPV.
Exposure is limited to a percentage of the underlying assets,
providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out
below.
2021 2020
Number of active facilities 8 8
Total facilities (GBPm) 185.5 139.0
Carrying value (GBPm) 118.9 94.9
------ ------
The maximum advance under these facilities was 80% of the
underlying assets.
These accounts do not have a requirement to make regular
payments, operating on a revolving basis. The performance of each
loan is monitored monthly on a case by case basis by the Group's
Credit Risk function, assessing compliance with covenants relating
to both the customer and the performance and composition of the
asset pool. These assessments, which are reported to Credit
Committee, are used to inform the assessment of expected credit
loss under IFRS 9.
At 30 September 2021, one of these facilities was identified as
Stage 2 (2020: four) with the remainder in Stage 1.
RLS, CBILS and BBLS
Loans under these schemes have the benefit of guarantees
underwritten by the UK Government, which launched them as a
response to the impact of Covid on UK SMEs.
CBILS and BBLS were launched in 2020 and remained open for new
applications until March 2021. RLS was launched in April 2021 as a
successor scheme and is expected to be available until June
2022.
The Group offered term loans and asset finance loans under the
CBIL scheme. Interest and fees are paid by the UK Government for
the first twelve months and the government guarantee covers up to
80% of the lender's principal loss after the application of any
proceeds from the asset financed (if applicable).
Loans under the BBL scheme are six year term loans at a standard
2.5% per annum interest rate. The UK Government pays the interest
on the loan for the first twelve months and provides lenders with a
guarantee covering the whole outstanding balance.
The Group offers term loans and asset finance loans under the
RLS. Interest and fees are payable by the customer from inception.
The Government guarantee covers up to 80% of the lender's principal
loss up, after the application of any proceeds from the asset
financed (if applicable), although the Government has announced its
intent to reduce this cover to 70% for applications received after
1 January 2022.
The Group's outstanding RLS, CBILS and BBLS loans at 30
September 2021 were:
2021 2020
GBPm GBPm
RLS
Term loans 0.1 -
Asset finance 20.7 -
----- -----
Total RLS 20.8 -
----- -----
CBILS
Term loans 28.1 20.6
Asset finance 29.9 1.0
----- -----
Total CBILS 58.0 21.6
----- -----
BBLS 5.0 3.6
----- -----
83.8 25.2
----- -----
At 30 September 2021, only GBP0.2m of this balance was
considered to be non-performing (2020: GBPnil).
Unsecured consumer loans
Almost all of the Group's unsecured consumer loan assets are
part of purchased debt portfolios where the consideration paid will
have been based on the credit quality and performance of the loans
at the point of the transaction. Collections on purchased accounts
remain in excess of those implicit in the purchase prices.
Arrears performance
The number of accounts in arrears by asset class, based on the
most commonly quoted definition of arrears for the type of asset,
at 30 September 2021 and 30 September 2020, compared to the
industry averages at those dates published by UK Finance ('UKF')
and the FLA, was:
2021 2020
% %
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver of
rent cases 0.21 0.15
Buy-to-let accounts excluding receiver of
rent cases 0.14 0.10
Owner-occupied accounts 4.48 3.72
UKF data for mortgage accounts more than
three months in arrears
Buy-to-let accounts including receiver of
rent cases 0.45 0.52
Buy-to-let accounts excluding receiver of
rent cases 0.43 0.50
Owner-occupied accounts 0.85 0.90
All mortgages 0.78 0.82
------ ------
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts 19.08 14.77
Post-2010 originations 1.18 0.62
Legacy cases (Pre-2010 originations) 23.12 21.17
Purchased assets 24.76 17.85
FLA data for secured loans 8.60 8.40
------ ------
Motor finance loans
Accounts more than 2 months in arrears
All accounts 4.15 4.58
Originated cases 2.30 1.76
Purchased assets 14.07 13.10
------ ------
Asset finance loans
Accounts more than 2 months in arrears 0.27 1.75
FLA data for business lease / hire purchase
loans 0.60 1.70
------ ------
No published industry data for asset classes comparable to the
Group's other books has been identified. Where revised data at 30
September 2020 has been published by the FLA or UKF, the
comparative industry figures above have been amended.
Arrears information is not given for development finance,
structured lending or invoice finance activities as the structure
of the products means that such a measure is not appropriate.
It should be noted that, where customers were allowed to defer
payments as part of Covid reliefs, these deferrals were not
classified as arrears, in accordance with regulatory guidance.
Few of the arrangements remained in place at 30 September 2021,
meaning that some of the increases shown above will relate to the
suppression of arrears at the previous year end.
The Group calculates its headline arrears measure for buy-to-let
mortgages, shown above, based on the numbers of accounts three
months or more in arrears, including purchased Idem Capital assets,
but excluding those cases in possession and receiver of rent cases
designated for sale. This is consistent with the methodology used
by UKF in compiling its statistics for the buy-to-let mortgage
market as a whole.
The number of accounts in arrears will naturally be higher for
legacy books, such as the Group's legacy second charge mortgages
and residential first mortgages than for comparable active ones, as
performing accounts pay off their balances, leaving arrears
accounts representing a greater proportion of the total.
The figures shown above for secured loans incorporate purchased
portfolios which generally include a high proportion of cases in
arrears at the time of purchase and where this level of performance
is allowed for in the discount to current balance represented by
the purchase price. However, this will lead to higher than average
reported arrears.
Acquired assets
Almost all the Group's unsecured consumer loan assets are part
of purchased debt portfolios where the consideration paid was based
on the credit quality and performance of the loans at the point of
the transaction. No additional loans to customers treated as POCI
were acquired in the year ended 30 September 2021.
Collections on purchased accounts have been comfortably in
excess of those implicit in the purchase prices.
In the debt purchase industry, ERCs is commonly used as a
measure of the value of a portfolio. This is defined as the sum of
the undiscounted cash flows expected to be received over a
specified future period. In the Group's view, this measure may be
suitable for heavily discounted, unsecured, distressed portfolios
(which will be treated as POCI under IFRS 9), but is less
applicable for the types of portfolio in which the Group has
invested, where cash flows are higher on acquisition, loans may be
secured on property and customers may not be in default. In such
cases, the IFRS 9 amortised cost balance, at which these assets are
carried in the Group balance sheet, provides a better indication of
value.
However, to aid comparability, the 84 and 120 month ERCs value
for the Group's purchased consumer loan assets, are set out below.
These are derived using the same models and assumptions used in the
EIR calculations. ERCs are set out both for all purchased consumer
portfolios and for those classified as POCI under IFRS 9.
2021 2020 2019
GBPm GBPm GBPm
All purchased consumer assets
Carrying value 185.2 235.3 291.1
84 month ERCs 221.2 277.8 342.3
120 month ERCs 245.2 313.7 387.5
------ ------ ------
POCI assets only
Carrying value 113.2 139.8 168.3
84 month ERCs 143.9 176.9 214.1
120 month ERCs 163.4 203.7 246.0
------ ------ ------
Amounts shown above are disclosed as loans to customers (note
10). They include first mortgages, second charge mortgage loans and
unsecured consumer loans.
NOTES TO THE PRELIMINARY FINANCIAL INFORMATION - BASIS OF
PREPARATION
For the year ended 30 September 2021
The notes set out below describe the accounting basis on which
the Group prepares its accounts, the particular accounting policies
adopted by the Group and the principal judgements and estimates
which were required in the preparation of the financial
statements.
They also include other information describing how the
preliminary financial information have been prepared required by
legislation and accounting standards.
28. ACCOUNTING POLICIES
The preliminary financial information has been prepared on the
basis of the accounting policies used in the production of the
financial statements for the year. Therefore, they have been
prepared on the basis of accounting policies set out in the Annual
Report and Accounts of the Group for the year ended 30 September
2020, except for the adoption of the amendments to IFRS 9 and IAS
39 described in note 29 below.
The Group is required to prepare its financial statements for
the year ending 30 September 2021 in accordance with International
Financial Reporting Standards ('IFRS') in conformity with the
requirements of the Companies Act 2006. They must also be prepared
in accordance with IFRS adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union ('EU'). In the
financial years reported on this will also mean that, in the
Group's circumstances, the financial statements also accord with
IFRS as approved by the International Accounting Standards
Board.
The "requirements of the Companies Act 2006" here means accounts
being prepared in accordance with "international accounting
standards" as defined in section 474(1) of that Act, as it applied
immediately before IP Completion Day (the end of the UK's
transition period following its departure from the EU) ('IPCD'),
including where the Company also makes use of standards which have
been adopted for use within the United Kingdom in accordance with
regulation 1(5) of the International Accounting Standards and
European Public Limited Liability Company (Amendment etc.) (EU
Exit) Regulations 2019, subsequent to the IPCD.
Under the Listing Rules of the FCA, despite the UK's exit from
the EU on 31 January 2020, the EU endorsed IFRS regime remains
applicable to the Group until its first financial year commencing
after the IPCD on 31 December 2020.
Therefore, while EU endorsed IFRS applies to these financial
statements, those for the year ending 30 September 2022 will
instead be prepared under 'UK-adopted international accounting
standards'.
The changes in the way that the basis of preparation is
described, which result from the UK's exit from the EU, including
the move to UK-adopted international accounting standards from the
Group's financial year commencing 1 October 2021, do not represent
a change in the basis of accounting which would necessitate a prior
year restatement.
Going concern basis
The going concern basis has been adopted in the preparation of
this preliminary financial information. The reasons for the
adoption of this basis are set out in note 31.
Comparability of information
The balance sheet information at 30 September 2019, was not
required to be restated on the adoption of IFRS 16 on 1 October
2020. The information presented is derived in accordance with IAS
17 - 'Leases' ('IAS 17'), and therefore may not be directly
comparable with the balance sheets at 30 September 2021 and 30
September 2020 which are prepared under IFRS 16.
New and revised reporting standards
Other Standards and interpretations in issue but not effective
do not address matters relevant to the Group's accounting and
reporting.
No new or revised reporting standards significantly affecting
the Group's accounting have been issued since the approval of the
Group's financial statements for the year ended 30 September
2020.
29. CHANGES IN ACCOUNTING STANDARDS
IAS 39 amendments 'Interest Rate Benchmark Reform'
In August 2020 the IASB issued a further amendment to IAS 39
'Interest Rate Benchmark Reform - Phase 2'. This amendment sets out
accounting requirements for the treatment of IBOR-linked financial
assets and liabilities under the amortised cost method and IBOR
related hedge accounting when a firm replaces the IBOR linkage in
the underlying instruments with a replacement benchmark. It is
therefore potentially applicable to the Group's LIBOR-linked loan
assets and those FRN liabilities where interest is charged on the
basis of LIBOR or other IBOR rates. It also affects the Group's
LIBOR (and other IBOR) referenced derivative assets and liabilities
and the hedging relationships which they form part of.
The intention of the standard is that, where the transition is
effectively a like for like replacement, no windfall gain or loss
should occur on transition, and hedging relationships should be
able to continue.
This amendment is effective from the Group's financial year
ending 30 September 2022 but has been endorsed by both the EU and
the UK and has been early adopted by the Group as permitted. The
Group has utilised, and will continue to utilise, the provisions of
the amendment as it transitions its IBOR-linked assets and
liabilities. The impact of the amendment will depend upon the IBOR
related assets, liabilities and hedging relationships at the point
at which transition occurs.
30. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The most significant judgements which the directors have made in
the application of the accounting policies set out in note 28
relate to:
(a) Significant Increase in Credit Risk ('SICR')
Under IFRS 9, the directors are required to assess where a
credit obligation has suffered a Significant Increase in Credit
Risk ('SICR'). The directors' assessment is based primarily on
changes in the calculated PD, but also includes consideration of
other qualitative indicators and the adoption of the backstop
assumption in the Standard that all cases which are more than 30
days overdue have an SICR, for account types where days overdue is
an appropriate measure.
If additional accounts were determined to have an SICR, these
balances would attract additional impairment provision and the
overall provision charge would be higher.
In determining whether an account has an SICR in the Covid
environment the granting of Covid reliefs, including payment
holidays and similar arrangements, may mean that an SICR may exist
without this being reflected in either arrears performance or
credit bureau data. The Group has accepted the advice of UK
regulatory bodies that the grant of Covid-related relief does not,
of itself, indicate an SICR, but has carefully considered internal
credit and customer data to determine whether there might be any
accounts with SICR not otherwise identified by the process.
Where accounts have received secondary periods of relief beyond
the initial three month period, this has generally been considered
to be strongly indicative of underlying problems and such accounts
have been identified as having an SICR. Furthermore, adjustments to
correct probabilities of default in models will also have a
consequent result of identifying more SICRs.
More information on the definition of SICR adopted is given in
note 11.
(b) Definition of default
In applying the impairment provisions of IFRS 9, the directors
have used models to derive the probabilities of default. In order
to derive and apply such models, it is required to define 'default'
for this purpose. The Group's definition of default is aligned to
its internal operational procedures. IFRS 9 provides a rebuttable
presumption of default when an account is 90 days overdue and this
was used as the starting point for this exercise. Other factors
include account management activities such as appointment of a
receiver or enforcement procedures.
A combination of qualitative and quantitative measures was
considered in developing the definition of default.
If a different definition of default had been adopted the
expected loss amounts derived might differ from those shown in the
accounts.
More information on the Group's definition of default adopted is
given in note 11.
(c) Classification of financial assets
The classification of financial assets under IFRS 9 is based on
two factors:
-- The company's 'business model' - how it intends to generate cash and profit from the assets
-- The nature of the contractual cash flows inherent in the assets
Financial assets are classified as held at amortised cost, at
fair value through OCI, or at fair value through profit and
loss.
For an asset to be held at amortised cost, the cash flows
received from it must comprise solely payments of principal and
interest ('SPPI'). In effect, this restricts this classification to
'normal' lending activities, excluding arrangements where the
lender may have a contingent return or profit share from the
activities funded. The Group has considered its products and
concluded that, as standard lending products, they fall within the
SPPI criteria.
This is because all the Group's lending arrangements involve the
advancing of amounts to customers, either as loans or finance lease
products and the receipt of repayments of principal and charges,
where those charges are calculated based on the amount loaned.
There are no 'success fee' or other compensation arrangements not
linked to the loan principal.
The use of amortised cost accounting is also restricted to
assets which a company holds within a business model whose object
is to collect cash flows arising from them, rather than seek to
profit by disposing of them (a 'Held to Collect' model). The
Group's strategy is to hold loan assets until they are repaid or
written off. Loan disposals are rare, and the Group does not manage
its assets in order to generate profits on sale. On this basis, it
has categorised its business model as Held to Collect.
Therefore, the Group has classified its customer loan assets as
carried at amortised cost.
Certain of the balances reported in the financial statements are
based wholly or in part on estimates or assumptions made by the
directors. There is, therefore, a potential risk that they may be
subject to change in future periods. The most significant of these
are:
(d) Impairment losses on loans to customers
Impairment losses on loans are calculated based on statistical
models, applied to the present status, performance and management
strategy for the loans concerned which are used to determine each
loan's PD and LGD.
Internal information used will include number of months arrears,
qualitative information, such as possession by a first charge
holder on a second charge mortgage or where a buy-to-let case is
under the control of a receiver of rent, the receiver's present and
likely future strategy for the property (e.g. keeping current
tenants in place, refurbish and relet, immediate sale etc).
External information used includes customer specific data, such
as credit bureau information as well as more general economic
data.
Key internal assumptions in the models relate to estimates of
future cash flows from customers' accounts, their timing and, for
secured accounts, the expected proceeds from the realisation of the
property or other charged assets. These cash flows will include
payments received from the customer, and, for buy-to-let cases
where a receiver of rent is appointed, rental receipts from
tenants, after allowing for void periods and running costs. These
key assumptions are based on observed data from historical patterns
and are updated regularly based on new data as it becomes
available.
In addition, the directors consider how appropriate past trends
and patterns might be in the current economic situation and make
any adjustments they believe are necessary to reflect current and
expected conditions.
All of this information may be impacted by the ongoing effects
of the Covid pandemic, its economic effect on customers and the
forms of the reliefs given to ameliorate that impact. These may
both change the underlying data and impact on the derivation of
metrics normally used to monitor credit performance.
The accuracy of the impairment calculations would therefore be
affected by unexpected changes to the economic situation, variances
between the models used and the actual results, or assumptions
which differ from the actual outcomes. In particular, if the impact
of economic factors such as employment levels on customers is worse
than is implicit in the model then the number of accounts requiring
provision might be greater than suggested by the model, while falls
in house prices, over and above any assumed by the model might
increase the provision required in respect of accounts currently
provided. Similarly, if the account management approach assumed in
the modelling cannot be adopted the provision required may be
different.
In order to provide forward looking economic inputs to the
modelling of the ECL, the Group must derive a set of scenarios
which are internally coherent. The Group addresses these
requirements using four distinct economic scenarios chosen to
represent the range of possible outcomes. These scenarios at 30
September 2021 have been derived in light of the current economic
situation, modelling a variety of possible outcomes as described in
note 11. It should be noted, however, that there remains a
significant range of different opinions amongst economists about
the longer-term prospects for the UK and, while these positions are
converging, this is likely to remain the case for some time to
come.
The variables are used for two purposes in the IFRS 9
calculations:
-- They are applied as inputs in the models which generate PD
values, where those found by statistical analysis to have the most
predictive value are used
-- They are used as part of the calculation where the variable
has a direct impact on the expected loss calculation, such as the
house price index
The economic variables will also inform assumptions about the
Group's approach to account management given a particular
scenario.
In addition to uncertainty created by the economic scenarios,
the Group recognises that the present situation lies outside the
range of situations considered when it originally derived its IFRS
9 approach to impairment. It therefore considered, for each class
of asset, whether any adjustment to the normal approach was
required to ensure sufficient provision was created and also
reviewed other available data, both from account performance and
customer feedback to form a view of the underlying reasons for
observed customer behaviours and of their future intentions and
prospects.
As a result of this exercise additional requirements for
provision were identified, to compensate for potential model
weakness and to allow for economic pressures in the wider economy
which cannot be identified by a modelled approach. By their nature
such adjustments are less systematic and therefore subject to a
wider range of outturns. The nature and amounts of these PMA's are
set out in note 11.
The position after considering all these matters is set out in
note 11, together with further information on the Group's approach
and sensitivity analysis. The economic scenarios described above
and their impact on the overall provision are also set out in that
note.
(e) Effective interest rates
In order to determine the EIR applicable to loans and borrowings
an estimate must be made of the expected life of each asset or
liability and hence the cash flows relating thereto, including
those relating to early redemption charges. For purchased loan
accounts this will involve estimating the likely future credit
performance of the accounts at the time of acquisition. For each
portfolio a model is in place to ensure that income is
appropriately spread.
The underlying estimates are based on historical data and
reviewed regularly. For purchased accounts historical data obtained
from the vendor will be examined. The accuracy of the EIR applied
would therefore be compromised by any differences between actual
repayment profiles and those predicted, which in turn would depend
directly or indirectly (in the case of borrowings) on customer
behaviour.
To illustrate the potential variability of the estimate, the
amortised cost values were recalculated by changing one factor in
the EIR calculation and keeping all others at their current levels.
This exercise indicated that:
-- A reduction of the assumed average lives of loans secured on
residential property by three months would reduce balance sheet
assets by GBP12.0m (2020: GBP11.2m), while an increase of the
assumed asset lives of such assets by three months would increase
balance sheet assets by GBP12.1m (2020: GBP10.3m)
-- An increase of 50% in the number of five year fixed rate
buy-to-let loan assets assumed to redeem before the end of the
fixed rate period, generating additional early redemption charges
would increase balance sheet assets by GBP11.2m (2020: GBP7.3m)
-- A reduction (or increase) in estimated cash flows from
purchased loan assets of 5% would reduce (or increase) balance
sheet assets by GBP7.1m (2020: GBP9.4m)
As any of these changes would, in reality, be accompanied by
movements in other factors, actual outcomes may differ from these
estimates.
(f) Impairment of goodwill
The carrying value of goodwill recognised on acquisitions is
verified by use of an impairment test based on the projected cash
flows for the CGU, based on management forecasts and other
assumptions described in note 13, including a discount factor.
The accuracy of this impairment calculation would therefore be
compromised by any differences between these forecasts and the
levels of business activity that the CGU is able to achieve in
practice. As the Group forecasts are based on the Group's central
economic scenario, any variance from this will potentially impact
on the valuation. This test will also be affected by the accuracy
of the discount factor used.
The sensitivity of the impairment test to reasonably possible
movements in these assumptions is discussed in note 13.
(g) Retirement benefits
The present value of the retirement benefit obligation is
derived from an actuarial calculation which rests on a number of
assumptions relating to inflation, long-term return on investments
and mortality. Where actual conditions differ from those assumed
the ultimate value of the obligation would be different.
31. GOING CONCERN
Accounting standards require the directors to assess the Group's
ability to continue to adopt the going concern basis of accounting.
In performing this assessment, the directors consider all available
information about the future, the possible outcomes of events and
changes in conditions and the realistically possible responses to
such events and conditions that would be available to them, having
regard to the 'Guidance on Risk Management, Internal Control and
Related Financial and Business Reporting' published by the
Financial Reporting Council in September 2014.
Particular focus is given to the Group's financial forecasts to
ensure the adequacy of resources available for the Group to meet
its business objectives on both a short term and strategic basis.
The guidance requires that this assessment covers a period of at
least twelve months from the date of approval of these financial
statements.
The Group makes extensive use of stress testing in compiling and
reviewing its forecasts. This stress testing approach was reviewed
in detail during the year as part of the annual ICAAP cycle, where
testing considered the impact of a number of severe but plausible
scenarios. During the planning process, sensitivity analysis was
carried out on a number of key assumptions that underpin the
forecast to evaluate the impact of the Group's principal risks.
The key stresses modelled in detail to evaluate the forecast
were:
-- Increased business volumes -- An increase of 20% in
buy-to-let application volumes. This examined the impact of volumes
on profitability and illustrated the extent to which capital
resources and liquidity would be stretched due to the higher cash
and capital requirements
-- Higher funding costs - 25bps higher cost on all new savings
deposits throughout. This scenario illustrated the impact of a
significant prolonged margin squeeze on profitability and whether
this would cause significant impacts on any capital, liquidity or
encumbrance ratios
-- Lower development finance growth - 50% lower loan book growth
across the plan horizon coupled with a 50bp margin reduction. This
scenario replicated a significant increase in competition within
the sector, illustrating the impact of a lower proportion of the
high-yielding development finance product in the Group's long-term
asset mix on contribution to costs and other key ratios for the
Group
-- Higher buy-to-let redemptions - double redemption rates on
all cohorts for the first three months post-reversion. With a
significant volume of five-year fixes coming to an end in 2022,
this scenario highlighted the potential risk that is inherent in
the accounting difference between current and amortised cost
balances on such loans, and invited discussion as to what
mitigating action could be taken to avoid such an impact
-- High impairment -- a stress that modelled the IFRS 9 year end
severe scenario across the plan horizon, simulating a significant
short-term capital and profitability shock with prolonged house
price deflation, but maintaining the same lending levels as the
base case. This scenario is described in more detail in Note 11 and
is derived from, but more severe than the stress testing scenario
published by the Bank of England in January 2021. Although it is
not deemed likely that such a scenario would materialise, since
severe stresses almost always result in lower lending volumes, the
output from this stress provides a benchmark for a plausible
worst-case position that impacts all aspects of business
performance and ratios, in particular, capital
These stresses did not take account of management actions which
might mitigate the impact of the adverse assumptions used. They
were designed to demonstrate how such stresses would affect the
Group's financing, capital and liquidity positions and highlight
any areas which might impact the Group's going concern and
viability assessments. Under all these scenarios, the Group had the
ability to meet its obligations over the forecast horizon and
maintain a surplus over its regulatory requirements for both
capital and liquidity through normal balance sheet management
activities.
As part of the ICAAP process the Group also assessed the
potential operational risks it could face. This was done through
the analysis of the impact and cost of a series of severe but
plausible scenarios. This analysis did not highlight any factors
which cast doubt on the Group's ability to continue as a going
concern.
The Group begins the forecast period with a strong capital and
liquidity position, enabling the management of any significant
outflows of deposits and / or reduced inflows from customer
receipts. Overall, the forecasts, even under reasonable further
levels of stress show the Group retaining sufficient equity,
capital, cash and liquidity throughout the forecast period to
satisfy its regulatory and operational requirements.
The availability of funding and liquidity is a key
consideration, including retail deposit, wholesale funding, central
bank and other contingent liquidity options.
The Group's retail deposits of GBP9,300.4m (note 14), raised
through Paragon Bank, are repayable within five years, with 77.6%
of this balance (GBP7,212.9m) payable within twelve months of the
balance sheet date. The liquidity exposure represented by these
deposits is closely monitored; a process supervised by the Asset
and Liability Committee. The Group is required to hold liquid
assets in Paragon Bank to mitigate this liquidity risk. At 30
September 2021 Paragon Bank held GBP942.7m of balance sheet assets
for liquidity purposes, in the form of central bank deposits. A
further GBP150.0 million of liquidity was provided by an off
balance sheet swap arrangement, bringing the total to
GBP1,092.7m.
Paragon Bank manages its liquidity in line with the Board's risk
appetite and the requirements of the PRA, which are formally
documented in the Board's approved ILAAP, updated annually. The
Bank maintains a liquidity framework that includes a short to
medium term cash flow requirement analysis, a longer-term funding
plan and access to the Bank of England's liquidity insurance
facilities, where pre-positioned assets would support drawings of
GBP1,424.2m. Holdings of the Group's own externally rated mortgage
backed loan notes can also be used to access the Bank of England's
liquidity facilities or other funding arrangements. At 30 September
2021 the Group had GBP529.2m of such notes available for use, of
which GBP287.0m were rated AAA. The available AAA notes would give
access to GBP149.3m if used to support drawings on Bank of England
facilities.
The Group's securitisation funding structures provide match
funding for part of the asset base. Repayment of the securitisation
borrowings is restricted to funds generated by the underlying
assets and there is limited recourse to the Group's general funds.
Recent and current loan originations are financed through retail
deposits and may be refinanced through securitisation where this is
appropriate and cost-effective. While the Group has not accessed
the public securitisation market in the year, the market remains
active with strong levels of demand and the Group maintains the
infrastructure required to access it.
The earliest maturity of any of the Group's bond debt is the
GBP125.0m retail bond, due January 2022. GBP69.0m of TFS debt was
paid down after the year end and all other central bank debt was
refinanced and is not payable until 2025.
The Group's access to debt is enhanced by its corporate BBB
rating, affirmed by Fitch Ratings in March 2021, and its status as
an issuer is evidenced by the BB+ rating of its GBP150.0 million
Tier 2 bond issued in the year. It has regularly accessed the
capital markets for warehouse funding and corporate and retail
bonds over recent years and continues to be able to access these
markets.
The Group has access to the short-term repo market for liquidity
purposes which it uses from time to time, including during the
financial year ended 30 September 2021.
The Group's cash analysis, which includes the impact of all
scheduled debt and deposit repayments, continues to show a strong
position, even after allowing scope for significant discretionary
payments and capital distributions.
As described in note 26 the Group's capital base is subject to
consolidated supervision by the PRA the most recent review of the
Group's capital position and management systems resulted in a
reduction of the minimum capital level. Its capital at 30 September
2021 was in excess of regulatory requirements and its forecasts
indicate this will continue to be the case.
After performing this assessment, the directors concluded that
there was no material uncertainty as to whether the Group would be
able to maintain adequate capital and liquidity for at least twelve
months following the date of approval of these financial statements
and consequently that it was appropriate for them to continue to
adopt the going concern basis in preparing the financial statements
of the Group.
32. FINANCIAL ASSETS AND FINANCIAL LIABILITIES
The Group's financial assets and financial liabilities are
valued on one of two bases, defined by IFRS 9:
-- Financial assets and liabilities carried at fair value through profit and loss ('FVTPL')
-- Financial assets and liabilities carried at amortised cost
IFRS 7 - 'Financial Instruments: Disclosures' requires that
where assets are measured at fair value these measurements should
be classified using the fair value hierarchy set out in IFRS 13 -
'Fair Value Measurement'. This hierarchy reflects the inputs used
and defines three levels:
-- Level 1 measurements are unadjusted market prices
-- Level 2 measurements are derived from directly or indirectly
observable data, such as market prices or rates
-- Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3
measurements, the valuation is derived from cash flow models based,
where possible, on independently sourced parameters. The accuracy
of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the
assumptions used.
The Group had no financial assets or liabilities in the year
ended 30 September 2021 or the year ended 30 September 2020 carried
at fair value and valued using level 3 measurements, other than
contingent consideration amounts (note 16).
The Group has not reclassified any of its measurements during
the year.
The methods by which fair value is established for each class of
financial assets and liabilities are set out below.
(a) Assets and liabilities carried at fair value
The following table summarises the Group's financial assets and
liabilities which are carried at fair value.
Note 2021 2020
GBPm GBPm
Financial assets
Derivative financial assets 12 44.2 463.3
------ ------
44.2 463.3
------ ------
Financial liabilities
Derivative financial liabilities 12 43.9 132.4
Contingent consideration 16 7.5 13.5
------ ------
51.4 145.9
------ ------
All of these financial assets and financial liabilities are
required to be carried at fair value by IFRS 9.
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values
in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which
observable prices in active markets are not available. These are
principally present value calculations based on estimated future
cash flows arising from the instruments, discounted using a market
interest rate, adjusted for risk as appropriate.
The principal inputs to these valuation models are LIBOR and
SONIA benchmark interest rates for the currencies in which the
instruments are denominated, being sterling, EUR and dollars. The
cross-currency basis swaps have a notional principal related to the
outstanding currency borrowings and therefore the estimated rate of
repayment of these notes also affects the valuation of the swaps.
However, variability in this input does not have a significant
impact on the valuation, compared to other inputs.
In order to determine the fair values, the management applies
valuation adjustments to observed data where that data would not
fully reflect the attributes of the instrument being valued, such
as particular contractual features or the identity of the
counterparty. The management reviews the models used on an ongoing
basis to ensure that the valuations produced are reasonable and
reflect all relevant factors. These valuations are based on market
information and they are therefore classified as level 2
measurements. Details of these assets are given in note 12.
Contingent consideration
The value of the contingent consideration balances shown in note
16 are required to be stated at fair value in the accounts. These
amounts are valued based on the expected outcomes of the
performance tests set out in the respective sale and purchase
agreements, discounted as appropriate. The most significant inputs
to these valuations are the Group's forecasts on future activity
relating to business generated by operational units acquired,
business derived as a result of the vendor's contacts or other
goodwill and any other new business flows which are or might be
attributable to the acquisition agreement, which are drawn from the
overall Group forecasting model. As such, these are classified as
unobservable inputs and the valuations classified as level 3
measurements.
(b) Assets and liabilities carried at amortised cost
The fair values for financial assets and financial liabilities
held at amortised cost, determined in accordance with the
methodologies set out below are summarised below.
Note 2021 2021 2020 2020
Carrying Fair Carrying Fair
amount value amount value
GBPm GBPm GBPm GBPm
The Group
Financial assets
Cash 9 1,360.1 1,360.1 1,925.0 1,925.0
Loans to customers 10 13,402.7 13,470.6 12,631.4 12,856.1
Sundry financial assets 65.7 65.7 125.3 125.3
--------- --------- --------- ---------
14,828.5 14,896.4 14,681.7 14,906.4
--------- --------- --------- ---------
Financial liabilities
Short term bank borrowings 0.3 0.3 0.4 0.4
Asset backed loan notes 516.0 516.0 3,270.5 3,270.5
Secured bank borrowings 730.0 730.0 657.8 657.8
Retail deposits 14 9,300.4 9,308.5 7,856.6 7,900.6
Corporate and retail
bonds 386.1 411.9 446.6 455.7
Other financial liabilities 16 66.3 66.3 74.6 74.6
--------- --------- --------- ---------
10,999.1 11,033.0 12,306.5 12,359.6
--------- --------- --------- ---------
The fair values of retail deposits and corporate and retail
bonds shown above will include amounts for the related accrued
interest.
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and
overdrafts and asset backed loan notes, which are carried at
amortised cost are considered to be not materially different from
their book values. In arriving at that conclusion market inputs
have been considered but because all the assets mature within three
months of the year end and the interest rates charged on financial
liabilities reset to market rates on a quarterly basis, little
difference arises. This also applies to the parent company's loans
to its subsidiaries.
While the Group's asset backed loan notes 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.
As these valuation exercises are not wholly market based, they
are considered to be level 2 measurements.
Loans to customers
To assess the likely fair value of the Group's loan assets in
the absence of a liquid market, the directors have considered the
estimated cash flows expected to arise from the Group's investments
in its loans to customers based on a mixture of market based
inputs, such as rates and pricing and non-market based inputs such
as redemption rates. Given the mixture of observable and
non-observable inputs these are considered to be level 3
measurements.
Corporate debt
The Group's retail and corporate bonds are listed on the London
Stock Exchange and there is presently a reasonably liquid market in
the instruments. It is therefore appropriate to consider that the
market price of these borrowings constitutes a fair value. As this
valuation is based on a market price, it is considered to be a
level 1 measurement.
Retail deposits
To assess the likely fair value of the Group's retail deposit
liabilities, the directors have considered the estimated cash flows
expected to arise based on a mixture of market based inputs, such
as rates and pricing and non-market based inputs such as withdrawal
rates. Given the mixture of observable and non-observable inputs,
these are considered to be level 3 measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as
sundry assets and sundry liabilities are not considered to be
materially different to their carrying values.
These assets and liabilities are of relatively low value and may
be settled at their carrying value at the balance sheet date or
shortly thereafter.
APPICES TO THE PRELIMINARY ANNOUNCEMENT
For the year ended 30 September 2021
Additional financial information supporting the amounts shown in
the management report but not forming part of the preliminary
financial information.
A. Underlying results
The Group reports underlying profit excluding fair value
accounting adjustments arising from its hedging arrangements and
certain one-off items of income and costs relating to asset sales
and acquisitions.
The fair value adjustments arise principally as a result of
market interest rate movements, outside the Group's control. They
are profit neutral over time and are not included in operating
profit for management reporting purposes. They are also disregarded
by many external analysts.
The transactions relating to the asset disposals and
acquisitions do not form part of the day-to-day activities of the
Group and, therefore, their removal provides greater clarity on the
Group's operational performance.
This definition of 'underlying' has been chosen following
consideration of the needs of investors and analysts following the
Group's shares, and because management feel it better represents
the underlying economic performance of the Group's business.
2021 2020
GBPm GBPm
Profit on ordinary activities before
tax 213.7 118.4
Add back: Fair value adjustments (19.5) 1.6
------- ------
Underlying profit 194.2 120.0
------- ------
Underlying basic earnings per share, calculated on the basis of
underlying profit, charged at the overall effective tax rate, is
derived as follows.
2021 2020
GBPm GBPm
Underlying profit 194.2 120.0
Tax at effective rate (note 7) (44.7) (27.5)
------- -------
Underlying earnings 149.5 92.5
------- -------
Basic weighted average number of
shares (note 8) 252.3 253.6
------- -------
Underlying earnings per share 59.3p 36.5p
------- -------
Underlying return on tangible equity is derived using underlying
earnings calculated on the same basis.
2021 2020
GBPm GBPm
Underlying earnings 149.5 92.5
Amortisation of intangible assets 2.0 2.0
Adjusted underlying earnings 151.5 94.5
-------- ------
Average tangible equity (note
26(b)) 1,028.5 961.6
-------- ------
Underlying RoTE 14.7% 9.8%
-------- ------
B. income statement ratios
NIM and cost of risk (impairment charge as a percentage of
average loan balance) for the Group are calculated as follows:
Year ended 30 September 2021
Note Mortgage Commercial Idem Capital Total
Lending Lending
GBPm GBPm GBPm GBPm
Opening loans to
customers 10 10,819.5 1,514.8 297.1 12,631.4
Closing loans to
customers 10 11,608.7 1,568.8 225.2 13,402.7
--------- ----------- ------------- ---------
Average loans to
customers 11,214.1 1,541.8 261.1 13,017.0
--------- ----------- ------------- ---------
Net interest 219.2 94.5 20.2 310.5
NIM 1.95% 6.13% 7.74% 2.39%
--------- ----------- ------------- ---------
Impairment provision
(release) / charge 11 (5.9) 2.9 (1.7) (4.7)
Cost of risk (0.05)% 0.19% (0.65)% (0.04)%
--------- ----------- ------------- ---------
Year ended 30 September 2020
Note Mortgage Commercial Idem Capital Total
Lending Lending
GBPm GBPm GBPm GBPm
Opening loans to
customers 10 10,344.1 1,452.1 389.9 12,186.1
Closing loans to
customers 10 10,819.5 1,514.8 297.1 12,631.4
--------- ----------- ------------- ---------
Average loans to
customers 10,581.8 1,483.4 343.5 12,408.7
--------- ----------- ------------- ---------
Net interest 190.0 82.1 26.1 278.1
NIM 1.80% 5.53% 7.60% 2.24%
--------- ----------- ------------- ---------
Impairment provision
charge 11 25.8 21.7 0.8 48.3
Cost of risk 0.24% 1.46% 0.23% 0.39%
--------- ----------- ------------- ---------
Not all interest is allocated to segments (note 2).
C. COST:INCOME RATIO
Cost: income ratio is derived as follows:
Note 2021 2020
GBPm GBPm
Cost - operating expenses 135.4 126.8
Total operating income 324.9 295.1
------ ------
Cost / Income 41.7% 43.0%
------ ------
D. Net asset value
Note 2021 2020
Total equity (GBPm) 1,241.9 1,156.0
-------- --------
Outstanding issued shares (m) 18 262.5 261.8
Treasury shares (m) 20 (12.1) (5.2)
Shares held by ESOP schemes (m) 20 (3.7) (3.6)
-------- --------
246.7 253.0
-------- --------
Net asset value per GBP1 ordinary GBP5.03 GBP4.57
share
-------- --------
Tangible equity (GBPm) 26 1,071.4 985.9
-------- --------
Tangible net asset value per GBP1 GBP4.34 GBP3.90
ordinary share
-------- --------
CAUTIONARY STATEMENT
Sections of this preliminary announcement, including but not
limited to the management report may contain forward-looking
statements with respect to certain of the plans and current goals
and expectations relating to the future financial condition,
business performance and results of the Group. These statements can
be identified by the fact that they do not relate strictly to
historical or current facts. They use words such as 'anticipate',
'estimate', 'expect', 'intend', 'will', 'project', 'plan',
'believe', 'target' and other words and terms of similar meaning in
connection with any discussion of future operating or financial
performance but are not the exclusive means of identifying such
statements. These have been made by the directors in good faith
using information available up to the date on which they approved
this report, and the Group undertakes no obligation to update or
revise these forward-looking statements for any reason other than
in accordance with its legal or regulatory obligations (including
under the UK Market Abuse Regulation, UK Listing Rules and the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority ('FCA')).
By their nature, all forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances
that are beyond the control of the Group and depend upon
circumstances that may or may not occur in the future that could
cause actual results or events to differ materially from those
expressed or implied by the forward-looking statements. There are
also a number of factors that could cause actual future financial
conditions, business performance, results or developments to differ
materially from the plans, goals and expectations expressed or
implied by these forward-looking statements and forecasts. As a
result, you are cautioned not to place reliance on such
forward-looking statements as a prediction of actual results or
otherwise.
These factors include, but are not limited to: material impacts
related to foreign exchange fluctuations; macro-economic activity;
the impact of outbreaks, epidemics or pandemics, such as the Covid
pandemic and ongoing challenges and uncertainties posed by the
Covid pandemic for businesses and governments around the world,
including the duration, spread and any recurrence of the Covid
pandemic and the extent of the impact of the Covid pandemic on
overall demand for the Group's services and products; potential
changes in dividend policy; changes in government policy and
regulation (including the monetary, interest rate and other
policies of central banks and other regulatory authorities in the
principal markets in which the Group operates) and the consequences
thereof (including, without limitation, actions taken as a result
of the Covid pandemic); actions by the Group's competitors or
counterparties; third party, fraud and reputational risks inherent
in its operations; the UK's exit from the EU; unstable economic
conditions and market volatility, including currency fluctuations;
the risk of a global economic downturn; technological changes and
risks to the security of IT and operational infrastructure,
systems, data and information resulting from increased threat of
cyber and other attacks; general changes in government policy that
may significantly influence investor decisions (including, without
limitation, actions taken in support of managing and mitigating
climate change and in supporting the global transition to net zero
carbon emissions); societal shifts in customer financing and
investment needs; and other risks inherent to the industries in
which the Group operates.
Nothing in this preliminary announcement should be construed as
a profit forecast.
This information is provided by RNS, the news service of the
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END
FR DKABQNBDBOBK
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December 07, 2021 02:00 ET (07:00 GMT)
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