TIDM93RD TIDMTTM
RNS Number : 4830H
Co-Operative Bank Finance PLC (The)
28 July 2023
Nick Slape (CEO) and Louise Britnell (CFO) will host an audio conference on 28 July 2023 at
9am (UK time) to present the interim results for the six months ended 30 June 2023 and a Q&A
session.
To access the call please visit https://www.co-operativebank.co.uk/about-us/investor-relations
/
Additional materials are also available at this address.
BASIS OF PRESENTATION
The Co-operative Bank Holdings Limited is the immediate parent company of The Co-operative
Bank Finance p.l.c. and the ultimate parent company of The Co-operative Bank p.l.c. In the
following pages the term 'Group' refers to The Co-operative Bank Holdings Limited and its
subsidiaries. The term 'Finance Group' refers to The Co-operative Bank Finance p.l.c. and
its subsidiaries. The term 'Bank' refers to The Co-operative Bank p.l.c. and its subsidiaries
which are consolidated within the Finance Group and then ultimately the Group. Unless otherwise
stated, information presented for the Group equally applies to the Bank and the Finance Group.
Underlying basis: The statutory results are adjusted to remove certain items that do not
promote an understanding of historical or future trends of earnings or cash flows, which therefore
allows a more meaningful comparison of the Group's underlying performance.
Alternative performance measures: The Group uses a number of alternative performance measures,
including underlying profit or loss, in the discussion of its business performance and financial
position.
2023 Interim Financial Report
28 July 2023
The Co-operative Bank ('the Bank') is pleased to provide an
update on its performance in the six months ended 30 June 2023.
-- Profit before tax of GBP61.8m and underlying profit of
GBP72.2m; in line with 1H 22 (GBP61.9m)
-- Surplus liquidity position; Pillar 1 LCR spot position
224.0%, 12 month rolling average LCR 238.9%
-- Strong asset quality; only 0.15% of secured accounts greater than 3 months in arrears
-- Significant headroom to capital requirements; GBP200m
successful MREL issuance in this quarter
Nick Slape, Chief Executive Officer, said:
"In the first half of 2023, we have delivered a strong financial
performance with a statutory profit before tax of GBP61.8m and a
statutory return on tangible equity of 13.0%.
We have made good progress on our mortgage and savings
transformation program having launched a third new savings product,
completed the insourcing of Capita colleagues and migrated c.60% of
our existing savings accounts.
Our low risk balance sheet and strong capital and liquidity
positions provide a resilient foundation from which to focus on our
customer driven goals in an uncertain macro-economic
environment.
I am pleased to see the investment in our customer proposition
being validated and, looking to the future, I am excited by the
opportunity to leverage our technology re-platforming to the
benefit of both customers and colleagues alike.
We recognise the financial challenges that the current economic
uncertainty and the cost of living crisis poses for a number of our
customers and colleagues and we will continue to support them. We
are proud to have signed up to the recent "Mortgage Charter"
offering tailored help to those customers who need it.
I would again like to thank our colleagues and customers for
their continued support."
FINANCIAL PERFORMANCE UPDATE
INCOME STATEMENT (GBPm)
6 months ended 30 June
------------------------
2023 2022
Net interest income 245.1 208.2
Other operating income 21.4 21.4
==================================== =========== ===========
Total income 266.5 229.6
Operating expenditure (205.8) (175.1)
Impairment (charge) / credit (0.3) 2.8
Non-operating income 1.4 4.6
==================================== =========== ===========
Profit before tax 61.8 61.9
Taxation credit / (charge) 41.4 (33.5)
==================================== =========== ===========
Profit after tax 103.2 28.4
==================================== =========== ===========
Adjustments
Exceptional project expenditure 7.5 5.5
Other exceptional losses / (gains) 2.9 (3.8)
------------------------------------ ----------- -----------
Underlying profit before tax 72.2 63.6
==================================== =========== ===========
Key ratios:
Net interest margin (bps) (1) 184 151
RoTE (%) (2) 13.0 5.2
Cost:income ratio (%) (3) 76.8 74.8
Asset quality ratio (bps) (4) 0.3 (2.7)
------------------------------------ ----------- -----------
1. Annualised net interest income over average interest earning
assets
2. Annualised profit after tax over average equity less
intangibles, assuming no further DTA benefit in 2H 23
3. Total statutory expenditure over total statutory income
(excludes impairment)
4. Annualised impairment charge / (credit) over average customer
assets
PERFORMANCE HIGHLIGHTS
Profit before tax of GBP61.8m and underlying profit of
GBP72.2m
Total income of GBP266.5m; includes net interest income and
other operating income and increased by 16% in comparison to the
six months ended 30 June 2022 (1H 22: GBP229.6m).
Net interest income increased by 18% to GBP245.1m (1H 22:
GBP208.2m) and net interest margin (NIM) has risen by 33 basis
points (bps) from 151bps to 184bps, with both benefitting from
increases in the base rate. The SVR-based component of our EIR
asset is GBP25.8m and is underpinned by an assumption of a
refinancing period of 0.5 months for the whole fixed rate mortgage
book (10% of our customers reverting to SVR and then those
customers spending an average of 5 months there before
refinancing). In the last 6 months we have observed more customers
reverting to SVR. See page 206 in 2022 Annual Report & Accounts
for further information on assumptions.
Operating expenditure increased by 18% to GBP205.8m (1H 22:
GBP175.1m); driven mainly by strategic decisions and commitments to
complete key projects such as Capita mortgage insourcing which saw
c.400 colleagues join the Bank in the first half of the year.
Non-staff costs rose by 6% to GBP107.7m following inflationary
pressures and project costs increased to GBP27.0m (1H 22:
GBP16.5m), which includes costs of GBP7.5m relating to the mortgage
and savings transformation programme, as we accelerate investment
in transformation projects to realise future benefits. Our
statutory cost:income ratio increased in the period to 76.8% from
74.8%, as a result of increased statutory expenditure outweighing
increased income.
Net impairment charge of GBP0.3m (1H 22: GBP2.8m credit); driven
by an increased provision for macroeconomic factors, most notably
an increase in the base rate outlook, offset by refinement of
unsecured modelling.
We have reported a GBP1.4m non-operating exceptional gain (1H
22: GBP4.6m), predominantly relating to Visa shareholdings. 2022
includes the sale of a small loan portfolio.
Income tax credit of GBP41.4m
The income statement tax credit of GBP41.4m is driven by further
deferred tax asset recognition of historical tax losses partially
offset by the tax charge on profits in the period.
Surplus liquidity position
Total assets reduced by 2% compared with 31 December 2022 with
legacy assets reducing by 5% to GBP0.6bn. Retail secured balances
have seen a slight increase to GBP19.8bn (FY 22: GBP19.6bn) as we
look to manage new business volumes whilst strategically preserving
Bank margins.
Total liabilities reduced by 2% to GBP26.3bn over the period (FY
22: GBP26.8bn). SME deposit balances have decreased slightly to
GBP3.3bn (FY 22: GBP3.4bn) whilst retail deposit balances decreased
by 3% to GBP16.1bn (FY 22: GBP16.6bn) driven by a reduction in
retail current account balances to GBP5.4bn (FY 22: GBP5.8bn),
following a decrease in customer average balances, primarily
attributable to the cost of living crisis. 81.4% of our core
customer deposits are insured through FSCS, and have remained
stable throughout the year despite issues seen in the wider market
relating to Silicon Valley Bank. The Bank maintains a very strong
12 month average LCR position of 238.9%. Total blended cost of
funds has increased, due to base rate rises, to 210bps but still
remains cost efficient (FY 22: 73bps). During the period we have
repaid GBP376m of TFSME with a remaining balance of GBP4.9bn.
Strong asset quality
The asset quality ratio (AQR) in total across retail, SME and
legacy customer lending remains strong, reflecting the Bank's
low-risk lending profile. AQR for the Bank as a whole as at 30 June
2023 is a charge of 0.3bps (1H 22: release of 2.7bps). The average
core mortgage book loan-to-value (LTV) remains low at 55.8% (FY 22:
53.5%). Secured accounts that are greater than three months in
arrears represented only 0.15% of total accounts as at 30 June 2023
(FY 22: 0.13%). We are working hard to ensure our customers feel
supported and can access the advice and services they need through
our personal banking and SME dedicated financial support teams.
Significant headroom to capital requirements
Following the Bank's new GBP200m Green MREL Senior transaction
in May, plus profits in the period, total MREL-qualifying resources
have grown by GBP241.8m. We have GBP378.4m surplus MREL resources
against a requirement of GBP1,463m including CRD IV buffers. This
issuance creates further opportunity to optimise capital structure
in line with our plans.
CET1 ratio has increased from 19.8% to 20.1% and remains well
above the regulatory minimum of 13.3% with organic CET1 ratio
generation in 1H 23 totalling 30bps. Risk-weighted assets (RWAs)
totalled GBP4.9bn (FY 22: GBP4.8bn).
BUSINESS PERFORMANCE UPDATE
Retail and SME performance
Our retail and SME segments encompass the services we provide to
our personal and SME banking customers and only provide services to
UK-based customers.
To date, there has been lots of competition in the industry for
current account customers, with a wide variety of different switch
incentives across the market. To ensure we remained competitive in
the current account market, we introduced our 'Refer a Friend'
incentive throughout the second half of 2022 and the first half of
2023. This incentive gave customers the opportunity to introduce
like-minded friends to our ethical banking proposition and has
helped mitigate balance reductions driven by switch outs.
Earlier this year, we launched a new Visa promotion that
benefits both customers and charity partners, giving customers the
chance to win up to GBP2,500 when they make a purchase using their
Co-operative Bank credit or debit card. To allow our customers to
make a difference to the causes that matter to them, we're matching
the total customer prize pot and customers will get to vote how the
donation is allocated. The promotion will have three monthly draws
and as at 30 June 2023 there were 16,185 entries.
Within our SME segment, our community customers are now able to
apply for a business account digitally, significantly reducing
friction within the customer journey and replacing the traditional
paper-based application process. Since the implementation, there
has been a 35% increase in the number of new community accounts
opened compared to the same period in 2022.
Delivering our strategy alongside our scorecard measures
During the first half of the year, we have made progress against
our scorecard measures. We aim to continuously improve the service
we offer to customers whilst addressing their concerns, with a
target to reduce complaints per 1,000 customers and currently year
to date this has reduced compared with the prior six months. In
2023, we have started to track our customer perception on
Trustpilot with our score climbing since the start of the year from
1.7 (Bad) to 3.5 (Average). Whilst we did experience some system
outages earlier in the year, we were able to rectify the issue
quickly and keep customer impact to a minimum.
As part of our transformation measures, the mortgage and savings
platform simplification activity is critical to delivering cost
efficiencies, improving flexibility for introducing new products
and reducing technical debt. After a long period of planning and
developing, we are set to complete the majority of the work this
year, with decommissioning due to finish next year. During 1H 23 we
welcomed c.400 colleagues from Capita as part of the insourcing of
mortgage operations and have also launched a new savings product,
Fixed Rate Cash ISA, following the launch of two other savings
products in 2022. This year is significant in our transformation
journey, and while we acknowledge the present challenges, we firmly
believe that the changes we are making will yield substantial
benefits in the future. The timeline for completing the
transformation remains in line with expectations with savings to be
concluded in 2023 and mortgages in early 2024.
The current environment is challenging. With the upward movement
of base rates there is intensified competition for deposits, and
mortgage margins remain under pressure across the whole industry.
However, despite these hurdles, we remain on track with our
financial progress. This year serves as a cornerstone for our
long-term growth and success and we have made strong progress in
the first half of 2023. We have already published our dividend
policy in our 2022 Annual Reports and Accounts, providing clear
guidance to our shareholders and stakeholders. We have further
strengthened our capital position with the issuance of our second
Green MREL qualifying debt in May 2023, supporting our commitment
to Green residential mortgage lending which stands at GBP156m in
2023. We received an upgraded credit rating from Fitch in February
to BB, meaning we are two notches away from investment grade,
alongside our Moody's rating of Ba1, which is one notch away from
investment grade. We expect further engagement with credit rating
agencies post the interim results announcement.
BOARD MATTERS
The Board and its committees have focused on many key matters in
the period. These included, amongst others:
-- Reviewing the outputs of the Board and Committee Performance
Evaluation undertaken by the Chartered Governance Institute UK
& Ireland in November 2022;
-- The appointment of Fiona Clutterbuck to the Board of
Directors with effect from 17 April 2023;
-- The issuance of GBP200m of MREL-qualifying funds in May 2023,
the second issuance under the Bank's Green, Social and
Sustainability (GSS) Financing Framework;
-- Considering the impacts of the proposed reforms to the Basel
III Standards upon the Bank, and the steps being taken to implement
the required changes;
-- Oversight of the activities being undertaken to progress and
deliver the requirements of the Financial Conduct Authority's
Consumer Duty regulations;
-- The approval of the 2022 Annual Report and Accounts in
February 2023 and the first quarter results in May 2023;
-- Reviewing, challenging and approving the Bank's 2022
Sustainability Report evidencing how the Bank has delivered against
its Ethical Policy over the previous 12 months;
-- Overseeing the enhancement of customer experience, colleague
wellbeing and creation of an agile culture, whilst maintaining
focus on regulatory compliance, cyber security and sustainability.
The Board continues to review the ways of working to adapt to
changing market dynamics, remain competitive and deliver value and
good customer outcomes;
-- Overseeing the Bank's approach to the ongoing support of
co-operatives, the continued progress on our values and ethics-led
ESG commitments and ensuring the risks from climate change are
properly considered and incorporated into all areas of the
business;
-- The quarterly refresh of financial forecasting, including the
impact on the longer-term financial and capital plans, continuously
adapting to the external economic market conditions;
-- The regulatory agenda including the review and approval of
the Bank's internal capital adequacy assessment process (ICAAP),
the internal liquidity adequacy assessment process (ILAAP) and
operational resilience self-assessment;
-- The Board's ambitious transformation plan to simplify its
mortgage and savings platforms and overseeing the successful
in-housing of mortgage servicing operations.
Strengthening our values and ethics
We continue to campaign on matters that are consistent with our
values and ethics and in line with our customers' priorities, such
as demonstrating our ongoing commitment to protecting the
environment, campaigning alongside Zero Hour in their fight to
reverse the damage from the climate and nature crisis we're all
facing. Earlier this year on World Environment Day, representatives
from the Bank joined Zero Hour ambassadors and supporting
Parliamentarians to hand in the United For Nature petition, calling
on the Prime Minister to increase the UK Government's environmental
ambition from halting, to halting and reversing, nature loss by
2030.
The Co-operative Bank and Friends of the Earth have joined
forces to launch a multi-year partnership which will bring back
nature to some of the UK's most nature-deprived communities through
the Postcode Gardener Programme. The Postcode Gardener Programme is
an initiative aimed at connecting professional gardeners with their
communities, helping to organise and support local people in
getting greenery and wildlife to thrive in their local areas. The
idea was born of the realisation that whilst many people want to
live on streets thriving with greenery and wildlife, they need help
to make it happen.
Over the next two years, we will be campaigning alongside
Shelter to demand long-overdue reforms that could transform
renting. These reforms would bring an end to all-too-common unfair
evictions, unsafe housing, and secure stronger rights for all
renters. Over the past five years, we have become a leading voice
on youth homelessness thanks to our long-standing partnership with
Centrepoint. Our campaign with Shelter takes our work in this area
to the next level by bringing about positive change for those in
the UK facing housing insecurity.
Supporting and protecting human rights has been a commitment
within our Ethical Policy for over 30 years, which is why we are
delighted to have announced our sponsorship of Amnesty
International UK's "Team Amnesty", a group of passionate supporters
who raise funds to allow Amnesty International to perform vital
work to expose abuses, educate, and mobilise millions around the
world. We recognise the impact that the cost of living crisis is
having on those affected by economic abuse and continue to work and
fundraise with Refuge to provide specialist services to those who
are affected.
Outlook
Our financial outlook for the remainder of the year is as
follows:
-- Bank net interest margin of approximately 180bps; reflecting
additional base rate rises offset by mortgage margin pressure.
-- Total statutory costs of approximately GBP420m; further
investment in our brand and systems alongside inflationary
pressures.
-- Asset quality ratio of less than 5bps; arrears remain low and stable across all portfolios.
-- Customer assets of GBP20-21bn; guidance refreshed as we
actively manage mortgage volumes in the second half of the
year.
-- Return on tangible equity of over 10%; profitability and
improved performance drives shareholder value.
-- Our new capital management framework including dividend
policy will enable a more efficient level of capital resources and
allow us to make the required investment in our business to grow
and provide capital returns to our shareholders over the long
term.
Whilst we are delivering against the challenging objectives we
set ourselves in our 2021 strategic plan, we acknowledge that there
is more to accomplish as we approach the second half of 2023. We
maintain a strong belief in our ability to achieve the multi-year
strategic goals outlined in our current phase of the strategic
plan. This plan is designed to enhance operational efficiency,
pursue growth opportunities, and diversify revenue streams,
positioning ourselves to challenge high street banks and provide a
service to customers who want an ethical alternative.
SEGMENTAL PROFIT / (LOSS) (GBPm)
Further information is provided in note 3.
Core Legacy & unallocated Group
Six months ended 30 June 2023 Retail SME Total
Net interest income 199.2 45.2 244.4 0.7 245.1
Other operating income 12.8 8.3 21.1 0.3 21.4
====================================== ======= ====== ======= ==================== =======
Operating income/(expense) 212.0 53.5 265.5 1.0 266.5
Operating expenses (158.4) (32.8) (191.2) (14.6) (205.8)
Net credit impairment gains/(losses) 0.1 0.2 0.3 (0.6) (0.3)
Non-operating income - - - 1.4 1.4
====================================== ======= ====== ======= ==================== =======
Profit before tax 53.7 20.9 74.6 (12.8) 61.8
====================================== ======= ====== ======= ==================== =======
Six months ended 30 June 2022 Core Legacy & unallocated Group
Retail SME Total
Net interest income 183.6 28.8 212.4 (4.2) 208.2
Other operating income 12.1 9.0 21.1 0.3 21.4
====================================== ======= ====== ======= ==================== =======
Operating income/(expense) 195.7 37.8 233.5 (3.9) 229.6
Operating expenses (136.7) (30.0) (166.7) (8.4) (175.1)
Net credit impairment gains/(losses) 1.5 (0.8) 0.7 2.1 2.8
Non-operating income - - - 4.6 4.6
====================================== ======= ====== ======= ==================== =======
Profit before tax 60.5 7.0 67.5 (5.6) 61.9
====================================== ======= ====== ======= ==================== =======
SME performance has improved during the first six months of the
year with profit before tax increasing to GBP20.9m (1H 22: GBP7.0m)
whereas retail profit has reduced to GBP53.7m (1H 22: GBP60.5m).
Both segments have benefited from base rate rises with retail total
income increasing by 8% to GBP212.0m (1H 22: GBP195.7m) and SME
total income increasing by 42% to GBP53.5m (1H 22: GBP37.8m). The
significant increase in SME income is due to a high proportion of
the SME balance sheet comprising deposits which have benefited from
the rising rate environment. The SME segment remains a key
strategic focus for its growth potential.
Retail operating expenditure increased from GBP136.7m to
GBP158.4m. This is predominantly driven by the insourcing of Capita
colleagues and recruitment in the second half of 2022. SME
operating expenditure has increased to GBP32.8m (1H 22: 30.0m).
Legacy & unallocated operating expenditure has increased from
GBP8.4m to GBP14.6m due to increased strategic project spend that
has not been allocated to any segment.
SEGMENTAL BALANCE SHEET (GBPm)
30 June 2023 Core Legacy & unallocated Group
Retail SME Total
Segment assets 20,059.0 391.4 20,450.4 7,205.1 27,655.5
Segment liabilities 16,109.0 3,308.1 19,417.1 6,837.0 26,254.1
--------------------- -------- ------- -------- -------------------- --------
31 December 2022 Core Legacy & unallocated Group
Retail SME Total
Segment assets 19,841.3 388.2 20,229.5 7,903.3 28,132.8
Segment liabilities 16,607.8 3,396.8 20,004.6 6,829.2 26,833.8
===================== ======== ======= ======== ==================== ========
SELECTED KEY PERFORMANCE INDICATORS
% (unless otherwise stated) 1H 23 2022 Change
CET1 ratio 20.1 19.8 0.3
Total capital ratio 24.0 23.8 0.2
Risk-weighted assets (GBPm) 4,943 4,816 127
Leverage ratio (PRA) (1) 4.1 4.0 0.1
Liquidity coverage ratio (spot) 224.0 242.9 (18.9)
Liquidity coverage ratio (12 month rolling average) (2) 238.9 265.3 (26.4)
Loan to deposit ratio 108.2 104.1 4.1
Average core mortgage LTV 55.8 53.5 2.3
Core mortgage accounts > 3 months in arrears (volume) 0.15 0.13 0.02
NPL as a % of total exposures 0.4 0.4 0.0
========================================================= ===== ===== ======
1. Calculated as per PRA definition, excluding Bank of England reserves
2. Calculated in line with Pillar 3 requirements
Investor enquiries:
investorrelations@co-operativebank.co.uk
Gary McDermott, Corporate & Strategic Development Director:
+44 (0) 7811 599495
Media enquiries:
Sam Cartwright, H/Advisors Maitland: +44 (0) 7827 254 561
Dan Chadwick, Communications: +44 (0) 7724 701319
The person responsible for arranging the release of this
announcement on behalf of The Co-operative Bank Finance p.l.c and
The Co-operative Bank p.l.c. is Catherine Green, Company
Secretary.
About The Co-operative Bank
The Co-operative Bank p.l.c. provides a range of banking
products and services to about 2.5m retail customers and c.94k
small and medium sized enterprises ('SME'). The Bank is committed
to values and ethics in line with the principles of the
co-operative movement. The Co-operative Bank is the only high
street bank with a customer-led ethical policy, which gives
customers a say in how their money is used. Launched in 1992, the
policy has been updated on six occasions, with new commitments
added in June 2022 to cover what we do for our planet, people and
the community.
The Co-operative Bank p.l.c. is authorised by the Prudential
Regulation Authority and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority. The Co-operative
Bank p.l.c. eligible customers are protected by the Financial
Services Compensation Scheme in the UK, in accordance with its
terms.
Note: This announcement contains inside information.
The Co-operative Bank p.l.c. LEI: 213800TLZ6PCLYPSR448
The Co-operative Bank Finance p.l.c. LEI:
213800KNE8ER4N9BLF11
RISK MANAGEMENT
1. RISK MANAGEMENT OBJECTIVES & POLICIES - PRINCIPAL RISKS AND UNCERTAINTIES
The following Principal Risks and Uncertainties section
highlights the changes in risk profile and mitigation we have
experienced and pursued within credit, operational, and capital
risk since the publication of the 2022 Annual Report and Accounts
(ARA).
Risk Management Framework (RMF)
We have continued to enhance the RMF in 2023, 'right sizing' the
framework to suit both our current and future operating model. Key
areas of focus in 2023 have been to rationalise the principal risk
taxonomy to ensure it is representative of the Bank's most
significant risks which has resulted in the removal of pensions
risk and product risk from the Group's list of principal risk
taxonomies. The current list of principal risks within the Group
RMF can be seen in the chart below. We have also made changes to
how risk metrics are constructed and reported by translating risk
appetite into specific, Board-monitored Key Risk Appetite Metrics
(KRAMs).
The Group's 2023 principal risk taxonomy and relevant pages in
the 2022 ARA are as follows:
Credit risk
------------
Retail credit risk
Our strategy remains focused on monitoring both secured and
unsecured retail portfolios. At the start of 2023, we initiated an
unsecured "cost of living task force" set up to review customer
management processes and arrears strategies in light of the current
continued unfavourable macroeconomic conditions. This activity will
continue throughout the rest of 2023, alongside tracking our
existing suite of cost of living early warning indicators, and
operating our pre-arrears contact strategy for unsecured
customers.
Over 2023, we have also revised and updated the affordability
assessments of the residential secured portfolio to reflect the
impacts on household disposable income from the rising cost of
living and rate increases for customers with rate maturities in
2023 and 2024. These assessments enable us to identify customers
with the highest likelihood of entering a negative disposable
income position and are the most likely to require support. The
Group's "at risk" population for its Platform mortgages was 1,901
in December (2.04% of the portfolio) and has risen to 2,120 in
April (2.18% of the portfolio) which is expected given the
macroeconomic environment. We are contacting at risk customers to
remind them support is available should they require it.
We are committed to complying fully with the mortgage charter
set out by the Chancellor in June 2023 and already have a full
suite of forbearance options for customers in financial difficulty.
These include the ability to temporarily switch their mortgage from
repayment to interest only, or extend the term of the mortgage. We
consider repossession of a property as a last resort and will work
with customers to find other options where possible. Any
repossessions will comply fully with the requirement to have a full
twelve months between falling into arrears and repossession.
SME credit risk
SME customers continue to face high inflation and rising
interest rates, with some operating in sectors which continue to
struggle with recruitment due to a shortage of skilled labour.
Despite these challenges, the majority of our business customers
have continued to service their lending facilities without the need
for intervention. Customers who have experienced financial
difficulties have been supported with forbearance solutions where
appropriate. We operate tailored contact strategies for businesses
in need of assistance, driving dialogue to explore the need for
support. Where appropriate, customers are directed towards reliable
external advice and forbearance is considered where necessary.
To address the increasing SME credit risk resulting from
worsening economic conditions, we have refreshed our affordability
assessments and stress testing requirements at loan origination and
throughout the loan life cycle. This supports good customer
outcomes by reducing the potential for customers to become
overcommitted. Sector appetites and key credit criteria have been
updated to support our selective growth strategy.
Treasury credit risk
Credit monitoring has not identified any material changes
(including external credit rating downgrades) in the
creditworthiness of the Group's low-risk treasury portfolio during
the year, even accounting for recent banking sector turmoil leading
to the resolution of SVB and Signature Bank in early March 2023,
the takeover of Credit Suisse later in the month and the subsequent
collapse and rescue of First Republic Bank in May. We have not
experienced any historic defaults and current exposures remain
predominantly concentrated to counterparties rated AA- or higher,
suggesting a very low probability of default. We will continue to
monitor counterparty creditworthiness closely in the coming months
alongside monetary policy decisions (particularly in the UK),
evolving funding conditions and any potential impacts to
counterparty earnings which may cause credit deterioration.
Operational risk
-----------------
Regulatory change
We are committed to compliance with a high volume of significant
regulatory change in 2023 aimed at enhancing customer protection
and outcomes, and the Group's financial resilience. The following
highlights key regulatory change activity delivered in 2023:
-- FCA Consumer Duty - designed to increase the current level of
consumer protection across the retail financial services market. We
have made progress in 2023 to ensure readiness for the FCA's
implementation dates. Key Moment of Truths (KMOTs) and high risk
products have been assessed using predefined assessment frameworks
to identify areas of potential customer harm. All areas identified
have been triaged to understand the remediation or mitigation which
is required prior to the end of July 2023, and to develop the day 2
plan. We have delivered the 'All intermediaries Distribution
Product Review' ahead of the 30(th) of April 2023 deadline. In
addition, the Group's governance framework and data and management
information capabilities are being enhanced and developed to ensure
that good customer outcomes continue to be evidenced. We have also
invested in cultural change, supported by specific training
sessions, including Executive Committee training, monthly Q&A
sessions, mandatory training and regular updates. We are currently
on track to meet further FCA implementation dates.
-- [New] PRA Model Risk Management (MRM) Principles for Banks -
ensures firms take a strategic approach to MRM as a risk discipline
in its own right. This will lead to strengthened Group policies,
procedures, and practices to identify, manage, and control the
risks associated with the use of models.
-- [New] PSR New Reimbursement Requirements for Victims of
Authorised Push Payment (APP) Fraud - will ensure a greater number
of customers who fall victim to APP fraud will be reimbursed,
prompting banks to enhance control frameworks. In 2024, the new
reimbursement requirement will come into force. We welcome the new
PSR requirements, and have begun strengthening existing controls to
protect both customers and the Group from the risk of APP
fraud.
We recognise that a high volume of regulatory change activity
carries significant execution risks and represents a significant
resource demand across the business. We remain fully committed to
successfully delivering a significant regulatory change agenda
across 2023 and beyond, with significant time and effort invested
into planning and building the capability to mitigate the risks of
non-compliance or late / failed delivery.
Fraud risk
Fraud losses continue to be a significant factor contributing to
operational losses in 2023 although implementation of the card not
present (CNP) online transaction security enhancement in 2022 has
continued to reduce both the number of fraud cases and overall
fraud loss. We recognise that APP, impersonation and purchase scams
are some of the leading forms of fraud impacting our customers,
which aligns with wider industry data. In response, we have
continued to invest in our behavioural biometrics tool (Trusteer),
enabled to protect customers when they do their banking online. To
further mitigate this risk, we have planned security enhancements
and improved fraud notification banners within payment journeys
scheduled to be delivered later in 2023. In addition, tactical
controls remain in place for SME with a planned upgrade to our SME
transaction screening tool (Detica) scheduled for H2 2023,
delivering further protection against both account takeover and APP
for our business customers.
Change risk
Since 2022 we have introduced improved governance and oversight
for the delivery of business change. A refreshed business change
methodology, supported by a new financial control framework is now
in place and subject to reporting and review by a dedicated
committee. Our 2023 transformation portfolio continues to deliver a
set of initiatives core to our strategy with a focus on risk
remediation, improved customer experience, regulatory compliance
and most significantly, the migration of mortgage and savings
customers from legacy IT systems to a new platform.
We have delivered a number of significant improvements through
change in the first half of 2023, most notably;
-- the continued removal of legacy systems across our IT estate
in line with the approved plan;
-- transfer of Capita staff into the Group to a refurbished location for mortgage operations;
-- cyber security enhancements ; and ,
-- updated features and stability fixes within the retail and SME digital banking app .
For the remainder of 2023, robust programme monitoring and
oversight of key developments will continue to be driven across all
three lines of defence. Our regulators will continue to receive
frequent updates on the Group's transformation progress.
Capital risk
-------------
Capital compliance
Over the first half of 2023, the UK economy has continued to see
high levels of inflation (8.7% YoY CPI increase, for the 12 months
to April 2023), with the Bank of England increasing base rate from
3.5% as at 31 December 2022, to 5% (as at 30 June 2023). The lag
effects of changes in prices and interest rates have resulted in
continued resilience across our lending portfolios, supported by
sustained resilience in the labour market. Group RWAs have
increased to GBP4,943m, due to changes in balance sheet
composition, rather than balance sheet growth. Despite this, our
capital position has been strengthened by a further GBP200m MREL
Senior debt issuance, completed in May 2023.
Capital risk is monitored on a continuous basis by senior
management across all three lines of defence, and we remain well
positioned to react to changes in our capital risk profile. We
regularly assess changes in macroeconomic variables (such as house
prices, unemployment, inflation, interest rates and others) in
order to understand the potential impact on credit losses and RWAs.
We conduct an annual stress testing exercise to assess the impact
of highly severe yet plausible downturn scenarios, for which the
Group remains adequately capitalised to absorb. Furthermore,
capital contingency planning and recovery planning are regularly
reviewed by management in order to ensure that we are prepared to
take actions to protect our capital position.
With respect to PS11/20 model changes and the impact on RWAs and
expected loss (EL), we continue to engage closely with the PRA in
order to implement change. In order to ensure that RWAs and EL are
not underestimated, we have implemented a post model adjustment
(PMA) for PS11/20. We will continue to review the size of this PMA
to ensure it remains suitable as we complete our PS11/20 model
development. Capital risk is also mitigated through the continued
accrual of organic CET1 resources as a result of sustained
profitability. We plan to reduce dependency on interest income and
remain committed to diversifying its income streams, as noted in
the 2022 Annual Report and Accounts. Overall, we continue to
maintain a strong position across all regulatory capital frameworks
(TCR/MREL/Leverage) including capital buffers, on both an actual
and forecast basis.
Capital regulatory change
Regulatory change remains a key risk to the Group's capital
position. On 30 November 2022, the PRA released Consultation Paper
16/22 (CP16/22), which outlined the proposals for the
implementation of Basel 3.1 in the UK. As noted in the 2022 Annual
Report and Accounts, the PRA proposed a series of changes to the
current approach to calculating regulatory capital requirements, to
be implemented on 1 January 2025 on a phased basis. We highlighted
the magnitude of the development required ahead of implementation,
in order to calculate and report Pillar 1 requirements in line with
the proposed changes. We have developed a plan for delivering all
required changes in time for the implementation date and continue
our detailed assessment of potential impacts, all overseen through
Board and Executive-level governance. We have provided responses to
the consultation directly to the PRA and through UK Finance's
industry responses.
On 13 July 2023, after the reporting period end date, the FPC
implemented the increase in the UK CCyB rate as expected. There
have been no further regulatory changes that are expected to
materially impact the Group's capital position.
Emerging risks
---------------
Banking sector instability
The collapse of Silicon Valley Bank (SVB) and Signature Bank in
early March 2023, the takeover of Credit Suisse (CS) in April, and
the subsequent collapse of First Republic Bank in May drove
increased volatility in interest rate and wholesale debt markets,
leading to global "risk-off" sentiment as markets sought to
identify any potential risk of contagion.
Our response to this threat included the immediate enhancement
of customer and market monitoring and engagement with stakeholders
including meeting regulatory requests for liquidity data. There
were no material impacts to the Group arising from this period of
instability.
We are not exposed to the same profile of risks which led to the
failure of SVB, notably weakness within the Pillar 2 IRRBB
framework, and do not expect any long run idiosyncratic impacts as
a result of March's instability. We continue to closely monitor any
impacts of regulatory developments - aimed at limiting the risk of
bank failures occurring in the UK - on both the UK banking sector
and the Group.
Base rate rises
The UK economy over the past 12 months has been characterised by
persistently high levels of inflation. In response, the Bank of
England has increased the base rate by 150 basis points in 2023 as
at 30 June with further rate rises expected, following the total
325 basis point increase through 2022. We anticipate that further
base rate increases are likely to drive affordability challenges
for our borrowers, especially those on standard variable rate (SVR)
mortgages. Whilst our portfolios have not been materially affected
as yet, increased affordability pressure on our customers
consequentially increases the potential for increased rates of
arrears within our secured and unsecured portfolios.
The retail credit risk section on page 7 provides details on how
we are monitoring the impacts of the rising rate environment on our
customers.
Global conflict
The Group continues to have no direct exposure to the conflict
in Ukraine or potential conflict in Taiwan. Although no direct
threats have emerged over 2023, we remain conscious of a select
number of continued indirect impacts these conflicts have on our
risk profile and delivery of financial strategy. The most prominent
of these include:
-- Inflation - the impact that Russian sanctions continues to
have on global market prices for goods in particular oil prices,
exacerbating inflationary pressures on the UK economy.
-- Sanctions - the enforcement of sanctions regimes on Russia
causes a heightened level of compliance risk. Our lack of exposure
to affected regions provides some mitigation however enhanced
compliance resource is still required due to the increased severity
of sanctions imposed.
-- Cyber threats - international conflict opens the Group to
potential cyber threats from state sponsored groups / individual
threat actors. We are continuously strengthening and adapting cyber
defences in place to remain prepared for this evolving threat.
Market risk
------------
LIBOR transition
The Group has exposure to legacy LIBOR-linked products,
primarily across its legacy retail secured and corporate
portfolios. LIBOR was phased out at the end of 2021, and the work
to transition the Group's affected exposures to appropriate
replacement rates now been materially completed. For further
information on the risk management associated with this activity,
refer to the market risk disclosures within the 2022 Annual Report
and Accounts.
The table below outlines the Group's exposure at 30 June 2023 to
significant IBORs subject to reform that are yet to be transitioned
to an alternative benchmark rate. The carrying amounts of financial
assets are presented gross of any expected credit losses
(ECLs).
30 June 2023 31 December 2022
--------------------------------------------- ----------------------------------------------
Non-derivatives Derivatives Non-derivatives Derivatives
-------------------------------- ---------------------------------
Financial Financial Financial Financial
assets liabilities Nominal assets liabilities Nominal
Carrying value Carrying value amount Carrying value Carrying value amount
------------------- --------------- --------------- ----------- --------------- ---------------- -----------
GBP LIBOR 6.0 - - 105.9 - 68.7
------------------- --------------- --------------- ----------- ---------------- ---------------- -----------
Of the above balances, none (31 December 2022: GBP5.7m) are
classed as tough legacy. The majority of the remaining balances
will have completed their transition to an alternative rate by the
end of 2023, and the remaining population are expected to be moved
to a replacement rate when the synthetic LIBOR benchmark is removed
in March 2024.
The Group also has responsibility for the migration of certain
legacy LIBOR retail secured assets sold to unconsolidated
structured entities or other third parties but where it continues
to hold legal title. The gross outstanding balances of these LIBOR
assets not recognised on the Group's balance sheet are GBP133.5m
(31 December 2022: GBP142.6m), of which GBP21.2m (31 December 2022:
GBP22.7m) are classed as 'tough legacy' (i.e. those that do not
allow for variation of benchmark rates) and for which solutions
continue to be developed.
2. CREDIT RISK
All amounts are stated in GBPm unless otherwise indicated
Credit risk is the risk to earnings and capital arising from a customer's
failure to meet their legal and contractual obligations.
The Group manages credit risk on the following balance sheet
items:
-- Loans and advances to banks;
-- Loans and advances to customers;
-- Investment securities;
-- Derivative financial instruments; and
-- Other assets.
Expected credit loss (ECL) assessment approach
The Group's portfolio of assets on which credit risk is managed
remains low-risk and well-positioned to withstand the current
environment.
During 2023 the Group has observed the following impacts:
1. Level of arrears in the mortgage portfolio (core >3
months) is 0.02% higher compared to the year end: 0.15% as at 30
June 2023 (0.13% at 31 December 2022). We are seeing some small
increases driven by the squeeze on household finances due to
inflation and a rising interest rate environment.
2. There has not been a significant amount of material defaults
in the SME or legacy corporate portfolios in the period. The
profiles of customers are closely monitored including via
strategies to identify and contact 'at risk' customers as described
in the year end risk management report and which are managed on a
case-by-case basis.
More information is included in note 2 to the condensed
consolidated financial statements in relation to assumptions around
stage transfers and also in relation to the economic scenarios.
Allowance for losses and credit impairment charge analysis by
segment
Although the Group manages credit risk arising from a number of
balance sheet items, the most significant is the loans and
advances. The following tables analyse the allowance for losses as
at 30 June 2023 and the credit impairment charge for the period by
segment. Comparative information is shown within the analysis of
credit risk section alongside segmental information disclosed
within note 3 and information included in note 8 in relation to
loans and advances to customers.
The credit impairment (ECL charge) and the allowance for losses
(ECL provision) for the period arises from both modelled and also
post-model adjustments (PMAs) (i.e. known model deficiency
overlay). These management judgements were described within the
Annual Report and Accounts within the critical judgements of note
2, with an update in note 2 of this document. During the period,
the following represent the key movements within ECL:
Retail - the ECL provision has reduced from GBP28.1m to
GBP26.6m. This GBP1.5m reduction is driven by a higher retail
secured ECL provision of GBP0.6m offset by lower credit cards
(GBP1.9m) and overdrafts (GBP0.2m) ECL provisions. A key driver of
movement in ECL is changes in the PMAs applied by the Group, which
are disclosed in further detail in note 2 to the condensed
consolidated financial statements. This has resulted in a coverage
of c.9bps on the retail secured Platform book.
SME - the movement of the ECL provision from GBP7.9m to GBP7.1m
reflects a net (GBP0.3)m reduction in specific provision and PMA
movements (described in note 2).
Legacy & central items - the ECL provision has moved from
GBP4.3m at 31 December 2022 to GBP5.1m. The PMA movement is
described in note 2.
Analysis of credit risk
Core
--------------- -------------- --------
Legacy &
30 June 2023 Retail SME central items Total
------------------------------------------------- -------- ----- -------------- --------
Analysis of credit risk exposure
Gross accounting balances 20,131.6 396.5 617.1 21,145.2
Less: accounting adjustments(1) (72.6) (5.1) 2.4 (75.3)
================================================= ======== ===== ============== ========
Gross customer balances 20,059.0 391.4 619.5 21,069.9
Credit commitments 1,356.2 101.0 28.4 1,485.6
================================================= ======== ===== ============== ========
Gross customer exposure 21,415.2 492.4 647.9 22,555.5
------------------------------------------------- -------- ----- -------------- --------
Less: customer balances measured at FVTPL(1) (1.5) (1.8) (87.6) (90.9)
------------------------------------------------- -------- ----- -------------- --------
Net customer exposure subject to ECL calculation 21,413.7 490.6 560.3 22,464.6
------------------------------------------------- -------- ----- -------------- --------
Allowance for losses
Collectively modelled ECL 10.4 1.0 1.7 13.1
Individually assessed ECL - 1.0 2.6 3.6
Judgemental adjustment 16.0 4.2 0.5 20.7
Operational adjustment(2) 0.2 0.9 0.3 1.4
------------------------------------------------- -------- ----- -------------- --------
Total ECL 26.6 7.1 5.1 38.8
------------------------------------------------- -------- ----- -------------- --------
1. Accounting adjustments include some FV non- customer
balances.
2. Operational model adjustments are recognised in respect of
individually insignificant model corrections where management
judgement does not have a substantial impact on the quantification
of the adjustment
Core
--------------- -------------- --------
Legacy &
31 December 2022 Retail SME central items Total
------------------------------------------------- -------- ----- -------------- --------
Analysis of credit risk exposure
Gross accounting balances 19,918.3 393.2 650.7 20,962.2
Less: accounting adjustments(1) (77.0) (5.0) (1.2) (83.2)
================================================= ======== ===== ============== ========
Gross customer balances 19,841.3 388.2 649.5 20,879.0
Credit commitments 1,826.6 127.5 35.0 1,989.1
------------------------------------------------- -------- ----- -------------- --------
Gross customer exposure 21,667.9 515.7 684.5 22,868.1
------------------------------------------------- ======== ===== ============== ========
Less: customer balances measured at FVTPL(1) (1.6) (2.9) (90.5) (95.0)
------------------------------------------------- ======== ===== ============== ========
Net customer exposure subject to ECL calculation 21,666.3 512.8 594.0 22,773.1
------------------------------------------------- ======== ===== ============== ========
Allowance for losses
Collectively modelled ECL 9.8 0.8 1.4 12.0
Individually assessed ECL - 1.3 2.4 3.7
Judgemental adjustment 18.0 4.8 0.3 23.1
Operational adjustment(2) 0.3 1.0 0.2 1.5
------------------------------------------------- ======== ===== ============== ========
Total ECL 28.1 7.9 4.3 40.3
------------------------------------------------- ======== ===== ============== ========
1. Accounting adjustments include some FV non-customer
balances.
2. Operational model adjustments are recognised in respect of
individually insignificant model corrections where management
judgement does not have a substantial impact on the quantification
of the adjustment
Core
------------------------------- ----------- -------------- -----
Legacy &
Retail SME central items Total
------------------------------- ------ --- -------------- -----
Credit impairment (ECL charge)
Six months to 30 June 2023 0.1 0.2 (0.6) (0.3)
------------------------------- ------ --- -------------- -----
The movement in the gross customer exposure (excludes those
assets held at FVTPL) across the segments is shown below:
Gross customer exposure for ECL - Purchased or Originated Credit
Retail Stage 1 Stage 2 Stage 3 Impaired (POCI) Total
-------------------------------------- --------- --------- ------- ------------------------------------ ---------
At 31 December 2022 18,103.2 3,453.1 50.8 59.2 21,666.3
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (647.4) 647.4 - - -
To credit impaired (stage 1 or 2 to
3) (8.7) (10.8) 19.5 - -
To 12 month ECL (stage 2 to 1) 1,401.1 (1,401.1) - - -
From credit impaired (stage 3 to 2
or 1) 2.1 2.1 (4.2) - -
-------------------------------------- --------- --------- ------- ------------------------------------ ---------
Net changes arising from stage
transfers 747.1 (762.4) 15.3 - -
Other charges/(releases):
New assets originated or purchased 1,663.6 - - - 1,663.6
Other changes to risk parameters (456.7) - - - (456.7)
Redemptions and repayments (1,283.4) (161.7) (7.7) (4.5) (1,457.3)
Net other charges/(releases) 670.6 (924.1) 7.6 (4.5) (250.4)
-------------------------------------- --------- --------- ------- ------------------------------------ ---------
Assets written off (0.1) (0.7) (1.4) - (2.2)
-------------------------------------- --------- --------- ------- ------------------------------------ ---------
At 30 June 2023 18,773.7 2,528.3 57.0 54.7 21,413.7
-------------------------------------- --------- --------- ------- ------------------------------------ ---------
Gross customer exposure for ECL - SME Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- ------
At 31 December 2022 262.2 232.4 17.1 1.1 512.8
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (18.0) 18.0 - - -
To credit impaired (stage 1 or 2 to 3) (3.3) (5.3) 8.6 - -
To 12 month ECL (stage 2 to 1) 1.4 (1.4) - - -
From credit impaired (stage 3 to 2 or 1) 0.1 0.8 (0.9) - -
------------------------------------------- ------- ------- ------- ---- ------
Net changes arising from stage transfers (19.8) 12.1 7.7 - -
Other charges/(releases):
New assets originated or purchased 64.2 - - - 64.2
Other changes to risk parameters - - - - -
Redemptions and repayments (48.7) (29.9) (5.9) - (84.5)
Net other charges/(releases) (4.3) (17.8) 1.8 - (20.3)
------------------------------------------- ------- ------- ------- ---- ------
Assets written off - - (1.9) - (1.9)
------------------------------------------- ------- ------- ------- ---- ------
At 30 June 2023 257.9 214.6 17.0 1.1 490.6
------------------------------------------- ------- ------- ------- ---- ------
Gross customer exposure for ECL - Legacy Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ----- ------
At 31 December 2022 568.2 6.5 12.6 6.7 594.0
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (14.2) 14.2 - - -
To credit impaired (stage 1 or 2 to 3) - (0.1) 0.1 - -
To 12 month ECL (stage 2 to 1) 0.3 (0.3) - - -
From credit impaired (stage 3 to 2 or 1) - - - - -
------------------------------------------- ------- ------- ------- ----- ------
Net changes arising from stage transfers (13.9) 13.8 0.1 - -
Other charges/(releases):
New assets originated or purchased - - - - -
Other changes to risk parameters (0.3) - - - (0.3)
Redemptions and repayments (29.6) (2.5) (0.8) (0.3) (33.2)
Net other charges/(releases) (43.8) 11.3 (0.7) (0.3) (33.5)
------------------------------------------- ------- ------- ------- ----- ------
Assets written off - - - (0.2) (0.2)
------------------------------------------- ------- ------- ------- ----- ------
At 30 June 2023 524.4 17.8 11.9 6.2 560.3
------------------------------------------- ------- ------- ------- ----- ------
The movement in the allowance for losses across the three
segments (excludes FVTPL) is shown below:
Allowance for losses - Retail Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ----- -----
At 31 December 2022 8.5 15.5 3.9 0.2 28.1
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (0.5) 5.5 - - 5.0
To credit impaired (stage 1 or 2 to 3) - (0.2) 1.6 - 1.4
To 12 month ECL (stage 2 to 1) 0.6 (4.0) - - (3.4)
From credit impaired (stage 3 to 2 or 1) - - (0.1) - (0.1)
------------------------------------------- ------- ------- ------- ----- -----
Net changes arising from stage transfers 0.1 1.3 1.5 - 2.9
Other charges/(releases):
New assets originated or purchased 1.2 - - - 1.2
Other changes to risk parameters (3.4) 0.8 0.2 (0.1) (2.5)
Redemptions and repayments (0.3) (0.7) (0.3) - (1.3)
=========================================== ======= ======= ======= ===== =====
Net other charges/(releases) (2.4) 1.4 1.4 (0.1) 0.3
------------------------------------------- ------- ------- ------- ----- -----
Assets written off (0.1) (0.5) (1.2) - (1.8)
------------------------------------------- ------- ------- ------- ----- -----
At 30 June 2023 6.0 16.4 4.1 0.1 26.6
------------------------------------------- ------- ------- ------- ----- -----
Allowance for losses - SME Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- -----
At 31 December 2022 1.3 5.3 1.3 - 7.9
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) (0.2) 0.2 - - -
To credit impaired (stage 1 or 2 to 3) - (0.2) 0.4 - 0.2
To 12 month ECL (stage 2 to 1) - - - - -
From credit impaired (stage 3 to 2 or 1) - 0.1 - - 0.1
------------------------------------------- ------- ------- ------- ---- -----
Net changes arising from stage transfers (0.2) 0.1 0.4 - 0.3
Other charges/(releases):
New assets originated or purchased 0.3 - - - 0.3
Other changes to risk parameters (0.2) - - - (0.2)
Redemptions and repayments (0.1) (0.4) - - (0.5)
=========================================== ======= ======= ======= ==== =====
Net other charges/(releases) (0.2) (0.3) 0.4 - (0.1)
------------------------------------------- ------- ------- ------- ---- -----
Assets written off - - (0.7) - (0.7)
------------------------------------------- ------- ------- ------- ---- -----
At 30 June 2023 1.1 5.0 1.0 - 7.1
------------------------------------------- ------- ------- ------- ---- -----
Allowance for losses - Legacy Stage 1 Stage 2 Stage 3 POCI Total
------------------------------------------- ------- ------- ------- ---- -----
At 31 December 2022 1.4 0.1 2.7 0.1 4.3
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2) - 0.3 - - 0.3
To credit impaired (stage 1 or 2 to 3) - - - - -
To 12 month ECL (stage 2 to 1) - - - - -
From credit impaired (stage 3 to 2 or 1) - - - - -
------------------------------------------- ------- ------- ------- ---- -----
Net changes arising from stage transfers - 0.3 - - 0.3
Other charges/(releases):
Other changes to risk parameters (0.3) 0.1 0.5 0.1 0.4
Redemptions and repayments (0.1) 0.2 - - 0.1
=========================================== ======= ======= ======= ==== =====
Net other charges/(releases) (0.4) 0.6 0.5 0.1 0.8
------------------------------------------- ------- ------- ------- ---- -----
Assets written off - - - - -
------------------------------------------- ------- ------- ------- ---- -----
At 30 June 2023 1.0 0.7 3.2 0.2 5.1
------------------------------------------- ------- ------- ------- ---- -----
Secured residential portfolio analysis
The following tables show the secured residential drawn balances
(excluding Legacy) analysed by a number of key risk measurements.
The portfolio has remained stable in size. Within this book 4.3% of
balances have a probability of default (PD) of greater than 1% (31
December 2022: 3.3%), with the majority of the increase in the 1 to
3% PD band. The book is also subject to a range of forbearance
measures which are detailed in the 2022 Annual Report and Accounts.
There have been no changes in the measures since the December 2022
year end.
a) Loan-to-value (LTV) and repayment type
The table shows gross customer balances analysed by indexed LTV
bandings (with interest only including mortgages on a part
repayment/part interest basis).
30 June 2023 31 December 2022
----------------------------------- ------------------------------------------
Capital
LTV % repayment Interest only Total Capital repayment Interest only Total
----------------------------- ---------- ------------- -------- ----------------- ------------- --------
Less than 50% 6,165.5 983.2 7,148.7 6,641.3 1,118.0 7,759.3
50% to 60% 3,270.5 467.3 3,737.8 3,508.8 432.4 3,941.2
60% to 70% 3,638.3 186.5 3,824.8 3,747.7 160.3 3,908.0
70% to 80% 3,151.0 46.0 3,197.0 2,864.8 15.3 2,880.1
80% to 90% 1,438.8 1.3 1,440.1 974.8 0.9 975.7
90% to 100% 476.3 0.2 476.5 138.9 0.2 139.1
Greater than or equal to 100% 1.1 0.3 1.4 0.6 0.3 0.9
----------------------------- ---------- ------------- -------- ================= ============= ========
18,141.5 1,684.8 19,826.3 17,876.9 1,727.4 19,604.3
----------------------------- ---------- ------------- -------- ================= ============= ========
b) Mortgage type
The table below shows gross customer balances for mortgages
analysed by asset class. The LTV shown is the current indexed
average percentage. 99.9% of the total book is classified as prime
or buy-to-let mortgages. The higher risk self-certified, almost
prime and non-conforming account for only 0.1% of the total
book.
30 June 2023 31 December 2022
Gross customer Average Interest Gross customer Average Interest
balance LTV % only % balance LTV % only %
------------------ -------------- ------- -------- -------------- ------- --------
Prime residential 18,381.8 56.4 2.8 18,178.2 54.0 3.1
Buy-to-let 1,415.0 48.7 81.7 1,395.2 47.2 81.5
Self-certified 19.1 33.1 93.1 20.4 30.9 92.8
Almost prime 8.1 29.1 37.5 8.5 28.3 35.6
Non-conforming 2.3 45.2 65.0 2.0 47.4 76.1
------------------ -------------- ------- -------- ============== ======= ========
19,826.3 55.8 8.5 19,604.3 53.5 8.8
------------------ -------------- ------- -------- ============== ======= ========
c) UK regional distribution
The table below shows the analysis of LTVs and gross customer
balances by UK regions. Regional split now based on Government
Office Regions (was Economic Planning Regions). 2022 has been
re-presented on the same basis. The largest sector of London &
South East has an LTV broadly in line with the overall average;
with no significant variation in the LTV's between the regions.
30 June 2023 31 December 2022
------------------------------- -------------------------------
Gross customer balance LTV - % Gross customer balance LTV - %
----------------------- ---------------------- ------- ---------------------- -------
London & South East 6,266.9 56.0 6,144.0 53.7
Northern England 4,603.5 56.6 4,542.9 54.2
Midlands & East Anglia 5,452.7 55.1 5,430.1 52.9
Wales & South West 2,409.3 54.5 2,400.5 51.7
Other 1,093.9 57.6 1,086.8 55.5
----------------------- ---------------------- ------- ---------------------- -------
19,826.3 55.8 19,604.3 53.5
----------------------- ---------------------- ------- ---------------------- -------
Unsecured retail portfolio analysis
The table below shows the analysis of unsecured retail gross
customer exposure by product. The decline reflects the continued
lower usage of cards and overdrafts. The drawn balance has declined
from a combined GBP237.0m to GBP232.7m.
30 June 2023 31 December 2022
---------------------------- -----------------------------
Gross customer exposure ECL Gross customer exposure ECL
------------- ----------------------- --- ----------------------- ----
Credit cards 1,054.0 5.6 1,074.7 7.5
Overdrafts 182.6 3.9 185.0 4.1
1,236.6 9.5 1,259.7 11.6
------------- ----------------------- --- ----------------------- ----
SME portfolio analysis
The table below shows the analysis of SME gross customer
exposure by product. The movement is mainly driven through CBILS
and Bounce-Back loan repayments, partially offset by new
lending.
30 June 2023 31 December 2022
---------------------------- ----------------------------
Gross customer exposure ECL Gross customer exposure ECL
-------------------------- ----------------------- --- ----------------------- ---
Secured loans 219.9 0.8 230.4 2.6
CBILS & Bounce-Back loans 197.0 3.0 228.7 3.5
Unsecured loans 73.7 3.3 53.7 1.8
-------------------------- ----------------------- --- ----------------------- ---
490.6 7.1 512.8 7.9
-------------------------- ----------------------- --- ----------------------- ---
Sector analysis
The table below analyses the gross customer exposure for the SME
by sector excluding FVTPL of GBP1.8m (31 December 2022: GBP2.9m).
The exposure to higher-risk sectors is limited.
30 June 2023 31 December 2022
----------------------- ------------ ----------------
Business banking 175.9 200.9
Commercial real estate 107.8 98.4
Retail/wholesale 39.4 40.1
Food/hotel 39.4 32.2
Care 17.6 17.3
Charities 14.8 14.6
Education 12.1 9.0
Renewable energy 7.1 7.9
Financial/legal 5.1 14.2
Housing association 2.3 1.7
Other 69.1 76.5
======================= ------------ ================
490.6 512.8
----------------------- ------------ ================
Legacy portfolio analysis
The table below shows the analysis of corporate legacy gross
customer exposure by sector. As shown below the majority of the
balance is either in the low-risk private finance initiative (PFI)
or housing association (HA) sectors.
30 June 2023 31 December 2022
---------------------------- ----------------------------
Gross customer exposure ECL Gross customer exposure ECL
------------------------- ----------------------- --- ----------------------- ---
PFI 368.4 3.9 381.9 3.4
HA 243.6 0.1 257.1 0.1
Other 18.1 0.1 26.3 0.2
------------------------- ----------------------- --- ----------------------- ---
630.1 4.1 665.3 3.7
Less: FVTPL (87.6) - (90.5) -
------------------------- ----------------------- --- ----------------------- ---
Total corporate 542.5 4.1 574.8 3.7
------------------------- ----------------------- --- ----------------------- ---
Unsecured personal loans 0.7 0.2 1.1 0.1
Secured - Optimum 17.1 0.8 18.1 0.5
------------------------- ----------------------- --- ----------------------- ---
Total legacy 560.3 5.1 594.0 4.3
------------------------- ----------------------- --- ======================= ===
INDEPENT REVIEW REPORT TO THE CO-OPERATIVE BANK HOLDINGS
LIMITED
Conclusion
We have been engaged by the Group to review the condensed set of
financial statements in the half-yearly financial report for the
six months ended 30 June 2023 which comprises the Condensed
Consolidated Income Statement, Condensed Consolidated Statement of
Comprehensive Income, Condensed Consolidated Balance Sheet,
Condensed Consolidated Statement of Cashflows, Condensed
Consolidated Statement of Changes in Equity and related notes 1 to
17. We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2023 is not prepared, in all material respects, in accordance
with UK-adopted International Accounting Standard 34 .
Basis for Conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, "Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. A review of
interim financial information consists of making enquiries,
primarily of persons responsible for financial and accounting
matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
As disclosed in note 1.1, the annual financial statements of the
Group are prepared in accordance with UK-adopted international
accounting standards. The condensed set of financial statements
included in this half-yearly financial report has been prepared in
accordance with UK-adopted International Accounting Standard 34,
"Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
Conclusion section of this report, nothing has come to our
attention to suggest that management have inappropriately adopted
the going concern basis of accounting or that management have
identified material uncertainties relating to going concern that
are not appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with this ISRE, however future events or conditions may
cause the entity to cease to continue as a going concern.
Responsibilities of the Directors
The Directors are responsible for preparing the half-yearly
financial report in accordance with UK-adopted International
Accounting Standard 34.
In preparing the half-yearly financial report, the Directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the company or to cease
operations, or have no realistic alternative but to do so.
Auditor's Responsibilities for the review of the financial
information
In reviewing the half-yearly report, we are responsible for
expressing to the Group a conclusion on the condensed set of
financial statements in the half-yearly financial report. Our
conclusion, including our Conclusions Relating to Going Concern,
are based on procedures that are less extensive than audit
procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Group in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK) "Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Financial
Reporting Council. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Group,
for our work, for this report, or for the conclusions we have
formed.
Ernst & Young LLP
London
27 July 2023
CONDENSED CONSOLIDATED INCOME STATEMENT
GBPm
Six months ended 30 June
----------------------------------------------------------------- ---- --------------------------
Note 2023 2022
----------------------------------------------------------------- ---- ------------ ------------
Interest income calculated using the effective interest method 413.9 241.4
Other interest and similar income 129.3 27.3
================================================================= ==== ============ ============
Interest income and similar income 4 543.2 268.7
Interest expense and similar charges 4 (298.1) (60.5)
================================================================= ==== ============ ============
Net interest income 245.1 208.2
----------------------------------------------------------------- ---- ------------ ------------
Fee and commission income 33.4 31.5
Fee and commission expense (14.6) (16.1)
================================================================= ==== ============ ============
Net fee and commission income 18.8 15.4
----------------------------------------------------------------- ---- ------------ ------------
Other operating income (net) 5 4.0 10.6
================================================================= ==== ============ ============
Operating income 267.9 234.2
================================================================= ==== ============ ============
Operating expenses 6 (205.8) (175.1)
Operating profit before net credit impairment (losses)/gains 62.1 59.1
----------------------------------------------------------------- ---- ------------ ------------
Net credit impairment (losses)/gains 8 (0.3) 2.8
================================================================= ==== ============ ============
Profit before tax 61.8 61.9
----------------------------------------------------------------- ---- ------------ ------------
Income tax 7 41.4 (33.5)
----------------------------------------------------------------- ---- ------------ ------------
Profit for the period 103.2 28.4
----------------------------------------------------------------- ---- ------------ ------------
The results above wholly relate to continuing activities.
The profit for the financial period is wholly attributable to
equity shareholders.
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
GBPm
Six months ended 30 June
2023 2022
=============================================================== ====== =======
Profit for the period 103.2 28.4
=============================================================== ====== =======
Items that may be recycled to profit or loss:
Changes in cash flow hedges:
Transfers from equity to income or expense (3.4) (3.4)
Income tax 1.0 1.9
Changes in fair value through other comprehensive income:
Net changes in fair value recognised directly in equity 18.0 66.5
Transfers from equity to income or expense (16.1) (70.3)
Income tax - 1.3
Items that may not subsequently be recycled to profit or loss:
Changes in net retirement benefit asset:
Defined benefit plans losses for the period (0.5) (110.8)
Income tax 0.2 67.4
Other comprehensive expense for the period, net of income tax (0.8) (47.4)
--------------------------------------------------------------- ------ -------
Total comprehensive income/(expense) for the period 102.4 (19.0)
--------------------------------------------------------------- ------ -------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
CONDENSED CONSOLIDATED BALANCE SHEET
GBPm
30 June
Note 2023 31 December 2022
---------------------------------------------------------------- ---- -------- ----------------
Assets
Cash and balances at central banks 3,904.8 5,270.4
Loans and advances to banks 463.9 387.1
Loans and advances to customers 8 21,106.4 20,921.9
Fair value adjustments for hedged risk (500.1) (430.7)
Investment securities 9 1,481.2 942.7
Derivative financial instruments 621.1 520.1
Equity shares 11.6 11.1
Other assets 7.7 14.1
Prepayments 28.6 21.4
Property, plant and equipment 21.9 22.8
Intangible assets 100.3 90.0
Right-of-use assets 32.0 33.0
Current tax assets 0.8 1.8
Deferred tax assets 213.7 167.4
Net retirement benefit asset 12 161.6 159.7
---------------------------------------------------------------- ---- -------- ----------------
Total assets 27,655.5 28,132.8
---------------------------------------------------------------- ---- -------- ----------------
Liabilities
Deposits by banks 5,503.3 5,683.4
Customer accounts 19,551.4 20,107.3
Fair value adjustments for hedged risk (54.3) (34.6)
Debt securities in issue 172.6 181.9
Derivative financial instruments 98.5 103.5
Other liabilities 42.0 42.8
Accruals and deferred income 26.9 32.5
Provisions 11 28.0 33.2
Other borrowed funds 10 849.8 646.9
Lease liabilities 30.2 31.0
Net retirement benefit liability 12 5.7 5.9
---------------------------------------------------------------- ---- -------- ----------------
Total liabilities 26,254.1 26,833.8
---------------------------------------------------------------- ---- -------- ----------------
Capital and reserves attributable to the Group's equity holders
Ordinary share capital 15 0.9 0.9
Share premium account 15 313.8 313.8
Retained earnings 2,071.3 1,968.1
Other reserves (984.6) (983.8)
---------------------------------------------------------------- ---- -------- ----------------
Total equity 1,401.4 1,299.0
---------------------------------------------------------------- ---- -------- ----------------
Total liabilities and equity 27,655.5 28,132.8
---------------------------------------------------------------- ---- -------- ----------------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
Approved by the Board of The Co-operative Bank Holdings Limited
on 27 July 2023:
Bob Dench Nick Slape
Chair of the Board Chief Executive Officer
CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS
GBPm
Six months ended 30 June
----------------------------------------------------------- --------------------------
2023 2022
----------------------------------------------------------- -------------- ----------
Cash flows (used in)/from operating activities:
Profit before tax 61.8 61.9
Adjustments for non-cash movements:
Pension scheme adjustments (1.8) (6.1)
Net credit impairment losses/(gains) 0.3 (2.8)
Depreciation, amortisation and impairment 17.5 17.0
Other non-cash movements including exchange rate movements 55.5 97.6
Changes in operating assets and liabilities:
(Decrease)/Increase in deposits by banks (180.1) 143.9
Increase in prepayments and accrued income (7.2) (5.8)
Decrease in accruals and deferred income (5.6) (12.3)
Decrease in customer accounts (556.1) (554.8)
Increase in loans and advances to banks (78.1) (13.4)
(Increase)/decrease in loans and advances to customers (193.8) 102.1
Net movement of other assets and other liabilities (67.6) (12.8)
Income tax paid (2.7) (1.8)
------------------------------------------------------------ -------------- ----------
Net cash flows used in operating activities (957.9) (187.3)
------------------------------------------------------------ -------------- ----------
Cash flows (used in)/from investing activities:
Purchase of tangible and intangible assets (23.7) (18.3)
Purchase of investment securities (628.3) (317.2)
Proceeds from sale of shares and other interests 0.2 -
Proceeds from sale and maturity of investment securities 81.1 281.1
Proceeds from sale of investment properties 0.3 -
Dividends received 0.1 0.1
------------------------------------------------------------ -------------- ----------
Net cash flows used in investing activities (570.3) (54.3)
------------------------------------------------------------ -------------- ----------
Cash flows from/(used in) financing activities:
Proceeds from MREL issuance 199.3 248.4
Interest paid on Tier 2 notes and senior unsecured debt (25.5) (18.5)
Lease liability principal payments (3.2) (4.5)
Repayment of debt securities in issue (9.3) (9.4)
------------------------------------------------------------ -------------- ----------
Net cash flows from financing activities 161.3 216.0
------------------------------------------------------------ -------------- ----------
Net decrease in cash and cash equivalents (1,366.9) (25.6)
============================================================ ============== ==========
Cash and cash equivalents at the beginning of the period 5,458.1 5,717.5
------------------------------------------------------------ -------------- ----------
Cash and cash equivalents at the end of the period 4,091.2 5,691.9
------------------------------------------------------------ -------------- ----------
Comprising of:
----------------------------------------------------------- -------------- ----------
Cash and balances with central banks 3,822.7 5,550.7
Loans and advances to banks 268.5 141.2
------------------------------------------------------------ -------------- ----------
RECONCILIATION OF MOVEMENTS OF LIABILITIES TO CASHFLOWS ARISING
FROM FINANCING ACTIVITIES
GBPm
Six months ended 30 June 2023 Six months ended 30 June 2022
-------------------- ----------------------------------------------- -----------------------------------------------
Lease liabilities Other borrowed funds Total Lease liabilities Other borrowed funds Total
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Balance at the
beginning of the
period 31.0 646.9 677.9 44.1 402.1 446.2
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Changes from
financing cash
flows:
Proceeds from MREL
issuance - 199.3 199.3 - 248.4 248.4
Interest paid on
Tier 2 notes and
senior unsecured
debt - (25.5) (25.5) - (18.5) (18.5)
Lease liability
principal
payments (3.2) - (3.2) (4.5) - (4.5)
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Total changes from
financing cash
flows 27.8 820.7 848.5 39.6 632.0 671.6
==================== ================= ==================== ====== ================= ==================== ======
Other changes:
Interest payable
on lease
liabilities and
Tier 2 notes 0.5 27.4 27.9 0.7 22.0 22.7
Other non-cash
movements - 1.7 1.7 - (5.0) (5.0)
Recognition of
lease liabilities 1.9 - 1.9 0.3 - 0.3
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
Balance at the end
of the period 30.2 849.8 880.0 40.6 649.0 689.6
-------------------- ----------------- -------------------- ------ ----------------- -------------------- ------
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
GBPm
Defined
Cash flow Capital benefit
Six months ended Share Share FVOCI hedging re-organisation pension Retained Total
30 June 2023 capital premium reserve reserve reserve reserve earnings equity
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
At 1 January 2023 0.9 313.8 (5.3) 10.6 (1,011.4) 22.3 1,968.1 1,299.0
Total
comprehensive
income/(expense)
for the period - - 1.9 (2.4) - (0.3) 103.2 102.4
At 30 June 2023 0.9 313.8 (3.4) 8.2 (1,011.4) 22.0 2,071.3 1,401.4
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
Defined
Cash flow Capital benefit
Six months ended Share Share FVOCI hedging re-organisation pension Retained Total
30 June 2022 capital premium reserve reserve reserve reserve earnings equity
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
At 1 January 2022 0.9 313.8 2.9 14.7 (1,011.4) 485.0 1,946.0 1,751.9
Total
comprehensive
(expense)/income
for the period - - (2.5) (1.5) - (43.4) 28.4 (19.0)
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
At 30 June 2022 0.9 313.8 0.4 13.2 (1,011.4) 441.6 1,974.4 1,732.9
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
Defined
Cash flow Capital benefit
Year ended 31 Share Share FVOCI hedging re-organisation pension Retained Total
December 2022 capital premium reserve reserve reserve reserve earnings equity
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
At 1 January 2022 0.9 313.8 2.9 14.7 (1,011.4) 485.0 1,946.0 1,751.9
Total
comprehensive
(expense)/income
for the year - - (8.2) (4.1) - (462.7) 22.1 (452.9)
At 31 December
2022 0.9 313.8 (5.3) 10.6 (1,011.4) 22.3 1,968.1 1,299.0
----------------- -------- ----------- ----------- ----------- --------------- ----------- ----------- -------
Notes 1 to 17 form part of these interim condensed consolidated
financial statements.
SELECTED NOTES TO THE FINANCIAL STATEMENTS
All amounts are stated in GBPm unless otherwise indicated
1. BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES
1.1 Basis of preparation
The Interim Financial Statements for the Group are for the six
month period ended 30 June 2023 and are unaudited. The Group
Interim Financial Statements have been prepared in accordance with
UK-adopted International Accounting Standard (IAS) 34 'Interim
Financial Reporting'.
The Group Interim Financial Statements comprise the consolidated
results and position of The Co-operative Bank Holdings Limited
(Holding Company) together with its subsidiaries (together, the
Group).
1.2 Going concern
IAS 1 (Presentation of Financial Statements) requires Directors
to make an assessment of a company's ability to continue as a going
concern, and whether it remains appropriate to adopt the going
concern basis of accounting in preparing the entity's financial
statements. IAS 1 states that the information should cover at least
12 months from the end of the reporting period but not be limited
to that period, and Financial Reporting Council (FRC) guidelines
state that the information should consider a period of at least 12
months from the date the financial statements are authorised for
issue. This assessment has therefore considered information in
respect of the period ending 31 December 2024 (the 'assessment
period').
When considering the going concern status of the Group, the
Directors have referenced the FRC published guidance on the Going
Concern Basis of Accounting and Reporting on Solvency and Liquidity
Risks (the '2016 Guidance').
The assessment has been considered against the backdrop of the
principal risks faced by the Group as outlined in the risk
management section, and included a detailed review of the forecast
profitability, liquidity, capital resources, capital adequacy
ratios and the associated binding minimum regulatory requirements
as set out in the most recent long-term forecast reviewed by the
Directors, which takes into account the Group's plans in respect of
business activity, such as loan book growth, and capital
distributions. Whilst the Directors consider threats to its ability
to continue as a going concern from most of the principal risks to
be remote, in recent periods the Group has considered future
compliance with minimum binding regulatory capital requirements to
be a key source of uncertainty. These 'end-state requirements'
(which exclude CRD IV and PRA buffers) rose to two times the
Group's Total Capital Requirement (TCR) from 1 January 2023.
Following the successful issuance of GBP200m of MREL-qualifying
instruments in the first half of 2023 and increased profits, the
Group's improved and sustainable capital position means the Group
has further resilience against unexpected shocks; to a greater
degree than at the end of 2022, and to the extent that the
Directors expect that the Group could comfortably meet its
requirements throughout the assessment period without any further
capital issuances.
Whilst the Group's capital levels are still sensitive to shocks
to RWAs (and associated capital requirements) or the Group's own
profitability (thereby eroding capital resources), the degree of
headroom is considered sufficiently high that the risk of breaching
requirements is remote. Reverse stress testing was performed to
determine the level of RWA inflation (excluding any resource
impact) and/or one-off losses that would need to occur in order for
the Group to breach its end-state requirements, as outlined in the
following table:
End-state breach RWA inflation P&L charge Combined
------------------- -------------- ----------- -------------------
No further capital GBP2bn GBP513m GBP1bn and GBP257m
issuance
------------------- -------------- ----------- -------------------
The Group could mitigate the risk of non-compliance by
undertaking further capital issuances, as it has done successfully
in the recent past.
As such, the Directors do not consider there to be a material
uncertainty with regard to the Group's ability to remain compliant
with its minimum binding regulatory capital requirements. Liquidity
was also considered as part of the assessment but due to the
current and projected levels of liquidity (both within the
assessment period and beyond) this has not been deemed a
significant risk to the Group's going concern status.
After considering the matters above, the Directors have a
reasonable expectation that the Group will continue as a going
concern with no material uncertainties over the assessment period.
Accordingly, the accounts for period ended 30 June 2023 have been
prepared on a going concern basis.
1.3 Significant accounting policies
The accounting policies, presentation and methods of computation
are consistent with those applied by the Group in its audited 2022
Annual Report and Accounts, which were prepared in accordance with
UK-adopted international accounting standards and the provisions of
the Companies Act 2006.
1.4 Standards and interpretations issued
The following standards and amendments to IFRSs became effective
for annual reporting periods beginning on or after 1 January 2023
following endorsement by the UK Endorsement Board:
-- IFRS 17 Insurance Contracts
-- Disclosure of Accounting Policies (Amendments to IAS 1
Presentation of Financial Statements and to IFRS Practice Statement
2 Making Materiality Judgements)
-- Definition of Accounting Estimates (Amendments to IAS 8
Accounting Policies, Changes in Accounting Estimates and
Errors)
-- Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12 Income Taxes)
None of these standards or amendments had any significant impact
on the Group on adoption.
2. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
The preparation of financial information requires management to
make judgements and assumptions that affect the application of
accounting policies and the reported amounts of assets,
liabilities, income and expenses. Assumptions and estimates are
reviewed on an ongoing basis. Except as noted below, the accounting
policies, presentation and methods of computation of critical
accounting judgements and key sources of estimation uncertainty are
consistent with those applied by the Group in the 2022 Annual
Report and Accounts.
2.1 Loan impairment provisions
Further information on the Group's credit risk management
practices are outlined in the risk management section 2. The Group
has not significantly amended the nature of the judgements applied
in estimating credit losses from those disclosed by the Group in
its 2022 Annual Report and Accounts; however, certain key
estimation assumptions have changed in the Group's most recent
assessment of expected credit losses (ECL).
a) Collective impairment provisions - economic scenario
selection and weighting sensitivity
The Group's approach to scenario selection and weighting is
outlined in the explanatory information section 1.3.j.v of the
Group's 2022 Annual Report and Accounts. The scenarios and weights
used within the Group's ECL modelling process are shown below:
30 June 31 December
2023 2022
------------------- ------- -----------
Upside 20% 20%
Base 40% 40%
Mild downside 25% 30%
Downside(1) 10% 5%
Stress downside(2) 5% 5%
---------------------- ------- -----------
1. The downside scenario was disclosed at 31 December 2022 as
downside (low rate)
2. The stress downside scenario was disclosed at 31 December
2022 as downside (high rate)
At 31 December 2022, the Group introduced an additional stress
downside 'stagflation' economic scenario reflecting a high interest
rate stressed macroeconomic environment, influenced by the rapid
rises in the Bank of England base rate that had been observed
during the year and have since continued into 2023. This contrasts
with the Group's other downside scenario, in which inflation
subsides and interest rates revert quickly to lower levels. The
Group has made a small weighting shift from the mild downside
scenario to the downside scenario - if the 31 December 2022
weighting were applied to the 30 June 2023 modelled ECL, it would
decrease by GBP0.1m.
The table below demonstrates the modelled ECL if 100% weighting
was applied to each of the scenarios.
Core
-------------------------------
Legacy
% applied Retail Retail & central
in model secured unsecured SME items Total
------------------- --------- --------- ---------- -------- ---------- --------
Upside 20% 1.5 6.4 0.8 1.6 10.3
Base 40% 2.5 6.6 0.9 1.6 11.6
Mild downside 25% 4.2 7.0 1.2 1.8 14.2
Downside 10% 5.3 7.4 1.3 1.8 15.8
Stress downside 5% 13.7 8.1 1.6 2.0 25.4
------------------- --------- --------- ---------- -------- ---------- --------
Weighted average 3.6 6.8 1.0 1.7 13.1
------------------- --------- --------- ---------- -------- ---------- --------
The staging of individual loans contributing to the ECLs within
the above table reflects the base case position only and no
allowances for stage transfers have been made in fully weighted
alternative scenarios; these should therefore not be considered
reliable forecasts of expected losses under such economic
conditions. In practice, if any such scenario were experienced in
isolation it would be reasonable to expect customers to transfer
between stages, which would affect the total ECL. It should also be
noted that the above considers only modelled ECLs and not the
impact of any judgemental adjustments. In practice, certain
judgemental adjustments implemented by the Group may offset the
modelled movements above to reduce the sensitivity of the overall
ECL.
b) Collective impairment provisions - macroeconomic variables
and sensitivities
The key forecast variables used within the Group's range of
economic scenarios are depicted in the table below as the annual
and average over the five-year forecast period used within all
scenarios.
5 year Jun-23 Jun-23
2023 2024 2025 2026 2027 average(4) to peak to trough
------------------ ------ ------- ------- ----- ----- ----------- -------- ----------
GDP(1)
Upside 1.0% 2.2% 1.5% 1.8% 2.2% 1.7% 10% 0%
Base 0.5% 0.7% 0.8% 1.2% 1.5% 0.9% 5% 0%
Mild downside (0.0%) (0.7%) 0.5% 0.9% 1.2% 0.4% 2% (1%)
Downside (0.2%) (1.8%) 0.3% 0.7% 0.9% 0.0% 0% (2%)
Stress downside (0.3%) (4.1%) 0.9% 1.2% 1.2% (0.2%) 0% (5%)
Inflation(2)
Upside 4.7% 1.8% 1.6% 1.6% 2.0% 3.0% 9% 0%
Base 5.1% 2.3% 2.0% 2.0% 2.0% 3.4% 11% 0%
Mild downside 7.0% 4.6% 2.5% 2.5% 2.0% 4.4% 16% 0%
Downside 8.9% 6.9% 3.0% 3.0% 2.0% 5.5% 22% 0%
Stress downside 14.1% 14.0% 3.4% 2.4% 2.1% 7.7% 36% 0%
HPI(2)
Upside (3.4%) 2.5% 3.0% 5.6% 6.3% 2.3% 17% (1%)
Base (4.7%) (4.1%) 0.5% 4.5% 5.0% (0.2%) 3% (7%)
Mild downside (6.3%) (6.5%) (3.2%) 2.2% 2.5% (2.5%) 0% (13%)
Downside (8.0%) (8.9%) (7.8%) 2.2% 2.5% (4.2%) 0% (21%)
Stress downside (8.6%) (14.5%) (13.1%) 6.4% 6.8% (5.2%) 0% (31%)
Unemployment(3)
Upside 3.6% 3.6% 3.6% 3.6% 3.6% 3.6% (0%) (0%)
Base 3.8% 4.0% 4.4% 4.4% 4.1% 4.2% 1% 0%
Mild downside 4.3% 5.1% 6.0% 5.5% 5.0% 5.1% 5% 0%
Downside 5.0% 7.5% 7.2% 6.6% 6.0% 6.3% 4% 0%
Stress downside 5.2% 8.5% 8.0% 7.4% 6.8% 7.0% 5% 0%
Base rate(3)
Upside 4.25% 3.25% 2.50% 2.50% 2.50% 3.15% 0.00% (2.00%)
Base 4.75% 3.75% 3.00% 3.00% 3.00% 3.59% 0.25% (1.50%)
Mild downside 5.25% 4.25% 3.50% 3.50% 3.50% 4.01% 0.75% (1.00%)
Downside 3.50% 1.50% 1.50% 1.50% 1.50% 2.19% 0.00% (3.00%)
Stress downside 6.00% 6.00% 5.25% 4.25% 3.25% 4.98% 1.50% (1.25%)
------------------ ------ ------- ------- ----- ----- ----------- -------- ----------
1. Annual average YoY%
2. Year-end YoY%
3. Year-end %
4. Average of quarterly positions
The key parameters of the above scenarios are outlined in the
table below:
GDP Inflation HPI Unemployment Base rate
--------- --------------------- --------------------- ------------------- ----------------- -------------------
Upside Annual GDP growth Inflation declines House prices Unemployment Base rate is
increases by quicker than fall in each improves to cut to 4.25%
1.0% in 2023 in the base, quarter of 2023, 3.6% by Q4 2023, in August and
and 2.2% in falling to 4.7% driving annual then remains to 4.00% in
2024. Positive by Q4 2023 and fall of 3.4% flat over the February 2024.
quarterly growth reaching the in 2023, with remainder of Further six
throughout forecast. BoEs target 1.4% fall from the forecast 25bps cuts over
in Q4 2024, Jun23 to trough. period. 2024/2025 to
1 quarter earlier. Positive quarterly terminal rate
Inflation then growth from of 2.50%.
falls below 2024.
2%, returning
to 2.0% by end
of 2027.
========= ===================== ===================== =================== ================= ===================
Base Broadly flat Inflation ends House prices Unemployment Base rate to
quarterly GDP 2023 at 5.1%, forecast to remains stable peak at 4.75%
growth in 2023 falling to 2.3% fall 4.7% in at 3.8% in 2023 in August and
results in 0.5% in 2024 and 2023 and 4.1% rising to 4.0% cut 100ps in
annual growth reaching 2.0% in 2024, with in 2024, peaking 2024 and 75bps
and 0.7% growth in Q1 2025 and June 2023 to at 4.5% by 2026. in 2025, ending
in 2024. Positive remains at 2% trough fall 2027 at 3.00%
quarterly growth thereafter. of 7% by Q2 .
throughout forecast. 2025.
========= ===================== ===================== =================== ================= ===================
Mild GDP flat in Inflation rises House prices Unemployment Base rate rises
downside 2023 as the above the base, decline 6.3% rises to 4.3% to 4.75% in
economy enters falling to 7.0% in 2023 and in Q4 2023, August, 5.00%
into a four by Q4 2023 and 6.5% in 2024 and peaks at in September
quarter recession to 4.6% by 2024. with a June 6.0% in Q4 2025. and peaks at
with peak to Inflation remains 2023 to trough 5.25% in November.
trough fall above target fall of 13%. First cut in
of 1%. Positive throughout, Quarterly growth February 2024
quarterly growth returning to returns in Q1 to terminal
returns in Q3 2.0% by end 2026. rate of 3.50%.
24. of 2027.
========= ===================== ===================== =================== ================= ===================
Downside GDP contracts Inflation rises House prices Unemployment Base rate cut
by 0.2% in 2023 above the base decline 8.0% rises to 5.0% 50bps each quarter
as the economy throughout, in 2023 and in Q4 2023, in 2023 and
enters into peaking at 10.4% 8.9% in 2024 and peaks at 2024, reaching
a more severe in Q2 2024, as prices fall 7.5% in Q4 2024. a terminal rate
four quarter falling to 6.9% in each quarter, of 1.50% by
recession with by the end of June 2023 to November 2024.
peak to trough 2024, returning trough fall
fall of 2%. to 2.0% by end of 21%. Quarterly
Positive quarterly of 2027. growth returns
growth returns in Q1 2026.
in Q3 2024.
========= ===================== ===================== =================== ================= ===================
Stress GDP contracts Inflation accelerates House prices Unemployment Base rate rises
downside by 0.3% in 2023 above the base, decline 8.6% rises to 5.2% rapidly in first
as the economy peaking at 17.0% in 2023 and in Q4 2023, year of scenario,
enters into in Q2 2024, 14.5% in 2024 and peaks at reaching 6.00%
a more severe falling to 14.0% as prices fall 8.5% in Q4 2024. in 2023 with
four quarter by the end of in each quarter, the aim to reduce
recession with 2024, reaching June 2023 to inflation. Base
peak to trough 2.1% by the trough fall rate cut to
fall of 5%. end of 2027. of 31%. Quarterly 3.25% by 2027.
Positive quarterly growth returns
growth returns in Q1 2026
in Q3 2024.
========= ===================== ===================== =================== ================= ===================
The key changes to the base scenario forecasts over those in use
at 31 December 2022 are:
-- GDP - positive annual average throughout, compared to
negative growth in 2023 and 2024.
-- Inflation - improved in the short term due to reduced energy
prices, with both returning to the 2% target in 2025.
-- HPI - increased peak to trough fall as well as the low point
on year later, from rising mortgage rates and lower disposable
income.
-- Unemployment - lower levels in 2023 due to improved economic
output (GDP).
-- Base rate - accelerated rate rises relative to 2022 forecast
(4.00% in 2023 in 2022 forecast vs 4.75% in 2023 in 2023
forecast).
Whilst the above scenarios are those used in the Group's ECL
models as at 30 June 2023, the Group's Asset and Liability
Committee (ALCo) approved a revised base rate forecast in late June
for the purposes of business planning. This forecast includes a
higher base rate peak at 5.75% in 2023 and a higher long-term rate
at 3.50% from 2026 onward. Management has satisfied itself that not
including this revised base forecast within its ECL models at 30
June 2023 does not lead to material misstatement of these condensed
consolidated financial statements on the grounds that any
anticipated increase in credit risk is already captured within the
affordability PMAs disclosed in 2.1 c).
Sensitivities
The Group has not made any significant changes to its IFRS 9
models in the period, the sensitivities of which are consistent
with those disclosed by the Group in the 2022 Annual Report and
Accounts.
c) Collective impairment provisions - post-model adjustments
The Group applies judgemental adjustments to its modelled
outputs to capture risk characteristics for assets subject to
collective provisioning but for which a specific risk
characteristic is not captured within the collective models. These
are typically implemented by the Group in the form of Post Model
Adjustments (PMAs). The Group reviews judgemental adjustments on a
quarterly basis to determine whether adjustments should be stood
up, remeasured or retired. An overview of material judgemental
adjustments is disclosed below:
Core
------------------------------------- ------------------ ------------ ------
Retail Legacy
Retail unsecured &
30 June 2023 secured SME unallocated Total
------------------------------------- -------- ---------- ------ ------------ ------
Historical data confidence PMAs 9.3 - - 0.3 9.6
Affordability PMAs 1.7 0.8 3.3 - 5.8
COVID-19 PMAs - - 1.0 - 1.0
Other PMAs 2.4 1.8 - 0.2 4.4
-------------------------------------- -------- ---------- ------ ------------ ------
Total judgemental adjustments(1) 13.4 2.6 4.3 0.5 20.8
-------------------------------------- -------- ---------- ------ ------------ ------
Core
------------------------------------- ------------------ ------------ ------
Retail Legacy
Retail unsecured &
31 December 2022 secured SME unallocated Total
------------------------------------- -------- ---------- ------ ------------ ------
Historical data confidence PMAs 8.3 - - - 8.3
Affordability PMAs 2.5 1.5 3.2 0.1 7.3
COVID-19 PMAs - - 1.6 - 1.6
Other PMAs 3.2 2.5 - 0.2 5.9
-------------------------------------- -------- ---------- ------ ------------ ------
Total judgemental adjustments(1) 14.0 4.0 4.8 0.3 23.1
-------------------------------------- -------- ---------- ------ ------------ ------
1. Judgemental adjustments exclude operational model adjustments
of GBP1.4m (31 December 2022: GBP1.6m) in respect of individually
insignificant model corrections where management judgement does not
have a substantial impact on the quantification of the
adjustment
Nature of judgement Application within ECL Criteria for removal
calculation
---------------------------- ---------------------------- ---------------------------- ----------------------------
Historical data confidence Secured model understates Stress factors are applied 3-4 years after the end of a
PMAs risk due to book's relative to modelled PDs and LTVs and period of significant
immaturity and limited additional stage 2 triggers financial stress
default experience. based
on consumer indebtedness
levels are applied to uplift
certain stage 1 customers to
stage 2
============================ ============================ ============================ ============================
Affordability PMAs All models considered to Customers identified as Evidence of real wage growth
understate cost of living being at a higher and reduced level of
impacts on customer credit vulnerability to cost of inflation with stable
risk. living impacts based on arrears position
a combination of stressed
affordability tests
(secured), consumer
indebtedness levels
(unsecured)
and sector (SME) are
uplifted from stage 1 to
stage 2.
============================ ============================ ============================ ============================
COVID-19 PMAs In certain isolated BBLS are not included with Sustained evidence of
instances the Group may not modelled ECL due to 100% successful claims on arrears
successfully be able to government guarantee; cases
claim on guarantees therefore an ECL
under the Bounce Back Loan is calculated based on
Scheme (BBLS) observed default rates and
projected failed claim
rates.
============================ ============================ ============================ ============================
Other PMAs There are certain other Various, depending on the
areas where models do not nature the PMA Various, depending on the
adequately capture certain nature the PMA
identified risk
factors, such as the
potential exposure to EPC
remediation. No PMA is
individually significant.
============================ ============================ ============================ ============================
The key changes in judgemental adjustments during the period are
primarily small reductions in the Retail affordability PMAs due to
SICR thresholds being met and impacted customers being moved to
stage 2 in the Group's ECL models without the need for management
adjustments.
d) Individual impairment provisions
As disclosed in the 2022 Annual Report and Accounts, the Group's
individual impairment provisions are not sensitive to economic
variables.
2.2 Effective interest rate (EIR)
When calculating the EIR to apply to an asset or liability held
at amortised cost, the Group estimates future cash flows
considering all contractual terms of an instrument and associated
transaction costs. In most cases, the future cash flows arising
from an asset or liability will be dependent on a number of
variables, such as the proportion of mortgage customers who do not
switch product after a discount period ends, or future interest
rates set by the market. Therefore, it follows that management is
required to apply significant judgement in creating assumptions
about the value of these variables in the future.
At 30 June 2023, the Group recognised an EIR adjustment of
GBP72.1m (31 December 2022: GBP71.3m) in respect of its fixed rate
mortgage portfolio. Of this adjustment, GBP46.3m (31 December 2022:
GBP52.1m) is attributable to fees charged and received in the
mortgage origination process, and GBP25.8m (31 December 2022:
GBP19.2m) is attributable to expectations of increased future
income from those customers who revert to the Group's standard
variable rate (SVR). The element of the adjustment attributable to
fees is neither significantly judgemental nor sensitive. However,
the element of the adjustment attributable to future SVR income is
subject to significant estimation uncertainty, with the two most
sensitive variables being as follows:
a) Standard variable rate
The assumed standard variable rate (SVR), which will be in
effect at the end of a fixed rate product term, determines expected
income to be received post-reversion. This is determined with
reference to expected Bank of England base rate changes, with a
proportion of future increases assumed to pass through to the
Group's standard variable rate.
As a measure of the sensitivity of this variable, a 50bp
increase or decrease to the forecast SVR (currently 7.37% (31
December 2022: 5.87%) with rises tracking the base rate assumptions
used within the central base rate forecast used in the Group's ECL
model - see note 2.1 b)) following the expiry of the fixed rate
period would result in a GBP2.6m (31 December 2022: GBP2.0m)
increase or decrease respectively in the EIR asset within the loans
and advances to customers balance.
b) Timing of redemptions (behavioural lives)
Once a customer reaches the expiry of the fixed rate period on
the fixed product, interest is charged at the Group's SVR, which is
higher than the product fixed rate. The amount of time that the
customer stays on SVR affects the total lifetime income from the
customer, which affects the EIR adjustment.
The Group typically expects all fixed rate mortgages to spend a
weighted average of 0.5 months (31 December 2022: 0.45 months) on
SVR. This is driven by an expectation of a weighted average of 10%
(31 December 2022: 9%) of fixed rate mortgages to become chargeable
for at least one month of SVR, and then remain on the SVR rate for
a weighted average of 5 months (31 December 2022: 5 months). As a
measure of the sensitivity of this variable, if the average time
spent on SVR for those customers who spend at least 1 month on SVR
increases or decreases by 1 month, the EIR asset would increase or
decrease by GBP5.2m (31 December 2022: GBP3.8m) respectively.
3. SEGMENTAL INFORMATION
The Group provides a wide range of banking services within the
UK. The Executive Committee (ExCo) has been determined to be the
chief operating decision-maker of the Group. The Group's operating
segments reflect its organisational and management structures in
place at the reporting date. ExCo reviews information from internal
reporting based on these segments in order to assess performance
and allocate resources. The segments are differentiated by whether
the customers are individuals or business entities. The operating
costs of all business functions are allocated to the
income-generating businesses except strategic project costs which
are included in Legacy & unallocated. Treasury balances have
not been allocated to segments to maintain clarity on underlying
customer product balances.
The Group has aggregated Legacy & unallocated (being items
not related to a function) to align external reporting with the
Group's approach to internal reporting.
Core
Six months ended 30 June 2023 Retail SME Total Legacy & unallocated Total
--------------------------------------- ------- ------ ------- -------------------- -----------
Net interest income 199.2 45.2 244.4 0.7 245.1
Other operating income 12.8 8.3 21.1 0.3 21.4
======================================= ======= ====== ======= ==================== ===========
Operating income 212.0 53.5 265.5 1.0 266.5
Operating expenses (158.4) (32.8) (191.2) (14.6) (205.8)
Net credit impairment gains/(losses) 0.1 0.2 0.3 (0.6) (0.3)
Non-operating income - - - 1.4 1.4
Profit before tax 53.7 20.9 74.6 (12.8) 61.8
--------------------------------------- ------- ------ ------- -------------------- -----------
Core
Six months ended 30 June 2022 Retail SME Total Legacy & unallocated Total
--------------------------------------- ------- ------ ------- ---------------------- -------
Net interest income/(expense) 183.6 28.8 212.4 (4.2) 208.2
Other operating income 12.1 9.0 21.1 0.3 21.4
======================================= ======= ====== ======= ====================== =======
Operating income/(expense) 195.7 37.8 233.5 (3.9) 229.6
Operating expenses (136.7) (30.0) (166.7) (8.4) (175.1)
Net credit impairment gains/(losses) 1.5 (0.8) 0.7 2.1 2.8
Non-operating income - - - 4.6 4.6
Profit before tax 60.5 7.0 67.5 (5.6) 61.9
======================================= ------- ------ ------- ---------------------- -------
The table below represents the reconciliation of the underlying
basis and the segmental note to the consolidated income statement.
The underlying basis is the basis on which information is presented
to the chief operating decision-maker and excludes the items below
which are included in the statutory results.
Removal of:
IFRS Volatile Strategic Underlying
Six months ended 30 June 2023 statutory items(1) projects Non recurring(2) basis
------------------------------- ------------- ---------- --------- ------------------ ------------
Net interest income 245.1 - - - 245.1
Other operating income 22.8 (0.9) - (0.5) 21.4
=============================== ============= ========== ========= ================== ============
Operating income 267.9 (0.9) - (0.5) 266.5
Operating expenses (205.8) - 7.5 4.3 (194.0)
Net customer redress release - - - - -
Net credit impairment losses (0.3) - - - (0.3)
=============================== ============= ========== ========= ================== ============
Profit before tax 61.8 (0.9) 7.5 3.8 72.2
=============================== ============= ========== ========= ================== ============
Cost:income ratio(3) 77% 73%
------------------------------- ------------- ---------- --------- ------------------ ------------
1. In the period ended 30 June 2023, this comprises gain on
shares revaluation.
2. In the period ended 30 June 2023, this comprises one-off
income gains and other exceptional costs.
3. Cost:income ratio is calculated as (operating expenses + net
customer redress release)/(operating income).
Removal of:
IFRS Volatile Strategic Underlying
Six months ended 30 June 2022 statutory items(1) projects Non recurring(2) basis
------------------------------- ----------- ---------- --------- ------------------ ----------
Net interest income 208.2 - - - 208.2
Other operating income 26.0 (0.4) - (4.2) 21.4
=============================== =========== ========== ========= ================== ==========
Operating income 234.2 (0.4) - (4.2) 229.6
Operating expenses (176.1) - 5.5 1.8 (168.8)
Net customer redress release 1.0 - - (1.0) -
Net credit impairment gains 2.8 - - - 2.8
=============================== =========== ========== ========= ================== ==========
Profit before tax 61.9 (0.4) 5.5 (3.4) 63.6
=============================== =========== ========== ========= ================== ==========
Cost:income ratio(3) 75% 74%
------------------------------- ----------- ---------- --------- ------------------ ----------
1. In the period ended 30 June 2022, this comprises gain on
shares revaluation.
2. In the period ended 30 June 2022, this comprises gains on the
sale of a small legacy book, release of PPI provision and other
exceptional costs.
3. Cost:income ratio is calculated as (operating expenses + net
customer redress release)/(operating income).
The table below represents the segmental analysis of assets and
liabilities.
Core
---------------------------
30 June 2023 Retail SME Total Legacy & unallocated Total
---------------------- -------- ------- -------- -------------------- --------
Segment assets 20,059.0 391.4 20,450.4 7,205.1 27,655.5
Segment liabilities 16,109.0 3,308.1 19,417.1 6,837.0 26,254.1
---------------------- -------- ------- -------- -------------------- --------
Core
---------------------------
31 December 2022 Retail SME Total Legacy & unallocated Total
---------------------- -------- ------- -------- -------------------- --------
Segment assets 19,841.3 388.2 20,229.5 7,903.3 28,132.8
Segment liabilities 16,607.8 3,396.8 20,004.6 6,829.2 26,833.8
---------------------- ======== ======= ======== ==================== ========
4. NET INTEREST INCOME
Interest income and similar income
Six months ended 30 Six months ended 30 June
June 2023 2022
------------------------------ ------------------------------
Amortised Amortised
cost FVOCI Other Total cost FVOCI Other Total
------------------------------------- --------- ----- ----- ----- --------- ----- ----- -----
On financial assets not at fair value
through profit or loss:
Loans and advances to customers 299.6 - - 299.6 216.1 - - 216.1
Loans and advances to banks 94.6 - - 94.6 19.2 - - 19.2
Investment securities 1.4 18.3 - 19.7 0.6 5.5 - 6.1
Net interest income on net
defined benefit pension asset - - 3.9 3.9 - - 8.4 8.4
------------------------------------- --------- ----- ----- ----- --------- ----- ----- -----
395.6 18.3 3.9 417.8 235.9 5.5 8.4 249.8
------------------------------------- --------- ----- ----- ----- --------- ----- ----- -----
On financial assets at fair value
through profit or loss:
Loans and advances to customers - - 4.9 4.9 - - 5.1 5.1
Net interest income on financial
instruments hedging assets - - 98.6 98.6 - - 5.3 5.3
Net interest income on financial
instruments not in a hedging
relationship - - 21.9 21.9 - - 8.5 8.5
------------------------------------- --------- ----- ----- ----- --------- ----- ----- -----
Total net interest income 395.6 18.3 129.3 543.2 235.9 5.5 27.3 268.7
------------------------------------- --------- ----- ----- ----- --------- ----- ----- -----
Interest expense and similar charges
Six months ended 30 Six months ended 30
June 2023 June 2022
------------------------------ ---------------------------
Amortised Amortised
cost Other Total cost Other Total
-------------------------------------------------- --------- ------ ------- --------- ------ ------
On financial liabilities not at
fair value through profit or loss:
Customer accounts (123.8) - (123.8) (11.1) - (11.1)
Subordinated liabilities, debt
securities in issue and other
deposits (146.6) - (146.6) (43.2) - (43.2)
Interest on lease liabilities - (0.5) (0.5) - (0.7) (0.7)
Net interest expense on unfunded
pension obligations - (0.1) (0.1) - (0.1) (0.1)
-------------------------------------------------- --------- ------ ------- --------- ------ ------
(270.4) (0.6) (271.0) (54.3) (0.8) (55.1)
-------------------------------------------------- --------- ------ ------- --------- ------ ------
On financial liabilities at fair value
through profit or loss:
Net interest (expense)/income
on financial instruments hedging
liabilities - (9.3) (9.3) - 0.3 0.3
Net interest expense on financial
instruments not in a hedging relationship - (17.8) (17.8) - (5.7) (5.7)
-------------------------------------------------- --------- ------ ------- --------- ------ ------
Total interest expense and similar
charges (270.4) (27.7) (298.1) (54.3) (6.2) (60.5)
-------------------------------------------------- --------- ------ ------- --------- ------ ------
5. OTHER OPERATING INCOME/EXPENSE (NET)
Six months ended 30
June
---------------------------------------------------------
2023 2022
--------------------------------------------------------- --------- ----------
Profit on sale of investment securities 0.1 0.1
Profit on sale of loans and advances to customers 0.3 4.1
Fair value movement on loans and advances to customers
designated at fair value (3.0) (10.1)
Income from derivatives and hedge accounting 2.8 10.9
Income from assets and liabilities held at fair value
through profit or loss(1) 0.6 0.9
Foreign currency transactions 3.0 4.3
Exceptional refund of ATM rates(2) - 0.1
Other operating income 0.2 0.3
--------------------------------------------------------- --------- ----------
4.0 10.6
--------------------------------------------------------- --------- ----------
1. Income from assets and liabilities held at fair value through
profit or loss of GBP0.6m (30 June 2022: GBP0.9m) include GBP0.8m
gain on equity shares (30 June 2022: GBP0.3m).
2. Refund of historical ATM business rates paid following the
Supreme Court ruling handed down in May 2020.
6. OPERATING EXPENSES
Six months ended 30
June
-------------------------------------------------
Re-presented(1)
2023 2022
------------------------------------------------- ----- ---------------
Staff costs 76.7 59.9
Depreciation, amortisation and impairment of
fixed assets(2) 17.5 17.0
Technology costs 23.6 21.7
Outsourced operations 26.8 28.7
Professional services and IT consultancy costs 22.3 14.3
Property costs 5.8 4.4
Credit checking and screening 4.4 3.0
Regulatory levies 1.9 1.9
Other expenses 26.8 24.2
----------------------------------------------------- ----- ---------------
Total operating expenses 205.8 175.1
----------------------------------------------------- ----- ---------------
1. The capitalisation of operating costs incurred in the
generation of intangible assets were previously reflected as a
reduction of 'other expenses' but have now been represented as a
reduction in the appropriate cost lines. Prior period comparative
information has been re-presented, resulting in an increase in
Other expenses of GBP17.0m and a reduction in staff costs of
GBP10.0m, Technology costs of GBP1.9m, Outsourced operations of
GBP3.9m, Professional services and IT consultancy costs of GBP0.1m
and Credit checking and screening of GBP1.0m. There is no net
impact to total operating expenses.
2. Mainly comprises amortisation of intangible assets of
GBP11.5m (2022: GBP11.1.m).
7. INCOME TAX
Six months ended
30 June
-----------------------------
2023 2022
----------------------------- ---------- ------
Current tax charge 3.7 2.1
Deferred tax (credit)/charge (45.1) 31.4
Total tax (credit)/charge (41.4) 33.5
----------------------------- ---------- ------
In addition to the above, included within other comprehensive
income is a deferred tax credit of GBP1.2m (2022: credit of
GBP70.6m).
The tax on the profit before tax differs from the theoretical
amount that would arise using the standard corporation tax rate in
the UK as follows:
Six months ended
30 June
----------------------------------------------------------
2023 2022
---------------------------------------------------------- -------- --------
Profit before tax 61.8 61.9
========================================================== ======== ========
Tax charge calculated at a rate of 23.52% (2022: 19%) 14.5 11.8
Effects of:
Movement in unrecognised deferred tax (49.0) (16.1)
Impact of banking surcharge on deferred tax (4.3) (4.0)
Impact of corporation tax rate change on deferred tax (3.1) (0.9)
Expenses not deductible for tax purposes 0.4 0.3
Banking surcharge 0.1 -
Impact of banking surcharge rate change on deferred
tax - 41.9
Adjustment in respect of prior period - 0.5
Total tax (credit)/charge (41.4) 33.5
---------------------------------------------------------- -------- --------
The movement in unrecognised deferred tax represents the
recognition of historical tax losses, previously derecognised, that
are now brought onto the balance sheet reflecting their expected
utilisation against future probable taxable profits. This movement
is the result of improved profitability in the five year outlook
period. The Group has unrecognised deferred tax assets totalling
GBP445.0m (31 December 2022: GBP502.5m).
The UK corporation tax rate increased from 19% to 25% on 1 April
2023. The rate for the year ended 31 December 2023 is 23.52% and
will then be 25% for the year ended 31 December 2024 onwards. The
banking surcharge of 8% also applies to Bank Company. The banking
surcharge reduced from a rate of 8% to 3% on 1 April 2023, and is
chargeable on banking profits above GBP100m (previously GBP25m).
From 1 April 2023, the combined rate of tax on banking profits in
excess of GBP100m is 28%.
The Group's effective tax rate remains difficult to predict due
to the movement in unrecognised deferred tax assets and the effect
of the changes in tax rates.
8. LOANS AND ADVANCES TO CUSTOMERS
Analysis of the balance sheet
30 June 2023 31 December 2022
------------------------------------------------------------------ ------------ ----------------
Gross loans and advances 21,145.2 20,962.2
Less: allowance for losses (38.8) (40.3)
------------------------------------------------------------------ ------------ ----------------
Total loans and advances to customers net of allowance for losses 21,106.4 20,921.9
------------------------------------------------------------------ ------------ ----------------
Loans and advances to customers include GBP86.2m (31 December
2022: GBP93.3m) of financial assets designated at fair value
through profit or loss to eliminate or significantly reduce a
measurement or recognition inconsistency; of these, GBP51.4m (31
December 2022: GBP53.4m) are secured by real estate
collaterals.
For stage allocation and analysis, refer to the credit risk
section of the risk management report.
Certain loans and advances to customers have been pledged by the
Group; see note 13 for further details on encumbered and pledged
assets.
Analysis of allowance for impairment losses
Retail SME Legacy & unallocated Total
------------------------------------------- ------ ----- -------------------- -----
At 1 January 2023 28.1 7.9 4.3 40.3
Changes arising from stage transfers:
To lifetime ECL (stage 1 to 2 or 3) 5.0 - 0.3 5.3
To credit impaired (stage 1 or 2 to 3) 1.4 0.2 - 1.6
To 12 month ECL (stage 2 or 3 to 1) (3.4) - - (3.4)
From credit impaired (stage 3 to 2) (0.1) 0.1 - -
=========================================== ====== ===== ==================== =====
Net changes arising from stage transfers 2.9 0.3 0.3 3.5
------------------------------------------- ------ ----- -------------------- -----
Other charges/(releases):
New assets originated or purchased 1.2 0.3 - 1.5
Other changes to risk parameters (1) (2.5) (0.2) 0.4 (2.3)
Redemptions and repayments (1.3) (0.5) 0.1 (1.7)
------------------------------------------- ------ ----- -------------------- -----
Net other charges/(releases) 0.3 (0.1) 0.8 1.0
------------------------------------------- ------ ----- -------------------- -----
Assets written off (1.8) (0.7) - (2.5)
At 30 June 2023 26.6 7.1 5.1 38.8
------------------------------------------- ------ ----- -------------------- -----
1. Includes the impact of any asset sales.
Analysis of income statement
Six months ended 30 June
---------------------------------------------------------------------------------------
2023 2022
--------------------------------------------------------------------------------------- -------------- ----------
Net other (losses)/gains (1.0) 0.7
Amounts recovered against amounts previously written off 0.1 0.1
Adjustment to recognise interest on stage 3 assets based on their net carrying value 0.5 0.4
Financial guarantees impairment gain/Portfolio sale 0.1 1.6
Net impairment (losses)/gains for the period as shown in the income statement (0.3) 2.8
--------------------------------------------------------------------------------------- -------------- ----------
9. INVESTMENT SECURITIES
Analysis of investment securities
30 June 2023 31 December 2022
--------------------------------------- -----------------------------------
Amortised cost FVOCI FVTPL Total Amortised cost FVOCI FVTPL Total
------------------------------------ -------------- ------- ----- ------- -------------- ----- ----- -----
Investment securities(1) (listed) 51.8 1,426.6 2.8 1,481.2 56.4 883.3 3.0 942.7
------------------------------------ -------------- ------- ----- ------- ============== ===== ===== =====
1. Investment securities are shown net of impairment (nil for
the current and previous periods).
Movement in investment securities
30 June 2023 31 December 2022
--------------------------------------- ---------------------------------------
Amortised cost FVOCI FVTPL Total Amortised cost FVOCI FVTPL Total
---------------------------------- -------------- ------- ----- ------- -------------- ------- ----- -------
At the beginning of the period 56.4 883.3 3.0 942.7 67.3 1,131.6 2.5 1,201.4
Acquisitions - 628.3 - 628.3 - 465.7 - 465.7
Disposals and maturities (4.6) (76.4) - (81.0) (11.0) (667.8) - (678.8)
FVOCI - 1.9 - 1.9 - (9.7) - (9.7)
Fair value through profit or
loss - (16.1) (0.2) (16.3) - (36.9) 0.5 (36.4)
Amortisation of discount and
premium - (0.5) - (0.5) - (1.4) - (1.4)
Movement in interest accrual - 6.1 - 6.1 0.1 1.8 - 1.9
At the end of the period 51.8 1,426.6 2.8 1,481.2 56.4 883.3 3.0 942.7
Certain investment securities have been pledged or transferred
by the Group; see note 13 for further details on encumbered and
pledged assets.
Analysis of investment securities by issuer
30 June 2023 31 December 2022
Investment securities issued by public bodies:
Government securities 244.4 121.7
Other public sector securities 157.8 133.6
Total investment securities issued by public bodies 402.2 255.3
Other debt securities:
Other floating rate notes 997.9 595.3
Mortgage backed securities 81.1 92.1
Total other debt securities 1,079.0 687.4
Total investment securities 1,481.2 942.7
Other floating rate notes (FRNs) are sterling-denominated, with
contractual maturities ranging from three months to six years from
the balance sheet date.
10. OTHER BORROWED FUNDS
Issue Call Maturity 30 June
date date date 2023 31 December 2022
Tier 2-qualifying liabilities
9.5% fixed rate reset callable subordinated notes April 2019 April 2024 April 2029 200.0 200.0
MREL-qualifying liabilities
9.0% fixed rate reset callable senior unsecured
notes Nov 2020 Nov 2024 Nov 2025 200.0 200.0
6.0% fixed rate reset callable senior unsecured
notes April 2022 April 2026 April 2027 250.0 250.0
9.5% fixed rate reset callable senior unsecured
notes May 2023 May 2027 May 2028 200.0 -
Fixed rate subordinated notes 850.0 650.0
Issue costs, discounts and accrued interest 7.6 5.5
Hedged risk adjustment (7.8) (8.6)
849.8 646.9
Other borrowed funds comprise various subordinated liabilities
issued to meet the Group's Minimum Requirements for own funds and
Eligible Liabilities and Tier 2 capital requirements. The Tier 2
qualifying liabilities rank junior to the MREL-qualifying
liabilities, which rank pari passu amongst themselves. All
instruments are listed on the London Stock Exchange. New
MREL-qualifying instruments of GBP200.0m were issued during the
period.
11. PROVISIONS
Conduct /
Property Employee pay legal Other Total
-----
At 1 January 2023 (Re-presented)(1) 8.5 22.9 1.1 0.7 33.2
Provided in the period:
Operating expenses 0.8 7.0 1.6 1.0 10.4
Net customer redress release - - - - -
Utilised during the period (1.4) (14.2) - - (15.6)
At 30 June 2023 7.9 15.7 2.7 1.7 28.0
Amounts falling due within one year 2.7 10.5 2.7 1.7 17.6
Amounts falling due after one year 5.2 5.2 - - 10.4
Total provisions 7.9 15.7 2.7 1.7 28.0
1. At 31 December 2022, provisions related to employee pay were
included within 'other' provisions. These are now disclosed
separately and comparatives have been re-presented.
Property
The Group has a number of leasehold properties. Where a property
is partially or fully vacated prior to the end of the lease term,
the associated right-of-use assets are impaired and provisions are
recognised for expected outflows during the remaining periods of
the leases. In addition, dilapidation provisions are recorded to
the extent that the Group has incurred an obligation to restore a
property to a defined state of repair and/or any dilapidation
clauses within the contract have been invoked.
Employee pay
Provisions are recognised in respect of employee remuneration,
including staff bonuses and various other incentive plans, the
details of which are disclosed within the 2022 Annual Report and
Accounts. Of these liabilities, GBP9.2m (31 December 2022: GBP6.7m)
are classed as share based payments under IFRS 2.
Conduct / legal
In the ordinary course of business, the Group may be subject to
complaints or legal claims from customers, suppliers or other
parties. Consideration of such complaints and claims may result in
a contingent liability, a provision, or both.
12. RETIREMENT BENEFITS
Details of the pension schemes operated by the Group are
provided in the 2022 Annual Report and Accounts. The amounts
recognised in the balance sheet in relation to defined benefit
schemes are as follows:
31 December 2022 Movement 30 June 2023
Retirement benefit net surplus 159.7 1.9 161.6
Retirement benefit liabilities (5.9) 0.2 (5.7)
Total amounts recognised in the balance sheet 153.8 2.1 155.9
Represented by:
Funded DB schemes (Pace DB and BPS) 159.7 1.9 161.6
Unfunded DB schemes (5.9) 0.2 (5.7)
Total amounts recognised in the balance sheet 153.8 2.1 155.9
The present value of the defined benefit obligation as at 30
June 2023 has been derived using assumptions that are consistent
with those used for 31 December 2022, updated for market conditions
at the reporting date.
BPS employs a liability-driven investment strategy with the
objective of hedging the impact to liabilities, on the technical
provisions basis, of changes in interest rates and inflation.
Accordingly, on an accounting basis, the reduction in assets
exceeds the reduction in accounting liabilities driven by rising
interest rates, and, together with scheme expenditure, drives a
reduction in the net surplus position. This net decrease has been
largely offset by net interest income earned, the impact of new
factors implemented by the Trustee and expense reimbursement
contributions to BPS.
Pace employs a strategy to invest in annuities to substantially
mitigate the primary investment and longevity risks arising in the
scheme, through full risk transfer to specialist insurers. These
annuities, which now make up the vast majority of Pace's assets,
are valued in such a way that they match the associated liabilities
that have been insured. Consequently, movements in the Bank's
retirement benefit net surplus between periods is ordinarily a
result of cash used to fund scheme expenses. In 1H23, Pace also
made a one-off recovery against annuity policies in the scheme,
which had the effect of increasing the Bank's retirement benefit
net surplus.
13. CONTINGENT LIABILITIES, CONTRACTUAL COMMITMENTS AND GUARANTEES
The tables below provide the contractual amounts of contingent
liabilities and commitments. The contractual amounts indicate the
volume of business outstanding at the balance sheet date and do not
represent amounts at risk.
There have been no significant changes to the position of the
Group's contingent liabilities, contractual commitments and
guarantees as disclosed in the 2022 Annual Report and Accounts,
except as disclosed below.
30 June 2023 31 December 2022
Contractual amount Risk-weighted amount Contractual amount Risk-weighted amount
Contingent liabilities arising
from customer transactions:
Guarantees and irrecoverable
letters of credit 2.7 0.9 3.3 1.2
Other commitments arising from
customer transactions:
Undrawn formal standby
facilities, credit lines and
other commitments to lend
(includes revocable
and irrevocable
commitments)(1) 1,478.3 200.2 1,974.8 309.7
1,481.0 201.1 1,978.1 310.9
1. Revocable commitments which represent unused credit card
limits of GBP832.6m (31 December 2022: GBP849.4m).
Other contingent liabilities, contractual commitments and
guarantees
In October 2018, Mortgage Agency Services Number Five Limited
("MAS 5"), a subsidiary of the Group, received a complaint from a
mortgage customer which included a complaint regarding changes made
to MAS 5's standard variable rate between 2009 and 2012. The
complaint was subsequently referred to the FOS.
In April 2023 MAS 5 received a provisional decision from the FOS
regarding the merits of the case. As the decision remains at this
stage provisional, MAS 5 continues to work with the FOS regarding
its conclusions ahead of any final decision being published. The
Group considers that, in the event of an adverse final decision,
the financial impact on the Group resulting directly from the
complaints currently under review by the FOS would not be material.
However, there remain a number of continuing uncertainties on
whether the Group will ultimately be exposed to a material
financial liability in relation to other mortgage customers with
similar product characteristics.
Encumbered and pledged assets
The Group pledges certain assets as collateral to third parties
as part of its day-to-day activities. The carrying value of amounts
pledged to each counterparty types, as well as a high level summary
of the terms of the arrangements, are provided below.
Cash and
balances Loans Loans
at central and advances and advances Investment
30 June 2023 banks to banks to customers securities Total
TFSME - - 6,438.8 - 6,438.8
Pension scheme contingent
security - 63.9 510.0 - 573.9
Payment scheme collateral 280.0 48.5 - - 328.5
Interest rate swap collateral - 144.5 - 90.0 234.5
Securitisations - 10.9 207.1 - 218.0
Other - 32.7 - 133.9 166.6
Total assets pledged 280.0 300.5 7,155.9 223.9 7,960.3
Cash and
balances Loans and Loans and
at central advances advances Investment
31 December 2022 banks to banks to customers securities Total
TFSME - - 6,982.2 - 6,982.2
Pension scheme contingent
security - 70.1 493.5 - 563.6
Payment scheme collateral 280.0 53.2 41.1 41.6 415.9
Interest rate swap collateral - 171.2 - 80.3 251.5
Securitisations - 13.9 211.8 - 225.7
Other - 20.1 - 147.0 167.1
Total assets pledged 280.0 328.5 7,728.6 268.9 8,606.0
-- Term Funding Scheme with incentives for SME - residential
mortgages pledged as collateral against the Group's drawings from
the Bank of England's Term Funding Scheme.
-- Pension scheme contingent security - contingent security
provided by the Group to its defined benefit pension schemes.
Security has been pledged primarily in the form of retained
securitisation notes (which do not appear on the Group's
consolidated balance sheet), cash generated from the amortisation
of the notes, which can be substituted for further high-quality
investment securities, and cash held in custody for the benefit of
the Pace scheme in lieu of deficit recovery contributions. These
assets can only be accessed by the trustees in the event that the
Group was unable to meet future contribution obligations, as may be
agreed with the relevant scheme trustee, insolvency or the failure
to adhere to the terms of the security deeds.
-- Payment scheme collateral - collateral posted as part of the
Group's involvement in transactional payment schemes, including
Visa and BACS.
-- Interest rate swap collateral - collateral posted by the
Group against derivative contract exposures as part of its interest
rate risk hedging activities.
-- Securitisations - residential mortgages pledged as collateral
against investment securities issued by Group securitisation
subsidiaries. Noteholders would have recourse to the underlying
assets in the event of the Group's default. The Group may issue
investment securities from the securitisations externally to
investors for liquidity purposes, or may retain these internally to
be used as collateral in other arrangements. Where such securities
are retained internally, they are eliminated on consolidation and
do not appear on the Group's balance sheet.
-- Other - primarily relates to investment securities pledged to
cover essential operational continuity costs that would be incurred
if the Group were to be put into resolution.
Transferred assets not derecognised
In certain circumstances the Group sells assets to third parties
in arrangements where the risk and reward has not been fully
transferred. In these instances, the Group retains the asset on its
balance sheet, but reflects a liability to the third party for
amount due under the arrangement. These primarily rate to
repurchase agreements (repos) and are quantified below:
30 June 2023 31 December 2022
Assets not Associated liabilities Assets not Associated liabilities
derecognised derecognised
Repurchase
agreements
Loans and advances
to customers 6.7 - - -
Investment
securities 93.0 - 31.8 -
Deposits by banks - 96.5 - 31.8
Total 99.7 96.5 31.8 31.8
Unconsolidated structured entities
Details of the interests in unconsolidated structured entities
are disclosed in note 36 of the 2022 Annual Report and Accounts,
and there has been no significant change in the nature of the
transactions in these entities since this was published.
14. RELATED PARTY TRANSACTIONS
During the period to 30 June 2023 there have been no changes to
the nature of the related party transactions disclosed in note 32
of the 2022 Annual Report and Accounts that would materially affect
the position or performance of the Group.
15. SHARE CAPITAL
30 June 2023 31 December 2022
No. of shares (millions) Value No. of shares (millions) Value
Share capital allotted, called up and fully paid
At the beginning and end of the period 9,029.1 0.9 9,029.1 0.9
Share premium account
At the beginning and end of the period 313.8 313.8
There are 9,029,130,200 A shares (2022: 9,029,130,200) and 84 B
shares (2022: 83) in The Co-operative Bank Holdings Limited. The
holders of the ordinary A shares do not hold any voting rights but
are entitled to participate in distributions and to receive a
dividend on liquidation. The B shareholders have one vote for every
share held and also benefit from certain governance, notification
and approval rights with respect to the Holding Company, but have
no rights to distributions, other than on exit in an amount of
GBP25.0m in aggregate, subject to achieving a minimum valuation
threshold.
16. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The methodology and assumptions for determining the fair value
of financial assets and liabilities are consistent with those
disclosed in the 2022 Annual Report and Accounts.
Balance sheet classification and measurement category
The tables below analyse the balance sheet carrying values of
financial assets and liabilities by classification.
Measured at fair value
FVTPL - Derivatives
Amortised FVTPL - mandatorily in a hedging
30 June 2023 cost FVOCI designated measured relationship Total
Financial assets
Cash and balances at central banks 3,904.8 - - - - 3,904.8
Loans and advances to banks 463.9 - - - - 463.9
Loans and advances to customers 21,019.5 - 86.2 0.7 - 21,106.4
Investment securities 51.8 1,426.6 - 2.8 - 1,481.2
Derivative financial instruments - - - 43.9 577.2 621.1
Equity shares - - - 11.6 - 11.6
Other assets 5.3 - - - - 5.3
Total financial assets 25,445.3 1,426.6 86.2 59.0 577.2 27,594.3
Financial liabilities
Deposits by banks 5,503.3 - - - - 5,503.3
Customer accounts 19,551.4 - - - - 19,551.4
Debt securities in issue 172.6 - - - - 172.6
Derivative financial instruments - - - 33.6 64.9 98.5
Other borrowed funds 849.8 - - - - 849.8
Other liabilities 38.4 - - - - 38.4
Total financial liabilities 26,115.5 - - 33.6 64.9 26,214.0
All other balance sheet categories represent non-financial
assets and liabilities.
Measured at fair value
FVTPL - Derivatives
Amortised FVTPL - mandatorily in a hedging
31 December 2022 cost FVOCI designated measured relationship Total
Financial assets
Cash and balances at central banks 5,270.4 - - - - 5,270.4
Loans and advances to banks 387.1 - - - - 387.1
Loans and advances to customers 20,827.9 - 93.3 0.7 - 20,921.9
Investment securities 56.3 883.4 - 3.0 - 942.7
Derivative financial instruments - - - 51.7 468.4 520.1
Equity shares - - - 11.1 - 11.1
Other assets 12.4 - - - - 12.4
Total financial assets 26,554.1 883.4 93.3 66.5 468.4 28,065.7
Financial liabilities
Deposits by banks 5,683.4 - - - - 5,683.4
Customer accounts 20,107.3 - - - - 20,107.3
Debt securities in issue 181.9 - - - - 181.9
Derivative financial instruments - - - 44.8 58.7 103.5
Other borrowed funds 646.9 - - - - 646.9
Other liabilities 39.9 - - - - 39.9
Total financial liabilities 26,659.4 - - 44.8 58.7 26,762.9
Valuation of financial assets and liabilities measured at fair
value
The carrying values of financial assets and liabilities measured
at fair value are analysed in the following tables by the three
level fair value hierarchy defined as follows:
-- Level 1 - Quoted market prices in active markets;
-- Level 2 - Valuation techniques using observable inputs; and
-- Level 3 - Valuation techniques using unobservable inputs.
Fair value at end of the reporting period using:
30 June 2023 Category Level 1 Level 2 Level 3 Total
Non-derivative financial
assets
Loans and advances to
customers FVTPL - designated - 85.0 1.2 86.2
Loans and advances to
customers FVTPL - mandatorily measured - - 0.7 0.7
Investment securities FVOCI 1,405.8 - 20.8 1,426.6
Investment securities FVTPL - mandatorily measured - - 2.8 2.8
Equity shares FVTPL - mandatorily measured - - 11.6 11.6
Derivative financial
assets - 621.1 - 621.1
Non-financial assets:
Investment properties - - 1.8 1.8
Total assets carried at fair
value 1,405.8 706.1 38.9 2,150.8
Derivative financial
liabilities - 98.5 - 98.5
Total liabilities carried at
fair value - 98.5 - 98.5
Fair value at end of the reporting period using:
31 December 2022 Category Level 1 Level 2 Level 3 Total
Non-derivative financial
assets
Loans and advances to
customers FVTPL - designated - 92.1 1.2 93.3
Loans and advances to
customers FVTPL - mandatorily measured - - 0.7 0.7
Investment securities FVOCI 858.5 - 24.9 883.4
Investment securities FVTPL - mandatorily measured - - 3.0 3.0
Equity shares FVTPL - mandatorily measured 0.2 - 10.9 11.1
Derivative financial
assets - 520.1 - 520.1
Non-financial assets:
Investment properties - - 2.1 2.1
Total assets carried at fair
value 858.7 612.2 42.8 1,513.7
Derivative financial
liabilities - 103.5 - 103.5
Total liabilities carried at
fair value - 103.5 - 103.5
Key elements of the valuation techniques, inputs and assumptions
used in measuring the fair value of level 2 and 3 financial assets
are as follows:
-- Loans and advances to customers
Loans and advances to customers primarily comprise of corporate
loans of GBP84.9m as at 30 June 2023 (31 December 2022: GBP89.8m)
which are fair valued through profit or loss using observable
inputs. Loans held at fair value are valued at the sum of all
future expected cash flows, discounted using a yield curve based on
observable market inputs.
-- Derivative financial instruments
Over-the-counter (i.e. non-exchange traded) derivatives are
valued using valuation models which are based on observable market
data. Valuation models calculate the present value of expected
future cash flows, based upon 'no arbitrage' principles. The Group
enters into vanilla foreign exchange and interest rate swap
derivatives, for which modelling techniques are standard across the
industry. Examples of inputs that are generally observable include
foreign exchange spot and forward rates, and benchmark interest
rate curves.
-- Investment securities
Investment securities comprise of RMBS of GBP20.8m (FVOCI) and
GBP2.8m (FVTPL - mandatorily measured) as at 30 June 2023 (31
December 2022: FVOCI: GBP24.9m and FVTPL GBP3.0m). An independent
third party valuation agent is used to provide prices for the rated
RMBS obtained from large financial institutions. These prices are
indicative values only and do not represent an offer to purchase
the securities. These RMBS represent the Group's interests in
unconsolidated structured entities.
-- Equity shares
Equity shares primarily comprise of US Dollar-denominated
convertible preference shares in Visa Inc., with any movements in
fair value being recognised through profit or loss. The fair value
of the Visa Inc. shares has been calculated by taking the period
end NYSE share price and discounting for illiquidity and clawback.
If the illiquidity premium to the discount rate was increased by an
absolute 10%, it would result in a reduction in the overall fair
value of the equity shares of GBP1.5m as at 30 June 2023.
-- Investment properties
Investment properties are valued by using recent valuations of
individual assets within the portfolio, index linked to the balance
sheet date using the relevant house price index.
Movements in fair values of instruments with significant
unobservable inputs (level 3) were:
Sales,
Fair value Purchases transfers Fair value
at and out and Other Income at
31 December 2022 transfers in repayments comprehensive income statement 30 June 2023
Loans and advances
to customers 1.9 - - - - 1.9
Investment
securities 27.9 - (4.2) 0.2 (0.2) 23.7
Equity shares 10.9 - (0.2) - 0.9 11.6
Investment
properties 2.1 - (0.3) - - 1.8
42.8 - (4.7) 0.2 0.7 39.0
Fair values of financial assets and liabilities not carried at
fair value
The carrying values of financial assets and liabilities measured
at amortised cost are analysed in the following tables by the three
level fair value hierarchy set out above.
Fair value
Items where
Total fair value
carrying approximates
30 June 2023 value Level 1 Level 2 Level 3 carrying value Total
Financial assets
Cash and balances at central banks 3,904.8 - - - 3,904.8 3,904.8
Loans and advances to banks 463.9 - 105.7 - 358.2 463.9
Loans and advances to customers 21,019.5 - - 18,905.2 770.8 19,676.0
Investment securities 51.8 - - 52.3 - 52.3
Other assets 5.3 - - - 5.3 5.3
Financial liabilities
Deposits by banks 5,503.3 - 5,061.3 - 436.3 5,497.6
Customer accounts 19,551.4 - - 1,638.7 17,883.5 19,522.2
Debt securities in issue 172.6 - - 172.7 - 172.7
Other borrowed funds 849.8 - 834.4 - - 834.4
Other liabilities 38.4 - - - 38.4 38.4
Fair value
Items where
Total fair value
carrying approximates
31 December 2022 value Level 1 Level 2 Level 3 carrying value Total
Financial assets
Cash and balances at central banks 5,270.4 - - - 5,270.4 5,270.4
Loans and advances to banks 387.1 - 7.5 - 379.6 387.1
Loans and advances to customers 20,827.9 - - 18,961.1 676.3 19,637.4
Investment securities 56.3 - - 55.7 - 55.7
Other assets 12.4 - - - 12.4 12.4
Financial liabilities
Deposits by banks 5,683.4 - 5,289.4 - 388.4 5,677.8
Customer accounts 20,107.3 - - 1,522.5 18,554.0 20,076.5
Debt securities in issue 181.9 - - 182.1 - 182.1
Other borrowed funds 646.9 - 618.7 - - 618.7
Other liabilities 39.9 - - - 39.9 39.9
There were no transfers between level 1, 2 and 3 during the
period.
17. EVENTS AFTER THE BALANCE SHEET DATE
There are no post balance sheet events to report.
FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements with
respect to the business, strategy and plans of the Group and its
current targets, goals and expectations relating to its future
financial condition and performance, developments and/or prospects.
Forward-looking statements sometimes can be identified by the use
of words such as 'may', 'will', 'seek', 'continue', 'aim',
'anticipate', 'target', 'projected', 'expect', 'estimate',
'intend', 'plan', 'goal', 'believe', 'achieve', 'predict', 'should'
or in each case, by their negative or other variations or
comparable terminology, or by discussion of strategy, plans,
objectives, goals, future events or intentions.
Examples of such forward-looking statements include, without
limitation, statements regarding the future financial position of
the Group and its commitment to its plan and other statements that
are not historical facts, including statements about the Group or
its Directors' and/or management's beliefs and expectations. Any
such forward-looking statements are not a reliable indicator of
future performance, as they may involve significant stated or
implied assumptions and subjective judgements, which may or may not
prove to be correct. There can be no assurance that any of the
matters set out in forward-looking statements are attainable, will
actually occur, will be realised, or are complete or accurate. Past
performance is not necessarily indicative of future results.
Differences between past performance and actual results may be
material and adverse.
For these reasons, recipients should not place reliance on, and
are cautioned about relying on, forward-looking statements as
actual achievements, financial condition, results or performance
measures could differ materially from those contained in the
forward-looking statement. By their nature, forward-looking
statements involve known and unknown risks, uncertainties and
contingencies because they are based on current plans, estimates,
targets, projections, views and assumptions and are subject to
inherent risks, uncertainties and other factors both external and
internal relating to the Group's plan, strategy or operations, many
of which are beyond the control of the Group, which may result in
it not being able to achieve the current targets, predictions,
expectations and other anticipated outcomes expressed or implied by
these forward-looking statements. In addition, certain of these
disclosures are dependent on choices relying on key model
characteristics and assumptions and are subject to various
limitations, including assumptions and estimates made by
management. No representations or warranties, expressed or implied,
are given by or on behalf of the Group as to the achievement or
reasonableness of any projections, estimates, forecasts, targets,
prospects or returns contained herein. Accordingly, undue reliance
should not be placed on forward-looking statements.
Any forward-looking statements made in this document speak only
as of the date of this document and it should not be assumed that
these statements have been or will be revised or updated in the
light of new information or future events and circumstances arising
after today. The Group expressly disclaims any obligation or
undertaking to provide or release publicly any updates or revisions
to any forward-looking statements contained in this document as a
result of new information or to reflect any change in the
expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based,
except as required under applicable law or regulation.
- END -
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