TIDMSTB
RNS Number : 2569A
Secure Trust Bank PLC
23 March 2017
PRESS RELEASE
Thursday 23 March 2017
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year to 31 December 2016
A year of tremendous progress delivers record profits
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a record total Group profit after tax of
GBP137.5m for the year to 31 December 2016. This result includes
the profit on disposal of the Everyday Loans Group ("ELG") in the
first half of the year. The Bank has traded strongly throughout the
year, generating underlying profit before tax, which excludes the
profit on disposal, of GBP32.9m which is 23% higher than the
previous year. The Group also completed its move to a Premium
Listing on the Main Market of the London Stock Exchange in the
second half of the year. The record profit has further strengthened
the Group's balance sheet and capital ratios, creating capacity for
the Group to continue its growth despite the evolving economic
environment.
FINANCIAL HIGHLIGHTS
-- Total profit after tax GBP137.5m (2015: GBP28.7m)
up 379%
-- Underlying profit before tax* GBP32.9m (2015: GBP26.7m)
up 23%
-- Statutory profit before tax* GBP25.0m (2015: GBP24.8m)
up 1%
-- Common equity tier 1 ratio of 17.4% (2015: 13.6%)
up 3.8 percentage points
-- Operating income* GBP118.2m (2015: GBP92.1m) up
28%
-- Gain on disposal of ELG confirmed at GBP116.8m
-- Basic earnings per share 754.1p (2015: 157.8p) up
378%
-- Underlying earnings per share* 137.7p (2015: 114.3p)
up 20%
-- Ordinary dividends for 2016 of 75p per share including
interim dividend of 17p per share paid in September
2016 and proposed final dividend of 58p per share
payable in May 2017
-- Special interim dividend of 165p per share paid
in July 2016
OPERATIONAL HIGHLIGHTS
-- Business model repositioned with sale of ELG sub-prime
unsecured personal loan business, closure of the
basic current account product and cessation of unsecured
personal loan originations
-- Customer deposits increased to GBP1,151.8m (2015:
GBP1,033.1m) up 11%
-- Overall loan book increased to GBP1,321.0m (2015:
GBP960.6m*) up 38%
-- Total customer numbers increased to 754,968; a 42%
increase on 2015: 532,278*
-- Lending to house builders closely managed with overall
LTGDV of portfolio 58%
-- High levels of customer satisfaction as measured
by FEEFO
-- Investors In People Gold status achieved
-- Invoice Finance business trading profitably within
2 years of commencement
*excluding ELG.
Lord Forsyth, Chairman, said:
"The record profit after tax of GBP137.5m in 2016 enabled Secure
Trust Bank to increase shareholder equity from GBP141.2m to
GBP236.0m whilst distributing GBP43.1m in dividends. The Bank of
England's recent consultation on ways to help create a more level
competitive playing field in respect of capital is a possible step
forward. Our successful move to the premium segment of the Main
Market of the London Stock Exchange and our very strong capital and
liquidity resources open up a wide range of strategic options as we
enter our 65(th) year of operation."
Paul Lynam, Chief Executive, said:
"This has been a year of tremendous progress for Secure Trust
Bank. We have repositioned the actitivies of the Group, almost
doubled our capital base, increased our customer numbers by 42%,
and delivered excellent levels of customer satisfaction. Having
generated total shareholder returns of 247%, including dividends,
in the five years since our AIM flotation in late 2011, we are in a
strong position to pursue our strategic priorities, as we develop
our existing businesses, diversify into new areas and remain open
to potential M&A activities."
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Andrew Buchanan
Sunil Duggal
Tel: 020 7523 8000
Bell Pottinger
Dan de Belder
Molly Stewart
Tel: 020 3772 2500
Forward looking statements
This document contains forward looking statements with respect
to the business, strategy and plans of Secure Trust Bank PLC and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Secure Trust Bank PLC's or
management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. Secure Trust Bank
PLC's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a
result of a variety of factors. These include UK domestic and
global economic and business conditions, risks concerning borrower
credit quality, market related risks including interest rate risk,
inherent risks regarding market conditions and similar
contingencies outside Secure Trust Bank PLC's control, any adverse
experience in inherent operational risks, any unexpected
developments in regulation or regulatory and other factors. The
forward looking statements contained in this document are made as
of the date hereof, and Secure Trust Bank PLC undertakes no
obligation to update any of its forward looking statements.
Group strategy and business model
Secure Trust Bank PLC ('the Bank') is an established,
well-funded and capitalised UK retail bank. The Bank was
incorporated in 1954, was admitted to AIM in November 2011 and, in
October 2016, successfully listed on the Main Market of the London
Stock Exchange. The Bank and its subsidiaries are referred to as
'the Group'.
Group strategy
The Group's strategy is to build on its current position as an
established UK retail bank through a focus on carefully selected
and attractively priced segments of the consumer and business
markets, prudent underwriting and a prudent approach to capital and
liquidity. The Group intends to continue growing its business
through professional and responsible lending across existing and
new lending divisions and selective acquisitions of loan books and
businesses, funded by capital and customer deposits.
The strategy is underpinned by three strategic themes and six
values, which are embedded within the Group's culture and are used
to evaluate each employee's personal performance:
Themes
Grow To maximise shareholder value through strong
lending growth by delivering great customer
outcomes in both our existing and new markets.
Sustain To protect the reputation, integrity and
sustainability of the Bank for all of our
customers and stakeholders via prudent balance
sheet management, investment for growth and
robust risk and operational control. Controlled
growth is one of the top strategic priorities
for the Bank.
Love To ensure that the fair treatment of customers
is central to corporate culture and that
the Bank is a highly rewarding environment
for all staff and one where they can enjoy
progressive careers.
Values
Customer focused Good customer outcomes are at the heart of
everything we do.
Risk aware Understanding of risk keeps our customers
and us safe and secure.
Change orientated Embracing change and implementing good ideas
gives us a competitive advantage.
Teamwork Companies achieve more when staff work well
together.
Ownership Personal responsibility and taking tasks
through to completion benefits the individual
as well as customers.
Performance Secure Trust Bank will only become the best
driven bank in Britain by each employee taking personal
accountability for their performance.
Business model
The Group's diversified lending portfolio currently focuses on
two sectors:
-- Business Finance through its Real Estate Finance,
Asset Finance and Commercial Finance divisions and
-- Consumer Finance through its Personal Lending, Motor
Finance and Retail Finance divisions.
The Group intends to use its strong capital base to develop a
broad based portfolio, balanced in the longer term across these
sectors and residential mortgage lending.
This lending is primarily funded by customer deposits ranging
from instant access to seven year bonds. Deposit accounts are
promoted to meet funding needs and to broadly match the maturity
profiles of loans and deposits. Through carefully targeted lending
products, the absence of large fixed overheads in the form of a
branch network and a policy of not cross-subsidising loss making
products with profitable ones, the Group is able to offer
competitive deposit interest rates and has been successful in
attracting deposits from a wide range of customers.
The Group operates principally from its head office in Solihull,
West Midlands, and had 726 employees (full-time equivalent) as at
31 December 2016. Lending business is sourced primarily through
carefully selected business partners and through online channels.
The Consumer Finance division utilises underwriting technology to
make lending decisions quickly, resulting in high customer
satisfaction scores, while exercising strong risk management to
minimise losses through bad debts.
Financial and operating highlights
2016 2015 2014
------------------------------- ----------- ----------- ---------
GBP129.3 GBP132.5 GBP97.9
Operating income million million million
Underlying profit before tax GBP32.9 GBP26.7 GBP23.8
* million million million
GBP27.5 GBP36.5 GBP26.1
Profit before tax million million million
Common Equity Tier 1 ('CET1')
capital ratio 17.4% 13.6% 18.7%
Loan to deposit ratio** 115% 104% 102%
754.1 157.8 122.3
Earnings per share pence pence pence
GBP1,510.0 GBP1,247.4 GBP782.3
Total assets million million million
------------------------------- ----------- ----------- ---------
* Underlying profit is the profit attributable to continuing
operations, adjusted for items that are outside of the Group's
normal recurring business activities. A reconciliation of
underlying profit before tax to statutory profit before tax is
provided on page 26.
** This excludes the UK Treasury Bills borrowed from the Bank of
England under the Funding for Lending Scheme, which have
subsequently been pledged as part of a sale and repurchase
agreement. If these were included the loan to deposit ratio would
be 108% (2015: 101%, 2014: 100%).
Loans
New business and advances
volumes to customers
2016 2016
GBPmillion GBPmillion
--------------------- ------------- --------------
Real Estate Finance 218.0 451.0
Asset Finance 84.7 117.2
Commercial Finance 39.5 62.8
Personal Lending 39.0 65.5
Motor Finance 146.8 236.2
Retail Finance 396.3 325.9
Other 40.0 62.4
--------------------- ------------- --------------
964.3 1,321.0
--------------------- ------------- --------------
2016 2015 2014
GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- -----------
Loans and advances to customers 1,321.0 1,074.9 622.5
--------------------------------- ----------- ----------- -----------
-- Total customer lending balances across the STB Group
increased by 23% to GBP1,321.0 million.
-- Business Finance lending balances increased by 35%
to GBP631.0 million.
-- Consumer Finance lending balances increased by 36%
to GBP627.6 million, on a continuing operations
basis.
-- The Group closed its Current Account business and
withdrew its Unsecured Personal Lending product.
-- Customer deposits increased by 11% to GBP1,151.8
million.
-- Customer numbers increased 42% to 754,968.
-- Customer FEEFO ratings (from the Feedback Forum,
mark out of 5 based on star rating from approximately
400 reviews): 4.5 stars.
-- Employee survey engagement score (based on 2016
all staff survey): 85%.
-- The Customer Service Excellence Award was renewed
in 2016. The Group has also achieved gold accreditation
for Investors in People.
Chairman's statement
I am delighted to report that Secure Trust Bank has enjoyed
another year of excellent progress in 2016. This success is a
tribute to the work of our excellent Chief Executive, Paul Lynam
and to the outstanding leadership Sir Henry Angest has given as our
Chairman for more than three decades. Henry has diligently and
carefully grown the company taking it public with an IPO on AIM in
the fourth quarter of 2011. In the five years since, STB has
continued to grow in a disciplined manner and rewarded investors
with total shareholder returns of 247%1. Henry's determination to
focus on our customers and prudent lending ensured the bank traded
successfully and profitably during the last crisis when others fell
by the wayside. I am pleased he is remaining on the Board and
consider it a great privilege and challenge to have been chosen to
succeed him. I and the Board are committed to building on his
considerable legacy in the years ahead.
(1) based on the appreciation of the share price since the IPO,
assuming all dividends have been reinvested.
One of the most important developments, in October of 2016, was
the move from AIM to the premium segment of the Main Market of the
London Stock Exchange. It was a complex and time consuming exercise
and I am grateful to the project team for delivering it so
seamlessly.
Since then I have sought to strengthen the Board and was
delighted to welcome Ann Berresford and Victoria Stewart as new
independent Non-Executive Directors in November. Ann has joined the
Audit and Nomination Committees and Victoria serves on the
Remuneration Committee. Their skills and experience complement
those of the existing directors and they are already making
important contributions to our deliberations. Paul Marrow has been
appointed Senior Independent Director and was approved by the
regulator in December.
The Group continues to focus on customer satisfaction by
offering straightforward transparent products delivered by friendly
and professional staff and has retained the Customer Service
Excellence award, which was introduced by the Cabinet Office in
2010 to replace the kite mark. This independent external assessment
of customer service standards is consistent with the feedback
provided by FEEFO where consistently high scores are achieved
across the product range.
The 2016 annual staff opinion survey was, for the first time,
conducted by an independent specialist consultancy. Over 84%
participated and STB comfortably exceeded the external benchmarks.
This year a record number of employees took advantage of the
Group's personal development schemes with qualifications obtained
ranging from certificates in Retail Banking to MBAs.
Congratulations to all of them. We are also proud of our colleagues
who supported local and national charities. STB has a matching
funding scheme and the busy charity committee coordinated more than
700 hours of activity this year.
I have no doubt that this commitment by and to our employees
contributed to STB being awarded a Gold Standard for Investors in
People in late 2016. I helped to launch this scheme as an
Employment Minister nearly 25 years ago and it is gratifying to
know its exacting standards place the Group in the top 7% of all
participating businesses.
Despite the significant growth in the bank's operations and
balance sheet in recent years we remain a relatively small player
in UK banking. The share of the market controlled by the five
largest banks and the Nationwide Building Society is now higher, at
85%, than it was before the demise of Northern Rock and HBOS in the
financial crisis of 2008. The somewhat feeble Competition and
Market Authority investigation sadly failed to propose remedies,
whilst acknowledging the barriers to competition facing smaller
banks. These include capital requirement differentials, funding
cost disadvantages and increased taxation to part fund a reduction
in the bank levy on the systemic banks. We will continue to argue
for a fairer competitive market in 2017.
Our management philosophy of exercising prudence in respect of
capital, funding and lending remains unchanged. Having generated a
profit after tax of GBP137.5 million, the Group finished 2016 with
strong capital and liquidity ratios, notwithstanding the
substantial distributions paid to shareholders during the year. The
Board proposes to pay a final dividend of 58 pence per share. This,
when added to the interim dividend of 17 pence, and the special
dividend of 165 pence, would mean a full year dividend of 240 pence
per share. If approved, the final dividend will be paid on 12 May
2017 to shareholders on the register as at 18 April 2017.
STB enters 2017 well placed to pursue its strategic priorities
by developing its business model organically and pursuing M&A
opportunities. This, coupled with the Main Market premium listing
and substantial capital resources, means the Group is set fair to
navigate an uncertain economic and regulatory environment.
Finally the members of Board would like to express their thanks
to all of our colleagues across the Group and to our investors for
making this year one of considerable achievement.
Lord Forsyth
Chairman
22 March 2017
Chief Executive's statement
A year of tremendous progress
2016 has been a year of tremendous progress for Secure Trust
Bank ('STB'). The divestment of the Everyday Loans business ('ELG')
was completed in the first half, the move from AIM to a premium
listing on the Main Market of the London Stock Exchange was
concluded in the second half and throughout the year various
external customer service and staff related accolades were awarded.
In financial terms, the combined performance of the continuing
businesses and the one-off profit arising from the sale of ELG
resulted in another record annual profit after tax. Setting this in
context, STB started 2016 with shareholders' equity of GBP141.2
million. The overall profit after tax of GBP137.5 million
represents a 97.4% return on the equity held at the start of the
year and an 11.9% underlying return on the average equity held over
the full year. This has enabled us to significantly increase
shareholders' equity whilst paying progressive increases in the
ordinary dividend and a special dividend of GBP30 million (GBP1.65
per share).
All of this has been achieved whilst continuing to deliver
positive outcomes for customers and sustaining very high levels of
customer satisfaction.
I would like to echo the Chairman's sentiments by congratulating
and thanking all of my colleagues for their unrelenting customer
focus and professionalism throughout an exceptionally busy
year.
Customer base continues to increase and customer satisfaction
levels remain very positive
Across our chosen markets we are serving a record 754,968
customers which is an increase of 42% on the total customer base of
532,278 as at 31 December 2015.
We continue to focus on consistently delivering good outcomes
for customers and ensuring that the design of our products is
appropriate for their needs. From a conduct and behaviour
perspective we do not cross-subsidise losses or low profits on some
products with super profits on others. Nor do we discriminate
between customers by, for example, paying very low deposit interest
rates to existing loyal customers whilst offering relatively high
rates to new ones. We believe that our approach is the appropriate
way to interact with our customers for the long term benefit of all
parties.
Customer satisfaction is measured in a number of ways, including
STB being the only bank that uses FEEFO. This data, freely
available for all to see on the internet, reflects how our
customers actually experience us. Given its importance, customer
feedback data and trends remains the first thing we discuss at our
weekly management meeting. I am pleased to note that, once again,
we have consistently achieved customer satisfaction ratings in
excess of 90% across all of our products during the year.
Whilst being pleased with external accolades and ongoing high
customer satisfaction scores we are in no way complacent. We are
focused on improving our existing service and products and
diversifying our customer proposition via targeted investment in
people, systems, processes and products.
Prudent balance sheet and risk management
Our priority is, as ever, to safeguard the reputation and
sustainability of STB through prudent balance sheet management,
investment for growth and robust risk and operational controls.
In this respect our funding strategy is unchanged. We seek to
limit exposure to short term wholesale funding and interbank
markets and to broadly match fixed term fixed rate customer lending
with customer deposits of the same tenor and interest rate basis.
This helps us to minimise maturity transformation and interest rate
basis risk. During 2016 the market rate for retail deposits fell
and the differential in the spread between short and longer term
deposits narrowed considerably. This enabled us to increase the
average duration of the deposit book and the proportion held in
fixed rates, whilst achieving an overall reduction in the average
funding cost paid.
Our year end loan to deposit ratio was 115% (2015: 104%). We
have temporarily used surplus capital to fund some lending activity
as this is more effective than raising customer deposits whilst we
have excess capital on a reserve account at the Bank of England
paying a mere 0.25%. As this surplus capital is invested in balance
sheet growth, the loan to deposit ratio will move back towards
100%. As noted, to lock in lower term funding rates we increased
the average tenor of our deposits over the year with fixed term
deposits rising to 66% of total deposits. This compares to 57% as
at 31 December 2015.
Over the last couple of years we have been investing in a new
online customer deposit platform. Whilst our existing platform has
served us well and remains fit for purpose it does not have the
flexibility to offer a wider range of products. The new platform,
when launched later this year, will enable us to offer instant
access and cash ISA products thereby significantly broadening
available markets to provide funding at lower margins. This new
technology is expected to enhance our customer service proposition
whilst delivering operational efficiencies.
We do not expect any material change in the competitive dynamics
in the market for customer deposits and foresee no difficulties in
sustaining our current funding strategies.
Very strong capital ratios and modest leverage
Given the profits generated during 2016 our year end CET1
capital levels are extremely robust. The CET1 ratio of 17.4%
compares to the 2015 year end position of 13.6%. This is after
taking into account the increase in the risk weights on the
residential development lending activities from 100% to 150% as
advised to us by the Bank of England in December 2016. The net
effect of these changes was to reduce the CET1 ratio by 1.6%.
The Bank of England via the Prudential Regulation Authority
('PRA') has acknowledged that the formulaic application of Basel
standardised risk weights under Pillar 1 combined with various
Pillar 2 add ons can result in situations where some banks end up
holding more capital, at the aggregate level, than is required. The
PRA have indicated that they will seek to add more judgement to
this 'sum of the parts' approach when determining the total amount
of capital they require individual firms to hold by flexing the
Pillar 2 component of the overall capital calculation, where they
consider appropriate. Depending upon how this plays out in practice
it could reduce the impact of the increase in capital we now have
to hold to support the loans we continue to provide to smaller UK
housebuilding firms. The net effect of this new approach should
become more apparent in the second half of 2017.
As at 31 December 2016 STB's leverage ratio was 14.1% (2015:
10.4%). This ratio is comfortably ahead of minimum requirements and
demonstrates significant capacity to continue growing customer
lending balances whilst retaining regulatory capital headroom
relative to our minimum requirements.
Record profits
The sale of ELG and the decision to discontinue providing a
current account product necessitates an accounting treatment which
complicates the presentation of the total profit performance during
2016. Concurrent with the release of these accounts we have
published, on the Group's website, an investor presentation which
contains slides translating the technical accounting treatment into
the underlying performance of the Group during 2016.
In simple terms, the profit before tax from the continuing and
discontinued operations amounts to GBP144.3 million, being profit
before tax of GBP27.5 million and gain recognised on disposal of
GBP116.8 million. The total profit after tax for 2016 equates to
GBP137.5 million.
On an underlying basis, pre-tax profits for 2016 of GBP32.9
million are 23.2% higher than the prior year of GBP26.7 million.
This growth has been achieved notwithstanding the significant
ongoing investment in people and technology, especially in the
mortgage operations and the new customer deposit proposition.
Excluding discontinued operations, the Group's operating income
grew by 28.3% to a record level of GBP118.2 million (2015: GBP92.1
million) whilst operating costs rose 29.7% to GBP65.5 million from
GBP50.5 million in 2015. Loan impairments of GBP27.7 million (2015:
GBP16.8 million) rose by 64.9% reflecting growth in sub-prime
motor, an increase in the levels of interest bearing balances
written in Retail Finance and a further increase in the collective
provision relating to the potential for uncertainty in the period
ahead.
Costs continue to be robustly managed as reflected in the cost
to income ratio of 55.4% (2015: 54.8%). The move to the main market
gives rise to increased costs reflecting the different regulatory
environment in which the Group now operates and the strengthening
of the Board.
Customer lending activities
Strong double digit growth was achieved across the Group's loan
portfolio in 2016 notwithstanding the increasingly cautious stance
taken as the year progressed. Total new business lending volumes
grew 19% to GBP964.3 million (2015: GBP808.5 million) which
translated to an increase of 37.5% in overall balance sheet lending
assets to GBP1,321.0 million (2015: GBP960.6 million for continuing
operations).
Our strategy remained to prioritise growth in our consumer
finance lending in Retail Finance and Motor Finance with a limited
appetite to write new unsecured personal loans. Reflecting this,
the Retail Finance point of sale business, net of provisions, grew
strongly as intended, with balances at 31 December 2016 increasing
47.9% to GBP325.9 million (2015: GBP220.4 million). Our Retail
Finance business has continued to evolve as our balance sheet has
strengthened. Whilst remaining very well established in the cycle
and music sectors, we have been able to continue pitching for and
win larger retailer relationships across the leisure and home
furnishing sectors. As a result we are writing a broader spectrum
of business including increased levels of interest bearing lending.
This lending has higher levels of impairments compared to interest
free finance and this is factored into our pricing to ensure we
achieve our targeted risk adjusted return.
2016 was a mixed year for our Motor Finance activities. The
non-prime motor finance market, over the last eighteen months, has
seen extremely aggressive competition from non-bank new market
entrants and certain existing lenders who historically focused only
on prime lending. These new players compete by charging relatively
low rates of interest to borrowers, offering very high introducer
commission rates and competing aggressively to attract customers.
Rather than getting sucked into a 'race to the bottom' and
permanently resetting loan margins below what we regarded as a
sensible risk adjusted yield, the Group took the tactical decision
not to compete for the specific customer segments targeted by these
lenders. In the short term this affected the mix of new business
written as some better quality lending previously presented to STB
was instead directed to the newer entrants due to their aggressive
pricing and commission. As we expected we have seen the behaviour
of competitors moderate during the second half of 2016 and the
overall quality of the business written by STB has improved in
recent months.
Notwithstanding the challenge to our Motor Finance business, the
Group has been able to achieve strong lending with lending
balances, net of provisions, growing 42.5% to GBP236.2 million at
31 December 2016 (2015: GBP165.7 million). The impairment picture
for the year is complicated by a number of factors. The sub-prime
lending we began writing in 2015, whilst profitable and generating
a higher return on equity than would be achieved leaving surplus
equity in our Bank of England reserve account, has not met our
expectations and we have needed to address this through changes to
credit underwriting and pricing. In view of the current uncertainty
in the market we have increased the loan loss emergence period
which drives a mathematical increase in provisioning. The Finance
and Leasing Association reported an 86% increase in voluntary
terminations across the whole motor finance industry. Voluntary
terminations arise when customers repay more than half of their
credit agreement and use a clause in the Consumer Credit Act to
hand the vehicle back to the lender and cancel their agreement.
Whilst these are not credit losses, STB has historically accounted
for these provisions through the impairment line as the charge has
thus far been immaterial. The voluntary termination charge of
GBP1.5 million for 2016 is material and in order to address matters
going forward we have adjusted the amortisation profile of our
loans such that more customers should have positive equity in the
underlying vehicle once they have repaid half of the credit
agreement and thus should be less inclined to surrender the
vehicle.
Unsecured personal lending ('UPL') balances, net of provisions,
continued to contract and were reduced by 12% to GBP65.5 million at
31 December 2016 (2015: GBP74.3 million). During 2015 and 2016 we
consistently highlighted our unease at the competitive dynamics in
this market. This is by far the easiest lending market to enter as
all that is required is money to on lend and a way to originate
loans. As the economy has continued to grow we have seen an
increase in the activity of bank and non-bank lenders in this space
with inevitable consequences for credit underwriting standards and
pricing. The situation that now exists is that despite what many
see as a peak in job creation, which could foreshadow an increase
in unemployment and a steady increase in inflation which will
reduce household disposable income, some lenders are offering fixed
rate UPLs at the lowest ever rates. We share the regulators'
concerns about the trends in the UPL market which we regard as
unsustainable, hence our decision to cease originating new UPL
business for the time being. STB has a large amount of experience
in the UPL market, having been active since STB's formation in
1952, but at times has elected to reduce our exposure, for instance
substantially reducing our UPL activity in 2006-08, in response to
an unattractive competitor pricing environment at the time. We
intend to re-enter the UPL market once the risk adjusted yields
available become more attractive.
We have grown the Group's SME lending operations as planned
having adjusted our risk appetite in the Real Estate and Asset
Finance markets in case the outcome of the EU referendum created
increased uncertainty. Real Estate Finance lending balances
increased by 22.6% to GBP451.0 million as at 31 December 2016
(2015: GBP368.0 million). In determining new business volumes we
have also been mindful of the potential for the PRA to increase
capital requirements in respect of home building activities. The
bias of this portfolio is now towards residential investment
finance. STB remains wary of commercial property lending and has a
very limited appetite for these assets. We continue to see the
residential properties financed by us selling faster and for higher
prices than anticipated when we made the original loans. This
positive feature does mean that loans are being repaid sooner than
originally contemplated which enables us to reprice the new front
book lending to take account of the increased regulatory capital
requirements imposed in December 2016. The exception is inner
London where prices have fallen and properties have taken longer to
sell. We therefore remain cautious about the London market and
retain our maximum Loan to Gross Development Value limit of 50%. We
are happy to continue lending to proven residential developers.
During 2016 we have recruited a number of highly experienced
bankers which is enabling us to structure larger loans with bigger
counterparties. We remain confident about the medium term prospects
of this sector given fundamental supply and demand dynamics.
Secure Trust Bank Commercial Finance, the invoice finance
division of the Bank, has continued to build out a profitable
business. We are rapidly approaching the point where we will have
funded over GBP1 billion of customers' invoices, which gives a
sense of the progress made since operations began, as a start-up,
in late 2014. Customer lending balances, net of provisions grew
114% to GBP62.8 million at 31 December 2016 (2015: GBP29.3
million). I believe we have one of the most capable teams of
invoice financiers in the UK, supported by a scalable modern IT
platform. This, coupled with Group management's experience in SME
and corporate lending, gives STB a distinct advantage when it comes
to structuring transactions and responding rapidly to
opportunities. As STBCF's profile has risen we have 'punched above
our weight' winning and writing complex, and remunerative,
transactions in competition with much larger lenders. We expect to
make further positive progress in 2017.
We have continued to successfully foster the Asset Finance
strategic partnership with Haydock Finance during 2016. Customer
lending balances, originated by Haydock Finance Limited but written
by STB and fully conforming to STB's credit policies, grew 66% to
GBP117.2 million at 31 December 2016 (2015: GBP70.7 million). The
full year profit contribution and loan impairments have been in
line with expectations. Responding to the possibility of an
economic slowdown, which could impact used asset values, we reduced
our Loan to Value criteria in the second half of 2016. Other
lenders have not reacted in the same manner as STB. Indeed some
have become more aggressive on price and leverage as they seek to
grow market share. Our more prudent stance has resulted in us
writing lower volumes of new business albeit of a better
quality.
Fee based accounts
As highlighted in the 2016 Interim Report we closed our current
account product in September 2016. This decision was influenced by
a number of factors not least of which was the agreement between HM
Government and the large High Street banks whereby those banks will
provide a fee free basic bank account to all customers. It was not
equitable for us to continue to charge customers for a product that
became available for free elsewhere. The nature of the product also
requires constant IT investment and consumes considerable
management time and focus. Therefore the closure of the current
account is freeing up operational capacity to invest elsewhere
across the Group. The financial impact of this decision is
relatively immaterial and protects us from the capital consequences
of having a substantial current account customer base. I expand on
this aspect under Competitive and Regulatory Environment below.
As expected, the OneBill customer numbers continue to decline
over time, following its closure to new accounts in 2009, with
customer numbers falling to 19,995 by 31 December 2016 compared to
21,236 a year earlier.
Debt Managers Services ('DMS')
The markets for those debt collection agencies fully authorised
by the Financial Conduct Authority improved in 2016 as some
operators exited the market, in part because they did not wish to
pursue full authorisation. There appears to be an upward trend in
customer defaults in a number of sectors and the Bank of England
Credit Conditions Survey for Q4 2016 noted 'lenders responding to
the CCS reported a second consecutive significant increase in the
default rate on other unsecured loans in Q4'. Whilst it is
difficult to assess definitively how these trends might evolve, it
seems likely that a sustained increase in inflation coupled with an
increase in unemployment will impact consumer default levels. This
will translate into more opportunities for DMS in the third party
debt collection and portfolio acquisition spaces. DMS has purchased
a number of portfolios in 2016 which have performed well. Overall
the annual loss before tax of GBP0.5 million incurred in 2015 was
reversed in 2016 into a profit before tax of GBP0.2 million. DMS is
in the Group in part because of its counter cyclical nature and we
expect this to benefit DMS in 2017.
Competitive and regulatory environment
In my annual statement last year I noted that whilst progress
towards a more level competitive playing field had been
frustratingly slow there were signs that things were changing and
some traction was being achieved with key decision makers.
Developments in 2016 have served to vindicate this view and provide
grounds for optimism.
The Bank of England in its written submissions to the
Competition and Market Authority ('CMA') has acknowledged that some
of the differentials in the capital risks weights used by the
systemic banks under their own Internal Ratings Basis approach and
the multitude of smaller banks using the standardised approach are
too high to be justified on prudential grounds. These extremes are
most pronounced in the residential mortgage market where, using
Bank of England data provided to the CMA, a 50% loan to value owner
occupied mortgage would be risk weighted by a systemic bank, on
average, at 3.3% whereas smaller lenders would risk weight the
exact same loan at 35%. Thus the systemic bank can set aside 960%
less capital than a smaller competitor for taking the exact same
risks.
It is no surprise therefore that the systemic banks and
Nationwide Building Society utterly dominate the mortgage market in
both owner occupied and buy to let lending. Lloyds Banking Group
alone controls nearly half of the market for buy to let with a 42%
market share. RBS's admissions that it will not meet the
requirement to divest itself of Williams & Glyn and the
announcement by Co-op Bank in January 2017 that it is unlikely to
meet its Individual Capital Guidance over the planning period to
2020, illustrate the ongoing issues of the Too Big To Fail
banks.
One of the regulatory responses is the introduction of the
Minimum Requirement for Own Funds and Eligible Liabilities ('MREL')
regime. The Bank of England has directed that 'the largest and most
complex firms will be required to maintain sufficient MREL to
absorb losses and, in the event of their failure, be recapitalised
so that they continue to meet the Prudential Regulation Authority's
conditions for authorisation. The aim is that the firm is able to
operate without public support'. In layman's terms it seems the
plan is to require the systemic banks to hold sufficient bail in
capital, in addition to their existing minimum regulatory capital
requirements, that they can't go bust. All banks with more than
40,000 current accounts and GBP15 billion in assets will, by 2022,
need to hold MREL equivalent to their existing capital
requirements. This effectively doubles their total capital
requirements and implies that banks with material current account
customer bases will need to hold capital ratios of 20%+ from 2022.
Smaller firms (like STB) which the Bank of England 'assesses do not
provide services of a scale considered critical', will be subject
to a modified insolvency process and will meet their MREL simply by
meeting their existing capital requirements.
The Basel Committee on Banking Supervision was due to announce
the outcome of its consultations in respect of the capital regimes
in January 2017. It now appears that it will be March 2017, at the
earliest, before any clarification emerges. I understand that a key
sticking point relates to proposals to introduce a capital floor
under the IRB approach used by the largest banks, with the US
pushing for a floor of 75% of the risk weights used under the
standardised approach. There are rumours that a compromise could be
for the floor to be initially set at 55% from 2021 with this rising
to 75% by 2025 to allow time for the systemic banks to transition
to these new standards in an orderly fashion. The risk weight
floors proposed will be set as a percentage of the standardised
risk weights. This has given rise to the somewhat ironic situation
where I have personally witnessed systemic banks claiming that the
standardised risk weights are too high and should be reduced.
Indeed it is being indicated that the lowest standardised risk
weights for residential owner occupied could be reduced from 35% to
20%. The final decisions from Basel are awaited and the picture
could become further complicated by the stance of the Trump
administration. Smaller banks will certainly welcome the changes
being mooted as these have the potential to largely remove the
substantial capital advantages enjoyed by the systemic banks in
certain lending classes thereby creating a much more level
competitive playing field.
I outlined above the PRA's intention to adopt a holistic rather
than 'sum of the parts' approach when determining the levels of
regulatory capital required to be held by the smaller banks. We
wait to see how this will translate in practice but it could be a
pragmatic and positive development.
Clearly the positions here are very fluid and it remains to be
seen what actually comes to pass. What is apparent is that the
direction of travel is to reduce the capital differentials between
the systemic and non-systemic firms which should ultimately bode
well for smaller banks in the future. It should also benefit
consumers and SMEs by fostering competition thereby creating more
innovation and choice and reducing the risks that the taxpayer will
need to fund the bail out of failed banks in the future.
Strategic priorities
In the five years since Secure Trust Bank PLC undertook its AIM
IPO in November 2011 we have increased customer numbers by 440%,
increased our workforce by 176% and generated total underlying
shareholder returns over the period of 247%1. I believe this
reflects the effectiveness of the strategy we agreed and
subsequently pursued under Sir Henry Angest's chairmanship. I fully
concur with Lord Forsyth's comments about Sir Henry and would add
that I have thoroughly enjoyed and am grateful for the close and
effective working relationship we have had since I joined STB in
September 2010.
(1) based on the appreciation of the share price since the IPO,
assuming all dividends have been reinvested.
It will come as no surprise that we do not intend to deviate
much from the current growth strategy which is focused on three
strategic priorities: (i) organic growth, (ii) diversification and
(iii) M&A activity. Having completed a number of highly complex
and time consuming projects during 2016 management now has
increased capacity to consider M&A activities which offer a
good strategic fit and risk adjusted economic profile.
During 2016 we curtailed new lending to those sectors we
considered most exposed to potential uncertainty arising from the
EU referendum decision, particularly in higher Loan to Value asset
finance and central London housebuilding. We retain a cautious
short term stance here and are encouraged to see the Bank of
England in February 2017 significantly upgrade its GDP forecasts
for the UK for 2017 and 2018. It is however also pertinent to note
their forecasts of inflation running persistently above the 2%
target over the next three years which could impact consumer
spending and business investment.
These factors and the evolving regulatory regime clearly
influence our strategic thinking and plans. We will continue to
grow our Retail Point of Sale (V12) and Motor propositions in the
Consumer Finance sector. V12 has grown its lending balances from
GBP30 million when we acquired it in January 2013, to over GBP325
million as at 31 December 2016. It has consistently delivered
profit growth whilst remaining a modest player in a multi
GBPbillion market. In order to support this success we continue to
invest heavily in our operations in Cardiff. We have acquired an
additional freehold office building of 8,500 square feet to
accommodate the expanding workforce needed to provide excellent
service to a growing customer base. V12 has a number of competitive
advantages not least of which is the quality of its IT platform and
the ease that this can be integrated with online and instore retail
channels. The pace of IT advancement is relentless and in order to
sustain our competitive advantages we remain focused on further
improving our core customer propositions and IT capabilities.
The market for Motor Finance in the UK is nearly GBP20 billion.
This is a highly fragmented and competitive space where we have a
GBP0.2 billion share predominantly in non-prime lending. This
remains an important and profitable line of business for us. All of
our Motor Finance lending currently trades under our 'Moneyway'
brand. This is seen by dealers and brokers as a recognised, trusted
and consistent brand. These are positive attributes. However it has
become apparent that a brand exclusively associated with the
non-prime market does not lend itself to a successful and
progressive entry into the prime market. We see opportunities to
continue to grow our non-prime franchise whilst building a prime
lending business. Putting this in context we note there are bank
and non-bank lenders operating at the more prime end of the market
with customer lending balances, in aggregate, approaching GBP2
billion. The reality is that there is nothing these lenders are
doing that STB cannot do if we made some targeted investment,
recruited the right management and potentially create a new sister
brand for Moneyway. In order to progress our thinking we have
changed both the Managing Director and Finance Director in our
motor finance team and will provide a further strategic update when
appropriate.
Mark Twain said, 'buy land, they don't make it anymore'. This
neatly summarises the UK's housing crisis. A finite supply of land
upon which to construct properties to accommodate a growing
population is a major challenge. HM Government is pursuing a pro
construction policy agenda and we will be happy to continue
supporting proven residential property developers to build homes in
areas of known demand. Our Loan to Gross Development Value limits
will remain modest to ensure that the borrower has hard equity in
any deal and to provide a buffer lest market values fall, however
unlikely some might think this is.
The UK Invoice Finance and Asset Finance markets are large,
fragmented and growing markets of around GBP20 billion each. We are
pleased with the progress made by STB Commercial Finance and the
profits being generated here and in our asset finance business
line. We see significant future growth potential and could be
interested in acquiring businesses in these spaces if the risk
profile and economics of any transaction are attractive.
Our longer term ambition remains to grow a broad based
portfolio, balanced across consumer finance, SME finance and
residential mortgage lending. During 2016 we have built out the
operating platform necessary to support the launch into the
residential mortgage market. There are no changes to our plans to
initially focus on the owner occupied segment as this is by far the
largest part of the market and the area that could benefit most
from some of the potential regulatory capital changes. Our lending
will be specialist and manually underwritten enabling us to serve
those customers shunned by the automated processes used by the
systemic banks. We expect to compete against other challenger banks
and specialist non-bank lenders. As is to be expected we will incur
a 'J' curve effect from this start up business and attractive
returns on equity will take time to materialise whilst we work
through the front book: back book dynamic that is a prominent
feature of mortgage lending. We are interested in potentially
accelerating our entry into this market via acquisition if we can
identify existing mortgage lenders and/or portfolios which offer
acceptable risk and economic profiles.
Current trading and outlook
There has been no material change to the underlying performance
of the business in the early months of 2017. We continue to see
potential to grow our lending portfolio in line with our ambition
and have a clear growth strategy and a pipeline of organic and
external new business opportunities.
We noted, with much interest, RBS's recent announcement that
they are proposing a range of measures, including a GBP750m fund,
to promote competition in SME banking. We would consider ourselves
one of the 'eligible challenger banks' they refer to and will study
in depth their full proposals lest these enable us to profitably
deploy our surplus capital faster than we currently envisage.
I am optimistic about the potential, for a variety of different
reasons, for a more level and more competitive playing field in
respect of regulation to emerge which will ultimately open up a
much larger share of the market for smaller non-systemic banks to
compete in. I continue to believe greater levels of competition are
in the best interests of UK consumers and SMEs by providing more
choice, more innovation and less concentration in the UK banking
market. This also offers less risk to taxpayers.
The successful completion of a number of complex projects in
2016 including the divestment of the sub-prime unsecured personal
loan business of ELG, the closure of the current account product
and the step up from AIM to the Main Market puts us in a strong
position to pursue our strategic priorities by developing our
business model organically and pursuing M&A opportunities. This
coupled with the Main Market premium listing and substantial
capital resources, positions the Group well to navigate the
evolving economic and regulatory environment and to seek to take
full advantage of any opportunities that may arise during 2017.
Paul Lynam
Chief Executive Officer
22 March 2017
Strategic report
Business review - Business Finance
This section of the Report and Accounts contains the Strategic
Report required by the Companies Act 2006 to be prepared by the
directors of the Bank. It describes the component parts of the
Group's business; the principal risks and uncertainties; the
development and performance of the business during the financial
year; and the position of the business at the end of the year.
Financial and other key performance indicators are used where
appropriate. Reference is made to and additional explanations
provided about amounts that are included in the Group's
Accounts.
Real Estate Finance
Real Estate Finance was formed as a division within the Group in
2013. The division supports SMEs in providing finance principally
for residential development and residential investment.
What we do
Residential development
The Group lends to enable the development of new build property,
commercial to residential conversions (including those with
permitted development rights) and refurbishment projects.
Residential investment
The Group lends on portfolios of residential property where the
rental income will repay the underlying borrowing over a term
period. The Group has no exposure to the regulated buy to let
mortgage sector and has no plans to enter this sector.
Other lending
The Group has limited appetite for commercial lending (either
development or investment) and has limited exposure to mixed
development schemes.
How we do it
Financing is typically provided over a term of up to five years
with prudent loan to value targets, with a 60% Loan to Gross
Development Value to residential house builders but more
restrictive policies are implemented from time to time as required;
for instance the Group reduced its financing of residential
developments in Central London in 2015. The Group's Loan to Gross
Development Value / Loan to Value ratios average 58% across all
lending areas. The Group has no significant exposure to any one
property scheme or developer.
The Real Estate Finance team is staffed by experienced bankers
with proven property lending expertise. The team provides full
support to customers and introducers over the life of the
products.
Revenue and lending performance vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 28.4 20.3 2.5
Lending balance 451.0 368.0 133.8
Impairment losses 0.1 - -
------------------- ----------- ----------- -----------
2016 performance
The Real Estate Finance business continued to show controlled
growth in 2016, as the Group responded cautiously to the
uncertainties created from the UK vote to leave the European Union,
as well as addressing the increased capital requirements placed on
development lending by the regulator. Lending balances were
GBP451.0 million as at 31 December 2016, a 23% increase in the
year, leading to an overall 40% increase in revenue from the book.
The balance of the book has continued to shift towards residential
investment loans, driven by new business in this sector coupled
with repayments of GBP138 million on the development book as
projects have either been completed, part-sold or refinanced.
Residential investment represented 63% of the book at the end of
December. This has been achieved with no individual credit
impairments having arisen to date, reflecting the prudent credit
policies that have been adopted, and close monitoring of the
portfolio.
The book equally continues to consist primarily of residential
lending, with lending with a commercial element remaining low at
7%, most of which is not pure commercial property lending but
rather lending with a mix of residential and commercial units.
Looking forward
The business remains committed to further growth, with a good
pipeline of both development and investment opportunities, albeit
the business remains cautious in its outlook given ongoing market
uncertainty.
Asset Finance
Asset Finance was formed as a division within the Group in
December 2014.
What we do
The Asset Finance business provides funding to support SME
businesses in acquiring commercial assets, such as building
equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a strategic
partnership with Haydock, a well-established asset finance company
operating across the UK. Haydock provides a full business process
outsourcing service to the Group and also assists the Group in
sourcing new business and providing support to the Group's clients
on an ongoing basis. All of the lending written fully conforms to
the Group's credit policies, risk appetite or other specific
authorisations.
The current route to market is via introducers who are supported
by the Group's marketing resource and a targeted web and social
media presence. The Group offers hire purchase and finance lease
arrangements with terms of up to five years.
The Group also offers asset refinancing whereby the Group takes
ownership of the customer's existing equipment and enters into a
hire-purchase financing arrangement with the customer for a set
period of time.
Revenue and lending performance vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 7.8 2.4 -
Lending balance 117.2 70.7 4.5
Impairment losses 0.6 - -
------------------- ----------- ----------- -----------
2016 performance
The Asset Finance Division achieved strong growth in 2016, with
lending balances growing by 66% to GBP117.2 million at 31 December.
This growth has been the driver for the increase in revenues from
the business during 2016. Growth has slowed in the second half of
the year as a result of two key factors:
-- A reduction of credit appetite amongst corporates,
coupled with an adjustment in our credit appetite
to take account of the more uncertain credit conditions,
particularly in certain sectors, notably construction.
-- A desire to maintain yields and not to chase volume
at the expense of yield.
Whilst some credit losses have arisen during the year, the level
of overall impairment charge has been in line with expectation at
0.6 % (based on average lending balances), and the overall levels
of arrears remain low in comparison with industry comparatives.
Looking forward
The Group sees clear potential to build a scale and sustainable
business either by replicating the successful approach adopted in
the Invoice Finance market or by acquiring an existing operator
that can be grown with the benefit of our funding and capital.
The asset finance market is extremely competitive as newer
players compete aggressively with established asset financiers for
market share. Some lenders are underwriting deals that are at very
thin margins and there are downward pressures on margins in the
sector generally. The Group does not regard this behaviour as
sustainable. The Group is therefore tempering its ambition in this
sector until the market normalises and capital can be safely and
profitably deployed.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014.
What we do
The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
Invoice discounting services provide access to funding and
releases typically up to 90% of the value of unpaid invoices in a
manner that is non-customer facing and allows customers to stay in
control of sales ledger management.
Factoring services, where the sales ledger management is passed
onto the Group, may also provide access to funding of typically up
to 90% of the value of invoices and often results in the Group
managing credit control, cash allocation, statement and reminder
letter distribution.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The business
also provides SME commercial owner occupiers with finance to buy
the property they trade from in conjunction with other financing
facilities.
The division has built a strong team of proven business
development, credit and operational professionals who have
delivered a robust and compliant operational model.
Revenue and lending performance vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 4.6 1.6 0.1
Lending balance 62.8 29.3 5.0
Impairment losses 0.2 0.3 -
------------------- ----------- ----------- -----------
2016 performance
After only two full years of trading STB Commercial Finance
moved into the top ten independent providers of Asset Based Lending
facilities in the UK, with total facility limits agreed in excess
of GBP125 million. A customer focussed approach has been central to
this growth and the team has built key strategic partnerships and
shown a high degree of flexibility in the way it manages
facilities. The Group has handpicked a team of twenty people and
whilst the team's head office is domiciled in Manchester it has
both origination and client servicing capability across the UK. The
business has been underpinned by robust processes and controls
which has been reflected in a strong credit performance to
date.
Looking forward
Commercial Finance has continued to deliver on a key strategic
objective of fostering strong relationships with the professional
community and specifically those involved in the Private Equity
market. The portfolio has continued to grow with a range of
tailored lending solutions which are genuinely bespoke to the
client's needs. New technology and an expanded product offering
will continue to allow the team to enhance the client experience
and at the same time ensure that it maintains a fully compliant
process.
Strategic report
Business review - Consumer Finance
Personal Lending
Following the sale of ELG in April 2016, the Group continued to
provide unsecured personal loans through its Moneyway branded
business. In January 2017, the Group announced its intention to
cease originating new personal loans and this segment is now closed
to new business.
Personal unsecured loans are fixed rate, fixed term products
with payments received monthly in arrears. Loan terms are between
12 months and 60 months with advances varying from GBP1,000 to
GBP15,000. Loans were provided to customers for a variety of
purposes including home improvements, personal debt consolidation
and for the purchase of vehicles.
Revenue and lending performance vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 11.2 17.2 15.1
Lending balance 65.5 74.3 87.5
Impairment losses 4.4 4.8 3.3
------------------- ----------- ----------- -----------
2016 performance
Under the Moneyway brand, the Group took a cautious stance to
lending throughout the year, with personal lending volumes in the
year of GBP39.0 million being contained in line with those of the
previous year. As a result, lending balances have fallen by 12% to
GBP65.5 million (2015: GBP74.3 million), with revenue decreasing by
35% to GBP11.2 million (2015: GBP17.2 million).
The credit risks in the lending book are continually scrutinised
with this data being used, prior to the closure to new business, to
inform changes in risk appetite and pricing. Impairment losses were
GBP4.4 million compared to GBP4.8 million in 2015.
Looking forward
In the light of a potential slowing of the economy, current
economic uncertainty and the competitive dynamics in the personal
lending market, the Group has reviewed its risk appetite for this
product. In January 2017 it announced its intention to withdraw its
personal lending offer. The Group intends to re-enter the market
once risk adjusted yields become more attractive.
Motor Finance
Finance is arranged through motor dealerships and brokers and
involves fixed rate, fixed term hire purchase arrangements,
predominantly on used cars.
What we do
The Bank's Motor Finance business began lending in 2008 under
the Moneyway brand and provides hire purchase lending products to a
wide range of customers including those who might otherwise be
declined by other finance companies. The Bank helps our customers
gain the freedom and flexibility that motoring gives to their lives
as well as helping introducers to sell more cars.
Motor Finance agreements are fixed rate, fixed term hire
purchase agreements and are secured against the vehicle being
financed.
As the Group is lending into the non-prime market the majority
of vehicles financed are predominantly volume franchise used
cars.
How we do it
The Bank distributes its Motor Finance products via UK motor
dealers, brokers and internet introducers. New dealer relationships
are established and managed by our UK-wide Motor Finance sales team
with all introducers subject to a strict vetting policy, which is
reviewed on a regular basis.
The technology platform used allows Moneyway to receive
applications online from its introducers, to provide an automated
decision, document production through to pay-out to dealer and
ongoing in-life management.
Motor lending is administered in the Group head office in
Solihull; however the UK motor dealers and brokers are UK-wide.
Lending performance v prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 40.5 33.3 27.2
Lending balance 236.2 165.7 137.9
Impairment losses 14.6 7.3 3.9
------------------- ----------- ----------- -----------
2016 performance
New business volumes for motor lending increased from GBP85.7
million to GBP146.8 million, an increase of 71% year on year. This
generated a significant increase in lending assets during the year.
Income has increased by 22% to GBP40.5 million.
In the second half of 2015 the business widened its credit
parameters in order to drive profitable growth supported by our
strong introducer relationships.
Impairment losses including voluntary terminations for the year
increased from GBP7.3 million to GBP14.6 million. The motor finance
sector has seen an increase in the instance of voluntary
terminations and this has featured in our impairment losses as the
book matures. This reflects the continued growth and maturity of
the loan book, and refinement of the provisioning methodology.
Looking Forward
Into 2017 Moneyway will continue to optimise its performance in
the non-prime sector of the market through existing introducer
channels.
The division will also continue to develop its prime proposition
across its existing introducer channels to complement non-prime
products, enabling the Group to offer a product for every potential
customer.
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
What we do
The Bank's Retail Finance business commenced lending in 2009 and
provides unsecured, prime lending products to the UK customers of
its retail partners to facilitate the purchase of a wide range of
consumer products across in-store, mail order and online channels.
The acquisition of the V12 Finance Group in January 2013 was
complementary to the Group's existing retail finance proposition
and the V12 management team continued in the business. V12 Retail
Finance has provided finance in cooperation with their retail
partners for more than 20 years. The acquisition enabled the Group
to integrate its existing retail lending business with that of the
V12 Finance Group to generate synergistic benefits from the use of
a Group-wide point of sale system. All of the Group's retail
partners are now on the V12 platform and Retail Finance is
administered in V12 Retail Finance's offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed term
loans of up to 84 months in duration with a maximum loan size of
GBP25,000. The average new loan is for GBP900 over a 20 month term.
Lending is restricted to UK residents who are either employed or
self-employed.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing customers to
spread the cost of purchases into more affordable monthly payments
or paying later for the goods.
How we do it
The Group operates an online eCommerce service to retailers,
providing finance to customers through an online paperless
processing system. This includes allowing customers to digitally
sign their credit agreements, thereby speeding up the pay-out
process, and removing the need to handle and copy sensitive
personal documents through electronic identity verification.
The Group serves retailers across a broad range of retail
sectors including cycle, music, furniture, outdoor/leisure,
electronics, dental, jewellery and football season tickets.
The Group provides finance to customers of a large number of
retailers including household names such as Evans Cycles, AO.com,
Jessops, Halfords, DFS and Watchfinder.
Revenue and lending performance vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- -----------
Lending revenue 36.7 24.2 13.6
Lending balance 325.9 220.4 116.7
Impairment losses 9.5 5.2 1.2
------------------- ----------- ----------- -----------
2016 performance
The three largest sub-markets for the Retail Finance business
are the provision of finance for the purchase of sports and leisure
equipment (including cycles), furniture and consumer electronics.
Cycle finance has seen positive new business levels influenced by
the continued success of British cyclists in the Tour de France,
the Olympics and Paralympics.
The Retail Finance business has continued to grow strongly, with
new lending volumes increasing to GBP396.3 million (an increase of
35% on the previous year). Each of the core business sectors have
contributed towards this growth which has been achieved through a
combination of gaining increased market share and sector growth (as
seen in the cycle market). This growth has generated a significant
increase in lending assets during the year, which at the year-end
totalled GBP325.9 million (December 2015: GBP220.4 million).
Income from retail lending increased by 52% to GBP36.7 million
(2015: GBP24.2 million). Impairment losses were well controlled at
GBP9.5 million in 2016 (2015: GBP5.2 million).
Looking forward
The Group plans continued growth in Retail Finance during 2017
with the focus on acquiring increased market share across its
target markets. A number of initiatives are underway to further
enhance systems capabilities to ensure that quality of service to
both retailers and customers is maintained or improved as the
business continues to expand. To further support the maintenance of
service levels the business intends to continue the expansion of
its workforce whilst investing in additional office and support
facilities.
The Group undertakes its funding primarily via retail savings
deposits, attracting balances with competitive rates of
interest.
Strategic report
Business review - Savings
What we do
The Group's deposits consist of notice accounts and fixed term
savings, with a small proportion of instant access accounts,
available to individuals as well as private businesses and
non-profit enterprises.
Accounts are simple in design with competitive interest rates
easily applied for online and deposits are covered by the UK
Financial Services Compensation Scheme (up to the specified
limits).
The key terms of accounts that are usually offered from time to
time are summarised below:
-- Mixture of products ranging from 60 to 183 day notice
periods and fixed term savings with one to seven
year maturities.
-- Minimum balance of GBP1,000.
-- Maximum balance of GBP1 million for sole account
holders and GBP2 million for business and joint
accounts.
The fee-based current account product previously offered by the
Group was closed to new applicants at the end of 2015 and all
current accounts were closed by the end of September 2016.
The OneBill account had been in operation for many years and was
designed to aid customers with their household budgeting and
payments process. Customers provided the Group with details of
their annual bills (including rent, utility bills, insurance and
telephone line rental) which the Group aggregated and then
calculated a fixed weekly or monthly payment schedule to ensure the
bills were paid on time. This enabled customers to spread the cost
of their bills throughout the year in addition to receiving direct
debit discounts and all supplier contact being handled by the
Group. The Group charges a monthly fee for this service. The
product was closed to new customers in 2009.
How we do it
By virtue of a focus on higher margin lending, the absence of a
branch network and a policy of not cross-subsidising loss making
products with profitable ones, the Group is able to offer
competitive rates and has been successful in attracting high
volumes of deposits, particularly in short timescales, from a wide
range of customers. This provides a funding profile which gives
additional financial security to the business.
The Group enters the market for deposits as and when it is
necessary and maintains a funding strategy of broadly matching the
term and tenor of its customer deposits to the desired maturity
profiles of the Group which are primarily determined by the
interest rates and terms offered on loans and advances to
customers. This strategy seeks to help mitigate maturity
transformation and interest basis risks. The marketing methods
employed include providing information about the deposit accounts
offered on price comparison websites (for example
Moneysupermarket), newspaper best buy tables and articles and via
online endorsement (for example Money Saving Expert).
The Group is able to adjust the mix of interest rate offered and
term of deposit or notice period in a manner that allows it to
raise funding quickly. As part of this funding strategy, the Group
may only offer deposit accounts for limited periods of time and,
from time to time, may not offer deposit accounts to customers at
all. The Group will cease offering deposit products when the
Group's need for deposit funding at that time has been
satisfied.
The Bank is a member of the Financial Services Compensation
Scheme.
Savings balances vs prior years
2016 2015 2014
GBPmillion GBPmillion GBPmillion
---------------------- ----------- ----------- -----------
Notice deposits 373.8 404.9 239.5
Fixed Term Savings 762.8 588.7 331.2
Sight/Instant Access 15.2 39.5 37.7
---------------------- ----------- ----------- -----------
Total Balances 1,151.8 1,033.1 608.4
---------------------- ----------- ----------- -----------
2016 performance
The Group's customer deposits primarily comprise notice
deposits, term deposits, and instant access, as well as OneBill
accounts. At 31 December 2016 deposits totalled GBP1,151.8 million
(December 2015: GBP1,033.1 million). This represents an increase of
GBP118.7 million against the last year end. Balance growth was
muted overall in light of the level of free funding the Group had
on its balance sheet following the sale of ELG and its moderate use
of the Bank of England facilities: the Funding for Lending Scheme
and Term Funding Scheme.
During the year the Group was able to adjust its funding costs
in light of market conditions whilst retaining its competitive
pricing. It also successfully launched 1, 2 and 5 year bonds,
closing its 1 year bond within 5 days; evidence of the strength of
demand for the Group's savings products and its ability to raise
funds promptly.
Looking forward
The Group expects interest rates on savings accounts to remain
broadly at their current levels in the coming year, with a marginal
increase in the market cost of funds for notice and fixed term
savings driven by increasing competition as a result of the
continued entrance of new providers and now established
challengers.
The strategy is to continue to fund the business primarily via
retail deposits with balanced use of the Bank of England's Term
Funding Scheme following the approach of broadly matching term and
interest rates to mitigate both maturity transformation and
interest basis risks. The Group will compete for deposits via
competitive rates of interest on both personal and business
accounts with notice and fixed term products, with customers able
to apply online and be covered by the UK Financial Services
Compensation Scheme (up to the specified limits).
In the second half of 2017, the Group intends to introduce
internet banking for deposit products and diversify its product set
to include ISAs, providing access to an additional market of GBP270
billion of deposits (Source: Bank of England, as at November
2016).
Strategic report
Financial review
2016 2016 2016 2015 2015 2015
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
Summarised income
statement GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Interest, fee and
commission income 146.3 11.2 157.5 117.4 40.7 158.1
Interest, fee and
commission expense (28.1) (0.1) (28.2) (25.3) (0.3) (25.6)
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Operating income 118.2 11.1 129.3 92.1 40.4 132.5
Impairment losses (27.7) (2.6) (30.3) (16.8) (7.5) (24.3)
Operating expenses (65.5) (6.0) (71.5) (50.5) (21.2) (71.7)
Profit before tax 25.0 2.5 27.5 24.8 11.7 36.5
Fair value amortisation 0.9 - 0.9 0.9 - 0.9
Share based incentive
scheme (0.7) - (0.7) 0.7 - 0.7
Net Arbuthnot Banking
Group management
recharges 0.2 - 0.2 0.3 - 0.3
Transformation costs 3.4 - 3.4 - - -
Costs of moving to
Main Market 1.4 - 1.4 - - -
Discontinued operations - (2.5) (2.5) - (11.7) (11.7)
Bonus payments made
in respect of ELG
sale 3.5 - 3.5 - - -
Other items relating
to ELG sale (0.8) - (0.8) - - -
Underlying adjustments
to profit 7.9 (2.5) 5.4 1.9 (11.7) (9.8)
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
before tax 32.9 - 32.9 26.7 - 26.7
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax (6.3) (0.5) (6.8) (5.5) (2.3) (7.8)
Tax on underlying
adjustments (1.5) 0.5 (1.0) (0.4) 2.3 1.9
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying tax (7.8) - (7.8) (5.9) - (5.9)
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Profit after tax 18.7 2.0 20.7 19.3 9.4 28.7
Underlying adjustments
after tax 6.4 (2.0) 4.4 1.5 (9.4) (7.9)
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying profit
after tax 25.1 - 25.1 20.8 - 20.8
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Underlying basic
earnings per share
(pence) 137.7 - 137.7 114.3 - 114.3
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
The underlying adjustments to profit relate to items that fall
outside of the Group's normal recurring business activities.
Fair value amortisation relates to the acquisition of the
Group's subsidiaries, ELG and the V12 Finance Group. The
acquisition accounting required identifiable assets and liabilities
to be adjusted to their fair value, and these adjustments are
subject to amortisation.
The share based incentive scheme movements have been driven
primarily by market conditions, specifically the volatility of UK
share prices, rather than factors controllable by the Group.
Arbuthnot Banking Group management charges will no longer be
levied following the sale of their controlling interest in the
Group, and so do not represent recurring expenditure.
Transformation costs comprise the costs of setting up the
Group's mortgage operation and of closing the Current Account and
Unsecured Personal Lending products.
The move to the Main Market and sale of ELG also represent
non-recurring events.
On 13 April 2016 the sale of the Group's branch based
non-standard consumer lending business, ELG, to Non-Standard
Finance Plc ('NSF') completed generating a gain on disposal of
GBP116.8 million. Results relating to ELG have therefore been
analysed as discontinued operations throughout these annual report
and accounts. Unless otherwise stated, the analyses presented below
relate to continuing operations, which represents all of the
Group's divisions, excluding ELG.
Operating Income
Operating income from continuing operations increased by 28% to
GBP118.2 million. Operating income comprises net interest
receivable, being interest earned on assets less interest expense
on liabilities, plus net fees and commissions earned.
The Group measures net revenue margin, calculated as operating
income as a percentage of the average loan book. The net revenue
margin for 2016 was 10.4% compared with 12.4% for 2015.
The Group also measures gross revenue margin, being interest
income plus net fees and other income as a percentage of the
average loan book. The gross revenue margin for 2016 was 12.9%
compared with 15.8% for 2015. The reductions in these margins are
driven by the change in the composition of the loan book, with an
increase in the proportion of the book represented by lower
interest-bearing Business Finance lending. The component parts of
operating income are further analysed below:
Net Interest Receivable
2016 2016 2016 2015 2015 2015
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Interest receivable
and similar income 130.0 11.1 141.1 100.5 39.2 139.7
Interest expense
and similar charges (26.3) - (26.3) (21.6) - (21.6)
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Net interest receivable 103.7 11.1 114.8 78.9 39.2 118.1
------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Interest receivable and similar income, which is predominantly
earned on loans and advances to customers, increased to GBP130.0
million from GBP100.5 million in 2015, for continuing operations.
The increase was driven by the growth of the Group's loan books
over the year.
Interest expense and similar charges represents interest in
respect of deposits from customers. Interest expense and similar
charges increased to GBP26.3 million from GBP21.6 million in 2015,
for continuing operations. The increase is due to the increase in
customer deposits over the year. The cost of funding, measured as
interest expense and similar charges as a percentage of the average
loan book, reduced from 2.9% for 2015 to 2.3% for 2016. This
reflects the market for funding, in which the Group has been able
to replace maturing term deposits with new deposits of the same
tenor but at lower fixed rates.
The Group's net interest margin, calculated as interest
receivable and similar income less interest expense and similar
charges as a percentage of the average loan book, reduced from
10.6% in 2015 to 9.2% in 2016. The net interest margin reduced as a
result of the change in book composition, partially offset by the
reduction achieved in funding costs.
Fees and commissions
2016 2016 2016 2015 2015 2015
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ------------ ------------- ----------- ------------ ------------- -----------
Fee and commission
income 16.3 0.1 16.4 16.9 1.5 18.4
Fee and commission
expense (1.8) (0.1) (1.9) (3.7) (0.3) (4.0)
------------------------ ------------ ------------- ----------- ------------ ------------- -----------
Net fee and commission
income 14.5 - 14.5 13.2 1.2 14.4
------------------------ ------------ ------------- ----------- ------------ ------------- -----------
Fee and commission income consists principally of weekly and
monthly fees from the OneBill and Current Account products, and
commissions earned on debt collection activities in DMS. Fee and
commission income reduced from GBP16.9 million in 2015 to GBP16.3
million in 2016, for continuing operations. The fee income relating
to Current Account and OneBill has decreased year on year as these
products have been closed to new business; OneBill in 2009 and
Current Account in 2015. This income has been replaced in part by
increasing levels of fees earned on Commercial Finance and Retail
Finance lending.
Fee and commission expense consists primarily of fees and
commissions relating to the Current Account product. Fee and
commission expense decreased from GBP3.7 million in 2015 to GBP1.8
million in 2016, following the closure of the Current Account
product.
Impairment Losses
Impairment losses during the year were GBP27.7 million (2015:
GBP16.8 million). This increase is primarily due to the growth of
the business and consequent increase in the size of loans and
advances to customers.
The Group measures cost of risk, calculated as net impairment
losses on loans and advances to customers as a percentage of the
average loan book. The cost of risk for 2016 was 2.4%, compared
with 2.3% for 2015. Further analysis of the Group's loan book and
its credit risk exposures is provided in Notes 10, 12 and 29.
Operating Expenses
Operating expenses have increased, reflecting the investments
made in the infrastructure and human capital of the Group to
achieve growth targets, from GBP50.5 million in 2015 to GBP65.5
million in 2016, for continuing operations. The Group's cost to
income ratio remained stable at 55.4% (2015: 54.8%).
Taxation
The effective underlying tax rate has increased to 23.7% (2015:
22.1%), which is mainly due to adjustments in respect of prior
years of GBP1.8 million. The new Bank Corporation tax surcharge of
8%, which is effective from 1 January 2016, would apply to any
future taxable profits of Secure Trust Bank Plc company that were
in excess of GBP25.0 million.
Distributions to shareholders
The directors recommend the payment of a final dividend of 58
pence per share which, together with the interim dividend of 17
pence per share paid on 18 September 2015, and the special dividend
of 165 pence per share paid on 27 July 2016 following completion of
the sale of ELG, represents a total dividend for the year of 240
pence per share (2015: 68 pence per share).
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in
Note 8 to the financial statements. Basic earnings per share
increased by 378% to 754.1 pence per share (2015: 157.8 pence),
whilst the underlying basic earnings per share increased by 20% to
137.7 pence per share (2015: 114.3 pence per share).
2016 2015 2015 2015
Continuing Discontinued
Total operations operations Total
Summarised balance sheet GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ------------ ------------- -----------
Assets
Cash and balances at central
banks 112.0 131.8 - 131.8
Debt securities held-to-maturity 20.0 3.8 - 3.8
Loans and advances to banks 18.2 9.8 1.7 11.5
Loans and advances to customers 1,321.0 960.6 114.3 1,074.9
Other assets 38.8 22.9 2.5 25.4
---------------------------------- ----------- ------------ ------------- -----------
1,510.0 1,128.9 118.5 1,247.4
---------------------------------- ----------- ------------ ------------- -----------
Liabilities
Due to banks 70.0 35.0 - 35.0
Deposits from customers 1,151.8 1,033.1 - 1,033.1
Other liabilities 52.2 29.4 8.7 38.1
---------------------------------- ----------- ------------ ------------- -----------
1,274.0 1,097.5 8.7 1,106.2
---------------------------------- ----------- ------------ ------------- -----------
The 2016 balance sheet includes only continuing operations.
The assets of the Group, on a continuing basis, increased by 34%
to GBP1,510.0 million, primarily driven by the growth in the
Group's loan portfolios. The underlying return on average assets,
calculated as the underlying profit after tax for the year as a
percentage of average assets, was 1.9% for 2016, compared with 2.2%
for 2015.
The liabilities of the Group, on a continuing basis, increased
by 16% to GBP1,274.0 million, primarily driven by the increase in
deposits from customers, providing funding for the Group's lending
activities.
Loans and Advances to Customers
Loans and advances to customers includes secured and unsecured
loans and finance lease receivables. The following table shows the
increase in loans and advances to customers year on year, and the
change in composition of the book as the Business Finance loan
books continue to grow faster than the more mature Consumer Finance
books.
2016 2016 2015 2015
% of % of
GBPmillion total GBPmillion total
----------------------------- ----------- ------- ----------- -------
Business Finance:
Real Estate Finance 451.0 34.0% 368.0 34.3%
Asset Finance 117.2 8.9% 70.7 6.6%
Commercial Finance 62.8 4.8% 29.3 2.7%
Consumer Finance:
Retail Finance 325.9 24.7% 220.4 20.5%
Motor Finance 236.2 17.9% 165.7 15.4%
Personal Lending 65.5 5.0% 74.3 6.9%
Other 62.4 4.7% 32.2 3.0%
Discontinued operations and
assets held for sale:
Personal Lending - 0% 114.3 10.6%
----------------------------- ----------- ------- ----------- -------
Total 1,321.0 100.0% 1,074.9 100.0%
----------------------------- ----------- ------- ----------- -------
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year arising from
continuing operations, was GBP964.3 million (2015: GBP808.5
million).
Further analyses of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is
provided in Notes 10, 11 and 12.
Deposits from Customers
Customer deposits include term, notice and sight deposits, as
well as the Group's Current Account and OneBill products. Customer
deposits grew by 11.5% during the year to close at GBP1,151.8
million, to fund the increased lending balances. The Group also
held GBP70.0 million of wholesale deposits at the year-end,
following the sale and repurchase of Funding for Lending Scheme
Treasury Bills.
Key Performance Indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group:
2016 2015
------------------------------------------------ --------- ---------
Financial KPIs:
Net Revenue Margin(1) 10.4% 12.4%
Cost of Risk(2) 2.4% 2.3%
Cost to Income Ratio(3) 55.4% 54.8%
GBP32.9 GBP26.7
Underlying Profit Before Tax million million
Underlying Return on Average Assets 1.9% 2.2%
Underlying Return on Average Equity 11.9% 15.8%
Non-Financial KPIs:
Customer FEEFO ratings (mark out of 5 based
on star rating from 400 reviews) 4.5 N/A
Employee survey engagement score (based
on 2016 all staff survey) 85% N/A
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 5.4 N/A
------------------------------------------------ --------- ---------
The underlying return on average assets and underlying return on
average equity have both fallen as expected as a result of the sale
of ELG, the proceeds of which have increased the Group's equity and
capital and have not yet been fully reinvested.
Comparatives have not been provided for the non-financial KPIs.
The customer FEEFO ratings and employee survey scores were not
measured on a comparable basis in the prior year. As noted in the
Directors' Report, this is the first year of measurement of
environmental emissions and this year is being used as the baseline
year.
The Remuneration Report, starting on page 92, sets out how
executive pay is linked to the assessment of key financial and
non-financial performance metrics.
(1) Net revenue margin is calculated as operating income as a
percentage of average loan book .
(2) Cost of risk is calculated as net impairment losses on loans
and advances to customers as a percentage of average loan book
.
(3) Cost to income ratio is calculated as operating expenses as
a percentage of operating income.
Underlying profit is the profit attributable to continuing
operations, adjusted for items that are outside of the Group's
normal recurring business activities. A reconciliation of
underlying profit before tax to statutory profit before tax is
provided on page 26.
Annualised underlying return on average assets is calculated as
the underlying profit after tax for the previous 12 months as a
percentage of average assets .
Annualised underlying return on average equity is calculated as
the underlying profit after tax for the previous 12 months as a
percentage of average equity. Average equity is calculated as the
mean of the total equity at the 13 previous month ends.
The calculation of average loan book is the average of the
monthly balance of loans and advances to customers, net of
provisions and excluding ELG.
The calculation of average assets is the average of the monthly
balance of total assets, excluding ELG.
Underlying profit after tax (PAT) is profit after tax
attributable to continuing operations, adjusted for items that are
outside of the Group's normal recurring business activities. A
reconciliation of underlying profit after tax to statutory profit
after tax is provided on page 26.
All revenue, income, profit and earnings figures used in the
calculation of key performance indicators are on a continuing
operations basis.
Strategic report
Principal risks and uncertainties
Risk overview
The directors have carried out a robust assessment of the
principal risks facing the group, including those that would
threaten its business model, future performance, solvency or
liquidity. The principal risks are as follows:
Risk Description
----------------- ------------------------------------
The risk that a counterparty
will be unable to pay amounts
Credit Risk in full when due
----------------- ------------------------------------
The risk that the value of,
or revenue generated from,
the Group's assets and liabilities
is impacted as a result of
market movements, predominantly
Market Risk interest rates
----------------- ------------------------------------
The risk that the Group will
encounter difficulty in meeting
obligations associated with
its financial liabilities
that are settled by delivering
cash or another financial
Liquidity Risk asset
----------------- ------------------------------------
The risk of direct or indirect
loss arising from a wide
variety of causes associated
with the Group's processes,
personnel, technology and
infrastructure, and from
external factors other than
Operational Risk the risks identified above
----------------- ------------------------------------
The risk that the Group will
have insufficient capital
resources to support the
Capital Risk business
----------------- ------------------------------------
The potential for customers
(and the business) to suffer
financial loss or other detriment
through the actions and decisions
made by the business and
Conduct Risk its staff
----------------- ------------------------------------
The risk that the Group fails
to be compliant with all
Regulatory Risk relevant regulatory requirements
----------------- ------------------------------------
Notes 28 to 32 to the financial statements provide further
analysis of financial risks.
Further details of the principal risks, the changes in risk
profile since the previous financial year and the Group's risk
management framework are given below:
Credit risk
Description Mitigation
------------------------------- --------------------------------------
Credit risk is the risk that Credit risk is managed through
a counterparty will be unable the Group's internal controls
to pay amounts in full when and credit risk policies
due. Counterparties include and is monitored on a monthly
the consumers to whom the basis by the Credit Risk
Group lends on an unsecured Committee, with oversight
basis and the SMEs to whom provided by the Board Risk
the Group lends on a secured Committee. The Credit Risk
basis as well as the market Committee reviews the performance
counterparties with whom of significant portfolios
the Group deals. including new business volumes,
collections performance,
provisioning levels and provisioning
methodology across the Group's
consumer and commercial business
areas.
The Group structures the
levels of credit risk it
undertakes by placing limits
on the amount of risk accepted
in relation to individual
borrowers or groups of borrowers.
For Real Estate Finance and
Commercial Finance, lending
decisions are made on an
individual transaction basis,
using expert judgement and
assessment against criteria
set out in the lending policies.
Asset Finance lending is
outsourced to Haydock, who
operate in line with the
Group's credit policies and
risk appetite. The Group's
employees based in Haydock's
premises assess this lending
for compliance with policy.
Exposure to credit risk is
also managed in part by obtaining
collateral. Motor Finance
loans are secured against
motor vehicles. Real Estate
Finance and Asset Finance
loans are secured against
property and tangible assets
respectively.
The Board monitors the ratings
of the counterparties in
relation to the Group's loans
and advances to banks. There
is no direct exposure to
the Eurozone and peripheral
Eurozone countries.
Forbearance
The Group does not routinely
reschedule contractual arrangements
where customers default on
their repayments. It may
offer the customer the option
to reduce or defer payments
for a short period, in which
cases the loan will retain
the normal contractual payment
due dates and will be treated
the same as any other defaulting
cases for impairment purposes.
------------------------------- --------------------------------------
Change - STABLE but some deterioration in motor impairments
Consumer Finance Credit Risk
The size of the Unsecured Personal Lending product has been
reducing over the last 18 months, largely due to excessively
aggressive competition by lenders that now offer unsecured loans in
the near-prime market driving prices and margins down below the
Group's risk appetite. The continuation of this unattractive
pricing environment led to the Group's decision to withdraw its
Personal Lending offer.
The Retail business continues to grow as expected, with the
Group retaining its existing major contracts with retailers and
acquiring a number of valuable new relationships. This includes
growth of the Interest Bearing and Buy Now Pay Later segments of
the book, which carry more inherent risk, particularly in the
consumer electronics business. The differential in inherent risks
in interest bearing lending relative to interest free finance is
built into our pricing methodologies to derive the desired risk
adjusted yield. The Credit Risk Team is continually monitoring
acquisition and performance trends to ensure this portfolio
delivers expected performance. The Group expects this excellent
growth and account performance to continue into 2017.
As with Retail Finance, the motor product has seen significant
growth, largely through internet brokers. Competition within motor
lending has become much greater with companies attracted by the
returns that are available within the non-prime sector. The Group
decided not to compete directly with a number of lenders using
aggressive pricing and commission structures to gain a foothold in
the non-prime market. In the short term this affected the mix of
new business written as some better quality lending previously
presented to STB was instead directed to the newer entrants. This
business mix change and a higher volume of sub-prime new business
have resulted in an increase in average impairments. This cohort of
loans whilst ultimately profitable has failed to meet the Group's
expectations in terms of profitability and measures have been taken
to address this. We have also noticed, as expected, a tempering of
the activity of some competitors. The quality of the loans written
has shown a discernible improvement since the final quarter of 2016
and this should have a positive effect on the portfolio mix as 2017
progresses.
Business Finance Credit Risk
Lending to this sector has continued to grow, with continued
application of robust risk governance, credit appetite and lending
policies, alongside the significant experience within the lending
teams. This has served the Group well to date as it continues to
assess the impacts of the Referendum result, particularly in the
Central London Real Estate Market, where risk appetite has been
substantially reduced.
A programme to develop probability of default modelling for each
of the Business Finance portfolios commenced in 2015 and is now
entering into a testing and calibration phase. Ultimate delivery
will be during 2017.
Business Finance impairments and arrears have remained minimal
to date. Management continue to closely monitor the portfolios and
the external events and environment that could impact on each of
them.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of its lending operations, the Group does
not consider there to be a material exposure arising from
concentration risk.
Market risk
Description Mitigation
----------------------------------- ------------------------------------
For the Group, market risk Market risk is managed by
is primarily limited to interest the Company's Treasury function
rate risk, being the potential and is overseen by the Assets
adverse impact on the Group's and Liabilities Committee
future cash flows from changes ('ALCO'). The Group's policy
in interest rates arising is not to take significant
from the differing interest unmatched own account positions
rate risk characteristics in any market. The key measure
of the Group's assets and used to monitor the risk
liabilities. When interest is the Interest Rate Sensitivity
rates change, the present Gap pursuant to which, the
value and timing of future Group seeks to 'match' interest
cash flows change. This in rate risk on either side
turn changes the underlying of the Statement of Financial
value of the Group's assets, Position.
liabilities and off-balance
sheet instruments and hence The Group monitors the interest
its economic value. Changes rate mismatch on a daily
in interest rates also affect basis, considering the impact
the Group's earnings by altering across the maturity bandings
interest-sensitive income of the book on a parallel
and expenses, affecting its scenario for 100 and 200
net interest income. basis points movements. This
typically results in an immaterial
The Group is also exposed pre-tax mismatch, with the
to market risk as a result same immaterial impact to
of the NSF Shareholding resulting equity pre-tax.
from the ELG disposal. Any
deterioration in NSF's financial
performance could negatively
impact the price of NSF's
shares and reduce the value
of the Group's holding in
NSF exposing the Group to
potential losses.
The principal currency in
which the Group operates
is Sterling, although a small
number of transactions are
completed in US dollars and
Euros in the Commercial Finance
business. All currency exposures
are swapped to Sterling.
The Group has no significant
exposures to foreign currencies
and therefore there is no
significant currency risk.
----------------------------------- ------------------------------------
Change - STABLE
The Group has continued to focus on interest rate risk in the
banking book by monitoring the Interest Rate Sensitivity Gap. It
has continued to operate a broadly matched asset and liability
model.
The Group remained within risk appetite in respect of interest
rate risk throughout the year.
Liquidity risk
Description Mitigation
------------------------------------ --------------------------------------
The Group's approach to managing The liquidity requirements
liquidity is to ensure, as of the Group are met through
far as possible, that it withdrawing funds from its
will always have sufficient Bank of England reserve account
liquidity to meet its liabilities to cover any short-term fluctuations
when due, under both normal and longer term funding to
and stressed conditions, address any structural liquidity
without incurring unacceptable requirements. The Group is
losses or risking damage exposed to daily calls on
to the Group's reputation. its available cash resources
from maturing deposits and
The Group is funded by capital loan draw-downs, and maintains
and customer deposits, comprising significant cash resources
deposit accounts and fee to meet all of these needs
based accounts. The Group as they fall due.
has limited borrowings under
Bank of England schemes, The Group has a formal governance
but besides these has no structure in place to manage
exposure to wholesale markets. and mitigate liquidity risk
on a day to day basis. The
The matching and controlled Board sets and approves the
mismatching of the maturities Group's liquidity risk management
and interest rates of assets strategy. The ALCO, comprising
and liabilities is fundamental senior executives of the
to the management of the Group, meets monthly to review
Group. It is unusual for liquidity risk against set
banks to be completely matched, thresholds and risk indicators
as transacted business is including early warning indicators,
often of uncertain term and liquidity risk tolerance
of different types. levels and Internal Liquidity
Adequacy Assessment Process
The maturities of assets ('ILAAP') metrics. Key liquidity
and liabilities and the ability risk management information
to replace, at an acceptable is monitored daily.
cost, interest bearing liabilities
as they mature are the key The PRA requires a firm to
factors in assessing the maintain at all times liquidity
liquidity of the Group and resources which are adequate,
its exposure to changes in both as to amount and quality,
interest rates. to ensure that there is no
significant risk that its
liabilities cannot be met
as they fall due. There is
also a requirement that a
firm ensures its liquidity
resources contain an adequate
buffer of high quality, unencumbered
assets (i.e. government securities)
in the liquidity asset buffer,
and it maintains a prudent
funding profile. The liquidity
assets buffer is a pool of
highly liquid assets that
can be called upon to create
sufficient liquidity to meet
liabilities on demand, particularly
in a period of liquidity
stress. The liquidity resources
outside the buffer must either
be marketable assets with
a demonstrable secondary
market that the firm can
access, or a credit facility
that can be activated in
times of stress.
The Group has a Board approved
ILAAP, which is updated annually.
The liquidity buffer required
by the ILAAP is in place
and liquidity resources outside
of the buffer are made up
of deposits placed at the
Bank of England.
------------------------------------ --------------------------------------
Change - STABLE
During the year ended 31 December 2016, the Group regularly
attracted new fixed and variable rate deposits over terms ranging
from one to seven years. These were issued to broadly match the
term lending by the Group.
The primary measure used by management to assess the adequacy of
liquidity is the Overall Liquidity Adequacy Requirement, which is
the Board's own view of the Group's liquidity needs as set out in
the Board approved ILAAP. The Group maintained liquidity in excess
of the Overall Liquidity Adequacy Requirement through the year
ended 31 December 2016.
Other key measures used by the Group for managing liquidity risk
are the overall Funding to Loans ratio and the Liquidity Coverage
Ratio ('LCR'). The Funding to Loans ratio at 31 December 2016 was
110.4% (2015: 112.5%).
The LCR regime has applied to the Group from 1 October 2015,
requiring management of net 30 day cash outflows as a proportion of
High Quality Liquid Assets. The Group has set a more prudent
internal limit than that proposed in guidance from the regulator.
The actual LCR has significantly exceeded both limits throughout
the year ended 31 December 2016.
Operational risk
Description Mitigation
---------------------------------------- -------------------------------------
Operational Risk is the Risk The Group has adopted an
that the Group may be exposed Operational Risk Policy and
to direct or indirect loss Framework designed in accordance
arising from inadequate or with the 'Principles for
failed internal processes, the Sound Management of Operational
personnel, technology/ infrastructure, Risk' issued by the Basel
or from external factors. Committee on Banking Supervision.
The scope of Operational The approach ensures appropriate
Risk is broad and includes governance is in place to
Business Process, Business provide adequate and effective
Continuity, Third Party, oversight of the Group's
Financial Crime, Change, operational risk. The governance
Human Resources, Information framework includes the Board
Security & IT Risk. Risk Committee and Group
Operational Risk Committee.
The Group has a defined set
of qualitative and quantitative
Operational Risk Appetite
measures. Quantitative measures
cover operational losses,
complaints, key operational
risks, systems availability
and information security.
The appetite measures are
reported and monitored on
a monthly basis.
---------------------------------------- -------------------------------------
Change - IMPROVED
In 2016, the Group continued to invest in resource, expertise
and systems to support the development of its operational risk
capabilities. The Group's operational risk process and standards
are defined and communicated through a formal Operational Risk
Framework and Policy. This Framework defines and facilitates the
following activities:
-- A biannual Risk and Control Self Assessments process
to identify, assess and mitigate risks across all
business units through improvements to the control
environment.
-- The Governance arrangements for managing and reporting
these risks.
-- All risk appetite measures and associated thresholds
and metrics.
-- An incident management process that defines how incidents
should be managed and associated remediation, reporting
and root-cause analysis.
Key Risk themes of Operational Risk focus in 2016 include:
-- Supplier Management - The Group uses a number of third
parties to support its IT and operational processes.
The Group recognises that it is important to effectively
manage these suppliers.
-- IT Resilience - Having adequate and effective servers,
networks and storage systems. The Group tested its
disaster recovery and business continuity processes
in 2016 and further improved its process of identifying,
assessing and managing its critical IT assets and
processes.
-- Information Security and Cyber Risk - As a financial
institution, the Group is subject to a heightened
risk of actual or attempted IT security breaches by
sophisticated cybercrime groups. Any failure by the
Group's intrusion detection and anti-penetration software
to anticipate, prevent or mitigate a breach of the
Group's IT network could significantly disrupt the
Group's operations. The Group continues to invest
in its information security controls in response to
emerging cybercrime threats and to seek to ensure
that controls for known threats remain robust.
Cyber risk is considered to be one of the key emerging risks
facing the Group and is covered in more detail in the 'Strategic
and emerging risks' section below.
Capital risk
Description Mitigation
-------------------------------- --------------------------------------
Capital risk is the risk The Group's capital management
that the Group will have policy is focused on optimising
insufficient capital resources shareholder value, in a safe
to meet minimum regulatory and sustainable manner. The
requirements and to support Board regularly reviews the
the business. The Group adopts capital position to ensure
a conservative approach to capital resources are sufficient
managing its capital and to support planned levels
at least annually assesses of growth.
the robustness of the capital
requirements as part of the In accordance with the EU's
Group's Internal Capital Capital Requirements Directive
Adequacy Assessment Process IV ('CRD IV') and the required
('ICAAP'). parameters set out in the
EU's Capital Requirement
Regulation, the Group maintains
an ICAAP which is updated
at least annually. The ICAAP
is a process that brings
together the management framework
(i.e. the policies, procedures,
strategies and systems that
the Group has implemented
to identify, manage and mitigate
its risks) and the financial
disciplines of business planning
and capital management.
Not all material risks can
be mitigated by capital,
but where capital is appropriate
the Board has adopted a 'Pillar
1 plus' approach to determine
the level of capital the
Group needs to hold. This
method takes the Pillar 1
capital formula calculations
(standardised approach for
credit, market and operational
risk) as a starting point,
and then considers whether
each of the calculations
delivers a sufficient capital
sum adequately to cover management's
anticipated risks. Where
it is considered that the
Pillar 1 calculations do
not reflect the risk, an
additional capital add-on
in Pillar 2 is applied, as
per the Individual Capital
Guidance issued by the PRA.
-------------------------------- --------------------------------------
Change - IMPROVED
Stringent stress tests are performed to ensure that capital
resources are adequate over a future three year horizon. At 31
December 2016, the CET1 Ratio was 17.4% (2015: 13.6%) and the
Leverage Ratio was 14.1% (2015: 10.4%) on a solo-consolidated
basis.
Both ratios are significantly higher than regulatory
requirements. The solo-consolidated capital resources increased
significantly to GBP226.3 million as at 31 December 2016 (31
December 2015: GBP138.9 million) reflecting the gain on the sale of
ELG following transaction completion in April 2016.
Conduct risk
Description Mitigation
--------------------------------- ------------------------------------
The Group defines conduct The Group takes a principles
risk as the risk that the based approach and includes
Group's products and services, retail and commercial customers
and the way they are delivered, in its definition of 'customer',
result in poor outcomes for which covers all business
customers, or harm to the units and both regulated
Group. This could be as a and unregulated activities.
direct result of poor or
inappropriate execution of Across the Group, conduct
the Group's business activities risk exposure is managed
or staff behaviour. via monthly review and challenge
of key risk indicators ('KRIs')
at the Customer Focus Committee,
which oversees complaints,
FEEFO and Customer Service
Excellence as well as conduct
risk. Conduct risk management
information is also reviewed
at Executive Committee meetings
at product level.
The Key Risk Indicators vary
across the business units
to reflect the relevant conduct
risks; the business units'
Key Risk Indicators are aggregated
for measurement against the
Group's risk appetite, which
is reported to the Group
Executive Committee and the
Board.
--------------------------------- ------------------------------------
Change - STABLE
In 2016, the Conduct Risk framework was standardised to align to
the Operational Risk Framework, the conduct risk and control
assessments were refreshed with the business units and integrated
into the new Operational Risk Management System, and a regular
cycle of self attestations established with first line senior
managers.
Monthly review and challenge of Key Risk Indicators in the
Customer Focus Committee provides oversight of the first line
activities to assure senior management that the first line are
identifying conduct risks when they arise and taking appropriate
actions to mitigate them.
Further training on conduct risk has been delivered to first
line staff, with an eLearning module completed by staff during the
year.
Regulatory risk
Description Mitigation
------------------------------------- ----------------------------------
Regulatory risk is the risk The Group seeks to manage
that the Group fails to be regulatory risks through
compliant with all relevant the Group wide risk management
regulatory requirements. framework. The Group Compliance
This could occur if the Group and Regulatory Risk Committee
failed to interpret, implement is responsible for reviewing
and embed processes and systems and monitoring regulatory
to address regulatory requirements, changes, and ensuring that
emerging risks, key focus appropriate actions are taken,
areas and initiatives or and also reviewing and approving
deal properly with new laws the compliance risk management
and regulations. framework. Further details
are given on page 48.
------------------------------------- ----------------------------------
Change - STABLE
In the year ended 31 December 2016, the Group has delivered
changes to address new and revised regulations and legislation that
have come into force.
STB Leasing, a wholly owned STB subsidiary which is the lessor
of assets to consumers arising out of the activities outsourced to
RentSmart Limited, received its authorisation for Limited
Permissions for consumer hire at the end of February 2016.
Strategic and emerging risks
In addition to the principal risks above, the Board considers
strategic and emerging risks, including key factors, trends and
uncertainties which can influence the results of the Group. These
risks include the following:
Macroeconomic environment and market conditions
The Group operates exclusively within the UK and its performance
is influenced by the macroeconomic environment in the UK. The
economy affects demand for the Group's products, margins that can
be earned on lending assets and the levels of loan impairment.
The UK economy continued to grow in 2016, despite uncertainty
inherent both before the referendum to leave the EU and following
the result. The longer term effects of the vote remain unclear,
though the Group expects that the increase in liquidity in the
market and increases in the capital held by banks since the last
downturn will act as mitigants against any downward economic
pressure. The Group's diverse lending portfolio, strong capital and
liquidity positions and relatively low exposure to net interest
margin compression leave the Group well placed to compete in the
evolving UK economy.
On 4 August 2016, the Monetary Policy Committee announced a base
rate cut to 0.25%. Base rate falls have an impact on the net
interest margins of lenders. The Group is less exposed to net
interest margin compression than the systemically important banks
and building societies, and is therefore well positioned to take
advantage should these organisations curtail their lending. As
rising interest rates may expose borrowers to difficulties making
interest payments, the continuing low base rate position has a
mitigating effect on credit risk.
House prices recovered to pre-crisis levels in 2013 and have
since continued to rise. UK housing stock remains in short supply.
The Group will continue to monitor the mortgage market in
connection with its residential mortgage product.
Interest rate levels and volatility
The net interest income earned by the Group and hence its levels
of profit depend on the growth of the Group's loan portfolios and
the net interest margin in respect of those portfolios. Competition
between lenders can place downward pressure on lending asset yields
and hence on net interest margins. Given the Group's strategy of
targeting specialist areas of the market, many of which are
under-served by larger lenders, competition has not had a
significant impact on the margins achieved over the year.
Competition
The Group faces competition from established providers of
financial services, including banks and building societies, some of
which have substantially greater scale and financial resources,
broader product offerings and more extensive distribution networks
than the Group. In addition, while the Group utilises the Basel
'standardised' approach for assessing credit risk, which tends to
overestimate credit risk of lending portfolios, leading to higher
risk-weighted assets, larger competitors who utilise the internal
ratings-based approach can hold less capital against their lending
than the standardised approach, thus making it more economic for
them to do lower risk and lower priced lending.
In particular, the Group faces extensive competition from both
established banks and specialist finance providers in certain of
its niche segments, such as motor finance. Increased competition
within the markets in which the Group operates could result in a
loss of customers for the Group and increased pressure on the
Group's pricing which may lead to narrower margins.
The Group closely monitors the competitive dynamics in all of
its key markets, and has shown itself to be adaptable, as evidenced
by the diversification into SME lending over recent years and the
closure of its personal lending and current account activities. The
evolution of financial technology and its impact on the Group's
markets is also monitored, and the Group continues to invest in its
own technology in order to continually improve its customer
proposition.
Cyber crime
The Group continues to increase focus on enabling the effective
management of risks arising from a failure or breach of its
information technology systems, whether internal or affecting our
supply chain. The Group recognises that financial services
organisations face an increasing number and variety of
cyber-attacks that could result in customer exposure, business
disruption, financial losses, legal penalties or reputational
damage.
Maintaining resilience against emerging cyber threats requires
an understanding of the tactics and motivations of potential
attackers. The Group adopts strategies and comprehensive measures
to keep abreast of these tactics and to prevent, detect, disrupt
and facilitate rapid recovery from attacks.
Strategic report
Going concern and business viability
Going concern
In assessing the Group as a going concern, the directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Strategic Report. The Group uses various short and medium term
forecasts to monitor future capital and liquidity requirements and
these include stress testing assumptions to identify the headroom
on regulatory compliance measures.
The directors are satisfied that the Company and the Group have
adequate resources to continue to operate for the foreseeable
future as going concerns. For this reason they continue to adopt
the going concern basis in preparing these financial
statements.
Business viability
In accordance with provision C2.2 of the UK Corporate Governance
Code, the directors confirm that there is a reasonable expectation
that the Company and the Group will be able to continue in
operation and meet their liabilities as they fall due, for the
period up to 31 December 2019. The assessment of ongoing viability
covers this period as it is the Group's planning horizon and the
period covered by the Group's stress testing. While the directors
are confident of the Group's viability over the longer term, the
inherent uncertainties regarding the economic, regulatory and
market environment that the Group operates in may compromise the
reliability of longer range forecasts.
The directors have based the assessment on:
-- The latest annual budget, which contains information
on the expected financial position and performance
for the period to 31 December 2019 and by considering
the potential impact of the principal risks facing
the Group, as set out on pages 32 to 43.
-- The analysis of key sensitivities, undertaken as
part of the budget process, which could impact on
profitability for the forthcoming financial year.
Assumptions made to calculate risk weighted assets
and capital requirements are clearly stated and
additional scenarios are modelled to demonstrate
the potential impact of risks and uncertainties
on capital.
-- The Group's ILAAP, which uses stress scenarios to
assess the adequacy of liquidity resources.
-- The Group's ICAAP, which considers a macroeconomic
stress and a severe shock scenario in order to assess
the adequacy of capital resources.
-- Consideration of the other principal risks as set
out on pages 32 to 43, to identify any other severe
but plausible scenarios that could threaten the
Group's business model, future performance, solvency
or liquidity.
In making this statement, the Board has sought input from the
Audit Committee and the Risk Committee.
Strategic report
Risk management
Overview
A fundamental element of the Group's strategy is the effective
management of risk in order to protect the Group's depositors,
borrowers and shareholders, and to ensure that the Group maintains
sufficient capital, liquidity and operational control at all times,
and acts in a reputable way. This is reflected in the Group's
strategy and values, in particular the 'Sustain' strategy and 'Risk
Aware' value, which demonstrate the Group's commitment to protect
the reputation, integrity and sustainability of the Bank for all of
its customers and stakeholders via prudent balance sheet
management, investment for growth and robust risk and operational
control.
The Group's Chief Risk Officer is responsible for leading the
Group's Risk Function, which is independent from the Group's
operational and commercial functions. The Risk Function is
responsible for ensuring that appropriate risk management processes
and controls are in place, and that they are sufficiently robust,
so as to ensure that key risks are identified, assessed, monitored
and mitigated. The Chief Risk Officer is responsible for providing
assurance to the Board that the Group's principal risks are
appropriately managed and that it is operating within its risk
appetite.
The Group's risk management framework, policies and procedures
are regularly reviewed and updated to ensure that they accurately
identify the risks that the Group faces in its business activities
and are appropriate for the nature, scale and complexity of the
Group's business.
Risk appetite statement
The Group's risk appetite statement confirms the risk parameters
within which the strategic aims and vision of the Group are to be
achieved. The Board has identified risk themes, risk drivers and
major risk categories relevant to the business to enable it to
produce the following risk appetite statements which underpin the
strategy of the Group:
Key theme Risk appetite statement Risk categories
---------------- ----------------------------------------------- ----------------
Profitability The Group is profit and growth orientated Market risk
whilst seeking to maintain a conservative Credit risk
and controlled risk profile. The Group
manages credit risk through a pricing
for risk model, which drives a potential
post tax return on equity in excess
of 20% in aggregate.
Financial The Group's financial strength is Credit risk
strength safeguarded by a strong capital base Liquidity
and a prudent approach to liquidity risk
management. The Group's governance Capital
and capital planning processes and risk
procedures are designed to ensure
that capital levels will not fall
below the Group's individual capital
guidance requirements. Liquidity is
maintained at a level above the overall
liquidity adequacy requirement with
the majority of loans funded typically
by retail deposits.
Conduct The Group conducts its business in Conduct
with customers a way that seeks to avoid negative risk
and reputation outcomes for customers by consistently
treating them fairly. The Group is
straightforward and fair with its
customers and seeks to achieve excellent
customer service standards. The Group's
aim is to be seen as a sound and professional
business in the marketplace. It has
no appetite for reputational risk
arising from the way in which it or
its partners behave. It seeks to remain
fully compliant with all relevant
regulatory requirements.
Business The appetite of the Group for operational Operational
processes risk is to have well defined, scalable risk
and people and controlled processes, running Regulatory
on robust and resilient systems, effective risk
delivery of change and business continuity
management. It does not tolerate operational
losses above its pillar 1 capital
requirement.
---------------- ----------------------------------------------- ----------------
The Group's risk appetite statements are subject to regular
monitoring and review.
Risk appetite framework
The Group's risk management framework supports decision-making
across the Group and is designed to ensure that each risk is
managed, monitored and overseen through a dedicated risk-specific
committee. The Group operates a 'Three Lines of Defence' model for
the management of its risks in which each risk has a defined risk
appetite which is controlled and managed through documented
policies and frequent reporting, and is overseen by one or more
committees as part of the Group's governance process.
The Group's risk management framework is summarised in the table
below, which sets out for each risk the relevant policy governing
the risk, the method of reporting and the responsible
committee(s).
Risk Credit Market Liquidity Operational Capital Conduct Regulatory
------------ -------------- -------------- -------------- -------------- ----------- ----------- --------------
Key control Consumer Treasury Treasury Operational ICAAP Conduct Compliance
documents Credit Policy Policy Risk Risk Manual
Risk and ILAAP and ILAAP Policy Policy
Policy and Framework
Business
and
Commercial
Credit
Risk
Policy
Reporting Credit ALCO ALCO Operational ICAAP Conduct Compliance
Risk and Treasury and Treasury Risk and other Risk Reports
Reports Reports Reports MI and capital MI and
Reporting reports Reporting
Monitoring Consumer ALCO ALCO Group ALCO Customer Group
committee Credit and Business Focus Compliance
Risk Level Committee and
Committee Operational Regulatory
SME Credit Risk Risk
Committee Committees Committee
Oversight Risk Risk Risk Risk Risk Risk Risk
committee Committee Committee Committee Committee Committee Committee Committee
------------ -------------- -------------- -------------- -------------- ----------- ----------- --------------
Risk governance
The 'Three Lines of Defence' model is implemented by the
following individuals and/or units within the Group. These are:
(1) the Business Line Managers and Risk Owners;
(2) the Risk and Compliance Functions; and
(3) Internal Audit.
Each line of defence effectively ensures a robust operational
risk framework within the Group. The Group ensures that each line
understands its respective responsibilities and those of the other
lines, and has the appropriate resource and expertise in order to
fulfil its responsibilities.
First Line of Defence - Business Line Managers and Risk Owners:
As the First Line of Defence, the management and staff of each
business unit are responsible and accountable for identifying,
assessing, controlling and mitigating operational risks. They are
the owners of the risks and controls that operate within their
business. However there may be additional controls that are managed
for them elsewhere within the business or functional teams.
Each business unit or subsidiary is responsible for the
recording and maintenance of its own risks, and is subject to an
annual review and challenge, presented to the Group Operational
Risk Committee and the Board Risk Committee. Risks may be managed
by a designated manager, but the risk owner is ultimately
accountable for the risks in their business.
Second Line of Defence - Information Security, Operational Risk,
Financial Crime and Compliance Teams: The role of the Second Line
of Defence is to support and guide the Group in order to operate
within the risk appetite, by assisting the business in assessing
and controlling operational risks, and by reporting to the Board
and group risk committees on the effectiveness of the controls.
The Second Line of Defence enables the Group to adopt a common
strategy and approach to operational risk management. It sets
Group-wide policies and designs an operational risk management
framework that helps businesses to control risks and that provides
consistent insight into the risk profile.
Third Line of Defence - Group Internal Audit: Group Internal
Audit periodically gives independent assurance on the
organisational setup and effectiveness of risk management within
the Group. The Third Line of Defence acts as an additional control
to prevent risks from remaining unidentified.
Internal Audit provides the Audit Committee, the Board and
Senior Managers with detailed independent and objective assurance
on the effectiveness of the governance, risk management, and
internal controls. This includes the manner in which the First and
Second Lines of Defence achieve risk management and control
objectives.
The scope of this assurance covers a broad range of objectives,
including:
-- efficiency and effectiveness of operations
-- safeguarding of assets
-- reliability and integrity of reporting processes
-- compliance with laws, regulations, policies, procedures,
and contracts.
The remit extends to a number of areas: group-wide processes;
subsidiaries; business units and enabling functions, business
processes including customer lifecycle, sales, marketing and
operations, and enabling functions such as finance, HR, operational
risk, compliance and IT.
The monitoring and control of risk is a fundamental part of the
management process within the Group. The responsibilities of the
Board, Risk Committee and Audit Committee in this respect are
described in the Corporate Governance Report starting on page 56.
The following committees also form a key part of the Group's risk
management governance structure:
Assets and Liabilities Committee ('ALCO')
The ALCO is a sub-committee of the Risk Committee and is
responsible for implementing and controlling the liquidity and
asset and liability management risk appetite of the Group, ensuring
the high level control over the Group's balance sheet and
associated risks. The committee sets and controls capital
deployment, Treasury strategy guidelines and limits focusing on the
effects of the future plans and strategy on the Group's assets and
liabilities.
Consumer Credit Risk Committee
This committee ensures that there is control of credit and
lending decisions and related risks. Retail, Motor and Personal
Lending loans are reviewed in alternate months to ensure a detailed
analysis is undertaken of the entire portfolio. This committee
determines whether the credit strategies and risk polices are
working and will make recommendations on any changes required.
SME Credit Committees
The Group operates a Credit Committee structure for its Business
Finance operations, with lending authorities approved at the Board
Risk Committee. There is no local sales authority with all deals
going via the respective Credit Risk functions for manual
underwrite and where required under the mandate approval at the STB
Credit Committee level.
Group Operational Risk Committee
This committee reviews and monitors the adequacy, the
implementation and the level of embeddedness of the operational
risk management framework across the Group. It recommends and
undertakes improvements where required. The committee assesses the
operational risks across the Group and recommends, initiates and
monitors any further mitigating action that is required.
Group Compliance and Regulatory Risk Committee
This committee reviews and monitors regulatory change with which
the Group is required to comply and it provides oversight that
appropriate co-ordinated and controlled action is taken to deliver
the required changes to an acceptable standard, which achieves
compliance in a timely manner. This committee also reviews and
approves the compliance risk management framework, the compliance
universe and annual monitoring plan, anti-money laundering and
financial crime systems of governance and control. It ensures that
the Compliance function offers close and continual support to the
first line of defence in understanding regulatory requirements and
delivery of required outcomes.
Customer Focus Committee
This committee reviews and challenges customer experience
ensuring its treating customers fairly principles, conduct risk,
and customer service excellence requirements are met and good
customer outcomes are achieved.
Information Security Management Committee
This committee oversees the Group's management of information,
including safeguarding the personal information of its
customers.
Lord Forsyth
Chairman of the Board
22 March 2017
Strategic Report
Capital, leverage and liquidity
Capital
The Group's capital management policy is focused on optimising
shareholder value over the long-term. Processes exist to ensure
that capital is allocated to achieve targeted risk adjusted returns
whilst ensuring appropriate surpluses are held above the minimum
regulatory requirements. The Board reviews the capital position at
every Board meeting.
In accordance with the EU's Capital Requirements Directive and
the required parameters set out in the EU's Capital Requirements
Regulation, the Group's ICAAP is embedded in the risk management
framework of the Group. It is subject to ongoing updates and
revisions where necessary, but as a minimum an annual review is
undertaken as part of the business planning process. The ICAAP
brings together the risk management framework, including stress
testing using a range of scenarios, and the financial disciplines
of business planning and capital management.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a 'Pillar I plus'
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar I capital formula calculations as a
starting point, and then considers whether each of the calculations
delivers a sufficient capital sum adequate to cover anticipated
risks. Where it is considered that the Pillar I calculations do not
reflect the risk, an additional capital add-on in Pillar 2 is
applied, as per the Individual Capital Guidance issued to the Bank
by the PRA.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after
deducting intangible assets and deferred tax assets
which have arisen due to losses.
-- Tier 2 capital which comprises the collective allowance
for impairment.
The ICAAP includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated entities within
the Group have complied during the financial year with all of the
externally imposed capital requirements to which they are
subject.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group's on and off
balance sheet exposures. The weightings applied are those
stipulated in the Capital Requirements Regulation.
The Group is required by the PRA to report its capital on a solo
consolidated basis. The solo-consolidated group includes all
entities where a solo consolidation waiver has been received from
the PRA; this includes all subsidiary undertakings, except the V12
Finance Group and DMS. At the year end the solo-consolidated group
had the following capital resources and Total Risk Exposure. In
accordance with Capital Requirements Regulation, the Total Risk
Exposure reflects both credit risks and operational risks.
2016 2015
GBPmillion GBPmillion
---------------------------------- ----------- -----------
Capital
CET1 capital 221.0 135.8
Total Tier 2 capital 5.3 3.1
---------------------------------- ----------- -----------
Total capital 226.3 138.9
---------------------------------- ----------- -----------
Total Risk Exposure 1,266.9 998.6
---------------------------------- ----------- -----------
2016 2015
% %
---------------------------------- ----------- -----------
CRD IV ratios
CET1 capital (solo-consolidated) 17.4 13.6
Leverage ratio 14.1 10.4
---------------------------------- ----------- -----------
The increase in CET1 capital has been driven predominantly from
the sale of ELG and from the retained profit on continuing
operations. An analysis of CET1 capital can be found in Note 32 to
the financial statements.
Total Risk Exposure has increased by 27% to GBP1,266.9 million
reflecting the significant growth in both Business Finance and
Consumer Lending, and the increase in the risk weights applied to
residential development lending activities from 100% to 150% as
advised to us by the Bank of England in December 2016.
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure and was 17.4% at the year end. This
compares to 13.6% at the end of 2015. The sale of ELG has increased
the CET1 capital ratio and provided significant capital for
continued growth.
Leverage
The Basel III framework introduced a relatively simple,
transparent, non-risk based leverage ratio to act as a
supplementary measure to the risk-based capital requirements. The
leverage ratio is intended to restrict the build-up of leverage in
the banking sector to avoid destabilising deleveraging processes
that can damage the broader financial system and the economy,
whilst reinforcing the risk-based requirements with a complementary
simple, non-risk based 'backstop' measure.
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on and off
balance sheet asset exposure values, expressed as a percentage. The
Basel committee on Banking Supervision will continue to test a
minimum requirement of 3% for the leverage ratio during the
parallel run period (i.e. from 1 January 2013 to 1 January 2017).
Based on the results of the parallel run period, any final
adjustments to the definition and calibration of the Basel III
leverage ratio will be carried out by 2017, with a view to
migrating to a Pillar 1 treatment on 1 January 2018 based on
appropriate review and calibration.
As shown in the table above, the Bank has a leverage ratio at 31
December 2016 of 14.1%, comfortably ahead of the transitional
minimum requirement.
Liquidity
The Group continues to manage its liquidity on a conservative
basis by holding High Quality Liquid Assets and utilising
predominantly retail funding from customer deposits, with only
limited funding coming from the wholesale markets. In December
2012, Secure Trust Bank was admitted as a participant in the Bank
of England's Sterling Money Market Operations under the Sterling
Monetary Framework, to participate in the Discount Window Facility.
From July 2013, the Group was permitted to draw down facilities
under the Funding for Lending Scheme. Funding for Lending Scheme
monies are maintained as a liquidity buffer, above that required to
support lending.
At 31 December 2016 and throughout the year, the Group had
significant surplus liquidity over the minimum requirements due to
its stock of High Quality Liquid Assets, in the form of the Bank of
England Reserve Account and Bank of England Treasury Bills. As
shown in the table below, total liquid assets increased by 3% from
GBP145.4 million to GBP150.2 million, with the High Quality Liquid
Assets balance of GBP132.0 million.
2016 2015
GBPmillion GBPmillion
------------------------------- ----------- -----------
Liquid assets
Aaa - Aa3 132.0 135.6
A1 - A3 13.2 6.2
Unrated 5.0 5.3
------------------------------- ----------- -----------
150.2 147.1
Less assets held-for-sale - (1.7)
------------------------------- ----------- -----------
Statutory balance sheet total 150.2 145.4
------------------------------- ----------- -----------
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
The Group's loan to deposit ratio has increased from 104% in
2015 to 115% in 2016, due to the Group using capital generated from
the sale of ELG to fund new loans, rather than having to raise new
deposits. Additionally, fixed term deposits have increased from 57%
in 2015 to 66% in 2016.
The LCR, introduced by the Basel Committee on Banking
Supervision in 2013, applied to the Group from 1 October 2015. The
objective of the LCR is to promote the short term resilience of the
liquidity risk profile of banks, by ensuring that they have an
adequate stock of unencumbered High Quality Liquid Assets that can
be converted easily and immediately in private markets into cash to
meet their liquidity needs for a 30 calendar day liquidity stress
scenario.
The PRA completed its consultation on the minimum LCR
requirements to apply in the United Kingdom in 2015, and set levels
marginally higher than those prescribed in the Capital Requirements
Regulation during the transition period. The PRA have set the
minimum at 80% from 1 October 2015, 90% from 1 January 2017 and
100% from 1 January 2018, coming into line with the Capital
Requirements Regulation at this point.
The Group's LCR, and other measures used by management to manage
liquidity risk, are described in the Principal Risks and
Uncertainties section of the Strategic Report.
Strategic report
Culture and employees
The culture of the Group reflects the Group's promise to deliver
straightforward and transparent banking and is based on the core
values outlined in its strategy. These values are supported through
an employee culture which has colleague and customer centric
attitudes at its heart, rewards innovative and inspiring behaviours
and sets work expectations around staff being trustworthy,
compliant and safe.
Producing great customer outcomes is central to the Group's
strategy. Making sure that this is reflected in the experience of
customers and stakeholders is dependent on the Secure Trust Bank
team, which is why the Group continues to invest in initiatives
which nurture the culture of the Group.
Developing talent
This year the Group built on its existing Business Leader
Development Programme with the introduction of a Raising the Bar
Programme, aimed at helping business leaders to unlock their full
potential. The programme also has features designed to embed the
culture and values among employees. This is further supported by a
comprehensive in-house learning and development programme and
induction process.
In 2016 a record number of employees signed up to take an
external Banking Qualification as part of their career development.
The Banking Qualifications are delivered by the London Institute of
Banking & Finance (previously the IFS) and are available to all
employees. Wider career and skills development is also encouraged
with financial support and study time allowances to facilitate
relevant continued learning. The growth of the Group has also
provided career development opportunities as evidenced by the
record number of internal promotions made during the year.
The Group takes steps to address the wider needs and concerns of
its staff. For example, a focus on health and wellbeing was
launched as part of the Group's first 'Wellbeing at Work Week'
which encouraged employees to think about their mental and physical
health. The Group also held a 'Learning at Work Week' which allowed
employees to showcase some of their wider talents.
Investors in People
As an internationally recognised accreditation held by over
14,000 organisations across the world, Investors in People sets the
standard for what it means to lead, support and manage people well.
This year the Group built on its existing Investors in People
accreditation not once but twice. In May Secure Trust Bank was
awarded Investors in People Silver across the entire Group and in
December it joined a select group of organisations which meet the
Investors in People Gold standard.
Only seven per cent of accredited companies achieve the Gold
standard which demonstrates the Group's commitment to excellence
when it comes to people management. The assessment includes a mix
of hard assessment metrics, combined with softer interview based
data collection to build a robust picture of performance. The
Group's open and transparent culture and a strong commitment to
equality and diversity were cited as two reasons why employees
demonstrate high levels of trust in the Group's leadership team and
are motivated, engaged and proud to work for the Group.
The assessment also acknowledged the clarity of the Group's goal
of achieving its vision of building the best bank in Britain and
how employees demonstrate a high degree of buy in to the
organisation's strategic direction and live this through day-to-day
activities.
Employee Engagement and Recognition
Research has consistently shown a clear link between enhanced
levels of performance and teams that are fully engaged and share
the values of the organisation that they work for. The annual Your
Voice employee engagement survey measures the Group's progress in
this area.
This year the Group engaged an independent specialist in
employee feedback to run the survey, ensuring enhanced objectivity
and allowing us to benchmark results against other similar sized
companies in our sector. A participation rate of 84% meant that the
results were representative and it was very reassuring to find that
positive feedback across 42 key indicators was consistently above
the external benchmark in over 95% of areas. The Group continues to
look at areas for improvement at both a corporate and team level
and is in the process of developing initiatives which will address
issues raised by employees.
The progress in employee engagement was also recognised this
year at the Midlands and Yorkshire Contact Centre Awards where the
Group received the Highly Commended accolade for Employee
Engagement Strategy of the Year. The award was judged on various
aspects of employee engagement, including communication,
empowerment and reward. High standards of communication at a
personal level and corporate level were recognised.
The Group's recognition schemes and annual incentive programme
continue to help embed excellence within the culture. Employees who
demonstrate behaviour which promotes the customer first culture
regularly receive recognition and are rewarded via a number of
schemes which include:
Be valued awards: these awards recognise and reward every member
of staff who lives and breathes our company values with a gift and
certificate. Colleagues can nominate their peers at any time and as
often as they like.
Customer Service Excellence Awards: colleagues who go the extra
mile when it comes to exceptional internal and external customer
service are recognised at our monthly Customer Service Excellence
Award.
Outstanding Achievers: these are given to colleagues who stand
out for their fantastic contribution to the business. Winners are
nominated by their peers and then selected by a panel of
judges.
Incentive Programme: the Group's incentive scheme links tangible
performance targets which are based on the Group's strategy and
values, to the outcomes of the scheme.
Customer focus
Customer focus is at the heart of the Group's business model. It
is enshrined in the Group's values and mission to provide
straightforward, transparent banking and embedded through the
culture. In addition to recognition and reward structures, which
embed this behaviour, the Group also uses a number of recognised
independent tools to monitor and improve its customer service
standards.
The Group collects feedback through FEEFO, an independent global
ratings and reviews provider used by the world's most trusted
brands. Comments and ratings are reported on a daily basis allowing
service levels to be maintained and improved. The Group's average
FEEFO rating for the year based on nearly 400 reviews stood at 4.5
out of 5 in December 2016 and any poor ratings are followed up by
attempting to resolve the issue with the customer. The ratings and
comments are available on the Group's websites:
www.securetrustbank.co.uk
www.moneyway.co.uk
The Group is proud to be the only bank to have been awarded the
Customer Service Excellence Award which tests organisations in
great depth on those areas which are a priority for consumers, with
particular focus on delivery, timeliness, information,
professionalism and staff attitude. The standard also examines an
organisation's ability to develop customer insight, understand its
users' experience and put in place robust measures of service
satisfaction. It is an award which the Group retained for the
fourth year running following on site assessments in December 2016.
The report outlined the high standards demonstrated by the Group's
employees and made specific reference to their professionalism,
honesty and positivity about working at Secure Trust Bank, as well
as commenting on the organisation's ethics.
Responsible business
As a responsible business the Group seeks to assess the impact
of its business model and the delivery of its services on its
customers, as well as on the wider community in which it operates.
The Board does not consider there to be any environmental social or
governance matters that are significant to the business of the
Group.
As a financial services provider, the Group's operations do not
have a significant impact on the environment. This year, the Group
has started to report on its greenhouse gas emissions and, to
ensure its environmental impact remains low, has included it as a
key performance indicator. The key performance indicators are shown
on page 31 and further details of greenhouse gas emissions are
given in the Directors' Report, starting on page 99.
As well as through its customer focus, the Group's commitment to
social and community issues is demonstrated by the Group's
charitable activities. The Group Charity Committee is made up of
representatives from its different businesses which drive forward a
wide range of successful charitable activities. The committee is
supported by business specific charity teams which also organise at
least one flagship event each year. This year the Group also
introduced a pound for pound matching scheme to encourage and
empower staff to raise money for charities and good causes. A wide
range of fundraising activities have been held raising over
GBP40,000 for good causes during 2016.
A new community volunteering scheme was also launched by the
Group in 2016, allowing employees to take one day paid leave to
help make a difference to charities or community groups in their
area. The scheme has resulted in more than 700 man hours being
given to provide practical support to a wide range of initiatives
from homeless charities and foodbanks to environmental community
projects.
Human rights and tackling modern slavery
The Group is subject to the European Convention on Human Rights
and the UK Human Rights Act 1998. The fair treatment of customers
is central to the Group's strategy and values, and the Group
opposes all forms of discrimination.
The Group is committed to tackling modern slavery and human
trafficking and has taken steps to ensure it is considered and
addressed in its business and throughout its supply chain,
consistent with its obligations under the Modern Slavery Act 2015.
The full Board statement on Slavery and Human Trafficking can be
found on the Group's website:
www.securetrustbank.co.uk
Gender diversity
At the year end, the split by gender of the Group's employees
was as follows:
Male Female
----------------- ----- -------
Directors 75% 25%
Senior managers 83% 17%
Other employees 39% 61%
All employees 46% 54%
----------------- ----- -------
By order of the Board
Neeraj Kapur
Chief Financial Officer
22 March 2017
Corporate Governance Report
Chairman's Introduction
On behalf of the Board I am pleased to introduce our report on
Corporate Governance. This explains the Group's governance
arrangements and how the Group has applied the principles of the UK
Corporate Governance Code (the 'Code'). On 12 October 2016 the
Company's shares were admitted to the premium listing segment of
the official list of the Financial Conduct Authority and to trading
on the Main Market for listed securities of the London Stock
Exchange ('Admission'). At the same time, the admission of the
shares to trading on the AIM market operated by the London Stock
Exchange was cancelled.
In the prospectus published in connection with Admission the
Board stated its intention to comply with the applicable
requirements of the Code and to report to shareholders on
compliance with the Code.
In our last annual report and accounts, for 2015, the Board
confirmed its endorsement of the principles of openness, integrity
and accountability which underlie good corporate governance.
Following Admission the Group is now required to describe its
compliance with the Code and to provide specific information to
shareholders about this.
I was appointed as an independent Non-Executive Director of the
Group on 1 March 2014. Following Admission and on receipt of
regulatory approval Sir Henry Angest stepped down as Chairman and I
was appointed Chairman of the Board in his place on 19 October
2016. Further information is provided later in this report about
other Board appointments in 2016.
In 2016 and in particular in conjunction with Admission, the
Board reviewed the governance arrangements and made some changes
that are described further in this report. The governance
structures that had served the Company well during its time as a
public company on AIM have not been fundamentally changed, and in
particular, the structure of Board Committees with separate Audit
and Risk Committees has worked well. The opportunity was taken to
recognise the particular role and functions of the ALCO which now
reports directly to the Risk Committee. The ALCO monitors important
indicators relating to the business of the Group.
Since Admission, the Remuneration Committee has given careful
consideration to remuneration related matters, including the
formulation of a Remuneration Policy which is to be put to
shareholders at the 2017 Annual General Meeting and which is set
out later in this report.
The Board is committed to maintaining and developing high
standards of corporate governance. This is an evolving area and it
is expected that further developments and improvements in the
Group's governance will be made in 2017.
The Annual General Meeting in May 2017 will be the first at
which the Group is a premium listed company, marking another
milestone in the development of the Group. The Board looks forward
to engaging with shareholders at the Annual General Meeting.
Lord Forsyth
Chairman of the Board
Corporate Governance Report
Board of Directors
The Rt Hon Lord Forsyth of Drumlean PC Kt - Non-Executive
Chairman
Lord Forsyth is a director of J&J Denholm and Denholm
Logistics, former Chairman of Hyperion Insurance Group, and former
Deputy Chairman of JP Morgan UK and Evercore Partners
International. He was appointed to the Privy Council in 1995,
knighted in 1997, and joined the House of Lords in 1999. He was a
member of the House of Commons for 14 years and served in
Government for 10 years, latterly as a Cabinet Minster. He was
appointed to the board of Secure Trust Bank on 1 March 2014.
Michael is chairman of the Nomination Committee and a member of the
Audit and Remuneration Committees. He was appointed Chairman of the
Company on 19 October 2016.
Paul Lynam ACIB, AMCT, Fifs - Chief Executive Officer
Paul Lynam joined Secure Trust Bank as Chief Executive Officer
in September 2010, having spent 22 years working for NatWest and
RBS. He is an Associate of the Chartered Institute of Bankers and
has Associate Membership of the Association of Corporate
Treasurers. Paul was a governor and trustee of IFS University
College. Prior to leaving RBS, Paul was the Managing Director,
Banking, for RBS/NatWest's SME banking business across the UK.
Before that Paul spent four years as the Managing Director of
Lombard North Central PLC. During his career Paul has undertaken
roles in branch banking, business banking, corporate and commercial
banking, strategy, performance management, lending and central head
office functions. Paul is the chairman of the British Bankers
Association Challenger Bank Panel and a member of the board of the
British Bankers Association. He is a Fellow of the IFS University
College and an Associate of the Chartered Institute of Bankers and
the Association of Corporate Treasurers. Paul chairs the ALCO and
is a member of the Risk Committee. Paul is a director of Arbuthnot
Banking Group.
Neeraj Kapur B.Eng, ACGI, FCA, CF, FCIBS - Chief Financial
Officer
Neeraj Kapur has over 25 years' financial services experience
spent in both the accounting and banking industries. He holds a
degree in Aeronautical Engineering from Imperial College, London,
is a fellow of the Chartered Institute of Bankers in Scotland, a
fellow of the Institute of Directors, a fellow and a member of the
Council of the Institute of Chartered Accountants in England &
Wales ('ICAEW'), and Chair of the ICAEW Financial Services Faculty.
Neeraj qualified as a Chartered Accountant in 1993 at Arthur
Andersen and spent 11 years working in professional practice. He
joined RBS in 2001 and has undertaken a number of roles which
included Chief Financial Officer of Lombard North Central PLC.
Neeraj was appointed to the board of Secure Trust Bank on 31 May
2011. Neeraj is a member of the ALCO.
Sir Henry Angest LLL - Non-Executive Director
Sir Henry Angest was appointed to the Board by Arbuthnot Banking
Group. He is an experienced and respected banker. He is a past
Master of the Worshipful Company of International Bankers, Chairman
and Chief Executive of Arbuthnot Banking Group and Chairman of
Arbuthnot Latham & Co., Limited. He gained extensive national
and international experience as an executive of the DOW Chemical
Company and DOW Banking Corporation. He was chairman of the banking
committee of the London Investment Banking Association and a
director of the Institute of Directors. He has a law degree from
the University of Basel. Sir Henry stepped down as Chairman of the
Company on 19 October 2016. Sir Henry is chairman of the
Remuneration Committee and a member of the Nomination Committee and
was Chairman of the Company between 1982 and 2016.
Andrew Salmon ACA - Non-Executive Director
Andrew Salmon joined Arbuthnot Banking Group in 1997 and is its
Chief Operating Officer and Head of Business Development. He was
previously a director of Hambros Bank Limited and qualified as a
Chartered Accountant with KPMG. Andrew is appointed by Arbuthnot
Banking Group to the board of Secure Trust Bank. Andrew is a member
of the Audit, Assets and Liabilities, Remuneration, Risk and
Nomination Committees.
Paul Marrow ACIB - Independent Non-Executive Director (Senior
Independent Director)
Paul Marrow has over 40 years' banking experience and has, in
the past, been responsible for the Commercial Banking and
Specialist Corporate Banking business divisions of RBS Group in the
UK and been the chair of JCB Finance Limited. Paul holds banking
qualifications, gained by examination. Paul is also an independent
non-executive director of Arbuthnot Latham & Co. Limited, a
wholly owned subsidiary of Arbuthnot Banking Group and provides
consultancy services to Arbuthnot Latham & Co., Limited. Paul
was appointed to the board of Secure Trust Bank on 3 March 2011.
Paul is chairman of the Audit and Risk Committees and a member of
the Nomination and Remuneration Committees. Paul is the Senior
Independent Director.
Ann Berresford - Independent Non-Executive Director
Ann Berresford is a Chartered Accountant with a background in
the financial services and energy sectors. She has held positions
at Triodos Renewables plc, Hyperion Insurance Group, the Pension
Protection Fund, Bank of Ireland Group, Clyde Petroleum plc and
Grant Thornton. She is currently a non-executive director of the
Bath Building Society and the Pensions Regulator and is an
independent trustee to the Avon Pension Fund. Ann was appointed a
director of the Company on 22 November 2016. Ann is a member of the
Audit and Nomination Committees.
Victoria Stewart - Independent Non-Executive Director
Victoria Stewart has for many years been a fund manager and
investor in UK small companies. She has knowledge of corporate
structures and capital markets with particular experience in
smaller companies listed on the Main Market and AIM. She has held a
number of positions at Royal London Group and Chiswell Associates
(formerly Cantrade Investment Management Limited and now part of
Sarasin & Partners). Victoria was appointed as a director of
the Company on 22 November 2016. Victoria is a member of the
Remuneration Committee.
Alan Karter LLB (Hons) - Company Secretary
Alan Karter is a Scottish and English qualified solicitor. He
joined Arbuthnot Banking Group as Head of Legal Affairs in February
2012 and was appointed Company Secretary of Secure Trust Bank Plc
on 31 August 2014. On 1 September 2016 he ceased to be employed by
Arbuthnot Banking Group and was appointed General Counsel of Secure
Trust Bank. He remains the Company Secretary of Secure Trust
Bank.
Corporate Governance Report
Corporate Governance statement
UK Corporate Governance Code ("Code") - Statement of
Compliance
The Code sets out principles relating to the good governance of
companies. The Code is available at www.frc.org.uk.
Prior to Admission in October 2016 the requirements under the
Listing Rules in relation to the Code did not apply to the
Group.
The Board confirms that from Admission to the date of this
report the Group has complied with the requirements of the Code
save that until the appointment of Ann Berresford as a member of
the Nomination Committee a majority of the members of the
Nomination Committee were not independent Non-Executive Directors.
This was rectified on 21 February 2017.
The following sections of this report describe how the Board has
applied the principles of the Code and describes the Group's
governance arrangements with particular reference to leadership,
effectiveness, accountability, remuneration and relations with
shareholders.
Role of the Board
The Board provides strategic leadership to the Group, sets the
Group's long term strategic objectives and exercises oversight over
the implementation of the strategy and the activities of
management. The Board is responsible to shareholders for promoting
the long term success of the Group. The setting of a risk appetite
and the oversight of risk management practices is an important part
of the role of the Board.
The Board meets regularly and both as a Board and through its
committees provides direction, oversight and challenge of and to
management.
The Board has delegated specific authorities to its committees.
The Board exercises oversight of the work of its committees.
The Board is led by the Chairman.
There is a schedule of matters reserved for consideration by the
Board. Matters reserved for exclusive determination by the Board
include the determination of dividends, material acquisitions or
disposals and the issue of new shares.
The Board has delegated authority to executive management to run
the business and to implement the strategy set by the Board. Two
members of executive management, the CEO and the CFO, are members
of the Board.
The CEO is supported by an executive management team.
Board composition
The Board is composed of eight members, being the Non-Executive
Chairman, two Executive Directors, three independent Non-Executive
Directors and two Non-Executive Directors.
Sir Henry Angest and Andrew Salmon were appointed to the Board
by Arbuthnot Banking Group when Arbuthnot Banking Group owned the
Group's entire issued share capital and remain Non-Executive
Directors of the Group. There is an understanding between the Group
and Arbuthnot Banking Group that for so long as Arbuthnot Banking
Group holds ten per cent. or more of the issued share capital of
the Group, Arbuthnot Banking Group would expect two directors of
the Group to be nominees of Arbuthnot Banking Group.
In October 2016, following Admission to the Main Market, Sir
Henry Angest stepped down as Chairman of the Company (but remained
a Non-Executive Director) and Lord Forsyth was appointed Chairman
of the Board in his place.
On 22 November 2016 Ann Berresford and Victoria Stewart were
appointed as additional independent Non-Executive Directors of the
Group. Ann Berresford has become a member of the Audit and
Nomination Committees. Victoria Stewart has become a member of the
Remuneration Committee.
On 20 December 2016, Paul Marrow's appointment as Senior
Independent Director became effective. The Code recommends that the
Board should appoint one of the independent Non-Executive Directors
as Senior Independent Director. The Senior Independent Director
should be available to shareholders if they have concerns which
contact through the normal channels of Chairman, Chief Executive
Officer or other Executive Directors has failed to resolve or for
which such contact is inappropriate.
Appointments to the Board are the responsibility of the full
Board, on the recommendation of the Nomination Committee. On
appointment, new Non-Executive Directors enter into a formal
appointment letter which sets out the terms and conditions of their
appointment as Non-Executive Directors. The terms and conditions of
appointment of the Non-Executive Directors and the service
contracts of Executive Directors are available for inspection at
the Group's registered office during normal business hours.
Conflicts of Interest
All directors are required to disclose to the Board any outside
interests which may pose a conflict with their duties to the Group.
The Board is required to approve any actual or potential conflicts
of interest. On appointment new directors are required to disclose
their other interests. Conflicts of interest are also governed by
the Articles of Association of the Company and company law.
Role of the Chairman
The Chairman's role is to ensure good corporate governance and
the smooth and effective operation of the Board. His
responsibilities include leading the Board, ensuring the
effectiveness of the Board in all aspects of its role, ensuring
effective communication with shareholders, setting the Board's
agenda and ensuring that all Directors are encouraged to
participate fully in the activities and decision making process of
the Board.
The Chairman of the Board and the Chairman of the Remuneration,
Risk and Audit Committees and the Senior Independent Director are
all Senior Managers for the purposes of the regulatory regime.
Separation of roles of Chairman and Chief Executive
The roles of the Chairman and the Chief Executive Officer are
separate, clearly defined in writing and have been approved by the
Board.
Meetings and attendance
The Board meets at regular intervals. There is a comprehensive
Board pack and agenda which is circulated in advance of the meeting
and minutes and actions are documented. There is an annual Board
calendar at which certain items are considered by the Board at
certain times of the year, including the report and accounts,
regulatory filings and review of risk appetite. Additional meetings
of the Board are held as required and, in addition to the standing
committees of the Board, the Board may appoint ad hoc committees to
deal with particular matters from time to time.
In 2016 the Board was closely involved in the arrangements for
Admission, including the review and approval of the prospectus.
The table below sets out attendance of Board and Committee
members during the year. Figures are only provided where the Board
member is a member of the Committee concerned:
Audit Risk Remuneration Nomination
Board Committee Committee Committee committee
-------------------- ------ ----------- ----------- ------------- -----------
Number of meetings
during 2016 12 6 4 6 3
Lord Forsyth 12 5 N/A 5 2
Sir Henry Angest 12 N/A N/A 6 3
Ann Berresford* 1 1 N/A - N/A
Paul Lynam 12 N/A 4 - N/A
Neeraj Kapur 12 N/A N/A - N/A
Paul Marrow 12 6 4 4 2
Andrew Salmon 12 6 4 6 3
Victoria Stewart* 1 N/A N/A - -
-------------------- ------ ----------- ----------- ------------- -----------
*Ann Berresford and Victoria Stewart were appointed to the Board
on 22 November 2016.
From time to time decisions are taken and recorded by unanimous
agreement of the directors. Such decisions are not included in the
table above.
Company Secretary
The Company Secretary acts as Secretary to the Board and its
Committees and is responsible for ensuring that Board processes and
procedures are followed and support effective decision making. All
directors have access to the Company Secretary's advice and
services. Directors may obtain independent professional advice in
the course of their duties, if necessary, at the Company's expense
in order to assist them in carrying out their duties.
The Company Secretary provides support and acts as a first point
of contact for the Chairman and Non-Executive Directors. The
Company Secretary is also responsible for the induction of the new
independent Non-Executive Directors.
The role of the members of the Board
The Chairman leads the Board and ensures its effectiveness in
all areas. He sets the Board's agenda with the support of the
Company Secretary.
The Chief Executive Officer is responsible for the day-to-day
management of the Group within the delegated authority and risk
appetite approved by the Board. He recommends the Group strategy
and leads the executive management team in the execution of the
strategy approved by the Board. He leads the relationship with
institutional shareholders and ensures that timely and accurate
information is disclosed to the market.
The Chief Financial Officer manages the Group's financial
affairs and supports the Chief Executive Officer in the management
of the business. He has particular responsibility for the financial
and regulatory reporting of the Group and balance sheet and
liquidity management.
The Senior Independent Director acts as a sounding board for
other Non-Executive Directors and the Chairman. The Senior
Independent Director also conducts the Chairman's annual
performance evaluation, collecting views from the Non-Executive
Directors.
The Non-Executive Directors provide independent and constructive
challenge of the Executive Directors and scrutinise the delivery of
the strategy within the risk and control framework set by the
Board. Non-Executive Directors also determine Executive Director
remuneration.
Executive management
The Chief Executive Officer and Chief Financial Officer are
supported by an executive team who sit on an Executive Committee
which operates under authorities delegated from the Board.
Committees
The Board has established Audit, Nomination, Remuneration and
Risk Committees. There is also an ALCO which reports to the Risk
Committee. Each committee has formally delegated duties and
responsibilities and written terms of reference. The terms of
reference of the Board committees are available on
www.securetrustbank.com.
All Board committees have access to independent advice and the
services of the Company Secretary.
The Chairman of each committee reports to the Board.
The terms of reference of each committee are reviewed regularly
and each committee monitors its effectiveness.
Further information about the Board committees is set out later
in this governance report, including information about membership
of the committees, meetings held during the year and the attendance
of committee members.
Below the Executive Committee there is a comprehensive
governance structure involving a number of committees linked to
business lines and functions.
Election of Directors
The Articles of Association contain provisions for the
retirement by rotation of directors.
Since the last Annual General Meeting two new independent
Non-Executive Directors have been appointed and, in accordance with
the provisions of the Code, they are submitting themselves to
re--election at the first Annual General Meeting following their
appointment by the Board.
At the beginning of 2016, Arbuthnot Banking Group controlled the
majority of the share capital of the Company. Following sell-down
by Arbuthnot Banking Group and Admission, Arbuthnot Banking Group
now owns 18.9% of the Company and is no longer classified as a
'controlling shareholder'. The two directors of the Group appointed
by Arbuthnot Banking Group, Sir Henry Angest and Andrew Salmon, are
proposed for re--election at the forthcoming Annual General
Meeting. Sir Henry Angest, who was chairman of the Company before
the AIM IPO in 2011, and during the period that the Company was on
AIM, has steered the Group through its development. He has
demonstrated significant entrepreneurial flair in his leadership of
the Group and the Board continues to value his wise counsel. Andrew
Salmon, who has been a director of the Company since 2003, has
contributed significantly to the success of the Group, providing
advice and guidance to oversight of management. The Board
recommends both Sir Henry Angest and Andrew Salmon for re-election
at the 2017 Annual General Meeting.
The Board also recommends the re-election of Ann Berresford and
Victoria Stewart. Although they have only been directors since
November 2016 both have already made valuable contributions to
Board discussions and the Board looks forward to their further
contribution as independent Non-Executive Directors to the long
term success of the Company.
In connection with Admission the Board reviewed the composition
of the Board and the independence of Non-Executive Directors. The
Board concluded that Sir Henry Angest and Andrew Salmon were not
independent within the meaning of the Code, having regard to the
relationship between the Company and Arbuthnot Banking Group. The
Board is satisfied that Ann Berresford, Paul Marrow and Victoria
Stewart are all independent Non-Executive Directors within the
meaning of the Code and that Lord Forsyth, on his appointment as
Chairman, met the independence compliance criteria set out in the
Code. As a smaller company within the meaning of the Code, the
Company is required to have at least two independent Non-Executive
Directors.
Appointments to the Board
Further information about the procedure followed in relation to
Board appointments is provided later in this report by reference to
the work of the Nomination Committee in 2016.
At the time of Admission the terms of appointment of all
Non-Executive Directors were reviewed and new letters of
appointment were entered into by Non-Executive Directors. Letters
of appointment in a similar form were used in relation to the
subsequent Board appointments. The letters of appointment of
Non-Executive Directors are available for inspection at the
Company's registered office during normal business hours and at the
Annual General Meeting.
Induction, training and professional development
On appointment, all new directors receive a comprehensive and
tailored induction. The induction involves provision of information
about the Group as well as face-to-face meetings with directors and
senior management. New directors have access to historic Board
material and, in 2016, were provided with information produced in
connection with Admission, including the prospectus and other
Admission related documentation. New directors are also provided
with briefing notes on regulatory and legal matters, including
their duties and responsibilities under the Companies Act 2006.
The Board receives detailed reports from executive management on
the performance of the Group at its meetings. Updates are provided
on relevant legal, corporate governance and financial reporting
developments. Directors are encouraged to attend external seminars
on areas of relevance to their role.
Training is also made available to directors both by way of
internal on-line training and bespoke Board training on topics such
as regulatory developments. Directors are also encouraged to devote
time to professional development and to record this.
Board effectiveness
The composition of the Board and its committees and the
performance of directors were rigorously evaluated as part of the
process leading to Admission. Following the appointment of Lord
Forsyth as Chairman in October 2016 further consideration has been
given to the composition and responsibilities and performance of
the Board committees including by way of discussion between the
Chairman and the Chairmen of the committees about the work of the
committees and any need for improvement.
Formal evaluations of the performance of the Audit and Risk
committees took place during the year and the result of those
evaluations was that the performance of each committee was
considered to be satisfactory.
The Remuneration Committee has been extensively involved in the
formulation of the remuneration policy and related matters since
Admission. Once that work has been completed it is intended to
review the performance of the Remuneration Committee.
The Board has discussed its effectiveness and how it performs,
along with other board related governance matters, including the
provision of information to the Board and the induction of new
directors. The directors were mindful of the provisions of the Code
and their responsibilities as directors and, where applicable, as
senior managers under the regulatory regime. Directors are
encouraged to monitor their professional development and to keep a
record of training and related activities.
A formal self-evaluation of the effectiveness of the Board will
be conducted in 2017 and, in some future years, an externally
facilitated evaluation will be conducted.
Diversity
The Board embraces the benefits of diversity in the boardroom
and considers that diversity benefits governance. In considering
the appointment of new directors, the Board will give careful
consideration to diversity as well as the skill, experience and
knowledge of the candidates. The Board has approved a Board
Diversity Policy which operates in conjunction with the Equality
and Diversity Policy applicable throughout the Group. Appointments
to the Board are made on merit and having regard to the balance of
skills and experience of the board and the candidates. The Board
has not set targets for representation of any particular group on
the Board. Female membership of the Board currently stands at
25%.
Financial reporting
A description of the responsibilities of the directors in
relation to the preparation of the annual report and accounts is
set out on page 106.
The approach taken by the Board to ensuring that the annual
report and accounts are fair, balanced and understandable is set
out on page 72 and the information necessary for shareholders to
assess the Company's position and performance is set out in the
Strategic Report starting on page 14.
A statement of the responsibility of the external auditors in
relation to the report and accounts is set out on page 113.
The explanation of the business model and the strategy for
delivering the objectives of the Company is set out on pages 1 to
2.
The basis on which the Board reached its decision to adopt the
going concern basis of accounting is described on page 44.
Internal Control
The Board has overall responsibility for the Group's system of
internal control and for reviewing its effectiveness. Such a system
is designed to manage rather than eliminate risk of failure to
achieve business objectives and can only provide reasonable but not
absolute assurance against the risk of material misstatement or
loss.
The Board has adopted a Group Risk Appetite Statement which sets
out the Board's attitude to risk and internal control. Key risks
identified by the Directors are formally reviewed and assessed at
least once a year by the Board and are also reviewed by the Risk
Committee at its meetings. Key business risks are also identified,
evaluated and managed on an ongoing basis. The Board and the Risk
Committee also receive regular reports on any material risk
matters. Significant risks identified in connection with the
development of new activities are considered by the Board and the
Risk Committee in conjunction with the approval of any such new
activity.
The effectiveness of the internal control system is reviewed
regularly by the Board and the Audit Committee, which also receives
reports of reviews undertaken by the internal audit function. The
Audit Committee also receives reports from the external auditors,
KPMG LLP, which include details of internal control matters that
they have identified. Certain aspects of the system of internal
control are also subject to regulatory supervision, the results of
which are monitored closely by the Board and its Committees.
Key elements of the Group's system of internal control include
regular meetings of the Executive and business unit risk
committees, together with annual budgeting, monthly financial and
operational reporting for all businesses within the Group. Conduct
and compliance is monitored by management, the Risk team, Internal
Audit and Compliance and, to the extent necessary to support its
audit report, the external auditor. Oversight is also exercised by
the Board and Board Risk Committee.
During 2016 the Group continued to invest in its risk management
capability and this on--going investment will continue during
2017.
The Board regularly reviews actual and forecast performance
compared with annual plans as well as other key performance
indicators described in the report and accounts.
Lines of responsibility and delegated authorities are clearly
defined. The Group's policies and procedures are reviewed and
regularly updated and a training programme applies in relation to
the roll-out of policies.
Relations with shareholders
The Company maintains a regular dialogue with its principal
shareholders and makes full use of the Annual General Meeting to
communicate with investors. All Directors are expected to make
themselves available to shareholders at the Annual General Meeting.
The Chairmen of the Board Committees will be available to answer
questions about the work of their committees.
The Board recognises the importance of maintaining good
relationships with shareholders. The Chief Executive Officer and
the Chief Financial Officer would normally expect to meet with
institutional shareholders on a regular basis, including following
the publication of financial information or updates by the Group.
The Chairman has joined them in some meetings following his
appointment in October 2016. The Group's brokers also facilitate
communication between the Group and its institutional
shareholders.
The Chairman is responsible for ensuring that appropriate
channels of communication are established between the directors
(and in particular the Chief Executive Officer and Chief Financial
Officer) and shareholders and ensuring that the views of
shareholders are made known to the Board.
The Chief Executive Officer provides written reports prepared by
the Group's brokers to all Directors on meetings held with
institutional shareholders.
The Group recognises the importance of ensuring effective
communication with all of its shareholders. An annual financial
report is distributed to all shareholders. This report, together
with the half-yearly financial report, regulatory announcements and
current details of the Group's share price are made available on
the Company's website.
Annual General Meeting
The Group's first Annual General Meeting as a premium listed
entity will be held at Arbuthnot House, 7 Wilson Street, London,
EC2M 2SN at 3.00 p.m. on Wednesday 3 May 2017. The Notice of Annual
General Meeting, together with an explanation of the items of
business to be discussed at the meeting will be posted to
shareholders and made available at www.securetrustbank.com.
Members of the Board will be in attendance at the 2017 Annual
General Meeting which will provide an opportunity to engage with
shareholders and to respond to any questions from shareholders.
Approval
This Corporate Governance statement was approved by the Board on
22 March 2017 and signed on its behalf by:
A J Karter
Secretary
Corporate Governance Report
Nomination Committee Report
Having assumed the role of Chairman of the Board and of the
Nomination Committee on 19 October 2016, I am pleased to present my
first report of the work of the Nomination Committee.
The principal activity in connection with Admission and
subsequently has been to seek to achieve the right balance of
skills, knowledge and experience on the Board. The Group had
already been listed on AIM for five years, but it was acknowledged
that Admission would result in additional expectations of the Board
and that it would benefit the Board to increase the number of
independent Non-Executive Directors.
The Committee and the Board were, therefore, engaged in the
recruitment and appointment of new Board members in 2016 as well as
work relating to my own appointment as Chairman.
The Committee has also considered the composition of the Board
in the context of succession planning (for the Board, its
Committees and senior management).
On 21 February 2017 Ann Berresford was appointed as an
additional member of the Committee.
Further information on the activities of the Committee is
provided in the following report.
Lord Forsyth
Chairman of the Nomination Committee
Nomination Committee membership
The Nomination Committee is composed of five members. Three are
independent Non-Executive Directors (Lord Forsyth, Ann Berresford
and Paul Marrow) and the other two (Sir Henry Angest and Andrew
Salmon) are Non-Executive Directors. The Chairman of the Nomination
Committee is Lord Forsyth. The Company is therefore compliant with
the Code provision regarding the composition of the Nomination
Committee.
Lord Forsyth was appointed as Chairman of the Board on 19
October 2016 following the retirement of Sir Henry Angest as
Chairman of the Board. At the same time he was also appointed as
Chairman of the Nomination Committee, although Sir Henry Angest
remains a member of the Nomination Committee.
Ann Berresford was appointed as a member of the Nomination
Committee on 21 February 2017.
Role and activities of the Nomination Committee
The Nomination Committee assists the Board in discharging its
responsibilities relating to the structure, size and composition of
the Board. The Nomination Committee is responsible for, amongst
other matters, evaluating the balance of skills, knowledge,
independence, experience and diversity of the Board, and makes
recommendations to the Board on such matters. The Nomination
Committee also considers succession planning, taking into account
the skills and expertise that will be needed on the Board in the
future.
The Code provides that a majority of the members of the
Nomination Committee should be independent Non-Executive Directors
and the chairperson should be the chairman or an independent
Non-Executive Director. Between Admission and 21 February 2017 a
majority of the members of the Nomination Committee were not
independent Non-Executive Directors. That has now been
rectified.
From Admission, meetings will be held at least two times per
year. The number of meetings held during 2016 and the attending
directors are shown in the table below:
Nomination
Committee
-------------------------------- -----------
Number of meetings during 2016 3
Sir Henry Angest 3
Paul Marrow 2
Lord Forsyth 2
Andrew Salmon 3
-------------------------------- -----------
The Chairman of the Nomination Committee reports to the Board on
the outcome of meetings.
During the year the Nomination Committee was involved in the
identification, assessment and appointment of additional
independent Non-Executive Directors. This culminated in the
recommendations of the Nomination Committee that Ann Berresford and
Victoria Stewart be appointed as directors of the Company.
In connection with Admission the Board considered the structure,
size and composition of the Board and, having concluded that the
Board should be strengthened as a result of the step up, the
Nomination Committee began a process to identify additional
independent Non-Executive Directors. The Nomination Committee
considered the number of appointments in contemplation. The
Nomination Committee considered the process to follow in relation
to the recruitment and concluded that, at least initially, the
Company should seek to identify candidates by utilising contacts of
the directors. This resulted in a number of potential candidates
being identified. After consideration of the potential candidates
approaches were made to establish the willingness of the candidates
to be considered for appointment as an independent Non-Executive
Director of the Company. Having completed this initial
identification of candidates phase, the Nomination Committee then
established a process for the assessment of the candidates,
including by way of interview. Following the assessment phase the
Nomination Committee selected the two candidates that it proposed
to recommend to the Board. At this stage further checks were
carried out in relation to the candidates. The appointment process
was completed on the appointment of the two recommended candidates
by the Board.
The Nomination Committee was also involved in the appointment of
Lord Forsyth as Chairman following the decision of Sir Henry Angest
to step down as Chairman (but to remain as a Non-Executive
Director). The Nomination Committee was satisfied that, subject to
regulatory approval, Lord Forsyth, who had expressed a willingness
to be appointed as Chairman, satisfied the requirements and would
make an excellent Chairman. The decision to appoint Lord Forsyth as
Chairman was made before Admission and disclosed in the prospectus
issued by the Company in connection with Admission.
The Nomination Committee considered and recommended to the Board
a Board policy on diversity, including gender. The policy is
described in the opening section of this corporate governance
report.
The Nomination Committee has considered the Company's succession
plans and focused on Board (executive and non-executive) and Senior
Manager succession. Consideration has been given to potential
internal candidates, short term solutions in the event of
unsuspected changes in circumstances and external recruitment as
well as re--allocating responsibilities on a short term or longer
basis. The need for regulatory approval of the persons performing
Senior Manager functions under the regulatory regime has also been
taken into account.
The Nomination Committee considered whether to engage the
services of an external search consultancy in relation to the Board
changes in 2016 but concluded that the Company would derive minimal
benefit from this. The Nomination Committee reached this decision
having regard to the Board's wide range of contacts in the
financial services sector and the recent experience of directors
who had been involved in a similar search where leading external
consultants were appointed. These considerations also informed the
Nomination Committee decision not to use open advertising. The
Nomination Committee was pleased to have been able to recommend Ann
Berresford and Victoria Stewart for appointment as directors
following the selection process described above.
A full copy of the terms of reference for the Nomination
Committee can be obtained by request to the Company Secretary or
via the Group's website at www.securetrustbank.com.
Corporate Governance Report
Audit Committee Report
I am pleased to present the first report of the Audit Committee
as a premium listed company.
In 2016 the Audit Committee was involved in both business as
usual activities and also activities specific to Admission.
In relation to Admission, the Committee was closely involved in
the related financial statements, including the distinction between
continuing and discontinued businesses, as well as reviewing the
working capital statement and related papers, together with work
carried out by external advisers on the financial position and
prospects report.
The Committee also considered matters relating to the sale of
ELG.
In terms of business as usual, the Committee was closely
involved in the review of the 2015 annual accounts and the interim
results for the six month period to 30 June 2016 plus the
associated press releases and results presentations. The key
accounting judgments were reviewed to ensure that they were
appropriate and reflected the performance of the business. These
included income recognition (the treatment of fees and commissions
and whether they should be recognised immediately or included in
the effective interest rate and effectively recognised over the
behavioural life of the loan) and impairment provisions (including
adequacy of provisioning by reference to the emergence period used
for each product and whether a provision should be held, in excess
of that calculated for individual product portfolios, to reflect
continued uncertainty in the UK economy). The Committee was also
closely involved in the planning process for the 2016 annual
accounts in light of the additional disclosures resulting from
Admission.
Following the development of the Group's internal audit
function, the Committee has worked closely in 2016 with Internal
Audit to support their work in relation to internal control and
risk management. The Chief Internal Auditor reports directly to me
and we meet monthly to review internal control and risk management
and the work of the Internal Audit function.
Other on-going matters that were considered by the Committee
include the implementation of the new financial instruments
standard IFRS 9, regulatory reporting and whistleblowing.
In November 2016, Ann Berresford was appointed as a member of
the Committee following her appointment as an independent
Non-Executive Director of the Company.
2017 will be another busy year, particularly as the Group adapts
to the requirements of being a main market listed company with the
additional regulatory and disclosure responsibilities that brings,
and makes final preparations for the adoption of IFRS 9 in
2018.
Further information on the activities of the Audit Committee is
provided in the following report.
Paul Marrow
Chairman of the Audit Committee
Audit Committee membership and meetings
The Audit Committee is composed of four members; the Chairman of
the Company (Lord Forsyth), who was considered independent on
appointment as Chairman, two independent Non-Executive Directors
(Ann Berresford and Paul Marrow) and Andrew Salmon, who is a
Non-Executive Director. Andrew Salmon and Ann Berresford are
considered by the Board to have recent and relevant financial
experience. The chairman of the Audit Committee is Paul Marrow.
The Code provides that for smaller companies, such as the
Company, the Board should establish an Audit Committee of at least
two independent Non-Executive Directors. In addition, the Chairman
of the Company may be a member of, but not chair, the Committee if
he/she was considered independent on appointment as Chairman. The
Company complies with this provision.
The Audit Committee meets formally at least four times a year
and otherwise as required.
The number of meetings held during 2016 and the attending
directors are shown in the table below:
Audit
Committee
-------------------------------- ----------
Number of meetings during 2016 6
Paul Marrow 6
Ann Berresford* -
Lord Forsyth 5
Andrew Salmon 6
-------------------------------- ----------
*Ann Berresford was appointed to the Board on 22 November 2016
and joined the Audit Committee on that day, but after the meeting
of the Audit Committee on that day which she attended as an
observer.
The Company Secretary acts as Secretary to the Audit Committee.
Other individuals attend at the request of the Audit Committee
chairman and during the year the external auditor lead partner,
Chief Executive Officer, Chief Financial Officer and Chief Internal
Auditor attended meetings to report to the Audit Committee.
Role of the Audit Committee
The Audit Committee assists the Board in, amongst other matters,
discharging its responsibilities with regard to regulatory
reporting, financial reporting, including reviewing the Company's
annual financial statements, reviewing and monitoring the extent of
the non-audit work undertaken by external auditors, advising on the
appointment, reappointment, removal and independence of external
auditors and reviewing the effectiveness of the Company's internal
audit activities, internal controls and risk management systems.
The ultimate responsibility for reviewing and approving the annual
report and accounts and the half-yearly reports remains with the
Board.
A full copy of the terms of reference for the Audit Committee
can be obtained by request to the Company Secretary or via the
Group's website at www.securetrustbank.com.
Matters discussed at Audit Committee meetings since 1 January
2016
The Audit Committee has a schedule of meetings with standing
agenda items. Meetings are planned to coincide with key dates in
the Group's financial reporting cycle, enabling the Committee to
deal with matters on a timely basis over the course of the year. In
addition to standing agenda items the Committee also deals with
other matters that arise during the year. In 2016 this included
matters relating to Admission and the sale of ELG.
During the year the Audit Committee reviewed and approved its
Terms of Reference, the schedule of standing agenda items, the
Internal Audit Charter and the engagement contract with the
external auditors.
The principal matters considered by the Audit Committee during
the year and up to the date of this report are set out below.
Financial reporting
The Audit Committee has reviewed the following matters in
connection with the annual and interim financial statements:
Subject area Matters considered
-------------------- -------------------------------------------------
Accounting The Audit Committee reviewed the key
policies, key accounting judgments made by management
judgements in preparing the financial statements
and assumptions for the year ended 31 December 2016 (including
used in preparing comparatives for the year ended 31 December
interim and 2015), the interim financial statements
annual financial for the six months ended 30 June 2016,
statements and historical financial information
covering the three and a half years (financial
years ending 30 December 2013, 2014,
2015 and the half year ended 30 June
2016) included in the prospectus for
the Main Market listing, as well as the
press releases and analysts presentations
that were prepared when the financial
statements were released.
In particular the Committee considered
at its meeting in November 2016 a paper
on the key accounting judgments relating
to the 2016 annual report and accounts.
Among other matters the Committee considered
income recognition and impairments. In
relation to income recognition the treatment
of fees and commissions was considered
together with the assessment of the appropriate
expected lives for different products.
This is relevant to the calculation of
the effective interest rate for the product.
In relation to impairment provisions
the Committee considered the adequacy
of provision cover, including the emergence
period for different products, factors
relevant to the loss given default assumptions
used for consumer products and the need
for an overlay to the modelled impairment
provision to reflect increased uncertainty
in the UK economy.
In making its recommendations to the
Board to approve the annual and interim
financial statements the Committee has
taken into account matters raised by
the external auditor on matters of judgment
and disclosures in relation to non-recurring
or sensitive items.
Use of the The financial statements are prepared
Going concern on the basis that the Group and Company
basis in preparing are each a going concern. The Audit Committee
the financial has reviewed management's explanations
statements as to the appropriateness of the going
and long term concern basis in preparing the Group
viability of and Company financial statements.
the STB Group
The financial statements for 2016 also
include statements that provide shareholders
with the Board's views on the long term
viability of the Group. The Audit Committee
has reviewed and challenged the basis
for assessing long term viability, including
the period by reference to which viability
is assessed, the principal risks to long
term viability and actions taken or planned
to manage those risks.
Presentation The Audit Committee, having reviewed
of a 'fair, the content of the Annual Report and
balanced and considering relevant matters including
understandable' the presentation of material sensitive
Annual Report items, the representation of significant
and Accounts issues, the consistency of the narrative
disclosures in the 'front half' with
the financial statements, the overall
structure of the Annual Report and the
steps taken to ensure the completeness
and accuracy of the matters included,
has advised the Board that the 2016 Annual
Report and Accounts include a 'fair,
balanced and understandable' assessment
of the Group and company's businesses.
The potential The Committee has considered changes
impact of future to financial reporting requirements that
accounting are not yet effective but that are likely
changes to impact the reported results or financial
position of the Group in the future.
One significant future development is
the implementation of International Financial
Reporting Standard 9 (Financial Instruments)
which becomes effective in 2018 and for
which the Company has established an
implementation project. The Committee
has reviewed progress in responding to
the requirements of IFRS9 and has this
matter as a standing agenda item, considering
matters such as: key decisions taken;
credit loss modelling under the new and
existing standards; systems and controls
requirements to embed IFRS9; and risks
to the successful completion of the project.
-------------------- -------------------------------------------------
Internal controls and risk management
The Audit Committee monitors the effectiveness of the Group's
governance, risk and control framework and is encouraged by the
progress being made.
Whistleblowing
The Audit Committee has reviewed the effectiveness of
whistleblowing arrangements in place within the Group and adherence
to the Financial Conduct Authority Rules on Whistleblowing which
became effective in September 2016. During the year enhanced
arrangements have been implemented to enable staff to whistleblow
in complete anonymity. The chairman of the Committee is the
whistleblowing champion for the Group.
External audit
The Audit Committee has reviewed and approved the external audit
terms of engagement, the scope of the external audit, timetable,
materiality, strategy and fees. The Audit Committee has also
considered matters that might impair the independence of the
external auditor, including the extent of non-audit fees which in
2016 were substantial, and has confirmed that it was satisfied as
to the independence of the external audit firm KPMG. KPMG were the
reporting accountants in connection with Admission.
The Audit Committee reviews written reports prepared by the
external auditors setting out their audit approach and conclusions
on matters of judgment impacting the financial statements,
disclosures in relation to non-recurring or sensitive items and any
internal control findings identified in the courses of the external
audit.
During the year the Audit Committee assessed the effectiveness
of the work of the external auditors using a questionnaire which
considered matters such as the quality of the team, the scope of
the work, communications and fees. The Committee concluded that the
external auditors are performing well.
The Committee maintains a close dialogue with the external
auditors and undertakes meetings with them without management when
considered appropriate.
At its meeting in September 2016 the Committee assessed the
objectivity and independence of KPMG as external auditor. The
Committee considered general procedures to safeguard independence
and objectivity, independence and objectivity considerations
relating to the provision of non-audit services and independence
and objectivity considerations relating to other matters. In
particular, consideration was given to the fees payable to KPMG for
their work as reporting accountants in relation to Admission and
other non-audit fees payable to KPMG. KPMG fees incurred during
2016 in respect of audit and non-audit services were respectively
GBP213,000 and GBP548,000. The non-audit services comprised acting
as reporting accountants, non-statutory audit of historic financial
information, interim profits verification, tax advisory services
and assurance services in connection with the Funding for Lending
Scheme. The Committee is satisfied that these non-audit services
did not adversely impact the independence of KPMG's audit
services.
The Group has agreed a policy on the provision of non-audit
services by its external auditor. The policy ensures that the
engagement of the external auditor for such services requires
approval by appropriate levels of management and does not impair
the independence of the external auditor, and that such engagements
are reported to the Audit Committee on a quarterly basis. The
external auditor will only be selected for such services when they
are best suited to undertake the work and there is no conflict of
interest.
KPMG has also confirmed to the audit committee that it has
policies and procedures in place to satisfy the required standards
of objectivity, independence and integrity and that these comply
with the Auditing Practices Board's Ethical Standards for Auditors.
This ensures that the objectives of the proposed engagement are not
inconsistent with the objectives of the audit; allows the
identification and assessment of any related threats to KPMG's
objectivity; and assesses the effectiveness of available safeguards
to eliminate such threats or reduce them to an acceptable level.
KPMG do not carry out non-audit services where no satisfactory
safeguards exist.
KPMG (and their predecessor firm) were appointed as the
Company's auditor in 2009, and therefore the audit will be required
to be subject to an external tender process no later than 2019. The
current audit partner is Andrew Walker who has been the audit
partner for four years and who can therefore continue until 2017 at
the latest. The Company would expect to conduct an external tender
process following the change in audit partner.
The Committee recommended to the Board that a resolution to
re-appoint KPMG be proposed at the 2017 Annual General Meeting.
This is addressed in the Notice of 2017 Annual General Meeting.
Internal audit
The Group has an independent Internal Audit function led by the
Chief Internal Auditor.
The Audit Committee has reviewed and approved the rolling
internal audit plan and does so twice each year. The rolling
internal audit plan, which has been developed based on the Internal
Audit function's assessment of risk, sets out the matters to be
covered by internal audit in the following 18 months and the
resource requirements to execute that plan. The Audit Committee
also reviews other matters which are not currently contemplated in
the plan but which may be appropriate for inclusion in the future.
The Audit Committee approved the Internal Audit budget and was
satisfied that Internal Audit has the appropriate resources to
deliver the 2016 and 2017 internal audit plan.
In each meeting the Audit Committee considers the risk and
control matters identified in internal audit reports issued since
the previous meeting along with management's responses to those
points and progress in taking action to resolve control weaknesses
and any positive or adverse indicators regarding the culture
observed throughout the Group from internal audit reviews.
The Internal Audit function provides the Audit Committee with an
annual assessment of the overall effectiveness of the governance
and risk and control framework of the Group.
During the year the Audit Committee commissioned a third party
evaluation of the effectiveness of the Group's Internal Audit
function. The review involved a qualitative assessment of the work
of internal audit including its context and role within the Group
governance framework and the relevance and quality of the internal
audit output. The conclusions, which highlighted a number of
particular strengths, were that the function provides a good source
of assurance for the Audit Committee. Some areas for further
enhancement were identified and the Audit Committee is reviewing
progress made by the Chief Internal Auditor in adopting these.
The Chief Internal Auditor reports directly to the chairman of
the Audit Committee and they meet regularly.
The Internal Audit function has been further strengthened in
2016 by the recruitment of additional staff. In addition to the
internal resource it is also able to draw on a panel of external
subject matter experts.
Audit Committee effectiveness
During the year the Committee considered and evaluated its own
performance. It did this by means of a questionnaire which members
of the Committee completed. The chairman of the Committee then
collected the responses and produced a report to the Committee. The
result of the evaluation was that the Committee considered that it
was performing effectively.
Corporate Governance Report
Risk Committee Report
I am pleased to present the first report of the Risk Committee
as a premium listed company on the Main Market.
From the time of joining AIM in 2011, the Group has had separate
Audit and Risk Committees.
During the period of being a public company listed on AIM prior
to Admission, it had been involved in a process of enhancing the
risk management in the Group and this continued in 2016. The
adequacy and effectiveness of the Group's risk frameworks and risk
management arrangements were also reviewed in connection with
Admission and as a result the ALCO now reports to the Risk
Committee. The Group has invested in this area of its business and
continues to do so.
The Risk Committee is regularly involved in the review of risks
and monitoring the management of risk in the Group's businesses.
The Committee looks at all areas, including new business areas and
emerging regulatory requirements.
In 2016 cyber security has been an important issue that has been
considered by the Committee and is now a standing agenda item at
meetings of the Committee.
The Committee also considers regulatory filings and compliance
monitoring.
Further information on the activities of the Committee during
the year is provided in the following report and further
information about risk related matters can be found in the sections
of the report and accounts on pages 32 to 43.
Paul Marrow
Chairman of the Risk Committee
Risk Committee membership and meetings
The Risk Committee is composed of three members; Andrew Salmon,
a Non-Executive Director, Paul Marrow, an independent Non-Executive
Director and Paul Lynam, the Chief Executive Officer. Paul Marrow
replaced Andrew Salmon as chairman of the Risk Committee with
effect from 10 February 2016. This change was prompted by changes
in governance arising from the implementation of the individual
accountability regime. There were no changes to the membership of
the Committee in 2016.
The Risk Committee has met formally at least three times a year
and otherwise as required. For 2017 and following the step up to
the Main Market there will be a minimum of six meetings a year,
plus ad hoc meetings as required.
The number of meetings held during 2016 and the attending
directors are shown in the table below:
Risk
Committee
-------------------------------- ----------
Number of meetings during 2016 4
Paul Marrow 4
Paul Lynam 4
Andrew Salmon 4
-------------------------------- ----------
The Company Secretary acts as Secretary to the Risk Committee.
Other individuals attend at the request of the Risk Committee
Chairman and during the year the Chief Risk Officer, Chief Internal
Auditor and other senior managers attended meetings to report to
the Committee.
Role of the Risk Committee
The Risk Committee reviews the design and implementation of risk
management policies and risk related strategies and the procedures
for monitoring the adequacy and effectiveness of this process;
considers the Group's risk appetite in relation to the current and
future strategy of the Group; oversees the Group's ICAAP and ILAAP
and outputs from these; and exercises oversight of the risk
exposures of the Group.
The Committee exercises its internal control and risk management
role through the reports it receives from the ALCO, the Chief Risk
Officer, the Chief Internal Auditor, the Chief Executive Officer,
the Chief Financial Officer and other members of management and its
engagement with executive management, internal and external
auditors and consultants.
Other matters within the remit of the Committee are the risk
profile of the Group, risk appetite, frameworks and limits, the
risk management operating model, the technology infrastructure
supporting the risk management framework, operational risk and
regulatory and compliance matters.
A full copy of the terms of reference for the Risk Committee can
be obtained by request to the Company Secretary or via the Group's
website at www.securetrustbank.com.
Key topics discussed at Risk Committee meetings since 1 January
2016
The Risk Committee has a schedule of meetings with standing
agenda items so that all relevant matters are dealt with over the
course of the year.
During the year the Committee reviewed and approved its Terms of
Reference.
The principal matters discussed in the year were as follows:
Subject area Matters considered
----------------- ---------------------------------------------------
Group level The Group's key risk appetite metrics, which
risk appetite are reviewed and approved on an annual basis.
statements The Committee reviews last quarter performance
and Key Risk on the Key Risk Indicator metrics in each
Indicators meeting.
Strategic Strategic risks (those arising from the
risks internal environment and the external environment
that could have an effect on management's
ability to deliver on the Group strategic
plan) are discussed and challenged on an
annual basis.
Credit risk Credit risk performance for all businesses
and 'deep dive' reviews on status and plans
for individual account balances or portfolios
that warrant specific focus.
The Committee has a mandate to approve some
Group-wide mandates and policies including
single counterparty limits and Credit Risk
policies set for individual business areas.
Operational Oversight of the Operational Risk framework
risk including metrics and KPI reporting and
business unit management risk and control
self-assessment. Complaints data. Governance,
including review of the Group Governance
Manual.
Capital risk The Committee has primary responsibility
for reviewing and making a recommendation
to the Board on the Bank's ICAAP and ILAAP
and the Resolution and Recovery Plans. Specific
matters such as the Pillar 2A capital requirement
and the results of stress testing were reviewed
and debated.
Cyber resilience The strategies undertaken within the Group
risk to understand, identify, monitor and respond
to cyber threats including the current state
and planned activity.
Regulatory The key risk exposures and monitoring metrics
and conduct that are used to manage and mitigate these
risk key risks. The Compliance Monitoring Plan.
Whistleblowing The arrangements to permit whistleblowing.
----------------- ---------------------------------------------------
Further enhancement of the Group's risk management systems and
controls will take place in 2017 as the framework established in
previous years is embedded throughout the Group. The focus on cyber
resilience that came into increasing prominence in 2016 will
continue to be an important area of focus of the Committee as the
Group implements its cyber strategy. The Committee will also be
involved in the 2017 ICAAP. The Committee also expects that the
Group's response to further regulatory change, such as
implementation of the General Data Protection Regulation, will
require overview by the Committee.
Risk Committee effectiveness
During the year the Committee considered and evaluated its own
performance. It did this by means of a questionnaire which members
of the Committee completed. The chairman of the Committee then
collected the responses and produced a report to the Committee. The
result of the evaluation was that the Committee considered that it
was performing effectively.
Corporate Governance Report
Statement by the Chairman of the Remuneration Committee
On behalf of the Board, as Chairman of the Remuneration
Committee, I am pleased to present our first Directors'
Remuneration Report as a company listed on the Main Market of the
London Stock Exchange.
The report is divided into two principal sections:
-- the Remuneration Policy report which sets out the
Group's forward-looking Remuneration Policy (the
'Remuneration Policy') for Executive and Non-Executive
Directors, and
-- the Annual Remuneration Report which explains the
operation of remuneration related arrangements for
2016 and a summary of the intended operation of
the Remuneration Policy in 2017.
The Remuneration Policy will be subject to a binding shareholder
vote at the 2017 Annual General Meeting and the Annual Remuneration
Report will be subject to an advisory shareholder vote.
The Remuneration Committee assists the Board in fulfilling its
responsibilities in relation to remuneration including, amongst
other matters, determining the individual remuneration and benefits
package of each of the Executive Directors and recommending and
monitoring the remuneration of senior management below Board
level.
How we link executive remuneration to our strategy
The Group has had a Remuneration Committee since the Admission
to AIM in 2011. The step up to the Main Market has provided an
opportunity for us to review our executive remuneration
arrangements and to develop a new Remuneration Policy that is
appropriate for a Main Market premium listed company.
The key principles behind the Group's Remuneration Policy
are:
-- to be simple and transparent in order to reflect
the Group's mission statement of straightforward,
transparent banking,
-- to promote the long term success of the Group, with
transparent and demanding performance conditions,
-- to provide alignment between executive reward and
the Group's values, risk appetite and shareholder
returns, and
-- to have a competitive mix of base salary and short
and long term incentives, with an appropriate proportion
of the package linked to the delivery of sustainable
long term growth.
In developing the policy we have also had regard to regulatory
requirements and the responsibilities of senior managers under the
regulatory regime.
The Group is currently a level 3 firm within the classifications
applied by the regulators for their remuneration codes for
regulated entities. That means that the Group is not required to
satisfy in full all elements of the remuneration codes.
Notwithstanding this, in formulating the Remuneration Policy the
Committee has had regard to the remuneration codes.
The new Remuneration Policy will bring greater clarity to the
criteria that have to be achieved both for a variable pay award and
to achieve vesting. In addition, the new variable pay arrangements
will be subject to malus and clawback and the annual bonus will be
deferred for a longer period than previously applied (three years
instead of one year) and to a greater extent (50% of the bonus
earned instead of 25% of the bonus earned). In line with best
practice, long term incentive awards will be subject to a two year
holding period following the end of the three year performance
period.
The new Remuneration Policy also limits the normal maximum
annual bonus opportunity to 100% of salary and the normal maximum
long term incentive opportunity granted in respect of a financial
year to 100% of salary which is more restrictive than many peer
group companies. The maximum annual bonus may be increased to 200%
of salary in exceptional circumstances.
Composition of the Remuneration Committee and remuneration of
Non-Executive Directors
Following the step up to the Main Market we strengthened the
Board with the appointment of Ann Berresford and Victoria Stewart
on 22 November 2016. As contemplated in the prospectus issued in
October 2016, I retired as Chairman of the Group and Lord Forsyth
was appointed as Chairman in my place.
These changes and the step up to the Main Market have prompted
us to review the remuneration arrangements that we have in place
for Non-Executive Directors.
As result of that review which included a comparison with other
similar organisations, the Board agreed that the structure of fees
for the Non-Executive Directors would include a basic fee and
separate fees for further responsibilities (including committee
chairmanship fees, committee membership fees and holding the office
of Senior Independent Director). The Non-Executive Director fee
structure effective from 1 January 2017 is set out in further
detail on page 97 of the Annual Remuneration Report.
The UK Corporate Governance Code contemplates that, in relation
to the Company, the board should establish a Remuneration Committee
of at least two independent Non-Executive Directors. The Company
chairman may also be a member of the Committee where, as is the
case with STB, he was considered independent on appointment as
chairman. The Remuneration Committee now comprises five members
including the Board Chairman. Victoria Stewart joined the Committee
on her appointment as a Director on 22 November 2016. All the
members of the Committee are Non-Executive Directors and Paul
Marrow and Victoria Stewart are independent Non-Executive
Directors. The Company therefore now complies with the Code
provision in relation to the composition of the Remuneration
Committee.
The Remuneration Committee meets as frequently as its chairman
may require and also at regular intervals to deal with routine
matters and in any event not less than twice in each financial
year. A full copy of the terms of reference of the Remuneration
Committee can be obtained by request to the Company Secretary or
via the Group's website at www.securetrustbank.com.
Performance and variable pay outcomes for the year ended 31
December 2016
2016 was a momentous year for the Group. A number of complex
projects were successfully completed, including the sale of ELG and
the step up to the Main Market. In determining appropriate rewards
for executive management the Remuneration Committee has had regard
to the achievements of 2016 and the challenges faced in realising
those projects.
The Remuneration Committee considered the bonus arrangements in
relation to the Executive Directors for 2016 under the arrangements
that applied before the adoption of the Remuneration Policy. These
arrangements have to date operated on a largely discretionary basis
but the Remuneration Committee has taken into account the financial
performance of the Group and personal performance. For the year
ended 31 December 2016 bonus awards for the CEO and CFO comprise
two separate payments:
-- a 2016 bonus award of GBP500,000 for the CEO and
GBP200,000 for the CFO taking into account the outstanding
financial performance in 2016, a successful transition
from AIM to the Main Market, the successful implementation
of ICAAP and ILAAP procedures and the achievement
of high customer satisfaction levels. Further details
of the record profits, strong return on equity and
operational and regulatory performance is detailed
in the Annual Remuneration Report and elsewhere
in these financial statements; and
-- a one-off bonus to the CEO and CFO equal to GBP1,500,000
and GBP200,000 respectively following the sale of
ELG. As previously disclosed the Group acquired
the Everyday Loans Group in June 2012 for a consideration
of GBP1. Through subsequent effective management
and very skilled negotiation the Group disposed
of this asset for a consideration of GBP235,000,000
in April 2016. This was a transformational transaction
which generated a profit after tax of GBP116,800,000
which almost doubled the equity base of the company
and facilitated the payment of a special dividend
of GBP1.65 per share or GBP30m in special distributions
to shareholders. The committee considered that one-off
bonuses were warranted in recognition of the scale
of this exceptional achievement.
The Remuneration Committee, in determining appropriate awards
for Executive Directors, also has had regard to the risk culture of
the Group and regulatory matters as well culture and employee
engagement.
Share options granted to the CEO, CFO and Andrew Salmon on 2
November 2011 with an exercise price of GBP7.20 per share vested on
2 November 2016. Secure Trust's mid-market closing share price on
the date of vesting was GBP23.32 and this has been used to
calculate the gain at vesting in accordance with the remuneration
reporting regulations. Notwithstanding this, the actual value
realised by Andrew Salmon on exercise of his vested options was
GBP22.00 per share. The CEO and CFO did not exercise their share
options when they vested.
No awards were granted to the Executive Directors under the
existing cash settled share based payment scheme in 2016.
Executive remuneration arrangements for 2017
2017 will see the first year of operation of our Directors'
Remuneration Policy. The policy is subject to a binding shareholder
vote at the 2016 AGM and, subject to approval by shareholders, will
become effective from that date. A summary of the intended
operation of the Remuneration Policy in 2017 is set out on page
82.
In outline:
-- As disclosed in the Prospectus, the CEO's base salary
was increased to GBP1,200,000 for 2016. This reflected
his leadership and contribution to the Company's
growth. He will not receive a salary increase in
2017.
-- The CFO's base salary was increased to GBP400,000
with effect from 1 January 2017, reflecting Admission
to the Main Market, his contribution to the business,
his experience in his current role and the positioning
of his salary compared to peers.
-- The maximum annual bonus opportunity for the year
ending 31 December 2017 will be equal to 100% of
salary. The bonus will be subject to stretching
performance metrics based on a balanced business
scorecard of financial, customer, operational and
staff metrics. Up to an additional 100% of salary
may be awarded under the annual bonus in exceptional
circumstances (such as in order to recognise exceptional
performance during the year).
-- 50% of any bonus earned will be deferred into shares
under the Deferred Bonus Plan. Deferred shares will
vest in equal tranches after one, two and three
years following deferral and will be subject to
malus and clawback.
-- New long term incentive arrangements up to 100%
of salary are expected to be implemented in 2017
and are as described further on pages 84 and 85.
A summary of the key provisions of the new long
term incentive arrangements are set out in the 2017
Circular containing the Notice of AGM.
We encourage an active interest from our investors in our
Remuneration Policy and look forward to engaging with our
shareholders in relation to the Remuneration Policy. We welcome
dialogue with shareholders on remuneration and would expect to
engage regularly with shareholders on this topical subject.
Sir Henry Angest LLL
Chairman of the Remuneration Committee
Corporate Governance Report
Remuneration Policy
This Directors' Remuneration Policy will be submitted to the
2017 AGM for shareholder approval. If approved by shareholders, it
will formally take effect from the date of the AGM. The Directors'
Remuneration Policy has been prepared in accordance with the
regulations set out in the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008.
Policy table for Executive Directors
Element Operation Maximum opportunity Performance metrics
and purpose
-------------------- ------------------------------- ----------------------------------------- --------------------
Base salary Salaries are While there is N/A
To enable usually reviewed no maximum salary,
the Group annually taking increases will
to recruit into account: -- underlying normally be in
and retain Group performance; line with the
the services -- role, experience typical range
of individuals and individual of salary increases
of a suitable performance; awarded (in percentage
calibre. -- competitive of salary terms)
salary levels to other employees
and market in the Group.
forces; and Salary increases
-- pay and conditions above this level
elsewhere may be awarded
in the Group. to take account
of individual
circumstances,
such as, but
not limited to: -- where an Executive
Director has
had an increase
in responsibility;
-- where an Executive
Director has
been promoted
or has had
a change in
scope;
-- an individual's
development
or performance
in role (e.g.
to align a
newly appointed
Executive
Director's
salary with
the market
over time);
and
-- where an Executive
Director's
salary is
no longer
market competitive
(for example,
due to an
increase in
size and complexity
of the business).
Increases may
be implemented
over such time
period as the
Committee deems
appropriate.
Benefits Executive Directors Whilst the Committee N/A
To provide receive benefits has not set an
benefits in line with absolute maximum
that will market practice, on the level
be valued and these include of benefits Executive
by the recipient. a car allowance, Directors may
medical insurance, receive, the
life assurance value of benefits
and disability is set at a level
insurance. which the Committee
Other benefits considers to
may be provided be appropriately
based on individual positioned taking
circumstances. into account
These may include, relevant market
for example, levels based
relocation and on the nature
travel allowances. and location
of the role and
individual circumstances.
Pension Executive Directors Employer pension N/A
To provide are eligible contributions
an appropriate to participate are limited to
level of in the Group 5% of base salary.
retirement defined contribution The maximum cash
benefit pension plan. supplement in
(or cash In appropriate lieu of pension
allowance circumstances, is 5% of base
equivalent). such as where salary (less
contributions any employer
exceed the annual pension contribution).
or lifetime allowance,
Executive Directors
may be permitted
to take a cash
supplement in
lieu of contributions
to a pension
plan.
Annual bonus Awards are based The normal maximum Targets are set
Rewards on performance annual bonus annually reflecting
performance (measured over opportunity is the Group's
against a year) against 100% of base strategy
targets metrics determined salary. and aligned with
which support by the Committee. An additional key financial,
the strategic Pay-out levels annual bonus strategic and/or
direction are determined opportunity of individual targets.
of the Group. by the Committee up to 100% of The annual bonus
after the year base salary may will be assessed
end based on be awarded in against key
performance against exceptional circumstances. financial
those targets. performance metrics
The Committee of the business
has discretion and non-financial
to amend the strategic/personal
pay-out should objectives, in
any formulaic such proportions
output not reflect as the Committee
the Committee's considers
assessment of appropriate.
overall business Financial metrics
performance. At least 50%
To further link of the maximum
the Executive potential will
Directors' pay be paid for
to the interests on-target
of shareholders, performance and
Executive Directors all of the maximum
are required potential will
to defer 50% be paid for maximum
of any bonus performance.
earned into shares Non-financial
under the Deferred strategic or
Bonus Plan ('DBP'). individual metrics
Deferred share Vesting of the
awards vest in non-financial
equal tranches strategic or
after one, two individual metrics
and three years will apply on
following deferral. a scale between
Deferred share 0% and 100% based
awards will typically on the Committee's
take the form assessment of
of a nil-cost the extent to
/ nominal-cost which a
share option non-financial
but may be structured performance metric
as an alternative has been met.
form of share Deferred share
award. awards are not
The Committee subject to any
may decide to additional
pay the whole performance
of the bonus metrics.
earned in cash
where the amount
to be deferred
is less than
GBP50,000 and
would therefore,
in the opinion
of the Committee,
make operation
of the DBP administratively
burdensome.
Clawback provisions
will apply to
annual bonus
awards and malus
and clawback
provisions will
apply to deferred
share awards
as detailed at
the foot of this
table.
Long Term The first awards The normal maximum Performance metrics
Incentive will be granted award is 100% are selected
Scheme ('LTIP') in 2017, subject of salary in that reflect
To provide to approval of respect of a underlying business
an effective the LTIP at the financial year. performance.
long-term 2017 AGM. The Committee Performance metrics
incentive Awards will be will take into and their weighting
award to in the form of account Company where there is
motivate, nil-cost / nominal-cost and personal more than one
incentivise share options, performance during metric are reviewed
and assist conditional shares the preceding annually to
in the retention or other such financial year maintain
of the services form as has the when determining appropriateness
of key individuals. same economic the maximum award and relevance.
effect. Awards to be granted. Awards will vest
will be granted between 25% and
with vesting 100% for
dependent on performance
the achievement between 'threshold'
of performance performance (the
conditions set minimum level
by the Committee, of performance
normally over that results
at least a three in any level
year performance of vesting) and
period. 'maximum'
Awards will usually performance.
be subject to
a two year holding
period following
the end of the
performance period
(with the exception
that sufficient
awards may be
sold to meet
any income tax
and National
Insurance liabilities).
The holding period
does not apply
to awards with
a face value
of GBP150,000
or less at the
time of grant.
Awards may be
settled in cash
(or granted as
a right to a
cash amount)
at the election
of the Committee.
Malus and clawback
provisions will
apply to awards
as detailed at
the foot of this
table.
All employee Executive Directors Participant limits Not applicable.
share schemes are entitled are those set
To create to participate by the UK tax
alignment in a HMRC tax-qualifying authorities from
with the all-employee time to time.
Group and Sharesave Scheme
promote under the same
a sense terms as other
of ownership. Group employees.
-------------------- ------------------------------- ----------------------------------------- --------------------
Application of malus and clawback
Malus: The ability to reduce, cancel or impose further
conditions on unvested awards in the circumstances set out
below.
Clawback: The ability to cancel an award that has not been
released (in relation to an award which is subject to a holding
period) or exercised (in relation to share options), or require the
repayment of some or all of an award in the circumstances set out
below.
Malus and clawback provisions will apply over the following time
periods:
Element Malus Clawback
------------- ------------------ -------------------------------------
Annual bonus To such time as Up to three years following
award payment is made. payment.
Deferred To such time as Tranche of award deferred for
bonus award the award vests. one year: Up to two years following
vesting.
Tranche of award deferred for
two years: Up to one year following
vesting.
Tranche of award deferred for
three years: No clawback provisions
apply.
LTIP award To such time as Up to two years following vesting.
the award vests.
------------- ------------------ -------------------------------------
Malus may apply in the following circumstances:
-- The Executive Director's service agreement is terminated
for gross misconduct or the Executive Director receives
a formal written warning for gross misconduct, as
defined by the Company's disciplinary policy.
-- The Company suffers a material loss arising from
the Executive Director operating outside of agreed
risk policy parameters and as such the Committee
considers a material failure in risk management has
occurred.
-- The level of the award is not considered sustainable
when assessing the overall financial viability of
the Company.
-- The Executive Director is subject to regulatory censure
in respect of a material failure in control.
Clawback may apply in the following circumstances:
-- Discovery of a material misstatement resulting in
an adjustment in the audited consolidated accounts
of the Company.
-- The assessment of any performance target or condition
in respect of an award was based on material error
or materially inaccurate or misleading information.
-- The discovery that any information used to determine
the DBP and/or LTIP was based on material error,
or materially inaccurate or misleading information.
-- Action or conduct of an Executive Director which,
in the reasonable opinion of the Board, amounts to
fraud or gross misconduct.
-- The Executive Director is subject to regulatory censure
in respect of a material failure in control.
Non-Executive Directors
Element and Approach of the Company
purpose
--------------- --------------------------------------------------
Chairman and Fees are normally reviewed annually.
Non-Executive
Director fees Fees paid to Non-Executive Directors for
To enable their services are approved by the Board.
the Group Fees may include a basic fee and additional
to recruit fees for further responsibilities (for
and retain example, chairmanship and membership of
Non-Executive Board committees or holding the office
Directors of Senior Independent Director). Fees are
of a suitable based on the level of fees paid to Non-Executive
calibre. Directors serving on the board of similar-sized
UK listed companies and the time commitment
and contribution expected for the role.
Non-Executive Directors cannot participate
in any of the Company's share schemes or
annual bonus and are not eligible to join
the Company's pension scheme.
Non-Executive Directors may be eligible
to receive benefits such as private medical
insurance, the use of secretarial support,
travel costs or other support that may
be appropriate.
--------------- --------------------------------------------------
Explanation of performance metrics chosen
Performance metrics are selected that are aligned with the
performance of the Group and the interests of shareholders.
Stretching performance targets are set each year for the annual
bonus and LTIP awards. When setting these performance targets, the
Committee will take into account a number of different reference
points, which may include the Group's business plans and strategy
and the economic environment. Full vesting will only occur for what
the Committee considers to be stretching performance.
The annual bonus performance targets have been selected to
provide an appropriate balance between incentivising Directors to
meet financial targets for the year and achieving strategic and/or
personal objectives.
Long-term performance metrics provide a robust and transparent
basis on which to measure the Group's performance over the longer
term and provide further alignment with the business strategy.
The Committee retains the ability to adjust or set different
performance metrics or targets if events occur (such as a change in
strategy, a material acquisition and/or a divestment of a Group
business or a change in prevailing market conditions) which cause
the Committee to determine that the metrics are no longer
appropriate and that amendment is required so that they achieve
their original purpose.
Awards and options may be adjusted in accordance with the scheme
rules in the event of a variation of share capital, demerger,
delisting, special dividend or other event which may affect the
Company's share price.
Policy for the remuneration of employees more generally
Remuneration arrangements are determined throughout the Group
based on the same principle that reward should be achieved for
delivery of the business strategy and should be sufficient to
attract and retain high calibre talent.
Recruitment remuneration
The policy aims to facilitate the appointment of individuals of
a suitable calibre. When appointing a new Executive Director, the
Committee seeks to ensure that arrangements are in the best
interests of the Group and not to pay more than is appropriate.
The Committee will take into consideration a number of relevant
factors, which may include the calibre of the individual, the
candidate's existing remuneration package, and the specific
circumstances of the individual including the jurisdiction from
which the candidate was recruited.
When hiring a new Executive Director, the Committee will
typically align the remuneration package with the above policy. The
Committee may include other elements of pay which it considers are
appropriate, however, this discretion is capped and is subject to
the principles and the limits referred to below:
-- Base salary will be set at a level appropriate to
the role and the experience of the Executive Director
being appointed. This may include agreement on future
increases up to a market rate, in line with increased
experience and/or responsibilities, subject to good
performance, where it is considered appropriate.
-- Pension and benefits will be provided in line with
the above policy.
-- The Committee will not offer non-performance related
incentive payments (for example a 'guaranteed sign-on
bonus').
-- Other elements may be included in the following
circumstances:
o an interim appointment being made to fill an Executive
Director role on a short-term basis;
o if exceptional circumstances require that the
Chairman or a Non-Executive Director takes on
an executive function on a short-term basis;
o if an Executive Director is recruited at a time
in the year when it would be inappropriate to
provide a bonus or long-term incentive award for
that year as there would not be sufficient time
to assess performance. Subject to the limit on
variable remuneration set out below, the quantum
in respect of the months employed during the year
may be transferred to the subsequent year so that
reward is provided on a fair and appropriate basis;
and
o if the Executive Director will be required to
relocate in order to take up the position, it
is the Company's policy to allow reasonable relocation,
travel and subsistence payments. Any such payments
will be at the discretion of the Committee.
-- The Committee may also alter the performance metrics,
performance period and vesting period of the annual
bonus, DBP or LTIP, if the Committee determines
that the circumstances of the recruitment merit
such alteration. The rationale will be clearly explained
in the following Directors' Remuneration Report.
-- The maximum level of variable remuneration which
may be granted (excluding 'buyout' awards as referred
to below) will be within the maximum limits set
out in the policy table.
Any share awards referred to in this section will be granted as
far as possible under the Company's existing share plans. If
necessary, and subject to the limits referred to above, recruitment
awards may be granted outside of these plans as permitted under the
Listing Rules which allow for the grant of awards to facilitate, in
unusual circumstances, the recruitment of an Executive
Director.
The Committee may make payments or awards in respect of hiring
an employee to 'buyout' remuneration arrangements forfeited on
leaving a previous employer. In doing so the Committee will take
account of relevant factors including any performance conditions
attached to the forfeited arrangements and the time over which they
would have vested. The Committee will generally seek to structure
buyout awards or payments on a like-for-like basis to the
remuneration arrangements forfeited. Any such payments or awards
are limited to the expected value of the forfeited awards. Where
considered appropriate, such special recruitment awards will be
liable to forfeiture or 'malus' and/or 'clawback' on early
departure.
Where a position is filled internally, any ongoing remuneration
obligations or outstanding variable pay elements shall be allowed
to continue according to the original terms.
Fees payable to a newly-appointed Chairman or Non-Executive
Director will be in line with the fee policy in place at the time
of appointment.
Service agreements and letters of appointment
Executive Directors' service agreements are on a rolling basis
and may be terminated on 12 months' notice by the Company or the
Executive Director. Service agreements for new Executive Directors
will generally be limited to 12 months' notice by the Company.
All Non-Executive Directors' letters of appointment are on a
rolling basis and may be terminated on six months' notice by the
Company or the Non-Executive Directors. All Non-Executive Directors
are subject to re-election at intervals of not more than three
years.
Details of the Directors' service agreements, letters of
appointment and notice periods are set out below:
Name Commencement Notice
of current period
service/agreement/letter
of appointment
------------- -------------------------- ----------
P Lynam 28 July 12 months
2010
N Kapur 27 October 12 months
2011
M Forsyth(1) 6 October 6 months
2016
H Angest(1) 6 October 6 months
2016
A Berresford 22 November 6 months
2016
P Marrow(1) 6 October 6 months
2016
A Salmon(1) 6 October 6 months
2016
V Stewart 22 November 6 months
2016
------------- -------------------------- ----------
(1) Entered into new letters of appointment prior to the
Company's transition from the AIM to the Main Market.
Payments for loss of office
The principles on which the determination of payments for loss
of office will be approached are set out below:
Policy
---------------- ------------------------------------------------------
Payment in The Company has discretion to make a payment
lieu of notice in lieu of notice to Executive Directors
and Non-Executive Directors. Such a payment
would include base salary or fees for the
unexpired period of notice.
Annual bonus This will be at the discretion of the Committee
on an individual basis and the decision as
to whether or not to award an annual bonus
award in full or in part will be dependent
on a number of factors, including the circumstances
of the individual's departure and their contribution
to the business during the annual bonus period
in question. Any annual bonus award amounts
paid will normally be pro-rated for time
in service during the annual bonus period
and will, subject to performance, be paid
at the usual time (although the Committee
retains discretion to pay the annual bonus
award earlier in appropriate circumstances).
Any annual bonus earned for the year of departure
and, if relevant, for the prior year may
be paid wholly in cash at the discretion
of the Committee.
Deferred Bonus The extent to which any unvested award will
Plan vest will be determined in accordance with
the rules of the DBP.
Unvested awards will normally lapse on cessation
of employment. However, if a participant
leaves due to death, ill-health, injury,
disability, the sale of his employer or any
other reason at the discretion of the Committee,
the Committee shall determine whether the
award will vest at cessation or at the normal
vesting date. In either case, the extent
of vesting will be determined by the Committee,
taking into account, unless the Committee
determines otherwise, the period of time
elapsed from the date of grant to the date
of cessation relative to the deferral period.
Awards in the form of nil-cost or nominal-cost
share options may then be exercised during
such period as the Committee determines.
Awards in the form of nil cost or nominal-cost
share options which have vested but remain
unexercised at the date of cessation may
be exercised if a participant leaves due
to death, ill-health, injury, disability,
the sale of his employer or any other reason
at the discretion of the Committee. Awards
may then be exercised for such period as
the Committee determines.
LTIP The extent to which any unvested award will
vest will be determined in accordance with
the rules of the LTIP.
Unvested awards will normally lapse on cessation
of employment. However, if a participant
leaves due to death, ill-health, injury,
disability, the sale of his employer or any
other reason at the discretion of the Committee,
the Committee shall determine whether the
award will vest at cessation or at the normal
vesting date. In either case, the extent
of vesting will be determined by the Committee
taking into account the extent to which the
performance condition is satisfied and, unless
the Committee determines otherwise, the period
of time elapsed from the date of grant to
the date of cessation relative to the performance
period. Awards in the form of nil-cost or
nominal-cost share options may then be exercised
during such period as the Committee determines.
If a participant leaves for any reason (other
than summary dismissal) after an award has
vested but before it has been released (i.e.
during a 'holding period'), his award will
ordinarily continue until the normal release
date when it will be released. The Committee
retains discretion to release awards when
the participant leaves.
Awards in the form of nil cost or nominal-cost
share options which have vested and been
released but remain unexercised at the date
of cessation may be exercised if a participant
leaves for any reason (other than summary
dismissal). Awards may then be exercised
for such period as the Committee determines.
Phantom Share The extent to which any unvested award will
Option Plan vest will be determined in accordance with
(PSOS) the rules of the PSOS.
Unvested awards will normally lapse on cessation
of employment. However, if a participant
leaves due to death, ill-health, injury,
disability, redundancy, the sale of his employer
or any other reason at the discretion of
the Committee, the award may be exercised
for up to six months following the date of
cessation or such period as the Committee
determines. The extent of exercise will be
determined by the Committee taking into account
the extent to which the performance metric
is satisfied and the period of time elapsed
from the date of grant to the date of cessation
relative to the performance period, unless
the Committee determines otherwise.
Change of The extent to which unvested awards under
control the DBP, LTIP and PSOS will vest will be
determined in accordance with the rules of
the relevant plan.
Awards under the DBP will vest in full in
the event of a takeover, merger or other
relevant corporate event.
Awards under the LTIP will vest early on
a takeover, merger or other relevant corporate
event. The Committee will determine the level
of vesting taking into account the extent
to which the performance condition is satisfied
and, unless the Committee determines otherwise,
the period of time elapsed from the date
of grant to the date of the relevant corporate
event relative to the performance period.
In the event of a takeover, merger or other
relevant corporate event, awards under the
PSOS may be exercised within six months of
the relevant corporate event or such period
as the Committee determines. The Committee
will determine the level of vesting taking
into account the extent to which the performance
metric is satisfied and the period of time
elapsed from the date of grant to the date
of the relevant corporate event relative
to the performance period, unless the Committee
determines otherwise.
Mitigation Termination payments may be reduced where
the Executive Director commences alternative
employment during the notice period.
Other payments Payments may be made either in the event
of a loss of office or a change of control
under the Sharesave Scheme, which is governed
by its rules and the legislation relating
to such tax-qualifying plans. There is no
discretionary treatment for leavers or on
a change of control under these plans.
In appropriate circumstances, payments may
also be made in respect of accrued holiday,
outplacement and legal fees.
---------------- ------------------------------------------------------
Where a buy-out award is made under the Listing Rules then the
leaver provisions would be determined at the time of the award.
The Committee reserves the right to make additional exit
payments where such payments are made in good faith in discharge of
an existing legal obligation (or by way of damages for breach of
such an obligation) or by way of settlement or compromise of any
claim arising in connection with the termination of a Director's
office or employment.
Where the Committee retains discretion it will be used to
provide flexibility in certain situations, taking into account the
particular circumstances of the Director's departure and
performance.
There is no entitlement to any compensation in the event of
Non-Executive Directors' fixed-term agreements not being renewed or
the agreement terminating earlier with the exception of a payment
in lieu of notice as detailed in the table above.
Consideration of employment conditions elsewhere in the
Company
The Committee considers the general basic salary increase,
remuneration arrangements and employment conditions for the broader
employee population when determining remuneration policy for the
Executive Directors. There is no consultation with employees on
Director remuneration.
Shareholder views
The Committee is committed to an ongoing dialogue with
shareholders and welcomes feedback on Executive and Non-Executive
Directors' remuneration. Should any significant changes be proposed
to the policy going forward, the Company will engage with its
shareholders to seek their views.
Existing contractual arrangements
The Committee retains discretion to make any remuneration
payment or payment for loss of office outside the policy in this
report:
-- where the terms of the payment were agreed before
the policy came into effect;
-- where the terms of the payment were agreed at a time
when the relevant individual was not a Director of
the Company, and in the opinion of the Committee,
the payment was not in consideration of the individual
becoming a Director of the Company; and
-- to satisfy contractual arrangements under legacy remuneration
arrangements, including any arrangements in place
prior to Admission.
For these purposes, 'payment' includes the satisfaction of
awards of variable remuneration, and in relation to an award
involving shares the terms of the payment are agreed at the time
the award is granted.
The Committee may satisfy any Phantom Share Option granted under
the PSOS and may adjust the terms of any such Phantom Share Option
to take account of any variation of share capital, demerger,
delisting, special dividend or other event which may affect the
Company's share price.
The Committee may make minor changes to this policy which do not
have a material advantage to Directors, to aid in its operation or
implementation, taking into account the interests of shareholders
but without the need to seek shareholder approval.
Corporate Governance Report
Remuneration Report
The information provided in this section has been audited.
Single figure table
The following table sets out total remuneration for each
Director in respect of the year ended 31 December 2016 and the
prior year.
2011 share
Salary Annual option Total
and fees Benefits bonus scheme Pension remuneration
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's GBP'000's
--------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Executive Directors
P Lynam 1,200 900 23 24 2,000 500 2,284(5) - 35 35 5,542 1,459
N Kapur 325 275 22 22 400 175 571(5) - 25 25 1,343 497
Non-Executive Directors
M Forsyth(1) 95 55 1 - - - - - - - 96 55
H Angest(1,2) 55 54 - - - - - - - - 55 54
A
Berresford(3) 7 - - - - - - - - - 7 -
P Marrow 102 85 - - - - - - - - 102 85
A Salmon(2) 55 54 - - - - 2,284(5) - - - 2,339 54
V Stewart(3) 7 - - - - - - - - - 7 -
--------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1,846 1,423 46 46 2,400 675 5,139 - 60 60 9,491 2,204
--------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(1)Lord Forsyth was appointed as Chairman of the Board on 19
October 2016 following the retirement of Sir Henry Angest as
Chairman. Sir Henry Angest remains on the Board as a Non-Executive
Director.
(2)Fees for the services of Sir Henry Angest and Andrew Salmon
as Non-Executive Directors are paid to Arbuthnot Banking Group by
whom they are employed. Prior to the step up to the Main Market
total fees of GBP81,000 were paid in respect of these directors in
2016. Following the step up, fees of GBP5,000 per director per
month were paid. These figures exclude VAT.
(3)Ann Berresford and Victoria Stewart were appointed to the
Board on 22 November 2016.
Paul Lynam and Neeraj Kapur earned a bonus equal to GBP500,000
and GBP200,000 respectively in respect of performance for the
financial year ended 31 December 2016. Paul Lynam and Neeraj Kapur
also earned a one-off bonus equal to GBP1,500,000 and GBP200,000
respectively following the sale of ELG. Further information
regarding the one-off bonuses is provided below in the disclosure
regarding pre Main Market Admission bonus arrangements.
(5) Details of awards vesting under the 2011 share option scheme
(a pre Main Market Admission long term incentive) are set out on
page 151. Neither Paul Lynam nor Neeraj Kapur exercised their
options in 2016 and accordingly they did not receive a cash payment
in respect thereof.
The figures in the single figure tables above are derived from
the following:
Salary and The amount of salary / fees received in
fees the year.
Benefits The taxable value of benefits received
in the year. These are principally private
medical health insurance and car allowances.
Annual bonus The cash value of the bonus earned in
respect of the financial year (including
a proportion of the amount earned which
is deferred for one year).
2011 share The intrinsic value (as at the date of
option scheme vesting) of share options that vested
during the financial year.
Pension The amount of payments in lieu of Company
pension contributions received in the
year.
---------------- -----------------------------------------------
Additional disclosures in respect of the single figure table
Base salary and fees
As disclosed in the Prospectus, base salaries for the Executive
Directors in respect of the year ended 31 December 2016 are as
follows:
2016 base
salary
GBP000
--------- ----------
P Lynam 1,200
N Kapur 325
----------- ----------
Secure Trust delivered a fifth straight record year of profits
and strong operational and regulatory performance in 2015. In light
of this, and to reflect Paul Lynam's leadership and contribution to
the Company's growth over recent years, and the increase in his
responsibilities arising under the regulatory regime, the Committee
considered it appropriate to increase his base salary for 2016 to
GBP1,200,000.
The Committee also considered it appropriate to increase Neeraj
Kapur's base salary for 2016 to GBP325,000 to reflect his
contribution to the business, his experience in his current role
and the positioning of his salary compared to peers.
Pre Main Market Admission bonus arrangements
Bonuses for the Executive Directors for the financial year ended
31 December 2016 comprise two separate payments: one in relation to
the normal bonus arrangements applicable before the adoption of the
Remuneration Policy; and a one-off bonus following the sale of
ELG.
The normal annual bonus for 2016 was determined on a
discretionary basis, taking into account Company and personal
performance during the year. Paul Lynam earned a bonus equal to
GBP500,000 and Neeraj Kapur earned a bonus equal to GBP200,000. The
bonuses were determined by the Committee taking into account:
-- The delivery of record profits.
-- Strong Return On Equity performance (underlying
return on average equity 11.9%).
-- A successful transition from the AIM to the Main
Market.
-- Strong operational and regulatory performance.
-- The successful implementation of ICAAP and ILAAP
procedures.
-- The achievement of high customer satisfaction levels.
25% of the bonus earned is deferred in cash for one year (Paul
Lynam: GBP125,000, Neeraj Kapur: GBP50,000).
Paul Lynam and Neeraj Kapur also earned a one-off bonus equal to
GBP1,500,000 and GBP200,000 respectively following the sale of ELG.
As previously disclosed the Group acquired the Everyday Loans Group
in June 2012 for a consideration of GBP1. Through subsequent
effective management and very skilled negotiation the Group
disposed of this asset for a consideration of GBP235,000,000 in
April 2016. This was a transformational transaction which generated
a profit after tax of GBP116,800,000 which almost doubled the
equity base of the company and facilitated the payment of a special
dividend of GBP1.65 per share or GBP30m in special distributions to
shareholders. The committee considered that one-off bonuses were
warranted In recognition of the scale of this exceptional
achievement.
Pre Main Market Admission long term incentives
Awards vesting in respect of financial year
2011 Share Option Scheme
On 2 November 2011 Paul Lynam and Andrew Salmon were both
granted 283,333 share options with an exercise price of GBP7.20 per
share. On the same day, Neeraj Kapur was granted 70,833 share
options with an exercise price of GBP7.20 per share. 50% of the
share options vested and became immediately exercisable on 2
November 2014. 50% of the share options vested and became
immediately exercisable on 2 November 2016.
Share options that vested on 2 November 2016 were subject to
dividends paid by the Company between the grant date and vest date
(the vesting period) increasing in percentage terms (when compared
to an assumed dividend of GBP8 million in respect of the financial
year ended 31 December 2012) by a minimum of the higher of: (1) the
increase in the Retail Price Index during the vesting period; and
(2) 5% per annum during the vesting period.
Secure Trust's mid-market closing share price on the date of
vesting was GBP23.32 and this has been used to calculate the gain
at vesting in accordance with the remuneration reporting
regulations. Notwithstanding this, the actual value realised by
Andrew Salmon on exercise of his vested options was GBP22.00 per
share.
Paul Lynam and Neeraj Kapur have not exercised the share options
that vested on 2 November 2016.
Awards granted during the financial year
No awards were granted during the financial year ended 31
December 2016.
Payments made to former Directors during the year
No payments were made in the year to any former Director of the
Company.
Payments for loss of office made during the year
No payments for loss of office were made in the year to any
Director of the Company.
Statement of Directors' shareholding and share interests
No formal shareholding guidelines are currently in place.
However, Paul Lynam has committed to building up and maintaining a
shareholding of at least 100% of base salary, over time, by
retaining all awards under the new LTIP to be put to shareholders
for approval at the 2017 AGM that vest (net of income tax and
National Insurance).
The interests of the Directors and their connected persons in
the Company's ordinary shares as at 31 December 2016 were as set
out below. There have been no changes to those interests between 31
December 2016 and the date of signing of these financial
statements.
Vested Vested
during and
the exercised Sold Unvested, Total
year during during subject as at
Owned but the the to performance 31 December
Director Type outright unexercised year year conditions 2016
-------------- --------------- ---------- ------------- ----------- ---------- ---------------- -------------
P Lynam Shares 9,110 - - - - 9,110
Share Options - 141,667 - - - 141,667
Phantom share
options - - - - 187,500 187,500
N Kapur Shares 1,000 - - - - 1,000
Share Options - 35,417 - - - 35,417
Phantom share
options - - - - 31,250 31,250
M Forsyth Shares 2,000 - - - - 2,000
H Angest Shares - - - - - -
A Berresford Shares - - - - - -
P Marrow Shares 5,440 - - - - 5,440
A Salmon Shares 7,500 - 141,667 (141,667) - 7,500
V Stewart Shares - - - - - -
-------------- --------------- ---------- ------------- ----------- ---------- ---------------- -------------
(1) Each Phantom Share Option was granted on 23 March 2015 and
entitles the holder on exercise to a cash payment equal to the
difference between the market value of a share on the date of
exercise and a notional exercise price of GBP25.00 per share. Each
Phantom Share Option may be exercised on or after 3 November 2018
subject to the satisfaction of a performance condition that over
the period from 23 March 2015 to 3 November 2018 the dividends paid
by the Company have increased in percentage terms when compared to
the dividend of GBP12.3 million in respect of the financial year
ended 31 December 2014 by at least the higher of the increase in
RPI during that period and 5% per annum.
(2) Andrew Salmon exercised and sold his shares shortly after
the date of vesting.
Historical Chief Executive Officer remuneration outcomes
The table below shows details of the total remuneration bonus
and share options vesting (as a percentage of the maximum
opportunity) for the Chief Executive Officer over the last five
financial years. Pre Main Market Admission bonuses have been
determined by the Committee on a discretionary basis taking into
account Group financial and individual performance during the
financial year.
Share options
as a %
Total remuneration of maximum
GBP'000 opportunity
------ ------------------- --------------
2016 5,542 100%
2015 1,459 N/A
2014 3,671 100%
2013 1,031 N/A
2012 870 N/A
------- ------------------- --------------
CEO pay increase in relation to all employees
The table below sets out the percentage change (from the
financial year ending 31 December 2015) in base salary, value of
taxable benefits and bonus for the Chief Executive Officer compared
with the average percentage change for all employees.
Chief Executive
Percentage change Officer Wider workforce
------------------- ---------------- ----------------
Salary 33.33% 4.7%(1)
Taxable benefits 0% 0%
Annual bonus 300% 0%
------------------- ---------------- ----------------
(1) Actual award was 3% for wider workforce but additional spend
was applied to address pay concerns in some areas of Lending.
(2) Paul Lynam earned a bonus equal to GBP500,000 in respect of
performance for the financial year ended 31 December 2016 (equal to
the bonus earned in respect of performance for the financial year
ended 31 December 2015). Paul Lynam also earned a one-off bonus
equal to GBP1,500,000 following the sale of ELG.
Spend on pay
The following table sets out the percentage change (from the
financial year ending 31 December 2015) in dividends and the
overall expenditure on pay (as a whole across the
organisation).
2016 2015 Change
GBPmillion GBPmillion %
------------------------------ ----------- ----------- -------
Dividends and share buybacks 43.1 12.6 242.1
Overall expenditure on pay 39.5 39.7 (0.5)
------------------------------ ----------- ----------- -------
Implementation of Directors' Remuneration Policy for the
financial year ending 31 December 2016
As described in the Chairman's Statement, the Committee has
undertaken a detailed review of the Directors' Remuneration Policy
in light of the Company's transition from the AIM to the Main
Market. Details on how Secure Trust intends to implement the
Directors' Remuneration Policy for the financial year ending 31
December 2017 is set out below.
Salary
Paul Lynam will not receive a salary increase in 2017. Neeraj
Kapur's salary was increased to GBP400,000 with effect from 1
January 2017, reflecting Admission to the Main Market, his
contribution to the business, his experience in his current role
and the positioning of his salary compared to peers.
Fees
The following table sets out the Non-Executive Director fee
structure effective from 1 January 2017:
2017 fee
Role GBP'000's
---------------------------------- ----------
Chairman 200
Non-Executive Director (basic
fee) 65
Senior Independent Director 20
Chairman of Audit Committee 20
Chairman of Risk Committee 20
Chairman of Remuneration
Committee 10
Member of Audit Committee 5
Member of Risk Committee 5
Member of Remuneration Committee 5
------------------------------------ ----------
The considerations that were taken into account by the Committee
in determining these fees are described in the Chairman of the
Remuneration Committee's Statement and reflect the increased work
load reflecting the role and responsibilities of the Non-Executive
Directors following the transition to the Main Market, the growth
in the business of the Group and additional regulatory
responsibilities and time commitment.
The information provided in the remainder of the Directors'
Remuneration Report is not subject to audit.
Annual bonus
The proposed maximum annual bonus opportunity for the year
ending 31 December 2017 will be equal to 100% of salary. The bonus
will be subject to stretching performance metrics based on a
balanced business scorecard. 70% of the bonus will be subject to
financial performance metrics and the remaining 30% of the bonus
will be subject to a mixture of customer, operational and staff
performance metrics. The Committee considers that the targets are
commercially sensitive. A description of the performance metrics
and targets will be disclosed in the Annual Report on Remuneration
for the year ending 31 December 2017.
Up to an additional 100% of salary may be awarded in exceptional
circumstances (such as in order to recognise exceptional
performance during the year). To the extent that any additional
bonus is awarded, full details of the award and rationale will be
disclosed in the Annual Report on Remuneration for the year ending
31 December 2017.
50% of any bonus earned will be deferred into shares under the
Deferred Bonus Plan. Deferred shares will vest in equal tranches
after one, two and three years following deferral.
LTIP
The Company proposes to grant the first awards under the Secure
Trust 2017 LTIP in 2017. Awards will be granted in the form of
nil-cost or nominal share options at the level of 100% of salary
and will be subject to EPS, Relative TSR and risk management
performance metrics. Performance will be assessed over a three year
performance period.
The proposed EPS and relative TSR performance targets are set
out in the table below:
EPS growth Relative
(40% of award) TSR
(40% of
Vesting (% of maximum) award)
------------------------------ ---------------- ---------------
0% Less than Below Median
10% per annum
25% 10% per annum Median
100% 30% per annum Upper quartile
Straight-line vesting between
points.
------------------------------ ---------------- ---------------
The Committee intends to use the following group of selected
peers for assessing TSR performance: (Aldermore Group, Arbuthnot
Banking Group, Close Brothers, OneSavings Bank, Metro Bank, Paragon
Group of Companies, Provident Financial, S&U, Shawbrook Group
and Virgin Money).
20% of the award will be based on risk management performance
objectives aligned with the Company's risk management
framework.
Consideration by the Directors of matters relating to Directors'
remuneration
The Remuneration Committee is composed of five members; the
Chairman of the Board (Lord Forsyth), two independent Non-Executive
Directors (Paul Marrow and Victoria Stewart) and two Non-Executive
Directors (Sir Henry Angest, and Andrew Salmon). The chairman of
the Committee is Sir Henry Angest.
The Committee's principal responsibilities are:
-- reviewing the on-going appropriateness and relevance
of remuneration policy;
-- reviewing and approving the remuneration packages
of the Executive Directors;
-- recommending and monitoring the level and structure
of remuneration of senior management; and
-- production of the annual report on the Directors'
remuneration.
During the financial year ended 31 December 2016, the Committee
received assistance from representatives from Management, Human
Resources, Risk and Legal.
The Committee received no independent advice from external
consultants during the financial year ended 31 December 2016.
Statement of voting at AGM
This will be the first year that the Directors' Remuneration
Report is put to shareholders for approval. The results of the vote
will be disclosed in the 2017 Annual Report on Remuneration.
Approval
This Report was approved by the Board on 22 March 2017 and
signed on its behalf by:
Sir Henry Angest
Chairman of the Remuneration Committee
Directors' report
Report and financial statements
The directors submit their report, the related Strategic Report
and Corporate Governance Report and the audited financial
statements of Secure Trust Bank PLC and its subsidiaries (the
'Group') for the year ended 31 December 2016. The Strategic Report
is set out beginning on page 14. This Directors' Report also
includes additional disclosures required by the UKLA's Disclosure
and Transparency Rules and Listing Rules. Some of the matters
normally included in the Directors' Report are included by
reference as indicated below.
Principal activities and review
The principal activity of the Group is banking including deposit
taking and secured and unsecured lending.
The business review and information about further developments,
key performance indicators and principal risks are contained in the
Strategic Report.
Corporate governance
The Corporate Governance report contains information about the
Group's corporate governance arrangements, includes the Group's
compliance with the UK Corporate Governance Code. Until Admission
in October 2016 the Code did not apply to the Company although the
Company did take account of its principles.
Results
The results for the year are shown on page 114. The Group made a
profit before tax for the year of GBP144.3 million (2015: GBP36.5
million), being profit before tax of GBP27.5 million and gain
recognised on disposal of GBP116.8 million and a profit after tax
of GBP137.5 million (2015: GBP28.7 million). The reconciliation of
statutory results to underlying results is set out in the Financial
Review in the Strategic Report.
For the purposes of DTR 4.15R2 and DTR 4.1.8 this Directors'
Report and the Strategic Report on pages 14 to 55 comprise the
management report.
Dividends
The directors recommend the payment of a final dividend of 58
pence per share which, together with the interim dividend of 17
pence per share paid on 23 September 2016, represents total
dividends for the year of 75 pence per share (2015: 72 pence per
share) excluding the special dividend of 165 pence per share paid
on 27 July 2016 following completion of the sale of ELG. The final
dividend, if approved by members at the Annual General Meeting,
will be paid on 12 May 2017 to shareholders on the register at the
close of business on 18 April 2017.
Dividend Policy
The directors reviewed the dividend policy of the Company in
connection with the step up to the Main Market and have adopted a
progressive dividend policy which takes into account the Company's
capital requirements, earnings and cash flow in the long term.
The Directors will have regard to current and projected capital,
liquidity, earnings and market expectations in determining the
amount of the dividend. On occasion, the Company may declare and
pay a special dividend resulting from special circumstances,
however no such special dividend is currently envisaged.
Share capital
The share capital of the Company comprises one class of ordinary
shares with a nominal value of 40p each. As at 31 December 2016 the
Company had 18,475,229 ordinary shares in issue. Each ordinary
share entitles the holder to one vote.
All the ordinary shares are fully paid and rank equally in all
respects and there are no special rights to dividends or in
relation to control of the Company.
283,335 shares were issued during 2016.
Details of the Company's share capital and movements in the
Company's issued share capital during the year are provided in Note
25 of the consolidated financial statements.
The powers of the Directors, including in relation to the issue
or buyback of the Company's shares are set out in the Companies Act
2006 and the Company's Articles of Association. Shareholders will
be asked to grant authority to the Directors to issue and allot
shares at the 2017 Annual General Meeting.
Under section 551 of the Companies Act 2006, the Directors may
allot equity securities only with the express authorisation of
shareholders which may be given in General Meeting, but which
cannot last more than five years. Under section 561 of the
Companies Act 2006, the Board may also not allot shares for cash
(otherwise than pursuant to an employee share scheme) without first
making an offer to existing shareholders to allot such shares to
them on the same or more favourable terms in proportion to their
respective shareholdings, unless this requirement is waived by
special resolution of the shareholders.
Resolutions permitting such actions will be proposed at the 2017
Annual General Meeting. Details of the resolutions for such
authority are included in the Notice of the 2017 Annual General
Meeting and in the related explanatory notes.
There are no specific restrictions on the transfer of the shares
in the Company which are governed by the general provisions of the
Articles of Association and prevailing legislation.
On a show of hands, each member has the right to one vote at
General Meetings of the Company. On a poll, each member is entitled
to one vote for every share held. The shares carry no rights to
fixed income. No person has any special rights of control over the
Company's share capital and all issued shares are fully paid.
Under section 701 of the Companies Act 2006 a company may make a
market purchase of its own shares if the purchase has first been
authorised by a resolution of the company.
The Company did not repurchase any of the issued ordinary shares
during the year or up to the date of this report, although it was
granted authority to do so by shareholders at the 2016 Annual
General Meeting on 4 May 2016. That authority expires on 31 May
2017 or, if earlier, the conclusion of the 2017 Annual General
Meeting.
At the 2017 Annual General Meeting a special resolution will be
proposed authorising the Company to make market purchases of
ordinary shares within the limits set out in the resolution. The
resolution is in a similar form to that proposed at the 2016 Annual
General Meeting. The directors have no present intention of
exercising the authority granted by the resolution, but regard it
as a useful tool to have available.
Substantial shareholders
In accordance with Disclosure and Transparency Rules DTR5, the
Company as at 20 March 2017 (being the latest practicable date
before publication of this report), has been notified of the
following disclosable interests in its issued ordinary shares:
Percentage
of ordinary
Ordinary share
shares capital
------------------------------- ---------- -------------
Arbuthnot Banking Group
PLC 3,444,538 18.64
Invesco Limited 2,805,262 15.18
Threadneedle Asset Management
(Ameriprise Financial,
Inc.) 2,426,858 13.14
Steven A Cohen 1,510,412 8.18
Ruffer 1,324,979 7.17
Wellington Management
Company 1,297,610 7.02
Unicorn Asset Management 1,091,209 5.91
BAE Systems Pension Fund
Investment Management 782,741 4.24
Standard Life Investments 724,967 3.92
--------------------------------- ---------- -------------
Relationship with major shareholder
On the AIM IPO in 2011 the Company entered into a Relationship
Agreement with its majority shareholder, Arbuthnot Banking Group
PLC. Following the sell down by Arbuthnot Banking Group in 2016 the
Relationship Agreement terminated. Nevertheless, the Company has an
understanding with Arbuthnot Banking Group that for so long as
Arbuthnot Banking Group holds 10% or more of the issued share
capital of the Company, Arbuthnot Banking Group would expect two
directors of the Company to be nominees of Arbuthnot Banking
Group.
Directors
The directors of the Company are Lord Forsyth, Neeraj Kapur,
Paul Lynam, Sir Henry Angest, Paul Marrow, Ann Berresford, Andrew
Salmon and Victoria Stewart. All the directors, other than Ann
Berresford and Victoria Stewart, served on the Board throughout the
financial year and up to the date of signing these financial
statements. Ann Berresford and Victoria Stewart were appointed as
directors on 22 November 2016. Biographical information about each
director is shown on page 57. All the Non-Executive Directors
(other than Ann Berresford and Victoria Stewart) entered into new
letters of appointment on 6 October 2016 in connection with the
step up to the Main Market. Ann Berresford and Victoria Stewart
entered into letters of appointment on their appointment. Paul
Lynam and Neeraj Kapur are Executive Directors of the Company.
Sir Henry Angest and Mr A A Salmon retire under Article 82 of
the Articles of Association and, being eligible, offer themselves
for re-election at the 2017 Annual General Meeting.
In accordance with the recommendations of the UK Corporate
Governance Code, Ann Berresford and Victoria Stewart, who were
appointed as directors during 2016, offer themselves for
re-election at the 2017 Annual General Meeting.
Directors' Interests
The directors' interests (and those of any persons connected
with them) in the share capital of the Company from Admission and
as at 31 December 2016 are set out on pages 94 and 95 in the
Directors Remuneration Report.
Powers of directors
The directors' powers are conferred on them by UK legislation
and by the Company's Articles of Association. Changes to the
Company's Articles of Association must be approved by shareholders
by way of a special resolution and must comply with the provisions
of the Companies Act 2006 and the Financial Conduct Authority's
Disclosure and Transparency Rules.
It is proposed to adopt new Articles of Association at the 2017
Annual General Meeting and a description of the changes to the
Articles is set out in the separate Circular giving notice of the
Annual General Meeting.
Appointment and retirement of directors
The appointment and retirement of the directors is governed by
the Company's Articles of Association, the UK Corporate Governance
Code and the Companies Act 2006.
Directors' indemnities
The Company's Articles of Association provide that, subject to
the provisions of the Companies Act 2006, the Company may indemnify
any director or former director of the Company or any associated
company against any liability and may purchase and maintain for any
director or former director of the Company or any associated
company insurance against any liability.
The Group has maintained directors and officers liability
insurance throughout 2016.
The letters of appointment of the Non-Executive Directors
incorporate by reference the provisions of the Articles of
Association into the contract established by the letter of
appointment between the Non-Executive Director and the Company.
Consideration is being given to each of the directors entering
into a deed of indemnity with the Company under which the director
is indemnified by the Company in respect of liabilities incurred in
his or her role as a director. The deed, when entered into, would
indemnify the director to the extent permitted by the Companies Act
2006 and the Articles of Association of the Company. The
indemnities, when entered into, would be qualifying third party
indemnities provisions within the meaning of the legislation.
Disclosure of information under Listing Rule 9.8.4R
Additional information, where not already contained in the
Directors' Report, where applicable to the Company can be found in
the following sections of the Annual Report.
Item Page reference
=============================================== ===============
Details of any long term incentive schemes 84
=============================================== ===============
Allotments of cash of equity securities Note 26,
otherwise than to shareholders in proportion page 151
to their holdings
=============================================== ===============
Significant contracts
Details of related party transactions are set out in Note 35 to
the financial statements.
There are no contracts of significance in which a director is
interested.
There are no agreements between any Group company and any of its
employees or any director of any Group company which provide for
compensation to be paid to an employee or a director for
termination of employment or for loss of office as a consequence of
a takeover of the Company.
There are no significant agreements to which the Company is
party that take effect, alter or terminate upon a change of control
following a takeover bid for the Company.
Employment policies and equal opportunities
The Group is an inclusive and equal opportunities employer and
opposes all forms of discrimination. Applications from people with
disabilities will be considered fairly and if existing employees
become disabled, every effort is made to retain them within the
workforce wherever reasonable and practicable. The Group also
endeavours to provide equal opportunities in the training,
promotion and general career development of disabled employees.
Group policies seek to create a workplace that has an open
atmosphere of trust, honesty and respect. Harassment or
discrimination of any kind is not tolerated. This principle applies
to all aspects of employment from recruitment and promotion,
through to termination and all other terms and conditions of
employment.
The Group has processes in place for communicating with its
employees. Employee communications include information about the
performance of the Group, on major matters affecting their work,
employment or workplace and to encourage employees to get involved
in social or community events. These communications aim to achieve
a common awareness for all employees of the financial and economic
factors affecting the performance of the Group. The Group conducts
employee surveys and uses the results to improve performance. The
Group utilises a range of means of communication with employees,
including by means of a staff council.
Employee share schemes
New employee share schemes are proposed to be adopted at the
2017 Annual General Meeting. Further details are set out in the
Circular containing the Notice of AGM.
Research and development
The Group does not undertake research and development
activities.
Political donations and expenditure
The Group made no political donations and incurred no political
expenditure during the year (2015: GBPnil).
Post balance sheet events
There have been no significant events between 31 December 2016
and the date of approval of the financial statements which would
require a change to or additional disclosure in the financial
statements.
Disclosure of information to auditor
Each director in office at the date of this Directors' Report
confirms that so far as the director is aware, there is no relevant
audit information of which the Company's auditor is unaware and
each director has taken all the steps that they ought to have taken
as a director to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of
that information.
This confirmation is given and should be interpreted in
accordance with the provisions of the Companies Act 2006.
Going concern
The financial statements have been prepared on a going concern
basis. Further information about this is to be found on page
44.
Fair, Balanced and Understandable
The Directors are satisfied that the Annual Report and Accounts,
taken as a whole, are fair, balanced and understandable, and
provide the information necessary for members and other
stakeholders to assess the Group's position and performance,
strategy and business model.
Details of the governance procedures which have been used to
support this assertion can be found in the Audit Committee
Report.
Future developments and financial risk management objectives and
policies
Information about future developments, internal control and
financial risk management systems in relation to financial
reporting and financial risk management objectives and policies in
relation to the use of financial instruments can be found in the
following sections of the annual report which are incorporated into
this report by reference:
Future developments - see Strategic Report on pages 14 to
55.
Internal control and financial risk management systems in
relation to financial reporting - see Corporate Governance Report
on pages 56 to 98.
Financial risk management objectives and policies in relation to
the use of financial instruments - see Risk Management Report on
pages 45 to 48 and Note 28 to the financial statements.
Methodology
The Group intends to report on all of the emission sources
required under the Companies Act 2006 (Strategic Report and
Directors' Report) Regulation 2013. This is the first Greenhouse
Gas report that the Group has had to issue under the above
Regulation and as such it has only included emission sources where
accurate and consistent data is available for the complete
reporting period.
Greenhouse Gas emissions from our operations
The Group's Greenhouse Gas emissions are shown below.
Carbon dioxide
(tonnes)
--------------------------------------------------- ---------------
Scope 1 - direct emissions from combustion
of fuel 93.0
Scope 2 - indirect emissions from electricity
purchased 555.6
Scope 3 - other indirect emissions from purchased
electricity transmission and distribution 50.3
--------------------------------------------------- ---------------
Total scope 1 to 3 emissions 698.9
--------------------------------------------------- ---------------
Environmental intensity indicator (tonnes
carbon dioxide per GBP1 million group income) 5.4
--------------------------------------------------- ---------------
Scope 1 emissions resulting from the combustion of natural gas
for heating the Group's buildings and Scope
2 and 3 emissions associated with the consumption of purchased
electricity are included within the Greenhouse Gas report. The
Group has excluded Scope 1 emissions resulting from the use of
company owned/leased vehicles and the fugitive escape of
refrigerants used in air conditioning and heat pump systems. All
Scope 3 sources, except for purchased electricity transmission and
distribution emissions, have been excluded from this report.
Systematic procedures have now been established to collect
accurate data for Scope 1 company vehicle and fugitive refrigerant
emissions with effect from 1(st) January 2017. It is the Group's
intention to set 2017 as its Greenhouse Gas baseline year and
reports from 2018 will show emissions for the current year and for
each subsequent year following the baseline year.
In compiling this Greenhouse Gas report the Group has used the
Greenhouse Gas Protocol Corporate Accounting and Reporting Standard
(revised edition) and energy supplier invoice data. The Group
reports its greenhouse gas emissions as a single total, by
converting them to the equivalent amount of CO(2) using emission
factors from the UK Government's Greenhouse Gas Conversion Factors
for Company Reporting 2016.
Auditor
KPMG LLP was reappointed as auditor at the Annual General
Meeting held in 2016. Resolutions for its reappointment as auditor
and giving the directors authority to determine their remuneration
will be proposed at the 2017 Annual General Meeting. KPMG LLP has
indicated its willingness to continue in office.
Annual General Meeting
The 2017 Annual General Meeting will be held at 3pm on 3 May
2017 at Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
By order of the Board
A J Karter
Secretary
22 March 2017
Directors' responsibility statement
The directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare group and parent
company financial statements for each financial year. As required
by the Listing Rules they are required to prepare the group
financial statements in accordance with IFRS as adopted by the EU
and applicable law and have elected to prepare the parent company
financial statements on the same basis.
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the group and parent company and of
their profit or loss for that period. In preparing each of the
group and parent company financial statements, the directors are
required to:
-- select suitable accounting policies and then apply
them consistently;
-- make judgements and estimates that are reasonable
and prudent;
-- state whether they have been prepared in accordance
with IFRS as adopted by the EU; and
-- prepare the financial statements on the going concern
basis unless it is inappropriate to presume that
the group and the parent company will continue in
business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
company's transactions and disclose with reasonable accuracy at any
time the financial position of the parent company and enable them
to ensure that its financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the group
and to prevent and detect fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- The financial statements, prepared in accordance
with IFRS as adopted by the European Union, give
a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company
and the undertakings included in the consolidation
taken as a whole;
-- The strategic report includes a fair review of the
development and performance of the business and
the position of the Company and the undertakings
included in the consolidation taken as a whole,
together with a description of the principal risks
and uncertainties that they face; and
-- The Annual Report and financial statements, taken
as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders
to assess the Company's performance, business model
and strategy.
This responsibility statement was approved by the Board of
directors on 22 March 2017 and is signed on their behalf by:
P A Lynam Neeraj Kapur
Chief Executive Officer Chief Financial
Officer
Consolidated statement of comprehensive income
Note 2016 2016 2016 2015 2015 2015
Continuing Discontinued Total Continuing Discontinued Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Income statement
Interest receivable
and similar income 130.0 11.1 141.1 100.5 39.2 139.7
Interest expense
and similar charges (26.3) - (26.3) (21.6) - (21.6)
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Net interest income 4 103.7 11.1 114.8 78.9 39.2 118.1
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Fee and commission
income 16.3 0.1 16.4 16.9 1.5 18.4
Fee and commission
expense (1.8) (0.1) (1.9) (3.7) (0.3) (4.0)
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Net fee and commission
income 14.5 - 14.5 13.2 1.2 14.4
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Operating income 118.2 11.1 129.3 92.1 40.4 132.5
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Net impairment
losses on loans
and advances to
customers 12 (27.7) (2.6) (30.3) (16.8) (7.5) (24.3)
Operating expenses 5 (65.5) (6.0) (71.5) (50.5) (21.2) (71.7)
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Profit before income
tax 25.0 2.5 27.5 24.8 11.7 36.5
Income tax expense 7 (6.3) (0.5) (6.8) (5.5) (2.3) (7.8)
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Profit after income
tax 18.7 2.0 20.7 19.3 9.4 28.7
Gain recognised
on disposal 37 - 116.8 116.8 - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Profit for the
period 18.7 118.8 137.5 19.3 9.4 28.7
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income
Items that will
not be reclassified
to the income statement
Revaluation reserve 1.2 - 1.2 - - -
Taxation (0.2) - (0.2) - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
1.0 - 1.0 - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Items that may
subsequently be
reclassified to
the income statement
Available-for-sale
reserve (2.8) - (2.8) - - -
Taxation - - - - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
(2.8) - (2.8) - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income for the
period, net of
income tax (1.8) - (1.8) - - -
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income for the
period 16.9 118.8 135.7 19.3 9.4 28.7
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Profit attributable
to:
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 18.7 118.8 137.5 19.3 9.4 28.7
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income attributable
to:
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 16.9 118.8 135.7 19.3 9.4 28.7
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Earnings per share
for profit attributable
to the equity holders
of the Company
during the period
(pence per share)
Basic earnings
per share 8 102.6 651.5 754.1 106.1 51.7 157.8
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Diluted earnings
per share 8 101.8 646.9 748.7 104.1 50.7 154.8
-------------------------- ----- ----------- ------------- ----------- ----------- ------------- -----------
Consolidated statement of financial position
At 31 December
2016 2015
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 112.0 131.8
Loans and advances to banks 9 18.2 9.8
Loans and advances to customers 10 1,321.0 960.6
Debt securities held-to-maturity 13 20.0 3.8
Equity instruments available-for-sale 14 13.5 -
Property, plant and equipment 15 11.4 8.5
Intangible assets 16 9.0 7.0
Deferred tax assets 18 - 0.3
Other assets 19 4.9 7.1
Assets held-for-sale 37 - 118.5
---------------------------------------- ----- ----------- -----------
Total assets 1,510.0 1,247.4
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 70.0 35.0
Deposits from customers 21 1,151.8 1,033.1
Current tax liabilities 1.7 3.2
Deferred tax liabilities 18 0.2 -
Other liabilities 22 49.0 24.2
Provisions for liabilities and charges 23 1.3 2.0
Liabilities held-for-sale 37 - 8.7
---------------------------------------- ----- ----------- -----------
Total liabilities 1,274.0 1,106.2
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.3
Share premium 81.2 79.3
Revaluation reserve 1.2 0.2
Available-for-sale reserve 14 (2.8) -
Retained earnings 149.0 54.4
---------------------------------------- ----- ----------- -----------
Total equity 236.0 141.2
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,510.0 1,247.4
---------------------------------------- ----- ----------- -----------
The financial statements on pages 114 to 175 were approved
by the Board of Directors on 22 March 2017 and were
signed on its behalf by:
P Lynam
Chief Executive Officer
N Kapur
Chief Financial Officer
Company statement of financial position
At 31 December
2016 2015
Note GBPmillion GBPmillion
---------------------------------------- ----- ----------- -----------
ASSETS
Cash and balances at central banks 112.0 131.8
Loans and advances to banks 9 16.5 9.2
Loans and advances to customers 10 1,289.2 932.7
Debt securities held-to-maturity 13 20.0 3.8
Equity instruments available-for-sale 14 13.5 -
Property, plant and equipment 15 6.2 4.2
Intangible assets 16 6.2 3.2
Investments 17 3.7 3.7
Deferred tax assets 18 0.1 0.6
Other assets 19 35.3 146.0
---------------------------------------- ----- ----------- -----------
Total assets 1,502.7 1,235.2
---------------------------------------- ----- ----------- -----------
LIABILITIES AND EQUITY
Liabilities
Due to banks 20 70.0 36.4
Deposits from customers 21 1,151.8 1,033.1
Current tax liabilities 0.8 0.3
Other liabilities 22 57.0 28.2
Provisions for liabilities and charges 23 1.3 2.0
---------------------------------------- ----- ----------- -----------
Total liabilities 1,280.9 1,100.0
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of the
parent
Share capital 25 7.4 7.3
Share premium 81.2 79.3
Revaluation reserve 0.5 -
Available-for-sale reserve 14 (2.8) -
Retained earnings 135.5 48.6
Total equity 221.8 135.2
---------------------------------------- ----- ----------- -----------
Total liabilities and equity 1,502.7 1,235.2
---------------------------------------- ----- ----------- -----------
The Company has elected to take the exemption under
section 408 of the Companies Act 2006 not to present
the parent company income statement. The profit for
the parent company for the year is presented in the
Company Statement of Changes in Equity.
The financial statements on pages 114 to 175 were approved
by the Board of Directors on 22 March 2017 and were
signed on its behalf by:
P Lynam
Chief Executive Officer
N Kapur
Chief Financial Officer
Registered number: 00541132
Consolidated statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2015 7.3 79.3 0.2 - 38.1 124.9
Total comprehensive
income for the period
Profit for 2015 - - - - 28.7 28.7
Total comprehensive
income for the period - - - - 28.7 28.7
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Dividends - - - - (12.6) (12.6)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners - - - - (12.4) (12.4)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2015 7.3 79.3 0.2 - 54.4 141.2
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2016 - - - - 137.5 137.5
Other comprehensive income,
net of income tax
Revaluation reserve - - 1.0 - - 1.0
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 1.0 (2.8) - (1.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 1.0 (2.8) 137.5 135.7
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 1.2 (2.8) 149.0 236.0
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Company statement of changes in equity
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 1 January
2015 7.3 79.3 - - 26.1 112.7
Total comprehensive
income for the period
Profit for 2015 - - - - 34.9 34.9
Total comprehensive
income for the period - - - - 34.9 34.9
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Dividends - - - - (12.6) (12.6)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners - - - - (12.4) (12.4)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2015 7.3 79.3 - - 48.6 135.2
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period
Profit for 2016 - - - - 129.8 129.8
Other comprehensive income,
net of income tax
Revaluation reserve - - 0.5 - - 0.5
Available-for-sale
reserve - - - (2.8) - (2.8)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - 0.5 (2.8) - (2.3)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive
income for the period - - 0.5 (2.8) 129.8 127.5
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Issue of shares
under a share option
scheme 0.1 1.9 - - - 2.0
Dividends - - - - (43.1) (43.1)
Charge for share
based payments - - - - 0.2 0.2
Total contributions
by and distributions
to owners 0.1 1.9 - - (42.9) (40.9)
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 31 December
2016 7.4 81.2 0.5 (2.8) 135.5 221.8
--------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Year Year
ended ended
31 December 31 December
2016 2015
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the year 18.7 19.3
Adjustments for:
Income tax expense 7 6.3 5.5
Depreciation of property, plant and
equipment 15 0.6 0.5
Loss on sale of property, plant and
equipment 0.2 -
Amortisation of intangible assets 16 1.6 1.3
Impairment losses on loans and advances
to customers 27.7 16.8
Share based compensation 0.2 0.2
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 55.3 43.6
Changes in operating assets and liabilities:
- net (increase)/decrease in debt
securities held-to-maturity (16.2) 12.5
- net decrease in loans and advances
to banks - 15.0
- net increase in loans and advances
to customers (388.1) (448.8)
- net decrease/(increase) in other
assets 2.2 (2.6)
- net increase in amounts due to
banks 35.0 19.1
- net increase in deposits from
customers 118.7 424.7
- net increase /(decrease) in other
liabilities 22.9 (6.0)
Income tax paid (6.3) (4.2)
---------------------------------------------- ----- ------------- -------------
Net cash (outflow)/inflow from operating
activities - Continuing operations (176.5) 53.3
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Purchase of property, plant and equipment 15 (2.5) (1.1)
Purchase of computer software 16 (3.6) (2.3)
Net cash outflow from investing activities
- Continuing operations (6.1) (3.4)
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Shares issued 2.0 -
Dividends paid (43.1) (12.6)
---------------------------------------------- ----- ------------- -------------
Net cash flows from financing activities
- Continuing operations (41.1) (12.6)
---------------------------------------------- ----- ------------- -------------
Net (decrease)/increase in cash and
cash equivalents - Continuing operations (223.7) 37.3
Sale of subsidiary undertakings 37 209.9 -
Net increase in cash and cash equivalents
- Discontinued operations 0.7 -
Cash and cash equivalents at 1 January 143.3 106.0
---------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 27 130.2 143.3
---------------------------------------------- ----- ------------- -------------
Company statement of cash flows
Year Year
ended ended
31 December 31 December
2016 2015
Note GBPmillion GBPmillion
---------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
Profit for the year 129.8 34.9
Adjustments for:
Income tax expense 4.4 2.0
Depreciation of property, plant and
equipment 15 0.4 0.3
Loss on sale of property, plant and
equipment 0.2 -
Profit on sale of subsidiary undertakings (120.5) -
Amortisation of intangible assets 16 0.5 0.3
Impairment losses on loans and advances
to customers 28.6 17.1
Share based compensation 0.2 0.2
---------------------------------------------- ----- ------------- -------------
Cash flows from operating profits
before changes in operating assets
and liabilities 43.6 54.8
Changes in operating assets and liabilities:
- net (increase)/decrease in debt
securities held-to-maturity (16.2) 12.5
- net decrease in loans and advances
to banks - 15.0
- net increase in loans and advances
to customers (385.1) (449.7)
- net decrease/(increase) in other
assets 2.6 (29.8)
- net increase in amounts due to
banks 33.6 20.5
- net increase in deposits from
customers 118.7 424.7
- net increase in other liabilities 28.1 7.7
Income tax paid (3.5) (3.2)
---------------------------------------------- ----- ------------- -------------
Net cash (outflow)/inflow from operating
activities (178.2) 52.5
---------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Sale of subsidiary undertakings 37 212.3 -
Purchase of property, plant and equipment 15 (2.0) (0.8)
Purchase of computer software 16 (3.5) (2.2)
Net cash inflow/(outflow) from investing
activities 206.8 (3.0)
---------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Issue of shares 2.0 -
Dividends paid (43.1) (12.6)
---------------------------------------------- ----- ------------- -------------
Net cash flows from financing activities (41.1) (12.6)
---------------------------------------------- ----- ------------- -------------
Net (decrease)/increase in cash and
cash equivalents (12.5) 36.9
Cash and cash equivalents at 1 January 141.0 104.1
---------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 27 128.5 141.0
---------------------------------------------- ----- ------------- -------------
Notes to the consolidated financial statements
1. Accounting policies
The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These
policies have been consistently applied to all the years presented,
unless otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a company incorporated in the United
Kingdom (referred to as 'the Company'). The Company is registered
in England and Wales and has the registered number 00541132. The
registered address of the Company is One Arleston Way, Solihull,
West Midlands, B90 4LH. The consolidated financial statements of
the Company as at and for the year ended 31 December 2016 comprise
Secure Trust Bank PLC and its subsidiaries (together referred to as
'the Group' and individually as 'subsidiaries'). The Group is
primarily involved in banking and financial services.
1.2. Basis of presentation
The Group's consolidated financial statements and the Company's
financial statements have been prepared in accordance with
International Financial Reporting Standards, as adopted or early
adopted by the Group and endorsed by the EU and the Companies Act
2006 applicable to companies reporting under IFRS. They have been
prepared under the historical cost convention, as modified by the
revaluation of equity instruments available-for-sale and land and
buildings and financial instruments at fair value through profit or
loss. The consolidated financial statements are presented in pounds
sterling, which is the functional and presentational currency of
the entities within the Group.
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity or areas where assumptions
and estimates are significant to the consolidated financial
statements are disclosed in Note 2.
The directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The directors confirm they are satisfied that the
Company and the Group have adequate resources to continue in
business for the foreseeable future. For this reason, they continue
to adopt the 'going concern' basis for preparing accounts, as set
out in the going concern and viability section of the Strategic
Report starting on page 14.
The consolidated financial statements were authorised for issue
by the Board of Directors on 22 March 2017.
The following International Financial Reporting Standards have
been issued which are not yet effective and which have not been
adopted early:
-- IFRS 9 'Financial instruments' (effective for annual
periods beginning after 1 January 2018). This is
the International Accounting Standards Board's replacement
of IAS 39 'Financial Instruments: Recognition and
Measurement'. Phase one of this standard deals with
the classification and measurement of financial
assets and represents a significant change from
the existing requirements in IAS 39. The standard
contains three primary measurement categories for
financial assets: 'amortised cost', 'fair value
through other comprehensive income' and 'fair value
through profit or loss' and eliminates the existing
categories of 'held-to-maturity', 'available-for-sale'
and 'loans and receivables'. Phase two of the standard
covers impairment, with a new expected loss impairment
model that will require expected credit losses to
be accounted for from when financial instruments
are first recognised and lowers the threshold for
the recognition of full lifetime expected losses.
Phase three covers general hedge accounting and
introduces a substantially reformed model for hedge
accounting with enhanced disclosure about risk management
activity. The new model aligns the accounting treatment
with risk management activities. Details of the
Group's implementation of this standard is set out
in Note 29.
-- IFRS 15 'Revenue from contracts with customers'
(effective for annual periods beginning after 1
January 2018). This standard replaces a number of
existing standards and interpretations and applies
to contracts with customers, but does not apply
to insurance contracts, financial instruments or
lease contracts, which are in the scope of other
IFRS. It also does not apply if two companies in
the same line of business exchange non-monetary
assets to facilitate sales to other parties. The
standard specifies how and when an IFRS reporter
will recognise revenue as well as requiring such
entities to provide users of financial statements
with more informative relevant disclosures. It introduces
a new revenue recognition model that recognises
revenue either at a point in time or over time.
The model features a principles-based five-step
model to be applied to all contracts with customers.
Following consideration of the Group's operating
model, this standard is considered unlikely to have
a material impact on the Group.
-- IFRS 16 'Leases' (effective for annual periods beginning
after 1 January 2019). The standard sets out the
principles for the recognition, measurement, presentation
and disclosure of leases for both parties to a contract
i.e. the customer ('lessee') and the supplier ('lessor').
IFRS 16 replaces the previous leases standard, IAS
17 'Leases', and related interpretations. IFRS 16
eliminates the classification of leases as either
operating leases or finance leases for a lessee.
Instead all leases, except short term and low value
leases, are treated in a similar way to finance
leases applying IAS 17. Leases are 'capitalised'
by recognising the present value of the lease payments
and showing them either as lease assets (right-of-use
assets) or together with property, plant and equipment.
If lease payments are made over time, a company
also recognises a financial liability representing
its obligation to make future lease payments. The
most significant effect of the new requirements
in IFRS 16 will be an increase in lease assets and
financial liabilities. The effect of this standard
is currently being assessed, but it is unlikely
to be substantial. Lessor accounting remains unchanged
from IAS 17.
IFRS9 and IFRS 15 have been endorsed by the EU in November 2016
and September 2016 respectively, however IFRS16 has not yet been
endorsed by the EU.
1.3. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition over the fair value of the
Group's share of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly in the Statement of Comprehensive Income.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment in
value.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Non-current assets held-for-sale and discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Under IFRS 5, the Group classifies a non-current asset as
held-for-sale if its carrying amount will be recovered mainly
through selling the asset rather than through usage. The
classification also applies to disposal groups, which are a group
of assets and liabilities which an entity intends to dispose of in
a single transaction.
The conditions for a non-current asset or disposal group to be
classified as held-for-sale are as follows:
-- the asset must be available for immediate sale in
its present condition and its sale must be highly
probable;
-- the asset must be currently marketed actively at
a price that is reasonable in relation to its current
fair value;
-- the sale should be completed, or expected to be so,
within a year from the date of the classification;
and
-- the actions required to complete the planned sale
will have been made, and it is unlikely that the
plan will be significantly changed or withdrawn.
Discontinued operations are a component of an entity that either
has been disposed of, or is classified as held-for-sale, and
represents a major line of business and is part of a single
co-ordinated disposal plan.
In 2015, discontinued operations were included in the income
statement as a single amount, with further analysis in the notes to
the accounts. In 2016, the income statement was restated to include
discontinued operations on a line-by-line basis, rather than in the
notes, as the directors consider that this presentation improves
clarity.
1.4. Interest income and expense
Interest income and expense are recognised in the Statement of
Comprehensive Income for all instruments measured at amortised cost
using the effective interest method.
The effective interest method calculates the amortised cost of a
financial asset or a financial liability and allocates the interest
income or interest expense over the relevant period. The effective
interest rate is the rate that discounts estimated future cash
payments or receipts through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset or financial liability. When
calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument but does
not consider future credit losses. The calculation includes all
fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and
all other premiums or discounts.
Once a financial asset or a group of similar financial assets
has been written down as a result of an impairment loss, interest
income is recognised using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment
loss.
1.5. Net fee and commission income
Fees and commissions which are not considered integral to the
effective interest rate are generally recognised on an accruals
basis when the service has been provided. Fees and commissions
income consists principally of weekly and monthly fees from the
OneBill and Current Account products along with associated
insurance commissions and commissions earned on debt collection
activities in DMS. Fee and commission expenses consist primarily of
fees and commission relating to the Current Account product.
1.6. Financial assets and financial liabilities
The Group classifies its financial assets at fair value through
profit or loss, loans and receivables, held-to-maturity or
available-for-sale and classifies its financial liabilities as
other financial liabilities. Management determines the
classification of its investments at initial recognition. A
financial asset or financial liability is measured initially at
fair value plus, for an item not at fair value through profit or
loss, transaction costs that are directly attributable to its
acquisition or issue.
(a) Financial assets at fair value through profit or loss
This category comprises derivative financial instruments which
are utilised by the Group for hedging purposes. Financial assets at
fair value through profit or loss are initially recognised on the
date from which the Group becomes a party to the contractual
provisions of the instrument. Subsequent measurement of financial
assets held in this category are carried at fair value through
profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable.
Loans are recognised when the funds are advanced to customers.
Loans and receivables are carried at amortised cost using the
effective interest method (see below).
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the
Group's management has the positive intention and ability to hold
to maturity. Held-to-maturity investments are carried at amortised
cost using the effective interest method.
(d) Available-for-sale
Available-for-sale investments are those not classified as
another category of financial assets. These include investments in
special purpose vehicles and equity investments in unquoted
vehicles. They may be sold in response to liquidity requirements,
interest rate, exchange rate or equity price movements. AFS
investments are initially recognised at cost, which is considered
as the fair value of the investment including any acquisition
costs. AFS securities are subsequently measured at fair value in
the Statement of Financial Position. Fair value changes on the AFS
securities are recognised directly in equity (AFS reserve) until
the investment is sold or impaired. Once sold or impaired, the
cumulative gains or losses previously recognised in the AFS reserve
are recycled to the profit or loss.
(e) Other financial liabilities
Other financial liabilities are non-derivative financial
liabilities with fixed or determinable payments. Other financial
liabilities are recognised when cash is received from the
depositors. Other financial liabilities are carried at amortised
cost using the effective interest method. The fair value of other
liabilities repayable on demand is assumed to be the amount payable
on demand at the Statement of Financial Position date.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of
ownership. In transactions in which the Group neither retains nor
transfers substantially all the risks and rewards of ownership of a
financial asset and it retains control over the asset, the Group
continues to recognise the asset to the extent of its continuing
involvement, determined by the extent to which it is exposed to
changes in the value of the transferred asset. There have not been
any instances where assets have only been partially derecognised.
The Group derecognises a financial liability when its contractual
obligations are discharged, cancelled or expire.
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a
financial instrument is not active the Group establishes a fair
value by using an appropriate valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
1.7. Foreign currencies
Transactions in foreign currencies are initially recorded at the
rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are retranslated into the Company's functional currency at the
rates prevailing on the balance sheet date. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of monetary items, are included in the income
statement for the period.
1.8. Impairment of financial assets
Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is
objective evidence that a financial asset or group of financial
assets is impaired. Objective evidence is the occurrence of a loss
event, after the initial recognition of the asset, that impacts on
the estimated future cash flows of the financial asset or group of
financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is
objective evidence of an impairment loss include, but are not
limited to, the following:
-- Delinquency in contractual payments of principal
or interest;
-- Breach of financial covenants or contractual obligations;
-- Cash flow difficulties experienced by the borrower;
and
-- Initiation of bankruptcy proceedings.
If there is objective evidence that an impairment loss on loans
and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset's carrying amount and
the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate. The carrying
amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the Statement
of Comprehensive Income. If a loan or held-to-maturity investment
has a variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate determined
under the contract.
The Group considers evidence of impairment for loans and
advances at both an individual asset and collective level. All
individually significant loans and advances are assessed for
specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been
incurred but not yet identified. In assessing collective impairment
the Group uses historical trends of the probability of default,
emergence period, the timing of recoveries and the amount of loss
incurred, adjusted for management's judgement as to whether current
economic and credit conditions are such that the actual losses are
likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the
related provision for loan impairment. Such loans are written off
after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of
amounts previously written off decrease the amount of the provision
for loan impairment in the Statement of Comprehensive Income.
Business finance
In assessing objective evidence of a loss event for business
loans, the following factors are considered:
-- If any contractual repayment date has been missed;
-- Covenant breaches; and
-- In Commercial Finance, a loan may be considered
for potential impairment if the financial prospects
of the borrower's customers deteriorates.
Consumer finance
For retail loans, cash flows are estimated based on past
experience combined with the Group's view of the future considering
the following factors:
-- Our exposure to the customer;
-- Based on the number of days in arrears at the Statement
of Financial Position date, the likelihood that
a loan will progress through the various stages
of delinquency and ultimately be written off; and
-- The amount and timing of expected receipts and recoveries.
Modification of loans
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Loans that have renegotiated
or deferred terms, resulting in a substantial modification to the
cash flows, are no longer considered to be past due but are treated
as new loans recognised at fair value, provided the customers
comply with the renegotiated or deferred terms.
Equity investments available--for--sale
In the case of equity investments classified as
available-for-sale, a significant or prolonged decline in the fair
value of the security below its cost is considered as an indicator
that the securities are impaired. If any such evidence exists for
available-for-sale financial assets, the cumulative loss, measured
as the difference between the acquisition cost and the current fair
value, less any impairment loss on that financial asset previously
recognised in profit or loss, is removed from equity and recognised
in the profit or loss.
A significant or prolonged decline in the fair value of an
equity security is objective evidence of impairment. The Group
regards a decline of more than 20 percent in fair value as
'significant' and a decline in the quoted market price that
persists for nine months or longer as 'prolonged'.
1.9. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment losses and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. Impairment losses are recognised
in the Statement of Comprehensive Income if the carrying amount
exceeds the recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software. These costs are amortised on the basis of the expected
useful lives, which are between three to ten years.
Costs associated with developing or maintaining computer
software programs are recognised as an expense as incurred unless
it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance.
(c) Other intangibles
The acquisition of subsidiaries is accounted for in accordance
with IFRS 3 'Business Combinations', which requires the recognition
of the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. As part of this process, it is
necessary to recognise certain intangible assets which are
separately identifiable and which are not included on the
acquiree's balance sheet.
Other intangible assets include trademarks, customer
relationships, broker relationships and technology. The intangible
assets recognised as part of the V12 Finance Group acquisition have
been recorded at fair value and are being amortised over their
expected useful lives, which are between five and ten years. The
intangible assets recognised as part of ELG acquisition were also
recognised at fair value, and were being amortised over a similar
period, apart from broker relationships, which were being amortised
over three years. The intangible asset relating to ELG was
reclassified as an asset held-for-sale as at 31 December 2015, and
was not amortised between the date that the conditional sale was
agreed in December 2015 and its disposal in 2016.
1.10. Property, plant and equipment
Property is held at historic cost as modified by subsequent
revaluations less depreciation. The Group has elected under IAS
16.31 to measure its property at fair value. Revaluations are kept
up to date such that the carrying amount does not differ materially
from its fair value as required by IAS 16.34. Revaluation of assets
and any subsequent disposal are addressed through the revaluation
reserve and any changes are transferred to retained earnings.
Plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Depreciation is
calculated using the straight-line method to allocate their cost to
their residual values over their estimated useful lives, which are
subject to regular review:
Land not depreciated
Freehold buildings 50 years
Leasehold improvements shorter of life
of lease or 7 years
Computer equipment 3 to 5 years
Other equipment 5 to 10 years
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the Statement
of Comprehensive Income.
1.11. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases.
When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference
between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income
is recognised over the term of the lease using the net investment
method, which reflects a constant periodic rate of return.
(b) As a lessee
Rentals made under operating leases are recognised in the
Statement of Comprehensive Income on a straight-line basis over the
term of the lease.
1.12. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents comprise highly liquid investments which are
convertible into cash with an insignificant risk of changes in
value with a maturity of three months or less at the date of
acquisition, including certain loans and advances to banks and
short-term highly liquid debt securities.
1.13. Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium
account, net of direct issuance costs.
Incremental costs directly attributable to the issue of an
equity instrument are deducted from the initial measurement of the
equity instruments. Costs associated with the listing of shares are
expensed immediately.
1.14. Employee benefits
(a) Post-retirement obligations
The Group contributes to defined contribution schemes for the
benefit of certain employees. The schemes are funded through
payments to insurance companies or trustee-administered funds at
the contribution rates agreed with individual employees. The Group
has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit
expense when they are due. Prepaid contributions are recognised as
an asset to the extent that a cash refund or a reduction in the
future payments is available. There are no post-retirement benefits
other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised as personnel expenses in
the income statement, with a corresponding increase in equity. The
Group adopts a Black-Scholes valuation model in calculating the
fair value of the share options as adjusted for an attrition rate
of members of the scheme and a probability of pay-out reflecting
the risk of not meeting the terms of the scheme over the vesting
period. The number of share options that are expected to vest are
reviewed at least annually.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the profit or loss with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
When share-based payments are changed from cash settled to
equity settled and there is no change in the fair value of the
replacement award, it is seen as a modification to the terms and
conditions on which the equity instruments were granted and is not
seen as the settlement and replacement of the instruments.
Accordingly, the liability in the Statement of Financial Position
is reclassified to equity and the prospective charge to the profit
or loss from the modification reflects the spreading of the initial
grant date fair value of the award over the remaining vesting
period in line with the policy on equity settled awards.
1.15. Taxation
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits
arise.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the Statement of Financial Position
date and are expected to apply when the related deferred tax asset
is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax assets and
liabilities, and they relate to taxes levied by the same tax
authority on the same taxable entity, or on different tax entities,
when they intend to settle current tax liabilities and assets on a
net basis or their tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
1.16. Dividends
Dividends on ordinary shares are recognised in equity in the
period in which they are approved.
1.17. Significant items
Items which are material by both size and nature (i.e. outside
of the normal operating activities of the Group) are treated as
significant items and disclosed separately on the face of the
Statement of Comprehensive Income. The separate reporting of these
items helps to provide an indication of the Group's underlying
business performance.
1.18. Funding for Lending Scheme
Under the applicable International Accounting Standard, IAS 39,
if a security is lent under an agreement to return it to the
transferor, as is the case for eligible securities lent by
institutions to the Bank of England under the Funding for Lending
Scheme, then the security is not derecognised because the
transferor retains all the risks and rewards of ownership. The UK
Treasury Bills borrowed from the Bank of England under the Funding
for Lending Scheme are not recognised on the Statement of Financial
Position of the institution until such time as they are subject to
a repurchase agreement with a third party, as they will not meet
the criteria for derecognition by the Bank of England. When the UK
Treasury Bills are pledged as part of a sale and repurchase
agreement with a third party, amounts borrowed from the third party
are recognised in the Statement of Financial Position.
2. Critical judgements and estimates
The Group makes certain judgements and estimates which affect
the reported amounts of assets and liabilities. Critical judgements
and the assumptions used in calculating estimates are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable under the circumstances.
2.1. Impairment losses on loans and advances to customers
Where financial assets are individually evaluated for
impairment, management uses their best estimates in calculating the
net present value of future cash flows. Management has to make
judgements on the financial position of the counterparty and the
net realisable value of collateral (where held), in determining the
expected future cash flows.
In assessing collective impairment the Group uses historical
trends of the probability of default, the timing of recoveries and
the amount of loss incurred, adjusted for management's judgement as
to whether current economic and credit conditions are such that the
actual losses are likely to be significantly different to historic
trends.
Consumer finance
The Group reviews its Consumer loan portfolios to assess
impairment at least on a half-yearly basis. The basis for
evaluating impairment losses is described in accounting policy 1.8.
In determining whether an impairment loss should be recorded in the
Statement of Comprehensive Income, the Group makes judgements as to
whether there is any observable data indicating that there is a
measurable decrease in the estimated future cash flows from
financial assets, or a group of financial assets.
This evidence may include observable data indicating that there
has been an adverse change in the payment status of borrowers in a
group, or national or local economic conditions that correlate with
defaults on assets in the group. Loans and advances are identified
as impaired by taking account of the age of the debt's delinquency
and the product type. The impairment provision is calculated by
applying a percentage rate to the balance of different ages and
categories of impaired debt. The methodology and assumptions used
for estimating both the amount and timing of future cash flows are
reviewed regularly to reduce any differences between loss estimates
and recent actual loss experience.
The key judgements made in calculating the Consumer individual
provisions are the probability of default rates and the loss given
default. Uplifting the probability of default rates and loss given
default used by 10% would result in an estimated increase in the
Consumer individual provisions as follows:
10% 10%
increase increase
in probability in loss
of default given
rates default
GBPmillion GBPmillion
------------------ ---------------- -----------
Personal Lending 0.2 0.3
Motor Finance 0.3 1.6
Retail Finance 0.1 0.4
------------------ ---------------- -----------
0.6 2.3
------------------ ---------------- -----------
Of the GBP1.6 million sensitivity to loss given default in Motor
Finance above, an estimated GBP0.8 million relates to the expected
loss on the sale of repossessed vehicles.
The sensitivities to loss given default rates above are also
impacted by the estimates of cash collection made by DMS. A 10%
increase in the estimated cash collected would reduce Consumer
individual provisions by GBP0.3 million.
The collective provision for the consumer portfolio assumes an
emergence period of 2 months for the Motor and Personal Loan
portfolios and 1 month for the Retail portfolio. Increasing this
assumption by 1 month would result in an estimated increase in the
collective impairment allowance as follows:
1 month
increase
in emergence
period
GBPmillion
------------------ --------------
Personal Lending 0.5
Motor Finance 0.8
Retail Finance 0.9
------------------- --------------
2.2
------------------ --------------
Business Finance
Within the Real Estate Finance and Asset Finance businesses,
accounts which are impaired are assessed against the discounted
cash flows expected to arise in order to identify any impairment
provisions. Collective provisions are assessed only to the extent
that there is sufficient data to justify an inherent level of
losses within the current portfolios.
For specific Invoice Finance clients assessment is made as to
the collectability of outstanding invoices in relation to the
amounts lent against them. If there is a deficit against
outstanding invoices then other security is considered in terms of
value and collectability. If there is an overall shortfall then the
unsecured amount is assessed as to whether a provision is required.
For collective provisions a view of the overall level of
non-collectability in the portfolio is taken. The level of
provision required is under review as the product is yet to mature,
and therefore data is developing, so we have estimated a level
appropriate based on other data available in the industry.
The Business Finance portfolio is largely assessed on an
individual basis with minimal losses experienced to date. The
decision on whether or not an impairment trigger has occurred for
Real Estate Finance loans is made based on the Group's knowledge of
the counterparty and assessment of their ability to repay their
loan balance. The Real Estate Finance portfolio is exposed to
deteriorations in property prices, in the event of borrower
default. However, given the low loan to value ratios of loans held
within the portfolio, this exposure is not considered
significant.
The collective provision for the Asset Finance portfolio assumes
an emergence period of 3 months. The collective provision for the
Commercial Finance and Real Estate Finance portfolios are based on
peer group experience of comparable groups of financial assets and
determined as 0.15% and 0.1% of gross balances net of specific
provisions respectively.
2.2. Acquisition accounting
The Group recognises identifiable assets and liabilities at
their acquisition date fair values. The exercise of attributing a
fair value to the balance sheet of the acquired entity requires the
use of a number of assumptions and estimates, which are documented
at the time of the acquisition. These fair value adjustments are
determined from the estimated future cash flows generated by the
assets.
2.3. Share Option Scheme valuations
The valuation of the equity settled Share Option Scheme was
determined at the original grant date of 2 November 2011 using
Black-Scholes valuation models. The final options under this scheme
vested on 2 November 2016 and consequently there will be no further
change to the valuation of the remaining outstanding options.
The valuation of the cash settled Share Option Scheme was
determined at 31 December 2016 using Black-Scholes valuation
models.
The most significant judgement relates to share price
volatility. See Note 26 for further details.
2.4. Average life of lending
IAS 39 requires interest earned from lending to be measured
under the effective interest rate method. The effective interest
rate is the rate that exactly discounts estimated future cash
receipts or payments through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected
life of each instrument and hence the expected cash flows relating
to it. The accuracy of these estimates would therefore be affected
by unexpected market movements resulting in altered customer
behaviour, inaccuracies in the models used compared to actual
outcomes and incorrect assumptions. The Group also needs to
identify which cash flows relating to each instrument should be
subject to the effective interest rate method.
A one month increase in the assumed behavioural life would
change the income received in the year as follows:
GBPmillion
------------------ -----------
Personal Lending -
Motor Finance 0.1
Retail Finance (0.6)
------------------- -----------
(0.5)
------------------ -----------
3. Operating segments
The Group is organised into six main operating segments, which
consist of the different products available, disclosed below:
Business finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium sized enterprises to
acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice
factoring.
Consumer finance
4) Personal Lending: Unsecured consumer loans sold to customers
via broker aggregators and business partners.
5) Motor Finance: Hire purchase agreements secured against the
vehicle being financed.
6) Retail Finance: Point of sale unsecured finance for in-store
and online retailers.
Other
Other includes Current Account, OneBill, STB Leasing Limited,
debt collection and a GBP30 million loan to NSF as part of their
purchase of ELG.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2016
Business finance
Real Estate Finance 28.3 0.1 28.4 0.1 451.0
Asset Finance 7.8 - 7.8 0.6 117.2
Commercial Finance 1.5 3.1 4.6 0.2 62.8
Consumer finance
Personal Lending 11.2 - 11.2 4.4 65.5
Motor Finance 39.6 0.9 40.5 14.6 236.2
Retail Finance 34.3 2.4 36.7 9.5 325.9
Other 7.3 9.8 17.1 (1.7) 62.4
---------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 130.0 16.3 146.3 27.7 1,321.0
Discontinued operations
and assets held-for-sale
Personal Lending 11.1 0.1 11.2 2.6 -
---------------------------- ------------ ------------ ----------- -------------- --------------
141.1 16.4 157.5 30.3 1,321.0
--------------------------- ------------ ------------ ----------- -------------- --------------
Net
impairment
Interest losses
receivable Fee Revenue on loans Loans
and and from and and
similar commission external advances advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ------------ ------------ ----------- -------------- --------------
Year ended 31 December
2015
Business finance
Real Estate Finance 20.2 0.1 20.3 - 368.0
Asset Finance 2.4 - 2.4 - 70.7
Commercial Finance 0.4 1.2 1.6 0.3 29.3
Consumer finance
Personal Lending 17.2 - 17.2 4.8 74.3
Motor Finance 33.2 0.1 33.3 7.3 165.7
Retail Finance 22.5 1.7 24.2 5.2 220.4
Other 4.6 13.8 18.4 (0.8) 32.2
---------------------------- ------------ ------------ ----------- -------------- --------------
Continuing operations 100.5 16.9 117.4 16.8 960.6
Discontinued operations
and assets held-for-sale
Personal Lending 39.2 1.5 40.7 7.5 114.3
---------------------------- ------------ ------------ ----------- -------------- --------------
139.7 18.4 158.1 24.3 1,074.9
--------------------------- ------------ ------------ ----------- -------------- --------------
The 'other' segment above includes other products which are
individually below the quantitative threshold for separate
disclosure and fulfils the requirement of IFRS 8.28 by reconciling
operating segments to the amounts reported in the financial
statements.
As interest, fees, commission and operating expenses are not
aligned to operating segments for day to day management of the
business and cannot be allocated on a reliable basis, profit by
operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the
United Kingdom and geographical information is therefore not
presented.
4. Net interest income
2016 2015
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Cash and balances at central banks 0.6 0.7
Loans and advances to banks - 0.2
Loans and advances to customers 129.4 99.6
Interest receivable and similar income 130.0 100.5
---------------------------------------- ----------- -----------
Deposits from customers (26.3) (21.6)
---------------------------------------- ----------- -----------
Interest expense and similar charges (26.3) (21.6)
---------------------------------------- ----------- -----------
Net interest income 103.7 78.9
---------------------------------------- ----------- -----------
Net interest income shown above excludes GBP11.1 million (2015:
GBP39.2 million) of interest on loans and advances to customers in
respect of discontinued operations, as shown in the Consolidated
Statement of Comprehensive Income set out on page 114.
5. Operating expenses
Continuing Discontinued Total Continuing Discontinued Total
2016 2016 2016 2015 2015 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Staff costs, including
those of directors:
Wages and salaries 32.0 3.0 35.0 24.7 10.0 34.7
Social security
costs 3.1 0.3 3.4 2.6 1.1 3.7
Pension costs 0.9 0.2 1.1 0.7 0.6 1.3
Share based payment
transactions (0.5) - (0.5) 1.4 - 1.4
Depreciation of
property, plant
and equipment (Note
15) 0.6 - 0.6 0.5 0.1 0.6
Amortisation of
intangible assets
(Note 16) 1.6 - 1.6 1.4 0.9 2.3
Operating lease
rentals 1.6 0.3 1.9 1.2 0.8 2.0
Other administrative
expenses 26.2 2.2 28.4 18.0 7.7 25.7
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Total operating
expenses 65.5 6.0 71.5 50.5 21.2 71.7
------------------------ ----------- ------------- ----------- ----------- ------------- -----------
Remuneration of the auditor and its associates, excluding VAT,
was as follows:
' GBP'000 GBP'000
------------------------------------------ -------- --------
Fees payable to the Company's auditor
for the audit of the Company's annual
accounts 149 190
Fees payable to the Company's auditor
for other services:
The audit of the Company's subsidiaries,
pursuant to legislation 63 122
Audit related assurance services 13 21
Other assurance services 521 -
Tax advisory services - 49
All other non-audit services 15 146
------------------------------------------ -------- --------
761 528
------------------------------------------ -------- --------
All other non-audit services incurred during 2016 related to
reporting accountant work on the Main Market listing.
6. Average number of employees
2016 2015
Number Number
---------------- ------- -------
Directors 6 7
Management 101 78
Administration 590 621
---------------- ------- -------
697 706
---------------- ------- -------
The above figures include employees of ELG for the period of
ownership by the Group.
7. Income tax expense
Continuing Discontinued Continuing Discontinued
operations operations Total operations operations Total
2016 2016 2016 2015 2015 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Current taxation
Corporation tax charge
- current year 4.2 0.6 4.8 5.4 2.5 7.9
Corporation tax charge
- adjustments in
respect of prior
years 1.8 - 1.8 0.6 (1.0) (0.4)
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
6.0 0.6 6.6 6.0 1.5 7.5
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Deferred taxation
Deferred tax charge
- current year - (0.1) (0.1) (0.5) (0.1) (0.6)
Deferred tax charge
- adjustments in
respect of prior
years 0.3 - 0.3 - 0.9 0.9
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
0.3 (0.1) 0.2 (0.5) 0.8 0.3
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense 6.3 0.5 6.8 5.5 2.3 7.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Tax reconciliation
Profit before tax 25.0 2.5 27.5 24.8 11.7 36.5
Tax at 20.0% (2015:
20.25%) 5.0 0.5 5.5 5.0 2.4 7.4
Permanent differences (0.8) - (0.8) (0.3) - (0.3)
Prior period adjustments 2.1 - 2.1 0.8 (0.1) 0.7
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
Income tax expense
for the year 6.3 0.5 6.8 5.5 2.3 7.8
-------------------------- ------------ ------------- ----------- ------------ ------------- -----------
The current taxation adjustment in respect of prior years
primarily relates to non-deductible expenditure.
On 2 July 2013 the Government substantively enacted a reduction
in the main rate of UK corporation tax from 23% to 21% with effect
from 1 April 2014 and then from 21% to 20% with effect from 1 April
2015. Further reductions to 19% (effective from 1 April 2017) and
to 17% (effective 1 April 2020) have also been substantively
enacted. This will reduce the Company's future current tax charge
accordingly.
8. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the
profit attributable to equity holders of the parent by the weighted
average number of ordinary shares as follows:
2016 2015
Profit attributable to equity
holders of the parent (GBP
millions)
Continuing operations 18.7 19.3
Discontinued operations 118.8 9.4
--------------------------------- ----------- -----------
137.5 28.7
------------------------------- ----------- -----------
Weighted average number of
ordinary shares (number) 18,234,588 18,191,894
--------------------------------- ----------- -----------
Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
2016 2015
-------------------------------- ----------- -----------
Weighted average number of
ordinary shares 18,234,588 18,191,894
Number of dilutive shares in
issue at the year end 130,200 352,147
---------------------------------- ----------- -----------
Fully diluted weighted average
number of ordinary shares 18,364,788 18,544,041
---------------------------------- ----------- -----------
Dilutive shares being based
on:
Number of options outstanding
at the year end 177,084 460,419
Exercise price (pence) 720 720
Average share price during
the period (pence) 2,720 3,062
---------------------------------- ----------- -----------
9. Loans and advances to banks
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------- ----------- ----------- ----------- -----------
Placements with banks included
in cash and cash equivalents
(Note 27) 18.2 9.8 16.5 9.2
-------------------------------- ----------- ----------- ----------- -----------
Included within loans and advances to banks are amounts placed
with Arbuthnot Latham & Co., Limited, a related company prior
to the sale of its controlling stake in the Group, of GBP5.0
million (31 December 2015: GBP5.3 million).
Moody's long-term ratings are as follows:
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
A1 4.6 0.1 4.6 0.1
A2 - (1.4) - -
A3 8.6 5.8 6.9 3.8
Arbuthnot Latham & Co., Limited
- No rating 5.0 5.3 5.0 5.3
--------------------------------- ----------- ----------- ----------- -----------
18.2 9.8 16.5 9.2
--------------------------------- ----------- ----------- ----------- -----------
The GBP1.4 million negative balance in the Group 2015 figures
above represented an overdraft attributable to continuing
operations. When amounts included in loans and advances to banks
attributable to discontinued operations are taken into account, the
overall balance is in credit.
None of the loans and advances to banks are either past due or
impaired.
10. Loans and advances to customers
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 1,381.5 994.9 1,316.9 953.3
Less: allowances for impairment
on loans and advances (Note
12) (60.5) (34.3) (27.7) (20.6)
--------------------------------- ----------- ----------- ----------- -----------
1,321.0 960.6 1,289.2 932.7
--------------------------------- ----------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 34. For a maturity profile of loans and advances to customers,
refer to Note 30.
Group and Company
At 31 December 2016 loans and advances to customers of GBP180.6
million were pre-positioned under the Bank of England's Funding for
Lending Scheme and were available for use as collateral within the
scheme (2015: GBP56.4 million).
At 31 December 2016, GBP86.0 million of UK Treasury Bills were
drawn under the Funding for Lending Scheme (2015: GBP36.0 million).
During the period, these Treasury Bills were pledged as part of a
sale and repurchase agreement with an original maturity period of
six months (2015: six months). Monies arising as a result are
disclosed in Note 20.
GBP0.2 million (2015: GBP0.2 million) is a standard mortgage
loan, with a loan to value ratio of 64% (2015: 72%), secured upon
residential property, and is neither past due nor impaired.
GBP451.0 million (2015: GBP368.0 million) of the loans are
secured upon residential or commercial property and these are
neither past due nor impaired. All portfolios of loans secured are
at an initial loan to value ratio of less than 80%. All property
valuations at loan inception, and the majority of development stage
valuations, are performed by independent Chartered Surveyors, who
perform their work in accordance with the Royal Institution of
Chartered Surveyors Valuation - Professional Standards.
GBP236.2 million (2015: GBP165.7 million) of the loans are
secured against motor vehicles where the security is discharged
when the buyer exercises an option to buy the goods at a
predetermined price at the end of the loan term. Management's
estimate of the fair value of the motor vehicles was GBP173.4
million (2015: GBP127.1 million), giving a loan to value ratio of
136.2% (2015: 130.4%).
Group
GBP2.9 million (2015: GBP3.7 million) of collateral is held from
RentSmart, against loans of GBP18.7 million (2015: GBP23.5
million). This collateral is included in trade payables at 31
December 2016. This is based upon the balance of customer
receivables and expected new agreements during the following
month.
11. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance
lease receivables:
- No later than 1 year 163.5 121.4 151.7 103.9
- Later than 1 year and no
later than 5 years 347.0 244.0 338.9 232.3
- Later than 5 years 1.5 0.9 1.5 0.9
------------------------------------- ----------- ----------- ----------- -----------
512.0 366.3 492.1 337.1
Unearned future finance income
on finance leases (151.2) (109.0) (146.2) (103.3)
------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 360.8 257.3 345.9 233.8
------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance
leases may be analysed as follows:
- No later than 1 year 98.0 73.3 89.9 60.3
- Later than 1 year and no
later than 5 years 261.5 183.2 254.7 172.7
- Later than 5 years 1.3 0.8 1.3 0.8
------------------------------------- ----------- ----------- ----------- -----------
360.8 257.3 345.9 233.8
------------------------------------- ----------- ----------- ----------- -----------
12. Allowances for impairment of loans and advances
Group
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
----------------------------- ----------- ----------- ----------- ----------
Year ended 31 December 2016
Business finance
Real Estate Finance - 0.5 0.5 0.1%
Asset Finance 0.4 0.1 0.5 0.4%
Commercial Finance 0.4 0.1 0.5 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 6.0%
Motor Finance 10.6 3.0 13.6 5.4%
Retail Finance 4.0 0.9 4.9 1.5%
Other 36.3 - 36.3 36.8%
----------------------------- ----------- ----------- ----------- ----------
55.2 5.3 60.5 4.4%
----------------------------- ----------- ----------- ----------- ----------
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
----------------------------- ----------- ----------- ----------- ----------
Year ended 31 December 2015
Business finance
Real Estate Finance - - - -
Asset Finance - - - -
Commercial Finance 0.3 - 0.3 1.0%
Consumer finance
Personal Lending 5.2 0.7 5.9 7.4%
Motor Finance 7.2 0.7 7.9 4.6%
Retail Finance 2.2 0.5 2.7 1.2%
Other 17.4 0.1 17.5 35.2%
----------------------------- ----------- ----------- ----------- ----------
32.3 2.0 34.3 3.4%
----------------------------- ----------- ----------- ----------- ----------
Provisions included in 'Other' are in respect of DMS and various
legacy products. This segment also includes loans of GBP18.7
million (2015: GBP23.5 million) held in STB Leasing Limited. The
credit risk associated with those loans is retained by its partner,
RentSmart. Accordingly, no provision is held against the RentSmart
loans.
The Group net impairment losses disclosed in the Consolidated
Statement of Comprehensive Income can be analysed as follows:
Continuing Continuing Discontinued Total
2016 2015 2015 2015
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------- ----------- ----------- ------------- -----------
Individual provision: charge
for impairment losses 25.1 16.6 7.7 24.3
Collective provision: charge
for impairment losses 3.3 0.9 0.2 1.1
Loans written off, net of amounts
utilised 1.2 0.3 0.7 1.0
Recoveries of loans written
off (1.9) (1.0) (1.1) (2.1)
27.7 16.8 7.5 24.3
----------------------------------- ----------- ----------- ------------- -----------
A reconciliation of the allowance accounts for losses on loans
and advances is as follows:
2016 2015
GBPmillion GBPmillion
-------------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 32.3 32.1
Charge for impairment losses 25.1 24.3
Amounts utilised (10.7) (9.5)
Changes to presentation in respect of debt
sales 8.5 (9.9)
Transfer to assets held-for-sale - (4.7)
-------------------------------------------- ----------- -----------
At 31 December 55.2 32.3
-------------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 2.0 2.0
Charge for impairment losses 3.3 1.1
Transfer to assets held-for-sale - (1.1)
At 31 December 5.3 2.0
-------------------------------------------- ----------- -----------
Total allowances for impairment 60.5 34.3
-------------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as
follows:
2016 2016 2015 2015
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,246.2 90.3% 939.1 94.4%
Not past due but impaired 0.6 0.0% - 0.0%
Past due but not impaired 12.4 0.9% - 0.0%
Past due up to 90 days and
impaired 59.7 4.3% 24.8 2.5%
Past due after 90 days and
impaired 62.6 4.5% 31.0 3.1%
-------------------------------- ----------- ------- ----------- -------
Gross 1,381.5 100.0% 994.9 100.0%
Less: allowance for impairment (60.5) (34.3)
-------------------------------- ----------- ------- ----------- -------
Net 1,321.0 960.6
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
2016 2015
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 44.3 16.5
Past due 30 - 60 days 9.8 5.5
Past due 60 - 90 days 5.6 2.8
Total 59.7 24.8
-------------------------- ----------- -----------
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
2016 2015
GBPmillion GBPmillion
----------------------- ----------- -----------
Past due up to 30 days 4.6 -
Past due 30 - 60 days 7.8 -
Total 12.4 -
----------------------- ----------- -----------
Company
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
----------------------------- ----------- ----------- ----------- ----------
Year ended 31 December 2016
Business finance
Real Estate Finance - 0.5 0.5 0.1%
Asset Finance 0.4 0.1 0.5 0.4%
Commercial Finance 0.4 0.1 0.5 0.8%
Consumer finance
Personal Lending 3.5 0.7 4.2 6.0%
Motor Finance 10.6 1.6 12.2 4.9%
Retail Finance 4.0 0.9 4.9 1.5%
Other 3.5 1.4 4.9 13.4%
----------------------------- ----------- ----------- ----------- ----------
22.4 5.3 27.7 2.1%
----------------------------- ----------- ----------- ----------- ----------
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
----------------------------- ----------- ----------- ----------- ----------
Year ended 31 December 2015
Business finance
Real Estate Finance - - - -
Asset Finance - - - -
Commercial Finance 0.3 - 0.3 1.0%
Consumer finance
Personal Lending 5.2 0.7 5.9 7.4%
Motor Finance 7.2 0.7 7.9 4.6%
Retail Finance 2.2 0.5 2.7 1.2%
Other 3.6 0.2 3.8 10.6%
----------------------------- ----------- ----------- ----------- ----------
18.5 2.1 20.6 2.2%
----------------------------- ----------- ----------- ----------- ----------
The Company net impairment losses included in the Company
Statement of Comprehensive Income can be analysed as follows:
2016 2015
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Individual provision: Charge
for impairment losses 25.8 16.5
Collective provision: Charge
for impairment losses 3.2 1.0
Loans written off, net of amounts
utilised 0.9 0.2
Recoveries of loans written
off (0.3) -
Profit on sale of debt (1.0) -
28.6 17.7
----------------------------------- ----------- -----------
A reconciliation of the allowance accounts for losses on loans
and advances is as follows:
2016 2015
GBPmillion GBPmillion
---------------------------------------- ----------- -----------
Individual allowances for impairment
At 1 January 18.5 16.9
Charge for impairment losses 25.8 16.5
Utilised (8.5) (2.8)
Release of allowance for impairment on
the sale of debt (13.4) (12.1)
At 31 December 22.4 18.5
---------------------------------------- ----------- -----------
Collective allowances for impairment
At 1 January 2.1 1.1
Charge for impairment losses 3.2 1.0
At 31 December 5.3 2.1
---------------------------------------- ----------- -----------
Total allowances for impairment 27.7 20.6
---------------------------------------- ----------- -----------
Loans and advances to customers can be further summarised as
follows:
2016 2016 2015 2015
GBPmillion % GBPmillion %
-------------------------------- ----------- ------- ----------- -------
Neither past due nor impaired 1,227.9 93.3% 916.0 96.1%
Not past due but impaired 0.6 0.0% - 0.0%
Past due but not impaired 12.4 0.9% - 0.0%
Past due up to 90 days and
impaired 59.4 4.5% 24.5 2.6%
Past due after 90 days and
impaired 16.6 1.3% 12.8 1.3%
-------------------------------- ----------- ------- ----------- -------
Gross 1,316.9 100.0% 953.3 100.0%
Less: allowance for impairment (27.7) (20.6)
-------------------------------- ----------- ------- ----------- -------
Net 1,289.2 932.7
-------------------------------- ----------- ------- ----------- -------
Gross amounts of loans and advances to customers that were past
due up to 90 days and impaired were as follows:
2016 2015
GBPmillion GBPmillion
------------------------ ----------- -----------
Past due up to 30 days 44.1 16.3
Past due 30 - 60 days 9.7 5.5
Past due 60 - 90 days 5.6 2.7
Total 59.4 24.5
-------------------------- ----------- -----------
Gross amounts of loans and advances to customers that were past
due but not impaired were as follows:
2016 2015
GBPmillion GBPmillion
----------------------- ----------- -----------
Past due up to 30 days 4.6 -
Past due 30 - 60 days 7.8 -
Total 12.4 -
----------------------- ----------- -----------
The impairment provision calculation is based on the individual
past-due status of each loan.
Group and Company
Interest income on loans classified as impaired totalled GBP6.4
million (2015: GBP6.0 million).
13. Debt securities held-to-maturity
Debt securities of GBP20.0 million (31 December 2015: GBP3.8
million) represent UK Treasury Bills. The Company's intention is to
hold them to maturity and, therefore, they are stated in the
Statement of Financial Position at amortised cost.
All of the debt securities held-to-maturity had a rating agency
designation at 31 December 2016, based on Moody's long-term ratings
of Aa1. None of the debt securities held-to-maturity are either
past due or impaired.
14. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of ELG to NSF, the Group
acquired 23,529,412 shares in NSF Plc at a cost of 69.25 pence per
share. At 31 December 2016, these shares had a value of 57.5 pence
per share. This equity instrument is considered to be
available-for-sale, and therefore fair value changes on the
Available-For-Sale securities are recognised directly in other
comprehensive income and equity (AFS reserve) until the investment
is sold or impaired. The fall in value is not considered to be
significant or prolonged, and also given current market volatility,
the directors do not consider this investment to be impaired.
Accordingly, this reduction in value at 31 December 2016 of GBP2.8
million is recognised in the AFS reserve. A deferred tax asset has
not been recognised on this amount.
15. Property, plant and equipment
Group
Freehold Computer
land and
and Leasehold other
buildings improvements equipment Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- -------------- ----------- -----------
Cost or valuation
At 1 January 2015 7.1 0.4 9.3 16.8
Additions - 0.2 1.2 1.4
Transfer to assets held-for-sale - (0.6) (0.4) (1.0)
At 31 December 2015 7.1 - 10.1 17.2
---------------------------------- ----------- -------------- ----------- -----------
Additions 1.4 - 1.1 2.5
Disposals - - (0.3) (0.3)
Revaluation 0.5 - - 0.5
At 31 December 2016 9.0 - 10.9 19.9
---------------------------------- ----------- -------------- ----------- -----------
Accumulated depreciation
At 1 January 2015 (0.5) (0.3) (7.9) (8.7)
Depreciation charge (0.1) (0.1) (0.4) (0.6)
Transfer to assets held-for-sale - 0.4 0.2 0.6
---------------------------------- ----------- -------------- ----------- -----------
At 31 December 2015 (0.6) - (8.1) (8.7)
---------------------------------- ----------- -------------- ----------- -----------
Depreciation charge (0.1) - (0.5) (0.6)
Disposals - - 0.1 0.1
Revaluation 0.7 - - 0.7
---------------------------------- ----------- -------------- ----------- -----------
At 31 December 2016 - - (8.5) (8.5)
---------------------------------- ----------- -------------- ----------- -----------
Net book amount
---------------------------------- ----------- -------------- ----------- -----------
At 31 December 2015 6.5 - 2.0 8.5
---------------------------------- ----------- -------------- ----------- -----------
At 31 December 2016 9.0 - 2.4 11.4
---------------------------------- ----------- -------------- ----------- -----------
Company
Computer
and
Freehold other
property equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost
At 1 January 2015 2.7 8.7 11.4
Additions - 0.8 0.8
At 31 December 2015 2.7 9.5 12.2
-------------------------- ----------- ----------- -----------
Additions 1.4 0.6 2.0
Disposals - (0.3) (0.3)
Revaluation 0.5 - 0.5
-------------------------- ----------- ----------- -----------
At 31 December 2016 4.6 9.8 14.4
-------------------------- ----------- ----------- -----------
Accumulated depreciation
At 1 January 2015 - (7.7) (7.7)
Depreciation charge - (0.3) (0.3)
At 31 December 2015 - (8.0) (8.0)
-------------------------- ----------- ----------- -----------
Depreciation charge (0.1) (0.3) (0.4)
Disposals - 0.1 0.1
Revaluation 0.1 - 0.1
-------------------------- ----------- ----------- -----------
At 31 December 2016 - (8.2) (8.2)
-------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2015 2.7 1.5 4.2
-------------------------- ----------- ----------- -----------
At 31 December 2016 4.6 1.6 6.2
-------------------------- ----------- ----------- -----------
The Group's freehold properties are the Registered Office of the
Company, which is fully utilised for the Group's own purposes, and
Secure Trust House, Boston Drive, Bourne End, SL8 5YS, the majority
of which up to the sale of ELG, was also used for the Group's own
purposes. Since the sale, it is only partially used for the Group's
own purposes. In addition, during the year the Group purchased 25
and 26 Neptune Court, Vanguard Way, Cardiff, CF24 5PJ for GBP1.4
million, the majority of which is used for the Group's own
purposes.
The directors have assessed the value of the Group's freehold
property at the year end through comparison to current rental
yields on similar properties in the same area and an increase in
the fair value of freehold property has been recognised and its
carrying value has been adjusted accordingly. Changes in the fair
value of freehold property are recognized in other comprehensive
income, to the extent that any reductions do not exceed the initial
increase.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings and which is
not depreciated is GBP1.9 million (2015: GBP1.7 million).
The historical cost of freehold property included at valuation
is as follows:
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- -----------
Cost 7.9 6.5 4.1 2.7
Accumulated depreciation (1.4) (1.3) (0.1) (0.1)
6.5 5.2 4.0 2.6
-------------------------- ----------- ----------- ----------- -----------
16. Intangible assets
Group
Other
Computer intangible
Goodwill software assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ------------ -----------
Cost or valuation
At 1 January 2015 1.0 7.3 7.3 15.6
Additions - 2.3 - 2.3
Transfer to assets held-for-sale - (0.3) (5.1) (5.4)
At 31 December 2015 1.0 9.3 2.2 12.5
---------------------------------- ----------- ----------- ------------ -----------
Additions - 3.6 - 3.6
At 31 December 2016 1.0 12.9 2.2 16.1
---------------------------------- ----------- ----------- ------------ -----------
Accumulated amortisation
At 1 January 2015 - (3.8) (3.6) (7.4)
Amortisation charge - (1.2) (1.1) (2.3)
Transfer to assets held-for-sale - 0.2 4.0 4.2
At 31 December 2015 - (4.8) (0.7) (5.5)
---------------------------------- ----------- ----------- ------------ -----------
Amortisation charge - (1.3) (0.3) (1.6)
At 31 December 2016 - (6.1) (1.0) (7.1)
---------------------------------- ----------- ----------- ------------ -----------
Net book amount
---------------------------------- ----------- ----------- ------------ -----------
At 31 December 2015 1.0 4.5 1.5 7.0
---------------------------------- ----------- ----------- ------------ -----------
At 31 December 2016 1.0 6.8 1.2 9.0
---------------------------------- ----------- ----------- ------------ -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2016 2015
GBPmillion GBPmillion
---------------- ----------- -----------
Music business 0.3 0.3
V12 0.7 0.7
----------------- ----------- -----------
Total 1.0 1.0
----------------- ----------- -----------
Company
Computer
Goodwill software Total
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
Cost or valuation
At 1 January 2015 0.3 3.3 3.6
Additions - 2.2 2.2
At 31 December 2015 0.3 5.5 5.8
--------------------------- ----------- ----------- -----------
Additions - 3.5 3.5
At 31 December 2016 0.3 9.0 9.3
--------------------------- ----------- ----------- -----------
Accumulated amortisation
At 1 January 2015 - (2.3) (2.3)
Amortisation charge - (0.3) (0.3)
At 31 December 2015 - (2.6) (2.6)
--------------------------- ----------- ----------- -----------
Amortisation charge - (0.5) (0.5)
At 31 December 2016 - (3.1) (3.1)
--------------------------- ----------- ----------- -----------
Net book amount
-------------------------- ----------- ----------- -----------
At 31 December 2015 0.3 2.9 3.2
--------------------------- ----------- ----------- -----------
At 31 December 2016 0.3 5.9 6.2
--------------------------- ----------- ----------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment.
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three year
period, and a discount rate of 8%. Cash flow projections during the
forecast period are based on the expected rate of new business. A
zero growth based scenario is also considered. The directors
believe that any reasonably possible change in the key assumptions
on which recoverable amount is based would not cause the aggregate
carrying amount to exceed the aggregate recoverable amount of the
cash-generating unit.
17. Investments
Company
Shares Impairment Net
at cost provisions investments
GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ------------ -------------
At 31 December 2015, 1 January 2016
and 31 December 2016 3.7 - 3.7
------------------------------------- ----------- ------------ -------------
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31
December 2016 are stated at cost less any provision for impairment.
All subsidiary undertakings are unlisted and none are banking
institutions. The subsidiary undertakings were all incorporated in
the UK and wholly owned via ordinary shares. All subsidiary
undertakings are included in the consolidated financial statements
and have an accounting reference date of 31 December.
Details are as follows:
Principal activity
---------------------------------- --------------------------
Owned directly
Debt Managers (Services)
Limited Debt collection company
Secure Homes Services
Limited Property rental
STB Leasing Limited Leasing
V12 Finance Group Limited Holding company
Owned indirectly via intermediate
holding companies
V12 Personal Finance Limited Dormant
Sourcing and servicing of
V12 Retail Finance Limited unsecured loans
---------------------------------- --------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West
Midlands, B90 4LH.
The following subsidiaries were sold to NSF on 13 April 2016,
and were included in assets held-for-sale at 31 December 2015:
Principal activity
---------------------------------- -----------------------------
Owned directly
Everyday Loans Holdings
Limited Holding company
Owned indirectly via intermediate
holding companies
Sourcing and servicing of
Everyday Loans Limited unsecured and secured loans
Provider of unsecured and
Everyday Lending Limited secured loans
---------------------------------- -----------------------------
18. Deferred taxation
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
Unrealised surplus on revaluation
of freehold property (0.2) (0.2) - -
Other short term timing differences - 0.2 - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities (0.2) - - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
Other short term timing differences - 0.3 0.1 0.6
Deferred tax assets - 0.3 0.1 0.6
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax liabilities:
At 1 January - - - -
Income statement - - - -
Other comprehensive income (0.2) - - -
------------------------------------- ----------- ----------- ----------- -----------
At 31 December (0.2) - - -
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
At 1 January 0.3 1.0 0.6 0.3
Income statement (0.3) (0.3) (0.4) 0.3
Other comprehensive income - - (0.1) -
Transferred to assets held-for-sale - (0.4) - -
------------------------------------- ----------- ----------- ----------- -----------
At 31 December - 0.3 0.1 0.6
------------------------------------- ----------- ----------- ----------- -----------
On 2 July 2013 the Government substantively enacted a reduction
in the main rate of UK corporation tax from 21% to 20% with effect
from 1 April 2015, and on 26 October 2015 substantively enacted
further reductions in the main rate of UK corporation tax to 19%
with effect from 1 April 2017 and 17% with effect from 1 April
2020. This will reduce the Group's future current tax charge
accordingly. Deferred tax has been calculated based on the enacted
rates to the extent that the related temporary or timing
differences are expected to reverse in the future periods.
19. Other assets
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ----------- -----------
Trade receivables 0.7 1.5 0.6 1.4
Amounts due from related companies - 1.3 31.2 142.0
Prepayments and accrued income 4.2 4.3 3.5 2.6
4.9 7.1 35.3 146.0
------------------------------------ ----------- ----------- ----------- -----------
20. Due to banks
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- ----------- -----------
Amounts due to other credit
institutions 70.0 35.0 70.0 36.4
----------------------------- ----------- ----------- ----------- -----------
Amounts due to banks for the current year represent monies
arising from the sale and repurchase of drawings under the Funding
for Lending Scheme. These are due for repayment between January
2017 and May 2017 (2015: March 2016).
21. Deposits from customers
Group and Company
2016 2015
GBPmillion GBPmillion
------------------------- ----------- -----------
Current/demand accounts 15.2 39.5
Term deposits 1,136.6 993.6
------------------------- ----------- -----------
1,151.8 1,033.1
------------------------- ----------- -----------
For a maturity profile of deposits from customers, refer to
Notes 30 and 32.
22. Other liabilities
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Trade payables 21.2 13.8 17.5 8.3
Amounts due to related companies - 0.1 13.2 10.4
Accruals and deferred income 27.8 10.3 26.3 9.5
49.0 24.2 57.0 28.2
---------------------------------- ----------- ----------- ----------- -----------
Within Group and Company accruals and deferred income there is
GBP15.8 million relating to accrued interest payable (2015:
GBPnil).
Financial Services Compensation Scheme Levy
The liability for the Financial Services Compensation Scheme
levy is included in accruals and deferred income of both Group and
Company.
In common with all regulated UK deposit takers, the Company pays
a levy to the Financial Services Compensation Scheme to enable it
to meet claims against it. The levy consists of a compensation levy
which covers the amount of compensation and a management expenses
levy, which covers the costs of running the scheme and interest
associated with compensation which the scheme pays.
The Company's Financial Services Compensation Scheme provision,
reflects market participation up to the reporting date and the
accrual of GBP0.3 million (2015: GBP0.2 million) relates to the
levy for the scheme year 2016/17 which is payable in September
2017. This amount was calculated on the basis of the Company's
share of protected deposits and the Financial Services Compensation
Scheme's estimate of total interest levies payable for each scheme
year.
23. Provisions for liabilities and charges
Customer redress provision
Details of the provision for outstanding potential customer
redress claims are as follows:
2016 2015
GBPmillion GBPmillion
---------------------------------------------- ----------- -----------
Balance at 1 January 2.0 2.0
Charged to Statement of Comprehensive Income 0.4 2.6
Utilised (1.1) (2.0)
Transferred to assets held-for-sale - (0.6)
---------------------------------------------- ----------- -----------
Balance at 31 December 1.3 2.0
---------------------------------------------- ----------- -----------
The Group provides for its best estimate of redress payable in
respect of historical sales of PPI, by considering the likely
future uphold rate for claims, in the context of confirmed issues
and historical experience. The likelihood of potential new claims
is projected forward to 2019, as management believe this to be an
appropriate time horizon, recognising the significant decline in
recent claims experience and the increasing subjectivity beyond
that. The accuracy of these estimates would be affected, were there
to be a significant change in either the number of future claims
or, the incidence of claims upheld by the Financial Ombudsman
Service.
The Financial Conduct Authority is currently consulting on a
proposed deadline for making customer redress claims. The ruling is
expected to come into force in the middle of 2017 with a deadline
of 2 years from the ruling, which would give consumers until
approximately August 2019 to make a claim.
24. Contingent liabilities and commitments
Capital commitments
At 31 December 2016, the Group had no capital commitments (2015:
GBPnil).
The Company had no capital commitments (2015: GBPnil).
Credit commitments
See Note 29 for details of the Group and Company commitments to
extend credit to customers.
Operating lease commitments
Group
The future aggregate lease payments for non-cancellable
operating leases are as follows:
2016 2015
Land Land
and and
buildings Other buildings Other
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.3 0.4 1.0 0.5
Between 1 year and 5 years 0.9 0.1 1.6 0.3
Over 5 years 0.1 - 0.3 -
---------------------------- ----------- ----------- ----------- -----------
1.3 0.5 2.9 0.8
---------------------------- ----------- ----------- ----------- -----------
Company
The future aggregate lease payments for non-cancellable
operating leases are as follows:
2016 2015
Land Land
and and
buildings Other buildings Other
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ----------- -----------
Within 1 year 0.1 0.3 0.1 0.3
Between 1 year and 5 years 0.4 0.1 0.6 0.2
Over 5 years 0.1 - 0.1 -
---------------------------- ----------- ----------- ----------- -----------
0.6 0.4 0.8 0.5
---------------------------- ----------- ----------- ----------- -----------
There are 4 leases classified as land and buildings in the Group
(2015: 35). Other leases include motor vehicles and computer
hardware.
25. Share capital
Number Ordinary
of shares shares
GBPmillion
---------------------------------------- ----------- -----------
At 1 January 2015 and 31 December 2015 18,191,894 7.3
Shares issued during year 283,335 0.1
---------------------------------------- ----------- -----------
At 31 December 2016 18,475,229 7.4
---------------------------------------- ----------- -----------
Share capital comprises ordinary shares with a par value of 40
pence each.
26. Share based payments
Equity settled share based payments
On 17 October 2011, the Group established the Share Option
Scheme entitling three directors and certain senior employees to
purchase shares in the Company.
The performance conditions of the Scheme are that for the
duration of the vesting period, the dividends paid by the Company
must have increased in percentage terms when compared to an assumed
dividend of GBP8 million in respect of the financial year ending 31
December 2012, by a minimum of the higher of the increase in the
Retail Prices Index during that period or 5% per annum.
All dividends paid by the Company each year during the vesting
period must be paid from the Company's earnings referable to that
year. Also from the grant date to the date the option is exercised,
there must be no public criticism by any regulatory authority on
the operation of the Company or any of its subsidiaries which has a
material impact on the business of the Company.
Options are forfeited if they remain unexercised after a period
of more than 10 years from the date of grant. If the participant
ceases to be employed by the Group by reason of injury, disability,
ill-health or redundancy; or because his employing company ceases
to be a shareholder of the Group; or because his employing business
is being transferred out of the Group, his option may be exercised
within six months after such cessation. In the event of the death
of a participant, the personal representatives of a participant may
exercise an option, to the extent exercisable at the date of death,
within six months after the death of the participant.
On cessation of employment for any other reason (or when a
participant serves, or has been served with, notice of termination
of such employment), the option will lapse although the
Remuneration Committee has discretion to allow the exercise of the
option for a period not exceeding six months from the date of such
cessation.
In such circumstances, the performance conditions may be
modified or waived as the Remuneration Committee, acting fairly and
reasonably and taking due consideration of the circumstances,
thinks fit. The number of Ordinary Shares which can be acquired on
exercise will be pro-rated on a time elapsed basis, unless the
Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, decides otherwise. In
determining whether to exercise its discretion in these respects,
the Remuneration Committee must satisfy itself that the early
exercise of an option does not constitute a reward for failure.
On 2 November 2011, 934,998 share options were granted at an
exercise price of GBP7.20 per share. Approximately half of the
share options vested and became exercisable on 2 November 2014,
with the remainder vesting and becoming exercisable on 2 November
2016, being classed as share option tranches SOS1 and SOS2
respectively. On 7 November 2016, 283,335 SOS2 options were
exercised, leaving 177,084 SOS2 share options unexercised at 31
December 2016. A total of 14,167 share options have been forfeited
since their grant date.
The Share Option Scheme is an equity settled scheme. The
original grant date valuation was determined to be GBP1.69 per
option and this valuation has been used in the calculation. An
attrition rate of option holders has been assumed of nil for the
second tranche of share options. Due to the options being fully
conditional knockout options, a probability of pay-out has been
assigned based on the likelihood of meeting the performance
criteria, which is 100% for SOS2. The Company incurred an expense
in relation to share based payments of GBP0.1 million during 2016,
as disclosed in Note 5 (2015: GBP0.2 million).
2016 2016 2015 2015
No. No.
of option of option
holders SOS2 holders SOS2
-------------------------------------- ----------- -------- ----------- --------
Directors 2 177,084 3 318,751
Senior management - - 5 141,668
-------------------------------------- ----------- -------- ----------- --------
Share options in issue 2 177,084 8 460,419
-------------------------------------- ----------- -------- ----------- --------
Exercise price (GBP) 7.20 7.20
Grant date value per option
(GBP) 1.69 1.69
-------------------------------------- ----------- -------- ----------- --------
Fair value of share options,
if all share options were exercised
(GBPmillion) 0.3 0.8
-------------------------------------- ----------- -------- ----------- --------
Behavioural assumption (attrition) - -
Probability of pay-out 100% 100%
-------------------------------------- ----------- -------- ----------- --------
Assumed value of share options
on exercise date (GBPmillion) 0.3 0.8
-------------------------------------- ----------- -------- ----------- --------
Value of share options at 31
December 2016 (GBPmillion) 0.3 0.6
-------------------------------------- ----------- -------- ----------- --------
Cash settled share based payments
On 16 March 2015, a four year 'phantom' share option scheme was
established in order to provide effective long-term incentive to
senior management of the Group. Under the scheme, no actual shares
would be issued by the Company, but those granted awards under the
scheme would be entitled to a cash payment. The amount of the award
is calculated by reference to the increase in the value of an
Ordinary share in the Company over an initial value set at GBP25
per Ordinary share, being the price at which the shares resulting
from the exercise of the first tranche of share options under the
Share Option Scheme were sold in November 2014.
As at 31 December 2016, 312,917 (2015: 326,917) share options
remained outstanding.
As at 31 December 2016, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2016 2015
--------------------------------- ------- -------
Expected stock price volatility 40.00% 27.00%
Expected dividend yield 3.40% 2.09%
Risk free interest rate 0.06% 0.72%
Average expected life (years) 1.84 2.85
----------------------------------- ------- -------
This resulted in the following being recognised in the financial
statements:
2016 2015
GBPmillion GBPmillion
------------------------------- ----------- -----------
Liability at 1 January 1.2 -
Charge for the year (included
in staff costs - see Note 5) (0.6) 1.2
--------------------------------- ----------- -----------
Liability at 31 December 0.6 1.2
--------------------------------- ----------- -----------
Intrinsic value - 0.8
--------------------------------- ----------- -----------
27. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central
banks 112.0 131.8 112.0 131.8
Loans and advances to banks
(Note 9) 18.2 9.8 16.5 9.2
130.2 141.6 128.5 141.0
Included in assets held-for-sale
Loans and advances to banks
(Note 37) - 1.7 - -
---------------------------------- ----------- ----------- ----------- -----------
130.2 143.3 128.5 141.0
---------------------------------- ----------- ----------- ----------- -----------
28. Financial risk management strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The directors and senior
management of the Group have formally adopted a Group Risk Appetite
Statement which sets out the Board's attitude to risk and internal
controls. Key risks identified by the directors are formally
reviewed and assessed at least once a year by the Board, in
addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
A more detailed description of the risk governance structure is
contained in the Strategic Report beginning on page 14.
The principal financial risks inherent in the Group's business
are credit risk (Note 29), market risk (Note 30), liquidity risk
(Note 31), and capital risk (Note 32).
29. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. A formal Credit Risk Policy has been agreed by the Board
whilst credit risk is monitored on a monthly basis by the Credit
Risk Committee which reviews performance of key portfolios
including new business volumes, collections performance,
provisioning levels and provisioning methodology. A credit risk
department within the Bank ensures that the Credit Risk Policy is
being adhered to, implements risk tools to manage credit risk and
evaluates business opportunities and the risks and opportunities
they present to the Bank whilst ensuring the performance of the
Bank's existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are
approved periodically by the Board of Directors and actual
exposures against limits monitored daily.
Impairment provisions are provided for losses that have been
incurred at the Statement of Financial Position date. Significant
changes in the economy could result in losses that are different
from those provided for at the Statement of Financial Position
date. Management therefore carefully manages its exposures to
credit risk as they consider this to be the most significant risk
to the business.
Exposure to Consumer credit risk is managed through regular
analysis of the ability of borrowers and potential borrowers to
meet interest and capital repayment obligations and by changing
these lending limits where appropriate. Exposure to credit risk is
also managed in part by obtaining collateral, principally motor
vehicles on Motor loans and a credit support balance provided by
RentSmart. The assets undergo a scoring process to mitigate risk
and are monitored by the Board.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group's credit policies and risk appetite.
The loans are secured against the assets lent against (real estate,
trade receivables and commercial plant and equipment,
respectively). Disclosures relating to collateral and arrears on
loans and advances to customers are disclosed in Notes 10 and 12
respectively.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year end are contained in Note 9. There is no direct exposure
to the Eurozone and peripheral Eurozone countries.
The maximum exposure to credit risk for the Company and the
Group was as follows:
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central
banks 112.0 131.8 112.0 131.8
Loans and advances to banks 18.2 9.8 16.5 9.2
Loan and advances to customers 1,321.0 960.6 1,289.2 932.7
Debt securities held-to-maturity 20.0 3.8 20.0 3.8
Trade receivables 0.7 1.5 0.6 1.4
Amounts due from related parties - 1.3 31.2 142.0
Assets held-for-sale - 118.5 - -
Credit risk exposures relating
to off-balance sheet assets
are as follows:
Loan commitments 178.0 138.6 177.8 138.6
---------------------------------- ----------- ----------- ----------- -----------
At 31 December 1,649.9 1,365.9 1,647.3 1,359.5
---------------------------------- ----------- ----------- ----------- -----------
The above table represents the maximum credit risk exposure (net
of impairment) to the Company and Group at 31 December 2016 and
2015 without taking account of any collateral held or other credit
enhancements attached. For on-balance sheet assets, the exposures
are based on the net carrying amounts as reported in the Statement
of Financial Position.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of the Group's lending operations the
directors do not consider there to be a material exposure arising
from concentration risk. The increase in lending balances and loan
commitments in the London region is principally due to the increase
in Real Estate Finance activities during the year. The
concentration by product and location of the Group and Company's
lending to customers and loan commitments are detailed below:
Group
Loans and advances to
customers Loan commitments
Continuing
operations
Continuing Discontinued and
Total operations operations Total Total Total
2016 2015 2015 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------ ----------- ------------ ------------- ----------- ----------- ------------
Concentration by
product
Business Finance:
Real Estate Finance 451.0 368.0 - 368.0 99.4 109.0
Asset Finance 117.2 70.7 - 70.7 19.5 20.1
Commercial Finance 62.8 29.3 - 29.3 28.9 9.3
Consumer Finance:
Personal Lending 65.5 74.3 114.3 188.6 - -
Motor 236.2 165.7 - 165.7 0.6 0.2
Retail 325.9 220.4 - 220.4 28.6 -
Other 62.4 32.2 - 32.2 1.0 -
------------------------ ----------- ------------ ------------- ----------- ----------- ------------
At 31 December 1,321.0 960.6 114.3 1,074.9 178.0 138.6
------------------------ ----------- ------------ ------------- ----------- ----------- ------------
Concentration by
region:
East Anglia 113.1 89.4 10.4 99.8 19.7 28.1
East Midlands 52.3 41.4 11.3 52.7 3.0 1.1
London 415.3 300.6 17.0 317.6 61.3 55.0
North East 37.4 24.5 - 24.5 2.2 0.6
North West 120.8 73.4 7.6 81.0 17.0 4.9
Northern Ireland 12.5 8.3 15.6 23.9 0.4 -
Scotland 90.3 62.7 3.0 65.7 10.6 2.0
South East 205.0 125.5 5.8 131.3 35.0 28.4
South West 62.6 44.2 8.4 52.6 12.1 4.4
Wales 46.8 35.1 5.3 40.4 4.2 1.4
West Midlands 80.5 59.0 4.9 63.9 5.5 4.0
Yorkshire and the
Humber 69.1 52.4 13.5 65.9 3.9 3.0
Overseas 15.3 44.1 11.5 55.6 3.1 5.7
------------------------ ----------- ------------ ------------- ----------- ----------- ------------
At 31 December 1,321.0 960.6 114.3 1,074.9 178.0 138.6
------------------------ ----------- ------------ ------------- ----------- ----------- ------------
The above table relates to the location of the borrower. The
majority of the overseas borrowers are Real Estate Finance clients.
All of the property secured against Real Estate Finance loans is
based in the United Kingdom.
Company
Loans and
advances to
customers Loan commitments
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- -----------
Concentration by product:
Business Finance:
Real Estate Finance 451.0 368.0 99.4 109.0
Asset Finance 117.2 70.7 19.5 20.1
Commercial Finance 62.8 29.3 28.9 9.3
Consumer Finance:
Personal Lending 65.5 74.3 - -
Motor 236.2 165.7 0.6 0.2
Retail 325.9 220.4 28.6 -
Other 30.6 4.3 0.8 -
--------------------------- ----------- ----------- ----------- -----------
At 31 December 1,289.2 932.7 177.8 138.6
--------------------------- ----------- ----------- ----------- -----------
Concentration by region:
East Anglia 110.4 87.0 19.7 28.1
East Midlands 50.1 39.4 3.0 1.1
London 411.2 297.5 61.1 55.0
North East 35.9 23.2 2.2 0.6
North West 117.1 69.9 17.0 4.9
Northern Ireland 11.9 7.8 0.4 -
Scotland 87.1 59.5 10.6 2.0
South East 200.6 122.2 35.0 28.4
South West 60.3 42.6 12.1 4.4
Wales 45.1 33.5 4.2 1.4
West Midlands 77.8 56.4 5.5 4.0
Yorkshire and the Humber 66.4 50.0 3.9 3.0
Overseas 15.3 43.7 3.1 5.7
--------------------------- ----------- ----------- ----------- -----------
At 31 December 1,289.2 932.7 177.8 138.6
--------------------------- ----------- ----------- ----------- -----------
The above table relates to the location of the borrower. The
majority of the overseas borrowers are Real Estate Finance clients.
All of the property secured against Real Estate Finance loans is
based in the United Kingdom.
Forbearance (relating to continuing operations)
The Group does not routinely reschedule contractual arrangements
where customers default on their repayments. It may offer the
customer the option to reduce or defer payments for a short period,
in which cases the loan will retain the normal contractual payment
due dates and will be treated the same as any other defaulting
cases for impairment purposes. Arrears tracking will continue on
the account with any impairment charge being based on the original
contractual due dates for all products.
Implementation of IFRS 9
The Group has continued its project to enable compliance with
IFRS 9. The main impact of the standard, which is described more
fully in Note 1.2, is in accounting for impairment. The
classification and measurement and hedge accounting phases of the
standard have no material impact on the Group. The standard
fundamentally changes the calculation and recognition of credit
losses, by introducing the requirement to base impairment
provisions on expected credit losses over the life of the financial
asset. It also requires credit losses to be recognised for all
loans, in contrast to the current standard (IAS 39) which requires
recognition of losses only when there is evidence of impairment.
The models used to calculate expected credit losses need to include
forward looking factors including macro-economic variables.
The project is sponsored by the Chief Financial Officer and is
resourced by the Group's Finance, Credit Risk, IT and Change teams.
It has focused on the following areas:
-- Interpreting the requirements of the standard and
developing detailed business requirements for a
compliant solution. This work has been done in conjunction
with external consultants and engagement is underway
with the Group's auditors.
-- Designing, building and testing credit risk models,
that use the historic performance of loans and forward
looking factors, including macro-economic effects,
to estimate expected credit losses. Model build
is well progressed and the Group expects to be able
to use the second half of 2017 to run and calibrate
the models. As a precursor to building IFRS 9 models
for the Business Finance portfolios, credit grading
models which assign probabilities of default to
these loans have been developed and are now being
tested and calibrated.
-- Assess data requirements and build the IT support
required to run the models and associated processes.
To date no significant issues with the availability
of data have been identified. Prototype models have
been successfully run on the Group's IT systems.
-- Develop the disclosures required by IFRS 7 that
pertain to IFRS 9, and related internal management
information.
30. Market risk
Market risks arise from open positions in interest rate and
currency products, all of which are exposed to general and specific
market movements. The Group and Company have no significant
exposures to foreign currencies and therefore there is no
significant currency risk.
Interest rate risk
Interest rate risk is the potential adverse impact on the
Company and Group's future cash flows from changes in interest
rates and arises from the differing interest rate risk
characteristics of the Company and Group's assets and liabilities.
In particular, fixed rate savings and borrowing products expose the
Group to the risk that a change in interest rates could cause
either a reduction in interest income or an increase in interest
expense relative to variable rate interest flows. The Group seeks
to 'match' interest rate risk on either side of the Statement of
Financial Position. However, this is not a perfect match and
interest rate risk is present on money market deposits of a fixed
rate nature, fixed rate loans and fixed rate savings products. The
Group monitors the interest rate mismatch on a daily basis in
conjunction with liquidity and capital.
The interest rate mismatch is monitored, throughout the maturity
bandings of the book on a parallel scenario for 100 and 200 basis
points movements. The Group considers the 100 and 200 basis points
movement to be appropriate for scenario testing given the current
economic outlook and industry expectations. This typically results
in a pre-tax mismatch of GBP0.7 million or less (2015: GBP1.0
million or less) for the Company and Group, with the same impact to
equity pre-tax.
Interest rate sensitivity gap
The following tables summarise the re-pricing periods for the
assets and liabilities in the Company and Group, including
derivative financial instruments which are principally used to
hedge exposure to interest rate risk. Items are allocated to time
bands by reference to the earlier of the next contractual interest
rate re-price and the maturity date.
Group
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 18.2 - - - - - 18.2
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.7 119.7 164.8 644.6 - 13.2 1,321.0
Other assets - - - - - 38.8 38.8
Total assets 528.9 119.7 164.8 644.6 - 52.0 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 52.2 52.2
Equity - - - - - 236.0 236.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 288.2 1,510.0
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 36.5 13.0 101.0 108.7 (23.0) (236.2)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 36.5 49.5 150.5 259.2 236.2 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2015
ASSETS
Cash and balances
at central banks 131.8 - - - - - 131.8
Loans and advances
to banks 9.8 - - - - - 9.8
Debt securities
held-to-maturity 3.8 - - - - - 3.8
Loans and advances
to customers 163.4 138.4 172.2 520.9 - (34.3) 960.6
Other assets - - - - - 22.9 22.9
Assets held-for-sale 118.5 - - - - - 118.5
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets 427.3 138.4 172.2 520.9 - (11.4) 1,247.4
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks - 35.0 - - - - 35.0
Deposits from customers 97.9 371.0 94.4 432.0 37.8 - 1,033.1
Other liabilities - - - - - 29.4 29.4
Liabilities held-for-sale 8.7 - - - - - 8.7
Equity - - - - - 141.2 141.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 106.6 406.0 94.4 432.0 37.8 170.6 1,247.4
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 320.7 (267.6) 77.8 88.9 (37.8) (182.0)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 320.7 53.1 130.9 219.8 182.0 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2016
ASSETS
Cash and balances
at central banks 112.0 - - - - - 112.0
Loans and advances
to banks 16.5 - - - - - 16.5
Debt securities
held-to-maturity 20.0 - - - - - 20.0
Loans and advances
to customers 378.6 119.1 162.3 629.2 - - 1,289.2
Other assets - - - - - 65.0 65.0
Total assets 527.1 119.1 162.3 629.2 - 65.0 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks 30.0 40.0 - - - - 70.0
Deposits from customers 462.4 66.7 63.8 535.9 23.0 - 1,151.8
Other liabilities - - - - - 59.1 59.1
Equity - - - - - 221.8 221.8
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 492.4 106.7 63.8 535.9 23.0 280.9 1,502.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 34.7 12.4 98.5 93.3 (23.0) (215.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 34.7 47.1 145.6 238.9 215.9 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
3 months 6 months 1 year 5 years 5 years bearing Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As at 31 December
2015
ASSETS
Cash and balances
at central banks 131.8 - - - - - 131.8
Loans and advances
to banks 9.2 - - - - - 9.2
Debt securities
held-to-maturity 3.8 - - - - - 3.8
Loans and advances
to customers 145.7 133.2 164.9 509.5 - (20.6) 932.7
Other assets - - - - - 157.7 157.7
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets 290.5 133.2 164.9 509.5 - 137.1 1,235.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
EQUITY
Due to banks - 35.0 - - - 1.4 36.4
Deposits from customers 97.9 371.0 94.4 432.0 37.8 - 1,033.1
Other liabilities - - - - - 30.5 30.5
Equity - - - - - 135.2 135.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities
and equity 97.9 406.0 94.4 432.0 37.8 167.1 1,235.2
--------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity
gap 192.6 (272.8) 70.5 77.5 (37.8) (30.0)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Cumulative gap 192.6 (80.2) (9.7) 67.8 30.0 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
The method of allocating deposits from customers to the
appropriate time bands has been revised during the year, resulting
in a more accurate representation of the contractual interest rate
re-price and the maturity dates.
31. Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and, longer term
funding to address any structural liquidity requirements.
The Company has a formal governance structure in place to manage
and mitigate liquidity risk on a day to day basis. The Board sets
and approves the Company's liquidity risk management strategy. The
ALCO, comprising senior executives of the Company, monitors
liquidity risk. Key liquidity risk management information is
reported by the Treasury function and monitored by the Chief
Executive Officer and Chief Financial Officer on a daily basis. The
ALCO meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity
risk tolerance levels and ILAAP metrics.
The Company issued fixed rate deposit bonds to customers during
the year as set out below:
2016 2015
------- --------- ---------
GBP299 GBP172
Amount million million
1 to 1 to
Term 7 years 7 years
------- --------- ---------
These were issued to broadly match the term lending by the
Company.
The PRA requires a firm to maintain at all times liquidity
resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities
cannot be met as they fall due. There is also a requirement that a
firm ensures its liquidity resources contain an adequate buffer of
high quality, unencumbered assets (i.e. Government Securities in
the liquidity asset buffer); and it maintains a prudent funding
profile. The liquidity assets buffer is a pool of highly liquid
assets that can be called upon to create sufficient liquidity to
meet liabilities on demand, particularly in a period of liquidity
stress. The liquidity resources outside the buffer must either be
marketable assets with a demonstrable secondary market that the
firm can access, or a credit facility that can be activated in
times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require
STB to identify, measure, manage and monitor liquidity and funding
risks across different time horizons and stress scenarios,
consistent with STB's risk appetite as established by the STB
Board. The ILAAP seeks to document STB's approach to liquidity and
funding, and demonstrate that it complies with the Overall
Liquidity Adequacy Rule. The PRA's approach to liquidity
supervision is based on the principle that a firm must have
adequate levels of liquidity resources and a prudent funding
profile, and that it comprehensively manages and controls liquidity
and funding risks. The liquidity buffer required by the ILAAP has
been put in place and maintained since that time. Liquidity
resources outside of the buffer are made up of deposits placed at
the Bank of England. The ILAAP is updated annually.
The primary measures used by management to assess the adequacy
of liquidity is the Overall Liquidity Adequacy Requirement, which
is the Board's own view of the Group's liquidity needs as set out
in the Board approved ILAAP. The Group maintained liquidity in
excess of the Overall Liquidity Adequacy Requirement throughout the
year ended 31 December 2016.
The LCR regime has applied to the Group from 1 October 2016,
requiring management of net 30 day cash outflows as a proportion of
High Quality Liquid Assets. STB has set a more prudent internal
limit. The actual LCR has significantly exceeded both limits
throughout the year.
The Group is exposed to daily calls on its available cash
resources from current accounts, maturing deposits and loan
draw-downs. The Group maintains significant cash resources to meet
all of these needs as they fall due.
The matching and controlled mismatching of the maturities and
interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely
matched, as transacted business is often of uncertain term and of
different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows
for the financial liabilities and assets into relevant maturity
groupings:
Group
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks (70.0) (70.0) (30.0) (40.0) - -
Deposits from customers (1,151.8) (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities (18.3) (18.3) (18.3) - - -
(1,240.1) (1,291.2) (509.9) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 18.2 18.2 18.2 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,321.0 1,955.5 349.1 413.9 1,192.2 0.3
Other financial
assets 0.9 0.9 0.9 - - -
1,472.1 2,106.6 500.2 413.9 1,192.2 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 232.0 815.4 (9.7) 226.0 622.7 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2015
Non-derivative financial
liabilities
Due to banks (35.0) (35.0) (35.0) - - -
Deposits from customers (1,033.1) (1,078.0) (442.9) (142.7) (449.5) (42.9)
Other financial
liabilities (13.8) (13.8) (13.8) - - -
Liabilities held-for-sale (8.7) (8.7) (8.7) - - -
(1,090.6) (1,135.5) (500.4) (142.7) (449.5) (42.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 131.8 131.8 131.8 - - -
Loans and advances
to banks 9.8 9.8 9.8 - - -
Debt securities
held-to-maturity 3.8 3.8 3.8 - - -
Loans and advances
to customers 960.6 1,194.5 130.8 335.6 728.1 -
Other financial
assets 2.9 2.9 2.9 - - -
Assets held-for-sale 118.5 118.5 118.5 - - -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
1,227.4 1,461.3 397.6 335.6 728.1 -
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 136.8 325.8 (102.8) 192.9 278.6 (42.9)
--------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Company
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2016
Non-derivative financial
liabilities
Due to banks (70.0) (70.0) (30.0) (40.0) - -
Deposits from customers (1,151.8) (1,202.9) (461.6) (147.9) (569.5) (23.9)
Other financial
liabilities (30.7) (30.7) (30.7) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(1,252.5) (1,303.6) (522.3) (187.9) (569.5) (23.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 112.0 112.0 112.0 - - -
Loans and advances
to banks 16.5 16.5 16.5 - - -
Debt securities
held-to-maturity 20.0 20.0 20.0 - - -
Loans and advances
to customers 1,289.2 1,921.5 345.7 397.6 1,177.9 0.3
Other financial
assets 33.0 33.0 33.0 - - -
1,470.7 2,103.0 527.2 397.6 1,177.9 0.3
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 218.2 799.4 4.9 209.7 608.4 (23.6)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
At 31 December 2015
Non-derivative financial
liabilities
Due to banks (36.4) (36.4) (36.4) - - -
Deposits from customers (1,033.1) (1,078.0) (442.9) (142.7) (449.5) (42.9)
Other financial
liabilities (8.3) (8.3) (8.3) - - -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(1,077.8) (1,122.7) (487.6) (142.7) (449.5) (42.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Non-derivative financial
assets
Cash and balances
at central banks 131.8 131.8 131.8 - - -
Loans and advances
to banks 9.2 9.2 9.2 - - -
Debt securities
held-to-maturity 3.8 3.8 3.8 - - -
Loans and advances
to customers 932.7 1,160.9 127.1 321.7 712.1 -
Other financial
assets 1.4 1.4 1.4 - - -
1,078.9 1,307.1 273.3 321.7 712.1 -
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Liquidity mismatch 1.1 184.4 (214.3) 179.0 262.6 (42.9)
-------------------------- ----------- ----------- ----------- ----------- ----------- -----------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing financial
liabilities as they mature are important factors in assessing the
liquidity of the Company and Group and its exposure to changes in
interest rates and exchange rates.
Other financial liabilities, as shown above, do not include
non-interest accruals as these are not classed as financial
liabilities.
32. Capital risk
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in
the Capital Requirements Regulation, the Group's ICAAP is embedded
in the risk management framework of the Group and is subject to
ongoing updates and revisions when necessary. However, at a
minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies,
and systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business
planning and capital management. Prior to the sale of Arbuthnot's
controlling stake in the Group, the Group's ICAAP was aggregated
into the Arbuthnot Banking Group's ICAAP.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a 'Pillar 1 plus'
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequate to cover
management's anticipated risks. Where it is considered that the
Pillar 1 calculations do not reflect the risk, an additional
capital add-on in Pillar 2 should be applied, as per the Individual
Capital Guidance issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1)
and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which would allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Pillar 3 disclosures for the Group for the
year ended 31 December 2016 are published as a separate document on
the Group's website.
The following table shows the regulatory capital resources as
managed by the solo-consolidated Group:
2016 2015
GBPmillion GBPmillion
------------------------------------------------- ----------- -----------
Tier 1
Share capital 7.4 7.3
Share premium 81.2 79.3
Retained earnings 140.2 53.1
Revaluation reserve 1.2 0.2
Available-for-sale reserve (2.8) -
Goodwill (0.3) (0.3)
Intangible assets net of attributable deferred
tax (5.9) (3.8)
CET1 capital 221.0 135.8
------------------------------------------------- ----------- -----------
Tier 2
Collective allowance for impairment of
loans and advances 5.3 3.1
------------------------------------------------- ----------- -----------
Total Tier 2 capital 5.3 3.1
------------------------------------------------- ----------- -----------
Own Funds 226.3 138.9
------------------------------------------------- ----------- -----------
Reconciliation to total equity:
Goodwill and other intangible assets net
of attributable deferred tax 6.2 4.1
Collective allowance for impairment of
loans and advances (5.3) (3.1)
Net cumulative profits of non-solo-consolidated
entities 8.8 1.3
Total equity 236.0 141.2
------------------------------------------------- ----------- -----------
The Group ICAAP, which includes a summary of the capital
required to mitigate the identified risks in its regulated entities
and the amount of capital that the Group has available. The PRA
sets Individual Capital Guidance for each UK bank calibrated by
reference to its Capital Resources Requirement, broadly equivalent
to 8% of risk weighted assets and thus representing the capital
required under Pillar 1 of the Basel III framework. The ICAAP is a
key input into the PRA's Individual Capital Guidance setting
process, which addresses the requirements of Pillar 2 of the Basel
II framework. The PRA's approach is to monitor the available
capital resources in relation to the Individual Capital Guidance
requirement. The Group maintains an extra internal buffer and
capital ratios are reviewed on a monthly basis to ensure that
external and internal requirements are adhered to.
The Group is also subject to further capital requirements
imposed by the PRA. During the periods, the Group complied with
these requirements.
33. Maturity analysis of consolidated assets and liabilities
Group
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 18.2 - - 18.2
Loans and advances to customers 663.2 657.8 - 1,321.0
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale - - 13.5 13.5
Property, plant and equipment - - 11.4 11.4
Intangible assets - - 9.0 9.0
Other assets 4.9 - - 4.9
Total assets 818.3 657.8 33.9 1,510.0
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 1.7 - - 1.7
Deferred tax liabilities - 0.2 - 0.2
Other liabilities 47.4 2.9 - 50.3
Total liabilities 712.0 562.0 - 1,274.0
--------------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2015
ASSETS
Cash and balances at central
banks 131.8 - - 131.8
Loans and advances to banks 9.8 - - 9.8
Loans and advances to customers 439.7 520.9 - 960.6
Debt securities held-to-maturity 3.8 - - 3.8
Property, plant and equipment - - 8.5 8.5
Intangible assets - - 7.0 7.0
Deferred tax assets - - 0.3 0.3
Other assets 7.1 - - 7.1
Assets held-for-sale 118.5 - - 118.5
---------------------------------- ----------- ----------- --------------- -----------
Total assets 710.7 520.9 15.8 1,247.4
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 35.0 - - 35.0
Deposits from customers 563.3 469.8 - 1,033.1
Current tax liabilities 3.2 - - 3.2
Other liabilities 22.5 3.7 - 26.2
Liabilities held-for-sale 8.7 - - 8.7
---------------------------------- ----------- ----------- --------------- -----------
Total liabilities 632.7 473.5 - 1,106.2
---------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
Company
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2016
ASSETS
Cash and balances at central
banks 112.0 - - 112.0
Loans and advances to banks 16.5 - - 16.5
Loans and advances to customers 660.0 629.2 - 1,289.2
Debt securities held-to-maturity 20.0 - - 20.0
Equity instruments available-for-sale 13.5 - - 13.5
Property, plant and equipment - - 6.2 6.2
Intangible assets - - 6.2 6.2
Investments - - 3.7 3.7
Deferred tax assets - 0.1 - 0.1
Other assets 35.3 - - 35.3
--------------------------------------- ----------- ----------- --------------- -----------
Total assets 857.3 629.3 16.1 1,502.7
--------------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 70.0 - - 70.0
Deposits from customers 592.9 558.9 - 1,151.8
Current tax liabilities 0.8 - - 0.8
Other liabilities 58.3 - - 58.3
Total liabilities 722.0 558.9 - 1,280.9
--------------------------------------- ----------- ----------- --------------- -----------
Due
after
Due more
within than
one one No contractual
year year maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- --------------- -----------
Contractual maturity analysis
at 31 December 2015
ASSETS
Cash and balances at central
banks 131.8 - - 131.8
Loans and advances to banks 9.2 - - 9.2
Loans and advances to customers 423.2 509.5 - 932.7
Debt securities held-to-maturity 3.8 - - 3.8
Property, plant and equipment - - 4.2 4.2
Intangible assets - - 3.2 3.2
Investments - - 3.7 3.7
Deferred tax asset - 0.6 - 0.6
Other assets 146.0 - - 146.0
---------------------------------- ----------- ----------- --------------- -----------
Total assets 714.0 510.1 11.1 1,235.2
---------------------------------- ----------- ----------- --------------- -----------
LIABILITIES
Due to banks 36.4 - - 36.4
Deposits from customers 563.3 469.8 - 1,033.1
Current tax liabilities 0.3 - - 0.3
Other liabilities 30.2 - - 30.2
Total liabilities 630.2 469.8 - 1,100.0
---------------------------------- ----------- ----------- --------------- -----------
The directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
34. Classification of financial assets and liabilities
Group
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 18.2 - 18.2 18.2 2
Loans and
advances to Level
customers - - 1,321.0 - 1,321.0 1,636.8 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 0.9 0.9 0.9 3
13.5 20.0 1,451.2 0.9 1,485.6 1,801.4
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,173.2 3
Other financial Level
liabilities - - - 18.3 18.3 18.3 3
- - - 1,240.1 1,240.1 1,261.5
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
--------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2015
Cash and balances Level
at central banks - 131.8 - 131.8 131.8 1
Loans and advances Level
to banks - 9.8 - 9.8 9.8 2
Loans and advances Level
to customers - 960.6 - 960.6 1217.3 3
Debt securities Level
held-to-maturity 3.8 - - 3.8 3.8 1
Other financial Level
assets - - 2.9 2.9 2.9 3
Level
Assets held-for-sale - - 118.5 118.5 118.5 3
--------------------------- ----------------- ------------- ------------- ----------- -----------
3.8 1,102.2 121.4 1,227.4 1,484.1
--------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 35.0 35.0 35.0 2
Level
Deposits from customers - - 1,033.1 1,033.1 1,036.2 3
Other financial Level
liabilities - - 13.8 13.8 13.8 3
Level
Liabilities held-for-sale - - 8.7 8.7 8.7 3
--------------------------- ----------------- ------------- ------------- ----------- -----------
- - 1,090.6 1,090.6 1,093.7
--------------------------- ----------------- ------------- ------------- ----------- -----------
Equity investments held-for-sale are carried at fair value. All
other assets and liabilities are carried at amortised cost.
Therefore for these assets and liabilities, the fair value
hierarchy noted above relates to the disclosure in this note
only.
Company
Other
financial
Loans assets Total
and and carrying Fair
Available-for-sale Held-to-maturity receivables liabilities amount value
----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
-------------------- ------------------- ----------------- ------------ ------------ ----------- ----------- ----------
At 31 December
2016
Cash and balances
at central Level
banks - - 112.0 - 112.0 112.0 1
Loans and
advances to Level
banks - - 16.5 - 16.5 16.5 2
Loans and
advances to Level
customers - - 1,289.2 - 1,289.2 1,591.1 3
Debt securities Level
held-to-maturity - 20.0 - - 20.0 20.0 1
Equity instruments Level
available-for-sale 13.5 - - - 13.5 13.5 1
Other financial Level
assets - - - 33.0 33.0 33.0 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
13.5 20.0 1,417.7 33.0 1,484.2 1,786.1
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Level
Due to banks - - - 70.0 70.0 70.0 2
Deposits from Level
customers - - - 1,151.8 1,151.8 1,173.2 3
Other financial Level
liabilities - - - 30.7 30.7 30.7 3
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
- - - 1,252.5 1,252.5 1,273.9
-------------------- ------------------- ----------------- ------------ ------------ ----------- -----------
Other
financial
Loans assets Total
and and carrying Fair
Held-to-maturity receivables liabilities amount value
-----------
Fair
value
hierarchy
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion level
------------------------- ----------------- ------------- ------------- ----------- ----------- -----------
At 31 December 2015
Cash and balances Level
at central banks - 131.8 - 131.8 131.8 1
Loans and advances Level
to banks - 9.2 - 9.2 9.2 2
Loans and advances Level
to customers - 932.7 - 932.7 1,173.1 3
Debt securities Level
held-to-maturity 3.8 - - 3.8 3.8 1
Other financial Level
assets - - 142.7 142.7 142.7 3
------------------------- ----------------- ------------- ------------- ----------- -----------
3.8 1,073.7 142.7 1,220.2 1,460.6
------------------------- ----------------- ------------- ------------- ----------- -----------
Level
Due to banks - - 36.4 36.4 36.4 2
Level
Deposits from customers - - 1,033.1 1,033.1 1,036.2 3
Other financial Level
liabilities - - 8.3 8.3 8.3 3
------------------------- ----------------- ------------- ------------- ----------- -----------
- - 1,077.8 1,077.8 1,080.9
------------------------- ----------------- ------------- ------------- ----------- -----------
Equity investments available-for-sale are carried at fair value.
All other assets and liabilities are carried at amortised cost.
Therefore for these assets, the fair value hierarchy noted above
relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities. The Group measures fair value using the following fair
value hierarchy that reflects the significance of the inputs used
in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from
prices).
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs).
Cash and balances at central banks
The fair value of cash and balances at central banks was
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date.
At the end of each year, the fair value of cash and balances at
central banks was calculated to be equivalent to their carrying
value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date, and the same
assumptions regarding the risk of default were applied as those
used to derive the carrying value.
Debt securities held-to-maturity and equity instruments
available-for-sale
The fair value of debt securities held-to-maturity and equity
instruments available-for-sale is based on the quoted mid-market
share price.
At the end of December 2016 the fair value of debt securities
held-to-maturity was calculated to be equivalent to their carrying
value.
Due to banks
The fair value of amounts due to banks was calculated based upon
the present value of the expected future principal and interest
cash flows. The rate used to discount the cash flows was the market
rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks
was calculated to be equivalent to their carrying value due to the
short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based
upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access
deposits is equal to book value as they are repayable on
demand.
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was
calculated based upon the present value of the expected future
principal cash flows.
At the end of each year, the fair value of dividends and other
financial liabilities was calculated to be equivalent to their
carrying value due to their short maturity. The other financial
liabilities include all other liabilities other than non-interest
accruals.
35. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits as set out below. Except
for the directors' disclosures, there were no other Key Management
Personnel disclosures, therefore the tables below relate to
directors only.
Directors
2016 2015
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
Loans outstanding at 1 January 0.2 -
Loans advanced 3.4 0.2
Repayments (0.5) -
Interest applied 0.1 -
Loans outstanding at 31 December 3.2 0.2
------------------------------------------ ----------- -----------
Deposits
Deposits outstanding at 1 January 0.5 0.4
Additional deposits made during the year - 0.1
Withdrawals during the year (0.1) -
Director retired (0.1) -
Deposits outstanding at 31 December 0.3 0.5
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4 million advance (2015: GBP0.2 million)
as part of a GBP2.5 million facility agreed with
a company in which a director holds 50% of the voting
shares, which is secured by property and personal
guarantees.
-- A GBP2.8 million advance during the year as part
of a GBP4.4 million facility agreed with a director,
which is secured by property and certain other undertakings.
Both of these transactions were agreed by the Group's Real
Estate Finance business and arose during the normal course of
business. Both loans were subject to the usual Board governance and
Credit Committee approval procedures and are on substantially the
same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2016 2015
GBPmillion GBPmillion
----------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - income
from sale of debt portfolio (2.9) (2.4)
Secure Homes Services Limited - dividend
received - (2.0)
Secure Homes Services Limited - building
rental paid 0.4 0.4
STB Leasing Limited - dividend received - (4.0)
V12 Finance Group Limited - dividend received - (2.0)
V12 Retail Finance Limited - financial
intermediary charges - applications proposed 4.5 1.7
V12 Retail Finance Limited - financial
intermediary charges - applications accepted 2.2 3.4
V12 Retail Finance Limited - financial
intermediary charges - loan set-up and
processing 4.4 3.3
V12 Retail Finance Limited - loan book
management and servicing fees 7.1 4.0
----------------------------------------------- ----------- -----------
15.7 2.4
----------------------------------------------- ----------- -----------
No longer related parties
Arbuthnot Latham & Co., Ltd - recharge
income of shared services - (0.8)
Arbuthnot Banking Group PLC - group recharges 0.2 0.4
Everyday Loans Holdings Limited - dividend
received - (11.5)
Everyday Lending Limited - interest income
on loan receivable 1.9 (2.9)
Everyday Lending Limited - property and
leasing recharges - (0.2)
----------------------------------------------- ----------- -----------
2.1 (15.0)
----------------------------------------------- ----------- -----------
17.8 (12.6)
----------------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Group Group Company Company
2016 2015 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------- ------------ ----------- ----------- -----------
Amounts receivable from ultimate
parent undertaking - 1.3 - 1.3
Amounts receivable from subsidiary
undertakings - - 31.2 140.1
Amounts due to subsidiary undertakings - - (13.2) (10.4)
Amounts due to related companies - (0.1) - -
- 1.2 18.0 131.0
----------------------------------------------------- ----------- ----------- -----------
Directors' remuneration
The directors' emoluments (including pension contributions and
benefits in kind) for the year are disclosed in the Remuneration
Report beginning on page 92.
At the year end the ordinary shares held by the directors are
disclosed in the Directors' Report beginning on page 99. Details of
the directors' holdings of share options, as well as details of
those share options exercised during the year, are also disclosed
in the Directors' Report.
The interests of any directors who hold shares in the ultimate
parent company, Arbuthnot Banking Group PLC, which was the ultimate
parent company until the sale of their controlling stake, are shown
in the Directors' Report of that company.
36. Immediate and ultimate parent company
Prior to the sale of its controlling interest on 15 June 2016,
the Company regarded Arbuthnot Banking Group PLC, a company
registered in England and Wales, as the immediate and ultimate
parent company. Sir Henry Angest, the Group Chairman and Chief
Executive of Arbuthnot Banking Group has a beneficial interest in
53.7% of the issued share capital of Arbuthnot Banking Group and
was regarded by the Company as the ultimate controlling party. A
copy of the consolidated financial statements of Arbuthnot Banking
Group may be obtained from the Company Secretary, Arbuthnot Banking
Group, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
Since 15 June 2016, the Company has had no ultimate controlling
party.
37. Discontinued operations and assets and liabilities held-for-sale
On 4 December 2015, the Bank agreed to the conditional sale of
its non-standard consumer lending business, ELG, which comprises
Everyday Loans Holdings Limited and subsidiary companies Everyday
Lending Limited and Everyday Loans Limited, to Non-Standard Finance
PLC ('NSF'). Consideration received on completion comprised
GBP106.9 million in cash and GBP16.3 million in NSF ordinary
shares. The Disposal completed on 13 April 2016, and on completion
NSF paid GBP215.0 million to the Group, being the GBP106.9 million
cash consideration plus repayment of intercompany debt of GBP108.1
million. Subsequently, NSF took a GBP30.0 million three year loan
from STB. After selling costs of GBP2.7 million, this resulted in a
gain recognised on disposal of GBP116.8 million. In addition, staff
costs of GBP3.5 million were incurred in respect of the sale, which
are included in operating expenses.
Under the Bank's ownership, ELG had achieved impressive growth,
within the constraints imposed upon it as part of a highly
regulated banking group. An unsolicited approach revealed that NSF
was prepared to pay an attractive valuation for ELG.
The net effect of the Disposal was therefore to significantly
increase the equity base of the Group to GBP228 million, after
declaring the special dividend of GBP30 million. This substantially
improved STB's capital resources and broadened the range of
strategic options available to it.
The Disposal improved the Group's CET1 ratio and Leverage ratios
to 20.1% and 15.8% respectively, at 30 June 2016, which was the
first reporting date following the sale (from 15.0% and 11.9% on an
unadjusted basis as at 30 June 2015). This has generated a
substantial capital surplus and significant headroom over PRA
minimum leverage requirements, which supports the strong growth in
lending of the Group.
While in the short term the Disposal is expected to reduce
earnings, given the disposal of ELG's profit streams, the Board is
confident that the proceeds can be reinvested to accelerate the
Group's growth prospects and secure new income streams.
Details of the net assets disposed of and consequential gain
recognised on disposal, assets and liabilities held-for-sale at 31
December 2015 and cash flow of discontinued operations is set out
below.
Assets Assets
and and
liabilities liabilities
sold held-for-sale
on 13 at
April 31 December
2016 2015
GBPmillion GBPmillion
------------------------------------------------- -------------- ---------------
ASSETS
Loans and advances to banks 2.4 1.7
Loans and advances to customers 117.9 114.3
Property, plant and equipment 0.5 0.4
Intangible assets 1.2 1.2
Deferred tax assets 0.4 0.4
Other assets 0.8 0.5
------------------------------------------------- -------------- ---------------
Total assets 123.2 118.5
------------------------------------------------- -------------- ---------------
LIABILITIES
Current tax liabilities 4.0 3.4
Other liabilities 7.4 5.3
------------------------------------------------- -------------- ---------------
Total liabilities 11.4 8.7
------------------------------------------------- -------------- ---------------
Net assets disposed of/held-for-sale 111.8 109.8
------------------------------------------------- -------------- ---------------
Consideration
Cash (including the settlement of inter-company
debt) 215.0
NSF Plc shares 16.3
------------------------------------------------- -------------- ---------------
231.3
Selling costs (2.7)
Net assets disposed of (111.8)
------------------------------------------------- -------------- ---------------
Gain recognised on disposal 116.8
------------------------------------------------- -------------- ---------------
The cash flow from the sale of subsidiary undertakings can be
analysed as follows:
Group Company
GBPmillion GBPmillion
---------------------------------------------- ----------- -----------
Cash consideration (including the settlement
of inter-company debt) 215.0 215.0
Selling costs (2.7) (2.7)
Cash disposed of as part of sale (2.4) -
---------------------------------------------- ----------- -----------
209.9 212.3
---------------------------------------------- ----------- -----------
Company
Assets held-for-sale comprised investment in subsidiary
undertaking totaling GBP1.
Year Year
ended ended
31 December 31 December
2016 2015
GBPmillion GBPmillion
----------------------------------------------- ------------- -------------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the year 2.0 9.4
Adjustments for:
Income tax expense 0.5 2.3
Depreciation of property, plant and equipment - 0.1
Amortisation of intangible assets - 1.0
Impairment losses on loans and advances
to customers 2.6 7.5
----------------------------------------------- ------------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities 5.1 20.3
Changes in operating assets and liabilities:
- net increase in loans and advances to
customers (6.2) (27.9)
- net increase in other assets (0.3) (0.1)
- net increase in other liabilities 2.1 8.1
Income tax paid - (0.1)
----------------------------------------------- ------------- -------------
Net cash inflow from operating activities 0.7 0.3
----------------------------------------------- ------------- -------------
Cash flows from investing activities
Purchase of property, plant and equipment - (0.3)
Net cash flows from investing activities - (0.3)
----------------------------------------------- ------------- -------------
Net increase in cash and cash equivalents 0.7 -
Cash and cash equivalents at 1 January 1.7 1.7
----------------------------------------------- ------------- -------------
Cash and cash equivalents disposed of /
at 31 December 2.4 1.7
----------------------------------------------- ------------- -------------
38. Country by Country reporting
The Capital Requirements (Country-by-Country Reporting)
Regulations 2013 introduced reporting obligations for institutions
within the scope of CRD IV. The requirements aim to give increased
transparency regarding the activities of institutions.
The Country-by-Country Information is set out below:
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2016
Secure Trust Banking
Bank plc services UK 157.5 697 27.5 6.3
------------------ -------------- ---------- ----------- ---------- ----------- -----------
Profit Tax
Number before paid
Turnover of FTE tax on profit
Nature
Name of activity Location GBPmillion employees GBPmillion GBPmillion
------------------ -------------- ---------- ----------- ---------- ----------- -----------
31 December 2015
Secure Trust Banking
Bank plc services UK 158.1 706 36.5 4.2
------------------ -------------- ---------- ----------- ---------- ----------- -----------
39. Audited financial statements
The attached announcement, from Group strategy and business
model to note 38 above, has been extracted from the audited
financial statements of Secure Trust Bank PLC for the year ended 31
December 2016. The audit opinion on those financial statements was
unmodified. The full audited financial statements, together with
this announcement and the associated investors' presentation are
available on:
www.securetrustbank.com/results-reports/results-reports-presentations.
Five year summary (unaudited)
2016 2015 2014 2013 2012
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
Interest and similar
income 141.1 139.7 93.6 73.8 44.9
Interest expense and
similar charges (26.3) (21.6) (14.2) (12.9) (10.5)
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 114.8 118.1 79.4 60.9 34.4
---------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission
income 14.5 14.4 18.5 18.1 12.6
---------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 129.3 132.5 97.9 79.0 47.0
---------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment losses on
loans and advances (30.3) (24.3) (15.3) (15.6) (8.9)
Gain from a bargain purchase - - - 0.4 9.8
Other income - - - - 0.1
Exceptional costs - - - (0.9) (1.4)
Arbuthnot Banking Group
recharges - (0.8) (0.2) (0.1) (0.1)
Operating expenses (71.5) (70.9) (56.3) (45.7) (29.3)
---------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income
tax 27.5 36.5 26.1 17.1 17.2
---------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable
to the equity holders of the Group during
the year
(expressed in pence per
share)
- basic 754.1 157.8 122.3 78.3 108.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Financial position
Cash and balances at
central banks 112.0 131.8 81.2 - -
Loans and advances to
banks 18.2 11.5 39.8 110.0 155.3
Loans and advances to
customers 1,321.0 1,074.9 622.5 391.0 297.6
Debt securities held-to-maturity 20.0 3.8 16.3 - -
Other assets 38.8 25.4 22.5 24.9 21.7
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total assets 1,510.0 1,247.4 782.3 525.9 474.6
---------------------------------- ----------- ----------- ----------- ----------- -----------
Due to banks 70.0 35.0 15.9 0.1 -
Deposits from customers 1,151.8 1,033.1 608.4 436.6 398.9
Other liabilities 52.2 38.1 33.1 27.6 19.8
Total shareholders' equity 236.0 141.2 124.9 61.6 55.9
---------------------------------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity 1,510.0 1,247.4 782.3 525.9 474.6
---------------------------------- ----------- ----------- ----------- ----------- -----------
Glossary
Term Explanation
----------------------- ---------------------------------------------------
AIM The Alternative Investment Market is the
London Stock Exchange's international market
for smaller growing companies. A wide range
of businesses including early stage, venture
capital backed as well as more established
companies join AIM seeking access to growth
capital.
ALCO The Assets and Liabilities Committee. The
remit of the Committee is set out on page
47.
Bank of England The Bank of England promotes the good of
the people of the United Kingdom by maintaining
monetary and financial stability. It also
performs a supervisory role of the banking
system via the Prudential Regulation Authority.
CET 1 capital Common Equity Tier 1 capital comprises
a bank's core capital and includes common
shares, stock surpluses resulting from
the issue of common shares, retained earnings,
common shares issued by subsidiaries and
held by third parties, and accumulated
other comprehensive income.
CET 1 capital The Common Equity Tier 1 capital ratio
ratio is the ratio of the bank's CET 1 capital
to its Total Risk Exposure. This signifies
a bank's financial strength. The CET 1
capital ratio is utilized by regulators
and investors because it shows how well
a bank can withstand financial stress and
remain solvent.
CRD IV Capital Requirements Directive IV is intended
to implement the Basel III agreement in
the EU. This includes enhanced requirements
for the quality and quantity of capital;
a basis for new liquidity and leverage
requirements; new rules for counterparty
risk; and new macroprudential standards
including a countercyclical capital buffer
and capital buffers for systemically important
institutions.
Capital Requirement The EU regulation implementing CRD IV directly
Regulation across the EU.
DBP Deferred Bonus Plan.
DMS Debt Managers (Services) Limited, the wholly
owned subsidiary of Secure Trust Bank PLC,
responsible for carrying out market leading
debt recovery services to the credit industry.
ELG Everyday Loans Group, which comprised Everyday
Loans Holdings Limited and subsidiary companies
Everyday Lending Limited and Everyday Loans
Limited.
EU European Union.
Financial Conduct The Financial Conduct Authority is the
Authority conduct regulator for 56,000 financial
services firms and financial markets in
the UK. Its aims are to protect consumers,
enhance market integrity and promote competition.
FEEFO The Feedback Forum collects independent
reviews from the customers of over 2,500
businesses.
Funding for The Funding for Lending Scheme was designed
Lending Scheme to incentivise banks and building societies
to boost their lending to the UK real economy.
It did that by providing funding to banks
and building societies for an extended
period, with both the price and quantity
of funding provided linked to their lending
performance. This scheme is now in run-off
and is being replaced by the Term Funding
Scheme.
The Financial Set up by Parliament, the Financial Ombudsman
Ombudsman Service Service is the UK's official expert in
sorting out problems with financial services.
Financial Services The Financial Services Compensation Scheme
Compensation protects consumers when authorised financial
Scheme services firms fail.
General Data The General Data Protection Regulation
Protection Regulation (Regulation (EU) 2016/679) is a regulation
by which the European Parliament, the European
Council and the European Commission intend
to strengthen and unify data protection
for individuals within the European Union.
It also addresses export of personal data
outside the European Union.
High quality High quality liquid assets are assets with
liquid assets a high potential to be converted easily
and quickly into cash. This is comprised
of cash and balances at central banks and
treasury bills that are the subject of
a repurchase agreement (see below).
IAS International Accounting Standard.
ICAAP Internal Capital Adequacy Assessment Process.
A firm must carry out an ICAAP in accordance
with the PRA's ICAAP rules. These include
requirements on the firm to undertake a
regular assessment of the amounts, types
and distribution of capital that it considers
adequate to cover the level and nature
of the risks to which it is or might be
exposed.
IFRS International Financial Reporting Standard.
ILAAP The Internal Liquidity Adequacy Assessment
Process allows firms to assess the level
of liquidity and funding that adequately
supports all relevant current and future
liquidity risks in their business. In undertaking
this process, a firm should be able to
ensure that it has appropriate processes
in place to ensure compliance with the
CRD IV. This requires firms to develop
and use appropriate risk and liquidity
management techniques.
Individual Capital Guidance given to a firm about the amount
Guidance and quality of capital resources that the
PRA thinks the Bank should hold at all
times under the overall financial adequacy
rule as it applies on a solo level or a
consolidated level.
IPO Initial Public Offering of the Company's
shares on AIM in November 2011.
LCR The Liquidity Coverage Ratio regime has
applied to the Group from 1 October 2015,
requiring management of net 30 day cash
outflows as a proportion of High Quality
Liquid Assets. The Group has set a more
prudent internal limit than that proposed
in guidance from the regulator.
LTIP Long term incentive plan.
MREL Minimum Requirement for Own Funds and Eligible
Liabilities regime.
NSF Non-Standard Finance PLC, the AIM listed
business that bought ELG on 16 April 2016.
Overall Liquidity The Overall Liquidity Adequacy Requirement
Adequacy Requirement is the Board's own view of the Group's
liquidity needs as set out in the Board
approved ILAAP.
Pillar 1, Pillar Basel III uses a 'three pillars' concept
2 and Pillar - (1) Pillar 1 - minimum capital requirements
3 (addressing risk) using a standardised
approach for credit, market and operational
risk, (2) Pillar 2 - supervisory review
process and (3) Pillar 3 - market discipline
and enhanced disclosures. Basel II is the
second of the Basel Accords, (now extended
and partially superseded by Basel III),
which are recommendations on banking laws
and regulations issued by the Basel Committee
on Banking Supervision.
PRA The Prudential Regulation Authority was
created as a part of the Bank of England
by the Financial Services Act (2012) and
is responsible for the prudential regulation
and supervision of around 1,700 banks.
The PRA's objectives are set out in the
Financial Services and Markets Act 2000,
but the main objective is to promote the
safety and soundness of the firms it regulates.
PSOS Phantom Share Option Scheme.
Repurchase agreement A repurchase agreement is a form of short-term
borrowing for dealers in government securities.
The dealer sells the government securities
to investors, and buys them back at an
agreed point in the future.
SOS1 Share options vesting on 2 November 2014.
SOS2 Share options vesting on 2 November 2016.
SME Small to medium sized enterprises.
Term Funding The Term Funding Scheme is designed to
Scheme reinforce the transmission of Bank Rate
cuts to those interest rates actually faced
by households and businesses by providing
term funding to banks at rates close to
Bank Rate. The Term Funding Scheme allows
participants to borrow central bank reserves
in exchange for eligible collateral.
Tier 2 capital Tier 2 capital is the secondary component
of bank capital, in addition to Tier 1
capital, that makes up a bank's required
reserves. Tier 2 capital is designated
as supplementary capital, and is composed
of Collective allowance for impairment
of loans and advances.
Total Risk Exposure Total Risk Exposure is the total of the
bank's risk-weighted assets.
UPL Unsecured personal lending.
V12 V12 Retail Finance Limited, the wholly
owned subsidiary of Secure Trust Bank PLC,
responsible for retail lending.
----------------------- ---------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SESFAEFWSEED
(END) Dow Jones Newswires
March 23, 2017 03:00 ET (07:00 GMT)
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