TIDMSTB
RNS Number : 5943O
Secure Trust Bank PLC
22 August 2017
PRESS RELEASE
Tuesday 22 August 2017
For immediate release
SECURE TRUST BANK PLC
Interim Results for the six months to 30 June 2017
Robust results as repositioning continues
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a Group profit before tax of GBP13.9m for the
six months to 30 June 2017. The Group has continued its reshaping
of the business model, with the growth of lower risk Real Estate
Finance lending, cessation of non-prime unsecured personal lending
and subprime motor finance, and the launch of STB Mortgages. These
results reflect this strategic repositioning with the run off books
and investment in new business lines acting as a drag on earnings.
The benefits of this strategy are expected to be more visible in
2018 and beyond. The balance sheet has continued to grow, with
lower risk assets replacing the legacy books that are being run
off.
FINANCIAL HIGHLIGHTS
-- Statutory profit before tax GBP13.9m (2016: GBP12.5m) up 11%
-- Underlying profit before tax GBP14.5m (2016: GBP16.2m) down 10%
-- Common equity tier 1 ratio of 15.3% (2016: 20.1%)
-- Operating income GBP65.8m (2016: GBP57.3m) up 15%
-- Basic earnings per share 60.6p (2016: 57.0p) up 6%
-- Underlying earnings per share 63.3p (2016: 73.1p) down 13%
-- Interim dividend of 18p per share (2016: 17p per share), to be paid in September 2017
-- Total assets GBP1.67bn (2016: GBP1.35bn) up 24%
Note: Underlying profit and underlying earnings per share
relates to the Group's normal recurring business activities and
comparative figures for 2016 are reported on a continuing
operations basis.
OPERATIONAL HIGHLIGHTS
-- Customer deposits increased to GBP1,325.8m (2016: GBP1,042.6m) up 27%
-- Overall loan book increased to GBP1,509.6m (2016: GBP1,128.3m
- continuing operations) up 34%
-- Total customer numbers increased by 39% to 849,365
-- Real Estate Finance lending balances up 50% year-on-year to GBP541.4m
-- Invoice Finance business has funded over GBP1bn of customer invoices since inception in 2014
-- Short term retail finance lending balances increased by 45% year on year.
-- Mortgage product launched in March 2017
-- Continuing high levels of customer satisfaction as measured by FEEFO
Lord Forsyth, Chairman, said:
"2016 was a transformational year with record levels of profits
from ongoing trading and the sale of our branch based sub prime
lending subsidiary Everyday Loans. This was the start of an
evolution of our business model away from higher risk, higher
margin consumer lending, to lower risk activities. I am pleased
with the progress made and expect the benefits of this
repositioning to become more visible in 2018 and beyond."
Paul Lynam, Chief Executive, said:
"The first half of 2017 has seen a continuation of the strategic
repositioning of the business commenced in 2016. Over this time we
have considerably reduced our activities in higher risk consumer
lending and did so before the recent warnings from the Bank of
England and regulatory bodies. We have reallocated capital to lower
risk lending segments and are pleased with the strong growth
achieved here. We remain strongly capitalised and well positioned
to grow the Bank's lending portfolio in line with our ambition and
risk appetite and have a clear growth strategy."
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
Aarti Iyer
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.
Financial and operational highlights
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
--------------------------------------------- ---------------- ---------------- ----------------
GBP118.2
Operating income GBP65.8 million GBP57.3 million million
Underlying profit before tax * GBP14.5 million GBP16.2 million GBP32.9 million
Profit before tax GBP13.9 million GBP12.5 million GBP25.0 million
Common Equity Tier 1 ('CET1') capital ratio
** 15.3% 20.1% 18.0%
Loan to deposit ratio *** 113.9% 108.2% 114.7%
Earnings per share 60.6 pence 57.0 pence 102.6 pence
GBP1,674.4 GBP1,345.3 GBP1,510.0
Total assets million million million
--------------------------------------------- ---------------- ---------------- ----------------
Operating income, underlying profit before tax, profit before
tax and earnings per share are all attributable to continuing
operations.
* 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 profit before tax included in the
income statement is provided on page 14.
** Common Equity Tier 1 ('CET 1') capital ratio is calculated on
a group consolidated basis.
*** 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 108.7% (30 June 2016: 106.7%, 31 December 2016: 108.1%).
Loans and Loans and Loans and
New business advances New business advances New business advances
volumes to customers volumes to customers volumes to customers
Period Period
ended 30 At ended 30 At Year ended At
June 30 June June 30 June 31 December 31 December
2017 2017 2016 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------- ------------- -------------- ------------- -------------- ------------- --------------
Business Finance
Real Estate Finance 158.2 541.4 77.0 361.7 218.0 451.0
Asset Finance 19.5 111.5 58.3 112.3 84.7 117.2
Commercial Finance 25.9 94.2 19.4 54.5 39.5 62.8
Consumer Finance
Retail Finance 254.1 394.3 184.4 271.7 396.3 325.9
Motor Finance 72.2 258.4 73.8 205.6 146.8 236.2
Personal Lending 0.6 48.5 14.4 64.6 39.0 65.5
Other 4.3 61.3 35.2 57.9 40.0 62.4
---------------------- ------------- -------------- ------------- -------------- ------------- --------------
534.8 1,509.6 462.5 1,128.3 964.3 1,321.0
---------------------- ------------- -------------- ------------- -------------- ------------- --------------
December
June 2017 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- -----------
Deposits from customers 1,325.8 1,042.6 1,151.8
------------------------- ----------- ----------- -----------
-- Total customer lending balances across the STB Group increased by 33.8%
year-on-year (14.3% up from 31 December 2016) to GBP1,509.6 million.
-- Business Finance lending balances increased by 41.4% year-on-year (18.4%
up from 31 December 2016) to GBP747.1 million.
-- Consumer Finance lending balances increased by 29.4% year-on-year (11.7%
up from 31 December 2016) to GBP701.2 million
-- Customer deposits increased by 27.2% year-on-year (15.1% up from 31 December
2016) to GBP1,325.8 million.
-- Customer numbers increased 39.5% year-on-year (12.5% up from 31 December
2016) to 849,365.
-- Customer FEEFO ratings (from the Feedback Forum, mark out of 5 based on
star rating from approximately 300 reviews): 4.6 stars (31 December 2016:
4.5 stars from approximately 400 reviews).
Chairman's statement
This year marks the 65th anniversary of the foundation in 1952
of the Secure Trust Group. Throughout its history, the Group has
responded flexibly to changing economic and market conditions to
protect and create shareholder value and this approach continues
today. The Group enjoys strong capital ratios and liquidity, and
customer satisfaction as measured by FEEFO remains encouragingly
high. During the course of my visits to our operations across the
UK, I have met many employees and their commitment to our customers
is evident and much appreciated by the Board.
The skills, diversity and experience of the new independent
non-executive directors have enriched our Boardroom debates. I
welcome Victoria Stewart as our new chairman of the remuneration
committee and thank Sir Henry Angest for his work as the previous
chairman of the committee. The new remuneration policy approved by
shareholders at the AGM will ensure that, subject to performance, a
good proportion of the annual variable compensation of the
executives will be in the form of medium term share based payments,
aligning the interests of the executives with that of the
shareholders. The first awards under the Long Term Incentive Plan
were made in June. The new Save As You Earn share scheme, which
will be launched shortly, will also help staff to take a long term
stake in the Group's future.
The last six months have seen a slowdown in UK economic activity
and the Bank of England has expressed growing concern about
behaviour in some lending markets and announced plans to
investigate further. The Chief Executive, Paul Lynam, has warned
about this repeatedly and has curtailed activities which do not
generate targeted risk adjusted returns. The increased focus on the
Consumer Credit market by the regulators is welcome but the
majority of consumer credit firms are not regulated by the Bank of
England. Any intervention which results in activity moving to the
less heavily regulated non-banking market would be a mistake.
2016 was a transformational year with record levels of profits
from ongoing trading and the sale of our branch based subprime
lending subsidiary Everyday Loans. This was the start of an
evolution of our business model away from higher risk, higher
margin consumer lending, to lower risk activities. The statutory
profit before tax of GBP13.9 million for the first half of 2017
reflects this strategic repositioning.
The Board proposes to pay an increased interim dividend of 18p
per share (30 June 2016: 17p) in respect of the six months ending
30 June 2017. This will be paid on 29 September 2017 to
shareholders on the register as at 1 September 2017.
With strong capital and funding positions, the Board believes
that the Bank is well positioned to navigate the current economic
environment whilst seeking to take advantage of any attractive
opportunities that may arise. The Board continues to see potential
to grow the Bank's lending portfolio in line with its ambition and
risk appetite and has a clear growth strategy and organic and
external new business opportunities.
Chief Executive's statement
In my equivalent statement last year, I outlined my concerns
about the economic outlook and the steps we had started to take to
adopt a defensive position were an economic slowdown to occur. Our
previous bias towards subprime and near prime unsecured personal
lending had generated very substantial shareholder value over
recent years, most markedly in 2016 with the profits arising from
the sale of Everyday Loans. However, I had become concerned with
the dynamics of some parts of the lending market and the risks that
persistently high inflation could lead to a squeeze on household
disposable income, with associated negative implications for
general consumption and debt servicing. As a result we decided to
reduce our risk appetite and evolve the focus of the business model
away from higher risk unsecured consumer credit and to focus the
Group towards lower risk secured lending.
Building on actions taken in 2016, we have made further progress
in reshaping the business model during the last six months:
-- Following the successful sale of Everyday Loans in 2016, we
are no longer exposed to the subprime unsecured loan market
following the sale, for a modest profit, of the equity stake taken
in Non-Standard Finance plc as part of the consideration. Since 30
June, the GBP30 million vendor loan provided to Non-Standard
Finance plc has also now been repaid in full.
-- We ceased originating new non-prime online unsecured personal
loans in January 2017 and the back book of loans has been put into
run off. These balances have contracted by 26% since the beginning
of the year and are only 3.2% of the Group's overall loan book as
at 30 June 2017.
-- We have stopped writing new subprime motor finance and are
managing this exposure down. At the same time we have seen
significant growth in the volumes of better credit quality lending
being written.
-- We launched our residential mortgage lending operations in
March, targeting owner occupiers only. This new operation is slowly
building momentum.
-- We have increased new business volumes in Real Estate Finance
by 105%, compared to the same period last year, whilst maintaining
a modest overall loan to value risk profile.
-- Real Estate Finance net lending balances have grown by 50%
since 30 June 2016, despite a number of higher Loan to Gross
Development Value prime Central London residential property
development loans being satisfactorily repaid, in some cases
earlier than planned, at the Group's request. These early
redemptions have a short term income impact and remove the Bank's
related risk exposure should the Central London prime residential
market continue to weaken.
As a result of the Group's strategic repositioning this year, it
is seeing a change in the mix of its business, away from higher
risk unsecured lending, which has historically generated higher
returns but face an increasing level of risk, in particular against
a less certain economic backdrop. The Group is focusing on
reallocating capital into secured lending with a lower return but
also lower risk profile. This repositioning has a short term
economic impact as the lower income impact comes through faster
than the impairment benefit thus creating a short term profit
growth drag. This point is illustrated in relation to the legacy
personal unsecured loan portfolio, which has contracted by 26% in
the first six months of 2017, while generating GBP2 million of
impairments in the same period. As this portfolio continues to run
off, and is repaid the associated impairments will cease and the
associated profit drag will come to an end.
The financial results for the first half of 2017 reflect these
trends as the Group focuses on growth in lower risk lending,
invests in new lines of business such as mortgages and winds down
its existing unsecured non-prime personal and sub prime motor
balances. The Group statutory profit before tax for the first half
increased 11% to GBP13.9 million, while underlying profit before
tax reduced 10% to GBP14.5 million.
Strong customer satisfaction
I have been very pleased with the continuing commitment and 'can
do' attitude of my colleagues with a continued focus on delivering
good customer outcomes in a customer friendly and professional
manner, as the Group's lending and deposit taking activities grow.
This in turn is reflected in customer satisfaction levels which, as
measured by the independent FEEFO customer feedback forum, are
consistently in the 90-96% range.
Customer numbers continue to grow and are over 39.5% higher than
at 30 June last year at 849,365 (30 June 2016: 608,891).
Very robust Capital and Liquidity positions
The Bank's capital and funding positions remain strong.
Our Common Equity Tier one ratio was 15.3% as at 30 June 2017
compared to 20.1% at the same point last year. Our overall leverage
ratio was 12.7% (2016: 15.7%). The movement reflects the growth in
balance sheet assets and lending for residential development being
risk weighted at 150% during 2017 in line with guidance to all
banks on the Standard Approach to capital from the Bank of
England.
Secure Trust Bank has continued to fund its lending activities
primarily from customers' deposits. Our loan to deposit ratio was
113.9% at 30 June 2017 which compares to 108.2% at 30 June 2016.
Usage of the Funding for Lending and Term Funding Schemes remains a
nominal 4% of total lending balances. We have not undertaken
lending activities that are only viable when temporary discounted
funding is available and our deliberate and modest use of these
schemes means we are not exposed to a sudden funding cost shock
when these schemes end in early 2018.
We have no reliance for funding from wholesale or interbank
markets. The Bank has continued broadly to match-fund its customer
lending with customer deposits. This strategy seeks to mitigate
maturity transformation and interest basis risks. Customer demand
for our deposit products remains very strong, and I am pleased to
note that the majority of customers with maturing medium term
savings bonds chose to reinvest their funds into deposit products
with us.
To coincide with the commencement of residential mortgage
lending activities, we have upgraded our corporate treasury
capabilities with the recruitment of an experienced treasurer with
recent involvement in securitisation markets. Whilst we have no
current plans to use these markets, it is appropriate that we
should build this operational capability to maximise our options
for the future.
Lending activities
Our strategic repositioning and our reduced credit appetite have
guided the allocation of capital to support growth particularly in
lower risk in our core lending activities during the period.
Overall net customer lending as at 30 June 2017 of GBP1,509.6
million represents 34% growth over the same period in 2016. As at
30 June 2017, 53% of these lending balances are in secured SME
lending.
The total volume of new loans written in the period was GBP534.8
million representing a 15.6% increase on the GBP462.5 million for
the same period last year. Growth in the targeted segments of the
lending market remained strong, while the overall Group growth rate
reflected the curtailment of some higher risk lending activities as
previously mentioned.
Motor Finance balances have grown to GBP258.4 million from
GBP205.6 million a year ago and GBP236.2 million as at 31 December
2016 representing 26% and 9% growth respectively. As previously
disclosed, we stopped writing new subprime motor in light of the
performance of that cohort of risk. This is reflected in the
slowing of the motor finance new business growth rate in the last
six months. We are now focused on originating higher volumes of
lower risk, lower margin motor finance business. The proportion of
new lending written in this category during the period was over 37%
higher than the same period last year. This shift and further
changes being made to our credit criteria are expected to improve
the overall motor portfolio quality as it works through to the back
book.
Personal unsecured lending balances are being run off with no
new business being written. As such the balances have been
contracted to GBP48.5 million from GBP65.5 million as at 31
December 2016 representing a reduction of 26% in the last six
months.
We have prioritised Retail Point of Sale lending during this
period, noting this is the best quality consumer lending we write
and also the shortest in duration. Balances have grown to GBP394.3
million from GBP271.7 million a year ago and GBP325.9 million as at
31 December 2016 representing 45% and 21% growth respectively.
As at 30 June 2017, Real Estate Finance lending balances have
grown to GBP541.4 million from GBP361.7 million a year ago and
GBP451.0 million as at 31 December 2016, representing 50% growth
and 20% growth respectively. Consistent with our strategy of
reducing our risk profile during the period, a number of higher
Loan to Gross Development Value prime Central London residential
property development loans have been satisfactorily repaid, as
stated above. The lending repaid has been replaced with lower
margin and modestly leveraged residential investment lending. This
is reflected in the portfolio composition, which is now split
roughly 70% residential investment: 30% residential development.
(2016 50%: 50%).
Asset Finance lending balances have remained flat over the last
year at GBP111.5 million as at 30 June 2017 compared to GBP112.3
million a year ago. During the second half of last year, we reduced
our risk appetite in asset finance and no longer offer loans up to
100% of the open market value of the underlying asset. The
rationale is that in an economic downturn, business insolvencies
rise, which drives an increase in asset repossessions. This
increase in assets for sale, coinciding with reduced demand,
invariably leads to a fall in value. For some assets these
valuation adjustments can be quite marked. Whilst I do not
necessarily foresee a big increase in business insolvencies, the
reality is that the economy is slowing and the outlook is
increasingly uncertain. Nevertheless some lenders are still
offering loans up to or exceeding 100% of open market value on
asset finance at extremely low margins, by historical standards.
Our cautious stance means we are not seen as being as competitive
as the more aggressive lenders in the asset finance market and as a
result are writing materially less new business than previously
expected. We are not prepared to compromise on risk or price simply
to achieve short term net balance sheet growth, and as matters
stand expect this part of the lending portfolio to contract during
the rest of 2017 and into 2018, as existing loans, of an acceptable
risk profile, continue to get repaid. It is possible that the
competitive dynamics in the lending markets could change once the
Funding for Lending and Term Funding Schemes close in early 2018
and the supply of heavily discounted funding ends. We will monitor
developments closely and adjust our stance should risk: reward
dynamics change.
As at 30 June 2017 Invoice Finance lending balances have grown
to GBP94.2 million from GBP54.5 million a year ago and GBP62.8
million as at 31 December 2016 representing 73% growth and 50%
respectively. During this period we have surpassed the milestone of
having funded over GBP1billion of customer invoices since we
started invoice finance operations in September 2014.
The level of the Group's impairments reflects the mixture of its
businesses. Our SME lending activities have performed as expected,
with modest levels of impairments in asset finance and commercial
finance. The subprime segment of the motor book has, however,
continued to see higher levels of impairments consistent with the
trends in the second half of 2016. This was a key factor in our
decision to cease originating new subprime motor finance earlier
this year. We expect this to be addressed as the subprime cohort is
run off and replaced by the better quality new motor lending being
written. We are keeping a close watch on the performance of the
subprime cohort and are focused on recovery of the loans. The
legacy unsecured personal loan book is running off as expected. In
Retail Finance the increase in impairments seen is as expected,
being a mirror of the increase in net lending balances. Given the
slowing of economic growth and the heightened levels of uncertainty
we have continued to tighten our credit risk appetite and
acceptance criteria during this period. This is expected to impact
new lending volumes in the second half of 2017. As a matter of
course, we will regularly refine our credit criteria and pricing to
take into account our view of the current and future economic
conditions.
Fee based services
The OneBill service remains closed for new business. Customer
numbers continue to reduce in line with management expectations and
ended the period at 19,382.
Profits at our debt collection business, Debt Managers
(Services) Limited, have continued to grow.
Increasing regulatory focus and potential interventions
During the period the Bank of England has, via the Financial
Policy Committee and the PRA, expressed concerns about the UK
Consumer Credit market. The Financial Conduct Authority has echoed
many of these. Both regulators have subsequently taken steps to
address their concerns which are centred around mortgage
affordability, increases in the maximum size and terms of unsecured
personal loans coupled with much lower pricing, ever lengthening
interest free balance transfer periods on credit cards and the
associated accounting treatments, the pace of growth in Personal
Contract Purchase lending in the motor finance market and whether
mortgage customers are getting good outcomes having regard to the
pricing dynamics in the mortgage market.
The Bank of England has separately expressed concerns, once
again, regarding certain parts of the Commercial Property
Market.
Secure Trust Bank is not exposed to the majority of the issues
above and our mortgage affordability testing was already in line
with these regulatory expectations.
I am not surprised about the various announcements from the
regulators. In the recent past I have highlighted my views that
risk is being mispriced in a number of lending markets in the UK.
Our prior recognition of what we regard as unsustainable market
dynamics and assessment of the economic outlook have informed the
strategic repositioning of the Group's business model over the last
eighteen months.
It is rather frustrating that one form of regulatory
intervention was the Bank of England's decision to increase the UK
countercyclical capital buffer rate to 0.5% (of risk weighted
assets) from 0%. This applies to all banks and does not distinguish
between those like Secure Trust Bank which have exited overheating
parts of the consumer credit markets, from others.
The regulator has announced that it will be reviewing the
activities of individual firms in relation to the concerns
described above, and it will be interesting to see how this
influences the competitive landscape. It will also be interesting
to see if the regulators decide to intervene in the pricing of some
lending activities, as they did in the high cost short term credit
market.
It is now being widely speculated that the ongoing Basel
Committee on Banking Supervision's debates about bank capital
requirements will result in the introduction of a capital floor
under the IRB approach used by the largest banks, set as high as
70% to 75% of the risk weights used under the standardised
approach. This could be announced alongside measures to introduce
more risk sensitivity into the risk weights used in the
standardised approach. One reported proposal is to reduce the risk
weight on owner occupied residential mortgages where the LTV is 75%
or less, from a risk weight of 35% to 20%. Such an outcome would
largely remove the substantial capital advantages enjoyed by the
systemic banks in certain lending classes thereby creating a much
more level competitive playing field. This would clearly bode well
for smaller banks in the longer term.
We are reviewing the revised EU state aid remedies recently
announced by RBS to ascertain whether there is any potential
benefit arising for the Group.
Outlook
The forward looking economic indicators are pointing to a period
of low confidence and tepid economic growth. This is
notwithstanding the fact that the current UK economic fundamentals
are solid. The market is awash with liquidity and banks are holding
dramatically more capital than they were ahead of the last
downturn. There is record employment and unemployment is also at a
record low. While there remains a high job vacancy rate, net take
home pay is being squeezed by high inflation and low wage growth.
Inflation levels should subside as the effects of the devaluation
of sterling in the second half of 2016 begin to flow through. There
remains a chronic shortage of housing and a political consensus for
much more house building to address this.
During recent months we engaged in a number of discussions
relating to inorganic business opportunities but these did not
progress to a conclusion that was acceptable to us. Our previous
M&A activities have generated considerable shareholder value
due in part to the discipline that we apply. We will continue to be
disciplined in our approach to opportunities.
Our approach to the market will reflect evolving economic
conditions and our credit appetite will be kept under review. We
expect the second half to experience similar trends to the first
half, with the benefits of our strategic repositioning becoming
more visible in 2018 as we continue to build our SME and secured
offering, and reduce areas of higher risk lending.
Our long term strategic objective is to be active in Consumer
Credit, SME Finance and Mortgage Lending. This enables flexibility
to restrict lending in areas which may be overheating and allocate
capital for more sustainable returns. Notwithstanding the current
uncertain economic outlook, I believe there is scope to pursue our
strategic priorities by developing the business model organically
and pursuing attractive acquisition opportunities.
Interim business review - Business Finance
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.
Revenue and lending performance vs prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 14.8 14.0 28.4
Lending balance 541.4 361.7 451.0
Impairment losses 0.1 - 0.1
------------------- --------------- -------------- -------------
2017 performance
The Real Estate Finance business has maintained its growth
trajectory, with balances up 20% in the period and up 50%
year-on-year. This reflects the increase in the level of investment
lending within the portfolio, with new investment loans of GBP92
million in the period accounting for the overall growth in the
portfolio. The development book has remained stable with repayments
on a number of higher value developments in London offsetting the
new lending. This reflects the Group's more cautious policy in
relation to developments within London, as well as the desire to
focus on lower risk, and lower capital intensive lending within the
portfolio. Investment lending now accounts for 67% of the
portfolio, up from 63% at December 2016 and 50% at December 2015.
The change in mix means that the level of income growth has been
more limited due to lower yield on investment lending. The business
has continued to invest in its origination and risk functions in
the period to ensure that growth continues in a controlled fashion.
Credit performance has reflected the continued cautious approach,
with no individual impairment provisions required to date.
Looking forward
The business continues to invest in the quality of its people
and processes, with a view to maintaining growth. It remains alive
to the economic uncertainties which persist within the UK Real
Estate marketplace.
Asset Finance
Asset Finance was formed as a division within the Group in
December 2014. It provides funding to support SME businesses in
acquiring commercial assets, such as building equipment, commercial
vehicles and manufacturing equipment.
Revenue and lending performance vs prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 4.3 3.5 7.8
Lending balance 111.5 112.3 117.2
Impairment losses 0.5 0.2 0.6
------------------- --------------- -------------- -------------
2017 performance
The Asset Finance business has continued to consolidate during
2017 with balances reducing 5% from December 2016, and being
broadly in line with the balance at June 2016. The level of new
business has been managed by a combination of not reducing target
yields (to ensure the business is properly reflective of the risk)
and credit policy over asset values and debt servicing ability.
Whilst balances have been down, overall income is up GBP0.8m
compared to the same period last year, reflecting increased average
balances in 2017. The concerns over asset valuations have been
reflected in the increased impairment charge in the period, which
primarily arises due to specific historical cases where asset
valuations were reassessed.
Looking forward
The business remains committed to asset finance as an asset
class, and remains cautious as to the level of growth, until
pressures on asset valuations and yields come back to more
realistic levels.
Commercial Finance
Commercial Finance was formed as a division within the Group in
2014. The division specialises in providing a full range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
Revenue and lending performance vs prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 3.0 1.7 4.6
Lending balance 94.2 54.5 62.8
Impairment losses - - 0.2
------------------- --------------- -------------- -------------
2017 performance
Despite being only in its third year of trading, STB Commercial
Finance is one of the top ten independent providers of Asset Based
Lending facilities in the UK, with total facility limits agreed in
excess of GBP160 million. Since inception the business has funded
over GBP1bn of invoices providing clients with funding secured
against them. Key strategic partnerships continue to be developed,
and coupled with further expansion of the product range the Group
has enhanced the client experience and flexibility of facilities
offered. The handpicked team continues to offer origination and
client servicing capability across the UK from its head office in
Manchester. The team's expertise has maintained strong credit
performance.
Looking forward
Commercial Finance continues to develop strong links with the
professional community and private equity markets, and a client
base of increasing size. The market is moving towards funding
larger SMEs, and according to recent Asset Based Finance
Association statistics this is a trend which is accelerating.
Interim business review - Consumer Finance
Retail Finance
Retail Finance includes lending products for in-store and online
retailers to enable consumer purchases.
Revenue and lending performance vs prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 23.4 16.6 36.7
Lending balance 394.3 271.7 325.9
Impairment losses 6.6 4.8 9.5
------------------- --------------- -------------- -------------
2017 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.
The business has continued to grow strongly across all of the
core business sectors. This has been driven by continuing sector
growth, including the cycle market which continues to increase in
popularity, and the business' success in gaining increased market
share. New lending volumes increased to GBP254.1 million (an
increase of 37.8% on the previous year). Lending assets totalled
GBP394.3 million at the half year end (June 2016: GBP271.7 million)
which is an increase of 45.1% on the previous year.
Income from retail lending increased year-on-year by 41.0% to
GBP23.4 million, whilst impairment losses continued to be well
controlled and increased in line with business volumes to GBP6.6
million (an increase of 37.5% on the previous year).
Looking forward
The Group plans continued growth in Retail Finance for the
remainder of 2017 with the focus on acquiring increased market
share across its target markets including music, furniture, sports
and leisure equipment, consumer electronics, healthcare and
jewellery.
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 improve the level of process automation whilst
continuing the expansion of its workforce and investing in
additional office, support and training facilities.
Motor Finance
Finance is arranged through motor dealerships and brokers and
involves fixed rate, fixed term hire purchase arrangements,
predominantly on used cars. The Group uses its Moneyway brand for
this business.
Lending performance v prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 22.4 18.8 40.5
Lending balance 258.4 205.6 236.2
Impairment losses 9.2 6.1 14.6
------------------- --------------- -------------- -------------
2017 performance
Motor Finance balances have grown to GBP258.4 million from
GBP236.2 million as at 31 December 2016. This is despite the
cessation of lending to the subprime motor loans market segment and
shifting the business' lending focus to origination of higher
volumes of lower risk, lower margin motor finance lending. The
proportion of new lending written in this category during the
period was over 37% higher than the same period last year.
Impairment losses for the period increased from GBP6.1 million
to GBP9.2 million, reflecting the performance of subprime motor
lending discontinued by the business during the period.
Looking Forward
The Group will continue to optimise its performance in the
non-prime sector of the market through existing introducer
channels. The shift in business mix toward lower risk motor finance
lending during the period is expected to continue and result in
improvements in the overall motor portfolio quality as it works
through to the back book.
Personal Lending
Following the sale of Everyday Loans Group (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.
Revenue and lending performance vs prior periods
Year ended
Period ended Period ended 31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
------------------- --------------- -------------- -------------
Lending revenue 4.7 8.0 11.2
Lending balance 48.5 64.6 65.5
Impairment losses 2.1 2.2 4.4
------------------- --------------- -------------- -------------
Mortgage finance
STB Mortgages was launched on the 20(th) March 2017. The
division supports residential customers who are underserved by the
traditional high street lenders.
The UK has approximately 4.6 million self-employed and contract
workers. In addition there is a growing population of individuals
with complex income and those with a recently restored credit
history. These potential customers have been underserved by
traditional high street lenders whose operating models are based on
high volumes of simple, straight forward cases. STB Mortgages
provide, through intermediaries, competitive fixed rate mortgages
products to people whose personal circumstances do not fit the norm
but are still credit worthy individuals with good
affordability.
Financing is typically provided over a term of up to 35 years
with fixed interest rate periods of 2, 3 and 5 years. The Group's
purchase and remortgage products currently have a maximum loan to
value of 85% and a maximum loan size of GBP2m.
The STB Mortgage team is staffed by experienced Mortgage and
banking individuals with proven property lending expertise and
underwriting skills. The team provides full support to customers
and introducers over the life of the products.
2017 performance
Since launch, the pipeline has been steadily building.
Looking forward
STB Mortgages were initially available exclusively through the
Mortgage Advice Bureau to ensure the Group's proposition lived up
to its promise of providing excellent customer service. Since the
launch, STB Mortgages has steadily built out its distribution
partners and the plan is to continue to expand through 2017 and
2018. Additionally the Group is looking to extend its product range
and proposition to customers that are underserved and who are
aligned to STB's target market.
Interim business review - Savings
The Group is funded primarily via deposits from individuals and
small to medium sized businesses, attracting and retaining sizeable
balances with competitive rates of interest.
The Group's deposits consist principally of notice accounts and
fixed term savings, available to individuals as well as small to
medium sized businesses in the UK.
Accounts are straightforward in design with competitive interest
rates easily applied for online with deposits protected 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:
-- 60 to 183 day notice periods and fixed term savings over one to seven
years.
-- Minimum balance of GBP1,000
-- Maximum balance of GBP1 million for sole account holders and GBP2
million for business and joint accounts.
-- Interest paid quarterly (notice) or annually (fixed term) to a nominated
account.
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 sizeable 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 Group is able to reprice its new business range to adjust
the entire portfolio of products within 48 hours, enabling it to
raise large volumes of funding in short periods. 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 funding at that time has
been satisfied.
Savings balances vs prior periods
31 December
30 June 2017 30 June 2016 2016
GBPmillion GBPmillion GBPmillion
---------------------- ------------- ------------- ------------
Notice deposits 419.0 364.7 373.8
Fixed Term Savings 890.8 643.1 762.8
Sight/Instant Access 16.0 34.8 15.2
---------------------- ------------- ------------- ------------
Total Balances 1,325.8 1,042.6 1,151.8
---------------------- ------------- ------------- ------------
2017 performance
The Group acquired GBP344 million deposits during the period,
supported by sustained best buy and media coverage. At the end of
June 2017, the Group had almost 29,000 savings customers, acquiring
more than 5,500 new customers in the first six months of the year.
Both new and existing customers were in receipt of competitive
interest rates in comparison to the average rates quoted by the
Bank of England.
Alongside sustaining organic growth, the Group has been
developing its new deposit platform which is expected to be
delivered in the fourth quarter of this year. The platform will
provide a firm basis for considerable growth of the Group offering
a number of benefits; enhancing the existing product set,
introducing internet banking, improving operational efficiency,
strengthening risk controls and providing a sustainable platform
for future product and service development.
At launch, the majority of customers will now be able to:
-- Choose from monthly or annual interest, capitalised or paid away.
-- Apply online, receive their account number and sort code instantly
and deposit immediately.
-- Use internet banking and secure message servicing, alongside UK based
telephone service.
-- Provide their maturity instructions online with the option to choose
instant access, notice or fixed term.
This will enable the Group to further increase its capability to
acquire large volumes of deposits in short time periods and be more
nimble to take advantage of lending opportunities.
Looking forward
From late 2017 and into 2018, the Group will look to further
extend and diversify its savings proposition:
-- Introducing Fixed Term Cash ISAs; allowing new subscriptions and transfers
of previous years' ISA funds.
-- Appraising the opportunity to introduce Easy Access products; both
ISAs and non-ISAs.
-- Seeking further cost efficiency in its operational processes and diversification
of product distribution.
The group has ensured that usage of the Funding for Lending and
Term Funding Schemes has been at a nominal level and has not
undertaken lending activities that are only viable when temporary
discounted funding is available. As a result of the deliberate and
modest use of these schemes the Group is not exposed to a sudden
funding cost shock when these schemes end in early 2018.
Outside of the activity of the Group, the 2018 regulatory agenda
is of particular interest. Any intervention increasing transparency
and competition in the retail savings market are positive steps
towards levelling the playing field on the cost of funds. However,
regulatory intervention to date has had limited impact.
In particular, the Group welcomes the MREL capital requirements
on transactional accounts, Open Banking initiative, Competition and
Markets Authority review of digital aggregation tools and the
Financial Conduct Authority's review of the Retail Banking
Sector.
The Group believes these interventions could go some way to
reducing the advantage of existing current account incumbents in
their monopolisation of instant access funds - GBP665bn of
household retail savings funds with an average rate of 0.36% at the
end of May 2017 according to the Bank of England - which acts in
contradiction to the regulators' competition agenda and the
interests of savings customers seeking a fair and competitive rate
of interest.
Interim financial review
Period Period Period Period Year ended
ended ended ended ended 31 Year ended Year ended
30 June 30 June 30 June 30 June December 31 December 31 December
2017 2016 2016 2016 2016 2016 2016
Continuing
operations Continuing Discontinued Continuing Discontinued
and Total operations operations Total operations operations Total
------------ ------------ ------------- ----------- ----------- ------------- ------------
Summarised income
statement GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ------------ ------------- ----------- ----------- ------------- ------------
Interest, fee and
commission income 79.0 71.4 11.2 82.6 146.3 11.2 157.5
------------ ------------ ------------- ----------- ----------- ------------- ------------
Interest, fee and
commission expense (13.2) (14.1) (0.1) (14.2) (28.1) (0.1) (28.2)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Operating income 65.8 57.3 11.1 68.4 118.2 11.1 129.3
------------ ------------ ------------- ----------- ----------- ------------- ------------
Impairment losses (18.5) (13.3) (2.6) (15.9) (27.7) (2.6) (30.3)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Operating expenses (33.7) (31.5) (6.0) (37.5) (65.5) (6.0) (71.5)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit on sale of
equity investment
available-for-sale 0.3 - - - - - -
------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit before tax 13.9 12.5 2.5 15.0 25.0 2.5 27.5
------------ ------------ ------------- ----------- ----------- ------------- ------------
Fair value
amortisation 0.4 0.4 - 0.4 0.9 - 0.9
------------ ------------ ------------- ----------- ----------- ------------- ------------
Share based
incentive
scheme - 0.3 - 0.3 (0.7) - (0.7)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Net Arbuthnot
Banking
Group management
recharges - 0.2 - 0.2 0.2 - 0.2
------------ ------------ ------------- ----------- ----------- ------------- ------------
Transformation
costs 0.5 0.1 - 0.1 3.4 - 3.4
------------ ------------ ------------- ----------- ----------- ------------- ------------
Discontinued
operations - - (2.5) (2.5) - (2.5) (2.5)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Costs of moving to
Main Market - - - - 1.4 - 1.4
------------ ------------ ------------- ----------- ----------- ------------- ------------
Bonus payments made
in respect of ELG
sale - 3.5 - 3.5 3.5 - 3.5
------------ ------------ ------------- ----------- ----------- ------------- ------------
Other items
relating
to ELG sale - (0.8) - (0.8) (0.8) - (0.8)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit on sale of
NSF plc shares (0.3) - - - - - -
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying
adjustments
to profit 0.6 3.7 (2.5) 1.2 7.9 (2.5) 5.4
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying profit
before tax 14.5 16.2 - 16.2 32.9 - 32.9
------------ ------------ ------------- ----------- ----------- ------------- ------------
Tax (2.7) (2.2) (0.5) (2.7) (6.3) (0.5) (6.8)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Tax on underlying
adjustments (0.1) (0.7) 0.5 (0.2) (1.5) 0.5 (1.0)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying tax (2.8) (2.9) - (2.9) (7.8) - (7.8)
------------ ------------ ------------- ----------- ----------- ------------- ------------
Profit after tax 11.2 10.3 2.0 12.3 18.7 2.0 20.7
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying
adjustments
after tax 0.5 3.0 (2.0) 1.0 6.4 (2.0) 4.4
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying profit
after tax 11.7 13.3 - 13.3 25.1 - 25.1
------------ ------------ ------------- ----------- ----------- ------------- ------------
Underlying basic
earnings per share
(pence) 63.3 73.1 - 73.1 137.7 - 137.7
------------ ------------ ------------- ----------- ----------- ------------- ------------
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, Everyday Loans Group
('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
this interim report. 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 14.8%
year-on-year to GBP65.8 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 2017 was 9.6% compared with 11.0% for the period to 30
June 2016. 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 9.5%
in 2016 to 8.5% in 2017. The reductions in these margins are driven
by changes in book composition, partially offset by the reduction
achieved in funding costs, as further detailed below.
The gross revenue margin, being interest income plus net fees
and other income as a percentage of the average loan book, was
11.4% for 2017 compared with 13.6% for the first half of 2016. The
reduction is 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.
Interest, fee and commission income, which is predominantly
interest earned on loans and advances to customers, increased to
GBP79.0 million from GBP71.4 million in 2016, for continuing
operations. The increase was driven by the growth of the Group's
loan books over the period, offset by the reduction in margins
noted above.
Interest, fee and commission expense, which mainly represents
interest in respect of deposits from customers, along with some
consumer finance commissions, fell from GBP14.1 million in the
first half of 2016 to GBP13.2 million, for continuing operations.
The decrease is due principally to the fact that the Group has been
able to replace maturing term deposits with new deposits of the
same tenor but at lower fixed rates. The cost of funding, measured
as interest expense and similar charges as a percentage of the
average loan book, reduced from 2.5% for the first half of 2016 to
1.9% for 2017, which reflects this effect. In addition to this, the
fee income relating to Current Account and OneBill has decreased as
these products have been closed to new business; OneBill in 2009
and Current Account in 2015.
Impairment Losses
Impairment losses during the period were GBP18.5 million (2016:
GBP13.3 million). This increase is primarily due to the growth of
the business and consequent increase in the size of loans and
advances to customers, and in part due to an increase in the
impairment losses on the sub-prime motor book.
31 December
30 June 2017 30 June 2016 2016
Impairment Losses GBPmillion GBPmillion GBPmillion
-------------------------------------- ------------- ------------- ------------
Business Finance:
Real Estate Finance 0.1 - 0.1
Asset Finance 0.5 0.2 0.6
Commercial Finance - - 0.2
Consumer Finance:
Retail Finance 6.6 4.8 9.5
Motor Finance:
Voluntary termination provision 1.3 0.6 1.5
Other impairment 7.9 5.5 13.1
Personal Lending 2.1 2.2 4.4
Other - - (1.7)
-------------------------------------- ------------- ------------- ------------
Total Impairment Losses 18.5 13.3 27.7
-------------------------------------- ------------- ------------- ------------
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 2017 was 2.7%, compared
with 2.6% for the equivalent period in 2016. Further analysis of
the Group's loan book and its credit risk exposures is provided in
Notes 6, 7 and 17.
Operating Expenses
Operating expenses have increased, reflecting a continuation in
the investments made in the infrastructure and human capital of the
Group to achieve growth targets, from GBP31.5 million in the first
half of 2016 to GBP33.7 million in 2017, for continuing operations.
The investment and business as usual costs have been closely
managed, resulting in the Group's cost to income ratio reducing to
51.2% (2016: 55.0%).
Taxation
The effective underlying tax rate has increased to 19.3% (2016:
17.9%), which is mainly due to imputed Arbuthnot Banking Group
management fees being deductible in the first half of 2016. These
fees are no longer imputed, following the sale of their controlling
interest in the Group in June 2016. 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 have declared the payment of an interim dividend
of 18 pence per share.
Earnings per share
Detailed disclosures of earnings per ordinary share are shown in
Note 5 to the interim report. Basic earnings per share increased by
6.3% to 60.6 pence per share (2016: 57.0 pence), whilst the
underlying basic earnings per share fell by 13.4% to 63.3 pence per
share (2016: 73.1 pence per share).
30 June 30 June 31 December
2017 2016 2016
Summarised balance sheet GBPmillion GBPmillion GBPmillion
------------------------------------ ----------- ----------- ------------
Assets
Cash and balances at central banks 114.0 141.8 112.0
Debt securities held-to-maturity - 19.8 20.0
Loans and advances to banks 25.5 19.1 18.2
Loans and advances to customers 1,509.6 1,128.3 1,321.0
Other assets 25.3 36.3 38.8
------------------------------------- ----------- ----------- ------------
1,674.4 1,345.3 1,510.0
------------------------------------ ----------- ----------- ------------
Liabilities
Due to banks 63.0 15.0 70.0
Deposits from customers 1,325.8 1,042.6 1,151.8
Other liabilities 46.3 59.3 52.2
------------------------------------- ----------- ----------- ------------
1,435.1 1,116.9 1,274.0
------------------------------------ ----------- ----------- ------------
The assets of the Group, on a continuing basis, increased
year-on-year by 24.4% to GBP1,674.4 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 period as a percentage of average assets, was 1.6% for 2017,
compared with 2.2% for the equivalent period in 2016.
The liabilities of the Group, on a continuing basis, increased
year-on-year by 28.5% to GBP1,435.1 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, 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.
30 June 30 June 30 June 30 June 31 December 31 December
2017 2017 2016 2016 2016 2016
GBPmillion % of total GBPmillion % of total GBPmillion % of total
------------------ ----------- ----------- ----------- ----------- ------------ ------------
Business Finance 747.1 50% 528.5 47% 631.0 48%
Consumer Finance 701.2 46% 541.9 48% 627.6 48%
Other 61.2 4% 57.9 5% 62.4 4%
Total 1,509.6 100% 1,128.3 100% 1,321.0 100%
------------------ ----------- ----------- ----------- ----------- ------------ ------------
Loan originations in the period, being the total of new loans
and advances to customers entered into during the period arising
from continuing operations, was GBP534.8 million (2016: GBP462.5
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 6, 7 and 17.
Deposits from Customers
Customer deposits include term, notice and sight deposits.
Customer deposits grew by 27.2% during the period to close at
GBP1,325.8 million, to fund the increased lending balances. The
Group also held GBP63.0 million of wholesale deposits at the end of
the period, following the sale and repurchase of GBP15.0 million of
Funding for Lending Scheme Treasury Bills, and raising GBP48.0
million through the Term Funding Scheme.
Key Performance Indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group:
30 June 30 June 31 December
2017 2016 2016
--------------------------------------------- --------- --------- ------------
Financial KPIs:
Net Revenue Margin(1) 9.6% 11.0% 10.4%
Cost of Risk(2) 2.7% 2.6% 2.4%
Cost to Income Ratio(3) 51.2% 55.0% 55.4%
GBP14.5 GBP16.2 GBP32.9
Underlying Profit Before Tax million million million
Underlying Return on Average Assets 1.6% 2.2% 1.9%
Underlying Return on Average Equity 9.9% 15.3% 11.9%
Non-Financial KPIs:
Customer FEEFO ratings (mark out of 5 based
on star rating from 400 reviews) 4.6 N/A 4.5
--------------------------------------------- --------- --------- ------------
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.
The customer FEEFO rating was not measured on a comparable basis
in the period to 30 June 2016.
(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 profit before tax included in the
income statement is provided on page 14.
Underlying return on average assets is calculated as the
underlying profit after tax for the previous 12 months as a
percentage of average assets .
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 profit after tax
included in the income statement is provided on page 14.
All revenue, income, profit and earnings figures used in the
calculation of key performance indicators are on a continuing
operations basis.
Principle risks and risk management
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
----------------- -------------------------------------------
Credit Risk The risk that a counterparty will
be unable to pay amounts in full
when due
Market Risk 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
interest rates
Liquidity Risk 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
Operational Risk 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
the risks identified above
Capital Risk The risk that the Group will have
insufficient capital resources to
support the business
Conduct Risk The potential for customers (and
the business) to suffer financial
loss or other detriment through the
actions and decisions made by the
business and its staff
Regulatory Risk The risk that the Group fails to
be compliant with all relevant regulatory
requirements
----------------- -------------------------------------------
Overview
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 whilst Market risk
seeking to maintain a conservative and controlled Credit risk
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 safeguarded Credit risk
strength by a strong capital base and a prudent approach Liquidity risk
to liquidity management. The Group's governance Capital risk
and capital planning processes and 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 a way that Conduct risk
with customers seeks to avoid negative outcomes for customers
and reputation 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 Our appetite for operational risk is to have Operational
processes well defined, scalable and controlled processes, risk
and people running on robust and resilient systems, effective Regulatory
delivery of change and business continuity management. risk
STB has a low tolerance for operational losses
but understands that losses may occur in the
pursuit of its business objectives. STB does
not tolerate annual operational losses in excess
of 15% of gross income over a 3 year period.
---------------- -------------------------------------------------------- ----------------
The Group's risk appetite statements are subject to regular
monitoring and review.
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, Credit Risk,
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 following committees 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 expert judgement
underwriting and where required under the mandate approval at the
respective STB Credit Committee levels.
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. 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.
Group Financial Crime Committee
This committee reviews and monitors the risk management
framework for anti-money laundering and financial crime. It
oversees the delivery of the fraud risk appetite and implementation
of consistent financial crime standards across the Group. It
ensures that the Financial Crime function supports the first line
of defence in delivering regulatory requirements, and provides
assurance through its monitoring and oversight programme.
Customer Focus Committee
This committee reviews customer experience, ensuring the Group's
"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.
Changes to the Group's risk profile
Changes to the Group's risk profile since the position set out
in the 2016 Annual Report and Accounts are set out in the following
sections:
Credit risk
Consumer Finance Credit Risk
The Bank made the strategic decision to withdraw the Unsecured
Personal Lending product at the start of 2017, 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 Bank is now collecting
out the remaining balances outstanding on this portfolio.
The Retail business has demonstrated good growth in the first
half of 2017 as a result of both retaining the contracts with major
retailers and winning contracts from its competitors. There has
been further growth in the Interest Bearing and Buy Now Pay Later
products which carry more risk, but this is mitigated in the
pricing models which target accordingly to meet the Bank's minimum
Return On Equity hurdle. The Credit Risk Team is continually
monitoring acquisition and performance trends to ensure this
portfolio delivers expected performance and it has been taking
proactive steps to reduce exposure in the highest risk product
sectors.
The first half of 2017 has seen significant tightening of credit
policy in respect of Motor Finance, discontinuing the riskiest tier
of business, and this has been combined with constructive
discussions with key business introducers in order to attract a
better mix of business quality. Despite tightening policy, new
business performance has been strong and the Bank is achieving its
objective of attracting a better mix of customer quality. The
quality of the loans written continues to show a notable
improvement since the final quarter of 2016 and the Bank has seen a
significant shift of business towards the better quality tiers
which will have a positive effect on the overall portfolio mix as
2017 progresses.
The higher volume of sub-prime new business taken on in 2015 has
continued to perform below initial expectations. Although this
cohort of lending remains profitable overall, the level of
impairments associated with it has increased. The Group increased
the level of impairment provision in respect of Motor Finance as a
consequence.
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 continued uncertainty over Brexit, particularly in the
Central London Real Estate Market, where risk appetite has been
curtailed.
A programme to develop probability of default modelling for each
of the Business Finance portfolios commenced in 2015 and is now in
delivery phase. The Bank's back books have been entered into the
model to ensure the models robustness.
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
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
The increase in lending balances and loan commitments in the London
region is principally due to the growth in Real Estate Finance
portfolio during the period. Further detail on concentration risk
is provided in Note 17.
Market risk
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
The Group has continued to use competitive interest rates to
attract new fixed and variable rate deposits over terms ranging
from one to seven years. The Bank of England's Term Funding Scheme
has also been used for the first time, with GBP48 million drawn up
to 30 June 2017.
The Overall Liquidity Adequacy Requirement has been maintained
significantly above regulatory levels throughout the period. This
is the Board's own view of the Group's liquidity needs as set out
in the Board approved Internal Liquidity Adequacy Assessment
Process ("ILAAP"). The Liquidity Coverage Ratio (LCR), which
assesses net 30 day cash outflows as a proportion of High Quality
Liquid Assets, was also significantly higher than the regulatory
requirement throughout the period.
At 30 June 2017, the Funding to Loans ratio was 107.8% (30 June
2016: 114.0%, 31 December 2016: 110.4%). This ratio has fallen as
capital introduced to the Group following the sale of ELG has been
utilised.
Operational Risk
The Group's operational risk process and standards are defined
and communicated through a formal Operational Risk Policy and
Framework. 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 2017 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 and has introduced a new and more effective control
framework.
-- IT Resilience - Having adequate and effective servers,
networks and storage systems. The Group tests its disaster recovery
and business continuity processes each year and is also improving
its control framework in relation to the inherent resilience of its
critical IT assets.
-- 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.
Capital Risk
At 30 June 2017, the CET1 Ratio was 15.3% (30 June 2016: 20.1%,
31 December 2016: 18.0%) and the Leverage Ratio was 12.7% (30 June
2016: 15.7%, 31 December 2016: 14.2%) on a Group consolidated
basis. Both ratios are significantly higher than regulatory
requirements. The prior year numbers reflect the significant
capital injection arising from the sale of Everyday Loans. The
Group has since been utilising this capital to enable its organic
growth.
The most recent Internal Capital Adequacy Assessment Process
('ICAAP') was approved by the Board in May 2017 and confirmed the
Group's ability to withstand a range of stress scenarios. Updated
Internal Capital Guidance is expected in the second half of the
year.
Conduct risk
In line with the Operational Risk Framework, the conduct risk
and control assessments have been reviewed by the business units
with self-attestations by first line risk owners.
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.
Training on conduct risk is provided to first line staff as part
of an annual training and communication programme, with an
eLearning module completed by staff during the period.
Regulatory risk
In the period, the Group has delivered changes to address the
introduction of Conduct Rules to all staff. The Group continues to
work on new and revised regulations and legislation that will come
into force over the next 18 months and beyond.
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:
-- Common Equity Tier 1 ('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 period 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
Group and 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 period end the 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.
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
----------------------------------- ----------- ----------- ------------
Capital
CET1 capital 218.5 217.1 227.4
Total Tier 2 capital 5.3 3.0 5.3
----------------------------------- ----------- ----------- ------------
Total capital 223.8 220.1 232.7
----------------------------------- ----------- ----------- ------------
Total Risk Exposure 1,426.4 1,084.7 1,264.0
----------------------------------- ----------- ----------- ------------
CRD IV ratios
CET1 capital (Group consolidated) 15.3% 20.1% 18.0%
Leverage ratio 12.7% 15.7% 14.2%
----------------------------------- ----------- ----------- ------------
The Group benefited from a significant increase in CET1 capital
following the sale of ELG in the first half of 2016. This capital
is being utilised to drive the Group's organic growth. An analysis
of CET1 capital can be found in Note 13 to the interim report.
Total Risk Exposure has increased year-on-year by 31.5% to
GBP1,426.4 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 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 15.3% at the period end. This
compares to 18.2% at the end of 2016. The sale of ELG has provided
significant capital for continued growth, whilst maintaining the
CET1 ratio comfortably above regulatory minimum requirements.
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%. The Financial Policy Committee has
recently proposed to increase the ratio to 3.25% in its June 2017
consultation paper.
As shown in the table above, the Group has a leverage ratio at
30 June 2017 of 12.7%, comfortably ahead of the 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. In August 2016, as part of a monetary policy
package designed to stimulate the UK economy post-Brexit, the Bank
of England introduced the Term Funding Scheme (TFS) providing 4
year term funding to banks at base rate in the form of central bank
reserves to support additional lending to the real economy. The
Group was accepted as a member of the TFS on the 29th September
2016 and will make drawings until February 2018, when the scheme
closes, to secure 4 year long term funding. These drawings will be
repaid in the future through raising incremental client
deposits.
At 30 June 2017 and throughout the period, 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 reduced by 22.8% from
GBP180.7 million as at 30 June 2016 to GBP139.5 million as at 30
June 2017 (by 7.1% from GBP150.2 million as at 31 December
2016).
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
--------------------- ----------- ----------- ------------
Liquid assets
Aaa - Aa3 114.0 161.6 132.0
A1 - A3 20.5 14.1 13.2
Unrated 5.0 5.0 5.0
--------------------- ----------- ----------- ------------
Balance sheet total 139.5 180.7 150.2
--------------------- ----------- ----------- ------------
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 108.2% at
30 June 2016 to 113.9% at 30 June 2017, due to the Group using
liquidity generated from the sale of ELG to fund new loans, rather
than having to raise new deposits. Additionally, the proportion of
the savings book held as fixed term deposits has increased from
61.7% at 30 June 2016 to 67.2% at 30 June 2017.
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, have remained significantly above regulatory
requirements throughout the period.
Consolidated statement of comprehensive income
Year Year
Period Period Period Period ended Year ended
ended ended ended ended 31 ended 31
30 June 30 June 30 June 30 June December 31 December December
Note 2017 2016 2016 2016 2016 2016 2016
Unaudited Unaudited Unaudited Unaudited Audited Audited Audited
Continuing
and Total Continuing Discontinued Total Continuing Discontinued Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Income statement
Interest receivable
and similar income 71.2 62.7 11.1 73.8 130.0 11.1 141.1
Interest expense
and similar
charges (12.7) (13.2) - (13.2) (26.3) - (26.3)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Net interest
income 58.5 49.5 11.1 60.6 103.7 11.1 114.8
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Fee and commission
income 7.8 8.7 0.1 8.8 16.3 0.1 16.4
Fee and commission
expense (0.5) (0.9) (0.1) (1.0) (1.8) (0.1) (1.9)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Net fee and
commission
income 7.3 7.8 - 7.8 14.5 - 14.5
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Operating income 65.8 57.3 11.1 68.4 118.2 11.1 129.3
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Net impairment
losses on loans
and advances
to customers 7 (18.5) (13.3) (2.6) (15.9) (27.7) (2.6) (30.3)
Operating expenses (33.7) (31.5) (6.0) (37.5) (65.5) (6.0) (71.5)
Profit on sale
of equity
instruments
available-for-sale 8 0.3 - - - - - -
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit before
income tax 13.9 12.5 2.5 15.0 25.0 2.5 27.5
Income tax expense 4 (2.7) (2.2) (0.5) (2.7) (6.3) (0.5) (6.8)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit after
income tax 11.2 10.3 2.0 12.3 18.7 2.0 20.7
Gain recognised
on disposal 18 - - 116.8 116.8 - 116.8 116.8
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit for the
period 11.2 10.3 118.8 129.1 18.7 118.8 137.5
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 (2.1) - (2.1) (2.8) - (2.8)
Taxation - - - - - - -
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
2.8 (2.1) - (2.1) (2.8) - (2.8)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Other comprehensive
income for the
period, net of
income tax 2.8 (2.1) - (2.1) (1.8) - (1.8)
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income for the
period 14.0 8.2 118.8 127.0 16.9 118.8 135.7
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Profit attributable
to:
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 11.2 10.3 118.8 129.1 18.7 118.8 137.5
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Total comprehensive
income attributable
to:
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Equity holders
of the Company 14.0 8.2 118.8 127.0 16.9 118.8 135.7
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Earnings per
share for profit
attributable
to the equity
holders of the
Company during
the period (pence
per share)
Basic earnings
per share 5 60.6 57.0 652.9 709.9 102.6 651.5 754.1
-----------
Diluted earnings
per share 5 60.2 55.9 640.8 696.7 101.8 646.9 748.7
-------------------- ----- ----------- ----------- ------------- ----------- ----------- ------------- -----------
Consolidated statement of financial position
30 June 30 June 31 December
2017 2016 2016
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----- ----------- ----------- ------------
ASSETS
Cash and balances at central banks 114.0 141.8 112.0
Loans and advances to banks 25.5 19.1 18.2
Loans and advances to customers 6 1,509.6 1,128.3 1,321.0
Debt securities held-to-maturity - 19.8 20.0
Equity instruments available-for-sale - 13.7 13.5
Property, plant and equipment 11.2 8.5 11.4
Intangible assets 9.8 7.0 9.0
Deferred tax assets 0.9 0.9 -
Other assets 3.4 6.2 4.9
Total assets 1,674.4 1,345.3 1,510.0
--------------------------------------------- ----- ----------- ----------- ------------
LIABILITIES AND EQUITY
Liabilities
Due to banks 9 63.0 15.0 70.0
Deposits from customers 10 1,325.8 1,042.6 1,151.8
Current tax liabilities 3.5 0.2 1.7
Deferred tax liabilities 0.3 - 0.2
Dividend payable - 30.0 -
Other liabilities 41.3 27.8 49.0
Provisions for liabilities and charges 11 1.2 1.3 1.3
Total liabilities 1,435.1 1,116.9 1,274.0
--------------------------------------------- ----- ----------- ----------- ------------
Equity attributable to owners of the parent
Share capital 7.4 7.3 7.4
Share premium 81.2 79.3 81.2
Revaluation reserve 1.2 0.2 1.2
Available-for-sale reserve - (2.1) (2.8)
Retained earnings 149.5 143.7 149.0
--------------------------------------------- ----- ----------- ----------- ------------
Total equity 239.3 228.4 236.0
--------------------------------------------- ----- ----------- ----------- ------------
Total liabilities and equity 1,674.4 1,345.3 1,510.0
--------------------------------------------- ----- ----------- ----------- ------------
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
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Unaudited) Balance at
1 January 2017 7.4 81.2 1.2 (2.8) 149.0 236.0
Total comprehensive income
for the period
Profit for the six months
ended 30 June 2017 - - - - 11.2 11.2
Other comprehensive income
, net of income tax
Revaluation reserve - - - - - -
Available-for-sale reserve - - - 2.8 - 2.8
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - - 2.8 - 2.8
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period - - - 2.8 11.2 14.0
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
Dividends - - - - (10.7) (10.7)
Total contributions by
and distributions to
owners - - - - (10.7) (10.7)
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 30 June 2017 7.4 81.2 1.2 - 149.5 239.3
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Unaudited) Balance at
1 January 2016 7.3 79.3 0.2 - 54.4 141.2
Total comprehensive income
for the period
Profit for the six months
ended 30 June 2016 - - - 129.1 129.1
Other comprehensive income
, net of income tax
Available-for-sale reserve - - - (2.1) - (2.1)
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total other comprehensive
income - - - (2.1) - (2.1)
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total comprehensive income
for the period - - - (2.1) 129.1 127.0
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Transactions with owners,
recorded directly in
equity
Contributions by and
distributions to owners
2015 final dividend (55
pence per share) - - - - (10.0) (10.0)
Special dividend (165
pence per share) - - - - (30.0) (30.0)
Charge for share based
payments - - - - 0.2 0.2
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Total contributions by
and distributions to
owners - - - - (39.8) (39.8)
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Balance at 30 June 2016 7.3 79.3 0.2 (2.1) 143.7 228.4
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Share Share Revaluation Available-for-sale Retained
capital premium reserve reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
(Audited) Balance at
1 January 2016 7.3 79.3 0.2 - 54.4 141.2
Total comprehensive income
for the period
Profit for the twelve
months ended 31 December
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
---------------------------- ----------- ----------- ------------ ------------------- ----------- -----------
Consolidated statement of cash flows
Period Period
ended ended Year ended
30 June 30 June 31 December
2017 2016 2016
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
------------------------------------------------- ------ ----------- ----------- -------------
Cash flows from operating activities
- Continuing operations
Profit for the period 11.2 10.3 18.7
Adjustments for:
Income tax expense 2.7 2.2 6.3
Depreciation of property, plant and equipment 0.4 0.3 0.6
Amortisation of intangible assets 0.9 0.7 1.6
Loss on sale of property, plant and equipment - - 0.2
Impairment losses on loans and advances
to customers 18.5 13.3 27.7
Share based compensation - 0.2 0.2
Profit on sale of equity instruments
available-for-sale (0.3) - -
------------------------------------------------- ------ ----------- ----------- -------------
Cash flows from operating profits before
changes in operating assets and liabilities 33.4 27.0 55.3
Changes in operating assets and liabilities:
- net decrease/(increase) in debt securities
held-to-maturity 20.0 (16.0) (16.2)
- net increase in loans and advances
to banks - (5.0) -
- net increase in loans and advances
to customers (207.1) (181.0) (388.1)
- net decrease in other assets 1.5 0.9 2.2
- net (decrease)/increase in amounts
due to banks (7.0) (20.0) 35.0
- net increase in deposits from customers 174.0 9.5 118.7
- net (decrease)/increase in other liabilities (7.8) 2.9 22.9
Income tax paid (1.7) (5.3) (6.3)
Proceeds from sale of equity instruments
available-for-sale 16.6 - -
------------------------------------------------- ------ ----------- ----------- -------------
Net cash inflow/(outflow) from operating
activities - Continuing operations 21.9 (187.0) (176.5)
---------------------------------------------------------- ----------- ----------- -------------
Cash flows from investing activities
Purchase of property, plant and equipment (0.2) (0.3) (2.5)
Purchase of computer software (1.7) (0.7) (3.6)
Net cash outflow from investing activities
- Continuing operations (1.9) (1.0) (6.1)
---------------------------------------------------------- ----------- ----------- -------------
Cash flows from financing activities
Shares issued - - 2.0
Dividends paid (10.7) (10.0) (43.1)
---------------------------------------------------------- ----------- ----------- -------------
Net cash outflow from financing activities
- Continuing operations (10.7) (10.0) (41.1)
---------------------------------------------------------- ----------- ----------- -------------
Net increase/(decrease) in cash and cash
equivalents - Continuing operations 9.3 (198.0) (223.7)
Sale of subsidiary undertakings - Discontinued
operations - 209.9 209.9
Net increase in cash and cash equivalents
- Discontinued operations - 0.7 0.7
Cash and cash equivalents at start of
period 130.2 143.3 143.3
---------------------------------------------------------- ----------- ----------- -------------
Cash and cash equivalents at end of period 139.5 155.9 130.2
---------------------------------------------------------- ----------- ----------- -------------
Notes to the interim report
1. Accounting policies
The principal accounting policies applied in the preparation of
this interim report are set out below. These policies have been
consistently applied to all the periods 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 interim report of the
Company as at and for the period ended 30 June 2017 comprises
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 interim report does not constitute
statutory accounts as defined in section 434 of the Companies Act
2006, and has been prepared in accordance with International
Financial Reporting Standards, as adopted or early adopted by the
Group and endorsed by the EU, the Companies Act 2006 applicable to
companies reporting under IFRS and IAS 34 Interim Financial
Reporting.
The results for the periods ending 30 June 2017 and 30 June 2016
are unaudited. The results for the year ending 31 December 2016 are
audited.
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 interim
report is presented in pounds sterling, which is the functional and
presentational currency of the entities within the Group.
The preparation of the interim report 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 interim report
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
Group has adequate resources to continue in business for the
foreseeable future. For this reason, they continue to adopt the
'going concern' basis for preparing accounts.
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.
1.3. Accounting policies
The accounting policies applied in preparing the unaudited
condensed interim report are consistent with those used in
preparing the audited statutory financial statements for the year
ended 31 December 2016, except for the following:
Charge-off of debt sold by Secure Trust Bank Plc to Debt
Managers (Services) Limited
Previously, when debt was sold by Secure Trust Bank Plc to its
subsidiary Debt Managers (Services) Limited, the debt was 'charged
off', i.e. the gross receivable and associated impairment provision
were written off, when Debt Managers (Services) Limited considered
that the remaining debt was unlikely to be recovered. The Group
considers that it better reflects the economic reality to charge
off the debt at the point of its sale to Debt Managers (Services)
Limited.
This has resulted in a reduction of both gross receivables and
impairment provision of GBP10.9 million at 30 June 2016, GBP32.1
million at 31 December 2016 and GBP10.9 million at 31 December
2015. There is no impact on net receivables or the income
statement. Further information is provided in Note 6.
Taxation
Taxes on profits in interim periods are accrued using the tax
rate that will be applicable to expected total annual profits.
Standards in issue but not yet effective
New and amended standards and interpretations need to be adopted
in the first interim report issued after their effective date (or
date of early adoption). There are no new IFRSs or IFRICs that are
effective for the first time for the six months ended 30 June 2017
which have a material impact on the group. The following standards
have been issued which are not yet effective:
-- 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
are set out in Note 17.
-- 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 does not 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 under review.
However, it is likely to result in additional assets and
liabilities being recognised of approximately GBP2 million, and the
effect on the income statement is unlikely to be substantial.
Lessor accounting remains unchanged from IAS 17.
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.
The critical judgements and estimates relating to the Group's
financial reporting, with the exception of those in respect of the
new LTIP scheme launched in June 2017 which are shown below, are
set out in Note 2 to the audited statutory financial statements for
the year ended 31 December 2016 and summarised as follows:
Impairment losses on loans and advances to customers: Consumer
Finance
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.
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, the loss given default and the emergence period.
Impairment losses on loans and advances to customers: Business
Finance
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.
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.
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.
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. On 3 May 2017, the Group established the Long Term
Incentive Plan Scheme, the valuation of which was determined using
Black-Scholes and Monte-Carlo models. The most significant
assumption within these models relates to share price volatility.
See Note 15 for further details.
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 STB Leasing Limited, debt collection, current
accounts, OneBill and a GBP30 million loan to NSF as part of their
purchase of ELG. All current accounts were closed by the end of
September 2016, and OneBill has been closed to new customers since
2009.
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 Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------- ------------- ------------ ----------- --------------- --------------
Period ended 30 June 2017
Business finance
Real Estate Finance 14.7 0.1 14.8 0.1 541.4
Asset Finance 4.3 - 4.3 0.5 111.5
Commercial Finance 1.0 2.0 3.0 - 94.2
Consumer finance
Retail Finance 21.8 1.6 23.4 6.6 394.3
Motor Finance 22.0 0.4 22.4 9.2 258.4
Personal Lending 4.7 - 4.7 2.1 48.5
Other 2.7 3.7 6.4 - 61.3
---------------------------- ------------- ------------ ----------- --------------- --------------
71.2 7.8 79.0 18.5 1,509.6
--------------------------- ------------- ------------ ----------- --------------- --------------
Net impairment
Interest Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and advances
income income customers to customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------- ------------- ------------ ----------- --------------- --------------
Period ended 30 June 2016
Business finance
Real Estate Finance 13.9 0.1 14.0 - 361.7
Asset Finance 3.5 - 3.5 0.2 112.3
Commercial Finance 0.6 1.1 1.7 - 54.5
Consumer finance
Retail Finance 15.4 1.2 16.6 4.8 271.7
Motor Finance 18.4 0.4 18.8 6.1 205.6
Personal Lending 8.0 - 8.0 2.2 64.6
Other 2.9 5.9 8.8 - 57.9
------------------------------ ------------- ------------ ----------- --------------- --------------
Continuing operations 62.7 8.7 71.4 13.3 1,128.3
Discontinued operations and
assets held-for-sale
Personal Lending (ELG) 11.1 0.1 11.2 2.6 -
------------------------------ ------------- ------------ ----------- --------------- --------------
73.8 8.8 82.6 15.9 1,128.3
----------------------------- ------------- ------------ ----------- --------------- --------------
Net impairment
Interest Revenue losses
receivable Fee and from on loans Loans
and similar commission external and advances and 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
Retail Finance 34.3 2.4 36.7 9.5 325.9
Motor Finance 39.6 0.9 40.5 14.6 236.2
Personal Lending 11.2 - 11.2 4.4 65.5
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 (ELG) 11.1 0.1 11.2 2.6 -
------------------------------ ------------- ------------ ----------- --------------- --------------
141.1 16.4 157.5 30.3 1,321.0
----------------------------- ------------- ------------ ----------- --------------- --------------
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 interim
report.
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. Income tax expense
Period Period Period Period
ended ended ended ended Year ended Year ended Year ended
30 June 30 June 30 June 30 June 31 December 31 December 31 December
2017 2016 2016 2016 2016 2016 2016
Continuing
operations Continuing Discontinued Continuing Discontinued
and Total operations operations Total operations operations Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Current taxation
Corporation tax
charge -
current
period 3.4 2.3 0.6 2.9 4.2 0.6 4.8
Corporation tax
charge -
adjustments
in respect of
prior
periods (0.7) - - - 1.8 - 1.8
2.7 2.3 0.6 2.9 6.0 0.6 6.6
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Deferred
taxation
Deferred tax
charge
- current
period 0.1 (0.1) (0.1) (0.2) - (0.1) (0.1)
Deferred tax
charge
- adjustments
in
respect of
prior
periods (0.1) - - - 0.3 - 0.3
- (0.1) (0.1) (0.2) 0.3 (0.1) 0.2
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
Income tax
expense 2.7 2.2 0.5 2.7 6.3 0.5 6.8
----------------- ------------ ------------ ------------- ----------- ------------- ------------- -------------
The tax for the period ended 30 June 2017 has been calculated at
the current effective rate. The calculation is based on three
months at a rate of 20% and nine months at the current prevailing
rate of 19%.
The current taxation adjustment in respect of prior periods
primarily relates to non-deductible expenditure.
5. 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:
Period Period
ended ended Year ended
30 June 30 June 31 December
2017 2016 2016
Profit attributable to equity holders
of the parent (GBP millions)
Continuing operations 11.2 10.3 18.7
Discontinued operations - 118.8 118.8
--------------------------------------------- ----------- ----------- -------------
11.2 129.1 137.5
-------------------------------------------- ----------- ----------- -------------
Weighted average number of ordinary shares
(number) 18,475,229 18,191,894 18,234,588
--------------------------------------------- ----------- ----------- -------------
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
period, as noted above, as well as the number of dilutive share
options in issue during the period, as follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2017 2016 2016
-------------------------------------------- ----------- ----------- -------------
Weighted average number of ordinary shares 18,475,229 18,191,894 18,234,588
Number of dilutive shares in issue at
the period end 115,460 343,723 130,200
--------------------------------------------- ----------- ----------- -------------
Fully diluted weighted average number
of ordinary shares 18,590,689 18,535,617 18,364,788
--------------------------------------------- ----------- ----------- -------------
Dilutive shares being based on:
Number of options outstanding at the
period end 177,084 460,419 177,084
Exercise price (pence) 720 720 720
Average share price during the period
(pence) 2,069 2,841 2,720
--------------------------------------------- ----------- ----------- -------------
6. Loans and advances to customers
30 June 30 June 31 December
2017 2016 2016
Restated Restated
GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- ------------
Gross loans and advances 1,545.2 1,161.5 1,349.4
Less: allowances for impairment on loans
and advances (Note 7) (35.6) (33.2) (28.4)
------------------------------------------- ----------- ----------- ------------
1,509.6 1,128.3 1,321.0
------------------------------------------ ----------- ----------- ------------
The Group has changed its policy on the charge-off of debt sold
by Secure Trust Bank Plc to Debt Managers (Services) Limited. A
description of this change in accounting policy is set out in Note
1.3, the effect of which is set out below:
30 June 31 December 31 December
2016 2016 2015
GBPmillion GBPmillion GBPmillion
---------------------------------------- ----------- ------------ ------------
Gross loans and advances
As originally stated 1,172.4 1,381.5 994.9
Restatement (10.9) (32.1) (10.9)
----------------------------------------- ----------- ------------ ------------
As restated 1,161.5 1,349.4 984.0
----------------------------------------- ----------- ------------ ------------
Allowances for impairment on loans and
advances
As originally stated (44.1) (60.5) (34.3)
Restatement 10.9 32.1 10.9
----------------------------------------- ----------- ------------ ------------
As restated (33.2) (28.4) (23.4)
----------------------------------------- ----------- ------------ ------------
The fair value of loans and advances to customers is shown in
Note 14.
7. Allowances for impairment of loans and advances
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------
Period ended 30 June 2017
Business Finance:
Real Estate Finance - 0.5 0.5 0.1%
Asset Finance 1.3 0.2 1.5 1.3%
Commercial Finance 0.4 0.2 0.6 0.6%
Consumer Finance:
Retail Finance 4.8 1.2 6.0 1.5%
Motor Finance:
Voluntary termination provision 0.9 - 0.9 0.3%
Other impairment 13.6 2.5 16.1 5.8%
Personal Lending 5.6 0.6 6.2 11.3%
Other 3.8 - 3.8 5.8%
-------------------------------------- ----------- ----------- ----------- ----------
30.4 5.2 35.6 2.3%
-------------------------------------- ----------- ----------- ----------- ----------
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
-------------------------------------- ----------- ----------- ----------- ----------
Period ended 30 June 2016 (Restated)
Business Finance:
Real Estate Finance - 0.4 0.4 0.1%
Asset Finance 0.3 0.1 0.4 0.4%
Commercial Finance 0.3 - 0.3 0.5%
Consumer Finance:
Retail Finance 4.0 1.0 5.0 1.8%
Motor Finance:
Voluntary termination provision 0.8 - 0.8 0.4%
Other impairment 10.8 1.7 12.5 5.6%
Personal Lending 7.1 1.2 8.3 11.4%
Other 5.5 - 5.5 8.7%
-------------------------------------- ----------- ----------- ----------- ----------
28.8 4.4 33.2 2.9%
-------------------------------------- ----------- ----------- ----------- ----------
Individual Collective Provision
provision provision Total cover
GBPmillion GBPmillion GBPmillion %
---------------------------------------- ----------- ----------- ----------- ----------
Year ended 31 December 2016 (Restated)
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:
Retail Finance 4.0 0.9 4.9 1.5%
Motor Finance:
Voluntary termination provision 0.6 - 0.6 0.2%
Other impairment 10.0 3.0 13.0 5.2%
Personal Lending 3.5 0.7 4.2 6.0%
Other 4.2 - 4.2 6.3%
---------------------------------------- ----------- ----------- ----------- ----------
23.1 5.3 28.4 2.1%
---------------------------------------- ----------- ----------- ----------- ----------
Provisions included in 'Other' are in respect of OneBill and
other various legacy products. This segment also includes loans of
GBP17.1 million (30 June 2016: GBP21.0 million, 31 December 2016:
GBP18.7 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
GBP30 million loan to NSF, which is included in this segment, is
not impaired and no provision is held against it.
The Group has changed its policy on the charge-off of debt sold
by Secure Trust Bank Plc to Debt Managers (Services) Limited. A
description of this change, and its effect, is set out in Note
1.3.
The Group net impairment losses disclosed in the Consolidated
Statement of Comprehensive Income, for continuing operations, can
be analysed as follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- -------------
Individual provision: charge for impairment
losses 18.4 10.9 25.1
Collective provision: charge for impairment
losses (0.1) 2.4 3.3
Loans written off, net of amounts utilised 0.7 0.4 1.2
Recoveries of loans written off (0.5) (0.4) (1.9)
18.5 13.3 27.7
--------------------------------------------- ----------- ----------- -------------
A reconciliation of the allowance accounts for losses on loans
and advances is as follows:
Period Period
ended ended Year ended
30 June 30 June 31 December
2017 2016 2016
Restated Restated
GBPmillion GBPmillion GBPmillion
-------------------------------------------------- ----------- ----------- -------------
Individual allowances for impairment
At 1 January 23.1 21.4 21.4
Charge for impairment losses 18.4 10.9 25.1
Amounts utilised (7.3) (3.5) (10.7)
Changes to presentation in respect of debt sales (3.8) - (12.7)
30.4 28.8 23.1
-------------------------------------------------- ----------- ----------- -------------
Collective allowances for impairment
At 1 January 5.3 2.0 2.0
Charge for impairment losses (0.1) 2.4 3.3
5.2 4.4 5.3
-------------------------------------------------- ----------- ----------- -------------
Total allowances for impairment 35.6 33.2 28.4
-------------------------------------------------- ----------- ----------- -------------
8. Equity instruments available-for-sale
On 13 April 2016, as part of the sale of Everyday Loans Group
(ELG) to Non-Standard Finance plc ('NSF'), the Group acquired
23,529,412 shares in NSF at a cost of 69.25 pence per share. This
equity instrument was considered to be available for sale, and
therefore fair value changes on the Available-For-Sale securities
were recognised directly in other comprehensive income and equity
(AFS reserve).
In May 2017, the shares were sold at an average price of 71
pence, realizing a profit of GBP343,000. The AFS reserve balance of
GBP2.8 million, which had arisen due to previous movements in the
NSF share price, was reclassified from other comprehensive income
to the income statement.
9. Due to banks
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- ------------
Amounts due to other credit institutions 63.0 15.0 70.0
------------------------------------------- ----------- ----------- ------------
Amounts due to banks for the current period represent GBP15
million (2016: GBP15 million) arising from the sale and repurchase
of drawings under the Funding for Lending Scheme and drawings of
GBP48 million (2016: nil) under the Bank of England Term Funding
Scheme. The Funding for Lending scheme drawings are due for
repayment in September 2017 and the Term Funding scheme drawings in
2021.
10. Deposits from customers
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ------------
Current/demand accounts 16.0 34.8 15.2
Term deposits 1,309.8 1,007.8 1,136.6
------------------------- ----------- ----------- ------------
1,325.8 1,042.6 1,151.8
------------------------- ----------- ----------- ------------
The fair value of deposits from customers is shown in Note
14.
11. Provisions for liabilities and charges
Customer redress provision
Details of the provision for outstanding potential customer
redress claims are as follows:
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- ------------
Balance at 1 January 1.3 2.0 2.0
Charged to Statement of Comprehensive Income 0.2 0.1 0.4
Utilised (0.3) (0.8) (1.1)
1.2 1.3 1.3
---------------------------------------------- ----------- ----------- ------------
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 has announced a deadline for
making customer redress claims, which would give consumers until 29
August 2019 to make a claim.
12. Commitments
The Group's off-balance sheet exposure to undrawn loan
commitments at 30 June 2017 was GBP177.5 million (30 June 2016:
GBP124.2 million, 31 December 2016: GBP178.0 million).
13. 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.
The following table shows the regulatory capital resources as
managed by the Group:
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ------------
Tier 1
Share capital 7.4 7.3 7.4
Share premium 81.2 79.3 81.2
Retained earnings 138.2 138.9 149.0
Revaluation reserve 1.2 0.2 1.2
Available-for-sale reserve - (2.1) (2.8)
Goodwill (1.0) (1.0) (1.0)
Intangible assets net of attributable deferred
tax (8.5) (5.5) (7.6)
CET1 capital 218.5 217.1 227.4
------------------------------------------------ ----------- ----------- ------------
Tier 2
Collective allowance for impairment of loans
and advances 5.3 3.0 5.3
------------------------------------------------ ----------- ----------- ------------
Total Tier 2 capital 5.3 3.0 5.3
------------------------------------------------ ----------- ----------- ------------
Own Funds 223.8 220.1 232.7
------------------------------------------------ ----------- ----------- ------------
Reconciliation to total equity:
Goodwill and other intangible assets net of
attributable deferred tax 9.5 6.5 8.6
Collective allowance for impairment of loans
and advances (5.2) (3.0) (5.3)
Profits yet to be certified 11.2 4.8 -
Total equity 239.3 228.4 236.0
------------------------------------------------ ----------- ----------- ------------
Retained earnings within CET 1 Capital are reported on a
certified basis and therefore do not include uncertified earnings
of GBP11.2 million for the period ended 30 June 2017 (30 June 2016:
GBP4.8 million).
The Tier 2 Capital at 30 June 2017 does not include uncertified
adjustments for the period ended 30 June 2017.
14. Fair value of loans and advances to customers and deposits from customers
The fair value of loans and advances to customers and deposits
from customers is set out below:
Total Total Total
carrying carrying carrying
amount Fair value amount Fair value amount Fair value
30 June 30 June 30 June 30 June 31 December 31 December
2017 2017 2016 2016 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Loans and advances to
customers 1,509.6 1,607.5 1,128.3 1,234.1 1,321.0 1,399.8
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Deposits from customers 1,325.8 1,323.2 1,042.6 1,061.8 1,151.8 1,160.9
------------------------- ----------- ----------- ----------- ----------- ------------ ------------
Equity investments held-for-sale and freehold land and buildings
are carried at fair value. All other assets and liabilities are
carried at amortised cost.
During the period, the underlying methodology used to calculate
the fair values of loans and advances to customers has been
enhanced to calculate fair values on an individual business segment
basis. Accordingly the comparatives as at 31 December 2016 and 30
June 2016 have been re-presented on this basis.
15. Share based payments
At 30 June 2017, the Group had three share based payment schemes
in operation:
-- Equity settled share option scheme
-- Equity settled long term incentive plan
-- Cash settled 'phantom' share option scheme
Two further schemes, the 2017 sharesave scheme and the 2017
deferred bonus plan, have been approved by shareholders but have
not yet been launched.
Equity settled Share option scheme
On 17 October 2011, the Group established the Share Option
Scheme entitling three directors and certain senior employees to
purchase shares in the Company.
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 were exercised on 2 November 2014, with
the remainder vesting and becoming exercisable on 2 November 2016.
The bulk of the remainder were exercised on 7 November 2016,
leaving 177,084 share options unexercised at 30 June 2017.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. The Company incurred an
expense in relation to share based payments of GBPnil (30 June
2016: GBPnil, 31 December 2016: GBP0.1 million).
The value of the share options and number of option holders as
at 31 June 2017 remains unchanged from the position as at 31
December 2016.
30 June 30 June 31 December 31 December
2016 2016 2016 2016
No. of No. of
option option
holders GBP holders GBP
Directors 3 318,751 2 177,084
Senior management 5 141,668 - -
-------------------------------- --------- -------- ------------ ------------
Share options in issue 8 460,419 2 177,084
-------------------------------- --------- -------- ------------ ------------
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) 0.8 0.3
-------------------------------- --------- -------- ------------ ------------
Probability of pay-out 100% -
------------------------------ --------- -------- ------------ ------------
Assumed value of share
options on exercise date
(GBPmillion) 0.8 0.3
-------------------------------- --------- -------- ------------ ------------
Value of share options
at end of period 0.7 0.3
-------------------------------- --------- -------- ------------ ------------
Equity settled long term incentive plan
On 3 May 2017, the Group established the Long Term Incentive
Plan Scheme entitling two directors and certain other key senior
employees to purchase shares in the Company.
The awards are subject to three performance conditions, which
are based on:
-- Annual compound growth in Earnings per share over the performance period.
-- Rank of the total shareholder return over the performance
period against the total shareholder return of the comparator group
of peer group companies.
-- Maintaining appropriate risk practices over the performance
period reflecting the longer term strategic risk management of the
Group.
The awards will vest on the date on which the board determines
that these conditions have been met.
The awards have a performance term of 3 years. Those awards
granted to the Executive Directors are subject to a holding period
of 2 years following the vesting date. Those awards not subject to
a holding period will be released to the participants on the
vesting date.
On 1 June 2017, 67,992 share options were granted at an exercise
price of 40 pence per share.
The Long Term Incentive Plan is an equity settled scheme. The
original grant date valuation was determined to be GBP12.19 for
those awards that are subject to a holding period, and GBP14.82 for
those awards not subject to a holding period, and these valuations
have been used in the calculation. The Company incurred an expense
in relation to share based payments of GBPnil as the scheme is only
one month old resulting in no material charge as at 30 June
2017.
Grant
30 June date value 30 June
2017 per option 2017
No. of
option
holders GBP GBP
Directors 2 12.19 33,467
Senior management 35 14.82 34,525
--------------------------------- --------- ------------ --------
Share options in issue 37 67,992
--------------------------------- --------- ------------ --------
Exercise price (GBP) 0.40
Fair value of share options,
if all share options
were exercised (GBPmillion) 0.9
--------------------------------- --------- ------------ --------
Behavioural assumption
(attrition) 10%
Probability of pay-out 100%
--------------------------------- --------- ------------ --------
Assumed value of share
options on exercise date
(GBPmillion) 0.8
--------------------------------- --------- ------------ --------
Value of share options
at 30 June 2017 -
--------------------------------- --------- ------------ --------
Cash settled 'phantom' share option scheme
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 30 June 2017, 30 June 2016 and 31 December 2016 312,917
share options remained outstanding.
As at 30 June 2017, the estimated fair value has been prepared
using the Black-Scholes model. Measurement inputs and assumptions
used were as follows:
30 June 30 June 31 December
2016 2015 2016
--------------------------------- --------- -------- ------------
Expected stock price volatility 24.6% 47.00% 40.00%
Expected dividend yield 3.8% 2.09% 3.40%
Risk free interest rate 0.56% 0.72% 0.06%
Average expected life (years) 1.35 2.35 1.84
---------------------------------- --------- -------- ------------
This resulted in the following being recognised in the financial
statements:
30 June 30 June 31 December
2017 2016 2016
GBPmillion GBPmillion GBPmillion
---------------------------- ------------ ----------- ------------
Liability at 1 January 0.6 1.2 1.2
Charge for the year (0.3) - (0.6)
----------------------------- ------------ ----------- ------------
Liability at end of period 0.3 1.2 0.6
----------------------------- ------------ ----------- ------------
Intrinsic value - 0.5 -
----------------------------- ------------ ----------- ------------
16. Related party transactions
There were no changes to the nature of the related party
transactions during the period to 30 June 2017 that would
materially affect the position or performance of the Group. Details
of the transactions for the year ended 31 December 2016 can be
found in the 2016 Annual Report.
17. Credit risk
The Group takes 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).
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.
The maximum exposure to credit risk for the Company and the
Group was as follows:
30 June 31 December
30 June 2016 2016
2017 Restated Restated
GBPmillion GBPmillion GBPmillion
----------------------------------------------- ----------- ----------- ------------
Cash and balances at central banks 114.0 141.8 112.0
Loans and advances to banks 25.5 19.1 18.2
Loan and advances to customers 1,509.6 1,128.3 1,321.0
Debt securities held-to-maturity - 19.8 20.0
Trade receivables 2.4 2.8 0.7
Credit risk exposures relating to off-balance
sheet assets are as follows:
Loan commitments 177.5 124.2 178.0
------------------------------------------------ ----------- ----------- ------------
At end of period 1,829.0 1,436.0 1,649.9
------------------------------------------------ ----------- ----------- ------------
The above table represents the maximum credit risk exposure (net
of impairment) to the Group 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.
The table below further summarises loans and advances to
customers as follows:
30 June
30 June 30 June 2016 30 June 31 December 31 December
2017 2017 Restated 2016 Restated 2016 Restated 2016 Restated
GBPmillion % GBPmillion % GBPmillion %
--------------------------- ----------- -------- ----------- --------------- --------------- ---------------
Neither past due nor
impaired 1,457.6 94.3% 1,089.2 93.8% 1,246.2 92.4%
Not past due but impaired 0.6 0.0% - 0.0% 0.6 0.0%
Past due but not impaired 5.3 0.4% 7.6 0.7% 12.4 0.9%
Past due up to 90
days and impaired 43.5 2.8% 34.0 2.9% 59.7 4.4%
Past due after 90
days and impaired 38.2 2.5% 30.7 2.6% 30.5 2.3%
--------------------------- ----------- -------- ----------- --------------- --------------- ---------------
Gross 1,545.2 100% 1,161.5 100.0% 1,349.4 100.0%
Less: allowance for
impairment (35.6) (33.2) (28.4)
--------------------------- ----------- -------- ----------- --------------- --------------- ---------------
Net loan and advances
to customers 1,509.6 1,128.3 1,321.0
--------------------------- ----------- -------- ----------- --------------- --------------- ---------------
The restatement is due to a change in accounting policy for debt
sold to Debt Managers (Services) Limited as explained in Note
7.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
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:
Loans and advances to
customers Loan commitments
30 June 30 June 31 December 30 June 30 June 31 December
2016 2016
2017 Restated Restated 2017 2016 2016
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Concentration by product
Business Finance:
Real Estate Finance 541.4 361.7 451.0 109.5 92.0 99.4
Asset Finance 111.5 112.3 117.2 17.9 24.1 19.5
Commercial Finance 94.2 54.5 62.8 28.4 7.2 28.9
Consumer Finance:
Personal Lending 48.5 64.6 65.5 - - -
Motor 258.4 205.6 236.2 0.6 0.8 0.6
Retail 394.3 271.7 325.9 20.5 - 28.6
Other 61.3 57.9 62.4 0.5 0.1 1.0
-------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Total 1,509.6 1,128.3 1,321.0 177.4 124.2 178.0
-------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Concentration by region:
East Anglia 105.0 100.4 113.1 33.8 22.3 19.7
East Midlands 60.1 48.2 52.3 3.4 1.6 3.0
London 532.3 365.7 415.3 76.2 27.1 61.3
North East 42.3 33.4 37.4 1.7 1.4 2.2
North West 127.5 96.7 120.8 15.5 10.3 17.0
Northern Ireland 14.8 10.9 12.5 0.5 - 0.4
Scotland 98.4 73.9 90.3 6.6 10.3 10.6
South East 230.1 147.1 205.0 21.6 31.2 35.0
South West 68.1 53.8 62.6 7.2 7.3 12.1
Wales 51.1 41.6 46.8 2.1 3.4 4.2
West Midlands 85.2 73.0 80.5 4.4 3.6 5.5
Yorkshire and the Humber 78.8 64.7 69.1 2.9 2.1 3.9
Overseas 15.9 18.9 15.3 1.5 3.5 3.1
-------------------------- ----------- ----------- ------------ ----------- ----------- ------------
Total 1,509.6 1,128.3 1,321.0 177.4 124.2 178.0
-------------------------- ----------- ----------- ------------ ----------- ----------- ------------
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.
IFRS 9
The Group has now built the majority of the expected credit loss
models that will be used to measure impairment in accordance with
IFRS 9. The testing and validation of these models will be
concluded early in the second half of the year, with the models
then being run alongside the Group's existing provision models to
allow the impact of IFRS 9 on the Group's results to be fully
assessed.
The models are being run on the Group's existing systems and IT
architecture has been developed to allow the efficient loading of
data into the models and extract of outputs from them to support
accounting disclosure and management information. No significant
gaps in the data required to operate the models have thus far been
identified.
Additional governance has been developed around the IFRS 9
impairment process including detailed process and control
documentation. An Assumptions Committee has been established, as a
sub-committee of ALCO, which has approved the forward looking
scenarios that IFRS 9 requires to be built into expected credit
loss modelling.
The classification and measurement requirements of IFRS 9 have
been assessed and no material changes to the Group's categorisation
of its assets and liabilities are expected. Product developments
are being scrutinised on an ongoing basis to identify any changes
to lending products that could result in a change in
categorisation.
The hedge accounting requirements of IFRS 9 are currently not
relevant to the Group as no significant hedging is entered
into.
18. 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 '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.
Details of the net assets disposed of and consequential gain
recognised on disposal and cash flow of discontinued operations is
set out below.
Assets
and liabilities
sold on
13 April
2016
GBPmillion
------------------------------------------------------- ------------------
ASSETS
Loans and advances to banks 2.4
Loans and advances to customers 117.9
Property, plant and equipment 0.5
Intangible assets 1.2
Deferred tax assets 0.4
Other assets 0.8
-------------------------------------------------------- ------------------
Total assets 123.2
-------------------------------------------------------- ------------------
LIABILITIES
Current tax liabilities 4.0
Other liabilities 7.4
-------------------------------------------------------- ------------------
Total liabilities 11.4
-------------------------------------------------------- ------------------
Net assets disposed of 111.8
-------------------------------------------------------- ------------------
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:
GBPmillion
--------------------------------------------------------------- -----------
Cash consideration (including the settlement of inter-company
debt) 215.0
Selling costs (2.7)
Cash disposed of as part of sale (2.4)
---------------------------------------------------------------- -----------
209.9
--------------------------------------------------------------- -----------
Six months
ended
30 June
2016
GBPmillion
------------------------------------------------------ -----------
Cash flows from discontinued operations
Cash flows from operating activities
Profit for the period 2.0
Adjustments for:
Income tax expense 0.5
Impairment losses on loans and advances to customers 2.6
------------------------------------------------------- -----------
Cash flows from operating profits before changes in
operating assets and liabilities 5.1
Changes in operating assets and liabilities:
- net increase in loans and advances to customers (6.2)
- net increase in other assets (0.3)
- net increase in other liabilities 2.1
Net cash inflow from operating activities 0.7
------------------------------------------------------- -----------
Net increase in cash and cash equivalents 0.7
Cash and cash equivalents at 1 January 1.7
------------------------------------------------------- -----------
Cash and cash equivalents disposed of 2.4
------------------------------------------------------- -----------
Directors' responsibility statement
The directors confirm that, to the best of their knowledge:
-- the condensed financial statements have been prepared in
accordance with International Accounting Standard 34 - 'Interim
Financial Reporting', issued by the IASB and as adopted and
endorsed by the European Union;
-- the Interim business review includes a fair review of the
information required by Section 4.2.7R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being an indication of important events that have occurred during
the first six months of the current financial year and their impact
on the condensed financial statements and a description of the
principal risks and uncertainties for the remaining six months of
the financial year); and
-- the Interim business review includes a fair review of the
information required by Section 4.2.8R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being disclosure of related party transactions that have taken
place in the first six months of the current financial year and
that have materially affected the financial position or the
performance of the enterprise during that period; and any changes
in the related party transactions described in the last annual
report which could do so).
Approved by the Board of Directors and signed on behalf of the
Board.
P A Lynam Neeraj Kapur
Chief Executive Officer Chief Financial Officer
21 August 2017
Independent review report to Secure Trust Bank PLC
Conclusion
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2017 which comprises the statement of
comprehensive income, the statement of financial position, the
statement of changes in equity, the statement of cash flows and the
related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2017 is not prepared, in all material respects, in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU and
the Disclosure Guidance and Transparency Rules ("the DTR") of the
UK's Financial Conduct Authority ("the UK FCA").
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Andrew Walker
for and on behalf of KPMG LLP
Chartered Accountants
One Snowhill
Snow Hill Queensway
Birmingham B4 6GH
21 August 2017
This information is provided by RNS
The company news service from the London Stock Exchange
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