TIDMSTB
RNS Number : 2950V
Secure Trust Bank PLC
06 August 2020
PRESS RELEASE
Thursday 6 August 2020
LEI: 213800CXIBLC2TMIGI76
For immediate release
SECURE TRUST BANK PLC
Interim Results for the six months to 30 June 2020
This announcement contains inside information for the purposes
of Article 7 of EU Regulation 596/2014.
Resilience demonstrated by response to COVID-19 pandemic
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a profit of GBP5.1 million for the six months
to 30 June 2020 (30 June 2019: GBP18.1 million), despite the
unprecedented economic backdrop.
Following a strong first quarter of 2020, the result for the
first half was impacted by increased impairment charges, mostly
driven by forward looking estimates which take account of the
potential deterioration of the UK economy that the pandemic may
cause. In addition, the accounting treatment of payment holidays
has had a material impact on the profit for the first half.
The Group adapted its operations quickly and successfully to
maintain excellent customer service and ensure the welfare of our
employees. Customer numbers have increased by 15% year-on-year. As
expected, the short duration of the Group's lending portfolios has
resulted in the balance sheet contracting, with a consequential
improvement in capital ratios. The liquidity position remains very
healthy.
There are some encouraging signs of customer demand increasing
in the third quarter, in particular in Motor Finance and V12 Retail
Finance. However, as a result of continuing uncertainty regarding
the extent of the pandemic and its impact on the economy, forward
guidance continues to be suspended and no interim dividend is
proposed.
FINANCIAL HIGHLIGHTS
-- Statutory profit before tax down 71.8% to GBP5.1m (2019: GBP18.1m)
-- Adjusted profit before tax down 69.1% to GBP5.8m (2019: GBP18.8m)
-- Operating income GBP84.9m (2019: GBP81.4m) up 4.3%
-- Costs reduced by 1.8% to GBP44.7m (2019: GBP45.5m)
-- Impact of the pandemic has increased cost of risk to 2.9% (FY 2019: 1.4%)
-- One-off impact of payment holidays reduced profits by
GBP3.6m; this is a timing impact which is expected to reverse over
the remaining life of the loans
-- Common equity tier 1 ratio rose to 13.5% (2019: 12.8%*) due to balance sheet contraction
-- Total capital ratio of 15.9% (2019: 15.2%*)
-- Basic earnings per share 21.0p (2019: 79.0p) down 73.4%
-- Adjusted earnings per share 24.2p (2019: 82.3p) down 70.6%
-- Adjusted return on average equity of 3.5% (2019: 12.7%)
-- Total assets GBP2,630.7m (30 June 2019: GBP2,607.1m, 31 December 2019: GBP2,682.8m)
-- No interim dividend recommended (2019 interim dividend: 20p per share)
* Note: After accounting for the 2019 interim dividend, the CET
1 ratio at 30 June 2019 was 12.6% and the total capital ratio at 30
June 2019 was 15.0%
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased year-on-year by 14.8% to 1,660,541 (2019: 1,446,342)
-- Customer satisfaction scores, as measured by FEEFO, continue to be well over 90%
-- Third phase of Motor Transformation Programme scheduled to go
live shortly, enabling launch of prime products
-- Total new business lending volumes fell by 31.5% to GBP488m (2019: GBP712m)
-- Total Consumer Finance balances of GBP1,124.4m (2019:
GBP1,127.0m); since 31 December 2019 Retail Finance balances have
contracted by 6.0% and Motor Finance balances by 10.7%
-- Total Business Finance balances of GBP1,247.8m (2019:
GBP1,142.4m); since 31 December 2019 Real Estate Finance balances
have grown by 7.8% and Commercial Finance balances have contracted
by 23.9%
-- Customer deposits of GBP1,999.2m (2019: GBP2,001.5m); since
31 December 2019 these have reduced by 1.0% as the balance sheet
has contracted
COVID-19
-- The Group transitioned smoothly to a new operating model
involving the majority of employees working from home. This is
working effectively, is sustainable for as long as is necessary and
is delivering continued high customer service standards.
-- As expected, the managed contraction of the short duration
loan books is helping to maintain capital and liquidity levels
above regulatory requirements
-- Stress testing is continuing as conditions evolve to
demonstrate that these levels can be maintained during continued
adverse conditions and as the balance sheet returns to growth
-- Forward guidance remains suspended due to continuing economic uncertainty
Lord Forsyth, Chairman, said:
" I have been extremely impressed by the way in which the Group
has adapted to the circumstances brought about by the pandemic and
am very encouraged by the continued excellent levels of service
being delivered to our customers. Although it is disappointing that
the positive momentum that we took into 2020 will not now lead to
another successive year of double digit profit growth, it is
heartening that the balance sheet is behaving in line with our
expectations and that the Group is conserving capital. As a result,
we remain well placed to tackle the challenges ahead."
Paul Lynam, Chief Executive, said:
"After a strong first quarter we very quickly changed our focus
to prioritise on operational resilience, capital conservation and
supporting our customers and our employees. In this context, and
given the requirement to bring the potential future impact of the
pandemic into our impairment provisions, our profit performance is
creditable. The short duration of the Group's lending books and our
diverse product offering facilitates swift degearing of those
lending portfolios most exposed to recessionary pressure, and a
swift gearing into an economic recovery. As the pandemic has taken
hold, we have amended our credit risk appetite and allowed the
balance sheet to contract, conserving capital and liquidity levels.
We remain cautious, but are well-placed to navigate the current
crisis.
Our long term strategy remains unchanged and we will refocus on
our key priorities, recognising base rate falls have led to a
significant reduction in the funding cost advantages enjoyed by the
dominant systemic firms, once the COVID-19 storm has passed.
Continuing progress from our Motor Transformation Programme will
allow us to launch prime products later this year, which we will
commence with tempered new business volumes until the economic
outlook improves. Growth potential remains across all of our core
business lines and we will carefully consider the timing and extent
of our return to growth in each market."
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
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)
Sunil Duggal
David Tyrrell
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
Sheebani Chothani
Tel: 020 7353 4200
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.
Impact of COVID-19
Demonstrating our resilience
The COVID-19 pandemic has had a profound effect on many people's
lives, on livelihoods and businesses and on the world economy. The
UK Government's response to lockdown large sections of society in
order to reduce the risk of contagion and in order to protect
healthcare services has inevitably had a major impact on the UK
economy and consequently an impact on Secure Trust Bank's customers
and markets and on its operations and working environment.
This section sets out a summary of the primary factors which
have been and remain material to the Group's performance and to the
risks that the Group faces.
Government and regulatory response to the pandemic
In response to the pandemic, the UK Government, the PRA and the
FCA launched a series of significant initiatives designed to
support the economy. The measures are wide-ranging, with support
being provided directly to borrowers, employees, large and small
businesses and to banks as well as other financial firms.
In addition, the Government has made clear that there are
additional Government-support programmes and policies in the
pipeline. At the end of June, the Prime Minister emphasised the
theme of infrastructure spending, setting out plans to accelerate
GBP5 billion of spending on various projects. A new Infrastructure
Delivery Taskforce is to be set up and the Government will publish
the delayed National Infrastructure Strategy in the autumn.
In the Chancellor's economic statement on 8 July, Government
plans for steering the economy through the next stages of the
coronavirus crisis were outlined. The statement set out additional
stimulus measures, many of which were focused on averting large
rises in unemployment. Of particular note were the GBP9 billion job
retention bonus programme available to companies which take back
furloughed workers, together with measures directed at the
hospitality sector.
A summary of the key initiatives impacting Secure Trust Bank's
markets and customers is set out below:
Direct support for personal borrowers
At the onset of the crisis, the regulator announced proposals to
support borrowers and the flow of consumer credit to customers. In
April, the FCA issued new rules which provided temporary financial
relief for those consumer credit customers who have been impacted
by Coronavirus. The rules included the offer by financial firms of
a temporary payment freeze on loans and credit cards for up to
three months and zero interest rate overdrafts to customers who
already had an arranged overdraft on their main personal current
account, again for three months.
More recently, the FCA have extended these proposals designed to
support borrowers coming to the end of payment freezes or those who
have not yet requested one. These proposals include the requirement
to contact customers who have missed payments but can now afford to
resume payments and agree a payment plan; the requirement to
continue supporting customers who have already had a payment
holiday and need further help; and the requirement to allow
customers who have already have an arranged overdraft on their main
personal current account, to extend the zero interest overdraft for
a further three months.
The FCA requirement to give customers who are experiencing
temporary financial difficulties a three month repayment freeze has
been particularly relevant for the Group's Consumer Finance
businesses. The direct impact of these initiatives on the Group is
set out in the Consumer Finance section on page 28.
The Coronavirus Job Retention Scheme
The Coronavirus Job Retention Scheme is designed to support
employers whose operations have been affected by the COVID-19
pandemic. The scheme is available to employers for a total of eight
months, from March through to October 2020.
In June, the Government introduced a Flexible Furlough option
with effect from 1 July. The changes introduce greater
flexibilities and remove the requirement for a minimum furlough
period. These changes are designed to support businesses as the
economy moves out of lockdown and the focus shifts on getting
employees back to work.
From 1 August, a new taper is being introduced and employers
will have to start contributing towards the costs of paying their
furloughed staff. This employer contribution will gradually
increase in September and October.
Reduction of Bank Rate and new Term Funding Scheme
In March, the Monetary Policy Committee voted unanimously to
reduce the Bank Rate to 0.1% (after an original reduction to 0.25%)
and to introduce the Term Funding Scheme with additional incentives
for SMEs (TFSME), financed by the issuance of central bank
reserves.
The TFSME is intended to help banks pass on the reduction in the
Bank Rate to their customers. Conceptually similar to other BoE
facilities, the TFSME offers four year funding to participants on
rates at or close to Bank Rate against the provision of eligible
collateral (subject to haircuts) by those participants. The
objective is for additional lending to be made available for
increased funding to the real economy, especially to Small and
Medium-sized Enterprises.
The BoE expectation is that the TFSME will offer funding of at
least 5% of participants' share of real economy lending. Its
experience from the existing Term Funding suggests that the TFSME
could provide in excess of GBP100 billion in term funding.
The Coronavirus Business Interruption Loan Scheme
At the end of April, the Government launched two schemes
designed to help businesses struggling with the impact of the
lockdown restrictions, the Coronavirus Business Interruption Loan
Scheme (CBILS) and the Coronavirus Large Business Interruption Loan
Scheme (CLBILS).
The schemes are designed to provide liquidity to businesses
impacted by COVID-19. This financial support is provided through
accredited lenders listed on the Government's British Business Bank
website and, in both instances, the Government will provide a
guarantee of up to 80 % of the value of each of the loans.
The CBILS is aimed at small to medium sized businesses with an
annual turnover of up to GBP45 million. It provides access to
financial support (loans and other kinds of finance) up to GBP5
million for a term of up to six years. The CLBILS, meanwhile, is
aimed at larger businesses with an annual turnover of over GBP45
million. It provides companies with access to loans of up to GBP25
million for a term of up to three years (firms with a turnover
GBP250 million can apply for up to a GBP50 million).
The Group is a provider of CBILS and CLBILS, and further detail
is provided in the Business Finance section on page 27.
Prudential measures to support bank lending to the economy
At the start of the crisis in March, the Financial Policy
Committee announced with immediate effect a reduction in the UK
countercyclical capital buffer to 0% of banks' exposures to UK
borrowers. The rate had been 1% and had been due to reach 2% by
December 2020. Any subsequent increase will not take effect until
March 2022 at the earliest. According to the Bank of England's
statement in March, the release of the countercyclical capital
buffer will support up to GBP190 billion of bank lending to
businesses.
The PRA has also provided guidance that firms are able to make
use of their bank capital and liquidity buffers as necessary to
support the economy through the COVID-19 shock. In particular, the
regulator emphasised that the use of the CRD IV combined buffer is
not a breach of capital requirements and encouraged firms to do so,
should this be needed in order to continue lending into the
economy.
The regulators have also made clear that they expect banks to
take a sensible approach to distributions in current market
conditions. In March, the PRA set out its supervisory expectation
that banks should not increase dividends or other distributions,
such as bonuses, in response to these policy actions being
taken.
Guidance on the application of regulatory capital and IFRS 9
In May, the PRA issued guidance on the application of regulatory
capital and IFRS 9 requirements to granted or extended payment
holidays. The PRA set out that it considers that eligibility for,
and use of, COVID-19 related payment deferrals or extensions to
those deferrals granted in accordance with the FCA's proposed
guidance do not automatically result in a loan either being
regarded as having suffered a significant increase in credit risk
or being credit-impaired for expected credit loss ('ECL') purposes,
or triggering a default under Capital Requirements Regulation.
As set out on page 24, the PRA has ratified Basel Committee
proposals to increase the capital relief provided for impairment
provisions, where these do not relate to accounts that have
defaulted, arising in 2020 and 2021. This will significantly reduce
the short-term impact of impairment charges driven by the pandemic
on the Group's capital ratios.
Regulatory relief and delays to regulatory initiatives
The financial regulators have provided temporary relief and
supervisory forbearance in a number of areas. These do not
particularly impact the Group, but include:
-- Extension of regulatory reporting deadlines: The FCA has
temporarily extended deadlines for a variety of regulatory
returns.
-- Pillar 3 disclosure delays: The PRA has offered a delay of up
to one month in the submission of a range of regulatory returns,
where the original deadline fell before 31 May 2020. Submission of
audited financial statements can be delayed by up to two
months.
The financial regulators have also signalled delays to a number
of areas of policy development, in some cases delaying the deadline
for responses from the industry. Such extensions will inevitably
have an impact on the implementation dates of any new rules. The
key delays impacting the Group are set out below:
-- Operational resilience: The consultation papers on building
operational resilience had been due to close for comments on 3
April. This deadline has now been extended to 1 October. Despite
this extension, the impact of COVID-19 highlights the importance of
operational resilience across the industry and to its
regulators.
-- Vulnerable customers: The publication of guidance on the fair
treatment of vulnerable customers has been delayed from Q1 2020 and
is likely to push back publication of final guidance. Nevertheless,
across the industry there is an even greater focus on vulnerable
customers as a result of COVID-19.
-- Motor finance commission models: The final policy on rules
relating to the banning of discretionary commission models and the
introduction of additional information requirements was published
in July 2020. These changes will not have a significant impact on
the Group.
-- Climate-related disclosures: Proposals to enhance
climate-related disclosures by listed issuers has been delayed from
June 2020 to 1 October 2020, with implementation now planned for
2021.
Impact of COVID-19 on the macro-economy
According to the Office for National Statistics, the UK economy
shrank by 2.2 % in the first three months of 2020, the sharpest
decline in more than 40 years. This was followed in April, the
first full month of lockdown, by a collapse in economic output of
more than 20% and in May the economy grew by just 1.8%.
More recent economic sentiment has, however, been more upbeat,
as clinical cases have declined and as certain industries emerge
from lockdown. Retail sales in June increased by 13.9% when
compared with May bringing the volume of retail sales to a similar
level as before the coronavirus pandemic. The latest Business
Impact of Coronavirus (COVID-19) Survey, relating to the first half
of June showed that the proportion of businesses continuing to
trade had risen to 92% (from 75% at the start of lockdown); overall
footfall had risen to two-thirds of its level the same period a
year ago; and businesses reported that 7% of their total workforce
had returned from furlough over the preceding two weeks. However,
the majority of trading businesses reported that turnover was below
normal expectations for this time of year, with the arts,
entertainment and recreation sector and the accommodation and food
service activities sector particularly negatively affected.
Moreover, nearly half of trading businesses said that capital
expenditure had stopped or was lower than normal because of the
coronavirus pandemic.
The Bank of England's chief economist, Andy Haldane, has made
recent statements that the economy is recovering faster than
previous estimates and that there were signs of a V-shaped economic
recovery, with growth potentially rapidly rebounding from the steep
downturn in activity. In particular, there is some evidence that
the consumer sector, supported by job retention schemes, has been
stronger than expected in Q2. The DIY and Household Goods sectors
have been notably strong and there has been a sharp upturn in car
and home sales, both of which had fallen significantly at the start
of lockdown.
Relaxations in lockdown restrictions went ahead on 4 July,
enabling places including pubs, restaurants, hotels and
hairdressers to open, with the removal of further restraints
implemented on 10 July. Nevertheless, restrictions remain
significant and continue to constrain economic activity. Certain
businesses are still unable to open and the social distancing
rules, albeit relaxed, are still problematic for some key services
industries, notably the "face-to-face" sectors of the economy,
including hospitality and the arts.
Under these circumstances, it is still not possible to know the
pathway that economy will follow as and when all restrictions are
lifted. In particular, the largest single risk to the economic
recovering would be a significant increase in unemployment, which
has to date been somewhat limited as a result of the Government's
furlough scheme. As at the end of June, 9.3 million people had been
furloughed as part of the job retention scheme, with more than 2.5
million self-employed workers claiming income support.
Forecasts for the macro-economy remain inherently uncertain at
this stage. Nevertheless, we do believe that it is reasonable to
assume that the gradual easing of restrictions on movement should
result in a rebound in economic activity in the second half of this
year. The strength and shape of any rebound is highly dependent on
the extent of continuing social distancing requirements and the
levels of caution exercised by businesses and consumers, as well as
the absence of a significant second wave of contagion.
Our response to Customers
Demand for the Group's lending products has to date been
affected by the actions that some of our introducers and customers
have been required to take in response to Government directives.
Our business planning assumed a scenario that the main stress
event, including lockdown, would cause a significant reduction in
demand but that, post-lockdown, demand for the Group's products
would return gradually. As at the end of June 2020 we have seen the
start of an easing of lockdown restrictions over much of the UK
with demand for our products increasing although our lending risk
appetite remains cautious as the impact on employment and demand
becomes clearer over the second half of 2020.
Consumer Finance
The Group's two main Consumer Finance businesses have been
significantly impacted by COVID-19 as its retail and motor partners
closed stores and dealerships in response to the Government's
lockdown and social distancing requirements.
In our Retail Finance business, all but essential store-based
retailing activity closed in late March. Consequently, footfall and
sales were severely impacted and, in addition, some retailers faced
challenges in the supply chain which impacted their ability to
fulfil deliveries to their customers. Online activity remained
strong, however, with sports and leisure sectors in particular
showing higher than expected volumes after the introduction of
social distancing measures. With the vast majority of motor dealers
closing in March, our Motor Finance business took the decision to
temporarily cease writing new lending in order to focus on
supporting existing customers.
Both businesses rely on intermediaries (including brokers, motor
dealers and retailers) to generate new business and, if certain
partners had found themselves in difficulty during lockdown, there
was a significant risk to Secure Trust Bank arising from the
potential failure of intermediaries to deliver goods to customers
or indeed delivered goods not meeting quality standards. To address
this risk, from the initial lockdown period both our Retail and
Motor Finance businesses have monitored the delivery of goods and
to date they successfully managed these risks with no significant
losses.
The Retail Finance business continues to monitor the retailers'
performance closely and has seen an increase in demand as they
begin to open their stores. Overall in the second quarter, new
lending has been running at over 50% of pre-lockdown volumes, and
new lending has been steadily building as stores have opened from 4
July. In Motor Finance, dealerships started to open in June 2020
and, at the beginning of July, we recommenced restricted Near Prime
lending initially through our largest introducers and we are
targeting approximately one-third of the normal lending volumes in
the near term.
In both our Retail Finance and Motor Finance businesses, our
credit risk appetite remains cautious with acceptance levels lower
than those in place pre-COVID-19.
The reductions in new business activity allowed the businesses
to redeploy staff to customer services and collections in order to
support an anticipated uplift in activity from customers impacted
by COVID-19 and seeking payment deferrals. The businesses
successfully managed through these peaks whilst moving to a mix of
home working and COVID Secure office standards (see below for more
details) and implementing further customer self-serve options.
Across the second quarter, the Motor Finance business granted
either payment holidays or reduced payments to approximately 10,000
customers (approximately 18% of total customers) and the Retail
Finance business granted payment holidays or reduced payments to
approximately 20,000 customers (approximately 2.5% of total
customers). Both businesses are expecting and have prepared for a
second peak of activity during July and August as the initial
payment deferrals complete and some customers seek extensions or
initial payment deferral support (through to 31 October) in line
with the FCA's guidelines.
Following a promising first quarter where growth was
significantly ahead of expectations, the Debt Managers (Services)
Limited (DMS), business reduced its new portfolio acquisition
activity in response to the pandemic and also reduced its outbound
collections activity, instead shifting its focus onto servicing
existing customers. Indeed, in order to support existing customers
the business has reduced some volumes or prices with clients where
contracted debt purchase flows are in place.
Business Finance
New business in our SME lending businesses has also been
adversely affected by lockdown and social distancing. The primary
focus of the Real Estate Finance and Commercial Finance teams has
been on supporting the existing customer base. In addition, the
Commercial Finance business has been able to offer new CBILS and
CLBILS facilities alongside its continued lending to existing
clients. Overall, as their markets have slowed and with a
disciplined focus on effective risk management, new business
activity, utilisation rates and repayments have all reduced.
Although the outlook remains uncertain, across all of our lending
businesses we remain hopeful that customer demand will return to
normal in reasonably short order.
In terms of asset values, the Real Estate Finance business has
undertaken regular portfolio reviews, assessing all accounts in
detail and contacting all Real Estate Finance clients to understand
their position. The business is closely monitoring performance
against covenants, and is in close dialogue with all affected
customers in regards to any support they may need. Overall, given
that loan-to-value ratios are capped there is solid headroom
against the risk of any permanent declines in asset values.
Deposit taking
The Group's deposit taking capability is highly resilient in a
high stress situation given that it is centralised and automated
and can be operated remotely. In the current environment, we have
demonstrated this capability through our deposit raising
activity.
Secure Trust Bank generates demand for its deposit products
either directly through its website or through marketing activity
through best buy tables with over half of customers referred via
online aggregators. We are not aware of any threats to the ongoing
viability of such aggregators and consequently we consider the
risks to our deposit distribution channels to be low.
We have direct access to our existing depositors and we have
been able to implement an appropriate retention strategy to sustain
deposits. As the asset side of the balance sheet has contracted, we
have repriced the back book in line with overall market rates.
Operational Impact Assessment
The impact of the COVID-19 pandemic on the economy and the
Group's operations continues to be subject to ongoing monitoring
through the Group's Crisis Management Team (CMT) as well as via the
Group and business unit Executive Committees, with appropriate
escalation to the Board and supervisory authorities. The CMT is
chaired by the Chief Operating Officer and includes as its members
the Chief Risk Officer, Chief Technology Officer and HR
Director.
In making their assessment of the potential impact of COVID-19
on operational activities management have considered the immediate
challenges using a one-year time horizon as well as the potential
long-term impact. In April, management of each operating unit and
function had separately identified, assessed and documented the key
risks, assumptions, impact and contingency plans arising from
COVID-19. Initially these were subject to daily oversight and
monitoring by the Group CMT.
As the new ways of working have bedded down and become the new
norm of operation, with controls embedded in the business
operations, the frequency of this reporting has been extended with
situational update reports now being produced on a weekly basis
with reduced data requirements and reporting by exception. The
Group CMT now meet on a weekly basis but remain ready should the
situation change or a further response is required.
In addition to the points set out above, the main impacts of the
COVID-19 pandemic on the Group's operations are summarised on the
following page.
Management of the supply chain
The Group has classified its suppliers into three
categories:
-- Tier 1 suppliers that deliver critical or important
operational functions
-- Tier 2 suppliers that provide an operational function that if
failed, would impair operational performance and may result in
customer detriment
-- General Suppliers
All Tier 1 suppliers have provided us with their pandemic
response plans and have confirmed they have adequate business
continuity arrangements in place. Our supplier relationship
managers are in frequent communication with all suppliers and are
monitoring service levels as situations change. We conduct regular
financial health checks on Tier 1 and Tier 2 suppliers with the
objective of identifying any early warning indicators of disruption
to service.
All business and functional leads have considered their key
supplier dependencies and have identified how they would react
should a supplier fail. While we have not identified the need to do
so, our assessment is that switching some suppliers could lead to
disruption of between three and six months depending on supplier,
but disruption should be containable.
Management of the working environment
In mid-March, staff were advised by line managers to work
remotely where possible. Despite the fact that almost all staff
have been identified as critical workers, the majority of our
colleagues have been working from home since the commencement of
lockdown with colleagues only attending our open offices where
their activity could not be adequately performed remotely. In July,
approximately 30% of Group staff currently working were
office-based and around 70% were working remotely.
Our line managers have been focused on managing and supporting
their teams during this period of isolation and homeworking and on
maintaining staff morale. We continuously review colleague
engagement and wellbeing and, at present, there are no indicators
which would suggest that the revised approach is not working well.
The results of our recent internal COVID survey were very positive
particularly in relation to way the Group had responded to the
pandemic and the support being given to colleagues.
All of the premises that are attended meet the Government's
COVID Secure requirements. We are currently operating in six
locations across nine physical offices. All the consumer business'
offices remain open although staff numbers have been reduced
significantly through homeworking. Office space has been
reconfigured to meet the COVID Secure standards where homeworking
is not possible.
While customers are being encouraged to use self-service
functionality where available, this is not available in all
businesses and is not suitable for more complex customer queries or
the handling of complaints. We therefore do continue to rely on
call-centre staff attending work to maintain continuity of
operations.
Notwithstanding the changed internal environment and changes to
our customers' circumstances, our operations teams have maintained
good service levels throughout the period. There have been spikes
at times in certain activities and we do expect further spikes in
customer calls principally in relation to payment deferrals and
forbearance. In anticipation, we have increased our capacity in all
consumer collections teams.
We have made limited additional investments in technology to
support our teams. For example, we have expanded our telephony
solution to allow a number of operational agents to take calls and
servicing customer accounts from home. The technology allows for
call recording, live monitoring and supervisor take-over, and for
payments to be taken in a PCI compliant manner. In addition, the
introduction of Windows Virtual Desktop technology which started
before the onset of the pandemic has brought widespread access to
core IT applications and services through personalised desktop set
ups via the Microsoft Azure cloud service. This has resulted in
substantial benefits, enabling staff to meet their role
requirements efficiently and in a secure manner while working
remotely.
We believe at present the mix of office and home working is at
the optimal level to maintain service during the pandemic. Although
the likelihood of a full lockdown, where offices are required to
close appears to be diminishing, the Group does have contingency
plans in place that would provide for basic customer service
functionality to be maintained for all businesses with all staff
working from home.
The external environment and its impact on operations has been
and remains subject to continuous review. Initially, all business
and functional leaders were required to provide a daily situational
report to the CMT, with details of mitigating action where
required. As circumstances have become more stable, leaders now
prepare situational reports on a weekly basis or on an exceptions
basis, incorporating data required to compile the Group's Non
Systemic Bank COVID-19 Report weekly submission to the PRA.
Chairman's statement
Adapting to new conditions
The first six months of 2020 has been a tale of two halves for
STB. The positive momentum from 2019 was sustained in the first
quarter putting the Group on track to achieve double digit earnings
growth for the full year. The seismic impact of COVID 19 and
lockdown in the second quarter meant that the safety of our
colleagues, conservation of capital and minimising the impact of
severe recession became our overriding priorities.
Despite the unprecedented economic slowdown and the Group
contracting its lending balances, we can report a statutory profit
before tax for the first half of 2020 of GBP5.1 million and an
adjusted profit before tax of GBP5.8 million.
The Group's operational performance has proved resilient. The
impressive speed with which the business was transformed from being
office-based to largely working from home was matched with
continued excellent customer service standards. We were also
delighted to report a rise in customer numbers during the period.
Such a wholesale change in working practices presents challenges to
all those affected and the Board and management team have focused
on ensuring employees continue to feel engaged, positive and part
of a team. This has spawned a range of new initiatives including
the launch of STB Group Radio, an internal radio station, disc
jockeyed by staff members to help maintain high levels of internal
communications in a fun and interactive way.
All of the Group's offices have adapted to operate in a COVID
secure manner and management are focused on supporting customers,
colleagues and key business partners through this extraordinary and
unprecedented period.
There are some encouraging signs emerging in the third quarter,
with strong demand for Motor Finance and improvements in new
business volumes in V12 Retail Finance. Nevertheless, it is still
too early to be able to determine the impact of COVID on the full
year results.
The Board will continue to conserve capital given the continuing
uncertainty and, as expected, will not be proposing an interim
dividend in respect of the first half of 2020.
This period has also seen changes in the composition of the
Board with Paul Marrow stepping down at the Annual General Meeting
in June. Paul's experience and wise counsel have been much valued
over the years: we thank him for his contribution to the Group. I
am grateful to Ann Berresford for stepping up to become the Senior
Independent Director; Paul Myers who has taken over as Chairman of
the Risk Committee; and Lucy Neville-Rolfe who has become the
Chairman of our Group Employee Council and the nominated director
for employee engagement. They have all begun their new roles with
their customary enthusiasm and application. I am also pleased that
shareholders overwhelmingly supported the new Directors'
Remuneration Policy proposed at the Annual General Meeting. The
Group's remuneration arrangements have evolved considerably in
recent years and the new policy provides a suitable platform for
the next three years. We look forward to Rachel Lawrence joining us
as CFO in September.
Finally I would like, on behalf of the Board, to thank all
colleagues at STB for their resilience, professionalism and
pragmatism as we navigate these unprecedented circumstances and
continue to serve our customers. Given the resources at our
disposal, the talents of our people, the flexibility of our
business model and our clear strategy, we remain well placed to
tackle the challenges ahead and emerge from this period able to
take advantage of future opportunities.
Lord Forsyth
Chairman
Financial highlights
Profit before tax GBPmillion
June 2020 5.1
June 2019 18.1
Dec 2019 38.7
=========== =====
Earnings per share pence per share
June 2020 21.0
June 2019 79.0
Dec 2019 168.3
=========== ======
Chief Executive's statement
Focusing on resilience and stability
H1 results impacted by COVID-19
Earlier this year I was anticipating my 2020 interim report
being rather upbeat highlighting that the Group's very strong start
to 2020 had driven double digit growth in profit before tax for the
first six months. Whilst this was the case after the first quarter,
the COVID-19 pandemic fundamentally altered things in the second
quarter necessitating a rapid change in emphasis.
COVID-19 triggered the invocation of the Group's various
business continuity plans which worked very well, with minimal
operational disruption.
The UK lockdown caused a material fall in new lending during the
second quarter which, coupled with the short duration loan book,
resulted in the income generating lending balances contracting for
the first time in many years. This also weighed on top line
revenue. Despite these factors and a conservative approach to loan
impairment provisioning the Group has generated a statutory profit
before tax for the first six months of 2020 of GBP5.1 million
(2019: GBP18.1 million). Adjusted profit before tax was GBP5.8
million (2019: GBP18.8 million). Basic adjusted earnings per share
was 21.0p (2019: 79.0p).
Operational resilience and stability
Despite the challenges to our employees' lives presented by the
pandemic, the Group is operating in an effective manner which is
sustainable for a prolonged period, if required. Customer service
standards remains strong as shown in FEEFO, where the Group has
very high scores in absolute terms (90-95%) and relative to our
peers.
I have been hugely proud of the way the whole STB team has
responded to these unprecedented circumstances. We have been able
to rapidly adjust to new working practices, staying COVID secure at
all times, and maintain very high operational standards. I am
extremely grateful for the can-do attitude and fortitude shown by
my colleagues during the last few months and their ongoing
determination to manage the situation as best we can.
We continue to deliver good customer outcomes in a friendly and
professional manner and it is pleasing to note customer numbers
grew by 14.8% to 1,660,541 (2019: 1,446,342).
Healthy Capital and Liquidity positions
As expected our capital ratios have strengthened with Common
Equity Tier one ratio of 13.5% as at 30 June 2020 compared to 12.7%
at December 2019 and 12.8% at the same point last year. Our overall
leverage ratio was 10.3% (December 2019: 9.8% and June 2019: 9.5%)
and the total capital ratio was 15.9% (December 2019: 15.0% and
June 2019: 15.2%).
When considering our capital ratios it remains important to note
that as at 30 June 2020 the residual contractual average life of
the Group's assets was less than two years. This dynamic means the
Group can react rapidly and efficiently to sudden changes in market
conditions. This has been the case in the second quarter when we
boosted capital ratios by contracting consumer lending and
continuing to generate profits. In just the same way as the lending
balances can be quickly degeared, these can be quickly grown as
lending conditions and risk adjusted yields improve. These ratios
also take account of the capital relief provided in respect of IFRS
9 provision increases, as explained more fully on page 24.
The Group continues to fund its lending activities primarily
from customer deposits. Our loan to deposit ratio was 118.9% at 30
June 2020 which compares to 113.8% at 30 June 2019. 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.
The benefits of the Group's previous investment in new deposit
products and our Treasury capabilities have become very evident in
recent months. The strong demand for savings products, particularly
cash ISAs, is allowing fixed term savings products to mature, with
these being replaced by lower cost new deposits. This is helping to
reduce the overall cost of funds as will be evident in the second
half of 2020.
Highlights of 2020 to date
-- Operations adjusted successfully to respond to COVID-19 and
the lockdown
-- Half-year profit delivered despite the impact of the
pandemic
-- Continued growth of customer numbers
-- Customer satisfaction scores continue to be consistently over
90%
-- Improved capital ratios and healthy liquidity position
-- Motor Transformation Programme enables launch of prime
products
-- 16th best large company for women to work for
Growth in customer numbers: up 14.8% to 1,660,541 (2019:
1,446,342)
Feefo customer satisfaction ratings: 90%+ ( 2019: 90%+).
We made a strategic decision to introduce interest rate hedging
in the second half of 2019. One benefit is that the very
significant falls in base rates have an immaterial impact on the
Group notwithstanding the substantial surplus liquidity the Bank
holds, in cash, at any one time.
Finally, the Group is in dialogue with the Bank of England about
rolling some existing TFS funding into the new TFSME funding
scheme. This will allow it to lock in this attractively priced
funding until 2025.
Operational progress
The Group investment into Motor Finance has continued as this
part of the market has provided us with strong returns in the past
and continues to offer lending opportunities in scale and with
attractive gross margins. To recap, our Motor Transformation
Programme offers dealers and brokers a one stop solution for
wholesale and retail funding. The existing lenders in this space
enjoy attractive returns on equity and we believe that the
combination of the competitive funding costs provided via our
banking licence and a new technology platform will allow us to gain
market share and grow a sizable business in this space over the
next five years. The programme is split into four phases and
includes the provision of dealer wholesale and stocking finance
(phases 1 and 2) and a wider motor proposition for consumers
(phases 3 and 4). Phase 3 is the launch of prime products and is
scheduled to go live in the coming weeks. One consequence of
COVID-19 is that some of the large non-bank lenders in the prime
part of the market have not been able to access new funding and
those that can have seen very large increases in their funding
cost. This competitive dynamic coupled with demand for motor
finance supports a timely entry to this part of the market.
However, given the economic uncertainty we will temper prime new
business volumes until the outlook for credit risk and risk
adjusted yields improves.
We continue to invest in our operational and IT capabilities and
cyber security remains a very high focus area. Operational
resilience remains a key matter for regulatory scrutiny and as
previously disclosed we have adopted a proactive approach which has
stood us well when considering the operational and technological
impact of COVID-19.
Staff engagement receives constant attention and it is
gratifying to note that the annual Great Place to Work (R) survey
saw the Group placed as the 27th best large company for people to
work for and the 16th best large company for women to work for.
Lending activities
The Group finished 2019 strongly and entered 2020 with good new
business pipelines, particularly in Real Estate Finance. The
conversion of these pipelines and good ongoing control of credit
quality fuelled a strong overall performance for the Group in the
first quarter. The lockdown in the last week in March, and our
tightening of credit criteria, drove much lower new lending
business in the second quarter allowing us to contract our lending
balances, with the focus being in consumer credit. As a result
overall net customer lending as at 30 June 2020 of GBP2,377.5
million is 4.4% higher than the same period last year (June 2019:
GBP2,278.3 million) but 3.0% lower than the 31 December 2019
position of GBP2,450.1 million. 52.5% of these lending balances are
in secured lending (30 June 2019: 50.1%).
The total volume of new loans written in the period was GBP488
million, representing a fall of 32% compared to the GBP712 million
for the same period last year. We would expect new lending business
to rebuild compared to that seen in the second quarter of 2020 and
are already seeing higher volumes, particularly in V12 Retail
Finance with retail sales recovering to pre COVID-19 levels in
July.
Motor Finance balances of GBP289.0 million are 10.7% lower than
as at 31 December 2019 (GBP323.7 million and 3.6% lower than as at
30 June 2019 (GBP299.8 million). Retail Point of Sale lending
balances of GBP647.7 million are 6.0% lower than as at 31 December
2019 (GBP688.9 million) and 3.6% lower than as at 30 June 2019
(GBP671.7 million). We have written no new consumer mortgage
lending during 2020 and the lending balances of GBP94.6 million
compares to GBP113.2 million this time last year (contraction of
16.4%) and GBP105.9 million than as at 31 December 2019
(contraction of 10.7%.) Overall net lending to consumers has fallen
by 6.4% in the first half of 2020 (GBP1,124.4 million) compared to
the 2019 year end position of GBP1,200.9 million) and is 0.2% lower
than the same period last year (GBP1,127.0 million).
In SME markets the Group has continued to support its customers,
with finance being provided for developers to continue to build out
inflight construction projects and, where appropriate, COVID-19
Business Interruption Loans (CBILs) have been provided to
Commercial Finance customers. As at 30 June 2020, Real Estate
Finance lending balances have grown to GBP1,036.8 million from
GBP879.0 million a year ago and GBP962.2 million as at 31 December
2019, representing 18.0% growth and 7.8% growth respectively. The
loan book is performing well and remains heavily biased in favour
of modestly leveraged residential investment lending. This is
reflected in the portfolio composition, which in round terms is
split 70%/30% in favour of investment lending versus development
lending, with the overall portfolio loan to value remaining stable
at circa 60%.
Invoice discounting is the Group's shortest duration loan
account product. The lockdown served to heavily limit the
activities of most trading businesses and therefore many have been
unable to generate new invoices to raise finance against. The
consequence of this is that the net lending in this area has
contracted very materially, with some offset from new CBILs
lending. Balances of GBP191.6 million are 23.9% lower than as at 31
December 2019 (GBP251.7 million) and 13.2% lower than as at 30 June
2019 (GBP220.7 million). With lockdown restrictions easing allowing
businesses to resume trading and some financial sponsors eyeing
opportunistic M&A, we expect a strong new business performance
in the second half. It is noteworthy that we passed the milestone
of having funded over GBP5 billion of customers' invoices since we
started invoice finance operations in September 2014, with GBP2
billion being funded in the last 12 months.
Asset Finance lending balances have contracted as forecast as
the book is in run-off. Balances were 54.1% lower at GBP19.4
million as at 30 June 2020 compared to GBP42.7 million a year
ago.
Overall business lending balances of GBP1,247.8 million are
broadly flat against the 2019 year end position of GBP1,241.6
million and 9.2% higher than as at 30 June 2019 (GBP1,142.4
million).
Fee based services
The OneBill service closed for new business in 2010, is running
off in line with management's expectations and becoming
increasingly immaterial. Customer numbers ended the period at
16,354 (2019: 17,514). Profits at our debt collection business,
Debt Managers (Services) Limited, have continued to grow.
Cost of Risk impacted by COVID-19
In overall terms the SME loan portfolios have performed as
expected during the first half of 2020. The consumer books
performed well in the first quarter. The second quarter's
performance has been impacted by the FCA's decision to allow
borrowers to take loan repayment holidays. The majority of our
customers taking repayment holidays were not in distress at the
time and it remains to be seen how many exit the holiday period and
satisfactorily resume payments. At this very early stage, our
experience here is broadly in line with our expectations but the
situation has been further impacted by the FCA's decision to allow
repayment holiday extensions to be requested up until the end of
October 2020. The Group recognises that some of these customers
will eventually default and we have factored this estimation into
the IFRS9 impairment charge for the first half of 2020. This is
reflected in the cost of risk increasing from 1.4% as at 31
December 2019 to 2.9% for H1 2020.
We have made significant changes to our credit risk appetite and
acceptance criteria during this period, especially in Consumer
Finance which is most exposed to increases in bad debts in a
recessionary environment. In consequence the quality of the new
lending being written is, on average, higher than the existing
book.
This will help to mitigate credit pressures as the UK economy
navigates the ongoing effects of COVID-19, particularly if there is
a subsequent wave this winter and/or the absence of a trade deal
with the EU weakens the economy further.
Our portfolios have also been impacted by customers taking
advantage of payment holidays that we have offered following
guidance from the Government and regulators. These modifications to
contractual cash flows require us to reduce the carrying values of
these portfolios, with Motor Finance materially impacted. This
accounting treatment served to reduce earnings by GBP3.6 million
for the first half of 2020. It is expected that this will be
recovered over time and recognised as earnings in subsequent
periods. Further information is provided on page 20.
Outlook
We have diverse businesses with good potential for long-term
sustainable growth. The Group's medium-term strategy remains
unchanged, albeit for obvious reasons our number one priority is to
support colleagues, customers and business partners as we navigate
the challenges arising from the COVID-19 virus outbreak. The
benefits of a diversified business model with a short duration loan
book have been evident over the last two and a half years.
Once the crisis has passed we plan to refocus the Group on the
strategic priorities of:
1. Organic growth in responsible lending across a diverse
portfolio of attractive segments
2. Continued investment in broadening our product offerings to
customers
3. Pursuing M&A activity in line with our strategy
4. Optimising our capital and liquidity strategies
5. Continuing to target delivery of profit growth in the medium
term to create shareholder value
In recent months base rates have fallen to near 0% and the
market is now pricing in negative rates. The rates banks need to
offer savers to attract new deposits have moved much lower as a
result. This has served to significantly reduce the funding cost
advantage previously enjoyed by the incumbent banks which, coupled
with capital advantages, enables them to dominate key lending
markets in the UK. It follows that the near eradication of a
funding cost advantage increases the addressable market for the
smaller specialist banks. With yield curves implying very low rates
for a very long time, COVID-19 is likely to fundamentally alter the
competitive dynamic in UK bank markets, potentially to the benefit
of the smaller players.
The Group's lending portfolio remains appropriately positioned
for the current conditions and the short duration nature of the
asset portfolio means the Group is able to react quickly to both
opportunities and threats. The Group entered 2020 on the back of
successful years in 2018 and 2019 and has delivered a profit before
tax notwithstanding the very challenging environment in the first
half of 2020.
With stronger capital and liquidity positions, we are now
focused on supporting customers, colleagues and business partners
as we navigate the COVID-19 induced economic challenges, and are
prioritising the safeguard of capital and liquidity resources over
balance sheet growth at this time. As the COVID-19 storm passes we
will look to refocus on the pursuit of our strategic
priorities.
Paul Lynam
Chief Executive Officer
Strategy
The Group's strategy is based on three strategic themes. Over
2020, the strategy has developed as we focus on our near to
mid-term objectives.
Grow
To maximise shareholder value through strong lending growth by
delivering great customer outcomes in both our existing and new
markets.
Progress made in 2020
After continued strong growth in the first quarter, the onset of
COVID-19 saw an immediate fall in demand for our products with key
markets contracting, leading to a reduction in our balance
sheet.
Further progress made by the Motor Transformation Programme has
put us in a strong position to expand our Motor Finance lending as
market conditions improve.
Focus for the remainder of the year
With certain markets now reopening, we are preparing for the
return to growth of our balance sheet by carefully assessing the
areas in which we will focus our initial activity. This includes
taking advantage of the new market opportunities brought about by
the Motor Transformation Programme, albeit initially with limited
volumes.
Performance measures
The key performance measures, shown on the following page, in
respect of this theme show the growth of the lending book and the
margin that the Group earns on this lending.
Sustain
To protect the reputation, integrity and sustainability of the
Bank for all of our customers and stakeholders via prudent balance
sheet management, investment for growth and robust risk and
operational control. Controlled growth is one of the top strategic
priorities for the Bank.
Progress made in 2020
In response to the pandemic and the subsequent lockdown, we had
to swiftly adapt our working practices, to enable continued service
to our customers in an operationally resilient manner. We also
tightened credit criteria, to ensure our lending is responsible and
does not expose the Group to undue risk in these very difficult
conditions.
The reducing balance sheet has improved capital ratios and the
liquidity position remains very healthy.
Focus for the remainder of the year
Our credit criteria will continue to remain tight until the
extent of the economic impact of the pandemic is clearer.
Additional underwriting processes have been developed and will be
used to support Consumer Finance lending as volumes return.
Performance measures
Measures in respect of the Sustain theme focus on the control of
operational costs, funding costs and impairment losses. In
addition, funding ratios are measured to ensure the Group is
holding sufficient liquidity in relation to its loan books.
Regulatory capital metrics demonstrate the Group's capacity to
continue to grow while remaining well above regulatory limits.
Love
To ensure that the fair treatment of customers is central to
corporate culture and that the Bank is a highly rewarding
environment for all staff and one where they can enjoy progressive
careers.
Progress made in 2020
Throughout the crisis, our main focus has been to support our
colleagues, customers and business partners. Our teams have
responded superbly to the challenge of new ways of working, and
employee feedback shows continued high motivation and
engagement.
We have been ranked 16th in the 2020 list of UK Best Workplaces
for Women(TM) as well as being a UK Best Workplace(TM), the second
year we have received both accreditations from Great Place to
Work(R).
Focus for the remainder of the year
We will continue to engage closely with our colleagues to ensure
we are looking after their welfare while the crisis continues. We
are also using the COVID-19 experience to shape working practices
going forward, as it becomes possible to bring more employees back
into our office locations.
Performance measures
The Group's non-financial KPIs assess customer and employee
satisfaction, as well as impacts on the environment. Only the
customer satisfaction measure is updated at the half year, as the
employee survey is annual and environmental impact is measured
annually.
Key performance indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group:
The Remuneration Report, starting on page 82 of the Group's 2019
Annual Report and Accounts, sets out how executive pay is linked to
the assessment of key financial and non-financial performance
metrics.
These KPIs represent alternative performance measures that are
not defined or specified under IFRS. Definitions of the financial
KPIs, their calculation and an explanation of the reasons for their
use can be found in the Appendix to the Interim Report on page 62.
In the narrative of this financial review, KPIs are identified by
being in bold font.
Margin ratios
Net interest margin %
June 2020 6.4
June 2019 6.7
Dec 2019 6.5
=========== ====
Why we measure this
Shows the interest margin earned on the Group's loan books, net
of funding costs
Net revenue margin %
June 2020 7.0
June 2019 7.7
Dec 2019 7.3
=========== ====
Why we measure this
Shows the overall net margin earned on the Group's loan books,
including fees and commissions
Gross revenue margin %
June 2020 8.9
June 2019 9.8
Dec 2019 9.4
=========== ====
Why we measure this
Shows the yield of the Group's loan books, including fee and
commission income
Cost ratios
Cost of funds %
June 2020 1.9
June 2019 2.1
Dec 2019 2.0
=========== ====
Why we measure this
Measures the cost of the Group's customer deposits and other
funding sources
Cost to income ratio %
June 2020 52.7
June 2019 55.9
Dec 2019 56.9
=========== =====
Why we measure this
Measures how efficiently the Group utilises its cost base to
produce income
Cost of risk %
June 2020 2.9
June 2019 1.7
Dec 2019 1.4
=========== ====
Why we measure this
Measures how effectively the Group manages impairment losses
Growth
Loans and advances to customers GBPmillion
June 2020 2,377.5
June 2019 2,278.3
Dec 2019 2,450.1
----------- --------
Why we measure this
Shows the growth in the Group's lending balances, which generate
income
Funding ratios
Loan to deposit ratio %
June 2020 118.9
June 2019 113.8
Dec 2019 121.3
=========== ======
Why we measure this
Measures the adequacy of liquidity by comparing loan balances to
customer deposits
Total funding ratio %
June 2020 108.4
June 2019 112.2
Dec 2019 107.5
=========== ======
Why we measure this
Measures the adequacy of liquidity by comparing all funding held
by the Group to loan balances
Adjusted profit
Adjusted profit before tax GBPmillion
June 2020 5.8
June 2019 18.8
Dec 2019 41.1
=========== =====
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
Adjusted profit after tax GBPmillion
June 2020 4.5
June 2019 15.2
Dec 2019 33.0
=========== =====
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
EPS
Basic earnings pence per share
June 2020 21.0
June 2019 79.0
Dec 2019 168.3
=========== ======
Why we measure this
Demonstrates the earnings attributable to each shareholder
Adjusted basic earnings pence per share
June 2020 24.2
June 2019 82.3
Dec 2019 178.6
=========== ======
Why we measure this
Demonstrates the earnings attributable to each shareholder,
adjusted to improve comparability of information between reporting
periods
Return ratios
Adjusted return on average equity %
June 2020 3.5
June 2019 12.7
Dec 2019 13.5
=========== =====
Why we measure this
Measures the Group's ability to generate profit from the equity
available to it
Adjusted return on required equity %
June 2020 3.6
June 2019 13.6
Dec 2019 14.1
=========== =====
Why we measure this
Relates profitability to the capital that the Group is required
to hold
Adjusted return on average assets %
June 2020 0.3
June 2019 1.2
Dec 2019 1.3
=========== ====
Why we measure this
Demonstrates how profitable the Group's assets are in generating
revenue
Non-financial KPIs
Customer FEEFO rating Stars
June 2020 4.7
June 2019 4.6
Dec 2019 4.7
=========== ====
Why we measure this
Measures customer satisfaction: (mark out of 5 based on star
rating from 550 reviews (June 2019: 1,156 reviews, December 2019:
1,754 reviews))
Employee survey trust index score %
June 2020 N/A
June 2019 N/A
Dec 2019 79
=========== ====
Why we measure this
Only measured annually 2019 score 79% (based on 2019 all staff
survey
Environmental intensity indicator
June 2020 N/A
June 2019 N/A
Dec 2019 4.7
=========== ====
Why we measure this
Only measured annually 2019: 4.7 (tonnes carbon dioxide per GBP1
million Group income)
Internal financial review
Profit and earnings
Results for the period have been significantly impacted by the
COVID-19 pandemic. The largest impact is in respect of impairment
charges, particularly driven by forward-looking estimates which
take account of the potential deterioration of the economy that the
pandemic and subsequent lockdown will cause. The use of payment
holidays also resulted in a material reduction in profit, which is
disclosed separately in the consolidated statement of comprehensive
income on page 37. Adjustments to profit are explained in the
appendix to the interim report on page 62.
The statutory profit for the first six months of the year fell
by 71.8%, from GBP18.1 million to GBP5.1 million, while the
adjusted profit before tax for the period fell by 69.1% from
GBP18.8 million to GBP5.8million.
Earnings per share reduced as a consequence, from 79.6 pence at
June 2019 to 21.0 pence at June 2020 on a basic earnings per share
basis and from 82.3 pence to 24.2 pence on an adjusted basic
earnings per share basis. Detailed disclosures of earnings per
ordinary share are shown in Note 7.
Return measures
We measure adjusted returns on average assets, average equity
and required equity as set out in the KPIs table on page 19. All of
these return metrics have declined due to the reduced earnings.
The components of our profit are set out in the sections
below.
Impact of payment holidays
Although not included as an option within customer contracts,
following regulatory guidance we have offered payment holidays to
our Consumer Finance and Asset Finance customers. This is
considered under IFRS 9 as a modification to contractual cash
flows, which requires the carrying value of these loans to be
adjusted to the revised net present value of future cash flows. The
impact of this is a GBP3.1 million reduction in the net present
value of Motor Finance loans and a further GBP0.5 million reduction
in respect of other products.
30 June 2020 30 June 2019 31 Dec 2019
GBPmillion GBPmillion GBPmillion
------------------------------------------ ------------ ------------ -----------
Adjusted profit reconciliation
------------------------------------------ ------------ ------------ -----------
Interest, fee and commission income 108.2 103.5 212.3
------------------------------------------ ------------ ------------ -----------
Interest, fee and commission expense (23.3) (22.1) (46.8)
------------------------------------------ ------------ ------------ -----------
Operating income 84.9 81.4 165.5
------------------------------------------ ------------ ------------ -----------
Impairment losses (31.5) (17.8) (32.6)
------------------------------------------ ------------ ------------ -----------
Operating expenses (44.7) (45.5) (94.2)
------------------------------------------ ------------ ------------ -----------
Losses on modification of financial
assets (4.0) - -
------------------------------------------ ------------ ------------ -----------
Profit before tax 5.1 18.1 38.7
------------------------------------------ ------------ ------------ -----------
Adjustments to profit before tax (see
below) 0.7 0.7 2.4
------------------------------------------ ------------ ------------ -----------
Adjusted profit before tax 5.8 18.8 41.1
------------------------------------------ ------------ ------------ -----------
Adjusted tax (1.2) (3.6) (8.1)
------------------------------------------ ------------ ------------ -----------
Adjusted profit after tax 4.6 15.2 33.0
------------------------------------------ ------------ ------------ -----------
Adjusted basic earnings per share (pence) 24.2 82.3 178.6
------------------------------------------ ------------ ------------ -----------
Statutory results
------------------------------------------ ------------ ------------ -----------
Profit before tax 5.1 18.1 38.7
------------------------------------------ ------------ ------------ -----------
Tax (1.2) (3.5) (7.6)
------------------------------------------ ------------ ------------ -----------
Profit after tax 3.9 14.6 31.1
------------------------------------------ ------------ ------------ -----------
Basic earnings per share (pence) 21.0 79.0 168.3
------------------------------------------ ------------ ------------ -----------
Adjustments to profit before tax
------------------------------------------ ------------ ------------ -----------
Fair value amortisation 0.1 0.1 0.2
------------------------------------------ ------------ ------------ -----------
Transformation costs 0.4 0.6 1.0
------------------------------------------ ------------ ------------ -----------
Revaluation deficit - - 1.1
------------------------------------------ ------------ ------------ -----------
Bonus expenses 0.2 - 0.1
------------------------------------------ ------------ ------------ -----------
Adjustments to profit before tax 0.7 0.7 2.4
------------------------------------------ ------------ ------------ -----------
Financial highlights
Interest income GBPmillion
June 2020 100.7
----------- ------
June 2019 92.3
----------- ------
Interest expense GBPmillion
June 2020 22.8
----------- -----
June 2019 21.8
----------- -----
Fee and commission income GBPmillion
June 2020 7.5
----------- -----
June 2019 11.2
----------- -----
Fee and commission expense GBPmillion
June 2020 0.5
----------- ----
June 2019 0.3
----------- ----
Impairment losses GBPmillion
June 2020 31.5
----------- -----
June 2019 17.8
----------- -----
Operating expense GBPmillion
June 2020 44.7
----------- -----
June 2019 45.5
----------- -----
Interest, fee and commission income
Interest, fee and commission income is made up of interest
income, which is predominantly earned on loans and advances to
customers, and fee and commission income, which consists
principally of fees from the OneBill, Commercial Finance, Retail
Finance and Motor Finance products and commissions earned on debt
collection activities in DMS.
Interest income increased by 9.1% to GBP100.7 million (June
2019: GBP92.3 million). The reduction in new business brought about
by the pandemic caused loans and advances to customers to fall from
GBP2,450.1 million at year end to GBP2,377.5 million at 30 June
2020, though this remains 4.4% higher than the position at 30 June
2019 (GBP2,278.3 million). The used car market remained practically
closed over the first months of the lockdown, meaning that we could
not offer our products that carry the highest yield. This was the
main factors in the gross revenue margin reducing to 8.9% (30 June
2019: 9.8%).
Fee and commission income reduced by 33.0% to GBP7.5 million
(June 2019: GBP11.2 million). This is due to the fall in new
business brought about by the pandemic.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest
expense, which is incurred in respect of deposits from customers,
subordinated liabilities and TFS borrowings, and fee and commission
expense, comprising mainly fees and commissions on the Motor
product, and commissions paid on debt collection activities in
DMS.
Interest expense increased by 4.6% to GBP22.8 million for the
period to 30 June 2020 (June 2019: GBP21.8 million), which is in
line with the increase in loans and advances to customers over the
same period, noted above. The Group's cost of funds continued to
reduce, from 2.1% at June 2019 and 2.0% at December 2019 to 1.9%.
The reduction in lending balances has reduced the need for us to
retain previous levels of relatively high cost fixed rate funding
as it matures, and we have also reduced the rates on certain
tranches of notice account funding.
The Group's net interest margin reduced from 6.7% at 30 June
2019 to 6.4% at 30 June 2020, primarily due to the interruption to
the markets in which Motor Finance operates as noted on the
previous page.
Fee and commission expense was GBP0.5 million (30 June 2019:
GBP0.3 million).
Operating income
Operating income increased by 4.3% to GBP84.9 million (30 June
2019: GBP81.4 million).
The net revenue margin for 2020 was 7.0% compared with 7.7% at
30 June 2019.
Impairment losses
Impairment losses during the period were GBP31.5 million (June
2019: GBP17.8 million). A significant element of this increase in
charge is driven by the input of forward-looking data into the
Group's IFRS 9 models. The models use the correlation between
macroeconomic variables, such as unemployment and house price
indices, and historic credit losses to derive estimated future
losses given a range of forecast variables. Given the potentially
substantial economic downturn brought about by COVID-19, this
forecast economic data drives a significant element of the overall
provision charge. More detail is provided in Note 2.
The provision charge includes the impact of applying expert
credit judgement, resulting in overlays being added to provision
levels estimated using the Group's models. The economic impacts of
the pandemic could be greater than those experienced in recent
history, meaning that IFRS 9 models cannot rely on historic
correlations between loss levels and economic variables. This has
increased the necessity for overlays, as detailed in Note 9.
The actual increase in defaults experienced since the
announcement of the lockdown has been modest. This position is
obscured, however, by the take-up of payment holidays that the FCA
has encouraged lenders to put in place. We have offered such
holidays to our Consumer Finance customers, with 2.5% of Retail
Finance and 18% of Motor Finance customers having taken up our
offer by 30 June 2020. In line with regulatory guidance, we have
not assumed that all such customers have defaulted or experienced a
significant increase in credit risk; rather, the assumption that a
certain proportion of these customers will default is covered by
the forward-looking elements of our IFRS 9 models.
Prior to COVID-19, the Group's cost of risk had been reducing in
line with the improvement in the quality of our Consumer Finance
books. It reduced from 1.7% at 30 June 2019 to 1.4% at December
2019. At 30 June 2020, the cost of risk was 2.9% including the
modification loss in respect of payment holidays; without it it
would be 2.6%. Further analysis of the Group's loan book and its
credit risk exposures is provided in Notes 8 and 9.
Operating expenses
Operating expenses decreased by 1.8% to GBP44.7 million (30 June
2019: GBP45.5 million). Although recruitment was substantially
reduced once the COVID-19 outbreak took hold, employment costs were
already being managed to a lower level due to increased efficiency
in a number of business areas. Our response to the pandemic has
also resulted in the majority of employees working from home, which
has led to a reduction in travel and associated costs.
Following guidance published by HMRC in respect of VAT
recoverable on hire purchase costs, the Group has accounted for an
additional GBP1.7 million of recoverable VAT, primarily in respect
of prior years. This has reduced operating expenses in the
period.
The cost-to-income ratio improved compared to the equivalent
period last year, at 52.7% from 55.9% at June 2019.
Taxation
The effective adjusted tax rate has increased to 22.4% (30 June
2019: 19.1%).
The effective rate for the current period is increased by a
deferred tax debit of GBP0.3 million. This arises from a
reassessment of the rates that the deferred tax asset on the IFRS 9
transition adjustment would reverse out at over the next eight
years and the share price at which share options will be exercised.
The previous rates had assumed the level of corporation tax would
reduce to 17% with effect from 1 April 2020 but the new rates are
based on the rate remaining at 19%.
The tax rate reflects Bank Corporation Tax Surcharge of 8% on
any taxable profits of Secure Trust Bank PLC in excess of GBP25.0
million in an accounting period. Future effective tax rates for the
Group will be sensitive to the quantum of projected profits in the
Bank and other Group companies. Current forecasts show that the
effective tax rate is expected to increase by up to 3% over the
forecast period, compared with the 2019 effective rate, as the
effect of the banking surcharge becomes more significant.
Effective adjusted tax rate
30 June 2020 30 June 2019 31 December 2019
Effective adjusted Effective adjusted Effective adjusted
tax rate tax rate tax rate
GBPmillion GBPmillion GBPmillion
------------------- ------------------- ------------------- -------------------
Tax 1.3 3.6 8.1
------------------- ------------------- ------------------- -------------------
Profit before tax 5.86 18.8 41.1
------------------- ------------------- ------------------- -------------------
Effective rate (%) 22.4% 19.1% 19.7%
------------------- ------------------- ------------------- -------------------
Effective statutory tax rate
30 June 2019 31 December
30 June 2020 Effective 2019 Effective
Effective adjusted adjusted adjusted
tax rate tax rate tax rate
GBPmillion GBPmillion GBPmillion
------------------- ------------------- ------------ ---------------
Tax 1.2 3.5 7.6
------------------- ------------------- ------------ ---------------
Profit before tax 5.1 18.1 38.7
------------------- ------------------- ------------ ---------------
Effective rate (%) 23.5% 19.3% 19.6%
------------------- ------------------- ------------ ---------------
Distributions to shareholders
Given the continued uncertainty regarding the impact of the
COVID-19 pandemic, and regulatory guidance, the Directors are not
currently recommending the payment of an interim dividend (June
2019: 20 pence per share).
Summarised balance sheet
June 2020 June 2019 2019 GBP
GBPmillion GBPmillion million
----------------------------------- ----------- ----------- --------
Assets
----------------------------------- ----------- ----------- --------
Cash and balances at central banks 109.6 101.9 105.8
----------------------------------- ----------- ----------- --------
Debt securities 35.0 110.0 25.0
----------------------------------- ----------- ----------- --------
Loans and advances to banks 42.0 67.3 48.4
----------------------------------- ----------- ----------- --------
Loans and advances to customers 2,377.5 2,278.3 2,450.1
----------------------------------- ----------- ----------- --------
Derivative financial instruments 5.9 - 0.9
----------------------------------- ----------- ----------- --------
Other assets 60.7 49.6 52.6
----------------------------------- ----------- ----------- --------
2,630.7 2,607.1 2,682.8
----------------------------------- ----------- ----------- --------
Liabilities
----------------------------------- ----------- ----------- --------
Due to banks 268.1 263.5 308.5
----------------------------------- ----------- ----------- --------
Deposits from customers 1,999.2 2,001.5 2,020.3
----------------------------------- ----------- ----------- --------
Tier 2 subordinated liabilities 50.7 50.5 50.6
----------------------------------- ----------- ----------- --------
Derivative financial instruments 7.2 - 0.6
----------------------------------- ----------- ----------- --------
Other liabilities 46.2 51.3 48.7
----------------------------------- ----------- ----------- --------
2,371.4 2,366.8 2,428.7
----------------------------------- ----------- ----------- --------
The assets of the Group decreased by 1.9% to GBP2,630.7 million
in the six month period to 30 June 2020, driven by the fall in
lending balances.
The liabilities of the Group decreased by 2.4% to GBP2,371.4
million over the same period, primarily driven by the pay back of
amounts due to banks.
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. The loan book is split broadly
equally between Consumer Finance lending, which represents
approximately 47.5% of total lending (December 2019: 49%), and
Business Finance lending which represents approximately 52.5%
(December 2019: 51%).
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, reduced
significantly to GBP488 million (June 2019: GBP712 million) as the
impacts of COVID-19 affected both the available markets for our
products and our credit risk appetite. As in previous period, over
half of the new business volume (GBP289.3 million) was generated by
the Retail Finance business, and new business for this product has
continued to run at over 60% of expected levels, driven
particularly by online retailing. In contrast, the effective
shut-down of the used car market saw Motor Finance new business
levels reduce to GBP42.8 million.
Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is
provided in Notes 8 and 9.
Debt Securities
Debt Securities consist solely of sterling UK Government
Treasury Bills. These are used primarily to provide collateral
against Term Funding Scheme drawings with the Bank of England.
Due to Banks
The amount due to banks consists primarily of drawings from the
Bank of England Term Funding Scheme. The Group has drawn modest
levels of this low cost source of funding to supplement customer
deposit funding. The balance also includes GBP5 million of indexed
long-term repo ('ILTR') funding.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the Group's OneBill product. Customer deposits reduced by
1.0% during the period to GBP1,999.2 million (31 December 2019:
GBP2,020.3 million), in line with the reduction in lending
balances.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represent two GBP25 million
tranches of 6.75% Fixed Rate Callable Subordinated Notes, including
interest accrued. Further details of the note issuances are
provided in Note 14. The notes qualify as Tier 2 capital.
Capital and liquidity
Capital
The CET1 capital ratio is the ratio of CET1 capital divided by
the total risk exposure. The total capital ratio is total capital
divided by total risk exposure. The reduction in the Group's
balance sheet, and consequently of the total risk exposure, has led
to an increase in both of these ratios.
When taking account of the 2019 interim dividend, the CET 1
capital ratio at 30 June 2019 was 12.6% and the total capital ratio
was 15.0%. The ratios as at 31 December 2019 and 30 June 2020 do
not take account of foreseen dividends as no dividends have been
declared for those periods.
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
UK leverage ratio framework sets a minimum ratio of 3.25%. As shown
in the table below, the Group's leverage ratio remains comfortably
ahead of the minimum requirement.
30 June 30 June 31 December
2020 2019 2019
% % %
-------------------- ------- ------- -----------
CRD IV ratios
-------------------- ------- ------- -----------
CET1 capital ratio 13.5 12.8 12.7
-------------------- ------- ------- -----------
Total capital ratio 15.9 15.2 15.0
-------------------- ------- ------- -----------
Leverage ratio 10.3 9.5 9.8
-------------------- ------- ------- -----------
Capital resources
30 June 30 June 31 December
2020 2019 2019
% % %
--------------------- ------- ------- -----------
CET1 capital 279.3 253.5 268.0
--------------------- ------- ------- -----------
Total Tier 2 capital 50.0 49.3 50.0
--------------------- ------- ------- -----------
Total capital 329.3 302.8 318.0
--------------------- ------- ------- -----------
Total Risk Exposure 2,073.6 1,987.6 2,118.1
--------------------- ------- ------- -----------
The Group has elected to adopt the IFRS 9 transitional rules.
For 2020, this allows 70% (2019: 85%) of the initial IFRS 9
transition adjustment, net of attributable deferred tax, to be
added back to eligible capital. The same relief is allowed in
respect of increases in provisions since 1 January 2018, except
where these provisions relate to defaulted accounts. Further
information is provided in the Group's Pillar 3 report available at
www.securetrustbank.com/ investor-information.
The Basel Committee proposed a number of mitigation measures for
the capital regime in response to the COVID-19 pandemic. These were
enacted by the EU on 24 June as Directive EU/2020/873 and were
ratified by the PRA on 30 June. Certain of the measures apply from
27 June and are thus applied in this Interim Report. The measure
with the most significant impact on these results is the increase
in capital relief in respect of provisions raised in 2020 and 2021,
excluding those provisions relating to defaulted accounts. For
these provisions, 100% relief is allowed in 2020 and 2021, with the
relief then phased out over the following three years on a
straight-line basis (2022: 75%, 2023: 50%, 2024: 25%, 2025:
0%).
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after adding back
the IFRS 9 transition adjustment and deducting intangible assets,
both of which are net of attributable deferred tax
-- Tier 2 capital, which is subordinated debt net of unamortised
issue costs, capped at 25% of the capital requirement.
Capital resources increased to GBP329.3 million (30 June 2019:
GBP302.8 million), driven by retained earnings and the subordinated
notes issued in 2018 becoming fully eligible as Tier 2 capital in
the second half of 2019, as well as the impact of the IFRS 9
adjustments.
Capital requirements
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's Individual Capital Adequacy Assessment Process
('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 year with all of the externally
imposed capital requirements to which they are subject.
The Total Capital Requirement, set by the PRA, includes both the
calculated requirement derived using the standardised approach and
the additional capital derived in conjunction with the ICAAP. In
addition, capital is held to cover generic buffers set at a
macroeconomic level by the PRA. The capital conservation buffer has
been held at 2.5% of total risk exposure since 1 January 2019. The
countercyclical buffer was reduced by the PRA to 0% as part of its
response to COVID-19.
30 June 30 June 31 December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- -----------
Total Capital Requirement 207.6 198.8 212.0
---------------------------- ----------- ----------- -----------
Capital conservation buffer 51.8 49.7 52.9
---------------------------- ----------- ----------- -----------
Countercyclical buffer - 19.9 21.1
---------------------------- ----------- ----------- -----------
Total 259.4 268.4 286.0
---------------------------- ----------- ----------- -----------
Typical risk weighting
Weighting
%
-------------------------------------------- ---------
Standard on-balance sheet risk weighting
-------------------------------------------- ---------
Real Estate Finance: residential investment 35
-------------------------------------------- ---------
Real Estate Finance: commercial investment 100
-------------------------------------------- ---------
Real Estate Finance: development* 150
-------------------------------------------- ---------
Commercial Finance** 100
-------------------------------------------- ---------
Retail Finance 75
-------------------------------------------- ---------
Motor Finance 75
-------------------------------------------- ---------
Debt Management 100
-------------------------------------------- ---------
Consumer Mortgages (up to 80% LTV) 35
-------------------------------------------- ---------
* The Group has entered into an ENABLE Guarantee with the
British Business Bank, whereby the UK Government will take on a
portion of the risk on a portfolio of loans to smaller business in
return for a fee. When the Guarantee is triggered it will reduce
the net risk weighting applied to Real Estate Finance development
lending.
** A lower risk weighting than 100% is applied to Commercial
Finance lending where the customer is a small to medium enterprise
due to applying an 'SME factor'.
Liquid assets
30 June 30 June 31 December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- -----------
Aaa - Aa3 144.6 211.9 130.8
-------------------- ----------- ----------- -----------
A1 - A3 10.2 62.2 3.8
-------------------- ----------- ----------- -----------
Baa2 26.7 - 39.5
-------------------- ----------- ----------- -----------
Unrated 5.1 5.1 5.1
-------------------- ----------- ----------- -----------
Liquidity exposures 186.6 279.2 179.2
-------------------- ----------- ----------- -----------
Management of capital
Our capital management policy is focused on optimising
shareholder value over the long term. Capital is allocated to
achieve targeted risk adjusted returns whilst ensuring appropriate
surpluses are held above the minimum regulatory requirements.
Key factors influencing the management of capital include:
-- The level of buffers set by the PRA
-- Estimated credit losses calculated using IFRS 9 methodology,
and the applicable transitional rules
-- New business volumes
-- The product mix of new business.
We actively manage these last two factors in order to balance
growth, profitability and conservation of capital. The short
duration of the Group's lending has allowed us to manage down our
balance sheet and thereby conserve capital while the impacts of the
pandemic work through.
The variation in the risk weightings applied to the Group's key
lending assets, as shown above, and the Group's willingness and
ability to adapt its lending volumes and mix, provide significant
flexibility in the Group's management of capital.
Liquidity
At 30 June 2020 and throughout the period, the Group had
significant surplus liquidity over the minimum requirements due to
its stock of High Quality Liquid Assets ('HQLA'), in the form of
the Bank of England Reserve Account and UK Treasury Bills. Total
liquid assets were GBP186.6 million, broadly in line with the
position at 31 December 2019. Using the regulatory definition for
HQLA, the balance for these assets was GBP138.0 million.
-- The Group uses a number of measures to manage liquidity.
These include:
-- The Overall Liquidity Adequacy Requirement ('OLAR'), which is
the Board's 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 is a regulatory
measure that assesses net 30 day cash outflows as a proportion of
HQLA
-- Total funding ratio, as defined in the Appendix to the
interim report.
Both the OLAR and LCR were maintained significantly higher than
regulatory levels throughout the period. At 30 June 2020 the total
funding ratio was 108.4% (30 June 2019: 112.2%, 31 December 2019
107.5%). We have continued to manage our levels of customer deposit
funding in line with the changes in our lending balances. In the
second quarter of the year this has involved allowing deposit
balances to reduce, both by use of pricing changes and by
controlling our retention activity as tranches of fixed rate bonds
mature.
Secure Trust Bank is a participant in the Bank of England's
Sterling Money Market Operations under the Sterling Monetary
Framework and has drawn GBP263.0 million under the Term Funding
Scheme, this level being unchanged from that reported at 30 June
2019 and 31 December 2019.
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
Interim business review
Business Finance
Focused on supporting existing customers and maintaining very
low impairment losses while the COVID-19 crisis continues.
Revenue and lending performance vs prior periods
Real Estate Finance
Lending revenue GBPmillion
June 2020 26.7
June 2019 23.5
Dec 2019 48.9
=========== =====
Lending balance GBPmillion
June 2020 1,036.8
June 2019 879.0
Dec 2019 962.2
=========== ========
Impairment losses GBPmillion
June 2020 2.0
June 2019 0.2
Dec 2019 0.1
=========== ====
Commercial Finance
Lending revenue GBPmillion
June 2020 6.9
June 2019 8.4
Dec 2019 16.8
=========== =====
Lending balance GBPmillion
June 2020 191.6
June 2019 220.7
Dec 2019 251.7
=========== ======
Impairment losses GBPmillion
June 2020 1.1
June 2019 0.2
Dec 2019 0.1
=========== ====
Asset Finance
Lending revenue GBPmillion
June 2020 0.8
June 2019 1.9
Dec 2019 3.2
=========== ====
Lending balance GBPmillion
June 2020 19.4
June 2019 42.7
Dec 2019 27.7
=========== =====
Impairment losses GBPmillion
June 2020 0.6
June 2019 0.3
Dec 2019 0.7
=========== ====
In the tables above, lending revenue and impairment losses for
December 2019 are those for the full year.
Real Estate Finance
The division supports SMEs in providing finance principally for
residential development and residential investment.
2020 performance
The business continued to show good momentum in Q1 2020 which
then slowed following the impact of COVID-19 restrictions. This has
limited new business activity, and the business has focused on
supporting customers and maintaining strong risk management over
the portfolio. Existing developments have continued to be funded,
whilst the slowdown in the market has limited repayments. Overall
balances have still grown by 7.8% in H1 2020 compared to December
2019, and are 18.0% higher than H1 2019, leading to overall
revenues being 13.6% higher than H1 2019. The impact of changes in
macroeconomic factors has seen an increase in impairment charges in
2020. Low LTV ratios and close management focus on cases have
helped mitigate these charges. At 30 June 2020, 11.6% of customers
had been provided with a payment holiday, either in relation to
capital or interest payments or both. These related to loans with
exposures of GBP126 million.
Looking forward
The immediate focus of the business will remain on effective
risk management, and ensuring that we continue to support our
customers. Our experienced team remains able to manage
opportunities and threats in a timely manner, reflecting the
necessary caution required by current conditions. We will manage
our appetite in respect of new lending opportunities which arise as
the economic conditions become clearer going forward.
Commercial Finance
Commercial Finance specialises in providing a range of invoice
financing solutions to UK businesses including invoice discounting
and factoring.
2020 performance
The Company grew its Commercial Finance business in Q1 2020,
however the impact of COVID-19 on its clients has resulted in lower
utilisation whilst collections on the balances have held up well.
This has caused a decrease to total lending balances as at June
2020 and both income and return were lower than expected.
Lending to existing clients has been supplemented since April
2020 by lending under the Government's Coronavirus Business
Interruption Loan Scheme ('CBILS') and Coronavirus Large Business
Interruption Loan Scheme ('CLBILS'). In both cases the Government
guarantees 80% of the facility. This has allowed us to provide
additional support to our customers through the pandemic.
Looking forward
As clients experience normal trading conditions post-lockdown,
utilisation of existing facilities will increase and we expect
related income and returns to feature. Commercial Finance will
continue to offer CBILS and CLBILS facilities so resulting in
additional lending, and further penetration of the existing market
to new clients should result in further growth in H2 2020.
Asset Finance
Asset Finance provides funding to support SME businesses in
acquiring commercial assets, such as building equipment, commercial
vehicles and manufacturing equipment.
2020 performance
The portfolio has continued to reduce during 2020 and remains in
run-off. The level of reduction was lower than expected in H1 2020
as a result of payment holidays which have been granted. Lending
balances have however still reduced by 30% in H1 2020 and are down
by 55% compared to H1 2019, with consequent impact on revenues.
Impairments have increased in H1 2020 reflecting the heightened
risk on parts of the portfolio from the changed economic
conditions.
Looking forward
We ceased originating Asset Finance business in 2018. We expect
the book to continue to reduce in 2020, and will be monitoring the
book carefully to limit where possible the impact of the changed
economic conditions.
Consumer Finance
The pandemic and subsequent lockdown have restricted markets,
particular for Motor Finance, and required higher levels of
impairment provision.
Revenue and lending performance vs prior periods
Retail Finance
Lending revenue GBPmillion
June 2020 36.7
June 2019 36.1
Dec 2019 74.7
=========== =====
Lending balance GBPmillion
June 2020 647.7
June 2019 671.7
Dec 2019 688.9
=========== ======
Impairment losses GBPmillion
June 2020 13.4
June 2019 9.1
Dec 2019 19.8
=========== =====
Motor Finance
Lending revenue GBPmillion
June 2020 25.6
June 2019 24.3
Dec 2019 49.7
=========== =====
Lending balance GBPmillion
June 2020 289.0
June 2019 299.8
Dec 2019 323.7
=========== ======
Impairment losses GBPmillion
June 2020 18.0
June 2019 8.0
Dec 2019 13.8
=========== =====
Debt Managers (Services) Limited
Lending revenue GBPmillion
June 2020 7.1
June 2019 4.4
Dec 2019 8.4
=========== ====
Lending balance GBPmillion
June 2020 93.1
June 2019 42.3
Dec 2019 82.4
=========== =====
Impairment losses GBPmillion
June 2020 0.0
June 2019 0.0
Dec 2019 -2.1
=========== =====
Consumer Mortgages
Lending revenue GBPmillion
June 2020 1.7
June 2019 1.7
Dec 2019 3.7
=========== ====
Lending balance GBPmillion
June 2020 94.6
June 2019 113.2
Dec 2019 105.9
=========== ======
Impairment losses GBPmillion
June 2020 0.0
June 2019 0.1
Dec 2019 0.1
=========== ====
In the tables above, lending revenue and impairment losses for
December 2019 are those for the full year.
Retail Finance
Retail Finance includes lending products for use by in-store and
online retailers to enable consumer purchases.
2020 performance
The Retail Finance business has been heavily impacted by
COVID-19 as its retailer partners implemented changes in response
to social distancing requirements. Such changes included store
closures (leading to lower sales volumes) along with reduced
capability to fulfil goods delivered to customers as supply chains
and warehousing were also impacted. Online sales performances were
less impacted with sports and leisure sectors showing higher than
expected volumes since social distancing measures were
introduced.
As a result, new lending volumes reduced to GBP289.3 million (a
decrease of 22% on the equivalent period last year). This has led
to a reduction of 3.6% in lending assets, by 3.6% to GBP647.7
million in June 2020 (June 2019: GBP671.7 million).
In terms of the three largest sub-markets, sports and leisure
was the only sector to see an increase in lending year-on-year,
with the other largest sub-markets furniture and jewellery seeing a
decrease. Despite the decrease in volumes, market share (based on
Finance & Leasing Association new business values within retail
store and online credit) has remained relatively stable.
Lending revenue increased by 1.7% to GBP36.7 million (June 2019:
GBP36.1 million) linked to higher lending balances prior to the
impact of COVID-19.
Impairment losses increased to GBP12.9 million (June 2019:
GBP9.1million) and are mainly driven by increased provisioning
under IFRS 9 for macro-economic factors. We have granted payment
holidays to approximately 2.5% of our customers, with 17,056
customers being in a payment holiday at 30 June 2020 representing a
net lending balance of GBP21.2 million.
Looking forward
The Group plans to maintain stable growth within its Retail
Finance business as retailers emerge from the recent impacts of
COVID-19 with the anticipation of customer demand returning to
normal.
We will continue to invest in initiatives to further enhance
systems capabilities, to ensure that quality of service to both
retailers and customers is maintained or improved as well as
generating operational efficiencies. This includes enhancements to
telephony systems, customer application processes, and increased
functionality for customers using our online portal to help them
self-serve their needs.
Motor Finance
Finance is arranged through motor dealerships, brokers and
internet introducers and involves fixed rate, fixed term hire
purchase arrangements, predominantly on used cars.
2020 performance
The Motor Finance industry was significantly impacted by
COVID-19 with used cars bought on finance by consumers through the
point of sale down 63% in the three months to May 2020 over prior
year*. The Motor Finance business took the decision to cease
writing new business temporarily from March 2020 as a result of
COVID-19 to focus on supporting existing customers. Hence new
business volumes from consumers dropped from GBP89.0 million for
the period to 30 June 2019 to GBP42.8 million for the period to
June 2020.
In supporting its consumer customers with the impact of COVID-19
the Motor Finance business granted either payment holidays or
reduced payments to customers, with 10,759 customers at 30 June
2020 being in a payment holiday, representing a net lending balance
of GBP52.1 million .
Impairment losses for the period have increased from GBP8.0
million for the period to 30 June 2019 to GBP14.9 million for the
period to June 2020; this includes the expected impact of customer
defaults as a result of COVID-19.
The Motor Finance business also took the decision to cease
writing new Used Vehicle Stocking loans in March 2020.However, the
decision was taken to re-enter the market with enhanced credit
criteria from June 2020. There were GBP1.2 million of Used Vehicle
Stocking lending balances at the end of June 2020.
* Source: Finance and Leasing Association
Looking Forward
The Motor Finance business re-entered the near-prime consumer
finance sector from July 2020 with a restricted number of
introducers and restricted lending criteria. It is anticipated that
as the economy recovers these credit restrictions will be
lifted.
The Motor Finance business remains committed to expanding into
the prime credit market under the V12 Vehicle Finance brand, to
drive long-term receivables growth and sustainable return outcomes.
A clear opportunity exists to deliver prime and near-prime products
and services in the Motor lending market for an innovative and
technology led funding provider.
A programme of work is underway to deliver a new platform and
business transformation through 2020 with GBP7.8 million already
invested since the programme started in 2018. As part of this
programme the Motor Finance business is aiming to enhance system
capabilities and to deliver a broader range of products.
Planned product development includes development of Prime Hire
Purchase and PCP products and technology integrations with key
providers of Dealer Management Systems and auction partners.
This is expected to improve the credit quality of the portfolio,
drive business growth and deliver stable earnings. Alongside these
initiatives, the business will continue to focus on the near-prime
market sector through its existing introducer channel.
Debt Managers (Services) Limited
Debt Managers (Services) Limited ('DMS') is the Bank's debt
collection business.
2020 performance
Q1 2020 saw performance ahead of that expected as a result of
significant levels of growth in 2019.
The impacts of COVID-19 from late March has resulted in reduced
outbound collections activity and a focus on servicing existing
customers, and a slowdown in new portfolio acquisition. The strong
start to the year means that to date revenue and profit levels are
in line with those expected.
Looking forward
It is too early to say to what extent the reduced collections
activity during the COVID-19 pandemic will impact the longer term
collections performance, but following an initial decrease we
expect collections levels to recover. The strong reputation of DMS
in the industry means it is well placed take advantage of new
business opportunities in the coming year, especially those
presented by increased levels of defaults in the consumer lending
market.
Consumer Mortgages
Lending to individuals to purchase a property or remortgage
their current property.
2020 performance
The Group stopped originating new consumer mortgages in the
first quarter of 2019. With the pipeline now extinguished, lending
balances contracted over the period to GBP94.6 million, from
GBP105.9 million at the year end.
Impairment charges remain immaterial, though approximately 30%
of customers took advantage of payment holidays available to them.
By 30 June 2020, the number of customers on payment holiday had
reduced to 16%.
Looking forward
We will continue to service our existing customers and manage
the return to payments as payment holidays come to an end. There
are no current plans to re-establish new business in this
portfolio.
Savings
Stable funding base provided at reducing cost of funds, with
high customer experience standards.
Revenue and lending performance vs prior periods
Notice deposits GBPmillion
June 2020 679.9
June 2019 613.7
Dec 2019 663.7
=========== ======
Fixed term savings GBPmillion
June 2020 1,185.2
June 2019 1,368.6
Dec 2019 1,295.6
=========== ========
Sight/instant access GBPmillion
June 2020 53.9
June 2019 19.2
Dec 2019 22.6
=========== =====
Individual savings accounts GBPmillion
June 2020 80.2
June 2019 0.0
Dec 2019 38.4
=========== =====
The Group attracts funding primarily via retail savings,
offering individuals competitive, simple products, applied for
online and serviced through a highly commended internet banking
service. These products offer UK- based online and telephone
service and are backed by the protection provided by the UK
Financial Services Compensation Scheme.
2020 performance
With the challenges of COVID-19, we have maintained our access
to funding, sustained high customer experience standards and sought
to retain stable existing customers at lower cost.
Through the period, we have delivered significant change with
both short-term tactical advantage and long-term benefit. This
includes measures to keep our people safe in the Group's offices
and establish working from home practices in line with Government
guidelines. People engagement scores indicate high satisfaction
with the measures taken and leadership shown.
We have retained customer loyalty and continued to focus on
customer experience. We have maintained our strong customer review
scores, making the Bank one of the best rated providers amongst
Savings brands on TrustPilot.
Action has been taken through the first six months of this year
to reduce both the value and our cost of funds. We have sought a
balance of continuing to offer fair and competitive rates of
interest to existing customers whilst reflecting reductions in
market-wide funding costs.
Our ability to raise new funds remains robust. In the first six
months of 2020, over 10,000 accounts were opened across new fund
raising and retention. GBP270 million of new funds were raised -
equivalent to GBP17 every second across 20,000 transactions, also
evidencing the extent and scale of operations in the current
environment.
This includes the continued establishment of our ISA product,
with new funds of GBP43 million this year and total balance of over
GBP80 million from launch in 2019. Access deposits, including those
where customers mature onto the product, reached a balance of over
GBP39 million at the half year, evidencing a trend from 2019 of
successful ongoing product development into new markets.
100% of new savings applications were online. All customers
register for internet banking as part of the application process
and at the half year, nearly 42,000 customers were registered,
representing 89% of the customer base. Our belief is that this is
likely to be one of the highest penetration of internet banking
registration amongst UK Specialist Banks. We have also introduced
an online maturity process to offer fixed term customers a new
product to stay with us.
This continues to benefit the Group's resilience with customers
self-serving and, when raising queries, utilising secure messaging.
Compared to December 2019, the use of the service by May of this
year had increased nearly 240%. This, plus the introduction of a
new telephony platform and remote working practices ensures our
operations have adapted accordingly.
Over the last six months, operational challenges associated to
COVID-19 have not had an effect on our control environment, with no
fraud losses by any cause identified.
Looking forward
In light of the ongoing external uncertainty, we have embedded a
digitally focused, remote based operational model to continue to
provide funds to the Bank's ongoing needs.
We have a stable customer base and proven capability to retain
customers. Our products allow access to significant pools of
liquidity in UK Savings markets and we continue to be able to open
accounts. Our recently developed Access Account also remains ready
to deploy.
In the second half of 2020, we intend to introduce further
automation and resilience in our operations, enhance our efficiency
and scalability and make it significantly easier for existing
customers to open new products with us. This will continue to
prepare the business and operation accordingly for a range of
economic outcomes that are possible looking ahead.
Secure Trust Bank continues to be recognised by customers
through its strong levels of review scores and independent external
endorsement.
Longer term, in what will likely be a market where sustained low
and compressed interest rates mean rates are less of a
differentiator to attract and retain customers, building on our
already strong customer experience is likely to only further
increase in strategic importance.
Into 2021, we are therefore intending to continue to develop our
customer proposition. This will include consideration of
introducing a mobile app and utilising OpenBanking services. We
will also review widening customer access to our products such as
via Savings platforms.
Risk management and principal risks
Risk overview
On an ongoing basis, the Directors carry out a robust assessment
of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity.
Details of the Group's risk management framework, including risk
appetite statements, key policies and risk governance can be found
on the Group's website: www.securetrustbank.com/
our-corporate-information/risk- management.
Changes to the Group's risk profile
Changes to the Group's risk profile since the position set out
in the 2019 Annual Report and Accounts are set out in the following
sections. Further context in respect of the COVID-19 pandemic can
be found on pages 4 to 9.
Credit risk
Consumer Finance Credit Risk: Deteriorating
The Group made the strategic decision to temporarily withdraw
the Motor Finance product in March 2020, while the country was in
lockdown due to showrooms being closed and logistical companies not
delivering or collecting vehicles. The Bank cautiously
re-introduced the Motor Finance product at the end of June, writing
limited volumes of business. As a result of this the business
volumes are significantly down year-on-year. The arrears
performance is being impacted by payment holidays granted to
customers where forbearance has been requested. A number of
macro-economic models have been developed to produce a forward
looking provision overlay to take account of increased impairments
resulting from the expected economic downturn.
Whilst the Point of Sale Retail Finance business continued to
lend throughout the first half of the year, volumes of new business
were restricted following tightening of credit policy in light of
the national lockdown due to COVID-19. As with the Motor Finance
product, the arrears performance of the Retail Finance business is
also impacted by payment holidays. The same approach has been
implemented to determine a forward looking overlay for those
customers likely to roll into default as a consequence of the
anticipated economic downturn resulting from the COVID-19
pandemic.
Business Finance Credit Risk: Deteriorating
The Business Finance portfolio has seen a marginal decline in
balances during the period, reflecting a very selective approach to
new lending during the period, and a conscious decision to focus
resources on risk management of the existing portfolios due to the
uncertainties surrounding the potential impact of COVID-19.
The Real Estate and Asset Finance businesses saw a number of
accounts going into arrears during the early stages of the UK's
lockdown period, but these were largely resolved by the end of Q2,
both through delayed payments and some forbearance measures being
provided. Where granted, the Group's forbearance measures have
involved full/partial payment holidays, granted for no more than
six months. For the Real Estate Finance book specifically, the
impact of these measures has not resulted in a material movement in
the weighted average portfolio LTV.
Largely as a result of the forbearance measures granted, the
expected credit losses allocated to the Business Finance portfolios
have seen a minor uptick since year end. Management continues to
monitor the portfolios closely in order to establish whether
clients are expected to resume their debt repayments in line with
their contractual obligations, or if additional forbearance will be
required.
Our Commercial Finance business became an accredited CBILS
lender in March, and subsequently became an accredited provider of
CLBILS in June. The Group has provided CBILS and CLBILS loans to
several of the Group's clients, partially offsetting a decline in
exposures secured on debtor receipts, and continues to assess
further applications under the schemes as they are received.
Risk Description
---------------- -------------------------------------------------------------------------
The risk that a counterparty will be unable to pay amounts in full
Credit Risk when due
---------------- -------------------------------------------------------------------------
The risk that the Group will encounter difficulty in meeting obligations
associated with its financial liabilities that are settled by delivering
Liquidity Risk cash or another financial asset
---------------- -------------------------------------------------------------------------
The risk of direct or indirect loss arising from a wide variety
of causes associated with the Group's processes, personnel, technology
and infrastructure, and from external factors other than the risks
Operational Risk identified above
---------------- -------------------------------------------------------------------------
The risk that the Group will have insufficient capital resources
Capital Risk to support the business
---------------- -------------------------------------------------------------------------
The risk that the value of, or revenue generated from, the Group's
assets and liabilities is impacted as a result of market movements,
Market Risk predominantly interest rates
---------------- -------------------------------------------------------------------------
The potential for customers (and the business) to suffer financial
loss or other detriment through the actions and decisions made
Conduct Risk by the business and its staff
---------------- -------------------------------------------------------------------------
The risk that the Group fails to be compliant with all relevant
Regulatory Risk regulatory requirements
---------------- -------------------------------------------------------------------------
UK withdrawal from European Union
The Group continues to monitor very closely the uncertain
political and economic environment associated with the withdrawal
from the EU. The expected impact on the Group is described in the
Principal Risks and Uncertainties section of the 2018 Annual Report
and Accounts, and the Group's view has not significantly changed
since that assessment. The direct impact to the Group is limited,
even in a no deal scenario. The most significant indirect impact
continues to be in respect of credit risk, and the Group's ongoing
analysis of the macroeconomic position and the performance of its
own lending portfolios continues to suggest that the Group can
withstand a disorderly exit.
Liquidity risk: Improving
The Group has continued to use competitive interest rates to
attract new fixed and variable rate deposits over terms ranging up
to seven years. A moderate amount of borrowing under the Bank of
England's Term Funding Scheme has also been used, with GBP263.0
million drawn up to 30 June 2020. All drawings will be repaid ahead
of contractual maturity in February 2022.
The Overall Liquidity Adequacy Requirement is the Board's own
view of the Group's liquidity requirement covering a 90-day
stressed period and has been maintained significantly above
regulatory levels throughout the period. The Liquidity Coverage
Ratio ('LCR'), which assesses stressed outflows over a 30-day
period as a proportion of High Quality Liquid Assets, was also
significantly higher than the regulatory requirement throughout the
period.
At 30 June 2020, the total funding ratio remained well within
the Bank's risk appetite at 108.4% (30 June 2019: 112.2%, 31
December 2019: 107.5%). Definitions of this ratio, its calculation
and the reasons for its use can be found in the Appendix to the
interim report on page 64.
Operational risk: Deteriorating
The Group's operational risk process and standards are defined
and embedded through a formal Operational Risk Policy and
Framework, which is aligned to the Basel Committee on Banking
Supervision criteria for the sound management of operational risk.
The objective of operational risk management is to:
-- Identify and manage operational risks within acceptable
levels and defined risk appetite statements/metrics/thresholds and
to limit operational losses
-- Develop a transparent risk culture that seeks to understand
its risk profile, the incidents and losses they are incurring and
to respond with proportionate and expeditious action to thematic
areas of concern
-- Develop consistent and robust policies and controls that are
understood and embedded across all business areas.
Key Risk themes of operational risk focus in 2020 include:
COVID-19 - in response to the COVID-19 crisis, the STB Group
instigated its Crisis Management processes and has been closely
managing and monitoring the operational impacts and risks over 2020
to date. A number of key changes to our operating model have been
introduced to enable STB to continue to serve our customers across
all our business units, protect our staff and ensure the continued
success of our business. These have been closely monitored to
ensure our control framework remains robust in managing all
operational risks. This will continue to be a key area of focus as
the implications of this pandemic evolve.
Operational resilience - The Group continues to enhance the
operational resilience of its important business services, in line
with the regulatory timescales, where any disruption to the
services could cause detriment to our customers and could affect
the Group's financial stability. The Group's response to COVID-19
has shown that the Group has resilient operational capabilities
during such events, particularly in relation to staffing,
facilities and the automation of our processes.
Information communications technology (ICT) and security risks -
The Group recognises that threats to our ICT services and security
are continuously evolving and can result in significant adverse
risk to any financial institution's customers, operational
capability and prudential viability. The Group continues to invest
in and develop a robust framework of controls to identify, protect,
respond to and recover from emerging cyber, supply chain and
technology threats.
Supplier management - The Group recognises the need to
effectively manage and monitor its third party suppliers and as
such, has invested in additional resource to strengthen our
supplier governance capabilities and develop an enhanced control
framework.
Capital risk: Improving
The Group's balance sheet, and consequently total risk exposure,
has decreased since the beginning of the year due to the impact
that COVID-19 has had on new business levels. As the Group has to
date remained profitable, there has been no reduction to capital
resources. Additional capital relief has been provided by the PRA
in respect of IFRS 9 provisions. The result of the contraction and
capital relief is that capital ratios have improved since the
position noted at year end.
At 30 June 2020, the CET1 Ratio was 13.5% (30 June 2019: 12.8%,
31 December 2019: 12.7%) and the total capital ratio was 15.9% (30
June 2019: 15.2%, 31 December 2019: 15.0%). The Leverage Ratio was
10.3% (30 June 2019: 9.5%, 31 December 2019: 9.8%) on a Group
consolidated basis. The Group continues to explore options to raise
additional forms of capital as and when required.
Market risk: Improving
Secure Trust Bank Group continues to maintain a broadly-matched
asset and liability profile but is susceptible to movements in
interest rates which can affect the Group's earnings and the
overall value of its interest rate sensitive assets and liabilities
where unmatched. Interest rate swaps are transacted against
unmatched positions of any significance.
Interest rate risk in the banking book is monitored by reference
to the following Board Risk Appetite measures:
-- Earnings at Risk ('EaR')
-- Market Value Sensitivity ('MVS') and
-- Economic Value of Equity ('EVE').
The Group remained within its market risk appetite across all
measures throughout the year.
The Group has a small exposure to foreign exchange risk through
its Commercial Finance lending, which is subject to hedging
activities.
The Group does not operate a trading book.
Conduct risk: Stable
Conduct Risk and control assessments are reviewed by the
business units for self-attestations by first line risk owners.
Monthly review and challenge of Key Risk Indicators takes place
in the business unit ExCo meetings, with the Group ExCo having
oversight of the first line activities for assurance to senior
management that the first line are identifying conduct risks when
they arise and taking appropriate actions to mitigate them.
Training on Conduct Risk continues to be provided to new
starters, with an eLearning module completed by all staff during
the period.
Regulatory risk: Stable
In the period, we have delivered changes to implement new
regulatory guidance related to COVID-19 payment holidays in Retail
Finance, Motor Finance and Mortgages.
The Group will continue to work on new and revised regulations
and legislation that will come into force over the next 18 months
and beyond, including further guidance related to COVID-19 and
breathing space when the requirements are finalised.
Consolidated statement of comprehensive income
June June December
2020 2019 2019
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
--------------------------------------------- ---- ----------- ----------- -----------
Income statement
--------------------------------------------- ---- ----------- ----------- -----------
Interest income and similar income 3 100.7 92.3 191.4
--------------------------------------------- ---- ----------- ----------- -----------
Interest expense and similar charges (22.8) (21.8) (46.0)
--------------------------------------------- ---- ----------- ----------- -----------
Net interest income 77.9 70.5 145.4
--------------------------------------------- ---- ----------- ----------- -----------
Fee and commission income 3 7.5 11.2 20.9
--------------------------------------------- ---- ----------- ----------- -----------
Fee and commission expense (0.5) (0.3) (0.8)
--------------------------------------------- ---- ----------- ----------- -----------
Net fee and commission income 7.0 10.9 20.1
--------------------------------------------- ---- ----------- ----------- -----------
Operating income 84.9 81.4 165.5
--------------------------------------------- ---- ----------- ----------- -----------
Impairment losses on loans and advances to
customers 9 (31.5) (17.8) (32.6)
--------------------------------------------- ---- ----------- ----------- -----------
Losses on modification of financial assets 5 (3.6) - -
--------------------------------------------- ---- ----------- ----------- -----------
Operating expenses (44.7) (45.5) (94.2)
--------------------------------------------- ---- ----------- ----------- -----------
Profit before income tax 5.1 18.1 38.7
--------------------------------------------- ---- ----------- ----------- -----------
Income tax expense 6 (1.2) (3.5) (7.6)
--------------------------------------------- ---- ----------- ----------- -----------
Profit for the period 3.9 14.6 31.1
--------------------------------------------- ---- ----------- ----------- -----------
Other comprehensive income
--------------------------------------------- ---- ----------- ----------- -----------
Items that will not be reclassified to the
income statement
--------------------------------------------- ---- ----------- ----------- -----------
Revaluation reserve - - 0.2
--------------------------------------------- ---- ----------- ----------- -----------
Taxation - (0.2) (0.2)
--------------------------------------------- ---- ----------- ----------- -----------
Other comprehensive income for the period,
net of income tax - (0.2) -
--------------------------------------------- ---- ----------- ----------- -----------
Total comprehensive income for the period 3.9 14.4 31.1
--------------------------------------------- ---- ----------- ----------- -----------
Profit attributable to:
--------------------------------------------- ---- ----------- ----------- -----------
Equity holders of the Company 3.9 14.6 31.1
--------------------------------------------- ---- ----------- ----------- -----------
Total comprehensive income attributable to:
--------------------------------------------- ---- ----------- ----------- -----------
Equity holders of the Company 3.9 14.4 31.1
--------------------------------------------- ---- ----------- ----------- -----------
Earnings per share for profit attributable
to the equity holders of the Company during
the period (pence per share)
--------------------------------------------- ---- ----------- ----------- -----------
Basic earnings per share 7 21.0 79.0 168.3
--------------------------------------------- ---- ----------- ----------- -----------
Diluted earnings per share 7 20.8 78.3 166.4
--------------------------------------------- ---- ----------- ----------- -----------
Consolidated statement of financial position
June June December
2020 2019 2019
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
--------------------------------------- ---- ----------- ----------- -----------
ASSETS
--------------------------------------- ---- ----------- ----------- -----------
Cash and balances at central banks 109.6 101.9 105.8
--------------------------------------- ---- ----------- ----------- -----------
Loans and advances to banks 42.0 67.3 48.4
--------------------------------------- ---- ----------- ----------- -----------
Loans and advances to customers 8 2,377.5 2,278.3 2,450.1
--------------------------------------- ---- ----------- ----------- -----------
Debt securities 35.0 110.0 25.0
--------------------------------------- ---- ----------- ----------- -----------
Fair value adjustment for portfolio
hedged risk 7.3 - (0.9)
--------------------------------------- ---- ----------- ----------- -----------
Derivative financial instruments 4 5.9 - 0.9
--------------------------------------- ---- ----------- ----------- -----------
Investment properties 4.8 - 4.8
--------------------------------------- ---- ----------- ----------- -----------
Property, plant and equipment 11.2 16.5 11.3
--------------------------------------- ---- ----------- ----------- -----------
Leasing right-of-use assets 3.4 4.0 3.6
--------------------------------------- ---- ----------- ----------- -----------
Intangible assets 8.5 9.2 9.0
--------------------------------------- ---- ----------- ----------- -----------
Current tax asset 1.0 - -
--------------------------------------- ---- ----------- ----------- -----------
Deferred tax assets 6.6 7.8 7.5
--------------------------------------- ---- ----------- ----------- -----------
Other assets 17.9 12.1 17.3
--------------------------------------- ---- ----------- ----------- -----------
Total assets 2,630.7 2,607.1 2,682.8
--------------------------------------- ---- ----------- ----------- -----------
LIABILITIES AND EQUITY
--------------------------------------- ---- ----------- ----------- -----------
Liabilities
--------------------------------------- ---- ----------- ----------- -----------
Due to banks 10 268.1 263.5 308.5
--------------------------------------- ---- ----------- ----------- -----------
Deposits from customers 11 1,999.2 2,001.5 2,020.3
--------------------------------------- ---- ----------- ----------- -----------
Fair value adjustment for portfolio
hedged risk 6.5 - (0.7)
--------------------------------------- ---- ----------- ----------- -----------
Derivative financial instruments 4 7.2 - 0.6
--------------------------------------- ---- ----------- ----------- -----------
Current tax liabilities - 3.4 3.3
--------------------------------------- ---- ----------- ----------- -----------
Lease liabilities 4.3 4.9 4.5
--------------------------------------- ---- ----------- ----------- -----------
Other liabilities 34.5 42.1 40.9
--------------------------------------- ---- ----------- ----------- -----------
Provisions for liabilities and charges 12 0.9 0.9 0.7
--------------------------------------- ---- ----------- ----------- -----------
Subordinated liabilities 50.7 50.5 50.6
--------------------------------------- ---- ----------- ----------- -----------
Total liabilities 2,371.4 2,366.8 2,428.7
--------------------------------------- ---- ----------- ----------- -----------
Equity attributable to owners of the
parent
--------------------------------------- ---- ----------- ----------- -----------
Share capital 20 7.4 7.4 7.4
--------------------------------------- ---- ----------- ----------- -----------
Share premium 20 82.2 81.2 81.2
--------------------------------------- ---- ----------- ----------- -----------
Revaluation reserve 1.1 0.9 1.1
--------------------------------------- ---- ----------- ----------- -----------
Retained earnings 168.6 150.8 164.4
--------------------------------------- ---- ----------- ----------- -----------
Total equity 259.3 240.3 254.1
--------------------------------------- ---- ----------- ----------- -----------
Total liabilities and equity 2,630.7 2,607.1 2,682.8
--------------------------------------- ---- ----------- ----------- -----------
Consolidated statement of changes in equity
Share Share Revaluation Retained
capital premium reserve earnings Total
Unaudited GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2020 7.4 81.2 1.1 164.4 254.1
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for the period
--------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the six months ended
30 June 2020 - - - 3.9 3.9
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for the period - - - 3.9 3.9
--------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
--------------------------------------------------------------------------------------------------
Issue of ordinary shares - 1.0 - - 1.0
--------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - 0.5 0.5
--------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - (0.2) (0.3)
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions to owners - 1.0 - 0.3 1.3
--------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 30 June 2020 7.4 82.2 1.1 168.6 259.3
--------------------------------- ----------- ----------- ----------- ----------- -----------
Unaudited
--------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2019 (as
restated) 7.4 81.2 1.1 147.3 237.0
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for the period
--------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the six months ended
30 June 2019 - - - 14.6 14.6
--------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - (0.2) - (0.2)
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - (0.2) - (0.2)
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income
for the period - - (0.2) 14.6 14.4
--------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
--------------------------------------------------------------------------------------------------
Dividends - - - (11.8) (11.8)
--------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments _ _ _ 0.6 0.6
--------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - 0.1 0.1
--------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and
distributions to owners - - - (11.1) (11.1)
--------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 30 June 2019 7.4 81.2 0.9 150.8 240.3
--------------------------------- ----------- ----------- ----------- ----------- -----------
Share
capital Share premium Revaluation reserve Retained earnings Total
Audited GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Balance at 1 January
2019 7.4 81.2 1.1 147.3 237.0
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Total comprehensive
income for the period
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Profit for the 12
months ended 31
December 2019 - - - 31.1 31.1
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Revaluation reserve - - 0.2 - 0.2
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Tax on revaluation
reserve - - (0.2) - (0.2)
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Total other
comprehensive income - - - 31.1 31.1
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Total comprehensive
income for the period - - - 31.1 31.1
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Transactions with
owners, recorded
directly in equity
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Contributions by and
distributions to
owners Dividends - - - (15.5) (15.5)
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Share-based payments - - - 1.2 1.2
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Tax on share-based
payments - - - 0.3 0.3
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Total contributions by
and distributions to
owners - - - (14.0) (14.0)
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Balance at 31 December
2019 7.4 81.2 1.1 164.4 254.1
---------------------- ----------- ---------------------- --------------------- --------------------- -----------
Consolidated statement of cash flows
June
June 2019
2020 Unaudited Unaudited December 2019 Audited
Note GBPmillion GBPmillion GBPmillion
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash flows from operating activities
Profit for the period 3.9 14.6 31.1
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Adjustments for:
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Income tax expense 1.2 3.5 7.6
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Depreciation of property, plant and equipment 0.7 0.6 1.2
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Depreciation of right-of-use assets 0.5 0.5 0.9
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Amortisation of intangible assets 1.0 1.0 1.9
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Impairment losses on loans and advances to customers 31.5 17.8 32.6
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Losses on modification of financial assets 3.6 - -
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Share-based compensation 0.5 0.6 1.2
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Revaluation loss - - 1.1
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Lease interest charged 0.1 0.1 0.1
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Amortisation of subordinated liabilities issue costs 0.1 0.1 0.2
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash flows from operating profits before changes in
operating assets and liabilities 43.1 38.8 77.9
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Changes in operating assets and liabilities:
----------------------------------------------------------- ---- --------------- ----------- ---------------------
- net decrease/(increase) in loans and advances to
customers 37.5 (267.2) (453.8)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
- net (increase)/decrease in other assets (2.0) 9.9 4.6
----------------------------------------------------------- ---- --------------- ----------- ---------------------
- net (decrease)/increase in deposits from customers (34.4) 140.0 172.6
----------------------------------------------------------- ---- --------------- ----------- ---------------------
- net increase in other liabilities 7.1 16.4 1.3
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Income tax paid (4.8) (4.0) (7.8)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Net cash inflow/(outflow) from operating activities 46.5 (66.1) (205.2)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash flows from investing activities
Redemption of debt securities 80.1 150.0 320.1
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Purchase of debt securities (90.1) (110.3) (195.4)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Purchase of investment property - - (1.6)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Purchase of property, plant and equipment (0.6) (6.1) (5.5)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Purchase of intangible assets (0.5) (0.3) (1.1)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Net cash (outflow)/inflow from investing activities (11.1) 33.3 116.5
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash flows from financing activities
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Net (decrease)/increase in amounts due to banks (40.0) - 45.0
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Issue of shares 20 1.0 - -
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Dividends paid - (11.8) (15.5)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Repayments of lease liabilities (0.6) (0.7) (1.1)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Net cash (outflow)/inflow from financing activities (39.6) (12.5) 28.4
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Net decrease in cash and cash equivalents (4.2) (45.3) (60.3)
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash and cash equivalents at start of period 154.2 214.5 214.5
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Cash and cash equivalents at end of period 20 150.0 169.2 154.2
----------------------------------------------------------- ---- --------------- ----------- ---------------------
Consistent with the 2019 Annual Report and Accounts, redemption
and purchase of debt securities have been grossed up and moved from
operating activities to investing activities as this better
represents the nature of the underlying activity. June 2019
comparatives have also been restated on this basis.
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 public limited company incorporated
in England and Wales in the United Kingdom (referred to as 'the
Company') and is limited by shares. 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 interim report as at and for
the period ended 30 June 2020 comprise Secure Trust Bank PLC and
its subsidiaries (together referred to as 'the Group' and
individually as 'subsidiaries'). The Group is primarily involved in
banking and financial services.
1.2 Basis of presentation
The 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.
A copy of the statutory accounts for the year ended 31 December
2019 has been delivered to the Registrar of Companies. The
auditor's report on those accounts was not qualified and did not
contain statements under Section 498(2) or (3) of the Companies Act
2006.
The results for the periods ending 30 June 2020 and 30 June 2019
are unaudited. The results for the year ending 31 December 2019 are
audited.
The interim report has been prepared under the historical cost
convention, as modified by the revaluation of land and buildings.
The 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 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 interim business 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.
Given the uncertain economic conditions brought about by the
COVID-19 pandemic, the Group has undertaken additional stress
testing. Pages 50 and 51 of the 2019 Annual Report and Accounts
provides details of the specific stress testing undertaken in May
2020 for the 31 December 2019 going concern assessment in the light
of the pandemic. A range of scenarios was applied to assess capital
and liquidity positions in adverse conditions. The Group has
updated these assessments as at 30 June 2020, taking account of
actual result to date and the passage of time, in order to
demonstrate the continued adoption of the 'going concern' basis.
This work has demonstrated that the Group continues to meet its
capital and liquidity requirements in the stress scenarios
considered.
The Group has continued to operate effectively over the
pandemic, with the majority of employees working from home, and
expects to continue to be able to do so as long as is
necessary.
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 2019.
1.3.1 Taxation
Taxes on profits in interim periods are accrued using the tax
rate that will be applicable to expected total annual profits.
1.3.2 Standards in issue but not yet effective
There are no new standards in issue but not yet effective that
have a material effect on the Group.
2. Critical judgements and estimates
2.1 Judgements
No critical judgements have been identified.
2.2 Key sources of estimation uncertainty
Estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty are outlined below. The potential impact of
COVID-19 has been considered in determining reasonably possible
changes in key sources of estimation uncertainty which may occur in
the next 12 months.
2.2.1 Impairment losses on loans and advances to customers
As discussed in Note 1.9 of the Group's Annual Report for the
year ended 31 December 2019, ECLs are calculated by multiplying
three main components: the PD, EAD and LGD. These variables are
derived from internally developed statistical models and historical
data, adjusted to reflect forward-looking information. The
determination of both the PD and LGD require estimation which is
discussed further below.
2.2.2 Probability of default ('PD')
As set out in Note 1.9 of the Group's Annual Report for the year
ended 31 December 2019, Exogenous, Maturity, Vintage ('EMV')
modelling is used in the production of forward-looking lifetime PDs
in the calculation of ECLs. As the Group's performance data does
not go back far enough to capture a full economic cycle, the proxy
series of the quarterly rates of write offs for UK unsecured
lending data is used to build an economic response model ('ERM') to
incorporate the effects of recession. Even using proxy series data,
the potentially extreme economic impact brought about by COVID-19
cannot be accurately correlated to historic data, requiring the use
of model overlays.
The portfolios for which external benchmark information
represents a significant input into the measurement of expected
credit loss ('ECL') are Real Estate Finance, Asset Finance and
Commercial Finance. The benchmarks used for all three portfolios
are Standard & Poor's Ratings and Bank of England UK
Possessions as proxy data for ERM.
With the exception of the Motor Finance and Retail Finance
portfolios, sensitivity to reasonably possible changes in PD is not
considered to result in material changes in the ECL allowance. A
10% change in the PD for Motor Finance would immediately impact the
ECL allowance by GBP1.7 million (June 2019: GBP1.8 million,
December 2019: GBP2.0 million) and a 10% change in the PD for
Retail Finance would immediately impact the ECL allowance by GBP2.2
million (December 2019: GBP2.3 million). At June 2019, the
sensitivity to any reasonably possible change in PD was not
considered to be material to the Retail Finance portfolio.
The ECL allowance held for the Business Finance, Consumer
Mortgages and Other portfolios remains low. Reasonably possible
changes in the PD for these portfolios are not considered to result
in a material change in the ECL allowance.
2.2.3 Loss given default ('LGD')
The Group's policy for the determination of LGD is outlined in
Note 1.9 of the Group's Annual Report for the year ended 31
December 2019.
With the exception of the Motor Finance portfolio, the
sensitivity of the ECL allowance to reasonably possible changes in
the LGD is not considered material. For the Motor Finance portfolio
a 20% change in the LGD is considered reasonably possible due to
potential difficulties in the vehicle collection process and
reduced asset values brought about by COVID-19. A 20% change in the
vehicle recovery rate assumption element of the LGD for Motor
Finance would impact the ECL allowance by GBP2.5 million (June 2019
GBP3.0 million, December 2019: GBP2.6 million).
2.2.4 Incorporation of forward-looking data
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss by developing a number of
potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided in
Note 1.9.
The macroeconomic scenarios used at 30 June 2020 were internally
developed, having regard to externally published scenarios. The
scenarios and weightings applied are summarised below:
Weighting
Scenario Key assumptions June 2020
------------------- ---------------------------------------------------------------- ----------
Low case Peak unemployment of 6.9%. Peak to trough HPI reduction of 11% 20%
------------------- ---------------------------------------------------------------- ----------
Medium case Peak unemployment of 9.0%. Peak to trough HPI reduction of 11% 45%
------------------- ---------------------------------------------------------------- ----------
Hard case Peak unemployment of 10.7%. Peak to trough HPI reduction of 16% 25%
------------------- ---------------------------------------------------------------- ----------
Severe stress case Peak unemployment of 12.0%. Peak to trough HPI reduction of 20% 10%
------------------- ---------------------------------------------------------------- ----------
Weighting
June 2019 and
Scenario Derivation December 2019
------------------- --------------------------------------------------------------------------------- --------------
Assumes macroeconomic variables will move with a more positive trajectory than
Benign case the base case. 10%
------------------- --------------------------------------------------------------------------------- --------------
Derived from external consensus forecasts and used in the Group's strategic
planning and budgeting
Base case processes. 65%
------------------- --------------------------------------------------------------------------------- --------------
Management's assessment, based on historic data, of an adverse scenario that
could occur once
Stressed case every seven to eight years. 20%
------------------- --------------------------------------------------------------------------------- --------------
Based on the scenario used by the PRA for the ICAAP. This can be found on the
Bank of England's
Deeper stress case website: www.bankofengland.co.uk 5%
------------------- --------------------------------------------------------------------------------- --------------
The annual averages of the key assumptions in the June 2020
scenarios for each of the next two years are shown below:
Low case Medium case Sever case Hard case
Year 1 Year 2 Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
--------------------- ------ ------ ------ ------ ------- ------- ------ -------
Average unemployment 6.2% 4.9% 8.0% 5.6% 9.4% 6.0% 11.0% 6.8%
--------------------- ------ ------ ------ ------ ------- ------- ------ -------
HPI movement (6.0)% (2.0)% (6.0)% (6.0)% (12.0)% (12.0)% (9.0% (13.0)%
--------------------- ------ ------ ------ ------ ------- ------- ------ -------
The sensitivity of the ECL allowance to reasonably possible
changes in macroeconomic scenario weighting is presented below:
June June December
Increase in hard case (2019: stressed case) weighting 2020 2019 2019
by 5% and reduction in low case (2019: base case) GBPmillion GBPmillion GBPmillion
------------------------------------------------------ ----------- ----------- -----------
Motor Finance 0.2 0.1 0.1
------------------------------------------------------ ----------- ----------- -----------
Retail Finance 0.2 0.1 0.2
------------------------------------------------------ ----------- ----------- -----------
Real Estate Finance 0.1 - -
------------------------------------------------------ ----------- ----------- -----------
Increase in severe stress case (2019: deeper stress June June December
case) weighting by 5% and reduction in medium case 2020 2019 2019
(2019: base case) GBPmillion GBPmillion GBPmillion
------------------------------------------------------ ----------- ----------- -----------
Motor Finance 0.1 0.4 0.4
------------------------------------------------------ ----------- ----------- -----------
Retail Finance 0.2 0.8 0.7
------------------------------------------------------ ----------- ----------- -----------
Real Estate Finance 0.2 - -
------------------------------------------------------ ----------- ----------- -----------
The sensitivity is immaterial for other lending products.
Were each of the macroeconomic scenarios to be applied 100%,
rather than using the weightings set out above, the impact on ECL
would be as follows:
Motor Finance. Retail Finance Total Group
Scenario GBPmillion GBPmillion GBPmillion
----------- -------------- -------------- -----------
Low case 3.6 lower 3.5 lower 9.0 lower
----------- -------------- -------------- -----------
Severe case 3.3 higher 4.3 higher 15.6 higher
----------- -------------- -------------- -----------
2.2.5. Debt Management forecast collections
A +/-5.0% change in Debt Management forecast collections, which
the Directors consider to be a reasonable possible change, would
increase or decrease Loans and advances to customers by GBP4.4
million (December 2019: GBP4.0 million) respectively, resulting in
a corresponding GBP4.4 million (December 2019: GBP4.0 million)
increase or decrease in profit or loss.
3. Operating segments
The Group is organised into seven 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) Motor Finance: Hire purchase agreements secured against the
vehicle being financed.
5) Retail Finance: Point of sale unsecured finance for in-store
and online retailers.
6) Debt Management: Debt collection.
7) Consumer Mortgages: Residential mortgages for the
self-employed, contract workers, those with complex income and
those with a recently restored credit history, sold via select
mortgage intermediaries.
Other
The 'Other' segment 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.
Other includes principally OneBill (the Group's consumer bill
management service, which has been closed to new customers since
2009) and RentSmart (principally the funding and operation of
finance leases through a disclosed agency agreement with RentSmart
Limited).
Currently, the Debt Management and Consumer Mortgages segments
both fall below the quantitative threshold for separate disclosure,
but the Directors consider that they represent sufficiently
distinct types of business to merit separate disclosure.
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.
Interest Revenue Impairment
income Fee and from losses on loans Loans and
and similar commission external and advances to advances to
income income customers customers customers Loan commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
June 2020
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Real Estate
Finance 26.7 - 26.7 2.0 1,036.8 107.7
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Asset Finance 0.8 - 0.8 0.6 19.4 -
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Commercial
Finance 3.8 3.1 6.9 1.1 191.6 65.1
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Business Finance 31.3 3.1 34.4 3.7 1,247.8 172.8
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Retail Finance 35.5 1.2 36.7 12.9 647.7 54.9
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Motor Finance 25.2 0.4 25.6 14.9 289.0 -
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Debt
Management 6.8 0.3 7.1 - 93.1 -
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Consumer
Mortgages 1.7 - 1.7 - 94.6 -
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Consumer Finance 69.2 1.9 71.1 27.8 1,124.4 54.9
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Other 0.2 2.5 2.7 - 5.3 -
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
100.7 7.5 108.2 31.5 2,377.5 227.7
----------------- ------------ ---------------- --------------- --------------- --------------- ----------------
Impairment
Interest losses on loans
income Fee and Revenue from and advances Loans and
and similar commission external to advances Loan
income income customers customers to customers commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
June 2019
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Real Estate
Finance 22.6 0.9 23.5 0.2 879.0 129.3
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Asset Finance 1.9 - 1.9 0.3 42.7 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Commercial
Finance 3.4 5.0 8.4 0.2 220.7 38.3
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Business Finance 27.9 5.9 33.8 0.7 1,142.4 167.6
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Retail Finance 34.2 1.9 36.1 9.1 671.7 30.4
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Motor Finance 23.9 0.4 24.3 8.0 299.8 1.2
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Debt Management 3.8 0.6 4.4 - 42.3 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Consumer
Mortgages 1.7 - 1.7 0.1 113.2 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Consumer Finance 63.6 2.9 66.5 17.2 1,127.0 31.6
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Other 0.8 2.4 3.2 (0.1) 8.9 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
92.3 11.2 103.5 17.8 2,278.3 199.2
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Interest Impairment
income Fee and Revenue from losses on loans Loans and
and similar commission external and advances advances Loan
income income customers to customers to customers commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
December 2019
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Real Estate
Finance 47.9 1.0 48.9 0.1 962.2 120.9
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Asset Finance 3.2 - 3.2 0.7 27.7 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Commercial
Finance 7.5 9.3 16.8 0.1 251.7 48.7
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Business Finance 58.6 10.3 68.9 0.9 1,241.6 169.6
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Retail Finance 71.1 3.6 74.7 19.8 688.9 33.2
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Motor Finance 48.7 1.0 49.7 13.8 323.7 0.5
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Debt
Management 7.3 1.1 8.4 (2.1) 82.4 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Consumer
Mortgages 3.6 0.1 3.7 0.1 105.9 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Consumer Finance 130.7 5.8 136.5 31.6 1,200.9 33.7
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Other 2.1 4.8 6.9 0.1 7.6 -
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
191.4 20.9 212.3 32.6 2,450.1 203.3
----------------- ------------ ---------------- ---------------- ---------------- ----------------- ------------
Funding costs and operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis. Accordingly, profit
by operating segment has not been disclosed.
All of the Group's operations relate to continuing operations,
and are conducted wholly within the United Kingdom and geographical
information is therefore not presented.
4. Gains/losses from derivatives and hedge accounting
The Group holds interest rate swaps for risk mitigation
purposes. For further information on the Group's risk management
strategy for market risk refer to the Risk management and principal
risks section on page 36. No comparatives are presented for the
period ended June 2019 as the Group held no interest rate swaps
during that period. Interest rate swaps are designated on initial
recognition as measured at fair value through profit and loss. The
tables below provide an analysis of the notional amount and fair
value of derivatives held:
Changes in fair
value used for
calculating hedge
ineffectiveness
in
Notional Assets Liabilities the period
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------- ----------- ----------- ----------- ------------------
June 2020
----------------------------------- ----------- ----------- ----------- ------------------
Interest rate swaps designated as
fair value hedges 1,117.3 5.9 (6.9) -
----------------------------------- ----------- ----------- ----------- ------------------
Interest accruals on interest rate
swaps - - (0.3) -
----------------------------------- ----------- ----------- ----------- ------------------
1,117.3 5.9 (7.2) -
----------------------------------- ----------- ----------- ----------- ------------------
Changes in fair
value used for
calculating hedge
ineffectiveness
in
Notional Assets Liabilities the period
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- ------------------
31 December 2019
--------------------------------------- ----------- ----------- ----------- ------------------
Interest rate swaps designated as fair
value hedges 987.7 0.8 (0.6) -
--------------------------------------- ----------- ----------- ----------- ------------------
Interest accruals on interest rate
swaps - 0.1 - -
--------------------------------------- ----------- ----------- ----------- ------------------
987.7 0.9 (0.6) -
--------------------------------------- ----------- ----------- ----------- ------------------
Notional Assets Liabilities
GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- ------------------
June 2020
--------------------------------------- ----------- ----------- ----------- ------------------
In not more than one year 264.2 0.4 (1.9)
--------------------------------------- ----------- ----------- ----------- ------------------
In more than one year 853.1 5.5 (5.3)
--------------------------------------- ----------- ----------- ----------- ------------------
1,117.3 5.9 (7.2)
--------------------------------------- ----------- ----------- ----------- ------------------
Notional Assets Liabilities
GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- ------------------
31 December 2019
--------------------------------------- ----------- ----------- ----------- ------------------
In not more than one year 214.5 - (0.1)
--------------------------------------- ----------- ----------- ----------- ------------------
In more than one year 773.2 0.9 (0.5)
--------------------------------------- ----------- ----------- ----------- ------------------
987.7 0.9 (0.6)
--------------------------------------- ----------- ----------- ----------- ------------------
The notional amount represents the amount on which payment flows
are derived and does not represent amounts at risk.
In order to manage interest rate risk arising from fixed rate
financial instruments the Group reviews interest rate swaps
requirements on a monthly basis. The exposure from the portfolio
frequently changes due to the origination of new instruments,
contractual repayments and early prepayments made in each period.
As a result, the Group adopts a dynamic hedging strategy (sometimes
referred to as 'macro' or 'portfolio' hedge) to hedge its exposure
profile by closing and entering into new swap agreements on a
monthly basis. The Group establishes the hedging ratio by matching
the notional of the derivatives with the principal of the portfolio
being hedged.
The following table sets out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated amount of fair value
Carrying amount of hedged adjustments
item on the hedged item
----------------------------- ---------------------------------
Change in
fair value of
hedged item for
ineffectiveness
assessment in
Assets Liabilities Assets Liabilities Balance Sheet the period
GBPmillion GBPmillion GBPmillion GBPmillion line item GBPmillion
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
June 2020
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Interest rate
fair value hedges
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Fixed rate Real Loans and
Estate Finance advances to
loans 300.0 - 5.3 - customers -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Loans and
Fixed rate Motor advances to
Finance loans 105.0 - 1.1 - customers -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Loans and
Fixed rate Retail advances to
Finance loans 95.5 - 0.7 - customers -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Fixed rate Loans and
Consumer advances to
Mortgage loans 9.8 - 0.2 - customers -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Fixed rate
customer Deposits from
deposits - 607.0 - 6.5 customers -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Total 510.3 607.0 7.3 6.5 -
----------------- ----------- ---------------- --------------- ---------------- ---------------- ---------------
Accumulated amount of fair value
Carrying amount of hedged item adjustments on the hedged item
-------------------------------- --------------------------------
Change in
fair value of
hedged item for
ineffectiveness
assessment in
Assets Liabilities Assets Liabilities Balance Sheet the period
GBPmillion GBPmillion GBPmillion GBPmillion line item GBPmillion
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
31 December 2019
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Interest rate
fair value
hedges
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Fixed rate Real Loans and
Estate Finance advances to
loans 296.8 - (0.6) - customers -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Loans and
Fixed rate Motor advances to
Finance loans 100.1 - (0.2) - customers -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Fixed rate Loans and
Retail Finance advances to
loans 66.0 - (0.1) - customers -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Fixed rate Loans and
Consumer advances to
Mortgage loans 9.2 - - - customers -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Fixed rate
customer Deposits from
deposits - 515.6 - 0.6 customers -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total 472.1 515.6 (0.9) 0.6 -
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
The accumulated amount of fair value hedge adjustments remaining
in the statement of financial position for hedged items that have
ceased to be adjusted for hedging gains and losses is GBPnil
million.
Fair value gains and losses arising from derivatives and hedge
accounting recognised in the Group income statement was GBPnil
million.
Although the Group uses derivatives exclusively to hedge
interest rate risk exposures, income statement volatility can still
arise due to hedge accounting ineffectiveness or because hedge
accounting is not achievable. This arises from the application of
accounting rules which do not reflect the economic reality of the
business. Where such volatility arises it will trend back to zero
over time.
All derivatives held by the Group have been highly effective in
the period resulting in minimal hedge accounting ineffectiveness
recognised in the income statement. Future ineffectiveness may
arise as a result of:
-- differences between the expected and actual volume of
prepayments, as the Group hedges to the expected repayment date
taking into account expected prepayments based on past
experience
-- hedging derivatives with a non-zero fair value at the date of
initial designation
-- differences in the timing of cash flows for the hedged item
and the hedging instrument
The following table shows the impact of financial assets and
financial liabilities relating to transactions where:
-- there is an enforceable master netting agreement in place but
the offset criteria are not otherwise satisfied, and
-- financial collateral is paid and received
Gross amount
reported on Master netting Financial Net amounts
balance sheet arrangements collateral after offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- -------------- -------------- ----------- -----------------
June 2020
--------------------------------- -------------- -------------- ----------- -----------------
Derivative financial assets 5.9 (5.9) - -
--------------------------------- -------------- -------------- ----------- -----------------
Derivative financial liabilities (7.2) 5.9 1.1 (0.2)
--------------------------------- -------------- -------------- ----------- -----------------
Gross amount
reported on Master netting Financial Net amounts
balance sheet arrangements collateral after offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- -------------- -------------- ----------- -----------------
31 December 2019
--------------------------------- -------------- -------------- ----------- -----------------
Derivative financial assets 0.9 (0.6) (0.3) -
--------------------------------- -------------- -------------- ----------- -----------------
Derivative financial liabilities (0.6) 0.6 (0.1) (0.1)
--------------------------------- -------------- -------------- ----------- -----------------
Master netting arrangements do not meet the criteria for
offsetting in the statement of financial position. This is because
the arrangement creates an agreement for a right of set-off of
recognised amounts which is enforceable only following an event of
default, insolvency or bankruptcy of the Group or counterparties.
Furthermore, the Group and its counterparties do not intend to
settle on a net basis or realise the assets and settle the
liabilities simultaneously.
Financial collateral consists of cash settled, typically daily
or weekly, to mitigate the credit risk on the fair value of
derivatives.
5. Loan modification losses
Although not included as an option within customer contracts,
following regulatory guidance the Group has offered payment
holidays to our Consumer Finance and Asset Finance customers. This
is considered under IFRS 9 as a modification to contractual cash
flows, which requires the carrying value of these loans to be
adjusted to the net present value of future cash flows. The impact
of this is a GBP3.7 million reduction in the net present value of
Motor Finance loans and a further GBP0.3 million reduction in
respect of other products.
Of the overall GBP3.6 million loan modification loss, GBP1.1
million relates to financial assets with a loss allowance based on
lifetime ECL.
Financial assets (with loss allowance
based on lifetime ECL) modified during Total
the period GBPmillion
--------------------------------------------- -----------
Gross loans and advances before modification 426.3
----------------------------------------------- -----------
Less: allowances for impairments on loans
and advances (49.6)
----------------------------------------------- -----------
376.7
--------------------------------------------- -----------
Loan modification loss (1.1)
----------------------------------------------- -----------
Net amortised cost after modification 375.6
----------------------------------------------- -----------
6. Income tax expense
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- -----------
Current taxation
------------------------------------------------ ----------- ----------- -----------
Corporation tax charge - current period 0.4 3.3 7.0
------------------------------------------------ ----------- ----------- -----------
Corporation tax charge - adjustments in respect
of prior periods - - (0.1)
------------------------------------------------ ----------- ----------- -----------
0.4 3.3 6.9
------------------------------------------------ ----------- ----------- -----------
Deferred taxation
------------------------------------------------ ----------- ----------- -----------
Deferred tax charge - current period 0.8 0.2 0.7
------------------------------------------------ ----------- ----------- -----------
Deferred tax charge - adjustments in respect
of prior periods - - -
------------------------------------------------ ----------- ----------- -----------
0.8 0.2 0.7
------------------------------------------------ ----------- ----------- -----------
Income tax expense 1.2 3.5 7.6
------------------------------------------------ ----------- ----------- -----------
The tax for all the periods above has been calculated at the
current effective rate, which is 19%.
The main component of the deferred tax asset is deferred tax on
the IFRS 9 transition adjustment, which reverses on a straight-line
basis over 10 years commencing in 2018. The Company will incur the
8% corporation tax surcharge on banking company profits in excess
of GBP25.0 million during this period, but the quantum of this is
uncertain. Any changes in the forecast tax rate of the Company over
this period could significantly affect the future tax charge.
Due to the uncertain economic environment, the Group has
considered a number of scenarios that could impact 2020 performance
due to COVID-19, which in turn would affect the rates at which
deferred tax assets can be recognised. Any further adverse rate
effect on the tax charge in 2020 is not expected to exceed GBP0.5
million.
7. Earnings per ordinary share
7.1 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:
June June December
2020 2019 2019
------------------------------------------- ---------- ---------- ----------
Profit attributable to equity holders of
the parent (GBP millions) 3.9 14.6 31.1
------------------------------------------- ---------- ---------- ----------
Weighted average number of ordinary shares
(number) 18,603,521 18,476,628 18,476,280
------------------------------------------- ---------- ---------- ----------
Earnings per share (pence) 21.0 79.0 168.3
------------------------------------------- ---------- ---------- ----------
7.2 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:
June June December
2020 2019 2019
-------------------------------------------------- ---------- ---------- ----------
Weighted average number of ordinary shares 18,603,521 18,476,628 18,476,280
-------------------------------------------------- ---------- ---------- ----------
Number of dilutive shares in issue at the
period end 140,026 173,464 216,943
-------------------------------------------------- ---------- ---------- ----------
Fully diluted weighted average number of ordinary
shares 18,743,547 18,650,092 18,693,223
-------------------------------------------------- ---------- ---------- ----------
Dilutive shares being based on:
-------------------------------------------------- ---------- ---------- ----------
Number of options outstanding at the period
end 454,265 659,802 598,065
-------------------------------------------------- ---------- ---------- ----------
Exercise price (pence) 472 498 528
-------------------------------------------------- ---------- ---------- ----------
Average share price during the period (pence) 1,162 1,303 1,390
-------------------------------------------------- ---------- ---------- ----------
Diluted earnings per share (pence) 20.8 78.3 166.4
-------------------------------------------------- ---------- ---------- ----------
8. Loans and advances to customers
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- -----------
Gross loans and advances 2,456.3 2,346.8 2,510.7
--------------------------------------------- ----------- ----------- -----------
Less: allowances for impairment on loans and
advances (Note 9) (78.8) (68.5) (60.6)
--------------------------------------------- ----------- ----------- -----------
2,377.5 2,278.3 2,450.1
--------------------------------------------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 16.
9. Allowances for impairment of loans and advances
Not credit impaired Credit impaired
--------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject Subject Subject
to to to Gross
12 month lifetime lifetime Total loans and Provision
ECL ECL ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
June 2020
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Business Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Real Estate Finance 2.2 0.1 0.3 2.6 1,039.4 0.3%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Asset Finance 0.3 0.3 1.5 2.1 21.5 9.8%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Commercial Finance 0.9 0.6 - 1.5 193.1 0.8%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Consumer Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Retail Finance 13.2 11.0 4.5 28.7 676.4 4.2%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Motor Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Voluntary termination
provision 5.8 - - 5.8
--------------------------------- ------ ------------ --------------- ------------ ------------ ----------
Other impairment 6.6 16.0 17.3 39.9
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
12.4 16.0 23.6 45.7 334.7 13.7%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Debt Management - - (2.1) (2.1) 91.0 (2.3%)
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Consumer Mortgages 0.2 - 0.1 0.3 94.9 0.3%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Other - - - - 5.3 0.0%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
29.2 28.0 21.6 78.8 2,456.3 3.2%
========================== ============= ============ =============== ============ ============ ==========
Not credit impaired Credit impaired
--------------------------- ---------------
Stage 1: Stage 3:
Subject Stage 2: Subject
to Subject to Gross
12 month to lifetime lifetime Total loans and Provision
ECL ECL ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
June 2019
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Business Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Real Estate Finance 0.5 0.1 0.2 0.8 879.8 0.1%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Asset Finance 0.1 0.1 1.8 2.0 44.7 4.5%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Commercial Finance 0.3 0.1 0.5 0.9 221.6 0.4%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Consumer Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Retail Finance 9.9 10.0 4.4 24.3 696.0 3.5%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Motor Finance:
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Voluntary termination
provision 6.7 - - 6.7
--------------------------------- ------ ------------ --------------- ------------ ------------ ----------
Other impairment 3.9 13.0 16.5 33.4
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
10.6 13.0 16.5 40.1 339.9 11.8%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Debt Management - - - - 42.3 0.0%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Consumer Mortgages 0.3 - - 0.3 113.5 0.3%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Other - 0.1 0.1 9.0 1.1%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
21.7 23.3 23.5 68.5 2,346.8 2.9%
-------------------------- ------------- ------------ --------------- ------------ ------------ ----------
Not credit impaired Credit impaired
--------------------------- ---------------
Stage 1: Stage 3:
Subject Stage 2: Subject
to Subject to Gross
12 month to lifetime lifetime Total loans and Provision
ECL ECL ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
December 2019
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Business Finance:
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Real Estate Finance 0.5 - 0.1 0.6 962.8 0.1%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Asset Finance - 0.1 1.7 1.8 29.5 6.1%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Commercial Finance 0.3 - 0.6 0.9 252.6 0.4%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Consumer Finance:
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Retail Finance 10.0 11.1 4.4 25.5 714.4 3.6%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Motor Finance:
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Voluntary termination
provision 6.8 - - 6.8
--------------------------------- ------ ------------ --------------- ----------- ------------ ---------
Other impairment 3.7 12.9 10.2 26.8
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
10.5 12.9 10.2 33.6 357.3 9.4%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Debt Management - - (2.1) (2.1) 80.3 (2.6%)
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Consumer Mortgages 0.3 - - 0.3 106.2 0.3%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Other - - - - 7.6 0.0%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
21.6 24.1 14.9 60.6 2,510.7 2.4%
-------------------------- ------------- ------------ --------------- ----------- ------------ ---------
Total provisions above include expert credit judgements as
follows:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- -----------
Specific overlays held against credit
impaired secured assets held within
the Business Finance portfolio (1.2) 0.9 0.5
--------------------------------------- ----------- ----------- -----------
Future macroeconomic scenario overlay
in respect of Motor Finance 6.6 - -
--------------------------------------- ----------- ----------- -----------
Future macroeconomic scenario overlay
in respect of Retail Finance 4.2 - -
--------------------------------------- ----------- ----------- -----------
Planned enhancements to LGD elements
of the IFRS 9 models - 0.9 (0.8)
--------------------------------------- ----------- ----------- -----------
Management judgement in respect of
PD elements of the IFRS 9 models - 0.3 (0.8)
--------------------------------------- ----------- ----------- -----------
POCI adjustment (see below) - - (2.1)
--------------------------------------- ----------- ----------- -----------
Other - 0.2 (0.1)
--------------------------------------- ----------- ----------- -----------
Expert credit judgements over the
Group's IFRS 9 model results 9.6 2.3 (3.3)
--------------------------------------- ----------- ----------- -----------
The future macroeconomic scenario overlays are in respect of the
application of forward looking data, as included in Note 2.2.4, for
the Consumer Finance portfolios where the macroeconomic variables
have not been input directly to the models. The specific overlays
have been estimated on an individual basis by assessing the
recoverability and condition of the secured asset, along with any
other recoveries that may be made.
POCI adjustment
The Group's debt management business purchases credit-impaired
loans from the Company and other unrelated third parties. Under
IFRS 9, these are classified as Purchased and Originated Credit
Impaired ('POCI') loans. As a practical expedient, income on POCI
loans is initially recognised by applying the original
credit-adjusted EIR to the expected future cash flows arising from
the POCI assets. The Group's accounting policy is to recognise POCI
income by applying the original credit-adjusted EIR to the
amortised cost of the assets. Expected changes in cash flows since
the date of purchase are recognised as an impairment gain or loss
in the income statement. At December 2019, improvements in credit
quality resulted in a GBP2.1 million impairment gain.
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP5.2 million (June
2019: GBP8.5 million, December 2019: GBP7.2 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 impairment losses disclosed in the income statement can be
analysed as follows:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
-------------------------------------------------- ----------- ----------- -----------
Charge for impairment losses 30.1 15.3 28.1
-------------------------------------------------- ----------- ----------- -----------
Impairment losses in respect of off balance sheet
loan commitments 0.3 - -
-------------------------------------------------- ----------- ----------- -----------
Loans written off, net of amounts utilised 1.3 2.7 5.3
-------------------------------------------------- ----------- ----------- -----------
Recoveries of loans written off (0.2) (0.2) (0.8)
-------------------------------------------------- ----------- ----------- -----------
31.5 17.8 32.6
-------------------------------------------------- ----------- ----------- -----------
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Not credit impaired Credit impaired
----------------------------------------- --------------------------------- ----------------- -------------
Stage 2: Stage 3:
Stage 1: Subject to Subject to
Subject to lifetime lifetime Total
12 month ECL ECL ECL provision
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ------------- ------------------ ----------------- -------------
June 2020
----------------------------------------- ------------- ------------------ ----------------- -------------
At start of period 21.6 24.1 14.9 60.6
----------------------------------------- ------------- ------------------ ----------------- -------------
Increase/(decrease) due to change in
credit risk
----------------------------------------- ------------- ------------------ ----------------- -------------
- Transfer to stage 2 (6.6) 21.3 - 14.7
----------------------------------------- ------------- --- ------------- --- ------------ -------------
- Transfer to stage 3 - (12.2) 16.8 4.6
----------------------------------------- ------------- --- ------------- --- ------------ -------------
- Transfer to stage 1 1.5 (3.2) - (1.7)
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Passage of time (1.5) (2.4) 1.1 (2.8)
----------------------------------------- ------------- --- ------------- --- ------------ -------------
New loans originated 6.1 - - 6.1
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Derecognised loans (1.2) (1.4) - (2.6)
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Changes to credit risk parameters 10.4 1.8 (0.4) 11.8
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Other adjustments - - - -
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Charge to income statement 8.7 3.9 17.5 30.1
----------------------------------------- ------------- --- ------------- --- ------------ -------------
Allowance utilised in respect of write
offs (1.1) - (10.8) (11.9)
----------------------------------------- ------------- --- ------------- --- ------------ -------------
At end of period 29.2 28.0 21.6 78.8
----------------------------------------- ------------- ------------------ ----------------- -------------
Not credit impaired Credit impaired
--------------------------------- -----------------
Stage 2: Stage 3:
Stage 1: Subject to Subject to
Subject to lifetime lifetime Total
12 month ECL ECL ECL provision
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ------------- ------------------ ----------------- -------------
June 2019
----------------------------------------- ------------- ------------------ ----------------- -------------
At start of period 20.3 23.9 22.9 67.1
----------------------------------------- ------------- ------------------ ----------------- -------------
Increase/(decrease) due to change in
credit risk
----------------------------------------- ------------- ------------------ ----------------- -------------
- Transfer to stage 2 (2.5) 16.6 - 14.1
----------------------------------------- ------------- ------------------ ----------------- -------------
- Transfer to stage 3 - (11.5) 15.0 3.5
----------------------------------------- ------------- ------------------ ----------------- -------------
- Transfer to stage 1 0.6 (1.4) - (0.8)
----------------------------------------- ------------- ------------------ ----------------- -------------
Passage of time (5.9) (2.0) (1.2) (9.1)
----------------------------------------- ------------- ------------------ ----------------- -------------
New loans originated 8.8 - - 8.8
----------------------------------------- ------------- ------------------ ----------------- -------------
Derecognised loans (0.9) (2.2) - (3.1)
----------------------------------------- ------------- ------------------ ----------------- -------------
Changes to credit risk parameters 0.5 (0.1) (0.8) (0.4)
----------------------------------------- ------------- ------------------ ----------------- -------------
Other adjustments 2.3 - - 2.3
----------------------------------------- ------------- ------------------ ----------------- -------------
Charge to income statement 2.9 (0.6) 13.0 15.3
----------------------------------------- ------------- ------------------ ----------------- -------------
Allowance utilised in respect of write
offs (1.5) - (12.4) (13.9)
----------------------------------------- ------------- ------------------ ----------------- -------------
At end of period 21.7 23.3 23.5 68.5
----------------------------------------- ------------- ------------------ ----------------- -------------
Not credit impaired Credit impaired
------------------------------------------------- --------------------------------- --------------- ---------------
Stage 1: Stage 3:
Subject to Stage 2: Subject to
12 month Subject to lifetime lifetime
ECL ECL ECL Total provision
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ----------- -------------------- --------------- ---------------
December 2019
------------------------------------------------- ----------- -------------------- --------------- ---------------
At start of year 20.3 23.9 22.9 67.1
------------------------------------------------- ----------- -------------------- --------------- ---------------
Increase/(decrease) due to change in credit risk
------------------------------------------------- ----------- -------------------- --------------- ---------------
- Transfer to stage 2 (5.9) 36.9 - 31.0
------------------------------------------------- ----------- -------------------- --------------- ---------------
- Transfer to stage 3 - (23.5) 30.3 6.8
------------------------------------------------- ----------- -------------------- --------------- ---------------
- Transfer to stage 1 1.5 (3.5) - (2.0)
------------------------------------------------- ----------- -------------------- --------------- ---------------
Passage of time (10.1) (6.8) (6.3) (23.2)
------------------------------------------------- ----------- -------------------- --------------- ---------------
New loans originated 17.2 - - 17.2
------------------------------------------------- ----------- -------------------- --------------- ---------------
Derecognised loans (1.9) (4.7) (0.1) (6.7)
------------------------------------------------- ----------- -------------------- --------------- ---------------
Changes to model methodology 0.7 1.2 (0.2) 1.7
------------------------------------------------- ----------- -------------------- --------------- ---------------
Changes to credit risk parameters (1.1) 0.6 (0.1) (0.6)
------------------------------------------------- ----------- -------------------- --------------- ---------------
Other adjustments 3.9 - - 3.9
------------------------------------------------- ----------- -------------------- --------------- ---------------
Charge to income statement 4.3 0.2 23.6 28.1
------------------------------------------------- ----------- -------------------- --------------- ---------------
Allowance utilised in respect of write offs (3.0) - (31.6) (34.6)
------------------------------------------------- ----------- -------------------- --------------- ---------------
At end of year 21.6 24.1 14.9 60.6
------------------------------------------------- ----------- -------------------- --------------- ---------------
The table above has been prepared based on the monthly movements
in ECL.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represents movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macroeconomic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
Stage 1 write offs arise on the Motor accounts that have
exercised their right to voluntarily terminate their
agreements.
10. Due to banks
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- -----------
Amounts due to other credit institutions
----------------------------------------- ----------- ----------- -----------
Term Funding Scheme 263.0 263.0 308.0
----------------------------------------- ----------- ----------- -----------
Indexed long-term repos 5.0 - -
----------------------------------------- ----------- ----------- -----------
Accrued interest 0.1 0.5 0.5
----------------------------------------- ----------- ----------- -----------
268.1 263.5 308.5
----------------------------------------- ----------- ----------- -----------
These are due for repayment between May 2021 and February
2022.
11. Deposits from customers
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
---------------------------- ----------- ----------- -----------
Current/demand accounts 53.9 19.2 22.6
---------------------------- ----------- ----------- -----------
Term deposits 1,865.1 1,982.3 1,959.3
---------------------------- ----------- ----------- -----------
Individual savings accounts 80.2 - 38.4
---------------------------- ----------- ----------- -----------
1,999.2 2,001.5 2,020.3
---------------------------- ----------- ----------- -----------
The fair value of deposits from customers is shown in Note
16.
12. Provisions for liabilities and charges
ECL allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ------------- -----------
June 2020
--------------------------------------- ----------- ----------- ------------- -----------
At start of period 0.2 0.4 0.1 0.7
--------------------------------------- ----------- ----------- ------------- -----------
(Credited)/charged to income statement (0.2) (0.2) 0.6 0.2
--------------------------------------- ----------- ----------- ------------- -----------
At end of period - 0.2 0.7 0.9
======================================= =========== =========== ============= ===========
ECL allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ------------- -----------
June 2019
--------------------------------------- ----------- ----------- ------------- -----------
At start of period 0.8 0.1 0.4 1.3
--------------------------------------- ----------- ----------- ------------- -----------
Credited to income statement (0.4) - - (0.4)
--------------------------------------- ----------- ----------- ------------- -----------
At end of period 0.4 0.1 0.4 0.9
======================================= =========== =========== ============= ===========
ECL allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ------------- -----------
December 2019
--------------------------------------- ----------- ----------- ------------- -----------
At start of period 0.8 0.4 0.1 1.3
--------------------------------------- ----------- ----------- ------------- -----------
Credited to income statement (0.6) - - (0.6)
--------------------------------------- ----------- ----------- ------------- -----------
At end of period 0.2 0.4 0.1 0.7
--------------------------------------- ----------- ----------- ------------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in
respect of historical sales of accident, sickness and unemployment
insurance, by considering the likely future uphold rate for claims,
in the context of confirmed issues and historical experience.
The Financial Conduct Authority announced a deadline for making
these customer redress claims, giving consumers until 29 August
2019 to make a claim. The remaining provision for future claims has
therefore been removed in this period.
Fraud
The fraud provision relates to cases where the Bank has
reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9, the Group holds
an ECL allowance against loans it has committed to lend but have
not yet been drawn. The majority of the GBP0.7 million allowance
held at June 2020 relates to undrawn balances within Retail
Finance. For the Real Estate Finance and Commercial Finance
portfolios, where a loan facility is agreed that includes both
drawn and undrawn elements and the Group cannot identify the ECL on
the loan commitment separately, a combined loss allowance for both
drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component,
with any excess of the loss allowance over the gross drawn amount
presented as a provision. At June 2020, no provision was required
for losses in excess of drawn amounts given the relative size of
loan commitments.
13. Commitments
The Group's off balance sheet exposure to undrawn loan
commitments at June 2020 was GBP227.7 million (June 2019: GBP199.2
million, December 2019: GBP203.3 million). Details of the split by
business is given in Note 3.
14. Subordinated liabilities
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- -----------
Tier 2 capital 50.0 50.0 50.0
------------------------ ----------- ----------- -----------
Unamortised issue costs (0.5) (0.7) (0.6)
------------------------ ----------- ----------- -----------
Accrued interest 1.2 1.2 1.2
------------------------ ----------- ----------- -----------
50.7 50.5 50.6
------------------------ ----------- ----------- -----------
The Notes are treated as Tier 2 regulatory capital, which is
used to support the continuing growth of the business taking into
account increases in regulatory capital buffers.
15. Capital
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:
June June
2020 2019 December 2019
GBPmillion GBPmillion GBPmillion
(unaudited) (unaudited) (unaudited)
----------------------------------------------- ------------ ------------ -------------
Tier 1
----------------------------------------------- ------------ ------------ -------------
Share capital 7.4 7.4 7.4
----------------------------------------------- ------------ ------------ -------------
Share premium 82.2 81.2 81.2
----------------------------------------------- ------------ ------------ -------------
Retained earnings 168.6 150.8 164.4
----------------------------------------------- ------------ ------------ -------------
Revaluation reserve 1.1 0.9 1.1
----------------------------------------------- ------------ ------------ -------------
IFRS 9 transition adjustment 28.4 22.3 22.8
----------------------------------------------- ------------ ------------ -------------
Goodwill (1.0) (1.0) (1.0)
----------------------------------------------- ------------ ------------ -------------
Intangible assets net of attributable deferred
tax (7.4) (8.1) 7.9
----------------------------------------------- ------------ ------------ -------------
CET1 capital before foreseen dividend 279.3 253.5 268.0
----------------------------------------------- ------------ ------------ -------------
Proposed dividend - (3.7) -
----------------------------------------------- ------------ ------------ -------------
CET1 Capital 279.3 249.8 268.0
----------------------------------------------- ------------ ------------ -------------
Tier 2
----------------------------------------------- ------------ ------------ -------------
Subordinated liabilities 50.7 50.5 50.6
----------------------------------------------- ------------ ------------ -------------
Less ineligible portion (0.7) (1.2) (0.6)
----------------------------------------------- ------------ ------------ -------------
Total Tier 2 capital 50.0 49.3 50.0
----------------------------------------------- ------------ ------------ -------------
Own Funds 329.3 299.1 318.0
----------------------------------------------- ------------ ------------ -------------
Reconciliation to total equity:
----------------------------------------------- ------------ ------------ -------------
IFRS 9 transition adjustment (28.4) (22.3) (22.8)
----------------------------------------------- ------------ ------------ -------------
Eligible subordinated liabilities (50.0) (49.3) (50.0)
----------------------------------------------- ------------ ------------ -------------
Goodwill and other intangible assets net of
attributable deferred tax 8.4 9.1 8.9
----------------------------------------------- ------------ ------------ -------------
Proposed dividend - 3.7 -
----------------------------------------------- ------------ ------------ -------------
Total equity 259.3 240.3 254.1
----------------------------------------------- ------------ ------------ -------------
The capital resources shown in the table above include profits
for the period to June 2020. These profits are not yet approved by
the regulator.
The transitional adjustment to capital arises from the Group
making an election to phase in the impact of transitioning to IFRS
9 over a five-year period, by applying add back factors of 95%,
85%, 70%, 50% and 25% for years one to five respectively to the
initial IFRS 9 transition adjustment plus the movement in stage 1
and stage 2 impairment allowance from transition to the end of the
reporting period.
The PRA ratified additional capital mitigation proposed by the
Basel Committee, in response to COVID-19, with these measures
coming into force from 27 June 2020. The new measures allow for the
movement in stage 1 and stage 2 provisions arising in 2020 and 2021
to be fully added back in those years. This relief is then phased
out over the following three years on a straight line basis (2022:
75%, 2023: 50%, 2024: 25%, 2025: 0%). At June 2020, the impacts of
these adjustments amounted to the following:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
(unaudited) (unaudited) (unaudited)
===================================================== ============ ============ ============
Initial IFRS 9 transition adjustment 25.8 25.8 25.8
Movement in stage 1 and stage 2 impairment allowance
from transition to December 2019 1.6 0.4 1.0
===================================================== ============ ============ ============
27.4 26.2 26.8
Percentage add back 70% 85% 85%
===================================================== ============ ============ ============
19.2 22.3 22.8
===================================================== ============ ============ ============
Movement in stage 1 and stage 2 impairment allowance
during period ending June 2020 9.2 - -
Percentage add-back 100% - -
===================================================== ============ ============ ============
9.2 - -
----------------------------------------------------- ------------ ------------ ------------
IFRS 9 transition adjustment 28.4 22.3 22.8
----------------------------------------------------- ------------ ------------ ------------
16. 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 carrying Total carrying
amount Fair value amount Fair value Total carrying Fair value
June June June June amount December December
2020 2020 2019 2019 2019 2019
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------- -------------- ------------ -------------- ------------ ---------------- -------------------
Loans and advances
to customers 2,377.5 2,383.7 2,278.3 2,288.3 2,450.1 2,416.2
------------------- -------------- ------------ -------------- ------------ ---------------- -------------------
Deposits from
customers 1,999.2 2,002.3 2,001.5 2,018.1 2,020.3 2,016.9
------------------- -------------- ------------ -------------- ------------ ---------------- -------------------
Freehold land and buildings are carried at fair value. All other
assets and liabilities are carried at amortised cost.
17. Share-based payments
The Group has five share-based payment schemes in operation:
-- Share Option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave plan
-- 2017 deferred bonus plan
-- 'Phantom' share option scheme
There has been no movement in the number of awards granted under
the schemes during the period. A summary of the awards under each
scheme as at December 2019 is set out in the 2019 Annual
Report.
18. Related party transactions
There were no changes to the nature of the related party
transactions during the period to June 2020 that would materially
affect the position or performance of the Group. Details of the
transactions for the year ended December 2019 can be found in the
2019 Annual Report.
19. 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
Committees which review performance of key portfolios including new
business volumes, collections performance, provisioning levels and
provisioning methodology. A credit risk department within the Group
monitors adherence to the Credit Risk Policy, implements risk tools
to manage credit risk and evaluates business opportunities and the
risks and opportunities they present to the Group whilst ensuring
the performance of the Group'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 expected credit losses 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 it considers this to be the most significant risk to the
business.
Exposure to Consumer Finance 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. Prior to the closure of the book to new business, Asset
Finance credit risk management was 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 are no direct
exposures to non-UK countries.
With the exception of loans and advances to customers, the
carrying amount of financial assets represents the Group's maximum
exposure to credit risk. The Group's maximum exposure to credit
risk for loans and advances to customers by portfolio and IFRS 9
stage without taking account of any collateral held or other credit
enhancements attached was as follows:
Stage 1 Stage 2 Stage 3
---------- ----------------------------------- -----------------------------------
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
June 2020 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Business
Finance
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Real Estate
Finance 959.8 41.3 13.1 54.4 25.2 - 25.2 1,039.4
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Asset
Finance 15.3 4.5 - 4.5 1.7 - 1.7 21.5
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Commercial
Finance 184.8 8.3 - 8.3 - - - 193.1
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Consumer
Finance
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Retail
Finance 580.6 88.0 2.5 90.5 5.3 - 5.3 676.4
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Motor
Finance 192.3 114.4 3.0 117.4 25.0 - 25.0 334.7
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Debt
Management - - - - 12.0 79.0 91.0 91.0
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Consumer
Mortgages 93.0 - 0.3 0.3 1.6 - 1.6 94.9
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Other 5.3 - - - - - - 5.3
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total drawn
exposure 2,031.1 256.5 18.9 275.4 70.8 79.0 149.8 2,456.3
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Off balance
sheet
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Loan
commitments 227.7 - - - - - - 227.7
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total gross
exposure 2,258.8 256.5 18.9 275.4 70.8 79.0 149.8 2,684.0
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Less:
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Impairment
allowance (29.2) (24.8) (3.2) (28.0) (23.7) 2.1 (21.6) (78.8)
--------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Provision for
loan
commitments (0.7) - - - - - - (0.7)
Total net
exposure 2,228.9 231.7 15.7 247.4 47.1 81.1 128.2 2,604.5
Stage 1 Stage 2 Stage 3
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
June 2019 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Business
Finance
Real Estate
Finance 814.4 56.9 - 56.9 8.5 - 8.5 879.8
-----------
Asset
Finance 35.4 2.1 5.1 7.2 2.1 - 2.1 44.7
-----------
Commercial
Finance 212.7 8.3 - 8.3 0.6 - 0.6 221.6
-----------
Consumer
Finance
-----------
Retail
Finance 605.4 81.5 4.0 85.5 5.1 - 5.1 696.0
-----------
Motor
Finance 224.0 92.1 2.2 94.3 21.6 - 21.6 339.9
-----------
Debt
Management - - - - 10.2 32.1 42.3 42.3
-----------
Consumer
Mortgages 111.8 - 1.7 1.7 - - - 113.5
-----------
Other 9.0 - - - - - - 9.0
-----------
Total drawn
exposure 2,012.7 240.9 13.0 253.9 48.1 32.1 80.2 2,346.8
Off balance
sheet
Loan
commitments 199.2 - - - - - - 199.2
-----------
Total gross
exposure 2,211.9 240.9 13.0 253.9 48.1 32.1 80.2 2,546.0
Less:
Impairment
allowance (21.7) (19.2) (4.1) (23.3) (23.5) - (23.5) (68.5)
Provision for
loan
commitments (0.4) - - - - - - (0.4)
Total net
exposure 2,189.8 221.7 8.9 230.6 24.6 32.1 56.7 2,477.1
---------- -----------
Stage 1 Stage 2 Stage 3
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
December 2019 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
Business
Finance
Real Estate
Finance 910.2 33.7 2.8 36.5 16.1 - 16.1 962.8
----------
Asset
Finance 23.8 3.6 0.3 3.9 1.8 - 1.8 29.5
----------
Commercial
Finance 245.0 7.0 - 7.0 0.6 - 0.6 252.6
----------
Consumer
Finance
----------
Retail
Finance 624.1 80.3 4.5 84.8 5.5 - 5.5 714.4
----------
Motor
Finance 240.5 96.9 2.7 99.6 17.2 - 17.2 357.3
----------
Debt
Management - - - - 10.3 70.0 80.3 80.3
----------
Consumer
Mortgages 105.6 - 0.3 0.3 0.3 - 0.3 106.2
----------
Other 7.6 - - - - - - 7.6
----------
Total drawn
exposure 2,156.8 221.5 10.6 232.1 51.8 70.0 121.8 2,510.7
Off balance
sheet
----------
Loan
commitments 203.3 - - - - - - 203.3
----------
Total gross
exposure 2,360.1 221.5 10.6 232.1 51.8 70.0 121.8 2,714.0
Less:
----------
Impairment
allowance (21.6) (19.8) (4.3) (24.1) (17.0) 2.1 (14.9) (60.6)
Provision for
loan
commitments (0.4) - - - - - - (0.4)
Total net
exposure 2,338.1 201.7 6.3 208.0 34.8 72.1 106.9 2,653.0
19.1 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.
Details of the Group's loan and advances to customers and loan
commitments by product is provided in Note 3.
The Group's Real Estate Finance and Consumer Mortgages are
secured against UK property only. The geographical concentration of
these business loans and advances to customer, by location of the
security, is set out below:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
Real Estate Finance
----------- ----------- -----------
Central England 52.1 35.0 127.1
----------- ----------- -----------
Greater London 628.0 546.0 601.8
----------- ----------- -----------
Northern England 62.6 36.6 48.5
----------- ----------- -----------
South East England (excl. Greater
London) 264.1 224.1 160.8
----------- ----------- -----------
South West England 14.8 10.3 12.8
----------- ----------- -----------
Scotland, Wales and Northern Ireland 17.8 27.8 11.8
----------- ----------- -----------
Gross loans and receivables 1,039.4 879.8 962.8
----------- ----------- -----------
Allowance for impairment (2.6) (0.8) (0.6)
----------- ----------- -----------
Total 1,036.8 879.0 962.2
----------- ----------- -----------
Loan-to-value 57% 58% 59%
----------- ----------- -----------
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
Consumer mortgages
----------- ----------- -----------
Central England 18.3 21.6 19.9
----------- ----------- -----------
Greater London 11.5 14.7 13.5
----------- ----------- -----------
Northern England 18.9 22.0 21.2
----------- ----------- -----------
South East England (excl. Greater
London) 31.9 36.9 35.3
----------- ----------- -----------
South West England 9.5 12.1 11.0
----------- ----------- -----------
Scotland, Wales and Northern Ireland 4.8 6.2 5.3
----------- ----------- -----------
Gross loans and receivables 94.9 113.5 106.2
----------- ----------- -----------
Allowance for impairment (0.3) (0.3) (0.3)
----------- ----------- -----------
Total 94.6 113.2 105.9
----------- ----------- -----------
Loan-to-value 55% 58% 56%
----------- ----------- -----------
Under its credit policy, the Real Estate Finance business lends
to a maximum loan-to-value of 70% for investment loans and 60% for
residential development loans and up to 65% for pre-let commercial
development loans (based on gross development value), and the
Consumer Mortgages business lent to a maximum of 90%.
20. Cash flow statement
20.1 Cash and cash equivalents
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
----------- ----------- -----------
Cash and balances at central banks (per
the balance sheet) 109.6 101.9 105.8
----------- ----------- -----------
Less : Cash ratio deposits (1.6) - -
----------- ----------- -----------
108.0 101.9 105.8
Loans and advances to banks (per the
balance sheet) 42.0 67.3 48.4
----------- ----------- -----------
150.0 169.2 154.2
----------- ----------- -----------
Cash ratio deposits are mandatory deposits with the Bank of
England which are not available for use in the Group's day-to-day
operations.
20.2 Issue of ordinary shares
On 24 January 2020, the Company issued 145,164 ordinary shares
for a par value of GBP58,066 and total proceeds of GBP1,021,401.
Accordingly, at June 2020 the Company had a total of 18,622,664
ordinary shares in issue (December 2019 and June 2019:
18,477,500).
Appendix to the interim report:
Alternative performance measures
Key performance indicators
(i) Margin ratios
Net interest margin is calculated as interest income and similar
income less interest expense and similar charges for the financial
period as a percentage of the average loan book, net revenue margin
is calculated as operating income for the financial period as a
percentage of the average loan book and gross revenue margin is
calculated as interest receivable and similar income plus fee and
commission income for the financial period as a percentage of the
average loan book. The calculation of the average loan book is the
average of the monthly balance of loans and advances to customers,
net of provisions, over seven or 13 months as appropriate for the
financial period. The resulting margins for June 2020 are
multiplied by 366/182 and margins for June 2019 are multiplied by
365/181 to give an annual equivalent comparable to the annual
results:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
Net interest margin
Interest receivable and similar income 100.7 92.3 191.4
Interest expense and similar charges (22.8) (21.8) (46.0)
Net interest income 77.9 70.5 145.4
Net revenue margin
Net interest income 77.9 70.5 145.4
Net fee and commission income 7.0 10.9 20.1
Operating income 84.9 81.4 165.5
Gross revenue margin
Interest receivable and similar income 100.7 92.3 191.4
Fee and commission income 7.5 11.2 20.9
Gross revenue 108.2 103.5 212.3
Opening loan book 2,450.1 2,028.9 2,028.9
Closing loan book 2,377.5 2,278.3 2,450.1
Average loan book 2,439.5 2,135.0 2,252.4
Net interest margin 6.4% 6.7% 6.5%
Net revenue margin 7.0% 7.7% 7.3%
Gross revenue margin 8.9% 9.8% 9.4%
The margin ratios all measure the yield of the loan book.
(ii) Cost ratios
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book, cost of funds is calculated at interest
expense for the financial period as a percentage of average loan
book and cost to income ratio is calculated as operating expenses
for the financial period as a percentage of operating income for
the financial period. The resulting ratios for June 2020 are
multiplied by 366/182 and margins for June 2019 are multiplied by
365/181 to give an annual equivalent comparable to the annual
results:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
Impairment losses on loans and advances
to customers 31.5 17.8 32.6
----------- ----------- -----------
Loan modification losses 3.6 - -
----------- ----------- -----------
35.1 17.8 32.6
----------- ----------- -----------
Average loan book 2,439.5 2,135.0 2,252.4
----------- ----------- -----------
Cost of risk 2.9% 1.7% 1.4%
----------- ----------- -----------
Interest expense 22.8 21.8 46.0
----------- ----------- -----------
Average loan book 2,439.5 2,135.0 2,252.4
----------- ----------- -----------
Cost of funds 1.9% 2.1% 2.0%
----------- ----------- -----------
Operating expenses 44.7 45.5 94.2
----------- ----------- -----------
Operating income 84.9 81.4 165.5
----------- ----------- -----------
Cost to income ratio 52.7% 55.9% 56.9%
----------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment losses. The cost of funds measures the cost
of money being lent to customers. The cost to income ratio measures
how efficiently the Group is utilising its cost base in producing
income.
(iii) Return ratios
Annualised adjusted return on average assets is calculated as
the adjusted profit after tax for the financial period as a
percentage of average assets, annualised adjusted return on average
equity is calculated as the adjusted profit after tax for the
financial period as a percentage of average equity and annualised
adjusted return on required equity is calculated as the adjusted
profit after tax for the financial period as a percentage of
average required equity.
Further details of adjusted profit are given in Appendix Note
(vi), and a reconciliation of adjusted profit after tax to
statutory profit after tax is provided on page 20.
Average assets is calculated as the average of the monthly
assets balances, over seven or 13 months as appropriate for the
financial period, average equity is calculated as the average of
the monthly equity balances over seven or 13 months as appropriate
for the financial period and average required equity is calculated
as the average of the monthly balances of total required equity
over seven or 13 months as appropriate for the financial period.
Total required equity is calculated as the equity required to
achieve a CET1 ratio of 12%. The resulting returns for June 2020
are multiplied by 366/182 and margins for June 2019 are multiplied
by 365/181 to give an annual equivalent comparable to the annual
results:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
Adjusted profit after tax 4.5 15.2 33.0
----------- ----------- -----------
Opening assets (after IFRS 16 transition
adjustment - see below) 2,682.8 2,448.6 2,448.6
----------- ----------- -----------
Closing assets 2,630.7 2,607.1 2,682.8
----------- ----------- -----------
Average assets 2,728.4 2,476.9 2,554.9
----------- ----------- -----------
Opening equity (after IFRS 16 transition
adjustment - see below) 254.1 237.0 237.0
----------- ----------- -----------
Closing equity 258.3 240.3 254.1
----------- ----------- -----------
Average equity 260.1 240.5 243.6
----------- ----------- -----------
Opening required equity 251.8 217.8 217.8
----------- ----------- -----------
Closing required equity 246.6 236.8 251.8
----------- ----------- -----------
Average equity 253.2 226.0 234.5
----------- ----------- -----------
Annualised adjusted return on average
assets 0.3% 1.2% 1.3%
----------- ----------- -----------
Annualised adjusted return on average
equity 3.5% 12.7% 13.5%
----------- ----------- -----------
Annualised adjusted return on required
equity 3.6% 13.6% 14.1%
----------- ----------- -----------
A reconciliation of assets and opening equity to the balance
sheet at 1 January 2019 is as follows:
Assets Opening equity
GBPmillion GBPmillion
Balance sheet assets 2,444.3 237.1
----------- --------------
IFRS 16 transition adjustment 4.3 (0.1)
----------- --------------
2,448.6 237.0
----------- --------------
Return on average assets demonstrates how profitable the Group's
assets are in generating revenue. Return on average equity is a
measure of the Group's ability to generate profit from the equity
available to it. Return on required equity relates profitability to
the capital that the Group is required to hold.
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book, at the
period end, divided by deposits from customers at the period end,
and the total funding ratio is calculated as the total funding at
the period end, being the sum of deposits from customers,
borrowings under the Term Funding Scheme, Tier 2 capital and
equity, divided by the loan book at the period end:
June June December
2020 2019 2019
GBPmillion GBPmillion GBPmillion
----------- ----------- -----------
Loan book 2,377.5 2,278.3 2,450.1
----------- ----------- -----------
Deposits from customers 1,999.2 2,001.5 2,020.3
----------- ----------- -----------
Borrowings under the Term Funding Scheme and
Index Long-Term Repos 268.1 263.5 308.5
----------- ----------- -----------
Tier 2 capital (including accrued interest) 50.7 50.5 50.6
----------- ----------- -----------
Equity 258.3 240.3 254.1
----------- ----------- -----------
Total funding 2,576.3 2,555.8 2,633.5
----------- ----------- -----------
Loan to deposit ratio 118.9% 113.8% 121.3%
----------- ----------- -----------
Total funding ratio 108.4% 112.2% 107.5%
----------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Adjusted earnings per share
Adjusted earnings per ordinary share are calculated by dividing
the adjusted profit attributable to equity holders of the parent by
the weighted average number of ordinary shares as follows:
June June December
2020 2019 2019
---------- ---------- ----------
Adjusted profit attributable to equity holders
of the parent (GBP millions) 4.5 15.2 33.0
---------- ---------- ----------
Weighted average number of ordinary shares
(number) 18,603,521 18,476,628 18,476,280
---------- ---------- ----------
Adjusted earnings per share (pence) 24.2 82.3 178.6
---------- ---------- ----------
(vi) Adjusted profit
Adjusted profit before tax was GBP5.8 million (June 2019:
GBP18.8 million, December 2019: GBP41.1 million). Adjusted profit
after tax was GBP4.5 million (June 2019: GBP15.2 million, December
2019: GBP33.0 million).
The Group uses adjusted profit for planning and reporting
purposes, as it improves the comparability of information between
reporting periods. The adjustments to profit relate to
non-controllable items or other items that fall outside of the
Group's core business activities.
Fair value amortisation relates to the acquisition of 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.
Transformation costs for 2020 are made up mainly of the costs of
the Motor Transformation Programme and the costs of potential
M&A activity (June 2019: comprised principally the costs of the
Motor Transformation Programme and the costs to date of setting up
the Group's derivatives capability, December 2019: comprised
principally costs of the Motor Transformation Programme and
treasury development).
Bonus payments of GBP0.2 million (June 2019: GBPnil million,
December 2019: GBP0.1 million) relate to a long term incentive plan
that was set up for a small number of employees on the creation of
the Commercial Finance business. The scheme is based on profits
earned by that business up to the end of 2019, and is payable in
2020 and 2021.
The revaluation deficit of GBP1.1 million at December 2019
related to stamp duty and irrecoverable VAT incurred on the
acquisition of a freehold property during the year.
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 and give a true and fair view of the
assets, liabilities, financial position and profit of the
undertakings included in the consolidation as a whole;
-- 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.
Paul Lynam Lord Forsyth
Chief Executive
Officer Chairman
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
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of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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