TIDMWBS
RNS Number : 6736G
West Bromwich Building Society
26 November 2020
West Bromwich Building Society
Half-year results announcement
for the six months to 30 September 2020
The West Brom today announces its results for the six months to
30 September 2020.
Key highlights:
-- GBP248m of new mortgage lending (30 September 2019: GBP251m),
with 48% of new mortgages to first-time buyers (30 September 2019:
56%)
-- First lender to launch new mortgage product proposition
specifically designed to support mortgage prisoners, who have
previously been trapped in paying higher rates due to strict
borrowing criteria
-- Maintained our average rate for savers at 17%(1) above the
market average for the period, rising to 52% above by the period
end
-- Statutory profit before tax of GBP2.9m (30 September 2019:
(restated): GBP5.5m) after setting aside additional provisions for
credit losses in respect of the anticipated economic impact arising
from the COVID-19 pandemic
-- A strong capital position with the Common Equity Tier 1 (CET
1) capital ratio improving to 16.5% (31 March 2020: 15.9%)
-- Improving Net Promoter Score(R)2 from +73 at March 2020 to
+75, with customer satisfaction remaining strong at 96% (31 March
2020: 96%)
Jonathan Westhoff, Chief Executive, commented:
Set against the challenges of operating in full lockdown for
half of the period, I'm pleased to report the Society has delivered
a robust first half performance. Throughout this period, we have
been focusing on prioritising the wellbeing of our members,
colleagues and communities, remaining operationally and financially
resilient and ensuring our products, services and premises are safe
and accessible.
Prioritising the wellbeing of our members, colleagues and
communities
We responded to the first lockdown back in March by adapting our
operating model to ensure we could maintain our high service
standards. We did not place any employees on the furlough scheme,
and ensured all employees were paid their full salary irrespective
of whether they are required to work their full contractual hours.
We supported homeworking for a high number of employees, and
reduced the number of people working in our head office and
branches to enable social distancing.
A priority was to support our most financially vulnerable
borrowers, and help them access a payment deferral and other
specific support measures if required. We set up a dedicated team
to support these customers, and as of 30 September 2020, 14% of all
our residential mortgages had taken a payment deferral. For those
that had reached the end of their initial payment deferral, 84% had
either restarted their monthly payments or redeemed their mortgage,
with 16% requiring an extension, representing 2% of total
residential mortgages outstanding.
Our activity in the mortgage market, after a relatively short
hiatus at the start of the first lockdown, recovered strongly. The
knock on effects of a pause in the housing market mean that gross
lending for the six months to September does not accurately reflect
the true strength of our performance; compared with the same period
last year, our application volumes were up 39% to GBP563m.
Although we took the responsible approach to limiting the amount
of high loan to value lending, this did have an impact on the
volume of first-time buyer activity. This segment of the market,
however, is still at the heart of our Purpose and we were able to
support a further 699 first-time buyers to become homeowners in the
six months to 30 September 2020.
With Bank of England Base Rate at an all-time low of 0.10%, and
the prospect of the rate potentially turning negative, savers have
been hit hard by the pandemic with savers' rates at extremely low
levels. Despite this, throughout the first six months of the year,
the Society has continued to help savers by paying average rates
some 17%(1) above the market average(;) this had increased to 52%
by 30 September. In monetary terms, this means the Society has paid
an additional annualised GBP2.6m in interest and equivalent to
GBP5.7m using the period end rates. While this is lower than
previous years, this is reflective of our duty to balance the needs
of savers and borrowers.
An area that has been hit hard by the pandemic is the third
sector, with donations and fundraising levels falling due to the
lockdown restrictions. As a mutual, supporting the communities in
which we operate is a core part of our ethos, and we were able to
channel our fundraising efforts to helping groups most in need as a
result of the pandemic. This includes donations to local food
banks, care packages to new mothers at Walsall Manor Hospital, and
colleagues volunteering to provide hot meals to the homeless. We
also raised GBP30,000 to support the Midlands Air Ambulance to
support the vital, lifesaving work they do across the region.
In the face of all the challenges the pandemic has bought, I am
proud to say that our colleagues have maintained their commitment
to outstanding customer service. The Society's Net Promoter Score
(R)2 , which measures how likely our members are to recommend us,
has increased to 75+ (31 March 2020: +73), exceeding the average
across the financial services sector +50. As well as this, our
customer satisfaction rating maintained at 96% and is a testament
to the hard work and flexibility displayed by all colleagues during
this crisis.
Remaining operationally and financially resilient
Of course the economic impact of the actions taken to contain
the spread of COVID-19 has impacted on our reported profits, which
reduced to GBP2.9m (30 September (restated): GBP5.5m). However,
pre-tax profit before the impact of total impairment provisions
increased by 19.3% to GBP10.5m year on year and we preserved our
capital strength, with the CET1 ratio increasing to 16.5% (31 March
2020: 15.9%).
At 30 September, Group arrears for the core residential book
stood at 0.42% (31 March 2020: 0.34%) which continues to compare
favourably against the UK Finance average of 0.82%(3) . As
employment markets start to reflect the impact of the actions
employed to contain the spread of COVID-19, there is a likelihood
that these levels will increase.
Ensuring our products, services and premises are safe and
accessible
An important group to benefit from an exclusive product was
mortgage prisoners. These are borrowers trapped paying higher
interest rates, following the financial crisis in 2008, due to
being unable to remortgage to cheaper deals as they didn't meet the
affordability criteria introduced as a consequence of the lessons
learned in that crisis. Although this was only the start and much
more work needs to be done to support mortgage prisoners, we're
proud to have been the first lender to implement the FCA's new
modified affordability approach, and launch a mortgage product
proposition specifically for these borrowers. We also launched an
exclusive product to NHS employees with a higher loan to value, to
help these key workers when other products in the market were
closed to them.
As we move into the second half of the year, we are adapting our
products regularly with the ever changing market conditions, and we
will seek to reintroduce more first-time buyer products once we are
comfortable the risks to them and the Society are more balanced,
especially as we are yet to see the full impact of the lockdown
measures in respect to the housing market and employment.
Looking ahead
I am extremely proud of the efforts of all my colleagues, who
have remained resolute in their determination to ensuring the
Society could continue to deliver its Purpose. When considering the
progress the Society has made over the last decade to repair its
balance sheet and deliver a strong capital position, this gives us
the confidence that we will certainly weather the storm financially
and, most importantly, continue to support both our current and
future members. For the second half of the year, the outlook
remains uncertain as we grapple with the 'second wave' of the
pandemic, and second lockdown, despite the most recent optimism of
a vaccine potentially improving the longer term outlook. That is
why we will adapt and continue deliver the best service for both
our saving and borrowing members and, crucially, be there for those
who find themselves in financial difficulty as a result of this
crisis.
(1) Average market rates sourced from Bank of England Bankstats
table A6.1
(2) Net Promoter Score and NPS are trademarks of Satmetrix
Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
(3) Average market rates sourced from UK Finance at 30 September
2020
ENQUIRIES
The West Brom PR Manager Beth Meads
07507 634128
Jonathan Westhoff - Chief Executive
Ashraf Piranie - Group Finance & Operations Director
West Bromwich Building Society
Condensed consolidated
half-yearly financial information
30 September 2020
Delivering our Purpose through the pandemic: Three areas of
focus.
1) Prioritising the wellbeing of our members, colleagues and communities.
Supporting the wellbeing of members, colleagues and communities
has remained top of our priority list. Throughout the first half of
the year we have:
-- Approved payment deferrals for 14% of our residential
mortgage borrowers since the pandemic started;
-- Continued to reward savers by paying GBP2.6m more in interest than the market average;
-- Committed to not place any colleagues on furlough or reduce
payments where working hours or activities have reduced;
-- Supported the wellbeing of colleagues by introducing a range
of digital tools and activities to help people stay connected
through the pandemic; and
-- Progressed multiple fundraising and volunteering initiatives
for those causes hit hard by the pandemic.
2) Ensuring our products, services and premises are safe and accessible.
Given the challenges of the pandemic, providing products and
services in a safe and accessible way is more important than ever.
Throughout the first half of the year we have:
-- Extended an additional GBP248m of new residential mortgage
lending with 48% of new mortgages to first-time buyers;
-- Introduced a specific mortgage product to support NHS workers with small deposits;
-- Become the first lender to launch a specific proposition to help mortgage prisoners;
-- Prioritised enquiries from key workers;
-- Made sure all of our 36 branches and head office site are
COVID-19 secure and implemented social distancing; and
-- Enabled remote working for over 90% of our head office colleagues.
3) Remaining operationally and financially resilient.
The successful transition of our operating model and responsible
management of risk has delivered both operational and financial
resilience. Throughout the first half of the year we have:
-- Continued to provide all essential services to members;
-- Improved Net Promoter Score from +73 at March 2020 to +75,
with customer satisfaction remaining strong at 96%;
-- Improved our financial strength by increasing our CET 1 ratio to 16.5%; and
-- Reported a statutory profit before tax of GBP2.9m after
setting aside provisions for the impact of the pandemic.
Chief Executive's Business Review
Progressing by delivering our Purpose in uncertain times
The Society has delivered a robust first half performance
despite the very significant uncertainties that faced the UK
economy, and indeed all global economies, with the country having
entered into full lockdown at the start of this reporting
period.
As I covered in detail in my report at the year-end, from the
onset of the pandemic the Society's focus has been on ensuring the
Society remains operationally resilient, continuing to provide
members with the essential services on which they rely, while doing
everything we can to keep both members and colleagues safe.
After a very short period of adapting our operating model to the
challenges, we have remained fully operational. We have maintained
our high service standards, most notably in the mortgage market
where, after a short hiatus, activity recovered strongly. Indeed,
the new mortgage lending volume we report for the period to 30
September does not truly reflect the strength of our performance;
the knock-on effects of the initial lockdown period mean that much
of the activity of the first half will not show on the balance
sheet until the second half of the year. Our application volumes
were up 39% to GBP563m compared to the first six months of last
year.
Shortly after the period end, the Society further demonstrated
its commitment to supporting borrowers by becoming the first UK
lender to announce help to those borrowers who are referred to as
'mortgage prisoners', those who despite meeting their mortgage
commitments for many years, would not pass the stringent
affordability tests introduced following the 2008 financial crisis.
Our view was that in these times, more than ever, these borrowers
deserved to be helped, and it was time that someone took the
lead.
For savers, we continue to face the challenge of the ultra-low
interest rate environment. At the period end, we were paying our
savers 52% above the market average (30 September 2019: 52%), as we
strive to give what support we can. Regrettably for our savers we
can't be optimistic in terms of any material increase in interest
rates going forward, particularly as the prospect of Bank Rate
turning negative remains a serious consideration for the Monetary
Policy Committee.
Of course, with the future as uncertain as it is and with the
'second wave' of the pandemic now upon us, the range of potential
outcomes for economic recovery become both more unpredictable and
possibly increasingly pessimistic. The 'V' shaped recovery
initially anticipated is now less probable with a more enduring
downturn more likely. For the West Brom, the main impact of this
will be around credit provisioning, not only as unemployment
increases, and some borrowers struggle to meet their mortgage
commitments, but also as certain segments (such as high street
retail and the hospitality sector for example) face immense
challenges to their recovery. The latter will impact the
performance of the legacy commercial real estate lending that the
Society is still managing, even though this is now a fraction of
the exposure the Society had historically.
At the end of October, the UK government announced a second
lockdown for England, initially for a period of four weeks. As with
the first lockdown, the Society will continue to provide members
with essential services and will not be placing any employees on
furlough, will ensure all employees are paid their full salary
irrespective of whether they are required to work their full
contractual hours and will support fully the mortgage payment
deferral scheme. Regardless of the ongoing external challenges and
future uncertainties the Society remains extremely well positioned
to support members through the times that may lie ahead,
underpinned by its capital strength.
Performance update
Despite the impact additional credit provisioning has had in
terms of reduced profits, the capital position has strengthened
further to a Common Equity Tier 1 (CET 1) ratio of 16.5% (31 March
2020: 15.9%) and Leverage Ratio of 7.0% (31 March 2020: 6.9%). This
capital strength, along with access to the Bank of England's latest
funding scheme, has allowed the Society to continue to lend at very
competitive interest rates. At GBP248m our level of new mortgage
lending is in line with the first six months of the last financial
year (30 September 2019: GBP251m), despite a 37% fall in market
activity for the first two months of the period.
However, as stated earlier, this does not reflect fully the
activity of the first half with the number of new mortgage
applications increasing by 39% to GBP563m (30 September 2019:
GBP406m). Although pre-tax profits have reduced by 47.3%, this is
primarily as a result of the need for impairment provisions
attributable to the legacy commercial real estate loan exposure
which increased by GBP5.8m (30 September 2019: decrease of
GBP0.3m). Pre-tax profit before the impact of total impairment
provisions increased by 19.3% to GBP10.5m.
As reported at the year end, and in line with guidance from
RICS, we continue to note the material valuation uncertainty in the
West Brom Homes (WBH) investment portfolio. Accordingly the interim
valuation is based on the lower gain from either the Halifax or
Nationwide house price indices.
Although there have been additional costs incurred as a
consequence of the need to adapt the business to the initial
lockdown and subsequent 'social distancing' conditions, the ongoing
focus on efficiency resulted in costs being held broadly flat at
GBP23.1m (September 2019: GBP22.9m).
Capital resources
Transitional Full implementation Transitional
CRD IV of CRD IV CRD IV Full implementation
rules (3) rules of CRD IV(3)
30-Sep-20 30-Sep-20 31-Mar-20 31-Mar-20
GBPm GBPm GBPm GBPm
Members' interests and equity
(excluding Additional Tier
1) 387.6 387.6 383.8 383.8
Permanent interest bearing
shares (PIBS) deduction (7.8) (7.8) (8.9) (8.9)
Other adjustments (1) (0.5) (28.9) (1.6) (29.7)
------------------------------ ------------- -------------------- ------------- ----------------------------------
Common Equity Tier 1 (CET 1)
capital 379.3 350.9 373.3 345.2
Additional Tier 1 capital 7.8 - 8.9 -
------------------------------ ------------- -------------------- ------------- ----------------------------------
Total Tier 1 capital 387.1 350.9 382.2 345.2
Tier 2 capital (2) 21.7 21.7 21.6 21.6
Total regulatory capital
resources 408.8 372.6 403.8 366.8
------------------------------ ------------- -------------------- ------------- ----------------------------------
Risk weighted assets (RWA) 2,292.9 2,264.5 2,347.5 2,308.5
Leverage ratio exposure 5,519.0 5,490.6 5,569.6 5,541.5
------------------------------ ------------- -------------------- ------------- ----------------------------------
Capital ratios % % % %
Common Equity Tier 1 ratio
(as a percentage of RWA) 16.5 15.5 15.9 15.0
Common Equity Tier 1 before
IFRS 9 transitional
arrangements
(as a percentage of RWA) 15.5 15.5 15.0 15.0
Tier 1 ratio (as a percentage
of RWA) 16.9 15.5 16.3 15.0
Total capital ratio (as a
percentage of RWA) 17.8 16.5 17.2 15.9
Leverage ratio 7.0 6.4 6.9 6.2
------------------------------ ------------- -------------------- ------------- ----------------------------------
1 Other adjustments mainly comprise IFRS 9 transitional
arrangements and deductions for intangible assets and deferred tax.
Regulation (EU) 2020/873, issued in June 2020, extends the period
of IFRS 9 transition, for capital purposes, as part of a series of
measures to mitigate the impact of the COVID-19 pandemic. Under the
revised arrangements, 100% of the increase in stage 1 and stage 2
expected credit losses (ECLs) from 1 January 2020 can be added back
to CET 1 capital with this relief to be phased out over the five
financial years ending 31 March 2025. The relief for increases in
ECLs arising on IFRS 9 implementation and from 1 April 2018 to 31
December 2019 continues to amortise in accordance with the original
arrangements, currently at 70%. By way of derogation from point (b)
of paragraph 7 of CRR Article 473a, the Society has exercised the
option set out in Regulation (EU) 2020/873 to include the value of
IFRS 9 transitional relief within its total exposure measure and
risk weight it at 100% when calculating its capital
requirements.
2 Tier 2 capital comprises subordinated liabilities excluding
accrued interest.
3 The 'Full implementation of CRD IV' basis includes the full
unwind of IFRS 9 transitional relief.
Commitment to borrowers
The Society's new lending performance has been supported by very
competitive purchase and remortgage products. In part driven by the
market environment, the average loan to value of new lending, at
71% was lower than for the comparative period last year (30
September 2019: 79%). However, this reflects the decision to
restrict high loan to value products until such time as the
economic outlook, and its impact on the housing market in
particular, is better understood. There is a fine line between
helping borrowers with low deposits into home ownership, and
exposing those same borrowers to the harrowing experience of not
being able to meet their mortgage payments and maybe even suffering
from 'negative equity'.
Even with this responsible approach, in the first six months of
the year the Society has supported a further 699 first-time buyers
(30 September 2019: 790) to become home owners and this remains a
segment at the heart of our Purpose. These borrowers did include,
quite early into the lockdown period, one exception to our high
loan to value limitation, when we offered a product restricted to
NHS workers. This product helped ensure that those who were
contributing so much to the pandemic response were still able to
access the market with a much smaller deposit, where they were able
to demonstrate this remained affordable. While the overall lending
to first-time buyers has reduced compared with recent years, we
will seek to reintroduce more products suited to the needs of
first-time buyers once we consider that the risks to them and the
Society are a little more balanced than they have appeared of late,
particularly in respect of the housing market and employment.
There is one other segment that has been neglected for too long
given the constraints introduced by regulation regarding
affordability assessment; mortgage prisoners. These are borrowers
trapped paying higher interest rates than they may need to, despite
being up to date with payments, because they have been unable to
re-mortgage to new cheaper deals as they would not meet the
affordability criteria, primarily in terms of meeting the required
'stressed interest rate' introduced as a consequence of the
financial crisis of 2008. Following the FCA's introduction of a
'modified affordability' approach to address this constraint, the
Society became the first lender to offer support to these borrowers
through the design and launch of a new mortgage product
proposition. This market leading stance was well received by
commentators and whilst we acknowledge that this proposition will
not be able to help all such trapped borrowers, we hope that we
have set an example for others to follow. Indeed recently, a number
of lenders have now agreed to offer help to these borrowers.
Commitment to savers
With the Bank Rate at an all-time low of 0.10% and the realistic
prospect of this rate turning negative, it is perhaps unsurprising
that interest rates for savers are now at extremely low levels. The
Society has, however, continued to do what it can to help its
savers. During the first 6 months of the year, the Society paid
rates 17%(1) above (2019: 50% above) the market average, this had
increased to 52% by 30 September. This means that during this
period the Society has paid an additional annualised GBP2.6m (30
September 2019: GBP13.7m) in interest (equivalent to GBP5.7m using
the period end rates). As a consequence of this, and balancing the
needs of our borrowers and savers, the Net Interest Margin reduced
modestly to 1.04% (31 March 2020: 1.06%).
(1) Average market rates sourced from Bank of England Bankstats
table A6.1
Managing the potential credit impact of the pandemic
The long-term impact of the pandemic on the Society's borrowers
is very much dependent on how the economy emerges from the actions
taken to manage the containment of the virus. We are continuing to
monitor all developments closely and use a wide range of future
economic scenarios to assess the potential economic outcomes, which
include a large rise in unemployment, short term reductions to
house prices, and muted growth thereafter.
Where the economy emerges in terms of the range of these
scenarios, will dictate the credit losses that result. The
robustness of the housing market over the six months to 30
September is not necessarily an indicator of whether the government
interventions have succeeded in supporting this important segment
of the economy going forward. The income support mechanisms,
mortgage payment deferral, pent up demand for house moves built up
during the full lockdown and the Stamp Duty Land Tax concession all
combine to mask the underlying position of the housing market.
While the longer term trajectory remains uncertain, the Society's
exposure to credit losses from residential loans is mitigated by a
modest average loan to value, with 79% of loans being below 75%.
Taking into account the scenarios assessed by the Society, a
further GBP0.2m was set aside in the period to cover potential
residential lending credit losses.
Through the first half of the year the performance of the
Society's legacy commercial exposures, which include particular
concentrations in retail, healthcare and leisure sectors, has been
aligned with our expectations at the financial year end. However,
there is an increased potential for underperformance over the
medium to longer term as changing consumer habits start to emerge
and the financial strength of tenants becomes more stressed due to
the continued impact of COVID-19 restrictions on trading.
As a consequence we have taken a more pessimistic view of the
portfolio, predominately in relation to the retail linked
exposures, and set aside a further GBP5.8m in provisions to cover
potential credit losses. This takes the total provision increase
since the onset of the pandemic to GBP17.9m. Through a combination
of provisions and capital held for potential losses above this
level, the total loss cover for this legacy portfolio stands at
over 32% with a full breakdown of this position included on page 23
of this report.
Supporting our borrowers through the pandemic
Our teams have continued to work hard to ensure borrowers who
need to access a payment deferral period are able to do so, with
specific support measures put in place for our most financially
vulnerable borrowers. As at 30 September 14% of all our residential
mortgages had utilised the support of an initial payment deferral
period, 5,306 accounts. For borrowers who had reached the end of
their initial deferral period at 30 September, 84% had either
recommenced payments or redeemed their mortgage. Only 16% required
an extended period of deferral representing just 2% of total
residential mortgages outstanding.
At 30 September, Group arrears for the core residential book
stood at 0.42% (31 March 2020: 0.34%) which continues to compare
favourably against the UK Finance average of 0.82%(2) (31 March
2020: 0.74%). This increase is largely attributable to arrears in
the Buy to Let portfolio where we have deferred the appointment of
Law of Property Act Receivers during the pandemic. Needless to say
the Society does expect further increases in arrears rates through
the second half of the year as employment markets start to
anticipate the unwind of the pandemic support mechanisms. We will
continue to provide those borrowers who are facing an unexpected
period of employment challenge with an empathetic, flexible and
fair approach to forbearance options.
(2) Average market rates sourced from UK Finance at 30 September
2020
Adapting our operating model to maintain excellent service
levels
In the face of the operational challenges the pandemic has
brought, I am proud to say that our colleagues have maintained our
commitment to outstanding customer service. The Society's Net
Promoter Score (R)3 (NPS), which measures how likely our members
are to recommend us, has increased to +75 (31 March 2020: +73),
well in excess of the average across financial services of +50,
with our customer satisfaction rating maintained at 96% (31 March
2020: 96%). These results are testament to the commitment of our
colleagues to work flexibly during the pandemic while maintaining a
resolute focus on best in class customer service and good customer
outcomes.
(3) Net Promoter Score and NPS are trademarks of Satmetrix
Systems, Inc., Bain & Company, Inc., and Fred Reichheld.
Our Member and Employee councils have continued to meet through
the pandemic, enabled by videoconferencing technology and have
provided much valued input to key focus areas such as our Corporate
Social Responsibility (CSR) strategy, defining our Member
Commitments, supporting customers who find themselves in
financially vulnerable situations and how we continue to respond to
the challenges of the pandemic along with a demonstration of what
will become our new online savings system. This project represents
a significant investment in the Society's future and once
delivered, will represent a step change in the Society's digital
capabilities. The new system will provide both new and existing
members with the ability to open and view accounts across a range
of desktop and mobile devices. This development complements a range
of recent digital initiatives such as our recently launched online
mortgage portal.
Community response
Through the first six months of the year the Society's
fundraising efforts have been directed to helping groups most in
need as a result of the pandemic. Specific activities have included
collections in support of the West Bromwich Food Bank and the
Trident Reach supported living complex in Wednesbury, with our
colleagues also working to support the M idland Langar Seva Society
who provide hot meals to the homeless. These fantastic
contributions sit alongside our ongoing work to support the
Midlands Air Ambulance with over GBP30,000 raised for this service
during our partnership.
Principal risks and uncertainties
The Society continues to recognise that effective risk
management is essential to achieving the Society's objectives in an
operating environment where the nature of the threats which prevail
is continually evolving.
Where applicable, this report provides an update on the
principal risks and uncertainties reported on pages 33 to 39 of the
2019/20 Annual Report and Accounts.
Principal risks
The Society's identified principal risk categories have remained
unchanged in the period. The principal risks and uncertainties
reported at the year-end were updated to incorporate the impact of
COVID-19. To avoid repetition, we have chosen to focus on
developments in certain areas during the first 6 months of the
year.
Business conditions and the economic environment
As unavoidably referred to in many places in this report, the UK
economic environment remains extremely uncertain and therefore
challenging given both COVID-19 and Brexit. Both take us into
uncharted territory, with a wide range of potential economic
outcomes.
The government's suite of measures, combined with those of the
Bank of England and regulators, to mitigate the economic impact
from COVID-19, including the Job Retention Scheme (JRS), payment
deferrals, a new Term Funding Scheme with additional incentives for
Small and Medium-sized Enterprises (TFSME), the suspension of Stamp
Duty Land Tax and Bank Rate being reduced to 0.10%, will need to
unwind over time. Others such as Bank Rate turning negative may
still be introduced in the future, an action that has never been
used before and hence the consequences of which cannot be fully
assessed.
Although our prime focus in terms of the risk of a fall in house
values is the impact this would have on borrowers who fall into
payment difficulties, there would also be an immediate impact on
the Society's reported financial performance, in terms of
profitability, resulting from the Society's residential investment
subsidiary, West Brom Homes. These properties are revalued at each
financial reporting date, and any change recorded as a gain or
loss. This introduces short term volatility from an asset class
held for long term return. Some GBP17.8m of capital, 12.6% of the
portfolio's total value, has been set aside to recognise this
potential volatility.
Credit risk
The government has recently announced extensions to some of the
support schemes referred to above, including the furlough scheme.
As these approach their end, the impact on unemployment may create
a knock on impact on arrears levels and, where a borrower's
difficulties become extended, further credit losses.
At the year-end, the Society's IFRS 9 provisioning and stress
testing models had already been enhanced to incorporate a
relatively severe downside position which included delays or
permanent reductions in rental receipts or asset values. In the
first six months of the year, actual experience has broadly been
better than expected, although there are specific instances where
performance of individual accounts has deteriorated resulting in
additional provision. The retail exposures in the commercial
lending portfolio are particularly susceptible to such shocks
although, as detailed already, the combination of provisions set
aside against and capital directly allocated to these exposures is
significant. At the period end, coverage against the retail sector
exposures stood at 59.4% (30 September 2019: 49.2%).
Margin compression
The Net Interest Margin has reduced slightly as we do all we can
to balance the support to saving and borrowing members. The
increased application volumes as lockdown restrictions eased, which
have yet to be drawn, are at rates that we expect to support the
margin for the second half of the financial year. As outlined
above, the prospect of negative interest rates remains a very real
one, and if introduced could erode the Net Interest Margin,
although such an impact ought to be limited for this financial
year. The Society is well advanced in planning for the potential
impacts of a negative Bank Rate from an operational
perspective.
Operational resilience and technology investment
The focus on operational resilience remains high to ensure that
critical business services are readily available to meet members'
demands. As outlined at the year-end, COVID-19 resulted in a number
of changes to working practices which impacted the operational risk
profile. The Society has continued to adapt as guidance in this
area evolves. The risk and control environment associated with
remote working is subject to monitoring by Second and Third Line
functions. The Society remains committed to developing an
operational environment that is strong and resilient, meeting
members' and regulatory expectations.
Despite all of the challenges in the year to date, investment in
the core technology platforms, to allow greater digital capability
in both savings and mortgage origination, continued and this is
expected to retain significant management involvement through to
2021.
Outlook
In my report at year-end I reflected on the enormous progress
the Society had made over the last decade to repair its balance
sheet and capital position, to become one which is able to support
its members, even through conditions as extreme as those we are
currently dealing with. This progress has not only allowed the
Society to enter a potential economic stress with the confidence
that we are able to weather the storm financially, but that we can
also contribute to supporting the economy by continuing to lend to
UK households, as we have done in this first reporting period.
While both the near and long-term outlooks continue to be subject
to significant volatility, this resolute commitment to delivering
on our Purpose, in support of the financial wellbeing of our
members, will continue through the second half of the year and
beyond. I would like to conclude by thanking all colleagues for
their enormous efforts to support the continued delivery of the
Society's Purpose during the first half of the financial year.
Jonathan Westhoff
Chief Executive
Forward-looking statements
Certain statements in this half-yearly report are
forward-looking. Although the West Brom believes that the
expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these expectations will
prove to be an accurate reflection of actual results. By their
nature, all forward-looking statements involve risk and uncertainty
because they relate to future events and circumstances that are
beyond the control of the West Brom. As a result, the West Brom's
actual future financial condition, business performance and results
may differ materially from the plans, goals and expectations
expressed or implied in these forward-looking statements. Due to
such risks and uncertainties the West Brom cautions readers not to
place undue reliance on such forward-looking statements. We
undertake no obligation to update any forward-looking statements
whether as a result of new information, future events or
otherwise.
Condensed consolidated
half-yearly financial information
30 September 2020
Condensed consolidated half-yearly Income Statement
for the six months ended 30 September 2020
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited
unaudited Restated* audited
Notes GBPm GBPm GBPm
Interest receivable and similar income
Calculated using the effective interest
method 50.1 58.5 118.6
On instruments measured at fair value
through profit or loss (7.1) (2.0) (4.5)
Total interest receivable and similar
income 43.0 56.5 114.1
Interest expense and similar charges (14.1) (27.8) (55.0)
Net interest receivable 28.9 28.7 59.1
Fees and commissions receivable 0.9 1.1 2.3
Other operating income 2.0 2.2 4.0
Fair value losses on financial instruments (1.8) (5.2) (8.5)
Gains on deconsolidation of commercial
securitisations - - 5.3
Write down of goodwill - - (0.5)
Total income 30.0 26.8 61.7
Administrative expenses (19.5) (19.4) (38.2)
Depreciation and amortisation 10 (3.6) (3.5) (8.0)
Operating profit before revaluation gains,
impairment and provisions 6.9 3.9 15.5
Gains on investment properties 11 2.0 2.8 4.2
Impairment on loans and advances 6 (6.0) (0.5) (17.5)
Provisions for liabilities 7 - (0.7) (0.7)
Profit before tax 2.9 5.5 1.5
Taxation (0.5) (1.0) -
Profit for the period 2.4 4.5 1.5
-------------------------------------------- ------ ---------- ----------- ----------
*30 September 2019 fair value losses on financial instruments
and taxation have been restated as explained in note 4.
Condensed consolidated half-yearly Statement of Comprehensive
Income
for the six months ended 30 September 2020
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
Restated*
GBPm GBPm GBPm
Profit for the period 2.4 4.5 1.5
--------------------------------------------------- ---------------- ---------------- -----------------
Other comprehensive income
Items that may subsequently be reclassified
to profit or loss
Fair value through other comprehensive
income investments
Valuation gains/(losses) taken to equity 3.1 0.3 (2.2)
Taxation (0.6) (0.1) 0.4
Items that will not subsequently be reclassified
to profit or loss
Actuarial losses on defined benefit obligations - - (0.7)
Taxation - - 0.3
--------------------------------------------------- ---------------- ---------------- -----------------
Other comprehensive income for the period,
net of tax 2.5 0.2 (2.2)
--------------------------------------------------- ---------------- ---------------- -----------------
Total comprehensive income for the period 4.9 4.7 0.7
--------------------------------------------------- ---------------- ---------------- -----------------
*30 September 2019 profit for the period has been restated as
explained in note 4.
Condensed consolidated half-yearly Statement of Financial
Position
at 30 September 2020
30-Sep-20 30-Sep-19 31-Mar-20
unaudited
unaudited Restated* audited
Notes GBPm GBPm GBPm
Assets
Cash and balances with the Bank
of England 294.7 197.7 263.5
Loans and advances to credit
institutions 133.3 126.9 123.6
Investment securities 259.1 331.2 285.3
Derivative financial instruments 3.8 4.4 4.5
Loans and advances to customers 8 4,624.0 4,665.2 4,691.6
Current tax assets 0.4 - 0.4
Deferred tax assets 19.9 18.1 20.4
Trade and other receivables 3.6 3.2 4.1
Intangible assets 10 16.0 17.2 16.3
Investment properties 11 140.9 137.5 138.9
Property, plant and equipment 10 26.8 29.8 28.2
------------------------------------ ------ ----------- ----------- ----------
Total assets 5,522.5 5,531.2 5,576.8
------------------------------------ ------ ----------- ----------- ----------
Liabilities
Shares 9 3,719.6 3,982.3 3,846.1
Amounts due to credit institutions 966.5 631.9 883.8
Amounts due to other customers 100.6 105.2 94.6
Derivative financial instruments 61.0 52.7 54.2
Debt securities in issue 12 244.8 322.0 266.3
Deferred tax liabilities 7.2 5.9 6.7
Trade and other payables 11.3 13.7 15.2
Provisions for liabilities 7 0.5 1.5 0.6
Retirement benefit obligations 0.6 3.4 2.7
Subordinated liabilities 16 22.8 22.8 22.8
Total liabilities 5,134.9 5,141.4 5,193.0
------------------------------------ ------ ----------- ----------- ----------
Members' interests and equity
Core capital deferred shares 13 127.0 127.0 127.0
Subscribed capital 15 7.8 8.9 8.9
General reserves 248.9 250.5 246.5
Revaluation reserve 3.3 3.3 3.3
Fair value reserve 0.6 0.1 (1.9)
------------------------------------ ------ ----------- ----------- ----------
Total members' interests and
equity 387.6 389.8 383.8
==================================== ====== =========== =========== ==========
Total members' interests, equity
and liabilities 5,522.5 5,531.2 5,576.8
------------------------------------ ------ ----------- ----------- ----------
*30 September 2019 loans and advances to customers, deferred tax
assets and general reserves have been restated as explained in note
4.
Condensed consolidated Statement of Changes in Members'
Interests and Equity
for the six months ended 30 September 2020
6 months ended
30 September
2020 (unaudited)
Core
capital Fair
deferred Subscribed General Revaluation value
shares capital reserves reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2020 127.0 8.9 246.5 3.3 (1.9) 383.8
Profit for the
period - - 2.4 - - 2.4
Other
comprehensive
income
for the period
(net of tax)
Fair value
through other
comprehensive
income
investments - - - - 2.5 2.5
Total other
comprehensive
income - - - - 2.5 2.5
----------------- --------------- --------------- -------------- --------------- --------------- --------------
Total
comprehensive
income
for the period - - 2.4 - 2.5 4.9
Distribution to
the holders
of core capital
deferred shares - - (0.6) - - (0.6)
Buyback and
cancellation of
subscribed
capital - (1.1) 0.6 - - (0.5)
----------------- --------------- --------------- -------------- --------------- --------------- --------------
At 30 September
2020 127.0 7.8 248.9 3.3 0.6 387.6
----------------- --------------- --------------- -------------- --------------- --------------- --------------
6 months ended
30 September
2019
(unaudited)
Core
capital Fair
deferred Subscribed General Revaluation value
shares capital reserves reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2019 127.0 8.9 246.0 3.3 (0.1) 385.1
Profit for the
period
(restated)* - - 4.5 - - 4.5
Other
comprehensive
income
for the period
(net of tax)
Fair value
through other
comprehensive
income
investments - - - - 0.2 0.2
----------------- --------------- --------------- -------------- --------------- --------------- --------------
Total other
comprehensive
income - - - - 0.2 0.2
----------------- --------------- --------------- -------------- --------------- --------------- --------------
Total
comprehensive
income
for the period
(restated)* - - 4.5 - 0.2 4.7
----------------- --------------- --------------- -------------- --------------- --------------- --------------
At 30 September
2019
(restated)* 127.0 8.9 250.5 3.3 0.1 389.8
----------------- --------------- --------------- -------------- --------------- --------------- --------------
Year ended 31
March 2020
(audited)
Core
capital Fair
deferred Subscribed General Revaluation value
shares capital reserves reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2019 127.0 8.9 246.0 3.3 (0.1) 385.1
Profit for the
financial year - - 1.5 - - 1.5
Other
comprehensive
income
for the year
(net of tax)
Retirement
benefit
obligations - - (0.4) - - (0.4)
Fair value
through other
comprehensive
income
investments - - - - (1.8) (1.8)
Total other
comprehensive
income - - (0.4) - (1.8) (2.2)
----------------- --------------- --------------- -------------- --------------- --------------- --------------
Total
comprehensive
income
for the year - - 1.1 - (1.8) (0.7)
Distribution to
the holders
of core capital
deferred shares - - (0.6) - - (0.6)
=================
At 31 March 2020 127.0 8.9 246.5 3.3 (1.9) 383.8
----------------- --------------- --------------- -------------- --------------- --------------- --------------
*30 September 2019 profit for the financial period and general
reserves have been restated as explained in note 4.
Condensed consolidated half-yearly Statement of Cash Flows
for the six months ended 30 September 2020
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Net cash inflow from operating activities
(below) 37.6 82.2 140.3
-------------------------------------------- ----------------- ----------------- ------------------
Cash flows from investing activities
Purchase of investment securities (14.6) (57.5) (121.8)
Proceeds from disposal of investment
securities 43.8 47.9 124.7
Purchase of property, plant and equipment
and intangible assets (2.1) (3.0) (5.6)
Proceeds from disposal of property,
plant and equipment - 0.6 0.7
-------------------------------------------- ----------------- ----------------- ------------------
Net cash flows from investing activities 27.1 (12.0) (2.0)
-------------------------------------------- ----------------- ----------------- ------------------
Cash flows from financing activities
Repayment of debt securities in issue (21.7) (21.4) (57.5)
Interest paid on subordinated liabilities (1.2) (1.2) (2.5)
Payment of lease liabilities (0.2) (0.3) (0.6)
Distribution to the holders of core
capital deferred shares (0.6) - (0.6)
Buyback and cancellation of subscribed
capital (0.3) - -
------------------------------------------- ----------------- ----------------- ------------------
Net cash flows from financing activities (24.0) (22.9) (61.2)
-------------------------------------------- ----------------- ----------------- ------------------
Net increase in cash 40.7 47.3 77.1
Cash and cash equivalents at beginning
of period 375.8 298.7 298.7
-------------------------------------------- ----------------- ----------------- ------------------
Cash and cash equivalents at end of
period 416.5 346.0 375.8
-------------------------------------------- ----------------- ----------------- ------------------
For the purposes of the cash flow statement, cash and cash
equivalents comprise the following balances with maturities of
three months or less from the date of acquisition:
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Cash and cash equivalents
Cash in hand (including Bank of England Reserve account) 283.2 187.1 252.2
Loans and advances to credit institutions 133.3 126.9 123.6
Investment securities - 32.0 -
----------------------------------------------------------
416.5 346.0 375.8
---------------------------------------------------------- --------------- --------------- ---------------
The Group is required to maintain certain mandatory balances
with the Bank of England which, at 30 September 2020, amounted to
GBP11.5m (30 September 2019: GBP10.6m and 31 March 2020: GBP11.3m).
The movement in these balances is included within cash flows from
operating activities.
The Group's loans and advances to credit institutions includes
GBP49.9m (30 September 2019: GBP56.4m and 31 March 2020: GBP43.2m)
of balances belonging to the Society's structured entities which
are not available for general use by the Society.
Condensed consolidated half-yearly Statement of Cash Flows
(continued)
for the six months ended 30 September 2020
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited
unaudited Restated* audited
GBPm GBPm GBPm
Cash flows from operating activities
Profit before tax 2.9 5.5 1.5
Adjustments for non-cash items included
in profit before tax
Impairment on loans and advances 6.0 0.5 17.5
Depreciation and amortisation 3.6 3.5 8.0
Disposal of property, plant and equipment - (0.1) (0.2)
Revaluation of investment properties (2.0) (2.8) (4.2)
Gain on deconsolidation of commercial
securitisation - - (5.3)
Write down of goodwill - - 0.5
Changes in provisions for liabilities (0.1) 0.1 (0.8)
Interest on subordinated liabilities 1.2 1.2 2.5
Fair value losses on equity release
portfolio 0.4 0.1 0.1
Interest paid on lease liabilities - - 0.1
Other non-cash movements (5.1) (14.3) 3.4
---------------------------------------------- ---------- ----------- ----------
6.9 (6.3) 23.1
Changes in operating assets and liabilities
Loans and advances to customers 66.4 92.6 31.3
Loans and advances to credit institutions (0.2) (0.1) (2.5)
Derivative financial instruments 7.5 15.5 20.2
Shares (126.5) (8.9) (145.1)
Deposits and other borrowings 88.9 (7.3) 216.8
Trade and other receivables 0.5 0.5 (0.4)
Trade and other payables (3.5) (1.2) 0.9
Retirement benefit obligations (2.1) (1.5) (2.9)
Subscribed capital (0.3) - -
Tax paid - (1.1) (1.1)
Net cash inflow from operating activities 37.6 82.2 140.3
---------------------------------------------- ---------- ----------- ----------
*30 September 2019 profit before tax and loans and advances to
customers have been restated as explained in note 4, which have no
impact on net cash inflow from operating activities.
Notes to condensed consolidated half-yearly financial
information
for the six months ended 30 September 2020
1 General information
These half-yearly financial results do not constitute statutory
accounts within the meaning of the Building Societies Act 1986. A
copy of the statutory accounts for the year to 31 March 2020 has
been delivered to the Financial Conduct Authority and the relevant
information in this report has been extracted from these statutory
accounts. The statutory accounts for the year ended 31 March 2020
have been reported on by the Group's auditor and the report of the
auditor was (i) unqualified, and (ii) did not include a reference
to any matters to which the auditor drew attention by way of
emphasis without qualifying their report.
The consolidated half-yearly financial information for the six
months to 30 September 2020 and 30 September 2019 is unaudited and
has not been reviewed by the Group's auditor.
2 Basis of preparation
This condensed consolidated half-yearly financial report for the
six months ended 30 September 2020 has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, 'Interim Financial Reporting' as adopted
by the European Union. The half-yearly condensed consolidated
financial report should be read in conjunction with the Annual
Report and Accounts for the year ended 31 March 2020, which have
been prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union.
3 Going concern and business viability statement
Details of the Group's objectives, policies and processes for
managing its exposure to risk are contained in the Risk Management
Report of the 2019/20 Annual Report and Accounts. The Directors
also include statements in the Directors' Report in respect of
going concern and longer-term business viability on page 44 of the
2019/20 Annual Report and Accounts.
The Directors have reviewed the latest plans and forecasts for
the Group giving consideration to liquidity and capital adequacy.
They are satisfied that the Group has adequate resources to meet
both the normal demands of the business and the requirements which
might arise in stressed circumstances for the next 12 months and
that the longer-term business viability statement in the 2019/20
Annual Report and Accounts remains appropriate. Accordingly they
continue to adopt the going concern basis in preparing these
half-yearly financial results.
4 Accounting policies
The accounting policies adopted by the Group in the consolidated
half-yearly information are consistent with those disclosed in the
Annual Report & Accounts for the year ended 31 March 2020. The
year-end accounting policies were updated to include the impacts of
COVID-19. There have been no significant changes to accounting
policies within the period.
Prior period restatement
As explained in note 43 to the Annual Report and Accounts for
the year ended 31 March 2020, a prior year restatement was recorded
at 31 March 2019. This arose as a result of certain mortgages
(hedged items) within the portfolio interest rate risk hedge being
valued in accordance with reference to SONIA, which did not
correspond to the documented hedged risk for that portfolio. The
hedged items have been revalued in accordance with the documented
hedged risk (being fair value movements attributed to movements in
LIBOR). In accordance with IAS 8 Accounting policies, Changes in
Accounting Estimates and Errors, comparative amounts for the six
months to 30 September 2019 are restated as set out in the table
below.
The table below shows the effect of the retrospective
restatement on the prior year Group statement of financial
position.
Statements of financial position
at 30 September 2019
Previously
reported Restatement Restated
GBPm GBPm GBPm
Loans and advances to customers 4,667.4 (2.2) 4,665.2
Deferred tax assets 17.7 0.4 18.1
Total assets 5,533.0 (1.8) 5,531.2
General reserves 252.3 (1.8) 250.5
Total members' interests and
equity 391.6 (1.8) 389.8
Total members' interests, equity
and liabilities 5,533.0 (1.8) 5,531.2
---------------------------------- ------------------------ --------------------------- ------------------
The table below shows the effect of the retrospective
restatements on the Group's income statement for the period ended
30 September 2019.
Income Statement
for the six months ended 30
September 2019
Previously
reported Restatement Restated
GBPm GBPm GBPm
Fair value losses on financial instruments (4.3) (0.9) (5.2)
Total income 27.7 (0.9) 26.8
Operating profit before revaluation
gains, impairment and provisions 4.8 (0.9) 3.9
Profit before tax 6.4 (0.9) 5.5
Taxation (1.2) 0.2 (1.0)
Profit for the period 5.2 (0.7) 4.5
----------------------------------------------- ----------- ------------- ----------
Critical accounting estimates and judgements in applying
accounting policies
In the process of applying accounting policies, the Group makes
various judgements, estimates and assumptions which affect the
amounts recognised in the financial statements. Estimates and
judgements are continually evaluated and are based on historical
experience and other factors, including expectations of future
events that are believed to be reasonable under the
circumstances.
For the half year accounts, tax has been charged on the
statutory profit before tax at the UK standard rate of 19%. A full
review of the tax position of the Society and its subsidiaries will
be carried out at the year end date. Otherwise, the significant
judgements in applying accounting policies and key sources of
estimation uncertainty at 30 September 2020 are unchanged from
those existing at 31 March 2020.
5 Business segments
Operating segments are reported in accordance with the internal
reporting provided to the Group Board (the chief operating decision
maker), which is responsible for allocating resources to the
reportable segments and assessing their performance.
The Group has three main business segments:
-- Retail - incorporating residential lending, savings,
investments and protection;
-- Commercial real estate - primarily representing loans for
commercial property investment; and
-- Property - a portfolio of residential properties for
rent.
Central Group operations have been included in Retail and
comprise risk management, finance, treasury services, human
resources and computer services, none of which constitute a
separately reportable segment.
There were no changes to reportable segments during the
period.
Transactions between the business segments are carried out at
arm's length. The revenue from external parties reported to the
Group Board is measured in a manner consistent with that in the
consolidated Income Statement.
Funds are ordinarily allocated between segments, resulting in
funding cost transfers disclosed in inter-segment net interest
income. Interest charged for these funds is based on the Group's
cost of capital. Central administrative costs are also allocated
between segments and are disclosed in inter-segment administrative
expenses. There are no other material items of income or expense
between the business segments.
The Group does not consider its operations to be cyclical or
seasonal in nature.
6 months ended 30 September 2020 Commercial Consolidation Total
(unaudited) Retail real estate Property adjustments Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and similar income
Calculated using the effective interest
method 51.5 4.3 - (5.7) 50.1
On instruments measured at fair
value through profit or loss (7.1) - - - (7.1)
-------------------------------------------- -------- ------------- --------- -------------- --------
Total interest receivable and similar
income 44.4 4.3 - (5.7) 43.0
Interest expense and similar charges (14.3) (4.0) (1.5) 5.7 (14.1)
-------------------------------------------- -------- ------------- --------- -------------- --------
Net interest receivable/(expense) 30.1 0.3 (1.5) - 28.9
Fees and commissions receivable 0.9 - - - 0.9
Other operating income - - 2.0 - 2.0
Fair value losses on financial instruments - (1.8) - - (1.8)
-------------------------------------------- -------- ------------- --------- -------------- --------
Total income 31.0 (1.5) 0.5 - 30.0
Administrative expenses (18.9) (0.5) (0.1) - (19.5)
Depreciation and amortisation (3.6) - - - (3.6)
-------------------------------------------- -------- ------------- --------- -------------- --------
Operating profit/(loss) before revaluation
gains, impairment and provisions 8.5 (2.0) 0.4 - 6.9
Gains on investment properties - - 2.0 - 2.0
Impairment on loans and advances (0.2) (5.8) - - (6.0)
Provisions for liabilities - - - - -
-------------------------------------------- -------- ------------- --------- -------------- --------
Profit/(Loss) before tax 8.3 (7.8) 2.4 - 2.9
-------------------------------------------- -------- ------------- --------- -------------- --------
Total assets 5,501.5 332.2 143.5 (454.7) 5,522.5
-------------------------------------------- -------- ------------- --------- -------------- --------
Total liabilities 5,161.4 440.5 123.0 (590.0) 5,134.9
-------------------------------------------- -------- ------------- --------- -------------- --------
Commercial
6 months ended 30 September real Consolidation
2019 (unaudited)* Retail estate Property adjustments Total Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and
similar income
Calculated using the effective
interest method 60.9 5.3 - (7.7) 58.5
On instruments measured
at fair value through profit
or loss (2.0) - - - (2.0)
------------------------------------ -------- ------------- --------- -------------- ------------
Total interest receivable
and similar income 58.9 5.3 - (7.7) 56.5
Interest expense and similar
charges (27.4) (6.7) (1.4) 7.7 (27.8)
------------------------------------ -------- ------------- --------- -------------- ------------
Net interest receivable/(expense) 31.5 (1.4) (1.4) - 28.7
Fees and commissions receivable 1.1 - - - 1.1
Other operating income 0.1 - 2.1 - 2.2
Fair value losses on financial
instruments (1.3) (3.7) - (0.2) (5.2)
------------------------------------ -------- ------------- --------- -------------- ------------
Total income 31.4 (5.1) 0.7 (0.2) 26.8
Administrative expenses (18.8) (0.5) (0.1) - (19.4)
Depreciation and amortisation (3.5) - - - (3.5)
------------------------------------ -------- ------------- --------- -------------- ------------
Operating profit/(loss)
before revaluation gains,
impairment and provisions 9.1 (5.6) 0.6 (0.2) 3.9
Gains on investment properties - - 2.8 - 2.8
Impairment on loans and
advances 0.4 (0.9) - - (0.5)
Provisions for liabilities (0.7) - - - (0.7)
------------------------------------ -------- ------------- --------- -------------- ------------
Profit/(Loss) before tax 8.8 (6.5) 3.4 (0.2) 5.5
------------------------------------ -------- ------------- --------- -------------- ------------
Total assets 5,493.4 370.1 139.9 (472.2) 5,531.2
------------------------------------ -------- ------------- --------- -------------- ------------
Total liabilities 5,132.0 462.4 122.6 (575.6) 5,141.4
------------------------------------ -------- ------------- --------- -------------- ------------
Commercial Consolidation
Year ended 31 March 2020 (audited) Retail real estate Property adjustments Total Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and similar
income
Calculated using the effective
interest method 124.1 10.5 - (16.0) 118.6
On instruments measured at
fair value through profit or
loss (4.4) (0.1) - - (4.5)
------------------------------------ -------- ------------- --------- -------------- --------------
Total interest receivable and
similar income 119.7 10.4 - (16.0) 114.1
Interest expense and similar
charges (54.0) (13.5) (2.9) 15.4 (55.0)
------------------------------------ -------- ------------- --------- -------------- --------------
Net interest receivable/(expense) 65.7 (3.1) (2.9) (0.6) 59.1
Fees and commissions receivable 2.3 - - - 2.3
Other operating income - - 4.0 - 4.0
Fair value losses on financial
instruments (3.7) (4.1) - (0.7) (8.5)
Gain on deconsolidation of
commercial securitisations - 5.3 - - 5.3
Write down of goodwill (0.5) - - - (0.5)
------------------------------------ -------- ------------- --------- -------------- --------------
Total income 63.8 (1.9) 1.1 (1.3) 61.7
Administrative expenses (37.5) (0.4) (0.3) - (38.2)
Depreciation and amortisation (8.0) - - - (8.0)
------------------------------------ -------- ------------- --------- -------------- --------------
Operating profit/(loss) before
revaluation gains, impairment
and provisions 18.3 (2.3) 0.8 (1.3) 15.5
Gains on investment properties - - 4.2 - 4.2
Impairment on loans and advances (2.9) (14.6) - - (17.5)
Provisions for liabilities (0.5) (0.2) - - (0.7)
------------------------------------ -------- ------------- --------- -------------- --------------
Profit/(Loss) before tax 14.9 (17.1) 5.0 (1.3) 1.5
------------------------------------ -------- ------------- --------- -------------- --------------
Total assets 5,539.7 343.6 141.5 (448.0) 5,576.8
------------------------------------ -------- ------------- --------- -------------- --------------
Total liabilities 5,208.7 445.2 123.5 (584.4) 5,193.0
------------------------------------ -------- ------------- --------- -------------- --------------
*30 September 2019 fair value losses on financial instruments,
total assets and total liabilities have been restated as explained
in note 4.
6 Allowance for losses on loans and advances to customers
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Impairment charge for the period 6.0 0.5 17.5
---------------------------------------------- ---------- ---------- ----------
Impairment provision at end of period
Loans fully secured on residential property 7.2 4.3 7.0
Loans fully secured on land 87.7 70.4 81.8
---------------------------------------------- ---------- ---------- ----------
Total 94.9 74.7 88.8
---------------------------------------------- ---------- ---------- ----------
In accordance with IFRS 9, 'Financial instruments', forecasts of
future economic conditions are integral to the expected credit loss
calculations. At 30 September 2020, the Group modelled four
forward-looking macroeconomic scenarios: central, upside, downside
and stress with respective probability weightings unchanged from 31
March 2020. Individual economic variables within the scenarios are
regularly reviewed and updated to reflect the current economic
outlook.
Consistent with residential mortgages, the IFRS 9 ECL
calculation for the commercial portfolio incorporates central,
upside, downside and stress economic scenarios with the same
probability weightings applied.
In addition to the scenario weightings and account-specific
factors that impact cashflows, the key model assumption for
commercial provisioning is considered to be the exit yield
requirement, which is used to estimate the cash flows arising from
realisation of the property values on sale. While interest rates
also have a significant impact on the ECL, via the discount factor
applied in the model, compensating economic hedge arrangements
would substantially offset the movement in profit or loss terms.
Compared with the central economic forecast, the exit yield
requirement for each loan increases by 0.9% and 2.0% in the
downside and stress scenarios respectively and reduced by 0.2% in
the upside scenario. This compares to an average exit yield of
8%.
Presented below is the sensitivity to the total residential and
commercial ECL provision arising from the application of 100%
weighting to each scenario.
Current scenario (%)
Increase/ Increase/
(decrease) (decrease)
in provision in provision
with 100% with 10%
scenario increase
Probability 5 year weighting in
weighting 2020/21 2021/22 average (GBPm) weighting*(GBPm)
Central
scenario 50% Bank Rate 0.1 - 0.1
---------- ------------ --------------
HPI 2.0 (4.0) 1.9
---------- ------------
Unemployment 7.5 6.6 6.1
GDP (9.5) 6.8 0.9 (13.3) -
---------- ------------ ------------- --------------- ---------------- -------------------- -------------- -----------------
Upside
scenario 5% Bank Rate 0.1 0.3 0.5
---------- ------------ --------------
HPI 1.0 4.1 5.1
---------- ------------
Unemployment 4.8 5.7 4.5
GDP (6.5) 10.0 3.1 (17.1) (0.3)
---------- ------------ ------------- --------------- ---------------- -------------------- -------------- -----------------
Downside
scenario 30% Bank Rate 0.1 (0.1) -
---------- ------------ --------------
HPI (2.4) (6.0) (0.7)
---------- ------------
Unemployment 10.0 8.0 7.2
GDP (15.0) - (1.2) 9.0 2.2
---------- ------------ ------------- --------------- ---------------- -------------------- -------------- -----------------
Stress
scenario 15% Bank Rate - (0.1) (0.1)
---------- ------------ --------------
HPI (5.0) (15.0) (2.3)
---------- ------------
Unemployment 12.0 10.0 8.7
GDP (15.0) (5.0) (2.0) 33.9 4.6
---------- ------------ ------------- --------------- ---------------- -------------------- -------------- -----------------
* (increase in 10% weighting with a corresponding reduction in
the central scenario)
The tables below analyse the movement in residential impairment provisions
by IFRS 9 stage.
Stage Stage Stage
1 2 3 Total
6 months ended 30 September 2020 (unaudited) GBPm GBPm GBPm GBPm
Residential expected credit loss allowance
At 1 April 2020 1.1 2.7 3.2 7.0
Transfers due to increased credit risk:
From stage 1 to stage 2 (0.1) 0.4 - 0.3
From stage 1 to stage 3 (0.1) - 0.4 0.3
From stage 2 to stage 3 - (0.1) 0.5 0.4
Transfers due to decreased credit risk:
From stage 2 to stage 1 - (0.1) - (0.1)
From stage 3 to stage 1 - - (0.1) (0.1)
From stage 3 to stage 2 - - (0.3) (0.3)
Remeasurement of expected credit losses
with no stage transfer 0.2 (0.3) - (0.1)
Redemptions (0.1) - (0.1) (0.2)
Amounts written off - - (0.2) (0.2)
Other movements 0.2 - - 0.2
---------------------------------------------- ------- ------- ------- -------
At 30 September 2020 1.2 2.6 3.4 7.2
---------------------------------------------- ------- ------- ------- -------
Stage Stage Stage
1 2 3 Total
6 months ended 30 September 2019 (unaudited) GBPm GBPm GBPm GBPm
Residential expected credit loss allowance
At 1 April 2019 0.6 1.1 4.3 6.0
Transfers due to increased credit risk:
From stage 1 to stage 2 - 0.1 - 0.1
From stage 1 to stage 3 - - 0.1 0.1
From stage 2 to stage 3 - (0.1) 0.3 0.2
Transfers due to decreased credit risk:
From stage 2 to stage 1 - (0.1) - (0.1)
From stage 3 to stage 2 - - (0.2) (0.2)
Remeasurement of expected credit losses
with no stage transfer (0.2) (0.1) 0.2 (0.1)
Redemptions - - (0.1) (0.1)
Amounts written off - - (1.5) (1.5)
Other movements - - (0.1) (0.1)
---------------------------------------------- ------- ------- ------- -------
At 30 September 2019 0.4 0.9 3.0 4.3
---------------------------------------------- ------- ------- ------- -------
Stage Stage Stage
1 2 3 Total
Year ended 31 March 2020 (audited) GBPm GBPm GBPm GBPm
Residential expected credit loss allowance
At 1 April 2019 0.6 1.1 4.3 6.0
Transfers due to increased credit risk:
From stage 1 to stage 2 - 0.5 - 0.5
From stage 1 to stage 3 - - 0.5 0.5
From stage 2 to stage 3 - (0.1) 0.8 0.7
Transfers due to decreased credit risk:
From stage 2 to stage 1 0.1 (0.3) - (0.2)
From stage 3 to stage 2 - - (0.2) (0.2)
Remeasurement of expected credit losses
with no stage transfer 0.4 0.5 0.5 1.4
Redemptions (0.1) - (0.2) (0.3)
Amounts written off - - (2.5) (2.5)
Other movements 0.1 - - 0.1
Overlays in respect of payment deferrals - 1.0 - 1.0
--------------------------------------------
At 31 March 2020 1.1 2.7 3.2 7.0
-------------------------------------------- ------- ------- ------- -------
The tables below analyse the movement in commercial impairment
provisions by IFRS 9 stage.
Stage Stage Stage
1 2 3 Total
6 months ended 30 September 2020 (unaudited) GBPm GBPm GBPm GBPm
Commercial expected credit loss allowance
At 1 April 2020 - 9.3 72.5 81.8
Remeasurement of expected credit losses
with no stage transfer - 1.1 4.7 5.8
Other movements - - 0.1 0.1
---------------------------------------------- -------- ------- ------- -------
At 30 September 2020 - 10.4 77.3 87.7
---------------------------------------------- -------- ------- ------- -------
Stage Stage Stage
1 2 3 Total
6 months ended 30 September 2019 (unaudited) GBPm GBPm GBPm GBPm
Commercial expected credit loss allowance
At 1 April 2019 0.3 8.8 61.6 70.7
Transfers due to increased credit risk:
From stage 2 to stage 3 - (2.7) 2.8 0.1
Remeasurement of expected credit losses
with no stage transfer 0.1 (0.4) 3.0 2.7
Redemptions - - (0.7) (0.7)
Amounts written off - - (2.4) (2.4)
---------------------------------------------- ------- ------- ------- ---------
At 30 September 2019 0.4 5.7 64.3 70.4
---------------------------------------------- ------- ------- ------- ---------
Stage Stage Stage
1 2 3 Total
Year ended 31 March 2020 (audited) GBPm GBPm GBPm GBPm
Commercial expected credit loss allowance
At 1 April 2019 0.3 8.8 61.6 70.7
Transfers due to increased credit risk:
From stage 1 to stage 2 (0.3) 0.4 - 0.1
From stage 2 to stage 3 - (2.7) 2.6 (0.1)
Remeasurement of expected credit losses
with no stage transfer - 2.8 16.9 19.7
Redemptions - - (0.8) (0.8)
Amounts written off - - (7.8) (7.8)
---------------------------------------------- ------- ------- ------- -------
At 31 March 2020 - 9.3 72.5 81.8
---------------------------------------------- ------- ------- ------- -------
7 Provisions for liabilities
6 months 6 months
ended ended Year ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
At beginning
of period 0.6 1.4 1.4
Utilised in the
period (0.1) (0.6) (1.5)
Charge for the
period - 0.7 0.7
At end of period 0.5 1.5 0.6
----------------------------- ---------- ---------- -----------
Provisions for liabilities
Provisions for liabilities primarily relate to Payment
Protection Insurance (PPI) redress. The level of provision has
reduced in the period after the 29 August 2019 deadline set by the
Financial Conduct Authority (FCA) was passed.
8 Loans and advances to customers
30-Sep-20 30-Sep-19 31-Mar-20
unaudited
unaudited Restated* audited
GBPm GBPm GBPm
Amortised cost
Loans fully secured on residential
property 4,293.2 4,303.7 4,354.5
Loans fully secured
on land 368.8 382.1 373.3
4,662.0 4,685.8 4,727.8
Fair value through
profit or loss
Loans fully secured on residential
property 12.5 14.3 13.3
4,674.5 4,700.1 4,741.1
Fair value adjustment for
hedged risk 44.4 39.8 39.3
Less: impairment provisions (94.9) (74.7) (88.8)
4,624.0 4,665.2 4,691.6
------------------------------------ ---------- ----------- ----------
*2019 loans and advances to customers have been restated as
explained in note 4.
Included within loans and advances to customers are GBP413.2m
(31 March 2020: GBP417.2m) of commercial lending balances of which
GBP22.4m (31 March 2020: GBP22.7m) have been sold by the Group to
bankruptcy remote structured entities.
The tables below illustrate the IFRS 9 staging distribution of
residential and commercial loans and advances to customers held at
amortised cost and related credit loss provisions. Stage 2 loans
have been further analysed to show those which are more than 30
days past due, the IFRS 9 backstop for identifying a significant
increase in credit risk (SICR) and those which meet other SICR
criteria. For the purposes of this disclosure, gross exposures and
expected credit loss provisions are rounded to the nearest GBP0.1m
whereas the provision coverage percentages are based on the
underlying data prior to rounding.
As outlined in the year-end Report and Accounts, the Society, in
common with other lenders, has granted payment deferrals to its
borrowers. At 30 September, payment deferrals had been utilised on
5,306 residential mortgage accounts, of which 15% had received an
extension. In line with regulatory guidance, these arrangements did
not result in the loans being categorised as forborne for reporting
purposes. An overlay of GBP1.0m (31 March 2020: GBP1.0m) has been
recorded in respect of these accounts. During the period, the
Society has refined its assessment of accounts receiving payment
deferrals in order to estimate this overlay, by applying a higher
probability of default to those accounts which demonstrate
indicators of long term financial difficulties.
Expected
credit
Gross loss Provision
exposure provision coverage
At 30 September 2020 (unaudited) GBPm GBPm %
Residential loans held at
amortised cost
Stage 1 3,781.7 1.2 0.03
Stage 2
> 30 days past
due 9.5 0.1 1.05
Other SICR indicators 424.5 1.5 0.35
Overlays in respect of
payment deferrals - 1.0 -
Stage 3 61.1 3.4 5.56
4,276.8 7.2 0.17
----- ----- --------- -------------- ----------
Expected
credit
Gross loss Provision
exposure provision coverage
At 30 September 2019
(unaudited) GBPm GBPm %
Residential loans held at
amortised cost
Stage
1 3,793.3 0.4 0.01
Stage
2
> 30 days
past due 17.4 0.1 0.57
Other SICR indicators 416.9 0.8 0.19
Stage
3 56.7 3.0 5.29
4,284.3 4.3 0.19
---- --------------------------- --------- ---------- ----------
Expected
credit
Gross loss Provision
exposure provision coverage
At 31 March 2020 (audited) GBPm GBPm %
Residential loans held at
amortised cost
Stage 1 3,888.0 1.1 0.03
Stage 2
> 30 days past
due 12.9 0.2 1.55
Other SICR indicators 380.6 1.5 0.39
Overlays in respect
of payment deferrals - 1.0 -
Stage 3 56.5 3.2 5.66
4,338.0 7.0 0.16
---------------------------- ------------ --------------- ----------
Expected
credit
Gross loss Provision
exposure provision coverage
At 30 September 2020 (unaudited) GBPm GBPm %
Commercial loans held at
amortised cost
Stage
1 59.2 - 0.02
Stage
2
> 30 days
past due 5.7 0.2 3.51
Other SICR indicators 94.3 10.2 10.82
Stage
3 252.5 77.3 30.61
411.7 87.7 21.30
---------------------------------- --------- ---------- ----------
Expected
credit
Gross loss Provision
exposure provision coverage
At 30 September 2019
(unaudited) GBPm GBPm %
Commercial loans held at
amortised cost
Stage
1 71.0 0.4 0.57
Stage
2
> 30 days
past due - - -
Other SICR indicators 97.3 5.7 5.90
Stage
3 264.2 64.3 24.33
432.5 70.4 16.28
-------------------------- --------- ---------- ----------
Expected
credit
Gross loss Provision
exposure provision coverage
At 31 March 2020
(audited) GBPm GBPm %
Commercial loans held at
amortised cost
Stage
1 59.5 - 0.00
Stage
2
> 30 days
past due - - -
Other SICR indicators 103.6 9.3 8.98
Stage
3 254.1 72.5 28.53
417.2 81.8 19.61
-------------------------- --------- ---------- ----------
9 Shares
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Held by individuals 3,718.6 3,981.3 3,845.1
Other shares 1.0 1.0 1.0
--------------------- ---------- ---------- ----------
3,719.6 3,982.3 3,846.1
--------------------- ---------- ---------- ----------
10 Property, plant, equipment and intangible assets
Property,
Intangible plant
assets and equipment
6 months ended 30 September 2020 (unaudited) GBPm GBPm
Net book value at 1 April 2020 16.3 28.2
Additions 1.7 0.2
Depreciation, amortisation, impairment
and other movements (2.0) (1.6)
----------------------------------------------- -------------- -----------------
Net book value at 30 September 2020 16.0 26.8
----------------------------------------------- -------------- -----------------
Property,
Intangible plant
assets and equipment
6 months ended 30 September 2019 (unaudited) GBPm GBPm
Net book value at 1 April 2019 16.5 28.4
Changes on initial application of
IFRS 16 - 2.6
----------------------------------------------- -------------- -----------------
At 1 April 2019 including impact of
IFRS 16 adoption 16.5 31.0
Additions 2.7 0.8
Disposals - (0.5)
Depreciation, amortisation, impairment
and other movements (2.0) (1.5)
----------------------------------------------- -------------- -----------------
Net book value at 30 September 2019 17.2 29.8
----------------------------------------------- -------------- -----------------
Property,
Intangible plant
assets and equipment
Year ended 31 March 2020 (audited) GBPm GBPm
Net book value at 1 April 2019 16.5 28.4
Changes on initial application of
IFRS 16 - 2.6
----------------------------------------------- -------------- -----------------
At 1 April 2019 including impact of
IFRS 16 adoption 16.5 31.0
Additions 5.1 0.9
Disposals - (0.5)
Depreciation, amortisation, impairment
and other movements (5.3) (3.2)
----------------------------------------------- -------------- -----------------
Net book value at 31 March 2020 16.3 28.2
----------------------------------------------- -------------- -----------------
11 Investment properties
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Valuation
At beginning of period 138.9 134.7 134.7
Revaluation gains 2.0 2.8 4.2
------------------------ ---------- ---------- ----------
At end of period 140.9 137.5 138.9
------------------------ ---------- ---------- ----------
12 Debt securities in issue 30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Certificates of deposit - 1.0 1.0
Non-recourse finance on securitised
advances 244.8 321.0 265.3
------------------------------------- ---------- ---------- ----------
244.8 322.0 266.3
------------------------------------- ---------- ---------- ----------
The non-recourse finance comprises mortgage backed floating rate
notes (the Notes) secured over portfolios of mortgage loans secured
by first charges over residential and commercial properties in the
United Kingdom. Prior to redemption of the Notes on the final
interest payment date, the Notes will be subject to mandatory
and/or optional redemption, in certain circumstances, on each
interest payment date.
13 Core capital deferred shares
Number of CCDS nominal Share
shares amount premium Total
GBPm GBPm GBPm
At 30 September 2020
(unaudited) 1,288,813 1.3 125.7 127.0
---------------------------- ---------- ------------- --------- ------
At 30 September 2019
(unaudited) 1,288,813 1.3 125.7 127.0
---------------------------- ---------- ------------- --------- ------
At 31 March 2020 (audited) 1,288,813 1.3 125.7 127.0
---------------------------- ---------- ------------- --------- ------
CCDS are perpetual instruments and a form of Common Equity Tier
1 (CET 1) capital.
CCDS are the most junior-ranking capital instrument of the
Society, ranking behind the claims of all depositors, payables and
investing members.
Each holder of CCDS has one vote, regardless of the number of
CCDS held.
The CCDS holders are entitled to receive a distribution at the
discretion of the Society. The total distribution paid on each CCDS
in respect of any given financial year of the Society is subject to
a cap provided for in the Rules of the Society and adjusted
annually for inflation. The Directors declared a final distribution
in May 2020 of GBP0.50 per CCDS, which was paid in August 2020.
These distributions have been recognised in the Statement of
Changes in Members' Interests and Equity.
Subsequent to the balance sheet date, the Directors have
announced their intention to declare an interim distribution of
GBP0.50 per CCDS in respect of the period to 30 September 2020
which would be paid in February 2021. The interim distribution is
not reflected in the members reserves of these financial statements
as distributions to the CCDS holders are recognised with reference
to the date they are declared, although they are accrued for in
capital calculations. In the event of a winding up or dissolution
of the Society, the share of surplus assets (if any) a CCDS holder
would be eligible to receive is determined by the calculation of a
core capital contribution proportion, limited to a maximum of the
average principal amount, currently GBP100 per CCDS.
14 Related party transactions
Related party transactions for the six months to 30 September
2020 are within the normal course of business and of a similar
nature to those for the last financial year, full details of which
are disclosed in the Annual Report and Accounts for the year ended
31 March 2020.
15 Subscribed capital
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Permanent interest bearing shares 7.8 8.9 8.9
---------------------------------- --------------- --------- ---------
The 6.15% permanent interest bearing shares (PIBS) comprise
7,847 PIBS of GBP1,000 each issued at a price of 99.828% of their
principal amount, with the issue premium amortised. GBP66,109,000
in aggregate nominal amount of the PIBS were exchanged or tendered
and subsequently cancelled as part of the Liability Management
Exercise (LME) in April 2018.
On 22 July 2020, the Society purchased and cancelled
GBP1,044,000 of its remaining PIBS.
The PIBS are repayable at the option of the Society in whole on
5 April 2021 or any scheduled interest payment thereafter, subject
to approval by the Prudential Regulation Authority (PRA).
In a winding up or dissolution of the Society the claims of the
holders of permanent interest bearing shares (PIBS) would rank
behind all other creditors of the Society, with the exception of
the claims of holders of core capital deferred shares (CCDS). The
holders of PIBS are not entitled to any share in any final surplus
upon winding up or dissolution of the Society.
Future interest payments are at the discretion of the Society,
up to a maximum 6.15% prior to 5 April 2021 and, thereafter, a rate
of interest reset periodically and equal to the applicable 5-year
gilt rate plus a margin of 2.8%. As announced on 2 October 2020,
the Board resolved not to make an interest payment on the scheduled
interest payment date of 5 October 2020.
Whilst noting that any interest payments on the PIBS are at the
sole discretion of the Society, the Society announced during its
capital restructuring in 2018 that any future payments on PIBS will
be made only if and to the extent that they would have been
permitted had the LME had not taken place, and in the context of
determining the equivalent annual yield that would have been paid
to holders of the Society's Profit Participating Deferred Shares
(PPDS) had they remained in issue on their original terms. Under
the terms and conditions of the PPDS (which are available for
viewing on the Society's website), the Society's ability to pay
PPDS distributions was constrained by reference to a percentage of
profits generated in the relevant financial year, and to the extent
of any positive balance on a special PPDS reserve account (to which
a percentage of profits or losses of the Society was allocated each
year).
Whilst PPDS instruments no longer exist (having been exchanged
during the LME), the Society continues to monitor a notional PPDS
reserve. At 31 March 2018 (the last accounting date before the
completion of the LME) the deficit on the PPDS reserve stood at
GBP9.1m. At 31 March 2020, the Society disclosed a deficit balance
on this notional reserve of GBP5.7m. For the 6 month period ended
30 September 2020, the Society generated a reported net profit of
GBP2.4m, including the impact of GBP1.3m Tier 2 interest payable.
The net profit disregarding Tier 2 interest (after tax) would
therefore have been GBP3.4m. Accordingly, during the period the
notional PPDS reserve deficit reduced by GBP0.8m (25% of GBP3.4m)
leaving a deficit of GBP4.9m at 30 September 2020.
16 Subordinated liabilities
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Subordinated notes due 2038 -
11.0% 22.8 22.8 22.8
------------------------------- --------------- ---------- ----------
The Society's subordinated notes rank behind all other creditors
of the Society, with the exception of holders of CCDS and PIBS.
17 Financial instruments
Fair values of financial assets and financial liabilities
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Group determines
fair values by the following three tier valuation hierarchy:
Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2: Valuation techniques where all inputs are taken from
observable market data, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3: Valuation techniques where significant inputs are not
based on observable market data.
Valuation techniques include net present value and discounted
cash flow models, comparison to similar instruments for which
market observable prices exist and other valuation models.
Assumptions and market observable inputs used in valuation
techniques include risk-free and benchmark interest rates, equity
index prices and expected price volatilities. The objective of
valuation techniques is to arrive at a fair value determination
that reflects the price of the financial instrument at the
reporting date that would have been determined by market
participants acting at arm's length. Observable prices are those
that have been seen either from counterparties or from market
pricing sources including Bloomberg. The use of these depends upon
the liquidity of the relevant market.
The carrying value of cash and balances with the Bank of England
are assumed to approximate their fair value.
Financial assets and financial liabilities held at amortised
cost
The tables below show the fair values of the Group's financial
assets and liabilities held at amortised cost in the Statement of
Financial Position, analysed according to the fair value hierarchy
described above.
At 30 September 2020 (unaudited) Carrying Fair value Fair value Fair value Fair value
Level Level Level
value 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to credit institutions 133.3 - 133.3 - 133.3
Loans and advances to customers 4,611.5 - - 4,625.3 4,625.3
------------------------------------------
4,744.8 - 133.3 4,625.3 4,758.6
------------------------------------------ ------------ -------------- -------------- -------------- ------------
Financial liabilities
Shares 3,719.6 - - 3,700.7 3,700.7
Amounts due to credit institutions 966.5 - 966.5 - 966.5
Amounts due to other customers 100.6 - 100.6 - 100.6
Debt securities in issue 244.8 238.4 0.2 - 238.6
Subordinated liabilities 22.8 - 22.8 - 22.8
------------------------------------------
5,054.3 238.4 1,090.1 3,700.7 5,029.2
------------------------------------------ ------------ -------------- -------------- -------------- ------------
At 30 September 2019 (unaudited) Carrying Fair value Fair value Fair value Fair value
Value Level Level Level
Restated* 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to credit
institutions 126.9 - 126.9 - 126.9
Loans and advances to customers 4,650.9 - - 4,645.3 4,645.3
----------------------------------- -------------- --------------- --------------- --------------- --------------
4,777.8 - 126.9 4,645.3 4,772.2
----------------------------------- -------------- --------------- --------------- --------------- --------------
Financial liabilities
Shares 3,982.3 - - 3,948.2 3,948.2
Amounts due to credit institutions 631.9 - 631.9 - 631.9
Amounts due to other customers 105.2 - 105.2 - 105.2
Debt securities in issue 322.0 306.4 15.5 - 321.9
Subordinated liabilities 22.8 - 22.8 - 22.8
----------------------------------- -------------- --------------- --------------- --------------- --------------
5,064.2 306.4 775.4 3,948.2 5,030.0
----------------------------------- -------------- --------------- --------------- --------------- --------------
At 31 March 2020 (audited) Carrying Fair value Fair value Fair value Fair value
Level Level Level
value 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Loans and advances to credit
institutions 123.6 - 123.6 - 123.6
Loans and advances to customers 4,678.3 - - 4,707.3 4,707.3
---------------------------------------- ------------- -------------- -------------- -------------- -------------
4,801.9 - 123.6 4,707.3 4,830.9
---------------------------------------- ------------- -------------- -------------- -------------- -------------
Financial liabilities
Shares 3,846.1 - - 3,827.4 3,827.4
Amounts due to credit institutions 883.8 - 883.8 - 883.8
Amounts due to other customers 94.6 - 94.6 - 94.6
Debt securities in issue 266.3 258.0 1.7 - 259.7
Subordinated liabilities 22.8 - 22.8 - 22.8
---------------------------------------- ------------- -------------- -------------- -------------- -------------
5,113.6 258.0 1,002.9 3,827.4 5,088.3
---------------------------------------- ------------- -------------- -------------- -------------- -------------
*30 September 2019 loans and advances to customers have been
restated as explained in note 4.
a) Loans and advances to customers
The fair value of loans and advances to customers has been
determined taking into account factors such as impairment and
interest rates. The fair values have been calculated on a product
basis and, as such, do not necessarily represent the value that
could have been obtained for a portfolio if it were sold at 30
September 2020.
b) Shares and borrowings
The estimated fair value of deposits with no stated maturity,
which includes non-interest bearing deposits, is the amount
repayable on demand. The estimated fair value of fixed
interest-bearing deposits and other borrowings without quoted
market price is based on discounted cash flows using interest rates
for new deposits with similar remaining maturity. The fair values
have been calculated on a product basis and as such do not
necessarily represent the value that could have been obtained for a
portfolio if it were sold at 30 September 2020.
c) Debt securities in issue
The aggregate fair values are calculated based on quoted market
prices. For those notes where quoted market prices are not
available, a discounted cash flow model is used based on a current
yield curve appropriate for the remaining term to maturity.
Financial assets and financial liabilities held at fair
value
The tables below show the fair values of the Group's financial
assets and liabilities held at fair value in the Statement of
Financial Position, analysed according to the fair value hierarchy
described previously.
Level Level Level 3
At 30 September 2020 (unaudited) 1 2 Total
GBPm GBPm GBPm GBPm
Financial assets
Investment securities
At fair value through other
comprehensive
income 258.1 - - 258.1
At fair value through profit or
loss 1.0 - - 1.0
Derivative financial instruments - 3.8 - 3.8
Loans and advances to customers - - 12.5 12.5
--------------------------------------------- --------------- ---------------- ----------------- -----------------
259.1 3.8 12.5 275.4
--------------------------------------------- --------------- ---------------- ----------------- -----------------
Financial liabilities
Derivative financial instruments - 61.0 - 61.0
--------------------------------------------- --------------- ---------------- ----------------- -----------------
Level Level Level 3
At 30 September 2019 (unaudited) 1 2 Total
GBPm GBPm GBPm GBPm
Financial assets
Investment securities
At fair value through other
comprehensive
income 330.3 - - 330.3
At fair value through profit or
loss 0.9 - - 0.9
Derivative financial instruments - 4.4 - 4.4
Loans and advances to customers - - 14.3 14.3
331.2 4.4 14.3 349.9
--------------------------------------------- --------------- ---------------- ----------------- -----------------
Financial liabilities
Derivative financial instruments - 52.7 - 52.7
--------------------------------------------- --------------- ---------------- ----------------- -----------------
Level Level Level 3
At 31 March 2020 (audited) 1 2 Total
GBPm GBPm GBPm GBPm
Financial assets
Investment securities
At fair value through other comprehensive
income 284.3 - - 284.3
At fair value through profit or
loss 1.0 - - 1.0
Derivative financial instruments - 4.5 - 4.5
Loans and advances to customers - - 13.3 13.3
285.3 4.5 13.3 303.1
----------------------------------------------- --------------- --------------- --------------- -------------
Financial liabilities
Derivative financial instruments - 54.2 - 54.2
----------------------------------------------- --------------- --------------- --------------- -------------
The table below analyses movements in the level 3 portfolio
during the period.
6 months 6 months Year
ended ended ended
30-Sep-20 30-Sep-19 31-Mar-20
unaudited unaudited audited
GBPm GBPm GBPm
Equity release portfolio
At beginning of period 13.3 14.8 14.8
Items recognised in the Income
Statement
Interest receivable and similar
income 0.4 0.5 1.0
Fair value losses on financial
instruments (0.4) (0.1) (0.1)
Redemption payments (0.8) (0.9) (2.4)
---------------
At end of period 12.5 14.3 13.3
---------------------------------------- ------------------- ------------------- ---------------
There have been no transfers of financial assets or liabilities
between levels of the valuation hierarchy in the period.
18 Statement of Directors' responsibilities
The Directors confirm that this condensed set of financial
statements has been prepared in accordance with IAS 34 'Interim
Financial Reporting' as adopted by the European Union, and that the
interim management report herein includes a fair review of the
information required by DTR 4.2.7R and DTR 4.2.8R.
The Directors of West Bromwich Building Society are listed in
the West Bromwich Building Society Annual Report for the year ended
31 March 2020. On 1 August 2020, David Thomas was appointed to the
Board as a Non-Executive Director. He brings a wealth of experience
in general management, risk management, internal audit and
regulatory activities.
Signed on behalf of the Board of Directors:
Jonathan Westhoff Ashraf Piranie
Chief Executive Group Finance & Operations Director
26 November 2020
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END
IR BUBDBLBDDGGL
(END) Dow Jones Newswires
November 26, 2020 10:21 ET (15:21 GMT)
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