TIDMSTB
RNS Number : 1427I
Secure Trust Bank PLC
07 August 2019
PRESS RELEASE
Wednesday 7 August 2019
For immediate release
SECURE TRUST BANK PLC
Interim Results for the six months to 30 June 2019
Continued positive momentum yielding strong first half
performance
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce a 19.9% increase in Group profit before tax to
GBP18.1m for the six months to 30 June 2019.
The Group's diversified business model has allowed capital to be
allocated to attractive market segments where customer demand has
been higher than anticipated. There has been continued growth in
both Business Finance and Consumer Finance, resulting in increased
earnings and continued improvement in the quality of the loan
book.
The first phase of the Motor Finance transformation programme
has been delivered alongside the launch of V12 Vehicle Finance, and
the Group expanded its savings offering with the launch of its
fixed rate Cash ISA. Capital and liquidity positions remain strong
and the Group's flexible business model means it is well placed to
meet demand and manage risk across its product range.
FINANCIAL HIGHLIGHTS
-- Statutory profit before tax up 19.9% to GBP18.1m (2018: GBP15.1m)
-- Adjusted profit before tax of GBP18.8m (2018: GBP16.5m), up 13.9%
-- Continued improvement in loan book quality has reduced cost of risk to 1.7% (2018: 1.9%)
-- Healthy common equity tier 1 ratio of 12.8%* (2018: 13.8%)
supporting the strong growth in the loan portfolios
-- Total capital ratio of 15.2%* (2018: 13.8%)
-- Operating income GBP81.4m (2018: GBP72.5m) up 12.3%
-- Basic earnings per share 79.0p (2018: 68.7p) up 15.0%
-- Adjusted earnings per share 82.3p (2018: 74.7p) up 10.2%
-- Adjusted return on average equity of 12.7% (2018: 12.3%)
-- Interim dividend of 20p per share (2018: 19p per share), to be paid in September 2019
-- Total assets GBP2,607.1m, up 6.7% from year end (December
2018: GBP2,444.3) and up 19.2% from same point last year (June
2018: GBP2,187.1m)
* Note: After accounting for the 2019 interim dividend, the CET
1 ratio is 12.6% (2018: 13.6%) and the total capital ratio is 15.0%
(2018: 13.6%)
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased by 31.9% to 1,446,342 (2018: 1,096,854)
-- Customer satisfaction scores, as measured by FEEFO, continue to be in the 90-95% range
-- New Cash ISA products launched in April 2019
-- V12 Vehicle Finance brand launched and first phase of motor transformation plan implemented
-- Overall loan book GBP2,278.3m, up 12.3% from year end
(December 2018: GBP2,028.9m) and up 23.9% from same point last year
(June 2018: GBP1,839.1m)
-- Total Consumer Finance balances now exceed GBP1bn, with
Retail Finance balances growing by 12.5% since December 2018 to
GBP671.7m
-- Total Business Finance balances rose to GBP1,142.4m following
continued strong growth in Real Estate Finance and Commercial
Finance balances
-- The Commercial Finance invoice financing operation has now
funded over GBP3bn of customer invoices since inception in 2014
-- Customer deposits increased to GBP2,001.5m (2018: GBP1,656.8m) up 20.8%
Lord Forsyth, Chairman, said:
"Our diverse business has again demonstrated its growth
potential with pre-tax profits up by almost 20% in the first half
of this year. Earnings have grown strongly enabling us to propose
an improved interim dividend payment of 20 pence per share. We have
maintained the momentum of 2018 and are looking to the future with
confidence and optimism."
Paul Lynam, Chief Executive, said:
"The positive financial results for the first half of 2019 bode
well for the remainder of the year, assuming an orderly Brexit. The
Group has delivered on a number of strategic objectives, with the
launch of our Cash ISA product and completion of the first phase of
our motor transformation plan. Our capital and liquidity positions
remain healthy and have enabled us to take advantage of market
opportunities in the first half of the year whilst retaining
flexibility to manage economic uncertainty.
Our customer numbers grew by more than 30% from June last year
and I am very grateful to our employees who continually strive to
deliver positive outcomes with great customer service."
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Neeraj Kapur, Chief Financial Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Sunil Duggal
David Tyrrell
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
Sheebani Chothani
Tel: 020 7353 4200
Forward looking statements
This document contains forward looking statements with respect
to the business, strategy and plans of Secure Trust Bank PLC and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Secure Trust Bank PLC's or
management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. Secure Trust Bank
PLC's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a
result of a variety of factors. These include UK domestic and
global economic and business conditions, risks concerning borrower
credit quality, market related risks including interest rate risk,
inherent risks regarding market conditions and similar
contingencies outside Secure Trust Bank PLC's control, any adverse
experience in inherent operational risks, any unexpected
developments in regulation or regulatory and other factors. The
forward looking statements contained in this document are made as
of the date hereof, and Secure Trust Bank PLC undertakes no
obligation to update any of its forward looking statements.
Chairman's statement
Secure Trust Bank PLC has made good progress in the first half
of 2019, sustaining the positive momentum seen during 2018 and
building on the strategic repositioning of the business over recent
years.
The Group has delivered another good set of financial results
with statutory profit before tax of GBP18.1 million being 20%
higher than the statutory profit before tax of GBP15.1 million
reported for the first half of 2018.
The first six months of 2019 have seen further growth in
customer numbers, net customer lending and net customer deposit
balances. The Group continues to broaden its customer proposition.
A cash ISA product was launched to coincide with the new tax year
in April and the demand for this has been very encouraging.
Significant investment continues to be made in the Motor Finance
business and the new V12 Vehicle Finance brand has been well
received in the market. Our Retail Finance business has developed a
strong position in the season ticket finance market. I am also
delighted that the Group has been recognised as one of the UK's
best workplaces following an external assessment, based on a
comprehensive survey of employees, with the Group ranked 29th
overall and 14th as a best place to work for women.
We have diverse businesses with good growth potential. Our
strategy and business model remain unchanged. The Group is well
placed to meet demand in the consumer and business segments in
which it operates. Our risk appetite remains cautious and we
continue to assess carefully any potential impact on our business
from changes in the economy. We stay alert to operational risks and
challenges and the need for operational resilience in our
business.
Our two new independent Non-Executive Directors have settled in
well and are contributing to the Group. The new Group Employee
Council is now fully engaged with direct lines of communication to
the Board. We have made changes to our governance so as to comply
with the latest version of the Corporate Governance Code that came
into effect on 1 January 2019.
As part of our succession planning, Mark Stevens has been
promoted from Deputy Company Secretary to Company Secretary,
replacing Alan Karter who has stepped down as Company Secretary for
personal reasons. Alan has done an outstanding job as Company
Secretary and will continue as our General Counsel.
We are committed to operating as a responsible business. Details
of the Group's relationship with customers and employees, and its
social and environmental impact, were set out in the Corporate
Responsibility section of the Group's 2018 Annual Report and
Accounts. We will provide an update on our activities in these
areas in our year end reporting.
As a result of the strong first half performance and consistent
with our progressive dividend policy, the Board proposes to pay an
interim dividend of 20p per share (June 2018 interim: 19p)
representing a 5.3% increase on the prior year. This will be paid
on 27 September 2019 to shareholders on the register as at 20
August 2019.
Finally, I would like to take this opportunity, on behalf of the
Board, to thank all of our employees for their commitment and hard
work which has delivered strong growth and consistently high levels
of customer satisfaction. Given the resources at our disposal, the
talents of our people, the flexibility of our business model and
our clear strategy we can face the future, however uncertain, with
confidence and optimism.
Lord Forsyth
Chairman
6 August 2019
Financial highlights
June 2019 June 2018
------------------- --------- ---------
Earnings per share 79.0p 68.7p
------------------- --------- ---------
Dividends 20p 19p
------------------- --------- ---------
Chief Executive's statement
I am very pleased to report that the strong momentum seen
throughout 2018 has continued into the first half of 2019.
We have achieved good progress across a range of customer,
people, product and risk metrics which, assuming an orderly Brexit,
bodes well for the full year results. The Group's diversified
business model has enabled us to allocate capital across our
portfolios to meet higher than anticipated consumer demand whilst
continuing to support existing business customers without
compromising on risk.
The financial results for the first half of 2019 reflect these
positive dynamics with the statutory profit before tax for the
first half increasing by 19.9% to GBP18.1 million compared to
GBP15.1 million for the first half of last year. Adjusted profit
before tax on the same basis has increased by 13.9% to GBP18.8
million (2018: GBP16.5 million). Basic adjusted earnings per share
increased by 10.2%.
The economic and political uncertainty during the first half of
2019 has weighed on business investment sentiment and demand from
SMEs for lending facilities. By contrast there has been no
discernible change in the behaviour of the Bank's consumer
customers who are benefiting from low and falling inflation, record
employment and rising earnings.
The Group has been presented with additional opportunities,
within its existing risk appetite, to successfully deploy its
capital and funding in the first half of 2019 as a result of
non-bank lenders citing difficulties in obtaining or renewing
credit lines. The resulting curtailment, and in some cases ceasing,
of new business by these lenders has helped support record levels
of monthly new business volumes in Motor Finance and Retail Finance
in April and again in May.
Strong customer satisfaction
I remain grateful for the ongoing commitment of our team members
who continue to strive to deliver good customer outcomes in a
friendly and professional manner, as the Group's lending and
deposit taking activities grow. This in turn is reflected in
customer satisfaction levels which are independently measured by
FEEFO and are consistently in the 90-95% range.
Customer numbers continue to grow and at 1,446,342 are over 30%
higher than at 30 June last year (30 June 2018: 1,096,854).
Healthy Capital and Liquidity positions
The Bank's capital and funding positions remain healthy.
Our Common Equity Tier one ratio was 12.8% as at 30 June 2019
compared to 13.8% at the same point last year. Our overall leverage
ratio was 9.5% (June 2018: 10.4%), and the total capital ratio was
15.2% (June 2018: 13.8%).
The year-on-year movement is a function of the change in our
balance sheet composition with the addition of Tier 2 capital and
investment of capital to support the strong growth in the loan
portfolios. When considering our capital ratios it is important to
note that as at 30 June 2019 the residual contractual average life
of the Group's assets was just 1.9 years. On a behavioural basis
the duration would be even shorter. This balance sheet structuring
provides major advantages, one of which is the Group's ability to
react rapidly and efficiently to sudden changes in market
conditions.
For example, if the UK exit from the EU causes economic
disruption, we will be able to degear our balance sheet much more
quickly than many banks and in so doing reduce the absolute levels
of credit risk taken whilst simultaneously materially increasing
our capital ratios.
Secure Trust Bank has continued to fund its lending activities
primarily from customer deposits. Our loan to deposit ratio was
113.8% at 30 June 2019 which compares to 111.0% at 30 June 2018.
The Bank has continued broadly to match-fund its customer lending
with customer deposits. This strategy seeks to mitigate maturity
transformation and interest basis risks. Customer demand for our
deposit products remains strong, and it is encouraging that over
60% of customers with maturing medium-term savings bonds chose to
reinvest their funds into deposit products with us.
Operational progress
We have continued to invest in both our Treasury capabilities
and new deposit product development. The launch of the new Cash ISA
products in April 2019 was an important strategic milestone for the
Group. Cash ISAs are the second biggest pool of consumer deposit
liquidity in the UK and typically attract margins around 20% below
non-cash ISA deposits. Being able to access these sources of
funding will be helpful as the Term Funding Scheme unwinds.
Motor Finance remains an important and profitable line of
business for us. As part of our wider strategic shift towards prime
and near-prime lending, we have initiated a transformation
programme which will see us offering an entirely new market
solution to dealers and brokers. The existing lenders in this space
enjoy attractive returns on equity and we believe that the
combination of the competitive funding costs provided via our
banking licence and a new technology platform will allow us to gain
market share and grow a sizable business in this space over the
next 3-5 years. The motor transformation programme is split into
four phases and includes the provision of dealer stocking finance
(phases 1 and 2) and a wider motor proposition for consumers
(phases 3 and 4).
We launched our new V12 Vehicle Finance brand on 4 June 2019 in
conjunction with our key business partner, Aston Barclay. Aston
Barclay are one of the UK's largest vehicle auction houses. Our
partnership has been well received and the first phase of the motor
transformation plan (auction stock funding) is now live and
generating very significant levels of interest with car
dealerships.
Operational resilience remains a key matter for regulatory
scrutiny and we have adopted a proactive approach, having carefully
considered the PRA's Discussion Paper on 'Building the UK finance
sector's operational resilience'. We have updated our plan to
ensure we continue to focus on, and invest in, ensuring the Group
is adequately identifying, assessing and managing its risks. This
extends to managing the third party risks that arise when
outsourcing activities. In response to the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change' the Group is formalising
its plan to respond to these future risks and will provide further
detail and progress within its year end disclosures.
Lending activities
Our strategic repositioning has guided the allocation of capital
to support growth particularly in lower risk lending activities
during the period. Overall net customer lending as at 30 June 2019
of GBP2,278 million represents 23.9% growth compared to last year
(June 2018: GBP1,839 million). 50.1% of these lending balances are
in secured lending (30 June 2018: 53.3%). The total volume of new
loans written in the period was GBP712.0 million representing a
16.6% increase on the GBP610.4 million for the same period last
year.
Motor Finance balances have grown to GBP299.8 million from
GBP272.0 million a year ago representing 10.2% growth. As
previously disclosed, we stopped writing new subprime motor loans
in January 2017 and have largely run off this part of the book. The
run off assets are being replaced by lower risk, albeit lower
margin loans. These dynamics are reflected in the balance sheet
growth and profit metrics.
We have continued to prioritise Retail Point of Sale lending
given the uncertain economic outlook, due to the quality and short
duration nature of this lending. Balances have grown to GBP671.7
million from GBP508.0 million a year ago and GBP597.0 million as at
31 December 2018 representing 32.2% and 12.5% growth
respectively.
The mortgage market has continued to exhibit significant
competitive pressures, with lenders competing on price and risk
appetite to drive new business volumes. The Bank of England
recently noted that interest spreads on mortgage lending which were
3.10% in January 2010 had fallen to 1.60% in April 2019. The
compression of mortgage net interest margins was a significant
factor in our decision to cease originating new loans in Q1 2019
and this has subsequently proven a trend with other lenders in the
market. Our staff responded to this decision professionally and
continued focusing on delivering high quality service to our
customers. Fulfilment of our pipeline led to our mortgage lending
balances increasing from GBP37.3 million as at 30 June 2018 to
GBP113.2 million as at 30 June 2019, being growth of 203.5%. This
book is performing in line with our expectations.
As at 30 June 2019, Real Estate Finance lending balances have
grown to GBP879.0 million from GBP704.8 million a year ago and
GBP769.8 million as at 31 December 2018, representing 24.7% growth
and 14.2% growth respectively. The loan book is performing well and
remains heavily biased in favour of modestly leveraged residential
investment lending. This is reflected in the portfolio composition,
which in round terms is split 70%/30% in favour of investment
lending.
As at 30 June 2019, Invoice Finance lending balances have grown
to GBP220.7 million from GBP187.5 million a year ago and GBP194.7
million as at 31 December 2018, representing growth of 17.7% and
13.4% respectively. During this period we surpassed the milestone
of having funded over GBP3 billion of customers' invoices since we
started invoice finance operations in September 2014.
Notwithstanding a more challenging economic environment the quality
of our management team and our risk and control frameworks have
helped to minimise credit losses in this part of our business.
Asset Finance lending balances have contracted as forecast as
the book is in run-off. Balances were GBP42.7 million as at 30 June
2019 compared to GBP87.9 million a year ago.
In overall terms the loan portfolios have performed as expected
during the first half of 2019 with the benefits of the strategic
repositioning remaining evident. This is reflected in a reduction
in the cost of risk from 1.9% for H1 2018 to 1.7% for H1 2019,
driven by the improving book quality and consequent reduction in
probability of default. This improvement would have been more
pronounced save for two notable factors which influenced the IFRS 9
models. The first is the rapid growth in season ticket finance
during the second quarter which drove higher IFRS 9 provisions in
V12 which in turn weighs a little on the capital and cost of risk
ratios. These loans are short term, typically of six to nine months
duration, meaning the bulk of the benefits are expected to be
delivered during the second half of 2019 as the loans are repaid.
The second factor was the UK car market experiencing unusually
severe seasonal falls in asset values during the second quarter of
2019. Used car values reduced on average by 14% during this period.
Whilst we do not expect to see a continuation of these trends, the
sensitivity of the IFRS 9 models means we are taking these
reductions in values into account within our H1 2019 impairment
provisioning.
We have continued to refine our credit risk appetite and
acceptance criteria during this period. As a matter of course, we
regularly review our credit criteria and pricing to take into
account our view of the current and future economic conditions. We
have also undertaken more work during this period to better
understand how we might utilise artificial intelligence and machine
learning to further refine our credit decisions.
Fee based services
The OneBill service closed for new business in 2010, is running
off in line with management's expectations and becoming
increasingly immaterial. Customer numbers ended the period at
17,514 (2018: 18,438).
Profits at our debt collection business, Debt Managers
(Services) Limited, have continued to grow in line with our
expectations.
Strategic priorities
Our strategy remains unchanged. The benefits of a diversified
business model have been evident over the last six months. Despite
a slowing economy we have been able to continue to increase
customer lending balances and profit before tax by taking market
share in our chosen market segments, without compromising our
targeted risk parameters.
The focus for 2019 remains:
1. Organic growth in responsible lending across a diverse
portfolio of attractive segments
2. Continued investment in broadening our product offerings to
customers
3. Pursuing M&A activity in line with our strategy
4. Optimising our capital and liquidity strategies
5. Continuing to target delivery of profit growth in the medium
term to create shareholder value
We have been active across all five of these areas during the
last six months and will remain disciplined and focused here for
the rest of 2019 and beyond.
Outlook
It is pleasing to report the positive momentum and strong profit
growth during the period. We expect further progress during the
second half of the year but need to be mindful that our own and
other external forward looking economic indicators are pointing to
a period of low business confidence and tepid economic growth. We
are not detecting any discernible change in consumer behaviour but
will remain vigilant as the rescheduled Brexit date of 31 October
2019 approaches. The Bank's lending portfolio is well positioned
for the current conditions and the short duration nature of our
asset portfolio means we can react quickly to both opportunities
and threats. Assuming an orderly exit from the EU, we expect the UK
economic outlook to improve which the Group will seek to leverage
as it continues to execute its clearly defined growth strategy. We
are well placed to support an increase in demand for working
capital funding from businesses and residential development finance
from house builders. We would expect stronger economic growth to be
positive for retail sales and for our Retail Finance business. We
are progressing significant investment in our Motor Finance
business with the first of a four phase transformation plan now
live. We see potential for this portfolio to grow considerably over
the next five years.
In overall terms we are well positioned in a number of
attractive lending classes and have started 2019 strongly.
Therefore our base case assumption is for good progress to be made
in meeting our goals over the coming period.
Paul Lynam
Chief Executive Officer
6 August 2019
Highlights of 2019 to date
-- Statutory profit before tax increased by 19.9% compared to
the comparative period
-- Adjusted profit before tax increased by 13.9% compared to the
comparative period
-- Customer numbers up by more than 30%
-- Customer satisfaction scores continue to be in the 90-95%
range
-- Launch of new Cash ISA products in April 2019
-- V12 Vehicle Finance brand launched and first phase of motor
transformation plan implemented
-- Customer lending balances grown by 23.9% over the year to 30
June 2019
Growth in customer numbers
>30%
(1,446,342)
2018: 1,096,854
FEEFO customer satisfaction ratings
90-95%
Strategy
The Group's strategy is based on three strategic themes. Over
2019, the strategy has developed as we focus on our near to
mid-term objectives.
Grow
To maximise shareholder value through strong lending growth by
delivering great customer outcomes in both our existing and new
markets.
Progress made in 2019
Strong growth has continued in both the Consumer Finance and
Business Finance divisions, with Retail Finance again the fastest
growing area. The first stage of the Motor transformation project
has concluded with the launch of the V12 Motor Finance dealer
stocking product - see page 25 for more details.
Focus for the year ahead
Growth is expected to continue in Real Estate Finance,
Commercial Finance, Motor Finance and Retail Finance, with no
immediate plans to re-enter the Asset Finance or Mortgages markets.
Motor transformation activity will include the development of
further consumer products including in the prime market.
Performance measures
The key performance measures, shown on the following page, in
respect of this theme show the growth of the lending book and the
margin that the Group earns on this lending.
Sustain
To protect the reputation, integrity and sustainability of the
Bank for all of our customers and stakeholders via prudent balance
sheet management, investment for growth and robust risk and
operational control. Controlled growth is one of the top strategic
priorities for the Bank.
Progress made in 2019
The Group has continued to maintain a strong balance sheet with
reduced cost of risk compared with the equivalent period in 2018.
The potential funding base has been widened by the introduction of
a fixed rate ISA product, and post half year the Group has
developed hedging capabilities with interest rate swaps, providing
increased flexibility to manage its interest rate risk exposures
within risk appetite.
Focus for the year ahead
The move into the prime Motor market will further improve the
credit quality of the Group's balance sheet. Activity will continue
to widen the funding base, as described on page 27, and the Group
will build up its portfolio of interest rate swaps in order to
manage its balance sheet effectively.
The Group has initiated a programme to review its critical
processes and further enhance operational resilience.
Performance measures
Measures in respect of the Sustain theme focus on the control of
operational costs, funding costs and impairment losses. In
addition, funding ratios are measured to ensure the Group is
holding sufficient liquidity in relation to its loan books.
Regulatory capital metrics demonstrate the Group's capacity to
continue to grow while remaining well above regulatory limits.
Love
To ensure that the fair treatment of customers is central to
corporate culture and that the Bank is a highly rewarding
environment for all staff and one where they can enjoy progressive
careers.
Progress made in 2019
Secure Trust Bank has won a number of awards already in 2019
that show its commitment to customer service, including Best
Savings Provider, Best Fixed Rate Bond Provider and Best Notice
Account Provider at the 2019 Savings Champion Awards. The Group has
also been awarded Feefo Gold Trusted Service Award, their highest
accolade, for three years running.
Based on employee feedback and external assessment, the Group
was recognised as a UK Best Workplace(TM) in May 2019, at the Great
Place to Work(R) annual awards.
Focus for the year ahead
The Group continues to use feedback from its customers and
employees in order to improve its products, services and working
environment. Alongside its use of Feefo to gauge customer
satisfaction, the Group reviews Net Promoter Scores and is
developing additional monitoring of social media and review
platforms. The new Group Employee Council will enable direct
communication with the Chief Executive Officer and the Board.
Performance measures
The Group's non-financial KPIs assess customer and employee
satisfaction, as well as impacts on the environment. Only the
customer satisfaction measure is updated at the half year, as the
employee survey is annual and environmental impact is measured
annually.
Key Performance Indicators
The key performance indicators shown are the primary measures
used by management to assess the performance of the Group.
The Remuneration Report, starting on page 94 of the 2018 Annual
Report and Accounts, sets out how executive pay is linked to the
assessment of key financial and non-financial performance
metrics.
These KPIs represent alternative performance measures that are
not defined or specified under IFRS. Definitions of the financial
KPIs and their calculation can be found in the Appendix to the
interim report on page 56.
The employee survey and environmental intensity assessment are
carried out on an annual basis and are therefore not available for
reporting at the interim period.
In the narrative of the Interim Financial Review, KPIs are
identified by being in bold font.
Margin ratios
June 2019 June 2018 Dec 2018
---------------------- --------- --------- --------
Net interest margin % 6.7 7.6 7.4
---------------------- --------- --------- --------
Why we measure this
Shows the interest margin earned on the Group's loan books, net
of funding costs
June 2019 June 2018 Dec 2018
--------------------- --------- --------- --------
Net revenue margin % 7.7 8.6 8.3
--------------------- --------- --------- --------
Why we measure this
Shows the overall net margin earned on the Group's loan books,
including fees and commissions
June 2019 June 2018 Dec 2018
----------------------- --------- --------- --------
Gross revenue margin % 9.8 10.6 10.4
----------------------- --------- --------- --------
Why we measure this
Shows the yield of the Group's loan books, including fee and
commission income
Cost ratios
June 2019 June 2018 Dec 2018
---------------- --------- --------- --------
Cost of funds % 2.1 1.8 2.0
---------------- --------- --------- --------
Why we measure this
Measures the cost of the Group's customer deposits and other
funding sources
June 2019 June 2018 Dec 2018
----------------------- --------- --------- --------
Cost to income ratio % 55.9 56.7 55.7
----------------------- --------- --------- --------
Why we measure this
Measures how efficiently the Group utilises its cost base to
produce income
June 2019 June 2018 Dec 2018
--------------- --------- --------- --------
Cost of risk % 1.7 1.9 1.8
--------------- --------- --------- --------
Why we measure this
Measures how effectively the Group manages impairment losses
Growth
June 2019 June 2018 Dec 2018
------------------------------------- --------- --------- --------
Loans and advances to customers GBPm 2,278.3 1,839.1 2,028.9
------------------------------------- --------- --------- --------
Why we measure this
Shows the growth in the Group's lending balances, which generate
income
Funding ratios
June 2019 June 2018 Dec 2018
------------------------ --------- --------- --------
Loan to deposit ratio % 113.8 111.0 109.8
------------------------ --------- --------- --------
Why we measure this
Measures the adequacy of liquidity by comparing loan balances to
customer deposits
June 2019 June 2018 Dec 2018
---------------------- --------- --------- --------
Total funding ratio % 112.2 116.6 118.2
---------------------- --------- --------- --------
Why we measure this
Measures the adequacy of liquidity by comparing all funding held
by the Group to loan balances
Delivering
Adjusted profit
June 2019 June 2018 Dec 2018
-------------------------------- --------- --------- --------
Adjusted profit before tax GBPm 18.8 16.5 36.7
-------------------------------- --------- --------- --------
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
June 2019 June 2018 Dec 2018
------------------------------- --------- --------- --------
Adjusted profit after tax GBPm 15.2 13.8 29.9
------------------------------- --------- --------- --------
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
EPS
June 2019 June 2018 Dec 2018
------------------------------- --------- --------- --------
Basic earnings per share pence 79.0 68.7 153.2
------------------------------- --------- --------- --------
Why we measure this
Demonstrates the earnings attributable to each shareholder
June 2019 June 2018 Dec 2018
---------------------------------------- --------- --------- --------
Adjusted basic earnings per share pence 82.3 74.7 161.8
---------------------------------------- --------- --------- --------
Why we measure this
Demonstrates the earnings attributable to each shareholder,
adjusted to improve comparability of information between reporting
periods
Return ratios
June 2019 June 2018 Dec 2018
------------------------------------ --------- --------- --------
Adjusted return on average equity % 12.7 12.3 13.1
------------------------------------ --------- --------- --------
Why we measure this
Measures the Group's ability to generate profit from the equity
available to it
June 2019 June 2018 Dec 2018
------------------------------------- --------- --------- --------
Adjusted return on required equity % 13.6 14.6 14.8
------------------------------------- --------- --------- --------
Why we measure this
Relates profitability to the capital that the Group is required
to hold
June 2019 June 2018 Dec 2018
------------------------------------ --------- --------- --------
Adjusted return on average assets % 1.2 1.4 1.4
------------------------------------ --------- --------- --------
Why we measure this
Demonstrates how profitable the Group's assets are in generating
revenue
Non-financial KPIs
June 2019 June 2018 Dec 2018
----------------------------- --------- --------- --------
Customer FEEFO ratings Stars 4.6 4.6 4.7
----------------------------- --------- --------- --------
Why we measure this
Measures customer satisfaction: mark out of 5 based on star
ratings from 1,156 reviews (June 2018: 510 reviews, December 2018:
1,175 reviews)
June 2019 June 2018 Dec 2018
------------------------------------ ---------- ---------- --------
Employee survey trust index score % N/A N/A 77
------------------------------------ ---------- ---------- --------
Why we measure this
Employee satisfaction: not measured at half year (December 2018
based on 2018 all staff survey)
June 2019 June 2018 Dec 2018
---------------------------------- ---------- ---------- --------
Environmental intensity indicator N/A N/A 3.5
---------------------------------- ---------- ---------- --------
Why we measure this
Ensures that the Group's environmental impact, measured in
respect of greenhouse gas emissions, remains low. Not measured at
half year (December 2018 measures tonnes carbon dioxide per GBP1
million group income)
Interim financial review
Profit and earnings
Profit before tax for the period rose significantly on both a
statutory and adjusted basis, driven by increased revenues and well
managed impairments and costs. The statutory profit for the first
six months of the year increased by 19.9%, from GBP15.1 million to
GBP18.1 million, while the adjusted profit before tax for the
period increased by 13.9% from GBP16.5 million to GBP18.8
million.
Earnings per share rose as a consequence, from 68.7p at June
2018 to 79.0p at June 2019 on a basic earnings per share basis and
from 74.7p to 82.3p on an adjusted basic earnings per share basis.
Detailed disclosures of earnings per ordinary share are shown in
Note 5.
Return measures
The Group measures adjusted returns on average assets, average
equity and required equity as set out in the KPIs table on page 14.
Return on average assets demonstrates how profitable the Group's
assets are in generating revenue. Return on average equity is a
measure of the Group's ability to generate profit from the equity
available to it. Return on required equity relates profitability to
the capital that the Group is required to hold.
The returns on average assets and on required equity have fallen
slightly from June 2018 to June 2019. The return on average equity
improved from 12.3% at June 2018 to 12.7% at June 2019, driven by
rising earnings.
The components of the Group's profit are set out in the sections
below.
Interest, fee and commission income
Interest, fee and commission income is made up of interest
income, which is predominantly earned on loans and advances to
customers, and fee and commission income, which consists
principally of fees from the OneBill, Commercial Finance, Retail
Finance and Motor Finance products and commissions earned on debt
collection activities in DMS.
Interest income increased by 16.5% to GBP92.3 million (June
2018: GBP79.2 million). This was driven by the growth of the
Group's loan books, with loans and advances to customers increasing
by 23.9% over the same period from GBP1,839.1 million at June 2018
to GBP2,278.3 million at June 2019. The shift in the profile of
Motor Finance lending to better quality customers has reduced the
level of interest income on this product. This is the main reason
for the increase in interest income being lower that the increase
in loan balances.
30 June 2019 30 June 2018 31 Dec 2018
Adjusted profit reconciliation GBPmillion GBPmillion GBPmillion
--------------------------------------------- ------------- ------------- -----------
Interest, fee and commission income 103.5 89.0 188.6
--------------------------------------------- ------------- ------------- -----------
Interest, fee and commission expense (22.1) (16.5) (37.0)
--------------------------------------------- ------------- ------------- -----------
Operating income 81.4 72.5 151.6
--------------------------------------------- ------------- ------------- -----------
Impairment losses (17.8) (16.3) (32.4)
--------------------------------------------- ------------- ------------- -----------
Operating expenses (45.5) (41.1) (84.5)
--------------------------------------------- ------------- ------------- -----------
Profit before tax 18.1 15.1 34.7
--------------------------------------------- ------------- ------------- -----------
Adjustments to profit before tax (see below) 0.7 1.4 2.0
--------------------------------------------- ------------- ------------- -----------
Adjusted profit before tax 18.8 16.5 36.7
--------------------------------------------- ------------- ------------- -----------
Adjusted tax (3.6) (2.7) (6.8)
--------------------------------------------- ------------- ------------- -----------
Adjusted profit after tax 15.2 13.8 29.9
--------------------------------------------- ------------- ------------- -----------
Adjusted basic earnings per share (pence) 82.3 74.7 161.8
--------------------------------------------- ------------- ------------- -----------
Statutory results
--------------------------------------------- ------------- ------------- -----------
Profit before tax 18.1 15.1 34.7
--------------------------------------------- ------------- ------------- -----------
Tax (3.5) (2.4) (6.4)
--------------------------------------------- ------------- ------------- -----------
Profit after tax 14.6 12.7 28.3
--------------------------------------------- ------------- ------------- -----------
Basic earnings per share (pence) 79.0 68.7 153.2
--------------------------------------------- ------------- ------------- -----------
Adjustments to profit before tax
--------------------------------------------- ------------- ------------- -----------
Fair value amortisation 0.1 0.1 0.3
--------------------------------------------- ------------- ------------- -----------
Transformation costs 0.6 0.4 0.4
--------------------------------------------- ------------- ------------- -----------
Bonus payments - 0.9 1.3
--------------------------------------------- ------------- ------------- -----------
Adjustments to profit before tax 0.7 1.4 2.0
--------------------------------------------- ------------- ------------- -----------
Fee and commission income increased by 14.3% to GBP11.2 million
(June 2018: GBP9.8 million). The increase was driven by fees earned
in Real Estate Finance and Commercial Finance.
The gross revenue margin reduced from 10.6% to 9.8%. This
reflects the change in the risk profile of Motor Finance lending,
referenced above.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest
expense, which is incurred in respect of deposits from customers,
subordinated liabilities and Term Funding Scheme ('TFS')
borrowings, and fee and commission expense, comprising mainly fees
and commissions on the Motor product, and commissions paid on debt
collection activities in DMS.
Interest expense increased by 40.6% to GBP21.8 million for the
period to June 2019 (June 2018: GBP15.5 million). The Group's cost
of funds has been impacted by the rise in the Bank of England base
rate during 2018 and the raising of subordinated debt in that year,
as set out in Note 14. This cost increased from 1.8% at June 2018
to 2.0% at December 2018 and was 2.1% at June 2019. This increase,
the 20.8% increase of deposit balances over the year and the fact
that the subordinated debt was raised in the second half of 2018
all contributed to the higher interest expense.
The Group's net interest margin reduced from 7.6% at 30 June
2018 to 6.7% at June 2019, primarily due to the reduced Motor
Finance yields referred to above.
Fee and commission expense was GBP0.3 million (June 2018: 1.0
million). The main reductions arose in DMS and OneBill.
Financial highlights
June 2019 June 2018
GBPm GBPm
--------------------------- --------- ---------
Interest income 92.3 79.2
--------------------------- --------- ---------
Interest expense 21.8 15.5
--------------------------- --------- ---------
Fee and commission income 11.2 9.8
--------------------------- --------- ---------
Fee and commission expense 0.3 1.0
--------------------------- --------- ---------
Impairment losses 17.8 16.3
--------------------------- --------- ---------
Operating expense 45.5 41.1
--------------------------- --------- ---------
Operating income
Operating income increased by 12.3% to GBP81.4 million (June
2018: GBP72.5 million).
The net revenue margin for 2019 was 7.7% compared with 8.6% at
June 2018. The reduction in this margin is primarily due to the
reduction in Motor Finance yields.
Impairment losses
Impairment losses during the period were GBP17.8 million (June
2018: GBP16.3 million). The fact that impairment losses rose by
only 9.2% compared with the comparative period despite a 23.9%
increase in loans and advances to customers since June 2018 shows
the benefit of the strategic repositioning referred to in previous
annual and interim reports. The improving quality of the Motor
Finance book in advance of the full Motor Transformation programme
has also been a key factor in this reduction in impairments,
counterbalancing the accelerated recognition of losses that the
IFRS 9 methodology brings to the Group's rapidly growing consumer
loan books. As noted in the Motor Finance Business Review on page
25, a significant element of the provision charge for the period
was related to a fall in used vehicle valuations rather than to the
probability of default, which has continued to improve.
These improvements are reflected in the reduction in cost of
risk, from 1.9% at June 2018 to 1.7%. Further analysis of the
Group's loan book and its credit risk exposures is provided in
Notes 6 and 8.
The provision charge includes the impact of applying expert
credit judgement, resulting in overlays being added to provision
levels estimated using the Group's models. The level of these
overlays remain modest compared to the modelled provision level, as
detailed in Note 8.
Operating expenses
Operating expenses increased by 10.7% to GBP45.5 million (June
2018: GBP41.1 million). The Group has continued to invest in its
lending businesses to support growth targets. There has also been
increased investment in the Savings team, to increase the volume of
deposit funding, develop a wider product offering and significantly
enhance the Group's digital proposition. The Group has further
strengthened its compliance and risk function, including investment
in respect of the prevention of financial crime, and invested
further in its IT infrastructure.
The growth in costs is proportionately lower than the increase
in the Group's lending balances, demonstrating efficiencies derived
from increasing scale. Despite the reduction in the gross revenue
margin referred to above, the cost to income ratio reduced to 55.9%
from 56.7% at June 2018.
Taxation
The effective adjusted tax rate has increased to 19.1% (June
2018: 16.4%).
The effective rate for the period to June 2018 was reduced by a
deferred tax credit of GBP0.5 million arising from a reassessment
of the rates that the deferred tax asset on the IFRS 9 transition
adjustment would reverse out over the next nine years. The
effective rate for the current period has reverted back to being
close to the corporation tax rate of 19%.
The tax charge reflects Bank Corporation Tax Surcharge of 8% on
taxable profits of Secure Trust Bank PLC in excess of GBP25.0
million. Future effective tax rates for the Group will be sensitive
to the quantum of projected profits in the Bank and other Group
companies as well as the level of corporation tax which is due to
reduce to 17% with effect from 1 April 2020. Current forecasts
continue to show that the effective tax rate is expected to
increase by up to 4% over the forecast period, as the effect of the
banking surcharge becomes more significant.
Distributions to shareholders
The directors have declared an interim dividend of 20 pence per
share (June 2018: 19 pence per share).
Balance sheet
The assets of the Group increased by 6.7% to GBP2,607.1 million
in the six month period to June 2019, driven by 12.3% growth in the
Group's loan portfolios over the same period, offset by lower
levels of cash and debt securities held.
The liabilities of the Group increased by 7.2% to GBP2,366.8
million over the same period, primarily driven by the increase in
deposits from customers, providing funding for the Group's lending
activities.
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. At December 2018, the loan
book was split broadly equally between Consumer Finance lending,
which includes Consumer Mortgages, and Business Finance lending,
and this remains the case at June 2019.
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, increased by
16.6% to GBP712.0 million (June 2018: GBP610.4 million). Over half
of the new business volume (GBP372.6 million) was generated by the
Retail Finance business.
Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of the Group's loan books, is
provided in Notes 6, 8 and 19.
Debt Securities
Debt Securities consist solely of sterling UK Government
treasury bills. These are used primarily to provide collateral
against Term Funding Scheme drawings with the Bank of England.
Effective adjusted tax rate
30 June 2019 30 June 2018 31 December 2018
Effective adjusted tax rate Effective adjusted tax rate Effective adjusted tax rate
GBPmillion GBPmillion GBPmillion
------------------- ------------------------------ ----------------------------- -----------------------------
Tax 3.6 2.7 6.8
------------------- ------------------------------ ----------------------------- -----------------------------
Profit before tax 18.8 16.5 36.7
------------------- ------------------------------ ----------------------------- -----------------------------
Effective rate (%) 19.1% 16.4% 18.5%
------------------- ------------------------------ ----------------------------- -----------------------------
Effective statutory tax rate
-----------------------------------------------------------------------------------------------------------------
30 June 2019 30 June 2018 31 December 2018
Effective statutory tax rate Effective statutory tax rate Effective statutory tax rate
GBPmillion GBPmillion GBPmillion
------------------- ------------------------------ ----------------------------- -----------------------------
Tax 3.5 2.4 6.4
------------------- ------------------------------ ----------------------------- -----------------------------
Profit before tax 18.1 15.1 34.7
------------------- ------------------------------ ----------------------------- -----------------------------
Effective rate (%) 19.3% 15.9% 18.4%
------------------- ------------------------------ ----------------------------- -----------------------------
Summarised balance sheet
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------------- ----------- ----------- -----------
Assets
----------------------------------- ----------- ----------- -----------
Cash and balances at central banks 101.9 126.7 169.7
----------------------------------- ----------- ----------- -----------
Debt securities 110.0 150.0 149.7
----------------------------------- ----------- ----------- -----------
Loans and advances to banks 67.3 34.2 44.8
----------------------------------- ----------- ----------- -----------
Loans and advances to customers 2,278.3 1,839.1 2,028.9
----------------------------------- ----------- ----------- -----------
Other assets 49.6 37.1 51.2
----------------------------------- ----------- ----------- -----------
2,607.1 2,187.1 2,444.3
----------------------------------- ----------- ----------- -----------
Liabilities
----------------------------------- ----------- ----------- -----------
Due to banks 263.5 263.3 263.5
----------------------------------- ----------- ----------- -----------
Deposits from customers 2,001.5 1,656.8 1,847.7
----------------------------------- ----------- ----------- -----------
Tier 2 subordinated liabilities 50.5 - 50.4
----------------------------------- ----------- ----------- -----------
Other liabilities 51.3 42.0 45.6
----------------------------------- ----------- ----------- -----------
2,366.8 1,962.1 2,207.2
----------------------------------- ----------- ----------- -----------
Due to banks
The amount due to banks consists solely of drawings from the
Bank of England Term Funding Scheme. The Group has drawn modest
levels of this low cost source of funding to supplement customer
deposit funding.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the Group's OneBill product. Customer deposits grew by 8.3%
during the period to GBP2,001.5 million (December 2018: GBP1,847.7
million), to fund the increased lending balances.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represent two GBP25 million
tranches of 6.75% Fixed Rate Callable Subordinated Notes, including
interest accrued. Further details of the note issuances are
provided in Note 14. The notes qualify as Tier 2 capital.
New accounting standards
IFRS 16 'Leases' became effective for the period beginning on 1
January 2019, replacing the previous leases standard, IAS 17, and
related interpretations. Adoption of the standard has changed the
way in which the Group accounts for a number of its property leases
and motor vehicle leases, where the Group is the lessee. The
standard requires such leases to be recognised on the balance sheet
as 'the lease liability' with the right to use the underlying asset
('the right-of-use asset') also recognised. The Group has elected
to recognise the initial impact of implementing IFRS 16 through the
opening balance of retained earnings and has not restated
comparatives. Further detail is provided in Note1.
Capital and liquidity
Capital
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. The total capital ratio is total capital
divided by Total Risk Exposure. The CET1 capital and total capital
ratios remained healthy at 12.8% and 15.2% respectively, providing
a capital buffer for continued growth. When taking account of the
2019 interim dividend, the CET1 capital ratio is 12.6% and the
total capital ratio is 15.0% (30 June 2018: both ratios 13.6%).
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on and
off-balance sheet asset exposure values, expressed as a percentage.
The UK leverage ratio framework sets a minimum ratio of 3.25%. As
shown in the table, the Group's leverage ratio remains comfortably
ahead of the minimum requirement.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after adding back
the IFRS 9 transition adjustment and deducting intangible assets,
both of which are net of attributable deferred tax
-- Tier 2 capital, which is subordinated debt net of unamortised
issue costs, capped at 25% of the capital requirement. In July
2018, the Group issued GBP25.0 million of Tier 2 capital and a
further GBP25.0 million was issued in October 2018.
The Group has elected to adopt the IFRS 9 transitional rules.
For 2019, this allows 85% (2018: 95%) of the initial IFRS 9
transition adjustment, net of attributable deferred tax, to be
added back to eligible capital. Further information is provided in
the Group's Pillar 3 report available at
www.securetrustbank.com/investor-information.
Capital
30 June 30 June 31 December
2019 2018 2018
% % %
-------------------- ------- ------- -----------
CRD IV ratios
-------------------- ------- ------- -----------
CET1 capital ratio 12.8 13.8 13.8
-------------------- ------- ------- -----------
Total capital ratio 15.2 13.8 16.3
-------------------- ------- ------- -----------
Leverage ratio 9.5 10.4 10.0
-------------------- ------- ------- -----------
Capital resources
30 June 30 June 31 December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
--------------------- ----------- ----------- -----------
CET1 capital 253.5 239.4 251.8
--------------------- ----------- ----------- -----------
Total Tier 2 capital 49.3 - 45.7
--------------------- ----------- ----------- -----------
Total capital 302.8 239.4 297.5
--------------------- ----------- ----------- -----------
Total Risk Exposure 1,987.6 1,729.2 1,824.6
--------------------- ----------- ----------- -----------
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to the Group's on and off
balance sheet exposures. The weightings applied are those
stipulated in the Capital Requirements Regulation.
The Group's Individual Capital Adequacy Assessment Process
('ICAAP') includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated entities within
the Group have complied during the period with relevant regulatory
capital requirements.
The Total Capital Requirement, set by the PRA, includes both the
calculated requirement derived using the standardised approach and
the additional capital derived in conjunction with the ICAAP. In
addition, capital is held to cover generic buffers set at a
macro-economic level by the PRA. These buffers have risen
significantly in recent years, with the requirement at 30 June 2019
being GBP69.6 million.
Management of capital
The Group's capital management policy is focused on optimising
shareholder value over the long term. Capital is allocated to
achieve targeted risk adjusted returns whilst ensuring appropriate
surpluses are held above the minimum regulatory requirements.
Key factors influencing the management of capital include:
-- The level of buffers set by the PRA
-- Estimated credit losses calculated using IFRS 9 methodology,
and the applicable transitional rules
-- New business volumes
-- The product mix of new business.
These last two factors are actively managed by the Group in
order to balance growth, profitability and conservation of capital.
The variation in the risk weightings applied to the Group's key
lending assets, as shown in the table on the following page, and
the Group's willingness and ability to adapt its lending volumes
and mix, provide significant flexibility in the Group's management
of capital.
Capital requirements
30 June 30 June 31 December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- -----------
Total Capital Requirement 198.8 173.0 182.7
----------------------------- ----------- ----------- -----------
Capital conservation buffer* 49.7 32.4 34.2
----------------------------- ----------- ----------- -----------
Countercyclical buffer* 19.9 8.6 18.2
----------------------------- ----------- ----------- -----------
Total 268.4 214.0 235.1
----------------------------- ----------- ----------- -----------
Typical risk weighting
Risk weighting %
-------------------------------------------- -----------------
Standard on-balance sheet risk weighting
-------------------------------------------- ----------------
Real Estate Finance: residential investment 35
---------------------------------------------- ----------------
Real Estate Finance: commercial investment 100
---------------------------------------------- ----------------
Real Estate Finance: development** 150
---------------------------------------------- ----------------
Commercial Finance*** 100
---------------------------------------------- ----------------
Retail Finance 75
---------------------------------------------- ----------------
Motor Finance 75
---------------------------------------------- ----------------
Debt Management 100
---------------------------------------------- ----------------
Consumer Mortgages (up to 80% LTV) 35
---------------------------------------------- ----------------
Liquidity
30 June 30 June 31 December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- -----------
Liquid assets
-------------------- ----------- ----------- -----------
Aaa - Aa3 211.9 276.7 319.4
-------------------- ----------- ----------- -----------
A1 - A3 62.2 29.2 39.7
-------------------- ----------- ----------- -----------
Unrated 5.1 5.0 5.1
-------------------- ----------- ----------- -----------
Liquidity exposures 279.2 310.9 364.2
-------------------- ----------- ----------- -----------
Note: 31 December 2018 and 30 June 2019 ratios and capital
resources are stated using the IFRS 9 transitional rules basis.
* The countercyclical buffer increased from 0.5% to 1% on 28
November 2018. The Capital conservation buffer increased from
1.875% to 2.5% on 1 January 2019.
** The Group has entered into an ENABLE Guarantee with the
British Business Bank, whereby the UK Government will take on a
portion of the risk on a portfolio of loans to smaller business in
return for a fee. When the Guarantee is triggered it will reduce
the net risk weighting applied to Real Estate Finance development
lending.
*** A lower risk weighting than 100% is applied to Commercial
Finance lending where the customer is a small to medium
enterprise due to applying an 'SME factor'.
Liquidity
At 30 June 2019 and throughout the period, the Group had
significant surplus liquidity over the minimum requirements due to
its stock of High Quality Liquid Assets ('HQLA'), in the form of
the Bank of England Reserve Account and UK Treasury Bills. Total
liquid assets were GBP279.2 million at 30 June 2019, with the High
Quality Liquid Assets balance being GBP211.9 million.
The Group uses a number of measures to manage liquidity. These
include:
-- The Overall Liquidity Adequacy Requirement ('OLAR'), which is
the Board's view of the Group's liquidity needs as set out in the
Board approved Internal Liquidity Adequacy Assessment Process
('ILAAP')
-- The Liquidity Coverage Ratio ('LCR'), which is a regulatory
measure that assesses net 30 day cash outflows as a proportion of
HQLA
-- Total funding ratio, as defined in the Appendix to the
interim report.
The OLAR was maintained significantly higher than regulatory
levels throughout the period, and the LCR was also significantly
higher than the regulatory requirement over the period. At 30 June
2019, the total funding ratio was 112.2% (30 June 2018: 116.6%, 31
December 2018: 118.2%).
For LCR purposes the HQLA excludes UK Treasury Bills which are
encumbered to provide collateral as part of the Group's Term
Funding Scheme with the Bank of England. The total of unencumbered
HQLA for LCR purposes is GBP181.5 million (30 June 2018: GBP155.1
million, 31 December 2018: GBP240.8 million).
The Group continues to manage its liquidity on a conservative
basis by holding High Quality Liquid Assets and utilising
predominantly retail funding from customer deposits. It has
continued to attract new fixed and variable rate deposits and, as
shown in the Savings section of the Interim Business Report on page
27, is enhancing its digital proposition and increasing the number
of funding options available to it. Secure Trust Bank is a
participant in the Bank of England's Sterling Money Market
Operations under the Sterling Monetary Framework and has drawn
GBP263.0 million under the Term Funding Scheme, this level being
unchanged from that reported at 30 June 2018 and 31 December
2018.
The Group has no liquid asset exposures outside of the United
Kingdom and no amounts that are either past due or impaired.
Interim business review
Business Finance
Strong growth, focused on Real Estate Finance and Commercial
Finance, has continued to generate increasing revenues with very
low impairment losses.
Revenue and lending performance vs prior periods
Real Estate Finance
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 23.5 18.3 41.2
------------------ --------- --------- --------
Lending balance 879.0 704.8 769.8
------------------ --------- --------- --------
Impairment losses 0.2 0.5 0.5
------------------ --------- --------- --------
Asset Finance
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 1.9 3.8 6.6
------------------ --------- --------- --------
Lending balance 42.7 87.9 62.8
------------------ --------- --------- --------
Impairment losses 0.3 0.9 2.2
------------------ --------- --------- --------
Commercial Finance
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 8.4 6.2 13.4
------------------ --------- --------- --------
Lending balance 220.7 187.5 194.7
------------------ --------- --------- --------
Impairment losses 0.2 0.2
------------------ --------- --------- --------
Real Estate Finance
The division supports SMEs in providing finance principally for
residential development and residential investment.
2019 performance
The business has continued to grow its Real Estate Finance
business, building on the increase in origination staff in 2018.
Growth during H1 2019 has been focused on the investment book,
reflecting the continued cautious approach to development lending,
with the consequence that the level of investment lending increased
to back over 70% of the portfolio. This has driven the increase in
balances during H1 2019, with the book now 25% higher than at H1
2018, having grown by 14% in H1 2019. Revenues consequently grew by
28% from H1 2018 due to the balance increase, whilst also aided by
some one-off transactional fee income arising in 2019. Impairment
losses remain low as the quality of the book has remained stable in
H1 2019, with no crystallised impairments arising.
Looking forward
The business continues to remain cautious around credit policy
in the light of more uncertain market conditions, and can react
quickly to any threats which may emerge, whilst also seeking out
opportunities within the Group's chosen appetite. Growth will
continue to be managed carefully to ensure that returns are
maximised whilst maintaining credit quality.
Asset Finance
Asset Finance provides funding to support SME businesses in
acquiring commercial assets, such as building equipment, commercial
vehicles and manufacturing equipment.
2019 performance
Following the decision to cease new business in 2018, the
portfolio has continued to run-off with lending balances continuing
to reduce in 2019, down by 51% against H1 2018, and 32% since
December 2018, with a consequent impact on income levels. It is
equally of note that impairment levels have also reduced, with a
charge of GBP0.3 million in H1 being GBP0.6 million (66%) lower
than in H1 2018 and 77% lower than in H2 2018. This reflects the
continued robustness of the portfolio and the management of
collections within the book.
Looking forward
The business ceased originating asset finance business in 2018,
and accordingly expects the book to continue to reduce in line with
contractual repayments from customers. The business continues to
assess its options in this market, whilst ensuring an orderly
run-down of the current portfolio.
Commercial Finance
Commercial Finance specialises in providing a full range of
invoice financing solutions to UK businesses including invoice
discounting and factoring.
2019 performance
The Commercial Finance business continued to grow in the first
half of 2019, with lending balances increasing by 13%. Income
growth was also very positive whilst costs remained unchanged.
Impairment levels were minimal as a result of the strong culture of
risk management.
The business is now benefiting from the regional model that was
rolled out in 2018, with fully operational offices in Leeds,
Manchester, Birmingham and London. Recruitment and engagement of
high calibre people, combined with the ongoing support of the
Group, remains key to success.
Looking forward
The team has built a reputation for high quality service,
particularly within the market sectors that the Group is focusing
on. As a result, the prospects for future growth are encouraging.
Further national expansion through development of its regional
footprint will provide the Group with a more scalable business
model.
Consumer Finance
The Consumer Finance portfolios continue to grow, with the first
phase of the Motor Finance transformation programme delivered and
improving credit quality in this portfolio.
Revenue and lending performance vs prior periods
Retail Finance
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 36.1 29.4 62.8
------------------ --------- --------- --------
Lending balance 671.7 508.0 597.0
------------------ --------- --------- --------
Impairment losses 9.1 9.0 19.3
------------------ --------- --------- --------
Motor Finance
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 24.3 23.8 48.5
------------------ --------- --------- --------
Lending balance 299.8 272.0 276.4
------------------ --------- --------- --------
Impairment losses 8.0 6.4 11.3
------------------ --------- --------- --------
Debt Managers (Services) Limited
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 4.4 3.1 7.0
------------------ --------- --------- --------
Lending balance 42.3 28.3 32.3
------------------ --------- --------- --------
Impairment losses N/A N/A N/A
------------------ --------- --------- --------
Consumer Mortgages
June 2019 June 2018 Dec 2018
------------------ --------- --------- --------
Lending revenue 1.7 0.4 1.5
------------------ --------- --------- --------
Lending balance 113.2 37.3 84.7
------------------ --------- --------- --------
Impairment losses 0.1 0.0 0.2
------------------ --------- --------- --------
Retail Finance
Retail Finance includes lending products for use by in-store and
online retailers to enable consumer purchases.
2019 performance
The Retail Finance business has continued to grow strongly, with
new gross lending volumes increasing to GBP372.6 million (an
increase of 20% on the equivalent period last year). This has
driven a further significant increase in lending assets, which
during the year rose to GBP671.7 million (June 2018: GBP508.0
million).
Each of the three largest sub-markets for the business (sports
and leisure, furniture and jewellery) have contributed to this
growth, which as in previous years has been achieved through a
combination of gaining increased market share and sector
growth.
Following the exit of a major competitor within the football
season ticket sector in March 2019, the Retail Finance business has
secured a significant increase in its market share within this
area.
Lending revenue increased by 23% to GBP36.1 million (June 2018:
GBP29.4 million). Impairment losses were well controlled at GBP9.1
million (June 2018: GBP9.0 million) and reflect a more stable
provisioning under IRFS 9 than last year.
Looking forward
The Group plans to maintain growth within its Retail Finance
business and the expectation is that this will be across all
existing retail sectors with particular focus on the furniture and
football season ticket markets.
To underpin the continued growth, the Group continues to invest
in initiatives to further enhance its systems capabilities, to
ensure that quality of service to both retailers and customers is
maintained or improved. This includes the roll-out of improved
telephony systems across customer facing staff and further
enhancements to online account management service, which allows
customers to view their statement online and make routine
self-serve changes to their account.
Motor Finance
Finance is arranged through motor dealerships, brokers and
internet introducers and involves fixed rate, fixed term hire
purchase arrangements, predominantly on used cars.
2019 performance
The Motor Finance business saw an increase in new business
volumes from GBP77.2 million for the period ended 30 June 2018 to
GBP89.0 million for the period to 30 June 2019 following the
appointment of experienced sales resources at the end of 2018. New
business continues to reflect a higher credit quality following
changes to credit criteria in 2017. Revenues have increased from
GBP23.8 million to GBP24.3 million, despite the increased mix of
lower margin higher credit quality loans.
Impairment losses for the period have increased from GBP6.4
million to GBP8.0 million. A proportion of the increase is as a
result of the deterioration in the used vehicle market over and
above expected seasonal changes in valuations. The underlying cost
of risk reflects the continued improvement in the quality of the
book and improved collections performance.
Looking forward
The long-term strategy for Motor Finance is to expand operations
into the prime credit market, whilst maintaining and growing the
near prime portfolio, to drive long-term receivables growth and
sustainable earnings outcomes through improved portfolio credit
quality. The Group believes the market has a long-term opportunity
for innovative and technology-led funding providers. The key target
market for growth is the middle tier independent and lower/middle
tier franchise dealer segments. A full range of products will be
offered to this market and a programme of work is underway to
deliver a new platform and business transformation through
2019/2020 with GBP3.9 million already invested as at June 2019.
As part of this programme of work, Motor Finance have developed
a new Used Vehicle Stocking product allowing motor dealerships to
finance used vehicles on their forecourts. This product has
initially been developed in partnership with Aston Barclay Auctions
and the first vehicles were funded on 8 July 2019 under a new
brand, V12 Vehicle Finance.
The business will continue to develop its broker and online
introducer relationships, to grow primarily near prime volumes.
Debt Managers (Services) Limited
Debt Managers (Services) Limited ('DMS') is the Bank's debt
collection business.
2019 performance
In the first half of 2019, DMS has further invested in purchased
debt with the valuation of purchased debt increasing 32% on the
year end, whilst revenue has increased 42% on the same period last
year. This has been achieved through the development of
relationships with new and existing clients and a broadening of
service offerings.
Looking forward
Strong relationships and forward flow contracts with existing
clients will ensure the positive momentum is carried into the
second half of the year. This is likely to result in continued
growth of both revenue and profit. Leveraging new technologies will
enhance the Company's customer engagement and will facilitate
penetration of new sectors. The Company's bank ownership means it
is well placed to identify and take advantage of growth
opportunities in the coming year.
Consumer Mortgages
Lending to individuals to purchase a property or remortgage
their current property.
2019 performance
The Group ceased originating new consumer mortgages in the first
quarter of 2019. Fulfilment of the pipeline saw balances grow to
GBP113.2 million by the end of the period.
Savings
The Group's award-winning Savings offering has seen balances
grow in line with lending activities, and an extension to the
product set with the launch of fixed term Cash ISAs.
Revenue and lending performance vs prior periods
June 2019 June 2018 Dec 2018
--------------------- --------- --------- --------
Notice deposits 613.7 451.4* 516.4
--------------------- --------- --------- --------
Fixed Term Savings 1,368.6 1,190.4* 1,316.8
--------------------- --------- --------- --------
Sight/Instant Access 19.2 15.0 14.5
--------------------- --------- --------- --------
*At December 2018, accrued interest was reclassified from Other
liabilities to Deposits from customers, as this better represented
the commercial reality of the arrangement, so the June 2018 figures
have been restated accordingly.
The Group attracts funding primarily via retail savings;
offering individuals competitive, simple products, applied for
online and serviced through a highly commended internet banking
service. These products offer UK-based online and telephone
customer service and are backed by the protection provided by the
UK Financial Services Compensation Scheme.
H1 2019 performance
In the first six months of 2019, Savings balances have grown by
GBP154 million, an 8% growth from the end of 2018. This represents
over 13,000 new accounts and over 4,000 new customers joining the
Group, whilst 63% of existing customers have also chosen to retain
their savings or open new accounts with us. Including the OneBill
account, total customer deposits now exceed GBP2 billion.
The Group also achieved its largest monthly inflow of new funds
on record with over GBP122 million deposited in Savings accounts
during June. This inflow was supported by the launch of the Group's
first Fixed Rate ISA. At an attractive rate of 1.60%, the Bank
attracted over GBP10 million across almost 400 accounts on this
first product in a matter of weeks. This evidences the Bank's
growing ability to access deeper liquidity pools and attract
marginally lower cost funds.
So far in 2019, the Group has been awarded the Feefo Trusted
Award for its independent review scores. The Trusted Service awards
are given to businesses using Feefo to collect genuine reviews and
who also meet the criteria of excellence needed to achieve a
Trusted Service Award. Only the businesses providing the best
experience for their customers, as rated by them, make the grade.
The Group also collects independent customer reviews on
TrustPilot.
The Group has also been recognised by independent industry
stakeholders, winning awards for its overall Savings offer which
gives consideration to the competitiveness of interest rates,
customer service and online services. The Group has won a number of
coveted awards; taking top place for Best Notice Account Provider
and being Highly Commended as Best Fixed Account Provider and Best
Bank Savings Provider in the Moneyfacts Awards.
These latest awards underline the strength of the Group's
Savings offer, which was also recognised in the 2019 Savings
Champion awards as the winner of Best Savings Provider and Finalist
for Best Online Savings Provider.
The introduction and adoption of online servicing from 2018 has
continued, with nearly two-thirds of the savings customer base
actively logging on and making use of the Internet Banking
functionality. New customers opening accounts have an almost 100%
registration rate, with 74% of the last 20,000 new accounts
actively logging in. Further activity is planned for 2019 to
enhance the Group's digital services and invite more existing
customers to register.
Looking forward
The Group plans continued Savings growth through 2019. With the
launch of short-dated notice accounts in 2018 and fixed term Cash
ISAs in 2019, the Group has gained access to some of the largest
savings markets in the UK, broadening access to large liquidity
pools at lower marginal cost.
The planned introduction of an instant access product in 2019,
the largest market by value, will extend this access further. This
significant expansion of the Group's savings offer will reduce cost
of funds, increase the range of funding options, allow access to a
new significant pool of potential customers and improve the ability
to retain existing customers.
The UK savings market is experiencing increasing competition
from an overall increase in the number of providers and products
available, at a point in time where there is also potential for an
increase in demand for funds as a result of TFS drawings being
refinanced in the savings market. Alongside the extension to its
product range, the Group is continuing to invest in its digital
services, whilst actively examining new distribution opportunities
for its savings products.
Risk management and principal risks
Risk overview
On an ongoing basis, the directors carry out a robust assessment
of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity.
Details of the Group's risk management framework, including risk
appetite statements, key policies and risk governance can be found
on the Group's website:
www.securetrustbank.com/our-corporate-information/risk-management.
Changes to the Group's risk profile
Changes to the Group's risk profile since the position set out
in the 2018 Annual Report and Accounts are set out in the following
sections:
Credit risk
Consumer Finance Credit Risk
The Group made the strategic decision to withdraw the Mortgage
product at the start of 2019, largely due to excessively aggressive
competition by lenders relaxing their lending criteria in an
uncertain macro-economic climate.
The Point of Sale Retail Finance business has continued to grow
strongly through the acquisition of high quality business in the
first half of 2019. Motor Finance has also seen good growth in the
first half of the year as the Bank continues to reposition its book
in the better quality near-prime sector of the motor finance
market. The improvement in quality has been reflected in the
Group's impairment charge for the period, as shown in the Financial
Review on page 18.
Business Finance Credit Risk
Real Estate Finance and Commercial Finance lending balances have
continued to grow in line with the Group's existing credit
appetite, with no material impairments arising in the period.
Guided by the Group's approved lending policies and the significant
experience within the lending teams, the ongoing focus on both the
ability of customers to service their obligations and the quality
of the underlying collateral has continued to result in strong
portfolio performances. The Real Estate portfolio in particular
remains heavily weighted towards the residential investment sector,
which continues to perform in line with expectations.
All Business Finance lending areas remain cognisant of the
current political uncertainty in the UK and regularly review risk
appetite for any asset classes which could be impacted by any wider
political change.
The Asset Finance portfolio continues to amortise, following the
decision to cease new lending in this division in early 2018. No
material impairments have arisen from the portfolio as balances
continue to run-off.
Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentrations. Due to the
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
The security on the Real Estate Finance and Consumer Mortgages
businesses is principally located in London and the South East of
the United Kingdom, whilst the remainder of the loan book is spread
around the country broadly in proportion to the population.
UK withdrawal from European Union
The Group continues to monitor very closely the uncertain
political and economic environment associated with the withdrawal
from the EU. The expected impact on the Group is described in the
Principal Risks and Uncertainties section of the 2018 Annual Report
and Accounts, and the Group's view has not significantly changed
since that assessment. The direct impact to the Group is limited,
even in a no deal scenario. The most significant indirect impact
continues to be in respect of credit risk, and the Group's ongoing
analysis of the macro-economic position and the performance of its
own lending portfolios continues to suggest that the Group can
withstand a disorderly exit.
Risk Description
---------------- --------------------------------------------------------------------------------------------
Credit Risk The risk that a counterparty will be unable to pay amounts in full when due
---------------- --------------------------------------------------------------------------------------------
Liquidity Risk The risk that the Group will encounter difficulty in meeting obligations associated with its
financial liabilities that are settled by delivering cash or another financial asset
---------------- --------------------------------------------------------------------------------------------
Operational Risk The risk of direct or indirect loss arising from a wide variety of causes associated with
the Group's processes, personnel, technology and infrastructure, and from external factors
other than the risks identified above
---------------- --------------------------------------------------------------------------------------------
Capital Risk The risk that the Group will have insufficient capital resources to support the business
---------------- --------------------------------------------------------------------------------------------
Market Risk The risk that the value of, or revenue generated from, the Group's assets and liabilities
is impacted as a result of market movements, predominantly interest rates
---------------- --------------------------------------------------------------------------------------------
Conduct Risk The potential for customers (and the business) to suffer financial loss or other detriment
through the actions and decisions made by the business and its staff
---------------- --------------------------------------------------------------------------------------------
Regulatory Risk The risk that the Group fails to be compliant with all relevant regulatory requirements
---------------- --------------------------------------------------------------------------------------------
Liquidity risk
The Group has continued to use competitive interest rates to
attract new fixed and variable rate deposits over terms ranging up
to seven years. A moderate amount of borrowing under the Bank of
England's Term Funding Scheme has also been used, with GBP263.3
million drawn up to 30 June 2019. All drawings will be repaid ahead
of contractual maturity in February 2022.
The Overall Liquidity Adequacy Requirement is the Board's own
view of the Group's liquidity requirement covering a 90-day
stressed period and has been maintained significantly above
regulatory levels throughout the period. The Liquidity Coverage
Ratio ('LCR'), which assesses stressed outflows over a 30-day
period as a proportion of High Quality Liquid Assets, was also
significantly higher than the regulatory requirement throughout the
period.
At 30 June 2019, the total funding ratio remained well within
the Bank's risk appetite at 112.2% (30 June 2018: 116.6%, 31
December 2018: 118.2%). Definitions of this ratio, its calculation
and the reasons for its use can be found in the Appendix to the
interim report on page 56.
Operational risk
The Group's operational risk process and standards are defined
and embedded through a formal Operational Risk Policy and
Framework, which is aligned to the Basel Committee on Banking
Supervision criteria for the sound management of operational risk.
The objective of operational risk management is to:
-- Identify and manage operational risks within acceptable
levels and defined risk appetite statements/metrics/thresholds and
to limit operational losses
-- Develop a transparent risk culture that seeks to understand
its risk profile, the incidents and losses they are incurring and
to respond with proportionate and expeditious action to thematic
areas of concern
-- Develop consistent and robust policies and controls that are
understood and embedded across all business areas.
Key Risk themes of Operational Risk focus in 2019 include:
-- Operational Resilience - The Group recognises that any
disruption to the services it provides could cause detriment to its
customers and could affect the Group's financial stability. In
2019, the Group is rolling out a programme of work to review its
critical processes and identify opportunities to further enhance
the resilience of its operations.
-- Supplier Management - The Group uses a number of third
parties to support its IT and operational processes. The Group
recognises that it is important to effectively manage these
suppliers and is introducing an enhanced control framework and
developing its assurance requirements.
-- Information Security and Cyber Risk - As a financial
institution, the Group is subject to a heightened risk of actual or
attempted IT security breaches by sophisticated cybercrime groups.
Any failure by the Group's intrusion detection and anti-penetration
software to anticipate, prevent or mitigate a breach of the Group's
IT network could significantly disrupt the Group's operations. The
Group continues to invest in its information security controls in
response to emerging cybercrime threats and to seek to ensure that
controls for known threats remain robust.
Capital risk
At 30 June 2019, the CET1 Ratio was 12.8% (30 June 2018: 13.8%,
31 December 2018: 13.8%) and the total capital ratio was 15.2% (30
June 2018: 13.8%, 31 December 2018: 16.3%). The Leverage Ratio was
9.5% (30 June 2018: 10.4%, 31 December 2018: 10.0%) on a Group
consolidated basis. All capital ratios remain healthy and the Group
has no immediate plans to raise additional capital.
In the longer term, should the Group wish to increase its
capital resources, it has access to additional forms of capital, as
demonstrated by the issue of GBP50 million of Tier 2 Fixed Rate
Reset Callable Subordinated Notes in the second half of 2018 at a
rate of 6.75%. Further details of the Group's capital resources are
provided in Note 15.
Market risk
Secure Trust Bank continues to maintain a broadly-matched asset
and liability profile but is susceptible to movements in interest
rates which can affect the Bank's earnings and the overall value of
its interest rate sensitive assets and liabilities where
unmatched.
Interest rate risk in the banking book is monitored by reference
to the following measures:
-- Earnings at Risk ('EaR')
-- Market Value Sensitivity ('MVS'), and
-- Economic Value of Equity ('EVE').
The Group remained within its market risk appetite throughout
the year.
The Group has a small exposure to foreign exchange risk through
its Commercial Finance lending, which is subject to hedging
activities.
The Group does not operate a trading book.
Conduct risk
In line with the Operational Risk Framework, the conduct risk
and control assessments have been reviewed by the business units
with self-attestations by first line risk owners.
Monthly review and challenge of Key Risk Indicators takes place
in the product ExCo meetings, with the Customer Focus Committee
providing oversight of the first line activities to assure senior
management that the first line are identifying conduct risks when
they arise and taking appropriate actions to mitigate them.
Training on conduct risk is provided to first line staff as part
of an annual training and communication programme, with an
eLearning module completed by staff during the period.
Regulatory risk
In the period, the Group continued to work on new and revised
regulations and legislation that will come into force over the next
18 months and beyond, including the extension of the Senior
Managers and Certification Regime to the Group's subsidiaries.
Consolidated statement of comprehensive income
June June December
2019 2018 2018
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Income statement
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Interest income and similar income 92.3 79.2 169.2
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Interest expense and similar charges (21.8) (15.5) (35.5)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Net interest income 70.5 63.7 133.7
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Fee and commission income 11.2 9.8 19.4
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Fee and commission expense (0.3) (1.0) (1.5)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Net fee and commission income 10.9 8.8 17.9
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Operating income 81.4 72.5 151.6
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Impairment losses on loans and advances to customers 8 (17.8) (16.3) (32.4)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Operating expenses (45.5) (41.1) (84.5)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Profit before income tax 18.1 15.1 34.7
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Income tax expense 4 (3.5) (2.4) (6.4)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Profit for the period 14.6 12.7 28.3
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Other comprehensive income
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Items that will not be reclassified to the income statement
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Revaluation reserve - - (0.3)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Taxation (0.2) - 0.1
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Other comprehensive income for the period, net of income tax (0.2) - (0.2)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Total comprehensive income for the period 14.4 12.7 28.1
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Profit attributable to:
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Equity holders of the Company 14.6 12.7 28.3
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Total comprehensive income attributable to:
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Equity holders of the Company 14.4 12.7 28.1
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Earnings per share for profit attributable to the equity holders of the
Company during the
period (pence per share)
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Basic earnings per share 5 79.0 68.7 153.2
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Diluted earnings per share 5 78.3 67.6 150.9
------------------------------------------------------------------------- ---- ----------- ----------- -----------
Consolidated statement of financial position
June June December
2019 2018 2018
Unaudited Unaudited Audited
Note GBPmillion GBPmillion GBPmillion
-------------------------------------------- ---- ----------- ----------- -----------
ASSETS
-------------------------------------------- ---- ----------- ----------- -----------
Cash and balances at central banks 101.9 126.7 169.7
-------------------------------------------- ---- ----------- ----------- -----------
Loans and advances to banks 67.3 34.2 44.8
-------------------------------------------- ---- ----------- ----------- -----------
Loans and advances to customers 6 2,278.3 1,839.1 2,028.9
-------------------------------------------- ---- ----------- ----------- -----------
Debt securities 110.0 150.0 149.7
-------------------------------------------- ---- ----------- ----------- -----------
Property, plant and equipment 16.5 11.6 11.0
-------------------------------------------- ---- ----------- ----------- -----------
Leasing right-of-use asset 7 4.0 - -
-------------------------------------------- ---- ----------- ----------- -----------
Intangible assets 9.2 10.3 9.9
-------------------------------------------- ---- ----------- ----------- -----------
Deferred tax assets 7.8 7.4 7.9
-------------------------------------------- ---- ----------- ----------- -----------
Other assets 12.1 7.8 22.4
-------------------------------------------- ---- ----------- ----------- -----------
Total assets 2,607.1 2,187.1 2,444.3
-------------------------------------------- ---- ----------- ----------- -----------
LIABILITIES AND EQUITY
-------------------------------------------- ---- ----------- ----------- -----------
Liabilities
-------------------------------------------- ---- ----------- ----------- -----------
Due to banks 9 263.5 263.3 263.5
-------------------------------------------- ---- ----------- ----------- -----------
Deposits from customers 10 2,001.5 1,656.8 1,847.7
-------------------------------------------- ---- ----------- ----------- -----------
Current tax liabilities 3.4 2.8 4.2
-------------------------------------------- ---- ----------- ----------- -----------
Lease liabilities 11 4.9 - -
-------------------------------------------- ---- ----------- ----------- -----------
Other liabilities 42.1 37.6 40.1
-------------------------------------------- ---- ----------- ----------- -----------
Provisions for liabilities and charges 12 0.9 1.6 1.3
-------------------------------------------- ---- ----------- ----------- -----------
Subordinated liabilities 50.5 - 50.4
-------------------------------------------- ---- ----------- ----------- -----------
Total liabilities 2,366.8 1,962.1 2,207.2
-------------------------------------------- ---- ----------- ----------- -----------
Equity attributable to owners of the parent
-------------------------------------------- ---- ----------- ----------- -----------
Share capital 7.4 7.4 7.4
-------------------------------------------- ---- ----------- ----------- -----------
Share premium 81.2 81.2 81.2
-------------------------------------------- ---- ----------- ----------- -----------
Revaluation reserve 0.9 1.3 1.1
-------------------------------------------- ---- ----------- ----------- -----------
Retained earnings 150.8 135.1 147.4
-------------------------------------------- ---- ----------- ----------- -----------
Total equity 240.3 225.0 237.1
-------------------------------------------- ---- ----------- ----------- -----------
Total liabilities and equity 2,607.1 2,187.1 2,444.3
-------------------------------------------- ---- ----------- ----------- -----------
Consolidated statement of changes in equity
Share Share Revaluation Retained
capital premium reserve earnings Total
Unaudited GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2019 (as previously stated) 7.4 81.2 1.1 147.4 237.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
IFRS 16 transition adjustment net of tax (see Note 1) - - - (0.1) (0.1)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2019 (as restated) 7.4 81.2 1.1 147.3 237.0
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the six months ended 30 June 2019 - - - 14.6 14.6
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - (0.2) - (0.2)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - (0.2) - (0.2)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - (0.2) 14.6 14.4
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividends - - - (11.8) (11.8)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments _ _ _ 0.6 0.6
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - 0.1 0.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners - - - (11.1) (11.1)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 30 June 2019 7.4 81.2 0.9 150.8 240.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Unaudited
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2018 7.4 81.2 1.3 133.4 223.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the six months ended 30 June 2018 - - - 12.7 12.7
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividends - - - (11.3) (11.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - 0.3 0.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners - - - (11.0) (11.0)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 30 June 2018 7.4 81.2 1.3 135.1 225.0
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share Share Revaluation Retained
capital premium reserve earnings Total
Audited GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 1 January 2018 7.4 81.2 1.3 133.4 223.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the 12 months ended 31 December 2018 - - - 28.3 28.3
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Revaluation reserve - - (0.3) - (0.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on revaluation reserve - - 0.1 - 0.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total other comprehensive income - - (0.2) - (0.2)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total comprehensive income for the period - - (0.2) 28.3 28.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Transactions with owners, recorded directly in equity
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Contributions by and distributions to owners
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Dividends - - - (14.8) (14.8)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Share-based payments - - - 0.8 0.8
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Tax on share-based payments - - - (0.3) (0.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Total contributions by and distributions to owners - - - (14.3) (14.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Balance at 31 December 2018 7.4 81.2 1.1 147.4 237.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Consolidated statement of cash flows
June June December
2019 2018 2018
Unaudited Unaudited Audited
GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from operating activities
------------------------------------------------------------------------------- ----------- ----------- -----------
Profit for the period 14.6 12.7 28.3
------------------------------------------------------------------------------- ----------- ----------- -----------
Adjustments for:
------------------------------------------------------------------------------- ----------- ----------- -----------
Income tax expense 3.5 2.4 6.4
------------------------------------------------------------------------------- ----------- ----------- -----------
Depreciation of property, plant and equipment 1.1 0.4 1.3
------------------------------------------------------------------------------- ----------- ----------- -----------
Loss on disposal of computer software - - 0.1
------------------------------------------------------------------------------- ----------- ----------- -----------
Amortisation of intangible assets 1.0 1.0 1.8
------------------------------------------------------------------------------- ----------- ----------- -----------
Impairment losses on loans and advances to customers 17.8 16.3 32.4
------------------------------------------------------------------------------- ----------- ----------- -----------
Amortisation of subordinated liabilities issue costs 0.1 - -
------------------------------------------------------------------------------- ----------- ----------- -----------
Share-based compensation 0.6 0.3 0.8
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from operating profits before changes in operating assets and
liabilities 38.7 33.1 71.1
------------------------------------------------------------------------------- ----------- ----------- -----------
Changes in operating assets and liabilities:
------------------------------------------------------------------------------- ----------- ----------- -----------
- net decrease/(increase) in debt securities 39.7 (145.0) (144.7)
------------------------------------------------------------------------------- ----------- ----------- -----------
- net increase in loans and advances to customers (267.2) (288.9) (494.8)
------------------------------------------------------------------------------- ----------- ----------- -----------
- net decrease/(increase) in other assets 9.9 (2.4) (17.0)
------------------------------------------------------------------------------- ----------- ----------- -----------
- net increase in deposits from customers 140.0 162.2 364.5
------------------------------------------------------------------------------- ----------- ----------- -----------
- net increase/(decrease) in other liabilities 16.4 7.3 (0.5)
------------------------------------------------------------------------------- ----------- ----------- -----------
Income tax paid (4.0) (3.1) (6.4)
------------------------------------------------------------------------------- ----------- ----------- -----------
Interest paid on lease liabilities (0.1) - -
------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash outflow from operating activities (26.6) (236.8) (227.8)
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from investing activities
------------------------------------------------------------------------------- ----------- ----------- -----------
Purchase of property, plant and equipment (6.1) (0.5) (1.1)
------------------------------------------------------------------------------- ----------- ----------- -----------
Purchase of computer software (0.3) (0.9) (1.4)
------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash outflow from investing activities (6.4) (1.4) (2.5)
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash flows from financing activities
------------------------------------------------------------------------------- ----------- ----------- -----------
Net increase in amounts due to banks - 150.0 150.0
------------------------------------------------------------------------------- ----------- ----------- -----------
Issue of subordinated liabilities - - 50.0
------------------------------------------------------------------------------- ----------- ----------- -----------
Subordinated liabilities issue costs - - (0.8)
------------------------------------------------------------------------------- ----------- ----------- -----------
Repayments of principal under lease liabilities (0.5) - -
------------------------------------------------------------------------------- ----------- ----------- -----------
Dividends paid (11.8) (11.3) (14.8)
------------------------------------------------------------------------------- ----------- ----------- -----------
Net cash (outflow)/inflow from financing activities (12.3) 138.7 184.4
------------------------------------------------------------------------------- ----------- ----------- -----------
Net decrease in cash and cash equivalents (45.3) (99.5) (45.9)
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash and cash equivalents at start of period 214.5 260.4 260.4
------------------------------------------------------------------------------- ----------- ----------- -----------
Cash and cash equivalents at end of period 169.2 160.9 214.5
------------------------------------------------------------------------------- ----------- ----------- -----------
Notes to the interim report
1. Accounting policies
The principal accounting policies applied in the preparation of
this interim report are set out below. These policies have been
consistently applied to all the periods presented, unless otherwise
stated.
1.1 Reporting entity
Secure Trust Bank PLC is a public limited company incorporated
in England and Wales in the United Kingdom (referred to as 'the
Company') and is limited by shares. The Company is registered in
England and Wales and has the registered number 00541132. The
registered address of the Company is One Arleston Way, Solihull,
West Midlands, B90 4LH. The interim report of the Company as at and
for the period ended 30 June 2019 comprise Secure Trust Bank PLC
and its subsidiaries (together referred to as 'the Group' and
individually as 'subsidiaries'). The Group is primarily involved in
banking and financial services.
1.2 Basis of presentation
The interim report does not constitute statutory accounts as
defined in section 434 of the Companies Act 2006, and has been
prepared in accordance with International Financial Reporting
Standards, as adopted or early adopted by the Group and endorsed by
the EU, the Companies Act 2006 applicable to companies reporting
under IFRS and IAS 34 Interim Financial Reporting.
A copy of the statutory accounts for the year ended 31 December
2018 has been delivered to the Registrar of Companies. The
auditor's report on those accounts was not qualified, did not
include a reference to any matters to which the previous auditors
drew attention by way of emphasis without qualifying the report and
did not contain statements under section 498(2) or (3) of the
Companies Act 2006.
The results for the periods ending 30 June 2019 and 30 June 2018
are unaudited. The results for the year ending 31 December 2018 are
audited.
The interim report has been prepared under the historical cost
convention, as modified by the revaluation of land and buildings.
The interim report is presented in pounds sterling, which is the
functional and presentational currency of the entities within the
Group.
The preparation of the interim report in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity or areas where assumptions
and estimates are significant to the interim report are disclosed
in Note 2.
The directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The directors confirm they are satisfied that the
Group has adequate resources to continue in business for the
foreseeable future. For this reason, they continue to adopt the
'going concern' basis for preparing accounts.
In assessing the Group as a going concern, the directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Interim Business Report. The Group uses various short and
medium-term forecasts to monitor future capital and liquidity
requirements and these include stress testing assumptions to
identify the headroom on regulatory compliance measures.
1.3 Accounting policies
The accounting policies applied in preparing the unaudited
condensed interim report are consistent with those used in
preparing the audited statutory financial statements for the year
ended 31 December 2018, except for the following:
1.3.1 IFRS 16 'Leases'
The new standard is effective for annual periods beginning on or
after 1 January 2019, and sets out the principles for the
recognition, measurement, presentation and disclosure of leases for
both parties to a contract, i.e. the customer ('lessee') and the
supplier ('lessor'). It replaces the previous leases standard, IAS
17 'Leases', and related interpretations.
IFRS 16 uses a new single model that applies to all leases, thus
eliminating the classification of leases as either operating leases
or finance leases for a lessee. Applying that model, on
commencement of a lease, the lessee recognises a liability to make
lease payments ('the lease liability'), an asset representing the
right to use the underlying asset during the lease term ('the
right-of-use asset'), and depreciation of right-of-use assets is
shown separately from interest on lease liabilities in the income
statement.
The lease liability is initially measured based on the net
present value of the lease payments to be made over the remaining
lease term, using the lessee's incremental borrowing rate as the
discount rate. After commencement of the lease, the lease liability
is measured on an amortised cost basis, with interest being
calculated on an effective interest rate basis on the remaining
balance of the liability, and lease payments reducing the lease
liability when paid.
The right-of-use asset is initially measured at cost, being the
amount of the initial measurement of the lease liability, adjusted
for any prepaid rentals less any lease incentives plus any initial
direct costs incurred by the lessee and dismantling or restoration
costs. Subsequently, the right-of-use asset is amortised on a
straight-line basis over the remaining term of the lease.
Transition choices
The Group has elected to recognise the cumulative effect of
implementing IFRS 16 as an adjustment to the opening balance of
retained earnings at 1 January 2019. Accordingly, prior year
comparatives shall not be restated. As a practical expedient, the
Group will apply the new standard only to contracts that had
previously been identified as leases. Therefore, the new standard
will not be applied to contracts that had not previously been
identified as leases.
The Group has also elected not to apply IFRS 16 to the
following:
-- Short-term leases of 12 months or less.
-- Leases for which the underlying asset is of low value.
This has resulted in the new standard only being applicable to a
number of property leases and motor vehicle leases.
The Group has chosen to measure the initial right-of-use asset
for property leases at its carrying amount as if the standard has
been applied since the commencement date, but discounted using the
incremental borrowing rate as at 1 January 2019. The initial
right-of-use asset for all other leases is measured at an amount
equal to the lease liability.
The adjustments (net of tax) arising from the adoption of IFRS
16 on 1 January 2019, and their effect on the 31 December 2018
balance sheet, were as follows:
As originally IFRS 16
stated adjustment As restated
31 December 1 January 1 January
2018 2019 2019
GBPmillion GBPmillion GBPmillion
----------------------------------- ------------- ----------- -----------
Assets
----------------------------------- ------------- ----------- -----------
Cash and balances at central banks 169.7 - 169.7
----------------------------------- ------------- ----------- -----------
Debt securities 149.7 - 149.7
----------------------------------- ------------- ----------- -----------
Loans and advances to banks 44.8 - 44.8
----------------------------------- ------------- ----------- -----------
Loans and advances to customers 2,028.9 - 2,028.9
----------------------------------- ------------- ----------- -----------
Lease right-of-use assets - 4.5 4.5
----------------------------------- ------------- ----------- -----------
Deferred tax 7.9 0.2 8.1
----------------------------------- ------------- ----------- -----------
Other assets 43.3 (0.4) 42.9
----------------------------------- ------------- ----------- -----------
Total assets 2,444.3 4.3 2,448.6
----------------------------------- ------------- ----------- -----------
Liabilities
----------------------------------- ------------- ----------- -----------
Due to banks 263.5 - 263.5
----------------------------------- ------------- ----------- -----------
Deposits from customers 1,847.7 - 1,847.7
----------------------------------- ------------- ----------- -----------
Tier 2 subordinated liabilities 50.4 - 50.4
----------------------------------- ------------- ----------- -----------
Lease liabilities - 5.5 5.5
----------------------------------- ------------- ----------- -----------
Other liabilities 45.6 (1.1) 44.5
----------------------------------- ------------- ----------- -----------
Total liabilities 2,207.2 4.4 2,211.6
----------------------------------- ------------- ----------- -----------
Share capital 7.4 - 7.4
----------------------------------- ------------- ----------- -----------
Share premium 81.2 - 81.2
----------------------------------- ------------- ----------- -----------
Revaluation reserve 1.1 - 1.1
----------------------------------- ------------- ----------- -----------
Retained earnings 147.4 (0.1) 147.3
----------------------------------- ------------- ----------- -----------
Total equity 237.1 (0.1) 237.0
----------------------------------- ------------- ----------- -----------
Total liabilities and equity 2,444.3 4.3 2,448.6
----------------------------------- ------------- ----------- -----------
Of the total right-of-use asset of GBP4.5 million recognised at
1 January 2019, GBP4.2 million related to leases of property, and
GBP0.3 million related to leases of motor vehicles.
Adjustments to other assets
These relate to the release of rent prepayments that are no
longer required now that the leases are recognised as right-of-use
assets.
Adjustment to other liabilities
This relates to the release of a reverse lease premium, which,
under IAS 17, was included in accruals and was being spread over
the term of the lease.
The weighted average incremental borrowing rate applied to lease
liabilities recognised in the statement of financial position on
transition at 1 January 2019 was 2.61%.
The table below presents a reconciliation from operating lease
commitments disclosed at December 2018 to lease liabilities
recognised at 1 January 2019:
GBPmillion
------------------------------------------------------------------- ----------
Operating lease commitment disclosed under IAS 17 at December 2018 7.4
------------------------------------------------------------------- ----------
Effect of discounting (1.9)
------------------------------------------------------------------- ----------
5.5
------------------------------------------------------------------- ----------
In terms of the income statement impact, the application of IFRS
16 resulted in a decrease in other operating expenses and an
increase in depreciation and interest expense compared to IAS 17.
During the period, in relation to leases under IFRS 16 the Group
recognised the following amounts in the consolidated income
statement:
GBPmillion
----------------- ----------
Depreciation 0.5
----------------- ----------
Interest expense 0.1
----------------- ----------
Lessor accounting
Lessor accounting remains unchanged from IAS 17.
1.3.2 Taxation
Taxes on profits in interim periods are accrued using the tax
rate that will be applicable to expected total annual profits.
1.3.3 Standards in issue but not yet effective
There are no new standards in issue but not yet effective that
have a material effect on the Group.
2. Critical judgements and estimates
2.1 Judgements
No critical judgements have been identified.
2.2 Key sources of estimation uncertainty
Estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty are outlined below.
2.2.1 Impairment losses on loans and advances to customers
As discussed in Note 1.10 of the Group's Annual Report for the
year ended 31 December 2018, ECLs are calculated by multiplying
three main components: the PD, EAD and LGD. These variables are
derived from internally developed statistical models and historical
data, adjusted to reflect forward looking information. The
determination of both the PD and LGD require estimation which is
discussed further below.
2.2.2 Probability of default ('PD')
As set out in Note 1.10 Exogenous, Maturity, Vintage ('EMV')
modelling is used in the production of forward looking lifetime PDs
in the calculation of ECLs. As the Group's performance data does
not go back far enough to capture a full economic cycle, the proxy
series of the quarterly rates of write offs for UK unsecured
lending data is used to build an economic response model ('ERM') to
incorporate the effects of recession.
The portfolios for which external benchmark information
represents a significant input into the measurement of expected
credit loss ('ECL') are Real Estate Finance, Asset Finance and
Commercial Finance. The benchmarks used for all three portfolios
are Standard & Poor's Ratings and Bank of England UK
Possessions as proxy data for ERM.
A 10% change in the PD for Motor Finance would impact the ECL
allowance by GBP1.8 million (June 2018: GBP2.2 million, December
2018: GBP1.8 million).
With the exception of the Motor Finance portfolio, sensitivity
to reasonably possible changes in PD is not considered to result in
material changes in the ECL allowance.
The composition of the Retail Finance portfolio remains stable
with minimal movement in PDs. The ECL allowance held for the
Business Finance, Consumer Mortgages and Other portfolios remains
low. Reasonably possible changes in the PD for these portfolios are
not considered to result in a material change in the ECL
allowance.
2.2.3 Loss given default ('LGD')
The Group's policy for the determination of LGD is outlined in
Note 1.10 of the Group's Annual Report for the year ended 31
December 2018.
With the exception of the Motor Finance portfolio, the
sensitivity of the ECL allowance to reasonably possible changes in
the LGD is not considered material. For the Motor Finance portfolio
a 10% change in the LGD is considered reasonably possible due to
historic data showing movements in vehicle collection rates once a
loan is in repossession stage. A 10% change in the vehicle recovery
rate assumption element of the LGD for Motor Finance would impact
the ECL allowance by GBP1.5 million (June 2018 GBP1.7 million,
December 2018: GBP1.6 million). Vehicle collection rates and
proceeds received on sale of vehicles at auction remained broadly
stable over 2018, and therefore there was no material change to ECL
as a result of LGD changes.
2.2.4 Incorporation of forward looking data
The Group incorporates forward looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss by developing a number of
potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided in
Note 1.10. Whilst not material and therefore not required by IAS 1,
the Group has included the disclosure below as it is considered
useful to readers of the Interim Report.
The macro-economic scenarios and weightings applied are
summarised below:
Weighting Weighting
30 June 2019 and 30 June
Scenario Derivation 31 December 2018 2018
-------------- ------------------------------------------------------------------------ ----------------- ---------
Derived from external consensus forecasts and used in the Group's
strategic planning and budgeting
Base case processes. 65% 80%
-------------- ------------------------------------------------------------------------ ----------------- ---------
Assumes macro-economic variables will move with a more positive
Benign case trajectory than the base case. 10% 5%
-------------- ------------------------------------------------------------------------ ----------------- ---------
Management's assessment, based on historic data, of an adverse scenario
that could occur once
Stressed case every seven to eight years. 20% 10%
-------------- ------------------------------------------------------------------------ ----------------- ---------
Based on the scenario used by the PRA for the ICAAP. This can be found
on the Bank of England's
Deeper stress website: www.bankofengland.co.uk 5% 5%
-------------- ------------------------------------------------------------------------ ----------------- ---------
Weightings applied to the macro-economic scenarios were reviewed
and reconfirmed at the July 2019 Assumptions Committee.
The sensitivity of the ECL allowance to reasonably possible
changes in macro-economic scenario weighting is presented
below:
June June December
2019 2018 2018
Increase in stressed case weighting by 5% and reduction in base case GBPmillion GBPmillion GBPmillion
--------------------------------------------------------------------- ----------- ----------- -----------
Motor Finance 0.1 0.1 0.1
--------------------------------------------------------------------- ----------- ----------- -----------
Retail Finance 0.1 0.1 0.1
--------------------------------------------------------------------- ----------- ----------- -----------
June June December
2019 2018 2018
Increase in deeper stress case weighting by 5% and reduction in base case GBPmillion GBPmillion GBPmillion
-------------------------------------------------------------------------- ----------- ----------- -----------
Motor Finance 0.4 0.3 0.3
-------------------------------------------------------------------------- ----------- ----------- -----------
Retail Finance 0.8 0.8 0.8
-------------------------------------------------------------------------- ----------- ----------- -----------
The sensitivity of other portfolios to reasonably possible
changes in macro-economic scenario weightings is not considered
material.
3. Operating segments
The Group is organised into seven main operating segments, which
consist of the different products available, disclosed below:
Business Finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate.
2) Asset Finance: loans to small and medium-sized enterprises to
acquire commercial assets.
3) Commercial Finance: invoice discounting and invoice
factoring.
Consumer Finance
4) Motor Finance: Hire purchase agreements secured against the
vehicle being financed.
5) Retail Finance: Point of sale unsecured finance for in-store
and online retailers.
6) Debt Management: Debt collection.
7) Consumer Mortgages: Residential mortgages for the
self-employed, contract workers, those with complex income and
those with a recently restored credit history, sold via select
mortgage intermediaries.
Other
The 'Other' segment includes other products which are
individually below the quantitative threshold for separate
disclosure and fulfils the requirement of IFRS 8.28 by reconciling
operating segments to the amounts reported in the interim
report.
Other includes principally OneBill (the Group's consumer bill
management service, which has been closed to new customers since
2009) and RentSmart (principally the funding and operation of
finance leases through a disclosed agency agreement with RentSmart
Limited).
Currently, the Debt Management and Consumer Mortgages segments
both fall below the quantitative threshold for separate disclosure,
but the directors consider that they represent sufficiently
distinct types of business to merit separate disclosure. The June
2018 figures have been restated accordingly, in order to separately
disclose Debt Management, as this change had already been made at
December 2018. Also, now that the Group has ceased new mortgage
originations, the Consumer Mortgages business is now managed as
part of Consumer Finance, so both prior periods have been restated
accordingly.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Interest Impairment
income Revenue losses on
and Fee and from loans and Loans and
similar commission external advances to advances to Loan
income income customers customers customers commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
June 2019
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Real Estate Finance 22.6 0.9 23.5 0.2 879.0 129.3
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Commercial Finance 3.4 5.0 8.4 0.2 220.7 38.3
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Business Finance 27.9 5.9 33.8 0.7 1,142.4 167.6
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Retail Finance 34.2 1.9 36.1 9.1 671.7 30.4
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Motor Finance 23.9 0.4 24.3 8.0 299.8 1.2
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Debt Management 3.8 0.6 4.4 - 42.3 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Mortgages 1.7 - 1.7 0.1 113.2 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Finance 63.6 2.9 66.5 17.2 1,127.0 31.6
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Other 0.8 2.4 3.2 (0.1) 8.9 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
92.3 11.2 103.5 17.8 2,278.3 199.2
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Interest Impairment
income Revenue losses on
and Fee and from loans and Loans and
similar commission external advances to advances to Loan
income income customers customers customers commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
June 2018
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Real Estate Finance 18.3 - 18.3 0.5 704.8 168.7
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Asset Finance 3.8 - 3.8 0.9 87.9 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Commercial Finance 2.3 3.9 6.2 0.2 187.5 53.2
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Business Finance 24.4 3.9 28.3 1.6 980.2 221.9
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Retail Finance 27.4 2.0 29.4 9.0 508.0 25.8
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Motor Finance 23.2 0.6 23.8 6.4 272.0 0.8
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Debt Management 2.6 0.5 3.1 - 28.3 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Mortgages 0.4 - 0.4 - 37.3 13.8
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Finance 53.6 3.1 56.7 15.4 845.6 40.4
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Other 1.2 2.8 4.0 (0.7) 13.3 1.0
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
79.2 9.8 89.0 16.3 1,839.1 263.3
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Interest Impairment
income Revenue losses on
and Fee and from loans and Loans and
similar commission external advances to advances to Loan
income income customers customers customers commitments
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
December 2018
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Real Estate Finance 41.1 0.1 41.2 0.5 769.8 173.4
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Asset Finance 6.6 - 6.6 2.2 62.8 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Commercial Finance 5.5 7.9 13.4 - 194.7 45.6
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Business Finance 53.2 8.0 61.2 2.7 1,027.3 219.0
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Retail Finance 58.7 4.1 62.8 19.3 597.0 28.3
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Motor Finance 47.4 1.1 48.5 11.3 276.4 0.5
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Debt Management 6.1 0.9 7.0 - 32.3 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Mortgages 1.5 - 1.5 0.2 84.7 15.3
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Consumer Finance 113.7 6.1 119.8 30.8 990.4 44.1
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Other 2.3 5.3 7.6 (1.1) 11.2 -
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
169.2 19.4 188.6 32.4 2,028.9 263.1
-------------------- ----------- ----------- ----------- ------------ ------------ ------------
Funding costs and operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis. Accordingly, profit
by operating segment has not been disclosed.
All of the Group's operations relate to continuing operations,
and are conducted wholly within the United Kingdom and geographical
information is therefore not presented.
4. Income tax expense
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------------------------------------------- ----------- ----------- -----------
Current taxation
----------------------------------------------------------------- ----------- ----------- -----------
Corporation tax charge - current period 3.3 2.9 7.3
----------------------------------------------------------------- ----------- ----------- -----------
Corporation tax charge - adjustments in respect of prior periods - - 0.3
----------------------------------------------------------------- ----------- ----------- -----------
3.3 2.9 7.6
----------------------------------------------------------------- ----------- ----------- -----------
Deferred taxation
----------------------------------------------------------------- ----------- ----------- -----------
Deferred tax charge - current period 0.2 (0.5) (1.0)
----------------------------------------------------------------- ----------- ----------- -----------
Deferred tax charge - adjustments in respect of prior periods - - (0.2)
----------------------------------------------------------------- ----------- ----------- -----------
0.2 (0.5) (1.2)
----------------------------------------------------------------- ----------- ----------- -----------
Income tax expense 3.5 2.4 6.4
----------------------------------------------------------------- ----------- ----------- -----------
The tax for all the periods above has been calculated at the
current effective rate, which is 19%.
The main component of the deferred tax asset is deferred tax on
the IFRS 9 transition adjustment, which reverses on a straight-line
basis over 10 years commencing in 2018. The Company will incur the
8% corporation tax surcharge on banking company profits in excess
of GBP25.0 million during this period, but the quantum of this is
uncertain. Any changes in the forecast tax rate of the Company over
this period could significantly affect the future tax charge.
5. Earnings per ordinary share
5.1 Basic
Basic earnings per ordinary share are calculated by dividing the
profit attributable to equity holders of the parent by the weighted
average number of ordinary shares as follows:
June June December
2019 2018 2018
------------------------------------------------------------------- ---------- ---------- ----------
Profit attributable to equity holders of the parent (GBP millions) 14.6 12.7 28.3
------------------------------------------------------------------- ---------- ---------- ----------
Weighted average number of ordinary shares (number) 18,476,628 18,475,229 18,475,229
------------------------------------------------------------------- ---------- ---------- ----------
Earnings per share (pence) 79.0 68.7 153.2
------------------------------------------------------------------- ---------- ---------- ----------
5.2 Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
period, as noted above, as well as the number of dilutive share
options in issue during the period, as follows:
June June December
2019 2018 2018
--------------------------------------------------------- ---------- ---------- ----------
Weighted average number of ordinary shares 18,476,628 18,475,229 18,475,229
--------------------------------------------------------- ---------- ---------- ----------
Number of dilutive shares in issue at the period end 173,464 319,374 277,234
--------------------------------------------------------- ---------- ---------- ----------
Fully diluted weighted average number of ordinary shares 18,650,092 18,794,603 18,752,463
--------------------------------------------------------- ---------- ---------- ----------
Dilutive shares being based on:
--------------------------------------------------------- ---------- ---------- ----------
Number of options outstanding at the period end 659,802 468,157 511,706
--------------------------------------------------------- ---------- ---------- ----------
Exercise price (pence) 498 644 678
--------------------------------------------------------- ---------- ---------- ----------
Average share price during the period (pence) 1,303 1,924 1,489
--------------------------------------------------------- ---------- ---------- ----------
Diluted earnings per share (pence) 78.3 67.6 150.9
--------------------------------------------------------- ---------- ---------- ----------
6. Loans and advances to customers
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
--------------------------------------------------------------- ----------- ----------- -----------
Gross loans and advances 2,346.8 1,907.1 2,096.0
--------------------------------------------------------------- ----------- ----------- -----------
Less: allowances for impairment on loans and advances (Note 8) (68.5) (68.0) (67.1)
--------------------------------------------------------------- ----------- ----------- -----------
2,278.3 1,839.1 2,028.9
--------------------------------------------------------------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 16.
7. Leasing right-of-use asset
Leased
Leasehold Motor
property vehicles Total
GBPmillion GBPmillion GBPmillion
------------------------------------------------- ----------- ----------- -----------
Cost
------------------------------------------------- ----------- ----------- -----------
On transition at 1 January 2019 and 30 June 2019 4.2 0.3 4.5
------------------------------------------------- ----------- ----------- -----------
Accumulated depreciation
------------------------------------------------- ----------- ----------- -----------
Depreciation charge (0.4) (0.1) (0.5)
------------------------------------------------- ----------- ----------- -----------
At 30 June 2019 (0.4) (0.1) (0.5)
------------------------------------------------- ----------- ----------- -----------
Net book amount
------------------------------------------------- ----------- ----------- -----------
At 30 June 2019 3.8 0.2 4.0
------------------------------------------------- ----------- ----------- -----------
8. Allowances for impairment of loans and advances
Not credit impaired Credit impaired
-------------------------------- -------------------------- --------------- ----------- ------------ ---------
Stage 1:
Subject to Stage 2: Stage 3: Gross
12 month Subject to Subject to Total loans and Provision
ECL lifetime ECL lifetime ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
June 2019
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Business Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Real Estate Finance 0.5 0.1 0.2 0.8 879.8 0.1%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Asset Finance 0.1 0.1 1.8 2.0 44.7 4.5%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Commercial Finance 0.3 0.1 0.5 0.9 221.6 0.4%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Consumer Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Retail Finance 9.9 10.0 4.4 24.3 696.0 3.5%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Motor Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Voluntary termination provision 6.7 - - 6.7
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other impairment 3.9 13.0 16.5 33.4
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
10.6 13.0 16.5 40.1 339.9 11.8%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Debt Management - - - - 42.3 0.0%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Consumer Mortgages 0.3 - - 0.3 113.5 0.3%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other - - 0.1 0.1 9.0 1.1%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
21.7 23.3 23.5 68.5 2,346.8 2.9%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Not credit impaired Credit impaired
-------------------------------- -------------------------- --------------- ----------- ------------ ---------
Stage 1:
Subject to Stage 2: Stage 3: Gross
12 month Subject to Subject to Total loans and Provision
ECL lifetime ECL lifetime ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
June 2018
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Business Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Real Estate Finance 0.1 0.5 - 0.6 705.4 0.1%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Asset Finance 0.3 0.1 1.9 2.3 90.2 2.5%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Commercial Finance 0.2 0.3 0.5 1.0 188.5 0.5%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Consumer Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Retail Finance 8.3 7.7 4.0 20.0 528.0 3.8%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Motor Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Voluntary termination provision 5.7 - - 5.7
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other impairment 5.3 15.4 14.4 35.1
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
11.0 15.4 14.4 40.8 312.8 13.0%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Debt Management - - - - 28.3 0.0%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other - - 3.2 3.2 16.5 19.4%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
20.0 24.0 24.0 68.0 1,907.1 3.6%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Not credit impaired Credit impaired
-------------------------------- -------------------------- --------------- ----------- ------------ ---------
Stage 1:
Subject to Stage 2: Stage 3: Gross
12 month Subject to Subject to Total loans and Provision
ECL lifetime ECL lifetime ECL provision receivables cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
December 2018
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Business Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Real Estate Finance 0.6 - - 0.6 770.4 0.1%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Asset Finance 0.2 0.1 2.7 3.0 65.8 4.6%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Commercial Finance 0.2 0.2 0.4 0.8 195.5 0.4%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Consumer Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Retail Finance 8.9 9.8 4.3 23.0 620.0 3.7%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Motor Finance:
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Voluntary termination provision 6.0 - - 6.0
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other impairment 4.2 13.8 15.4 33.4
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
10.2 13.8 15.4 39.4 315.8 12.5%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Debt Management - - - - 32.3 0.0%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Consumer Mortgages 0.2 - - 0.2 84.9 0.2%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Other - - 0.1 0.1 11.3 0.9%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
20.3 23.9 22.9 67.1 2,096.0 3.2%
-------------------------------- ----------- ------------- --------------- ----------- ------------ ---------
Total provisions above include expert credit judgements as
follows:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------------------- ----------- ----------- -----------
Expert credit judgements over the Group's IFRS 9 model results 2.3 4.4 2.0
------------------------------------------------------------------------------- ----------- ----------- -----------
Of which:
------------------------------------------------------------------------------- ----------- ----------- -----------
Specific overlays held against credit impaired secured assets held within the
Business Finance
portfolio 0.9 1.8 1.4
------------------------------------------------------------------------------- ----------- ----------- -----------
These specific overlays have been estimated on an individual
basis by assessing the recoverability and condition of the secured
asset, along with any other recoveries that may be made.
Of the remaining GBP1.4 million at June 2019, GBP1.2 million has
been applied to the Group's Motor Finance IFRS 9 model results,
relating to management judgements in respect of LGD elements of the
model of GBP0.9 million and PD elements of the model of GBP0.3
million. The remaining GBP0.2 million is in respect of management
judgements over the macro-economic scenarios applies in the Real
Estate Finance portfolio (the remaining GBP0.6 million at December
2018 related primarily to the estimated impact of planned
enhancements to LGD elements of the models, offset by a net
decrease in the ECL due to management judgements in respect of the
PD elements of the models, and the remaining GBP2.6 million at June
2018 related to planned model enhancements of the motor model of
GBP1.2 million and management judgements in respect of PD elements
of the model of GBP1.4 million).
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP8.5 million (June
2018: GBP13.0 million, December 2018: GBP10.8 million) held in STB
Leasing Limited. The credit risk associated with those loans is
retained by its partner, RentSmart. Accordingly, no provision is
held against the RentSmart loans.
The impairment losses disclosed in the income statement can be
analysed as follows:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------- ----------- ----------- -----------
Charge for impairment losses 15.3 13.7 30.4
------------------------------------------------------------------- ----------- ----------- -----------
Impairment losses in respect of off balance sheet loan commitments - 0.1 -
------------------------------------------------------------------- ----------- ----------- -----------
Loans written off, net of amounts utilised 2.7 3.2 4.3
------------------------------------------------------------------- ----------- ----------- -----------
Recoveries of loans written off (0.2) (0.7) (2.3)
------------------------------------------------------------------- ----------- ----------- -----------
17.8 16.3 32.4
------------------------------------------------------------------- ----------- ----------- -----------
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Not credit impaired Credit impaired
------------------------------------------------- -------------------------- --------------- -----------
Stage 1:
Subject to Stage 2: Stage 3:
12 month Subject to Subject to Total
ECL lifetime ECL lifetime ECL provision
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ----------- ------------- --------------- -----------
June 2019
------------------------------------------------- ----------- ------------- --------------- -----------
At start of period 20.3 23.9 22.9 67.1
------------------------------------------------- ----------- ------------- --------------- -----------
Increase/(decrease) due to change in credit risk
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 2 (2.5) 16.6 - 14.1
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 3 - (11.5) 15.0 3.5
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 1 0.6 (1.4) - (0.8)
------------------------------------------------- ----------- ------------- --------------- -----------
Passage of time (5.9) (2.0) (1.2) (9.1)
------------------------------------------------- ----------- ------------- --------------- -----------
New loans originated 8.8 - - 8.8
------------------------------------------------- ----------- ------------- --------------- -----------
Derecognised loans (0.9) (2.2) - (3.1)
------------------------------------------------- ----------- ------------- --------------- -----------
Changes to credit risk parameters 0.5 (0.1) (0.8) (0.4)
------------------------------------------------- ----------- ------------- --------------- -----------
Other adjustments 2.3 - - 2.3
------------------------------------------------- ----------- ------------- --------------- -----------
Charge to income statement 2.9 (0.6) 13.0 15.3
------------------------------------------------- ----------- ------------- --------------- -----------
Allowance utilised in respect of write offs (1.5) - (12.4) (13.9)
------------------------------------------------- ----------- ------------- --------------- -----------
At end of period 21.7 23.3 23.5 68.5
------------------------------------------------- ----------- ------------- --------------- -----------
Not credit impaired Credit impaired
------------------------------------------------- -------------------------- --------------- -----------
Stage 1:
Subject to Stage 2: Stage 3:
12 month Subject to Subject to Total
ECL lifetime ECL lifetime ECL provision
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ----------- ------------- --------------- -----------
June 2018
------------------------------------------------- ----------- ------------- --------------- -----------
At start of period 18.9 24.9 27.9 71.7
------------------------------------------------- ----------- ------------- --------------- -----------
Increase/(decrease) due to change in credit risk
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 2 (3.0) 15.7 - 12.7
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 3 (0.1) (12.2) 16.0 3.7
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 1 0.8 (1.8) - (1.0)
------------------------------------------------- ----------- ------------- --------------- -----------
Passage of time (4.4) (1.1) (2.5) (8.0)
------------------------------------------------- ----------- ------------- --------------- -----------
New loans originated 8.5 0.1 - 8.6
------------------------------------------------- ----------- ------------- --------------- -----------
Derecognised loans (0.9) (1.6) - (2.5)
------------------------------------------------- ----------- ------------- --------------- -----------
Other adjustments 0.2 - - 0.2
------------------------------------------------- ----------- ------------- --------------- -----------
Charge to income statement 1.1 (0.9) 13.5 13.7
------------------------------------------------- ----------- ------------- --------------- -----------
Allowance utilised in respect of write offs - - (17.4) (17.4)
------------------------------------------------- ----------- ------------- --------------- -----------
At end of period 20.0 24.0 24.0 68.0
------------------------------------------------- ----------- ------------- --------------- -----------
Not credit impaired Credit impaired
------------------------------------------------- -------------------------- --------------- -----------
Stage 1:
Subject to Stage 2: Stage 3:
12 month Subject to Subject to Total
ECL lifetime ECL lifetime ECL provision
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ----------- ------------- --------------- -----------
December 2018
------------------------------------------------- ----------- ------------- --------------- -----------
At start of year 18.9 24.9 27.9 71.7
------------------------------------------------- ----------- ------------- --------------- -----------
Increase/(decrease) due to change in credit risk
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 2 (6.3) 33.0 - 26.7
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 3 (0.1) (23.4) 30.8 7.3
------------------------------------------------- ----------- ------------- --------------- -----------
- Transfer to stage 1 1.5 (3.2) - (1.7)
------------------------------------------------- ----------- ------------- --------------- -----------
Passage of time (6.7) (1.7) (3.9) (12.3)
------------------------------------------------- ----------- ------------- --------------- -----------
New loans originated 17.4 - - 17.4
------------------------------------------------- ----------- ------------- --------------- -----------
Derecognised loans (1.8) (4.0) - (5.8)
------------------------------------------------- ----------- ------------- --------------- -----------
Changes to model methodology (1.3) (0.2) - (1.5)
------------------------------------------------- ----------- ------------- --------------- -----------
Changes to credit risk parameters (1.2) (1.5) 0.6 (2.1)
------------------------------------------------- ----------- ------------- --------------- -----------
Other adjustments 2.4 - - 2.4
------------------------------------------------- ----------- ------------- --------------- -----------
Charge to income statement 3.9 (1.0) 27.5 30.4
------------------------------------------------- ----------- ------------- --------------- -----------
Allowance utilised in respect of write offs (2.5) - (32.5) (35.0)
------------------------------------------------- ----------- ------------- --------------- -----------
At end of year 20.3 23.9 22.9 67.1
------------------------------------------------- ----------- ------------- --------------- -----------
The table above has been prepared based on the monthly movements
in ECL.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represents movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macro-economic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
Stage 1 write offs arise on the Motor accounts that have
exercised their right to voluntarily terminate their
agreements.
9. Due to banks
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- -----------
Amounts due to other credit institutions 263.0 263.0 263.0
----------------------------------------- ----------- ----------- -----------
Accrued interest 0.5 0.3 0.5
----------------------------------------- ----------- ----------- -----------
263.5 263.3 263.5
----------------------------------------- ----------- ----------- -----------
Amounts due to banks represent monies arising from drawings
under the Term Funding Scheme. These are due for repayment between
May 2021 and February 2022.
At December 2018, accrued interest was reclassified from Other
liabilities to Amounts due to banks, as this better represented the
commercial reality of the arrangement, so the June 2018 figures
have been restated accordingly.
10. Deposits from customers
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- -----------
Current/demand accounts 19.2 15.0 14.5
------------------------ ----------- ----------- -----------
Term deposits 1,982.3 1,641.8 1,833.2
------------------------ ----------- ----------- -----------
2,001.5 1,656.8 1,847.7
------------------------ ----------- ----------- -----------
The fair value of deposits from customers is shown in Note
16.
At December 2018, accrued interest was reclassified from Other
liabilities to Deposits from customers, as this better represented
the commercial reality of the arrangement, so the June 2018 figures
have been restated accordingly.
11. Lease liabilities
June June December
2019 2018 2018
Charged to the income statement GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- -----------
Interest expense on lease liabilities 0.1 - -
-------------------------------------- ----------- ----------- -----------
The Group has elected not to apply the recognition requirements
of IFRS 16 'Leases' to short-term leases or leases for which the
underlying asset is of low value. Accordingly, the expense incurred
under such leases for the period ended June 2019 is not
material.
12. Provisions for liabilities and charges
ECL
Allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- -----------
June 2019
--------------------------------------- ----------- ----------- ----------- -----------
At start of period 0.8 0.1 0.4 1.3
--------------------------------------- ----------- ----------- ----------- -----------
(Credited)/charged to income statement (0.4) - - (0.4)
--------------------------------------- ----------- ----------- ----------- -----------
At end of period 0.4 0.1 0.4 0.9
--------------------------------------- ----------- ----------- ----------- -----------
ECL
Allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- -----------
June 2018
--------------------------------------- ----------- ----------- ----------- -----------
At start of period 1.2 0.2 0.3 1.7
--------------------------------------- ----------- ----------- ----------- -----------
(Credited)/charged to income statement - (0.1) 0.1 -
--------------------------------------- ----------- ----------- ----------- -----------
Utilised (0.1) - - (0.1)
--------------------------------------- ----------- ----------- ----------- -----------
At end of period 1.1 0.1 0.4 1.6
--------------------------------------- ----------- ----------- ----------- -----------
ECL
Allowance
Customer on loan
redress Fraud commitment Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- -----------
December 2018
--------------------------------------- ----------- ----------- ----------- -----------
At start of period 1.2 0.2 0.3 1.7
--------------------------------------- ----------- ----------- ----------- -----------
(Credited)/charged to income statement (0.4) (0.1) 0.1 (0.4)
--------------------------------------- ----------- ----------- ----------- -----------
At end of period 0.8 0.1 0.4 1.3
--------------------------------------- ----------- ----------- ----------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in
respect of historical sales of accident, sickness and unemployment
insurance, by considering the likely future uphold rate for claims,
in the context of confirmed issues and historical experience.
The Financial Conduct Authority has announced a deadline for
making these customer redress claims, giving consumers until 29
August 2019 to make a claim. The likelihood of potential new claims
is projected forward to this date. The accuracy of these estimates
would be affected, were there to be a significant change in either
the number of future claims or the incidence of claims upheld by
the Financial Ombudsman Service.
Fraud
The fraud provision relates to cases where the Bank has
reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9, the Group holds
an ECL allowance against loans it has committed to lend but have
not yet been drawn. The majority of the GBP0.4 million allowance
held at June 2019 relates to undrawn balances within Retail
Finance. For the Real Estate Finance and Commercial Finance
portfolios, where a loan facility is agreed that includes both
drawn and undrawn elements and the Group cannot identify the ECL on
the loan commitment separately, a combined loss allowance for both
drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component,
with any excess of the loss allowance over the gross drawn amount
presented as a provision. At June 2019, no provision was held for
losses in excess of drawn amounts.
13. Commitments
The Group's off balance sheet exposure to undrawn loan
commitments at June 2019 was GBP199.2 million (June 2018: GBP263.3
million, December 2018: GBP263.1 million). Details of the split by
business is given in Note 3.
14. Subordinated liabilities
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------ ----------- ----------- -----------
Tier 2 capital 50.0 - 50.0
------------------------ ----------- ----------- -----------
Unamortised issue costs (0.7) - (0.8)
------------------------ ----------- ----------- -----------
Accrued interest 1.2 - 1.2
------------------------ ----------- ----------- -----------
50.5 - 50.4
------------------------ ----------- ----------- -----------
The Notes are treated as Tier 2 regulatory capital, which is
used to support the continuing growth of the business taking into
account increases in regulatory capital buffers.
15. Capital
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
The following table shows the regulatory capital resources as
managed by the Group:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
(unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------- ------------ ------------ ------------
Tier 1
---------------------------------------------------------------------- ------------ ------------ ------------
Share capital 7.4 7.4 7.4
---------------------------------------------------------------------- ------------ ------------ ------------
Share premium 81.2 81.2 81.2
---------------------------------------------------------------------- ------------ ------------ ------------
Retained earnings 150.8 135.1 147.4
---------------------------------------------------------------------- ------------ ------------ ------------
Revaluation reserve 0.9 1.3 1.1
---------------------------------------------------------------------- ------------ ------------ ------------
Goodwill (1.0) (1.0) (1.0)
---------------------------------------------------------------------- ------------ ------------ ------------
Intangible assets net of attributable deferred tax (8.1) (9.1) (8.8)
---------------------------------------------------------------------- ------------ ------------ ------------
Transitional IFRS 9 adjustment 22.3 24.5 24.5
---------------------------------------------------------------------- ------------ ------------ ------------
CET1 capital 253.5 239.4 251.8
---------------------------------------------------------------------- ------------ ------------ ------------
Tier 2
---------------------------------------------------------------------- ------------ ------------ ------------
Subordinated liabilities 50.5 - 50.4
---------------------------------------------------------------------- ------------ ------------ ------------
Less ineligible portion (1.2) - (4.7)
---------------------------------------------------------------------- ------------ ------------ ------------
Total Tier 2 capital 49.3 - 45.7
---------------------------------------------------------------------- ------------ ------------ ------------
Own Funds 302.8 239.4 297.5
---------------------------------------------------------------------- ------------ ------------ ------------
Reconciliation to total equity:
---------------------------------------------------------------------- ------------ ------------ ------------
Goodwill and other intangible assets net of attributable deferred tax 9.1 10.1 9.8
---------------------------------------------------------------------- ------------ ------------ ------------
Transitional IFRS 9 adjustment (22.3) (24.5) (24.5)
---------------------------------------------------------------------- ------------ ------------ ------------
Eligible subordinated liabilities (49.3) - (45.7)
---------------------------------------------------------------------- ------------ ------------ ------------
Total equity 240.3 225.0 237.1
---------------------------------------------------------------------- ------------ ------------ ------------
CET1 capital 253.5 239.4 251.8
---------------------------------------------------------------------- ------------ ------------ ------------
Proposed dividends (3.7) (3.5) (11.8)
---------------------------------------------------------------------- ------------ ------------ ------------
CET1 capital including proposed dividends 249.8 235.9 240.0
---------------------------------------------------------------------- ------------ ------------ ------------
Own Funds including proposed dividends 299.1 235.9 285.7
---------------------------------------------------------------------- ------------ ------------ ------------
The capital resources shown in the table above include profits
for the period to 30 June 2019. These profits will not be included
in the Group's Pillar 3 return for June 2019, as they are not yet
approved by the regulator.
The transitional adjustment to capital arises from the Group
making an election to phase in the impact of transitioning to IFRS
9 over a five year period, by applying add back factors of 95%,
85%, 70%, 50% and 25% for years one to five respectively. At June
2019, this amounted to 85% of the IFRS 9 transition adjustment of
GBP25.8 million, adjusted for the movement in stage 1 and stage 2
impairment allowance between 1 January 2019 and 31 December 2018 of
GBP0.4 million (June 2018 and December 2018: 95% of the IFRS 9
transition adjustment of GBP25.8 million).
16. Fair value of loans and advances to customers and deposits
from customers
The fair value of loans and advances to customers and deposits
from customers is set out below:
Total Total Total
carrying carrying carrying
amount Fair value amount Fair value amount Fair value
June June June June December December
2019 2019 2018 2018 2018 2018
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Loans and advances to customers 2,278.3 2,288.3 1,839.1 1,910.6 2,028.9 2,032.5
-------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,001.5 2,018.1 1,656.8 1,655.6 1,847.7 1,859.7
-------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Freehold land and buildings are carried at fair value. All other
assets and liabilities are carried at amortised cost.
17. Share-based payments
The Group has five share-based payment schemes in operation:
-- Share Option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave plan
-- 2017 deferred bonus plan
-- 'Phantom' share option scheme
A summary of the awards under each scheme is set out below:
Weighted
Outstanding Granted Exercised Outstanding average
at the start during the during the at the end Vested and exercise
of the period period period of the period exercisable Vesting price
Number Number Number Number Number Date GBP
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
Equity settled
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
Share option scheme 177,084 - - 177,084 177,084 2016 7.20
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
2017 long term incentive
plan 161,597 134,046 - 295,643 - 2020-2024 0.40
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
2017 sharesave plan 145,009 - - 145,009 - 2020-2021 13.39
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
2017 deferred bonus plan 14,690 28,775 (1,399) 42,066 3,497 2019-2022 0.40
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
498,380 162,821 (1,399) 659,802 180,581
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
Cash settled
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
'Phantom' share option
scheme 312,917 - - 312,917 312,917 2019 25.00
------------------------ -------------- ----------- ----------- -------------- ------------ --------- ---------
17.1 Share option scheme
The number of unexercised share options as at June 2019 remains
unchanged from the position as at June 2018 and December 2018.
These awards vested in November 2016 and remain exercisable for
seven years following the vesting date. The intrinsic value of
unexercised options is GBP2.5 million (June 2018: GBP2.0 million,
December 2018: GBP0.8 million).
17.2 Long term incentive plan
The long term incentive plan was established on 3 May 2017.
On 25 April 2019, a further 134,046 share options were granted
at an exercise price of 40 pence per share, which are subject to
the same rules as the awards granted under the plan during 2018, as
disclosed in the 2018 Annual Report and Accounts. Details of the
awards under the plan are set out below:
Subject to a Subject
holding to no
period of two holding
years period Total
Number Number Number
------------------------------------- -------------- -------- -------
At 1 January 2018 33,467 34,525 67,992
------------------------------------- -------------- -------- -------
Awarded on 20 April 2018 30,429 64,075 94,504
------------------------------------- -------------- -------- -------
Leavers during 2018 - (899) (899)
------------------------------------- -------------- -------- -------
At 30 June 2018 and 31 December 2018 63,896 97,701 161,597
------------------------------------- -------------- -------- -------
Awarded on 25 April 2019 54,312 79,734 134,046
------------------------------------- -------------- -------- -------
At 30 June 2019 118,208 177,435 295,643
------------------------------------- -------------- -------- -------
The original grant date valuation of the 2019 awards was
determined to be GBP9.02 for those awards that are subject to a
holding period, and GBP10.48 for those awards not subject to a
holding period, using a Black-Scholes model for the EPS and risk
management tranches, and a Monte Carlo model for the total
shareholder return ('TSR') tranche, and these valuations have been
used in the calculation. The share price at date of grant was
GBP15.20 and the expected dividend yield was 6.18%. The other
measurement inputs and assumptions used at the grant date were as
follows:
Awards Awards not
subject to a subject to a
holding holding
period period
--------------------------------------------------------- ------------- -------------
Expected stock price volatility 25.9% 29.1%
--------------------------------------------------------- ------------- -------------
Risk free interest rate 0.86% 0.72%
--------------------------------------------------------- ------------- -------------
Average expected life (years) 5.00 3.00
--------------------------------------------------------- ------------- -------------
Discount for lack of marketability during holding period 10.00% N/A
--------------------------------------------------------- ------------- -------------
17.3 Sharesave plan
The sharesave plan was established on 3 May 2017.
The number of awards under this scheme remains unchanged from
the position as at December 2018, as disclosed in the 2018 Annual
Report and Accounts.
17.4 Deferred bonus plan
The deferred bonus plan was established on 3 May 2017.
As disclosed in the Directors' remuneration report in the 2018
Annual Report and Accounts, 50% of the 2018 bonus earned by two
Executive directors, amounting to GBP450,000, was deferred into
shares under the deferred bonus plan. Accordingly, on 25 April
2019, 28,775 share options were awarded at an exercise price of 40
pence per share, which will vest in three equal tranches after one,
two and three years following deferral.
For accounting purposes, the grant date is deemed to be 1
January 2019, as this is the date that there is a shared
understanding of the terms and conditions of the arrangement,
although the calculation of the number of options awarded only took
place upon Remuneration Committee approval in April 2019. The
original grant date valuation was determined to be GBP10.69 for
those awards vesting after one year, GBP9.94 for those awards
vesting after two years and GBP9.59 for those awards vesting after
three years, using a Black-Scholes model, and these valuations have
been used in the calculation. The share price at date of grant was
GBP11.90 and the expected dividend yield was 7.06%. The other
measurement inputs and assumptions used at the grant date were as
follows:
Awards Awards Awards
vesting after vesting after vesting after
one year two years three years
-------------------------------- --------------- -------------- --------------
Expected stock price volatility 27.34% 24.79% 28.82%
-------------------------------- --------------- -------------- --------------
Risk free interest rate 0.77% 0.75% 0.75%
-------------------------------- --------------- -------------- --------------
Average expected life (years) 1.00 2.00 3.00
-------------------------------- --------------- -------------- --------------
17.5 Cash settled share-based payments
The 'Phantom' share option scheme is a cash settled share-based
payment scheme and was established on 16 March 2015.
312,917 options were awarded under the scheme, entitling the
holders to a cash payment, calculated by reference to the increase
in the value of an ordinary share in the Company over an initial
value set at GBP25 per ordinary share.
As at June 2019, 312,917 share options remained outstanding. The
options vested on 16 March 2019, and remain exercisable for six
years following the vesting date.
The estimated fair value as at June 2019 was GBP0.43 pence,
prepared using the Black-Scholes model. The share price at June
2019 was GBP14.25 and the expected dividend yield was 5.89%. The
other measurement inputs and assumptions used at the grant date
were as follows
June
2019
-------------------------------- -----
Expected stock price volatility 27.3%
----------------------------------- -----
Risk free interest rate 0.64%
----------------------------------- -----
Average expected life (years) 5.7
----------------------------------- -----
This resulted in the following being recognised in the financial
statements:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------- ----------- ----------- -----------
Liability at start of period 0.2 0.2 0.2
------------------------------ ----------- ----------- -----------
Charge for the year (0.1) - -
------------------------------ ----------- ----------- -----------
Liability at end of period 0.1 0.2 0.2
------------------------------ ----------- ----------- -----------
18. Related party transactions
There were no changes to the nature of the related party
transactions during the period to June 2019 that would materially
affect the position or performance of the Group. Details of the
transactions for the year ended December 2018 can be found in the
2018 Annual Report.
19. Credit risk
The Group takes on exposure to credit risk, which is the risk
that a counterparty will be unable to pay amounts in full when due.
A formal Credit Risk Policy has been agreed by the Board whilst
credit risk is monitored on a monthly basis by the Credit Risk
Committees which review performance of key portfolios including new
business volumes, collections performance, provisioning levels and
provisioning methodology. A credit risk department within the Group
monitors adherence to the Credit Risk Policy, implements risk tools
to manage credit risk and evaluates business opportunities and the
risks and opportunities they present to the Group whilst ensuring
the performance of the Group's existing portfolios is in line with
expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are
approved periodically by the Board of Directors and actual
exposures against limits monitored daily.
Impairment provisions are provided for expected credit losses at
the statement of financial position date. Significant changes in
the economy could result in losses that are different from those
provided for at the statement of financial position date.
Management therefore carefully manages its exposures to credit risk
as it considers this to be the most significant risk to the
business.
Exposure to Consumer Finance credit risk is managed through
regular analysis of the ability of borrowers and potential
borrowers to meet interest and capital repayment obligations and by
changing these lending limits where appropriate. Exposure to credit
risk is also managed in part by obtaining collateral, principally
motor vehicles on Motor loans and a credit support balance provided
by RentSmart. The assets undergo a scoring process to mitigate risk
and are monitored by the Board.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Prior to the closure of the book to new business, Asset
Finance credit risk management was outsourced to Haydock, who
operate in line with the Group's credit policies and risk appetite.
The loans are secured against the assets lent against real estate,
trade receivables and commercial plant and equipment,
respectively.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. There are no direct
exposures to non-UK countries.
With the exception of loans and advances to customers, the
carrying amount of financial assets represents the Group's maximum
exposure to credit risk. The Group's maximum exposure to credit
risk for loans and advances to customers by portfolio and IFRS 9
stage without taking account of any collateral held or other credit
enhancements attached was as follows:
Stage 1 Stage 2 Stage 3
---------- ----------------------------------- ------------------------------------ -----------
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
June 2019 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Business
Finance
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Real Estate
Finance 814.4 56.9 - 56.9 8.5 - 8.5 879.8
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Asset
Finance 35.4 2.1 5.1 7.2 2.1 - 2.1 44.7
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Commercial
Finance 212.7 8.3 - 8.3 0.6 - 0.6 221.6
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Consumer
Finance
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Retail 605.4 81.5 4.0 85.5 5.1 - 5.1 696.0
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Motor 224.0 92.1 2.2 94.3 21.6 - 21.6 339.9
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Debt
Management - - - - 10.2 32.1 42.3 42.3
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Consumer
Mortgages 111.8 - 1.7 1.7 - - - 113.5
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Other 9.0 - - - - - - 9.0
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total drawn
exposure 2,012.7 240.9 13.0 253.9 48.1 32.1 80.2 2,346.8
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Off balance
sheet
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Loan
commitments 199.2 - - - - - - 199.2
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total gross
exposure 2,211.9 240.9 13.0 253.9 48.1 32.1 80.2 2,546.0
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Less:
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Impairment
allowance (21.7) (19.2) (4.1) (23.3) (23.5) - (23.5) (68.5)
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total net
exposure 2,189.8 221.7 8.9 230.6 24.6 32.1 56.7 2,477.1
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Stage 1 Stage 2 Stage 3
---------- ----------------------------------- ------------------------------------ -----------
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
June 2018 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Business
Finance
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Real Estate
Finance 649.5 55.9 - 55.9 - - - 705.4
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Asset
Finance 76.2 4.6 0.4 5.0 9.0 - 9.0 90.2
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Commercial
Finance 170.7 17.2 - 17.2 0.6 - 0.6 188.5
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Consumer
Finance
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Retail 472.9 47.2 3.4 50.6 4.5 - 4.5 528.0
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Motor 200.5 70.7 22.5 93.2 19.1 - 19.1 312.8
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Debt
Management - - - - 9.3 19.0 28.3 28.3
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Consumer
Mortgages 37.4 - - - - - - 37.4
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Other 13.4 - - - 3.1 - 3.1 16.5
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total drawn
exposure 1,620.6 195.6 26.3 221.9 45.6 19.0 64.6 1,907.1
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Off balance
sheet
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Loan
commitments 263.3 - - - - - - 263.3
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total gross
exposure 1,883.9 195.6 26.3 221.9 45.6 19.0 64.6 2,170.4
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Less:
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Impairment
allowance (20.0) (12.7) (11.3) (24.0) (24.0) - (24.0) (68.0)
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Total net
exposure 1,863.5 182.9 15.0 197.9 21.6 19.0 40.6 2,102.0
------------ ---------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Stage 1 Stage 2 Stage 3
---------- ----------------------------------- ----------------------------------- -----------
Excl.
purchased Purchased
<= 30 days > 30 days credit credit
past due past due Total impaired impaired Total Total
December 2018 GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Business
Finance
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Real Estate
Finance 723.3 47.1 - 47.1 - - - 770.4
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Asset Finance 55.6 6.5 0.5 7.0 3.2 - 3.2 65.8
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Commercial
Finance 186.1 8.8 - 8.8 0.6 - 0.6 195.5
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Consumer
Finance
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Retail 537.1 74.1 3.9 78.0 4.9 - 4.9 620.0
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Motor 200.2 92.7 2.4 95.1 20.5 - 20.5 315.8
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Debt
Management - - - - 9.3 23.0 32.3 32.3
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Consumer
Mortgages 84.9 - - - - - - 84.9
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Other 11.3 - - - - - - 11.3
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total drawn
exposure 1,798.5 229.2 6.8 236.0 38.5 23.0 61.5 2,096.0
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Off balance
sheet
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Loan
commitments 263.1 - - - - - - 263.1
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total gross
exposure 2,061.6 229.2 6.8 236.0 38.5 23.0 61.5 2,359.1
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Less:
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Impairment
allowance (20.3) (19.9) (4.0) (23.9) (22.9) - (22.9) (67.1)
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Provision for
loan
commitments (0.4) - - - - - - (0.4)
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
Total net
exposure 2,040.9 209.3 2.8 212.1 15.6 23.0 38.6 2,291.6
------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- -----------
19.1 Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
nature of the Group's lending operations the directors consider the
lending operations of the Group as a whole to be well diversified.
Details of the Group's loan and advances to customers and loan
commitments by product is provided in Note 3.
The Group's Real Estate Finance and Consumer Mortgages are
secured against UK property only. The geographical concentration of
these business loans and advances to customer, by location of the
security, is set out below:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- -----------
Real Estate Finance
------------------------------------------ ----------- ----------- -----------
Central England 35.0 26.5 35.1
--------------------------------------------- ----------- ----------- -----------
Greater London 546.0 389.4 451.5
--------------------------------------------- ----------- ----------- -----------
Northern England 36.6 80.2 37.6
--------------------------------------------- ----------- ----------- -----------
South East England (excl. Greater London) 224.1 186.8 209.0
--------------------------------------------- ----------- ----------- -----------
South West England 10.3 9.2 9.6
--------------------------------------------- ----------- ----------- -----------
Scotland, Wales and Northern Ireland 27.8 13.3 27.6
--------------------------------------------- ----------- ----------- -----------
Gross loans and receivables 879.8 705.4 770.4
--------------------------------------------- ----------- ----------- -----------
Allowance for impairment (0.8) (0.6) (0.6)
--------------------------------------------- ----------- ----------- -----------
Total 879.0 704.8 769.8
--------------------------------------------- ----------- ----------- -----------
Loan-to-value 58% 57% 57%
--------------------------------------------- ----------- ----------- -----------
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
------------------------------------------ ----------- ----------- -----------
Consumer mortgages
------------------------------------------ ----------- ----------- -----------
Central England 21.6 6.5 16.2
--------------------------------------------- ----------- ----------- -----------
Greater London 14.7 6.9 12.2
--------------------------------------------- ----------- ----------- -----------
Northern England 22.0 6.7 16.6
--------------------------------------------- ----------- ----------- -----------
South East England (excl. Greater London) 36.9 10.4 26.3
--------------------------------------------- ----------- ----------- -----------
South West England 12.1 4.9 9.3
--------------------------------------------- ----------- ----------- -----------
Scotland, Wales and Northern Ireland 6.2 2.0 4.3
--------------------------------------------- ----------- ----------- -----------
Gross loans and receivables 113.5 37.4 84.9
--------------------------------------------- ----------- ----------- -----------
Allowance for impairment (0.3) (0.1) (0.2)
--------------------------------------------- ----------- ----------- -----------
Total 113.2 37.3 84.7
--------------------------------------------- ----------- ----------- -----------
Loan-to-value 58% 59% 59%
--------------------------------------------- ----------- ----------- -----------
Under its credit policy, the Real Estate Finance business lends
to a maximum loan-to-value of 70% for investment loans and 60% for
residential development loans and up to 65% for pre-let commercial
development loans (based on gross development value), and the
Consumer Mortgages business lends to a maximum of 90%.
Key performance indicators
(i) Margin ratios
Net interest margin is calculated as interest income and similar
income less interest expense and similar charges for the financial
period as a percentage of the average loan book, net revenue margin
is calculated as operating income for the financial period as a
percentage of the average loan book and gross revenue margin is
calculated as interest receivable and similar income plus fee and
commission income for the financial period as a percentage of the
average loan book. The calculation of the average loan book is the
average of the monthly balance of loans and advances to customers,
net of provisions, over seven or 13 months as appropriate for the
financial period. The resulting margins for June 2019 and June 2018
are multiplied by 365/181 to give an annual equivalent comparable
to the annual results:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- -----------
Net interest margin
--------------------------------------- ----------- ----------- -----------
Interest receivable and similar income 92.3 79.2 169.2
--------------------------------------- ----------- ----------- -----------
Interest expense and similar charges (21.8) (15.5) (35.5)
--------------------------------------- ----------- ----------- -----------
Net interest income 70.5 63.7 133.7
--------------------------------------- ----------- ----------- -----------
Net revenue margin
--------------------------------------- ----------- ----------- -----------
Net interest income 70.5 63.7 133.7
--------------------------------------- ----------- ----------- -----------
Net fee and commission income 10.9 8.8 17.9
--------------------------------------- ----------- ----------- -----------
Operating income 81.4 72.5 151.6
--------------------------------------- ----------- ----------- -----------
Gross revenue margin
--------------------------------------- ----------- ----------- -----------
Interest receivable and similar income 92.3 79.2 169.2
--------------------------------------- ----------- ----------- -----------
Fee and commission income 11.2 9.8 19.4
--------------------------------------- ----------- ----------- -----------
Gross revenue 103.5 89.0 188.6
--------------------------------------- ----------- ----------- -----------
Opening loan book 2,028.9 1,566.5 1,566.5
--------------------------------------- ----------- ----------- -----------
Closing loan book 2,278.3 1,839.1 2,028.9
--------------------------------------- ----------- ----------- -----------
Average loan book 2,135.0 1,699.0 1,818.2
--------------------------------------- ----------- ----------- -----------
Net interest margin 6.7% 7.6% 7.4%
--------------------------------------- ----------- ----------- -----------
Net revenue margin 7.7% 8.6% 8.3%
--------------------------------------- ----------- ----------- -----------
Gross revenue margin 9.8% 10.6% 10.4%
--------------------------------------- ----------- ----------- -----------
A reconciliation of the loan book figures used above to the
statement of financial position at 1 January 2018 is as
follows:
GBPmillion
----------------------------- ----------
Balance sheet loan book 1,598.3
--------------------------------- ----------
IFRS 9 transition adjustment (31.8)
--------------------------------- ----------
1,566.5
----------------------------- ----------
The margin ratios all measure the yield of the loan book.
(ii) Cost ratios
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book, cost of funds is calculated at interest
expense for the financial period as a percentage of average loan
book and cost to income ratio is calculated as operating expenses
for the financial period as a percentage of operating income for
the financial period. The resulting ratios for June 2019 and June
2018 are multiplied by 365/181 to give an annual equivalent
comparable to the annual results:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- -----------
Impairment losses on loans and advances to customers 17.8 16.3 32.4
----------------------------------------------------- ----------- ----------- -----------
Average loan book 2,135.0 1,699.0 1,818.2
----------------------------------------------------- ----------- ----------- -----------
Cost of risk 1.7% 1.9% 1.8%
----------------------------------------------------- ----------- ----------- -----------
Interest expense 21.8 15.5 35.5
----------------------------------------------------- ----------- ----------- -----------
Average loan book 2,135.0 1,699.0 1,818.2
----------------------------------------------------- ----------- ----------- -----------
Cost of funds 2.1% 1.8% 2.0%
----------------------------------------------------- ----------- ----------- -----------
Operating expenses 45.5 41.1 84.5
----------------------------------------------------- ----------- ----------- -----------
Operating income 81.4 72.5 151.6
----------------------------------------------------- ----------- ----------- -----------
Cost to income ratio 55.9% 56.7% 55.7%
----------------------------------------------------- ----------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment losses. The cost of funds measures the cost
of money being lent to customers. The cost to income ratio measures
how efficiently the Group is utilising its cost base in producing
income.
(iii) Return ratios
Annualised adjusted return on average assets is calculated as
the adjusted profit after tax for the financial period as a
percentage of average assets, annualised adjusted return on average
equity is calculated as the adjusted profit after tax for the
financial period as a percentage of average equity and annualised
adjusted return on required equity is calculated as the adjusted
profit after tax for the financial period as a percentage of
average required equity.
Further details of adjusted profit are given in Appendix Note
(vi), and a reconciliation of adjusted profit after tax to
statutory profit after tax is provided on page 16.
Average assets is calculated as the average of the monthly
assets balances, over seven or 13 months as appropriate for the
financial period, average equity is calculated as the average of
the monthly equity balances over seven or 13 months as appropriate
for the financial period and average required equity is calculated
as the average of the monthly balances of total required equity
over seven or 13 months as appropriate for the financial period.
Total required equity is calculated as the equity required to
achieve a CET1 ratio of 12%. The resulting returns for June 2019
and June 2018 are multiplied by 365/181 to give an annual
equivalent comparable to the annual results:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
---------------------------------------------- ----------- ----------- -----------
Adjusted profit after tax 15.2 13.8 29.9
---------------------------------------------- ----------- ----------- -----------
Opening assets 2,444.3 1,866.1 1,866.1
---------------------------------------------- ----------- ----------- -----------
Closing assets 2,607.1 2,187.1 2,444.3
---------------------------------------------- ----------- ----------- -----------
Average assets 2,476.9 2,035.1 2,182.4
---------------------------------------------- ----------- ----------- -----------
Opening equity 237.1 223.3 223.3
---------------------------------------------- ----------- ----------- -----------
Closing equity 240.3 225.0 237.1
---------------------------------------------- ----------- ----------- -----------
Average equity 240.5 226.2 228.9
---------------------------------------------- ----------- ----------- -----------
Opening required equity 220.9 173.3 173.3
---------------------------------------------- ----------- ----------- -----------
Closing required equity 236.9 204.3 220.9
---------------------------------------------- ----------- ----------- -----------
Average required equity 226.0 190.7 201.7
---------------------------------------------- ----------- ----------- -----------
Annualised adjusted return on average assets 1.2% 1.4% 1.4%
---------------------------------------------- ----------- ----------- -----------
Annualised adjusted return on average equity 12.7% 12.3% 13.1%
---------------------------------------------- ----------- ----------- -----------
Annualised adjusted return on required equity 13.6% 14.6% 14.8%
---------------------------------------------- ----------- ----------- -----------
A reconciliation of assets and opening equity to the balance
sheet at 1 January 2018 is as follows:
Opening
Assets equity
GBPmillion GBPmillion
----------------------------- ----------- -----------
Balance sheet assets 1,891.6 249.1
----------------------------- ----------- -----------
IFRS 9 transition adjustment (25.5) (25.8)
----------------------------- ----------- -----------
1,866.1 223.3
----------------------------- ----------- -----------
Return on average assets demonstrates how profitable the Group's
assets are in generating revenue. Return on average equity is a
measure of the Group's ability to generate profit from the equity
available to it. Return on required equity relates profitability to
the capital that the Group is required to hold.
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book, at the
period end, divided by deposits from customers at the period end,
and the total funding ratio is calculated as the total funding at
the period end, being the sum of deposits from customers,
borrowings under the Term Funding Scheme, Tier 2 capital and
equity, divided by the loan book at the period end:
June June December
2019 2018 2018
GBPmillion GBPmillion GBPmillion
---------------------------------------------------------------------------- ----------- ----------- -----------
Loan book 2,278.3 1,839.1 2,028.9
---------------------------------------------------------------------------- ----------- ----------- -----------
Deposits from customers 2,001.5 1,656.8 1,847.7
---------------------------------------------------------------------------- ----------- ----------- -----------
Borrowings under the Term Funding Scheme, or the Funding for Lending Scheme 263.5 263.3 263.5
---------------------------------------------------------------------------- ----------- ----------- -----------
Tier 2 capital (including accrued interest) 50.5 - 50.4
---------------------------------------------------------------------------- ----------- ----------- -----------
Equity 240.3 225.0 237.1
---------------------------------------------------------------------------- ----------- ----------- -----------
Total funding 2,555.8 2,145.1 2,398.7
---------------------------------------------------------------------------- ----------- ----------- -----------
Loan to deposit ratio 113.8% 111.0% 109.8%
---------------------------------------------------------------------------- ----------- ----------- -----------
Total funding ratio 112.2% 116.6% 118.2%
---------------------------------------------------------------------------- ----------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Adjusted earnings per share
Adjusted earnings per ordinary share are calculated by dividing
the adjusted profit attributable to equity holders of the parent by
the weighted average number of ordinary shares as follows:
June June December
2019 2018 2018
---------------------------------------------------------------------------- ---------- ---------- ----------
Adjusted profit attributable to equity holders of the parent (GBP millions) 15.2 13.8 29.9
---------------------------------------------------------------------------- ---------- ---------- ----------
Weighted average number of ordinary shares (number) 18,476,628 18,475,229 18,475,229
---------------------------------------------------------------------------- ---------- ---------- ----------
Adjusted earnings per share (pence) 82.3 74.7 161.8
---------------------------------------------------------------------------- ---------- ---------- ----------
(vi) Adjusted profit
Adjusted profit before tax was GBP18.8 million (June 2018:
GBP16.5 million, December 2018: GBP36.7 million). Adjusted profit
after tax was GBP15.2 million (June 2018: GBP13.8 million, December
2018: GBP29.9 million).
The Group uses adjusted profit for planning and reporting
purposes, as it improves the comparability of information between
reporting periods. The adjustments to profit relate to
non-controllable items or other items that fall outside of the
Group's core business activities.
Fair value amortisation relates to the acquisition of V12
Finance Group. The acquisition accounting required identifiable
assets and liabilities to be adjusted to their fair value, and
these adjustments are subject to amortisation.
Transformation costs for 2019 are made up mainly of the costs of
the motor transformation project and the costs to date of setting
up the Group's derivatives capability (June 2018: comprised
principally the costs of potential M&A activity, December 2018:
comprised principally costs of closing the unsecured personal
lending product, the cost of potential corporate acquisition work
and treasury development.
Bonus payments of GBPnil (June 2018: GBP0.9 million, December
2018: GBP1.3 million) relate to a long term incentive plan that was
set up for a small number of employees on the creation of the
Commercial Finance business. The scheme is based on profits earned
by that business up to the end of 2019, and is payable in 2019 and
2020.
Directors' responsibility statement
The directors confirm that, to the best of their knowledge:
-- the condensed financial statements have been prepared in
accordance with International Accounting Standard 34 - 'Interim
Financial Reporting', issued by the IASB and as adopted and
endorsed by the European Union and give a true and fair view of the
assets, liabilities, financial position and profit of the
undertakings included in the consolidation as a whole;
-- the interim business review includes a fair review of the
information required by Section 4.2.7R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being an indication of important events that have occurred during
the first six months of the current financial year and their impact
on the condensed financial statements and a description of the
principal risks and uncertainties for the remaining six months of
the financial year); and
-- the interim business review includes a fair review of the
information required by Section 4.2.8R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being disclosure of related party transactions that have taken
place in the first six months of the current financial year and
that have materially affected the financial position or the
performance of the enterprise during that period; and any changes
in the related party transactions described in the last annual
report which could do so).
Approved by the Board of Directors and signed on behalf of the
Board.
Paul Lynam Neeraj Kapur
Chief Executive Officer Chief Financial Officer
6 August 2019
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR ZMGGRKVMGLZM
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