TIDMALD
RNS Number : 2286X
Aldermore Group PLC
27 August 2015
27 August 2015
Aldermore Group PLC
H1 2015: Continued momentum drives doubling of profit
Underlying profit before tax(1) up by 109% to GBP44m
-- Net interest margin expanded to 3.6% (H1 2014: 3.3%)
-- Underlying cost/income ratio(1) improved by 11pts to 53% (H1 2014: 64%)
-- Excellent credit performance; cost of risk improved by 12bps to 20bps (H1 2014: 32 bps)
-- Reported profit before tax up by 112% to GBP40m (H1 2014: GBP19m)
On track to deliver net loan growth of cGBP1.4bn in 2015,
equivalent to c30% full year growth
-- Record first half origination of GBP1.2bn; up 14% on prior year (H1 2014: GBP1.0bn)
-- Net loans to customers up by GBP635m or 13% to GBP5.4bn (31 December 2014: GBP4.8bn)
-- Lending to SMEs up by GBP270m or 12% to GBP2.5bn (31 December 2014: GBP2.2bn)
-- Residential Mortgages up by GBP365m or 14% to GBP2.9bn (31 December 2014: GBP2.6bn)
Innovative online deposit franchise funds lending growth
-- Customer deposits up by 11% to GBP5.0bn (31 December 2014: GBP4.5bn)
-- Strong growth in SME deposits, up by 20% to GBP1.2bn (31 December 2014: GBP1.0bn)
Successful IPO supports robust capital position
-- Total capital ratio(2) of 15.8% (31 December 2014: 14.8%)
-- CET 1 capital ratio(2) of 12.0% (31 December 2014: 10.4%)
-- Leverage ratio(2) of 7.2% (31 December 2014: 6.3%)
Delivering strong, sustainable returns to shareholders
-- Underlying return on equity(1) increased to 18.6% (H1 2014: 11.7%)
-- Earnings per share 8.8p (H1 2014: 4.8p)
Phillip Monks, CEO, commented:
"It's been an excellent six months for the Group, we've
generated continued growth, doubled profits, listed on the London
Stock Exchange and joined the FTSE 250. We're supporting more
customers than ever before with lending to SMEs up by 12% to
GBP2.5bn and Residential Mortgages up by 14% to GBP2.9bn. Our
innovative online deposit business supports this lending and our
competitive, transparent products together with the recent launch
of our SME Rate Checker have helped drive a 20% increase in SME
deposits to GBP1.2bn.
We've more than doubled underlying profit before tax to GBP44m
compared with GBP21m for the first half of 2014. These excellent
results give us great confidence for the rest of 2015 and beyond.
We remain committed to delivering strong, sustainable returns to
shareholders while generating growth and maintaining our
disciplined approach to risk management and increased our
underlying return on equity by around 7pts to nearly 19%. We're
also making great progress towards our target of delivering a
cost/income ratio of less than 40% by the end of 2017.
We're excited by the significant ongoing growth opportunity
presented by SMEs and homeowners, who we believe continue to be
underserved by the wider market. Our track record and the great
customer feedback we receive demonstrate that we're exceptionally
well placed to continue to support these customers and grow the
business."
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and
GBP3.2m post-tax (H1 2014: GBP2.2m and GBP1.7m)
(2) Capital ratios as at 30 June 2015 include H1 2015
profits
Enquiries:
Analysts Media
Claire Cordell Holly Marshall
Tel: +44 (0) 20 Tel: +44 (0) 20 3553 4828
3553 4274
Amit Deshpande Andy Homer
Tel: +44 (0) 20 Tel: +44 (0) 20 3553 4244
3553 4251
FTI Consulting
Neil Doyle/ Paul Marriott
Mobile: +44 (0) 7771 978 220
/+44 (0) 7703 330 390
A live webcast of the analyst presentation, including the
question and answer session, will be broadcast on our IR website
www.investors.aldermore.co.uk at 9:30am today and is available via
a listen only conference call by dialling UK Freephone: 0800 368
0649 or International dial in: + 44 (0) 20 3059 8125. An indexed
version of the webcast will be available on the website by the end
of the day and copies of the slides to be presented at the analyst
meeting will be available on the website from 9.00am today.
CONTENTS Page
Summary balance sheet 3
Summary income statement 4
CEO review 5
Financial review 8
Principal risks and uncertainties 20
Directors' responsibility statement 23
Independent review report to Aldermore
Group PLC 24
Consolidated income statement 26
Consolidated statement of comprehensive
income 27
Consolidated statement of financial
position 28
Consolidated statement of cash flows 29
Consolidated statement of changes in
equity 30
Notes to the consolidated interim financial
statements 31
Note on rounding:
The CEO and Financial reviews have been prepared by rounding
financial data in GBP thousands to the nearest GBP million to one
decimal place. As a result of rounding, some of the tables may not
exactly reconcile to the total shown. All percentage movements are
calculated using the data shown in GBP thousands in the statutory
consolidated financial statements rather than the rounded
amounts.
Important disclaimer
Visit www.aldermore.co.uk for more information. This press
release may contain 'forward-looking statements' with respect to
certain of the Group's plans and its current goals and expectations
relating to its future financial condition, performance, results,
strategic initiatives and objectives. Generally, words such as
"may", "could", "will", "expect", "intend", "estimate",
"anticipate", "aim", "outlook", "believe", "plan", "seek",
"continue" or similar expressions identify forward-looking
statements. These forward-looking statements are not guarantees of
future performance. By their nature, all forward-looking statements
are inherently predictive and speculative and involve risk and
uncertainty because they relate to future events and circumstances
which are beyond the Group's control, including amongst other
things, UK economic business conditions, market-related risks such
as fluctuations in interest rates, the policies and actions of
regulatory authorities, the impact of competition, inflation,
deflation, the timing impact and other uncertainties of future
acquisitions or combinations within relevant industries, as well as
the impact of tax and other legislation or regulations in the
jurisdictions in which the Group operates. As a result, the Group's
actual future financial condition, performance and results may
differ materially from the plans, goals and expectations set forth
in the Group's forward-looking statements. Forward-looking
statements in this press release are current only as of the date on
which such statements are made. The Group undertakes no obligation
to update any forward-looking statements, save in respect of any
requirement under applicable law or regulation. Nothing in this
press release shall be construed as a profit forecast.
Aldermore
Aldermore is an SME-focused bank which operates with modern,
scalable and legacy-free infrastructure. It offers simple financial
products and solutions to meet the needs of underserved Small and
Medium-sized Enterprises (SMEs) across their business and personal
lives, as well as homeowners and savers. Aldermore has no branch
network but serves customers and intermediary partners online, by
phone and face to face through its network of regional offices
located around the UK. Building on its core values of being
reliable, expert, dynamic and straightforward, Aldermore aims to
deliver banking as it should be. Established in 2009, Aldermore has
grown significantly. At the end of June 2015, lending to customers
stood at GBP5.4 billion and customer deposits totalled GBP5.0
billion. For more information, please visit
www.aldermore.co.uk.
Aldermore Bank PLC is an operating entity of Aldermore Group
PLC. In March 2015, Aldermore Group PLC's shares (ALD.L) listed on
the Main Market of the London Stock Exchange. Aldermore Bank PLC is
regulated by the Prudential Regulation Authority and the Financial
Conduct Authority and is registered under the Financial Services
Compensation Scheme.
Summary balance sheet
30 June 31 December Movement
2015 2014 %
GBPm GBPm
Net loans 5,436.3 4,801.1 13%
Cash and investments 772.7 706.7 9%
Intangible assets 23.1 22.6 2%
Fixed and other assets 29.6 35.0 (15)%
-------- ------------ ---------
Total assets 6,261.7 5,565.2 13%
-------- ------------ ---------
Customer deposits 4,967.3 4,459.0 11%
Wholesale funding 726.5 621.8 17%
Other liabilities 87.6 105.6 (17)%
-------- ------------ ---------
Total liabilities 5,781.4 5,186.4 11%
Ordinary shareholders' equity 406.7 305.2 33%
AT1 capital 73.7 73.7 -%
Equity 480.3 378.9 27%
-------- ------------ ---------
Total liabilities and equity 6,261.7 5,565.2 13%
-------- ------------ ---------
Key ratios (%)
(MORE TO FOLLOW) Dow Jones Newswires
August 27, 2015 02:03 ET (06:03 GMT)
Non-performing loans ratio
(NPL) 0.43% 0.43% -%
Loans to deposits ratio 109% 108% 1%
CRD IV fully loaded CET 1 ratio(1) 12.0% 10.4% 1.6%
CRD IV fully loaded total capital
ratio(1) 15.8% 14.8% 1.0%
(1) Capital ratios as at 30 June 2015 include H1 2015
profits
Summary income statement
H1 2015 H1 2014 Movement
GBPm GBPm %
Interest income 139.1 103.8 34%
Interest expense (47.1) (42.6) (10)%
-------- -------- ---------
Net interest income 92.0 61.2 50%
Net fee and other operating
income 12.3 12.0 2%
Net derivatives income and gains
on disposal of debt securities 0.4 0.6 (29)%
-------- -------- ---------
Operating income 104.8 73.9 42%
Expenses, depreciation and amortization (56.0) (47.1) (19)%
IPO costs (4.1) (2.2) (83)%
Operating profit before impairment
losses 44.7 24.5 82%
Impairment losses (5.2) (5.9) 12%
-------- -------- ---------
Profit before tax 39.5 18.6 112%
Tax (8.3) (4.4) (90)%
-------- -------- ---------
Profit after tax 31.2 14.2 119%
Basic earnings per share (pence) 8.8p 4.8p 4.0p
Diluted earnings per share (pence) 8.7p 4.8p 3.9p
Underlying profit before tax(1) 43.6 20.8 109%
Underlying profit after tax(1) 34.5 16.0 116%
H1 2015 H1 2014 Movement
Key ratios % % %
Gross interest margin 5.4 5.6 (0.2)%
Cost of funding 1.8 2.3 0.5%
Net interest margin 3.6 3.3 0.3%
Cost/income ratio 57 67 10%
Underlying cost/income ratio(1) 53 64 11%
Cost of risk (annualised) 20bps 32bps 12bps
Return on Equity 16.8 10.4 6.4%
Underlying return on Equity(1) 18.6 11.7 6.9%
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and
GBP3.2m post-tax (H1 2014: GBP2.2m and GBP1.7m)
CEO review
I'm delighted to be presenting our first set of results since
our IPO in March. The transition to life as a listed company has
been exciting but busy and I'm exceptionally proud of the way in
which the business has continued to deliver. Our half year results
are excellent and give us great confidence for the full year 2015
and beyond.
Our vision is to support UK SMEs across their business and
personal lives, as well as homeowners, as we believe both groups
are underserved by the wider banking sector. We are confident of
achieving our strategic objectives of delivering for customers and
shareholders while maintaining a prudent risk appetite and strong
capital base. We focus on prime credit quality customers across
four lending lines chosen for their large market sizes, high levels
of tangible asset security and attractive risk adjusted returns and
within which we only need to capture a relatively small market
share to deliver on our growth plans.
Our DNA is to be Reliable, Expert, Dynamic and Straightforward
and this informs everything we do, creating the basis of our
culture and brand. We engage with customers through multiple
channels and aim to differentiate our service by being easy to do
business with and making consistent and transparent credit
decisions. We enjoy the advantage of modern, legacy-free and
scalable systems which we use to support our expert underwriters in
making considered decisions rather than adopting a "computer says
no" approach.
At the centre of our funding base is our dynamic online
proposition which provides both retail and SME customers with
innovative savings products. With our modern systems it is possible
for a customer to open and fund an account online, usually in less
than fifteen minutes.
Market environment
During the first six months of 2015, macro-economic conditions
were relatively benign and our target market segments have grown.
Asset finance new business at a market level grew by around 16%
compared with H1 2014 and I'm delighted that we grew our
origination by 25% over the same period, gaining market share. The
most recent statistics available from the invoice finance industry
show client numbers flat and a 3% reduction in advances since the
end of 2014. Despite this, we have attracted new customers with net
lending remaining broadly flat. In commercial mortgages, demand for
property development finance continues to grow with planning
applications and consents now at their highest level since 2007. We
grew our origination by 6% compared with the first half of 2014
with more than a quarter of origination coming from our property
development proposition. We maintained our market share in
residential mortgages where, according to the Council of Mortgage
Lenders, gross mortgage lending reached around GBP97bn in the first
half of 2015 with the second quarter 17% higher than the first,
potentially due to uncertainty ahead of the general election.
As expected, we are seeing some signs of increased competition
with a few new entrants in Asset and Invoice Finance and mortgage
lenders exhibiting a greater focus on buy-to-let. We see this less
in owner-occupied residential mortgages where we continue to target
prime credit quality customers who fall outside of the
"cookie-cutter" approach adopted by some larger banks.
Differentiating ourselves by delivering exceptional service, every
time, to our broker partners and direct customers is a priority. We
continue to invest in technology to improve our brokers' and
customers' experience including new web-content in Asset Finance,
lead-generation functionality in Invoice Finance, a new buy-to-let
website hub, as well as optimising our sites for mobile and tablet
visitors who, together, now represent close to half of all visitors
to our mortgages site. This approach is working and, as described
below, we are holding gross margins broadly stable while remaining
on track to achieve our target of growth in net lending of around
GBP1.4bn for 2015.
First half performance
This first half of 2015, was another excellent six months for
the Group as we generated continued momentum and drove further top
and bottom line benefits. As at 30 June 2015, we are supporting
more UK SMEs and homeowners than ever before with lending customer
numbers up by 15% to over 64,000. Net loans to customers were up by
13% to GBP5.4bn (31 December 2014: GBP4.8bn). The balance of the
portfolio, as expected, remained broadly consistent over the period
with loans to SMEs up by 12% to GBP2.5bn (31 December 2014:
GBP2.2bn) and Residential Mortgages up by 14% to GBP2.9bn (31
December 2014: GBP2.6bn).
This growth was driven by a record first half of origination,
all of it organic, which was up by 14% compared with the same
period in 2014 to GBP1,186m (H1 2014: GBP1,041m). Originations to
SMEs were up by 16% to GBP650m (H1 2014: GBP561m) where, in
addition to growth in customer numbers, we saw the benefits from
more recently launched soft asset and stocking finance propositions
in Asset Finance and good progress within property development in
SME Commercial Mortgages. New lending through our Residential
Mortgages division was up by 12% to GBP536m (H1 2014: GBP480m) with
a fairly even spread between owner-occupied and buy-to-let
mortgages. This positions us well for the second half of 2015,
which historically has been the seasonally stronger six months. We
adopt a multi-channel approach and have a broad distribution
network. We continued to extend our direct distribution which grew
by 24% compared to the first half of 2014 and now accounts for 17%
of total origination (H1 2014: 15%).
We actively manage our funding base, balancing the ongoing
diversification of funding sources with maintaining a prudent loan
to deposit ratio. We remain predominantly deposit-funded and have
grown deposits by 11% to GBP5.0bn (31 December 2014: GBP4.5bn) to
support our increased lending. We continue to provide innovative
savings products to customers and, in response to research we
conducted showing that approximately a quarter of SMEs did not know
what rate they were receiving on deposits, launched our SME Rate
Checker which allows SMEs to compare rates from over 90 providers.
The feedback has been excellent and I am delighted that our SME
deposits have grown by 20% to GBP1.2bn (31 December 2014:
GBP1.0bn).
We are a straightforward business, lending growth drives
increased net interest income and we leverage our cost base to
deliver accelerating profitability. Our first half results clearly
demonstrate this, as our ongoing momentum drove net interest income
up by 50% to GBP92.0m (H1 2014: GBP61.2m) and our net interest
margin expanded to 3.6% (H1 2014: 3.3%). At the same time, despite
continued investment in the business, we improved our underlying
cost/income ratio(1) by 11 percentage points to 53% (H1 2014: 64%).
As a result, we delivered an 82% increase in operating profit
before impairment losses to GBP44.7m (H1 2014: GBP24.5m).
(MORE TO FOLLOW) Dow Jones Newswires
August 27, 2015 02:03 ET (06:03 GMT)
We take a rigorous approach to credit management, constructing a
granular and highly secured portfolio. Our cost of risk was 20bps
(H1 2014: 32bps), included no significant recoveries, and was a
strong performance aided by our ongoing actions in Invoice Finance,
low arrears across the business, as well as being reflective of
where we are in the current economic cycle. We stress test
affordability at origination and re-score the portfolio each month
giving us early sight of any emerging issues.
We are committed to delivering strong and sustainable returns
for our shareholders. Profit before tax on a reported basis
increased by 112% to GBP39.5m (H1 2014: GBP18.6m). Excluding IPO
related costs, the underlying profit before tax(1) increased by
109% to GBP43.6m (H1 2014: GBP20.8m) and we delivered a 7
percentage point improvement on our underlying return on equity
(RoE)(1) to 18.6% (H1 2014: 11.7%).
In March 2015, we successfully listed on the London Stock
Exchange raising GBP75m of gross primary capital to support our
future growth plans. We are strongly capitalised and at 30 June
2015, the Group had a fully loaded CRD IV total capital ratio(2) of
15.8% (31 December 2014: 14.8%), a fully loaded CRD IV CET1 capital
ratio(2) of 12.0% (31 December 2014: 10.4%) and a leverage ratio(2)
of 7.2% (31 December 2014: 6.3%).
(1) Excluding H1 2015 IPO related costs of GBP4.1m pre-tax and
GBP3.2m post-tax (H1 2014:GBP2.2m and GBP1.7m)
(2) Capital ratios as at 30 June 2015 include H1 2015
profits
Outlook
I am delighted by this excellent set of results which
demonstrate that we are on track to deliver on our goals for the
full year 2015, namely net loan growth of around GBP1.4bn, a net
interest margin of c3.6% and underlying expense growth of mid-teens
%, whilst maintaining a fully loaded CRD IV CET1 capital ratio of
around 11%. Management continue to believe that the normalised cost
of risk for the portfolio over the medium term remains in the mid
to high 30's basis points. However, if the credit environment
remains relatively benign and we continue to see low levels of
large losses then I would expect to see a continued good
performance on impairments in the second half of 2015.
Along with the rest of the banking sector, we face a changing
regulatory and legislative environment. On 8 July 2015, the Summer
Budget introduced an 8% surcharge on UK banking profits above
GBP25m, effective from 1 January 2016, which will increase our
corporate tax rate and impact returns. We will look to mitigate the
impact on returns to the extent possible and remain committed to
delivering strong, sustainable returns to shareholders while
generating growth and maintaining our disciplined approach to risk
management.
Additionally, the Summer Budget introduced plans to restrict
relief on mortgage interest for individual buy-to-let landlords to
the basic rate of income tax. This change applies from April 2017,
and will be phased in over four years giving enough time for those
investors who will be impacted to adjust to the new regime. We also
lend to landlords who prefer to invest via a corporate structure,
these customers are not impacted by the proposed changes. Although
it is too early to be completely definitive, we do not believe that
this will have a significant impact on the economics of investing
in, or demand for, buy-to-let properties. The UK is experiencing a
demographic shift, with around 26% of households expected to be
renting within the private sector by 2022(1) which is expected to
generate further growth in the buy-to-let sector.
Despite the above changes to the regulatory landscape, the
growth opportunity available to us remains significant. Indicators
show that our target market segments will continue to grow with
SMEs reporting increased levels of confidence and planned
investment. In the housing market, the number of registered house
hunters has reached its highest levels since August 2004.
I believe we are uniquely positioned to continue our support of
underserved UK SMEs and homeowners and am confident that we will
continue to build on our strong track record of delivery for both
customers and shareholders.
Phillip Monks
CEO
(1) OGLG/IMLA: Reshaping housing tenure in the UK May 2014
Financial review
Balance sheet
Assets
30 June 31 December Movement
* Net loans to customers 2015 2014 %
GBPm GBPm
Asset Finance 1,196.1 1,044.3 15%
Invoice Finance 170.5 180.6 (6)%
SME Commercial Mortgages 1,139.5 1,011.3 13%
-------- ------------ ---------
Net loans to SMEs 2,506.0 2,236.2 12%
Residential Mortgages 2,930.2 2,564.9 14%
-------- ------------ ---------
Net loans to customers 5,436.3 4,801.1 13%
We continued to support UK SMEs and homeowners, with net loans
to customers increasing by 13% in the first half of 2015 to
GBP5.4bn (31 December 2014: GBP4.8bn).
As expected, the portfolio mix has remained broadly consistent
with net loans to SMEs up by 12% to GBP2.5bn (31 December 2014:
GBP2.2bn) driven by strong growth in Asset Finance and SME
Commercial Mortgages. Invoice Finance remains a small part of our
portfolio and net loans were broadly flat at GBP0.2bn (31 December
2014: GBP0.2bn). Net loans to homeowners were up by 14% to GBP2.9bn
(31 December 2014: GBP2.6bn).
We remain on track to deliver on our target of around GBP1.4bn
growth in net lending for the full year.
30 June 31 December Movement
* Gross loans analysis 2015 2014 %
GBPm GBPm
Neither past due nor individually
impaired 5,399.9 4,760.2 13%
Past due but not individually
impaired 33.5 42.6 (22)%
Individually impaired 23.2 20.8 11%
--------- ------------ ---------
Gross loans 5,456.6 4,823.6 13%
Impairments (20.3) (22.6) 10%
--------- ------------ ---------
Net loans to customers 5,436.3 4,801.1 13%
Non-performing loans ratio 0.43% 0.43% - %
Allowance for losses - individual
provisions GBP10.9m GBP14.0m (23)%
Coverage ratio 46.82% 67.40% (20.58)%
82
We take a rigorous approach to credit management and have
deliberately constructed a granular and highly secured portfolio.
We have also maintained our prudent risk appetite as we've grown
the portfolio by 13% since the start of the year. This approach,
along with the current benign credit environment, has led to
continued low levels of arrears and a consistent non-performing
loans ratio of 0.43%. We continue to stress test affordability at
origination and re-score the portfolio on a monthly basis to give
us early sight of any emerging issues.
The coverage ratio measures the impairment allowance relating to
individual loan balances as a percentage of total individually
impaired balances. As at 30 June 2015, this ratio had reduced to
46.82% (31 December 2014: 67.40%) as a result of one SME Commercial
Mortgage account which was fully recovered in early July and
against which no provision was made at the balance sheet date. In
addition, the coverage ratio has also reduced due to a number of
fully provided loans being written off within Invoice Finance.
Liabilities
Our funding strategy remains to be predominantly deposit-funded
whilst actively managing wholesale sources including the Funding
for Lending Scheme (FLS) and Residential Mortgage Backed
Securitisation (RMBS) to drive an efficient cost of funds. As at 30
June 2015, our loans to deposits ratio was in line with management
expectations at 109% (31 December 2014: 108%).
30 June 31 December Movement
* Deposits 2015 2014 %
GBPm GBPm
Retail 3,666.9 3,411.3 7%
SME 1,227.9 1,024.4 20%
Corporate deposits 72.5 23.3 212%
4,967.3 4,459.0 11%
Our dynamic and innovative online savings franchise provides
award winning savings products to customers and grew by 11% to
GBP5.0bn (31 December 2014: GBP4.5bn) to support our growth in net
lending.
We are particularly pleased with further growth in SME deposits,
up by 20% to GBP1.2bn (31 December 2014: GBP1.0bn) which now form
25% of our total customer deposit base.
Corporate deposits, launched in December 2014 are another
element in our ongoing funding diversification, have grown by 212%
and now total GBP72.5m (31 December 2014: GBP23.3m).
30 June 31 December Movement
* Wholesale funding 2015 2014 %
GBPm GBPm
FLS 444.0 304.2 46%
RMBS 238.6 279.1 (15)%
Other wholesale funding 43.8 38.7 13%
-------- ------------ ---------
726.5 621.8 17%
Wholesale funding grew by 17% to GBP726.5m (31 December 2014:
GBP621.8m) and predominantly consists of on-balance sheet funding
via repurchase agreements of FLS drawings and our RMBS.
(MORE TO FOLLOW) Dow Jones Newswires
August 27, 2015 02:03 ET (06:03 GMT)
We took advantage of the cost-effective funding available under
the Bank of England's extension of FLS for SME lending, increasing
our funding to GBP444.0m (31 December 2014: GBP304.2m).
In April 2014, we issued our inaugural GBP333m RMBS transaction
priced at LIBOR + 67bps. The outstanding balance as at 30 June 2015
stood at GBP238.6m (31 December 2014: GBP279.1m).
Other wholesale funding includes Tier 2 capital of GBP37.4m (31
December 2014: GBP36.8m) which was issued in May 2012 with a
nominal value of GBP40m, has an effective interest rate of c18% and
is callable in May 2017.
Equity
GBPm
* Movements in ordinary shareholders' equity
31 December 2014 305.2
Profit after tax 31.2
Total other comprehensive income (0.4)
Net equity raised at IPO 72.3
Share based payments 1.1
AT1 coupon (net of tax) (2.8)
------
30 June 2015 406.7
Ordinary shareholders' equity increased to GBP406.7m (31
December 2014: GBP305.2m) predominantly as a result of GBP75m of
gross equity raised during the IPO in March 2015 and retained
earnings for the period partially offset by the coupon paid on the
Additional Tier 1 instrument in April 2015.
- AT1 Capital
On 9 December 2014, the Group issued GBP75m Fixed Rate Reset
Additional Tier 1 (AT1) Perpetual Subordinated Contingent
Convertible Securities. The securities are listed on the Irish
Stock Exchange, pay a coupon of 11.875% annually on 30 April,
subject to Board approval, and convert to equity if the Group's
CET1 ratio falls below 7%. The first call date is 30 April 2020.
From an accounting perspective, the securities are classified as
equity with the coupon payments treated like dividends and deducted
from retained earnings when paid.
Financial Performance
- Net interest income
During the first six months of 2015, interest income grew by 34%
to GBP139.1m (H1 2014: GBP103.8m), driven by continued growth in
net loans with the gross interest margin remaining relatively
stable at 5.4% (H1 2014: 5.6%).
We continued to benefit from our strategy of diversifying our
funding base and interest expense increased by only 10% to GBP47.1m
(H1 2014: GBP42.6m) as we drove the cost of funding down to 1.8%
(H1 2014: 2.3%).
As a result, the Group's net interest income increased by 50% to
GBP92.0m (H1 2014: GBP61.2m) while the net interest margin improved
by 0.3 percentage points to 3.6% (H1 2014: 3.3%).
H1 2015 H1 2014 Movement
* Net fee and other operating income GBPm GBPm %
Fee and commission income 12.6 12.7 (1)%
Fee and commission expense (3.8) (4.4) 14%
Other operating income 3.5 3.7 (6)%
12.3 12.0 2%
Net fee and other operating income were up by 2% to GBP12.3m (H1
2014: GBP12.0m) with fee and commission income remaining broadly
flat at GBP12.6m (H1 2014: GBP12.7m) and a reduction in fee and
commission expense by 14% to GBP3.8m (H1 2014: GBP4.4m)
predominantly driven by Invoice Finance. Other operating income is
mainly related to Invoice Finance and is marginally down.
H1 2015 H1 2014 Movement
* Net derivatives income and gains on disposal of debt GBPm GBPm %
securities
Net (expense)/income on derivatives (2.0) 0.4 n/a
Gains on disposal of debt securities 2.5 0.2 n/a
0.4 0.6 n/a
Net income from derivatives and gains on disposal of debt
securities was GBP0.4m (H1 2014: GBP0.6m) with the net expense from
derivatives offset by the gains on disposal of the related debt
securities.
H1 2015 H1 2014 Movement
* Expenses, depreciation and amortisation GBPm GBPm %
Other administrative expenses 51.6 42.6 (21)%
Provisions 2.2 2.7 20%
Depreciation and amortisation 2.2 1.8 (23)%
-------- -------- ---------
56.0 47.1 19%
Excluding IPO related costs, underlying administrative expenses
increased by 19% to GBP56.0m (H1 2014: GBP47.1m). The increase in
other administrative expenses was mainly due to an increase in
staff costs as we invested in further strengthening our central
functions ahead of becoming a listed company and to support the
growth of the business. During the first six months of 2015, on
average we employed 871 people, including contractors, an increase
of 17% on the same period in 2014. Provisions predominantly include
the full year charge for the Financial Services Compensation Scheme
(FSCS) levy which must be accounted for in the first half.
Depreciation and amortisation remained broadly flat in nominal
terms.
- Cost/income ratio
The underlying cost/income ratio measures administration
expenses, excluding IPO related costs but including depreciation
and amortisation, as a percentage of operating income. We continue
to make excellent progress towards achieving our target of a
cost/income ratio of less than 40% by the end of 2017 with the
underlying cost/income ratio for H1 2015 improving by 11 percentage
points to 53% (H1 2014: 64%).
- Operating profit before impairments
Operating profit before impairment losses increased by 82% to
GBP44.7m (H1 2014: GBP24.5m) as operating income growth of 42%
outstripped the growth in our expense base of 19% excluding IPO
related costs.
- Impairment losses
Impairment losses decreased by 12% to GBP5.2m (H1 2014: GBP5.9m)
despite the growth in the loan book as a result of our rigorous
focus on credit management and a relatively benign credit
environment. There were no significant one-off recoveries in either
period.
Across the portfolio, we experienced low levels of arrears and
few large losses and this is reflected in the 19% reduction in
individual provisions for the period to GBP3.5m (H1 2014: GBP4.3m).
The collective provision element of the charge for H1 2015
increased by 5% to GBP1.7m (H1 2014: GBP1.6m) reflecting growth in
the book. Given current stable conditions, no assumption changes
have been made since the end of 2014. In the first half of 2014,
the collective charge was negatively impacted by an increase in the
assumed forced sale discount percentage on the SME Commercial
Mortgage portfolio, which was partially offset by a positive
collective charge in Residential Mortgages as we reflected our
actual experience of loans which were one or two months in arrears
becoming three months in arrears, and therefore impaired.
Cost of risk, which measures impairment losses as a percentage
of average net loans, improved by 12 basis points to 20bps (H1
2014: 32bps). The specific cost of risk was 14bps (H1 2014: 23bps)
reflecting the low levels of both arrears and large losses
experienced during the first half of 2015. The collective cost of
risk was 7bps (H1 2014: 9bps).
- Profit before tax
Profit before tax for the first six months of this year
increased by 112% to GBP39.5m (H1 2014: GBP18.6m). Excluding
pre-tax IPO related costs of GBP4.1m (H1 2014: GBP2.2m), the
underlying profit before tax increased by 109% to GBP43.6m (H1
2014: GBP20.8m).
- Tax
The tax charge for the first six months of the year increased by
90% to GBP8.3m (H1 2014: GBP4.4m) reflecting the Group's increased
profitability. The effective tax rate is 21.0% (H1 2014:
23.5%).
On 8 July 2015, the Summer Budget proposed an 8% corporation tax
surcharge on all UK banking profits above GBP25m per annum. This
change is expected to be effective from 1 January 2016.
- Profit after tax
Profit after tax increased by 119% to GBP31.2m (H1 2014:
GBP14.2m). Excluding post-tax IPO related costs of GBP3.2m (H1
2014: GBP1.7m), the underlying profit after tax increased by 116%
to GBP34.5m (H1 2014: GBP15.9m).
- Return on equity
Return on equity as reported is 16.8% (H1 2014: 10.4%) and is
calculated as the profit after tax attributable to ordinary
shareholders expressed in relation to average shareholders' funds
attributable to ordinary shareholders, i.e. the AT1 coupon is
deducted from profit after tax.
Excluding post-tax IPO costs of GBP3.2m (H1 2014: GBP1.7m), the
underlying return on equity is 18.6% (H1 2014: 11.7%).
The proposed 8% tax surcharge would impact the Group's returns
going forward as we are already making profits in excess of the
GBP25m annual allowance. We will look to mitigate the impact on
returns to the extent possible and remain committed to delivering
strong, sustainable returns to shareholders while generating growth
and maintaining our disciplined approach to risk management.
- Earnings per share
Basic earnings per share (EPS) of 8.8p (H1 2014: 4.8p) is
calculated as net profit attributable to ordinary shareholders of
the Group divided by the weighted average number of ordinary shares
in issue during the period. On a fully diluted basis, the EPS was
8.7p (H1 2014: 4.8p).
The weighted average number of ordinary shares in issue during
the period was 322,075 thousand (H1 2014: 296,178 thousand) and
326,659 thousand (H1 2014: 299,056 thousand) on a diluted
basis.
Regulatory capital position(1)
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The fully loaded regulatory capital position of the Group under
CRD IV is set out below:
30 June 31 December Movement
2015 2014 %
Fully loaded CRD IV CET 1 ratio(1)
(%) 12.0 10.4 1.6%
Fully loaded CRD IV Tier 1
capital ratio(1) (%) 14.3 13.1 1.2%
Tier 2 capital ratio (%) 1.5 1.7 (0.2)%
Fully loaded CRD IV total capital
ratio(1) (%) 15.8 14.8 1.0%
Risk Weighted Assets (GBPm) 3,191.3 2,702.0 18%
As at 30 June 2015, the Group's fully loaded CRD IV total
capital ratio(1) was 15.8% (31 December 2014: 14.8%) and its CET1
ratio(1) was 12.0% (31 December 2014: 10.4%). These increases were
driven by the issue of GBP75m of gross primary equity during the
IPO and retained earnings generated during the period partially
offset by growth in Risk Weighted Assets (RWAs).
Leverage ratio(1)
The Group's leverage ratio under CRD IV is set out below:
30 June 31 December Movement
2015 2014 %
% %
Leverage ratio(1) 7.2 6.3 0.9%
The Group's leverage ratio improved by 0.9 percentage points to
7.2% (31 December 2014: 6.3%) mainly due to the issue of GBP75m of
gross primary equity during the IPO and retained earnings generated
during the period partially offset by growth in lending assets.
(1) Capital ratios as at 30 June 2015 include H1 2015
profits
Segmental analysis
Asset Finance 30 June 31 December Movement
2015 2014 %
GBPm GBPm
Net loans to customers 1,196.1 1,044.3 15%
NPL ratio 0.29% 0.25% (0.04)%
H1 2015 H1 2014 Movement
GBPm GBPm %
Organic origination 424 339 25%
Net interest income 25.2 16.2 56%
Net fees and other income 2.0 1.5 36%
-------- ------------ ---------
Operating income 27.3 17.7 54%
Administrative expenses (5.6) (5.5) (2)%
Impairment losses (2.2) (0.9) (137)%
-------- ------------ ---------
Segmental result 19.5 11.3 73%
Net interest margin (%) 4.5% 4.1% 0.4%
Cost of risk (bps) 40bps 24bps (16)bps
Aldermore supports capital investment in a wide range of
business-critical assets from hard assets such as vehicles and
agricultural machinery to printing equipment, digital technologies,
renewables and a wide array of soft assets. We aim to be our
partners' "funder of first choice" by being easy to do business
with, quick to respond and consistent in our credit decisions.
The Asset Finance business delivered strong growth in the first
half, with net loans growing by 15% to GBP1.2bn (31 December 2014:
GBP1.0bn) as we grew customer numbers by 18% to around 38,000 (31
December 2014: c33,000). This growth was also driven by excellent
organic origination which increased by 25% to GBP424m (H1 2014:
GBP339m). As a result of our service focus, we saw particularly
strong origination from our broker distribution channel which grew
by 29%. We also continued our focus on soft assets, which now
comprise around 6% of the portfolio and saw good progress with our
stocking proposition which we launched toward the end of 2014.
Redemptions performed as expected given the amortising nature
and average contract duration of these loans and the growing size
of the portfolio.
Net interest income grew by 56% to GBP25.2m (H1 2014: GBP16.2m)
driven mainly by growth in net loans. The net interest margin
improved to 4.5% (H1 2014: 4.1%) as a result of a reduction in cost
of funds and a broadly stable gross asset margin.
Administrative expenses were broadly stable at GBP5.6m (H1 2014:
GBP5.5m) as we continue to invest to support growth and leverage
our efficient operating platform.
Impairment charges for the first half totalled GBP2.2m (H1 2014:
GBP0.9m) leading to a cost of risk of 40bps (H1 2014: 24bps). This
charge includes a more normal level of specific provisions in H1
2015, compared with a reduced level in the same period in 2014,
together with a lower collective provision reflecting low levels of
arrears.
Asset Finance delivered an excellent bottom line performance
with the segmental result increasing by 73% to GBP19.5m (H1 2014:
GBP11.3m).
Invoice Finance 30 June 31 December Movement
2015 2014 %
GBPm GBPm
Net loans to customers 170.5 180.6 (6)%
NPL ratio 1.48% 3.13% 1.65%
H1 2015 H1 2014 Movement
GBPm GBPm %
Organic origination 20 27 (27)%
Net interest income 2.6 2.9 (9)%
Net fees and other income 7.5 8.8 (14)%
-------- ------------ ---------
Operating income 10.2 11.7 (13)%
Administrative expenses (7.4) (7.7) 5%
Impairment losses (0.6) (2.2) 73%
-------- ------------ ---------
Segmental result 2.2 1.8 25%
Net interest margin (%) 3.0% 2.8% 0.2%
Net revenue margin (%) 11.6% 11.3% 0.3%
Cost of risk (bps) 69bps 213bps 144bps
Invoice Finance is an important working capital tool for SMEs.
Aldermore will usually lend up to 85% of the value of approved
outstanding invoices issued by the borrower to its customers. Our
customers are typically owner-managed SMEs and we focus on key
sectors including Manufacturing, Wholesale, Recruitment and
Logistics. We employ specialist service teams that spend time
understanding our clients' business and design appropriate
financing solutions. Although distributed mainly via
intermediaries, our direct distribution has grown rapidly in recent
years and in the first six months of 2015, represented around 42%
of origination.
Invoice Finance is the smallest part of the business at around
3% of the total net loan portfolio. At 30 June 2015, net loans were
broadly flat at GBP0.2bn (31 December 2014: GBP0.2bn) as we focused
on improving the segmental result. Customer numbers increased
marginally, although remain around 1,200. Our trade and
construction finance propositions which were launched toward the
end of 2014 are starting to gain traction. Given the short term
nature of these loans, with the underlying invoices on average
converting to cash within 60 days, our average loan balance is
equivalent to providing over GBP1bn in working capital finance to
UK SMEs per annum.
Net interest income decreased marginally to GBP2.6m (H1 2014:
GBP2.9m). The net interest margin improved to 3.0% (H1 2014: 2.8%)
with an improvement in cost of funds more than compensating for a
marginal reduction in gross interest margin.
Net fee income was down 14% to GBP7.5m (H1 2014: GBP8.8m) due to
smaller average facility sizes and improvements in the credit
performance of the portfolio leading to lower collect out fees,
with the latter offset by improvements generated on impairments.
The net revenue margin improved to 11.6% (H1 2014: 11.3%).
Expenses decreased by 5% to GBP7.4m (H1 2014: GBP7.7m) due to
efficiency improvements.
In addition to a number of fully provided loans being written
off within Invoice Finance, we continue to benefit from actions
previously taken to enhance credit and fraud controls and our NPL
ratio has reduced by 1.65% to 1.48% since the start of the year.
These actions have also led to the improved credit performance of
the business with impairments down by 73% to GBP0.6m (H1 2014:
GBP2.2m) leading to a 144bps improvement in the cost of risk to
69bps (H1 2014: 213bps).
The segmental result improved by 25% to GBP2.2m (H1 2014:
GBP1.8m).
SME Commercial Mortgages 30 June 31 December Movement
2015 2014 %
GBPm GBPm
Net loans to customers 1,139.5 1,011.3 13%
NPL ratio 1.02% 0.62% (0.4)%
H1 2015 H1 2014 Movement
GBPm GBPm %
Organic origination 207 195 6%
Net interest income 24.4 18.0 35%
Net fees and other income 1.0 0.4 164%
-------- ------------ ---------
Operating income 25.4 18.4 38%
Administrative expenses (3.8) (3.3) (14)%
Impairment losses (1.2) (3.0) 59%
-------- ------------ ---------
Segmental result 20.5 12.1 69%
Net interest margin (%) 4.5% 4.4% 0.1%
Cost of risk (bps) 23bps 72bps 49bps
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We offer a full range of mortgages from property development
through to purchase and refinancing as well as bridging loans. Our
SME Commercial Mortgages business focuses on mortgages for shops,
warehouses, industrial units and offices as well as professional
buy-to-let, where the customer is a corporate entity or may have
more specialist lending requirements. In property development,
we've created flexible funding solutions for experienced
housebuilders working on residential and mixed-use developments. We
work closely with our brokers to ensure we are easy to do business
with and responsive, providing direct access to our underwriters in
more complex cases.
In the first half of 2015, our SME Commercial Mortgage business
grew net loans to customers by 13% to GBP1.1bn (31 December 2014:
GBP1.0bn) as we grew customer numbers by 13% to around 3,600 (31
December 2014: c3,200). Growth was supported by good organic
origination, up by 6% to GBP207m (H1 2014: GBP195m). We are
particularly pleased by the growth in the property development
portfolio, with brokers attracted by our high quality service and
national coverage, and the increase in direct distribution, due to
repeat business driven by our small dedicated direct team, which
accounted for c19% of total origination in H1 and grew by 148%.
The continued balance sheet momentum is reflected in the
increasing net interest income, up by 35% to GBP24.4m (H1 2014:
GBP18.0m). The gross interest margin remained broadly stable while
we reduced the cost of funding and as a result the net interest
margin improved by 0.1 percentage points to 4.5% (H1 2014:
4.4%).
Administrative expenses were up by 14% to GBP3.8m (H1 2014:
GBP3.3m) as we invested in front line capabilities particularly to
support growth in property development.
As at 30 June 2015, the NPL ratio was 1.02% and included one
account which was fully recovered in early July and which was
therefore not provided for at the balance sheet date. Impairment
losses were down by 59% to GBP1.2m (H1 2014: GBP3.0m) as a result
of lower levels of both specific and collective provisions than the
same period in 2014 despite the growth in the portfolio. Specific
provisions in H1 2014 included an additional charge for one account
which was then fully recovered in the second half of the year. The
H1 2014 collective charge was impacted by an increase in the
assumed forced sale discount percentage on the whole SME Commercial
Mortgage portfolio. There have been no changes to methodology or
underlying assumptions since the year end 2014. As a result, the
cost of risk has reduced by 49bps to 23bps (H1 2014: 72bps).
The segmental result was excellent, growing by 69% to GBP20.5m
(H1 2014: GBP12.1m).
Residential Mortgages 30 June 31 December Movement
2015 2014 %
GBPm GBPm
Net loans to customers 2,930.2 2,564.9 14%
NPL ratio 0.19% 0.23% 0.04%
H1 2015 H1 2014 Movement
GBPm GBPm %
Organic origination 536 480 12%
Net interest income 44.4 27.2 63%
Net fees and other income 1.7 1.5 13%
-------- ------------ ---------
Operating income 46.1 28.7 61%
Administrative expenses (5.4) (4.4) (22)%
Impairment losses (1.1) 0.2 (673)%
-------- ------------ ---------
Segmental result 39.6 24.5 62%
Net interest margin (%) 3.2% 2.9% 0.3%
Cost of risk (bps) 8bps (2)bps 10bps
Our Residential Mortgages business provides residential
buy-to-let and owner-occupied mortgages with around 60% (31
December 2014: 62%) of the portfolio being buy-to-let. In the
owner-occupied sector we target underserved prime customers
including the self-employed, professionals and first time
buyers.
As in our other divisions, we aim to be easy to do business
with, transparent and quick to respond. We benefit from our modern
technology. In Residential Mortgages, our brokers are able to apply
via an online portal and obtain a decision in principle within 90
seconds. This portal takes the application and links to external
systems, automatically completing basic identity, fraud and credit
checks and builds an underwriting file highlighting any specific
issues to our underwriters. This technology allows us to use
targeted human underwriting in a cost-effective manner to make
considered and consistent credit decisions.
The Residential Mortgages portfolio delivered another strong
performance, growing by 14% to GBP2.9bn (31 December 2014:
GBP2.6bn) driven by a 12% increase in customers to c21,000 (31
December 2014: c19,000). Organic origination was up by 12% to
GBP536m (H1 2014: GBP480m) with more than half being generated in
the owner occupied segment as we extended our product range and
supported the government's Help to Buy schemes. Our recently
launched bridging proposition is also making good progress.
The continued growth in the portfolio drove a strong increase in
net interest income, up by 63% to GBP44.4m (H1 2014: GBP27.2m). The
gross interest margin remained flat compared with the first half of
2014 with the reduction in the cost of funding leading to a 0.3%
expansion in the net interest margin to 3.2% (H1 2014: 2.9%).
Administrative expenses increased by 22% to GBP5.4m (H1 2014:
GBP4.4m) as we continued to invest to ensure that the platform is
able to support our growth plans.
Impairments of GBP1.1m (H1 2014: GBP0.2m release) reflect an
increased specific charge, in line with the growth of the portfolio
and a collective provision in line with the second half of 2014.
There was a reduction in the collective provision in H1 2014 as we
reflected our actual experience of loans which were one or two
months in arrears becoming three months in arrears, and therefore
impaired. Overall, both the NPL ratio at 0.19% (31 December 2014:
0.23%) and the cost of risk at 8 bps (H1 2014: 2 bps release)
remain low.
The business delivered an excellent bottom line performance with
the segmental result increasing by 62% to GBP39.6m (H1 2014:
GBP24.5m).
Central Functions H1 2015 H1 2014 Movement
GBPm GBPm %
Net interest income (4.6) (3.1) 50%
Net fees and other income 0.4 0.4 -%
-------- -------- ---------
Operating income (4.2) (2.6) 58%
Administrative expenses (excluding
IPO costs) (34.0) (26.2) (30)%
IPO related costs (4.1) (2.2) (83)%
Segmental result (42.2) (31.1) (36)%
Central Functions includes the Group's Treasury and Saving
functions as well as common costs which are not directly
attributable to the operating segments. Common costs include
support function costs such as Finance, IT, Legal & Compliance,
Risk and Human Resources.
Net interest income includes the interest expense relating to
the Tier 2 subordinated notes and the net interest income or
expense from derivatives held at fair value, neither of which are
recharged to the segments.
Net fees and other income predominantly includes the net expense
or income from derivatives (apart from the interest components of
hedging derivatives that are included in net interest income) and
other financial instruments at fair value through profit or loss
(which represents the market movements) and gains on disposal of
available for sale debt securities.
Central administrative expenses, excluding IPO costs, increased
by 30% to GBP34.0m (H1 2014: GBP26.2m) mainly driven by a 27%
increase in average head office employees (including contractors)
to 279 (H1 2014: 220) as we invested in the central support
functions ahead of the IPO and to support the growth of the
business.
Total IPO costs incurred in 2015 were GBP6.8m of which GBP4.1m
was charged to the P&L with the remainder deducted from
proceeds.
The segmental result was a charge of GBP42.2m (H1 2014: charge
of GBP31.1m)
Principal risks and uncertainties
There has been no significant change to the Group's business
model, risk management framework or risk appetite during the six
month period ended 30 June 2015. The following section summarises
the principal risks and uncertainties to which the Group is
exposed, along with the Group's approach to mitigating these risks.
A more detailed review of these principal risks is set out in Note
41 of the 2014 Annual Report on pages 97 to 119 which can be
accessed via the Group's website at www.aldermore.co.uk.
(a) Principal risks
The principal risks and uncertainties which the Group may face
in the remaining six months of the financial year are summarised
below:
Risk Mitigation of risk
-------------------------- -----------------------------------------------
Strategic risk The Group seeks to mitigate strategic
- The risk which risk by focusing on a sustainable
can affect the business model which is aligned to
Group's ability the Group's business strategy.
to achieve its
corporate and strategic
objectives.
-------------------------- -----------------------------------------------
Credit risk - The The Group seeks to mitigate credit
risk of financial risk by operating in business sectors
loss arising from where it has specific expertise. The
a borrower failing Group uses detailed lending policies
to meet their financial tailored to each business area combined
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obligations to with performing due diligence on borrowers
the Group in accordance and pledged security, reviewing credit
with agreed terms. reference agency reports and reviewing
financial information and credit scores
to assess credit risk.
-------------------------- -----------------------------------------------
Capital risk - The Group seeks to mitigate capital
The risk that the risk primarily by regulating the volume
Group has insufficient of asset origination. The Group also
capital to cover performs stress testing and sensitivity
regulatory requirements analysis along with monthly capital
and growth plans. forecasting over a period of 12-18
months to provide a current and forward
view of the Group's capital. Capital
requirements under stressed conditions
are considered as part of the Group's
Internal Capital Adequacy Assessment
Process ('ICAAP').
During the period the Group completed
its initial public offering and consequently
enhanced its capital position as a
result.
-------------------------- -----------------------------------------------
Liquidity risk The Group uses the Individual Liquidity
- The risk that Adequacy Assessment ('ILAA') process
the Group is not to mitigate liquidity risk. As part
able to meet its of the process, the Group determines
financial obligations the appropriate liquidity buffer and
as they fall due, assesses the level of liquidity necessary
or can do so only to prudently cover systemic and idiosyncratic
at excessive cost. risks. The liquidity buffer is monitored
on a daily basis in order to ensure
there are sufficient liquid assets
at all times to cover cash flow movements
and fluctuations in funding.
-------------------------- -----------------------------------------------
Interest rate risk Where possible the Group seeks to
- The risk of financial match the interest rate structure
loss through un-hedged of assets with liabilities or deposits
or mismatched asset creating a natural hedge. Where this
and liability positions is not possible the Group will enter
sensitive to changes into swap agreements to convert fixed
in interest rates. interest rate liabilities into variable
rate liabilities, which are then matched
with variable interest rate assets.
-------------------------- -----------------------------------------------
Market risk - The The Group does not seek to take or
financial impact expose itself to market risk, and
from movements does not carry out proprietary trading,
in market prices although certain liquid asset investments
on the value of which form part of the liquid asset
assets and liabilities. buffer may carry a limited amount
of mark-to-market risk which is regularly
monitored. It is accordingly considered
that there is minimal exposure to
market risk.
-------------------------- -----------------------------------------------
Operational risk The Group aims to minimise operational
- The risk of financial failures through the establishment
loss and/or reputational and subsequent investment in sound
damage resulting systems, controls and audit functions.
from inadequate The Group seeks to operate within
or failed internal a defined level of operational risk.
processes, people The operational risk appetite considers
and systems or risks events and the assessment of
from external events internal controls as well as holding
including financial additional capital for certain operational
crime. risks.
-------------------------- -----------------------------------------------
Conduct risk - The Group mitigates conduct risk by
The risk of detriment monitoring various operational metrics
to the Group's and by tracking activities which affect
customers due to customers, monitoring customer complaints,
the inappropriate implementing process improvements
execution of its and adhering to service standards.
business activities
and processes.
-------------------------- -----------------------------------------------
(b) Current risks
The above risks are all classified as principal risks within the
Group's Risk Management Framework and are considered to be
important to the development, performance and position of the
Group. The section below summarises specific current risks which
may adversely affect the Group. The current risks have the
potential to impact on a number of the principal risks described
above. The section below should not be regarded as a complete and
comprehensive statement of all current risks:
Area Consideration
----------------------- ----------------------------------------------
The domestic and The domestic economic environment
international economy continues to remain relatively stable,
with growth trends across all sectors,
stable property prices, low levels
of unemployment and contained inflationary
risks. Interest rates remain abnormally
low. As the economy continues to grow,
with positive wage inflation, the
point at which interest rates may
rise is getting nearer, although the
timing of rising interest rates remains
indeterminate. The Group has a material
proportion of mortgage assets which
are sensitive to interest rate rises,
and the continued low interest rate
environment will have a positive effect
on mortgage affordability. Gradual
increases in interest rates are not
expected to have a material effect
on the mortgage portfolio.
Some international geopolitical risks
remain and following the agreement
between the Eurozone and International
Monetary Fund creditors with Greece,
European economic instability risks
should moderate over the near term,
with a lower risk of a Greek exit
from Eurozone.
----------------------- ----------------------------------------------
UK Government Summer On 8 July 2015, the Summer Budget
Budget introduced an 8% surcharge on UK banking
profits above GBP25 million per annum,
effective from 1 January 2016 which
will increase our effective corporate
tax rate and impact returns. We will
look to mitigate the impact on returns
to the extent possible and remain
committed to delivering strong, sustainable
returns to shareholders while generating
growth and maintaining our disciplined
approach to risk management.
The Group operates in the Buy-to-Let
('BTL') sector. The Summer Budget
introduced plans to restrict relief
on mortgage interest for individual
BTL landlords to the basic rate of
income tax. This change applies from
April 2017, and will be phased in
over 4 years, giving enough time for
those investors who will be impacted
to adjust to the new regime. We also
lend to landlords who prefer to invest
via a corporate structure, these customers
are not impacted by the proposed changes.
Although it is too early to be completely
definitive, we do not believe that
this will have a significant impact
on the economics of investing in or
the long term demand for buy to let
properties.
----------------------- ----------------------------------------------
Cyber risk As the Group grows and expands its
activities, with a number of projects
running, operational risk will continue
to remain an area of focus. Operational
risks such as cyber risk and IT security
are reviewed at board level as well
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as at management level committees.
Cyber risk remains a high profile
issue for banks and cyber risk threats
are expected to increase over time
for the industry. The Group continues
to invest in its infrastructure and
has an investment plan specifically
designed to enhance cyber risk controls.
----------------------- ----------------------------------------------
Financial Services The reduction in the FSCS threshold
Compensation Scheme to GBP75,000 may affect the behaviour
('FSCS') of customers with higher value deposits.
The change may cause customers to
review the value deposited, especially
if the balance is between GBP75,000
and GBP85,000. The transitional arrangements
will allow the Group to monitor and
review the impact, but the effect
is not expected to be significant.
With the threshold changes affecting
all banks, the Group may be a net
beneficiary of deposits as customers
look to diversify their cash holdings
across a greater number of deposit
taking institutions.
----------------------- ----------------------------------------------
Directors' responsibility statement
The Directors are responsible for preparing the interim
financial report in accordance with applicable law and
regulations.
We confirm that to the best of our knowledge:
-- The condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting as adopted by
the European Union ('EU'); and
-- The interim management report includes a fair review of the information required by:
Ø DTR 4.2.7R of the Disclosure and Transparency Rules, being an
indication of important events that have occurred during the first
half of the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining half of the year; and
Ø DTR 4.2.8R of the Disclosure and Transparency Rules, being
related party transactions that have taken place in the first half
of the current financial year and that have materially affected the
financial position or performance of the entity during that period;
and any changes in the related party transactions described in the
last annual report that could do so.
The Board of Directors, as listed below, represents those
individuals responsible for these condensed consolidated interim
financial statements.
Glyn Jones
Phillip Monks
James Mack
Peter Cartwright
Neil Cochrane
Danuta Gray
John Hitchins
Robert Sharpe
Peter Shaw
Christopher Stamper
Cathy Turner
By order of the Board
James Mack
Director and Chief Financial Officer
26 August 2015
Independent review report to Aldermore Group PLC
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 June 2015 which comprises:
-- the consolidated income statement;
-- the consolidated statement of comprehensive income;
-- the consolidated statement of financial position;
-- the consolidated statement of cash flows;
-- the consolidated statement of changes in equity; and
-- the related explanatory notes.
We have read the other information contained in the half-yearly
financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the Disclosure and Transparency Rules ('the DTR')
of the UK's Financial Conduct Authority ('the UK FCA'). Our review
has been undertaken so that we might state to the Company those
matters we are required to state to it in this report and for no
other purpose. To the fullest extent permitted by law, we do not
accept or assume responsibility to anyone other than the Company
for our review work, for this report, or for the conclusions we
have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the Directors. The Directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in Note 1, the annual financial statements of the
Group are prepared in accordance with IFRSs as adopted by the EU.
The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with
IAS 34 'Interim Financial Reporting' as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK and Ireland) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
June 2015 is not prepared, in all material respects, in accordance
with IAS 34 as adopted by the EU and the DTR of the UK FCA.
Michael Peck
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E14 5GL
26 August 2015
Consolidated income statement Period Period
For the six month period ended ended ended
30 June 2015 30 June 30 June
2015 2014
Note GBP'000 GBP'000
Interest income 4 139,088 103,769
Interest expense 5 (47,057) (42,587)
Net interest income 92,031 61,182
-------------------------------------------- ---- -------- --------
Fee and commission income 6 12,583 12,701
Fee and commission expense 7 (3,757) (4,381)
Net (expense)/income from derivatives
and other financial instruments at fair
value
through profit or loss 8 (2,017) 392
Gains on disposal of available
for sale debt securities 2,466 236
Other operating income 9 3,515 3,726
Total operating income 104,821 73,856
-------------------------------------------- ---- -------- --------
Provisions 14 (2,186) (2,738)
Costs in preparation for an initial
public offering 10 (4,079) (2,231)
Other administrative expenses (51,640) (42,566)
-------------------------------------------- ---- -------- --------
Administrative expenses 10 (57,905) (47,535)
Depreciation and amortisation (2,192) (1,789)
Operating profit before impairment
losses 44,724 24,532
Impairment losses on loans and
advances to customers 13 (5,184) (5,924)
Profit before taxation 39,540 18,608
Taxation charge 11 (8,299) (4,364)
Profit after taxation - attributable
to equity holders of the Group 31,241 14,244
-------------------------------------------- ---- -------- --------
Basic earnings per share 12 8.8p 4.8p
Diluted earnings per share 12 8.7p 4.8p
-------------------------------------------- ---- -------- --------
The notes and information on pages 31 to 62 form part of these
interim financial statements.
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The result for the period is derived entirely from continuing
activities.
Consolidated statement of comprehensive Period Period
income ended ended
For the six month period ended 30 30 June 30 June
June 2015 2015 2014
GBP'000 GBP'000
Profit after taxation 31,241 14,244
------------------------------------------------ -------- --------
Other comprehensive (expense)/income:
Items that may subsequently be transferred
to the income statement:
Available for sale debt securities: (427) 502
Fair value movements 1,914 863
Amounts transferred to the income
statement (2,448) (236)
Taxation 107 (125)
------------------------------------------------ -------- --------
Total other comprehensive (expense)/income (427) 502
------------------------------------------------ -------- --------
Total comprehensive income - attributable
to equity holders of the Group 30,814 14,746
------------------------------------------------ -------- --------
Consolidated statement of 30 June 31 December
financial position 2015 2014
As at 30 June 2015
Note GBP'000 GBP'000
Assets
Cash and balances at central
banks 36,591 79,567
Loans and advances to banks 106,259 117,401
Debt securities 629,891 509,684
Derivatives held for risk
management 8,971 8,168
Loans and advances to customers 13 5,436,258 4,801,064
Fair value adjustment for
portfolio hedged risk 2,523 7,175
Other assets 2,265 3,344
Prepayments and accrued income 5,438 6,856
Deferred taxation 7,871 6,598
Property, plant and equipment 2,581 2,815
Intangible assets 23,068 22,571
Total assets 6,261,716 5,565,243
------------------------------------- ---- --------- -----------
Liabilities
Amounts due to banks 450,442 305,907
Customers' accounts 4,967,340 4,458,962
Derivatives held for risk
management 37,948 54,198
Fair value adjustment for
portfolio hedged risk (1,043) 1,528
Other liabilities 19,273 18,634
Accruals and deferred income 19,424 21,107
Current taxation 8,737 8,148
Provisions 14 3,265 2,008
Debt securities in issue 15 238,630 279,143
Subordinated notes 37,385 36,758
Total liabilities 5,781,401 5,186,393
------------------------------------- ---- --------- -----------
Share capital 16 33,924 23,737
Share premium account 16 68,391 -
Contingent convertible securities 73,657 73,657
Capital contribution reserve 2 2
Capital redemption reserve 173 -
Warrant reserve 2,200 2,200
Available for sale reserve 948 1,375
Retained earnings 301,020 277,879
Equity 480,315 378,850
------------------------------------- ---- --------- -----------
Total liabilities and equity 6,261,716 5,565,243
------------------------------------- ---- --------- -----------
These financial statements were approved by the Board and signed
on its behalf by:
Phillip Monks
Director and Chief Executive Officer
26 August 2015
Registered number: 06764335
The notes and information on pages 31 to 62 form part of these
interim financial statements.
Consolidated statement of cash flows Period Period
For the six month period ended 30 ended ended
June 2015 30 June 30 June
2015 2014
Note GBP'000 GBP'000
Cash flows from operating activities
Profit before taxation 39,540 18,608
Adjustments for non-cash items and
other adjustments included within the
income statement 18 5,207 3,770
(Increase) in operating assets 18 (611,421) (659,009)
Increase in operating liabilities 18 634,340 207,846
Income tax paid (8,138) (2,014)
Net cash flows generated from/(used
in) operating activities 59,528 (430,799)
----------------------------------------------- ---- --------- ---------
Cash flows from investing activities
Purchase of debt securities (339,051) (335,773)
Proceeds from sale and maturity of
debt securities 201,200 100,145
Capital repayments of debt securities 11,879 35,033
Interest received on debt securities 6,056 5,174
Purchase of property, plant and equipment
and intangible assets (2,455) (2,028)
Net cash used in investing activities (122,371) (197,449)
----------------------------------------------- ---- --------- ---------
Cash flows from financing activities
Proceeds from issue of ordinary shares 75,000 -
Issuance costs of ordinary shares (2,703) -
Capital repayments on debt securities
issued (40,731) -
Proceeds from issue of debt securities - 333,300
Debt securities issuance costs - (2,077)
Interest paid on debt securities
issued (1,642) -
Coupon paid on contingent convertible
securities (3,465) -
Interest paid on subordinated notes (2,575) (2,575)
Net cash from financing activities 23,884 328,648
----------------------------------------------- ---- --------- ---------
Net (decrease) in cash and cash equivalents (38,959) (299,600)
Cash and cash equivalents at start
of the period 134,019 415,210
Movement during the period (38,959) (299,600)
Cash and cash equivalents at end
of the period 18 95,060 115,610
----------------------------------------------- ---- --------- ---------
Consolidated statement of changes in equity
Share Share Contingent Capital Capital Warrant Available Retained Total
capital premium convertible contribution redemption reserve for earnings
account securities reserve reserve sale
reserve
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Period ended
30 June 2015
As at 1 January 23,737 - 73,657 2 - 2,200 1,375 277,879 378,850
Total
comprehensive
income - - - - - - (427) 31,241 30,814
Transactions
with equity
holders:
- Capital
reorganisation
prior to IPO 16 6,263 - - - 173 - - (6,436) -
- Share issue
proceeds from
IPO 16 3,906 71,094 - - - - - - 75,000
- Share
issuance
costs - (2,703) - - - - - - (2,703)
- Issue of
free shares
to employees 16 18 - - - - - - (18) -
- Share based
payments,
including
tax reflected
directly in
retained
earnings 17 - - - - - - - 1,117 1,117
- Coupon paid
on contingent
convertible
securities,
net
of tax - - - - - - - (2,763) (2,763)
As at 30 June
2015 33,924 68,391 73,657 2 173 2,200 948 301,020 480,315
--------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- -------
Period ended 31
December 2014
As at 1 July 23,737 237,305 - 2 - 2,200 1,084 16,055 280,383
Total
comprehensive
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income - - - - - - 291 24,190 24,481
Transactions
with equity
holders:
- Reduction
in share
premium - (237,305) - - - - - 237,305 -
- Issuance of
contingent
convertible
securities - - 75,111 - - - - - 75,111
- Issuance
costs - - (1,454) - - - - - (1,454)
- Share based
payments - - - - - - - 329 329
As at 31
December
2014 23,737 - 73,657 2 - 2,200 1,375 277,879 378,850
--------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- -------
Period ended
30 June 2014
As at 1 January 23,737 237,305 - 2 - 2,200 582 1,531 265,357
Total
comprehensive
income - - - - - - 502 14,244 14,746
Transactions
with equity
holders:
- Share based
payments - - - - - - - 280 280
As at 30 June
2014 23,737 237,305 - 2 - 2,200 1,084 16,055 280,383
--------------- ---- ------- --------- ----------- ------------ ---------- ------- --------- -------- -------
During the six month period ended 30 June 2015, the Company
completed its initial public offering ('IPO'). The Company also
undertook a capital reorganisation in advance of admission to the
London Stock Exchange ('LSE'). Further details of both transactions
are provided in Note 16.
Notes to the consolidated interim financial statements
1. Accounting policies and presentation
(a) Basis of preparation
These consolidated interim financial statements have been
prepared in accordance with the Disclosure and Transparency Rules
of the Financial Conduct Authority and with IAS 34 'Interim
Financial Reporting' as adopted by the EU. These consolidated
interim financial statements should be read in conjunction with the
Group's 2014 Annual Report and Accounts, which have been prepared
in accordance with International Financial Reporting Standards as
adopted by the EU ('IFRSs').
The comparative figures for the financial year ended 31 December
2014 are not the Group's statutory accounts for that financial
year. The Group's 2014 Annual Report and Accounts have been
delivered to the Registrar of Companies in England and Wales in
accordance with section 447 of the Companies Act 2006. The auditor
has reported on those accounts. Its report was unqualified; did not
include a reference to any matters to which the auditors drew
attention by way of emphasis without qualifying their report, and
did not contain a statement under section 498(2) or (3) of the
Companies Act 2006.
The consolidated interim financial statements were approved by
the Board of Directors on 26 August 2015.
(b) Basis of consolidation
The consolidated interim financial statements incorporate the
consolidated results of Aldermore Group PLC ('the Company') and its
subsidiaries (including Aldermore Bank PLC) which are entities
controlled by the Company (jointly referred to as 'the Group').
(c) Going concern
The consolidated interim financial statements are prepared on a
going concern basis, as the Directors are satisfied that the Group
has the resources to continue in business for the foreseeable
future (which has been taken as 12 months from the date of approval
of these consolidated interim financial statements). In making this
assessment, the Directors have considered a wide range of
information relating to present and future conditions, including
the current state of the balance sheet, future projections of
profitability, cash flows and capital resources and the longer term
strategy of the business.
The Group's capital and liquidity plans, including stress tests,
have been reviewed by the Directors. The Group's forecasts and
projections show that it will be able to operate at adequate levels
of both liquidity and capital for the foreseeable future, including
a range of stressed scenarios, taking management actions into
account as appropriate. After making due enquiries, the Directors
believe that the Group has sufficient resources to continue its
activities for the foreseeable future and to continue its
expansion, and the Group has sufficient capital and liquidity to
enable it to continue to meet its regulatory requirements as set
out by the Prudential Regulation Authority ('PRA').
The capital position of the Group has been further enhanced
during the period as a result of the completion of the Group's
IPO.
(d) Accounting policies
The accounting policies are consistent with those applied by the
Group in the 2014 Annual Report and Accounts. During the six month
period ended 30 June 2015, the accounting policies for share based
payments and capital raising costs have been updated to reflect the
nature of the share schemes now in force and the specific treatment
of IPO costs respectively. The updated policies are as follows:
Share based payments
Employees (including Senior Executives) of the Group may receive
remuneration in the form of equity settled share based payment
transactions to reward strong long-term business performance and to
incentivise growth for the future.
(d) Accounting policies continued
The grant date fair value is recognised as an employee expense
with a corresponding increase in equity over the period that the
employees become unconditionally entitled to the awards. The grant
date fair value is determined using valuation models which take
into account the terms and conditions attached to the awards.
Inputs into valuation models may include the risk free interest
rate, the expected volatility of the Company's share price and
other various factors which relate to performance conditions
attached to the awards.
The amount recognised as an expense is adjusted to reflect the
actual number of awards for which the related service and
non-market vesting conditions are expected to be met such that the
amount ultimately recognised as an expense is based on the number
of awards that do meet the related service and non-market
performance conditions at the vesting date. For share based payment
awards with market performance conditions or non-vesting conditions
the grant date fair value of the share based payment is measured to
reflect such conditions and there is no true-up for differences
between expected and actual outcomes.
Capital raising costs
Costs directly incremental to the issue of new capital are shown
in equity as a deduction from proceeds.
(e) Future accounting developments
There are a number of standards, amendments and interpretations
which have been issued by the International Accounting Standards
Board ('IASB') but which have not yet been endorsed by the EU. The
most significant of these are IFRS 9: 'Financial Instruments', the
planned replacement for IAS 39: 'Financial Instruments: Recognition
and Measurement' and IFRS 15: 'Revenue from contracts with
customers'.
2. Use of estimates and judgements
The preparation of financial information requires management to
make judgements, estimates and assumptions that affect the
application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in
which the estimate is revised and in any future periods affected.
The judgements and assumptions that are considered to be the most
important to the portrayal of the Group's financial condition are
those relating to loan impairment provisions and effective interest
rates ('EIR').
(a) Loan impairment provisions
Loan portfolios across all divisions of the Group are reviewed
on at least a monthly basis to assess for impairment. In
determining whether an impairment provision should be recorded,
judgements are made as to whether there is objective evidence that
a financial asset or portfolio of financial assets is impaired as a
result of loss events that occurred after recognition of the asset
and by the reporting date. The calculation of impairment loss is
management's best estimate of losses incurred in the portfolio at
the balance sheet date and reflects expected future cash flows
based on both the likelihood of a loan or advance being written off
and the estimated loss on such a write off.
At 30 June 2015, gross loans and advances to customers totalled
GBP5,457 million (31 December 2014: GBP4,824 million) against which
impairment allowances of GBP20 million (31 December 2014: GBP23
million) had been made (see Note 13). The Group's accounting policy
for loan impairment provisions on financial assets classified as
loans and receivables is described in the Group's 2014 Annual
Report and Accounts (Note 2g). Impairment allowances are made up of
two components, those determined individually against specific
assets and those determined collectively. Of the impairment
allowance of GBP20 million at 30 June 2015, GBP11 million (31
December 2014: GBP14 million) relates to individual provisions and
GBP9 million (31 December 2014: GBP9 million) relates to collective
provisions. The section below provides details of the critical
elements of judgement within the loan impairment calculations. Less
significant judgements are not disclosed.
Individual
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Individual impairment allowances are established against the
Group's individually significant financial assets that are deemed
by management to be impaired. The determination of individual
impairment allowances requires the exercise of considerable
judgement by management involving matters such as local economic
conditions, the financial status of the customer and the realisable
value of the security held. The actual amount of the future cash
flows and their timing may differ significantly from the
assumptions made for the purposes of determining the impairment
allowances and consequently these allowances can be subject to
variation as time progresses and the circumstances of the customer
become clearer.
Collective
The collective impairment allowance is also subject to
estimation uncertainty and in particular is sensitive to changes in
economic and credit conditions, including the interdependency of
house prices, unemployment rates, interest rates, borrowers'
behaviour and consumer bankruptcy trends. All of these factors can
influence the key assumptions detailed below. It is, however,
inherently difficult to estimate how changes in one or more of
these factors might impact the collective impairment allowance.
The key assumptions used in the collective model are:
probability of default ('PD'), the loss given default ('LGD') and
the loss emergence period ('EP') (the time between a trigger event
occurring and the loans being identified as individually impaired).
An additional element is included within the collective provision
to reflect fraud losses that are incurred as at the reporting date
but are yet to be individually identified. Further details in
respect of assumptions and details of the sensitivity of the
estimate to changes in significant assumptions are as follows:
Probability of default:
The PD is based on external individual customer credit rating
information updated for each reporting date. This external credit
rating information gives a PD in the next 12 months where 'default'
is defined as loans which are 2 months or more in arrears ('2 MIA')
and incorporates credit information from a broad range of financial
services products for each customer.
Management make an estimate so as to adjust the external data to
reflect both the individual nature of the Group's lending and the
Group's policy of classifying loans which are 3 months or more in
arrears ('3 MIA') as 'impaired'. This adjustment is achieved by
using two management assumptions: firstly a 'roll rate' that
reflects how many of the loans which fall into 2 MIA will also fall
into 3 MIA; and secondly a scalar that adjusts the external PDs to
reflect the individual nature of the Group's lending.
-- A 10 per cent. absolute increase in the 'roll rate' assumed
by management between 2 MIA and 3 MIA (e.g. a PD increasing from 50
per cent. to 60 per cent.), when the loans are considered to be
individually impaired would increase the impairment allowance by
GBP1.5 million.
-- A 10 per cent. relative reduction in the scaling factors
applied to external data in order to arise at PDs appropriate to
the individual nature of lending being undertaken would increase
the impairment allowance by GBP0.8 million.
Loss given default:
The model calculates the LGD from the point of repossession. Not
all cases that are 3 MIA will reach repossession. Management
therefore adjust the model by applying an assumption of the
percentage of accounts 3 MIA that will reach repossession.
-- A 10 per cent. absolute reduction in this assumption would
decrease the impairment allowance by GBP0.7 million.
The LGD is also sensitive to the application of the House Price
Index ('HPI') and Forced Sale Discount ('FSD') which affect the
underlying value of the collateral which is expected to be
received.
-- A 10 per cent. relative reduction in the HPI would increase
the overall impairment allowance by GBP1.3 million.
-- A 5 per cent. absolute increase in the FSD would increase the
overall impairment provision by GBP1.5 million.
Emergence period:
Management make a judgement, according to the line of business
for the underlying loans, on the length of emergence period to
apply to the estimated losses expected to be recognised in the next
12 months in order to determine those which are considered as
incurred as at the reporting date.
-- A three month increase in all emergence periods would
increase the overall impairment allowance by GBP3.8 million.
(b) Effective interest rate
IAS 39 requires interest earned from mortgages to be measured
under the EIR method. Management must therefore use judgement to
estimate the expected life of each type of instrument and hence the
expected cash flows relating to it. The accuracy of the EIR would
therefore be affected by unexpected market movements resulting in
altered customer behaviour, inaccuracies in the models used
compared to actual outcomes and incorrect assumptions.
A critical estimate in determining EIR is the expected life to
maturity of the Group's commercial and residential mortgage
portfolios, as a change in the estimates will have an impact on the
period over which the directly attributable costs and fees, and any
discount received on the acquisition of the mortgage loan
portfolios, are recognised.
An extension of the estimated expected lives on these portfolios
for a period of six months would have the effect of reducing the
cumulative profit before tax recognised as at 30 June 2015 by
GBP2.6 million (30 June 2014: GBP2.4 million). Included within this
sensitivity of GBP2.6 million is a GBP3.0 million cumulative
reduction in profits relating to acquired portfolios (30 June 2014:
GBP2.9 million) due to a change in the unwind of the discount which
is offset by a GBP0.4 million cumulative increase in profits
relating to the organic portfolios (30 June 2014: GBP0.5
million).
3. Segmental information
The Group's reportable operating segments are consistent with
those disclosed in the 2014 Annual Report and Accounts. Further
details regarding the operating segments are available in the 2014
Annual Report and Accounts.
Segmental information for the period ended 30 June 2015
Residential SME Commercial Asset Invoice Central Total
Mortgages Mortgages Finance Finance Functions
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Interest income -
external customers 69,929 32,165 36,309 3,797 (3,112) 139,088
Interest expense -
external customers - - - - (47,057) (47,057)
Interest (expense)/income
- internal (25,531) (7,769) (11,090) (1,152) 45,542 -
Net fees and other
income - external
customers 1,707 1,049 2,042 7,544 448 12,790
Total operating
income/(expense) 46,105 25,445 27,261 10,189 (4,179) 104,821
------------------------------ ----------- -------------- --------- -------- ----------- -----------
Administrative expenses
including depreciation
and amortisation (5,356) (3,765) (5,560) (7,352) (38,064) (60,097)
Impairment losses on
loans and advances
to
customers (1,135) (1,214) (2,229) (606) - (5,184)
Segmental result 39,614 20,466 19,472 2,231 (42,243) 39,540
------------------------------ ----------- -------------- --------- -------- ----------- -----------
Tax (8,299)
Profit after tax 31,241
Assets 2,930,211 1,139,451 1,196,120 170,476 825,458 6,261,716
Liabilities - - - - (5,781,401) (5,781,401)
Net assets/(liabilities) 2,930,211 1,139,451 1,196,120 170,476 (4,955,943) 480,315
------------------------------ ----------- -------------- --------- -------- ----------- -----------
Segmental information for the period ended 30 June 2014
Residential SME Commercial Asset Invoice Central Total
Mortgages Mortgages Finance Finance Functions
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Interest income -
external customers 47,456 25,315 25,410 4,691 897 103,769
Interest expense -
external customers - - - - (42,587) (42,587)
Interest (expense)/income
- internal (20,301) (7,292) (9,215) (1,792) 38,600 -
Net fees and other
income - external
customers 1,507 397 1,506 8,815 449 12,674
Total operating
income/(expense) 28,662 18,420 17,701 11,714 (2,641) 73,856
------------------------------- ----------- -------------- -------- -------- ----------- -----------
Administrative expenses
including depreciation
and amortisation (4,400) (3,311) (5,475) (7,710) (28,428) (49,324)
Impairment losses on
loans and advances
to
customers 198 (2,965) (942) (2,215) - (5,924)
Segmental result 24,460 12,144 11,284 1,789 (31,069) 18,608
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------------------------------- ----------- -------------- -------- -------- ----------- -----------
Tax (4,364)
Profit after tax 14,244
Assets 2,039,231 894,877 871,119 203,693 752,235 4,761,155
Liabilities - - - - (4,480,772) (4,480,772)
Net assets/(liabilities) 2,039,231 894,877 871,119 203,693 (3,728,537) 280,383
------------------------------- ----------- -------------- -------- -------- ----------- -----------
4. Interest income Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
On financial assets not at fair
value through profit or loss:
On loans and advances to customers 142,200 103,031
On loans and advances to banks 335 953
On debt securities 4,773 1,843
147,308 105,827
On financial assets at fair value
through profit or loss:
Net interest expense on financial
instruments hedging assets (9,800) (5,389)
Net interest income on debt securities
designated at fair value 1,580 3,331
139,088 103,769
--------------------------------------- -------- --------
Included within interest income on loans and advances to
customers for the six months ended 30 June 2015 is a total of
GBP1,653,000 (30 June 2014: GBP791,000) relating to impaired
financial advances.
Included within net interest expense on financial instruments
hedging assets for the six months ended 30 June 2015 are fair value
gains of GBP2,538,000 (30 June 2014: GBP1,473,000) on derivatives
held in qualifying fair value hedging arrangements, together with
losses of GBP4,652,000 (30 June 2014: GBP1,570,000) representing
changes in the fair value of the hedged item attributable to the
hedged interest rate risk on loans and advances to customers.
5. Interest expense Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
On financial liabilities not at fair
value through profit or loss:
On customers' accounts 42,582 39,730
On amounts due to banks 1,573 722
On debt securities in issue 1,863 1,072
On subordinated notes 3,202 3,100
49,220 44,624
On financial liabilities at fair value
through profit or loss:
Net interest income on financial instruments
hedging liabilities (2,889) (2,637)
Other 726 600
47,057 42,587
--------------------------------------------- -------- --------
Included within net interest income on financial instruments
hedging liabilities for the six months ended 30 June 2015 are fair
value gains of GBP1,882,000 (30 June 2014: GBP1,592,000) on
derivatives held in qualifying fair value hedging arrangements,
together with losses of GBP2,571,000 (30 June 2014: GBP1,617,000)
representing changes in the fair value of the hedged item
attributable to the hedged interest rate risk on customers'
accounts.
6. Fee and commission income
Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Invoice finance fees 6,085 7,410
Insurance commissions receivable 177 547
Other 6,321 4,744
12,583 12,701
----------------------------------- -------- --------
Other fee and commission income includes fees charged for
valuations, documentation, mortgage services and arrears.
7. Fee and commission expense Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Introducer commissions 834 1,085
Legal and valuation fees 1,342 1,336
Company searches and other fees 989 966
Credit protection and insurance
charges 519 581
Insurance commissions payable 73 413
3,757 4,381
------------------------------------ -------- --------
8. Net (expense)/income from derivatives Period Period
and other financial instruments ended ended
at fair value through profit or 30 June 30 June
loss 2015 2014
GBP'000 GBP'000
Net gains/(losses) on derivatives 5,959 (728)
Net (losses)/gains on assets designated
at fair value through profit or
loss (177) 1,548
Net losses on available for sale
assets held in fair value hedges (7,799) (428)
(2,017) 392
----------------------------------------------- -------- --------
9. Other operating income Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Disbursements, collect out and
other invoice finance income 3,269 3,561
Other 246 165
3,515 3,726
-------------------------------- -------- --------
10. Administrative expenses Note Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Staff costs 29,720 22,369
Legal and professional and other
services 13,012 10,798
Information technology costs 3,770 3,467
Office costs 2,250 1,974
Provisions 14 2,186 2,738
Other 6,967 6,189
57,905 47,535
---------------------------------- ---- -------- --------
Included in other administrative expenses are costs relating to
temporary staff of GBP3,433,000 (30 June 2014: GBP2,151,000),
travel and subsistence of GBP1,368,000 (30 June 2014: GBP1,365,000)
and staff recruitment of GBP647,000 (30 June 2014:
GBP1,425,000).
Costs associated with the IPO
Included within administrative expenses for the six months ended
30 June 2015 is GBP4.1 million (30 June 2014: GBP2.2 million) of
non-recurring costs associated with the IPO. The GBP4.1 million
consists of GBP0.4 million for a one-off share award to employees
and GBP3.7 million for fees associated with listing.
Incremental costs directly attributable to the issuance of
capital, including advisory and underwriting fees, have been
charged directly to equity. Other costs associated with the listing
have been allocated between administrative expenses and equity,
based on the proportion of primary shares issued compared to the
total number of shares. Total costs associated with the listing for
the six months ended 30 June 2015 are GBP6.8 million, comprising
GBP4.1 million charged to the income statement and GBP2.7 million
charged to equity.
11. Taxation Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Current tax on profits for the
period 9,387 5,406
Deferred tax (1,088) (1,042)
8,299 4,364
------------------------------- -------- --------
The deferred tax asset at 30 June 2015 of GBP7.9 million has
been calculated based on the rate of 20% substantively enacted at
the balance sheet date, and relates largely to temporary
differences between capital allowances and depreciation.
(MORE TO FOLLOW) Dow Jones Newswires
August 27, 2015 02:03 ET (06:03 GMT)
Reductions in the UK corporation tax rate from 23% to 21%
(effective from 1 April 2014) and 20% (effective from 1 April 2015)
were substantively enacted on 2 July 2013. In the Budget on 8 July
2015, the Chancellor announced additional planned reductions to 19%
with effect from 1 April 2017 and to 18% with effect from 1 April
2020. In addition, the Chancellor announced the introduction of a
corporation tax surcharge applicable to banking companies with
effect from 1 January 2016. The surcharge will be levied at a rate
of 8% on the profits of banking companies chargeable to corporation
tax after an allowance of GBP25 million per annum. These changes
will result in an overall increase in the Group's tax charge for
years commencing from 1 January 2016.
It is expected that the changes outlined in the 8 July 2015
Budget will be substantively enacted in the second half of 2015.
Accordingly the 2015 year end deferred tax balance will be provided
for at the revised substantively enacted rates that are expected to
apply when deferred tax assets are realised or deferred tax
liabilities are settled. The estimated impact of this change will
be to increase the net deferred tax asset recognised as at 30 June
2015 by GBP2.1 million, with a corresponding reduction to the tax
charge recognised in the income statement.
12. Earnings per share
Basic earnings per share ('EPS') is calculated by dividing the
net profit attributable to ordinary shareholders of the Group by
the weighted average number of ordinary shares in issue during the
period.
Period Period
ended 30 ended
June 2015 30
June 2014
Profit after taxation - attributable
to equity holders of the Group
(GBP'000) 31,241 14,244
Coupon paid on contingent
convertible securities, net
of tax (GBP'000) (2,763) -
Profit attributable to ordinary
shareholders of the Group (GBP'000) 28,478 14,244
--------------------------------------- ---------- ----------
Weighted average number of
ordinary shares in issue
(thousand) 322,075 296,178
Basic earnings per share
(pence) 8.8 4.8
------------------------------------------ ---------- ----------
The ordinary shares in issue used in the denominator in the
calculation of basic earnings per share are the ordinary shares of
the Company since the share reorganisation that occurred prior to
the Company's admission to the LSE. Further details of the share
reorganisation are provided in Note 16. Prior to that date the
ordinary shares in issue figure was based on the A1, A2, D and E
ordinary shares in issue. The B and C ordinary shares were excluded
from the calculation on the basis that they had no entitlement to
dividends or other distributions of the Company.
The calculation of basic and diluted EPS in the prior period has
been restated to reflect the impact of the bonus share issue that
was made to existing shareholders as part of the share
reorganisation that occurred prior to the Company's admission to
the LSE.
The calculation of diluted earnings per share has been based on
the net profit attributable to ordinary shareholders of the Group
as for basic earnings, the weighted average number of ordinary
shares outstanding after the potential dilutive effect of
outstanding share warrants (issued with the subordinated debt in
May 2012) and share based payment awards to Directors and
employees. The share warrants give the holders the right to
subscribe for 3,668,110 ordinary shares at a price of GBP0.89 per
share and a further 1,834,054 ordinary shares at a price of GBP1.23
per ordinary share, and are exercisable until 31 May 2022.
Period Period
ended 30 ended
June 2015 30
June
2014
Weighted average number of ordinary
shares in issue (thousand) (basic) 322,075 296,178
Effect of share warrants
in issue 3,084 2,878
Effect of outstanding share
based payment awards 1,500 -
------------------------------------------- ---------- -------
Weighted average number of ordinary
shares in issue (thousand) (diluted) 326,659 299,056
Diluted earnings per share
(pence) 8.7 4.8
------------------------------------------- ---------- -------
13. Loans and advances to customers 30 June 31 December
2015 2014
GBP'000 GBP'000
Gross loans and advances 5,456,583 4,823,638
less: allowance for impairment
losses (20,325) (22,574)
5,436,258 4,801,064
------------------------------------------ --------- -----------
Amounts include:
Expected to be recovered more
than 12 months after the reporting
date 4,748,755 4,205,825
----------------------------------------------- --------- -----------
At 30 June 2015, loans and advances to customers of GBP1,599.3
million (31 December 2014: GBP719.9 million) were pre-positioned
with the Bank of England and HM Treasury Funding for Lending
Scheme. These loans and advances were available for use as
collateral with the Scheme, against which GBP710.0 million of UK
Treasury Bills had been drawn as at the reporting date (31 December
2014: GBP485.0 million).
At 30 June 2015, loans and advances to customers include
GBP253.6 million (31 December 2014: GBP293.1 million) which have
been used in secured funding arrangements, resulting in the
beneficial interest in these loans being transferred to Oak No. 1
PLC, a securitisation vehicle consolidated into these financial
statements. All the assets pledged are retained within the
statement of financial position as the Group retains substantially
all the risks and rewards relating to the loans.
Allowance for impairment losses Individual Collective Total
GBP'000 GBP'000 GBP'000
Six months ended 30 June 2015
Balance as at 1 January 14,047 8,527 22,574
Impairment loss for the period:
Charge to the income statement 3,499 1,685 5,184
Unwind of discounting (897) (756) (1,653)
Write-offs, net of recoveries (5,780) - (5,780)
Balance as at 30 June 2015 10,869 9,456 20,325
------------------------------------- ---------- ---------- -------
Six months ended 31 December 2014
Balance as at 1 July 17,575 7,512 25,087
Impairment loss for the period:
Charge to the income statement 2,059 1,587 3,646
Unwind of discounting (646) (572) (1,218)
Write-offs, net of recoveries (4,941) - (4,941)
Balance as at 31 December 2014 14,047 8,527 22,574
------------------------------------- ---------- ---------- -------
Six months ended 30 June 2014
Balance as at 1 January 14,714 6,314 21,028
Impairment loss for the period:
Charge to the income statement 4,314 1,610 5,924
Unwind of discounting (379) (412) (791)
Write-offs, net of recoveries (1,074) - (1,074)
Balance as at 30 June 2014 17,575 7,512 25,087
------------------------------------- ---------- ---------- -------
14. Provisions Financial Customer Total
Services redress
Compensation
Scheme
GBP'000 GBP'000 GBP'000
Six months ended 30 June
2015
Balance as at 1 January
2015 1,230 778 2,008
Utilised during the period - (929) (929)
Provided/(released) during
the period 2,035 151 2,186
Balance as at 30 June
2015 3,265 - 3,265
-------------------------------- ------------- -------- -------
Six months ended 31 December
2014
Balance as at 1 July
2014 3,289 - 3,289
Utilised during the period (2,083) (65) (2,148)
Provided during the period 24 843 867
Balance as at 31 December
2014 1,230 778 2,008
-------------------------------- ------------- -------- -------
Six months ended 30 June
2014
Balance as at 1 January
2014 707 450 1,157
Utilised during the period - (606) (606)
Provided during the period 2,582 156 2,738
Balance as at 30 June
2014 3,289 - 3,289
-------------------------------- ------------- -------- -------
Financial Services Compensation Scheme ('FSCS')
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In common with all regulated UK deposit takers, the Group pays
levies to the FSCS to enable the FSCS to meet claims against it.
The FSCS provision at 30 June 2015 of GBP3,265,000 (31 December
2014: GBP1,230,000) represents interest levies for scheme years
2014/2015 and 2015/2016 of GBP1,090,000 and GBP1,062,000,
respectively, the estimated capital levy for scheme year 2015/2016
of GBP1,050,000, and management expenses levy for the scheme year
2015/2016 of GBP63,000.
Customer redress
The Group has a small number of loans which are regulated under
the Consumer Credit Act ('CCA') and has identified that, following
changes to the CCA in 2008, certain letters and statements have
been sent to customers that do not fully comply with the
requirements prescribed by the CCA. Accordingly, these customers
are entitled to redress for interest and fees charged on the
relevant loans as a result of this technical non-compliance,
notwithstanding there is unlikely to have been any customer
detriment. During the year ended 31 December 2014 a provision of
GBP999,000 was recorded in relation to CCA non-compliance. A
further provision of GBP151,000 has been recorded in the six months
ended 30 June 2015. Remediation payments to customers impacted has
been completed during the period.
15. Debt securities in issue
Debt securities in issue are repayable from
the reporting date in the ordinary course of
business as follows:
30 June 31 December
2015 2014
GBP'000 GBP'000
In more than one year 238,630 279,143
------------------------------- -------- ------------
Debt securities in issue with a principal value of GBP239.7
million (31 December 2014: GBP280.5 million) are secured on certain
portfolios of variable and fixed rate mortgages through the Group's
securitisation vehicle, Oak No. 1 PLC. These notes are redeemable
in part from time to time, such redemptions being limited to the
net capital received from mortgage customers in respect of the
underlying assets. There is no obligation for the Group to make
good any shortfall. Further disclosure relating to the underlying
assets is contained in Note 13.
16. Share capital 31 December
30 June 2014
2015
GBP GBP
Type
Ordinary shares of GBP0.10
each 33,923,742 -
A1 ordinary shares of GBP0.10
each - 3,569,400
A2 ordinary shares of GBP0.10
each - 5,870,427
B ordinary shares of GBP0.10
each - 385,463
C ordinary shares of GBP0.0001
each - 13,200
D ordinary shares of GBP0.10
each - 5,440,522
E ordinary shares of GBP0.10
each - 8,458,428
33,923,742 23,737,440
------------------------------- ---------- -----------
On 13 March 2015, the Company reorganised its share capital in
preparation for listing on the LSE. The restructuring can be
summarised as follows:
-- 1,025,586 A1 ordinary shares, 131,593,114 C ordinary shares
and 568,253 E ordinary shares were re-designated as deferred
shares.
-- 406,886 C ordinary shares (nominal value of GBP0.0999 per
share) were issued and allotted to C ordinary shareholders on a
pro-rata basis by way of bonus issue using distributable reserves,
resulting in an increase of GBP40,648 in share capital.
-- Each C ordinary share with a nominal value of GBP0.0999 was
consolidated with a C ordinary share with a nominal value of
GBP0.0001, resulting in 406,886 C ordinary shares with a nominal
value of GBP0.10 each being in issue.
-- The following shares were re-designated as ordinary shares:
34,668,414 A1 ordinary shares, 58,704,268 A2 ordinary shares,
3,854,632 B ordinary shares, 406,886 C ordinary shares, 54,405,224
D ordinary shares, and 84,016,023 E ordinary shares.
-- 63,944,554 ordinary shares were issued and allotted on a
pro-rata basis to all shareholders (excluding holders of deferred
shares) by way of bonus issue using distributable reserves,
resulting in an increase of GBP6,394,455 in share capital.
-- The Company bought back 133,186,953 deferred shares for an
aggregate price of GBP1 using distributable reserves. This resulted
in the creation of a capital redemption reserve of GBP172,543 and a
reduction in the Company's share capital of the same amount.
Following the reorganisation, 117,934,783 ordinary shares of
GBP0.10 each were issued in the IPO at a price of GBP1.92 per
share. Of the 117,934,783 shares in the offer, 78,872,283 were sold
by the selling shareholders, with the remaining 39,062,500 being
issued by the Company, resulting in an increase in share capital of
GBP3,906,250 and share premium account of GBP71,093,750.
Ordinary shares have full voting rights, dividend rights and
distribution rights in the event of sale or wind up.
At 13 March 2015, after completion of the IPO, there were
339,062,500 shares in circulation.
Following the listing, the Company granted 174,920 shares to
eligible employees as free share awards under the Share Incentive
Plan ('SIP'). Further details regarding the SIP are provided in
Note 17. The shares vested on 17 April 2015 resulting in an
increase of GBP17,492 in share capital and a reduction in retained
earnings of the same amount.
At 30 June 2015, there were 339,237,420 ordinary GBP0.10 shares
in circulation resulting in share capital of GBP33,923,742.
17. Share based payments
The Group implemented a number of new share schemes during the
period as described below:
Plan Eligible Nature of Vesting conditions Grant
Employees award date
--------------- ----------------- --------------- ----------------------- --------
A) Performance Selected Conditional Continuing employment 2 March
Share Plan senior employees share award or leavers in 2015
certain limited
circumstances
and achievement
of earnings per
share and total
shareholder return
performance conditions
--------------- ----------------- --------------- ----------------------- --------
B) Pre IPO award Selected Conditional Continuing employment 2 March
under the senior employees share award or leavers in 2015
Performance certain limited
Share Plan circumstances
and achievement
of total shareholder
return based
performance conditions
--------------- ----------------- --------------- ----------------------- --------
C) Restricted Selected Conditional Continuing employment 2 March
Share Plan senior employees share award or leavers in 2015
certain limited
circumstances
--------------- ----------------- --------------- ----------------------- --------
D) Share Incentive All employees Non-conditional Employment at 17 April
Plan share award date of grant 2015
--------------- ----------------- --------------- ----------------------- --------
Further details of each of the schemes are provided below.
A) Performance Share Plan
The Performance Share Plan ('PSP') is open to senior employees
including the Executive team. The grant date of awards was 2 March
2015, with individuals being required to remain in employment until
2 March 2018. The awards are subject to a two year holding period
which ends on 2 March 2020 and are exercisable between that date
and 1 March 2025.
Awards under the PSP are subject to performance conditions.
Performance conditions are set by the Remuneration Committee each
time awards are granted and determine the extent to which awards
can become available to individuals.
The performance conditions for these first awards relate to the
growth in Total Shareholder Return ('TSR') for the period to 31
December 2017, measured from the date of admission to the LSE (13
March 2015) for 50% of each award and Earnings per share ('EPS')
performance for the year ended 31 December 2017 for the remaining
50% of each award. The outcome of the performance conditions, as
assessed by the Remuneration Committee, will determine the vesting
outcome of the awards and the shares available for exercise.
In addition, there are 'underpin' performance conditions which
must be met, including in relation to the TSR element of the award.
The value of the TSR achieved, over the performance period, must be
equal to or greater than the TSR of the median company of FTSE 350
companies, excluding Investment Trusts.
B) Pre IPO award under the PSP
(MORE TO FOLLOW) Dow Jones Newswires
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The Pre IPO awards were granted to individuals, as a one-off
reward to those who contributed significantly to the development of
the Group in the build-up to its IPO. The awards were granted to a
number of senior employees, including the Executive team.
The grant date of the awards was 2 March 2015. The awards are
subject to performance conditions which must be satisfied in order
for individuals to be entitled to receive the shares awarded. If
the performance conditions are achieved the awards will vest on 31
December 2016.
The performance conditions relate to growth in TSR for the
period to 31 December 2016, measured from the date of admission to
the LSE (13 March 2015). The outcome of the performance conditions
determine the extent to which shares awarded become available to
individual participants. Similar 'underpin' performance conditions
apply to the awards as those in the PSP (see A above), including
the TSR condition based on a median of FTSE 350 companies excluding
Investment Trusts.
C) Restricted Share Plan
The Restricted Share Plan ('RSP') is open to a small number of
senior employees. The grant date of awards was 2 March 2015, with
individuals being required to remain in employment until 2 March
2018. The awards are subject to a two year holding period which
ends on 2 March 2020 and are exercisable between that date and 1
March 2025.
There are no financial performance conditions attached to the
awards under the RSP.
D) Share Incentive Plan
All employees are eligible to participate in the Share Incentive
Plan ('SIP'). An award of 'free shares' was granted under the SIP
on 17 April 2015. Each eligible employee received shares worth
GBP200, with an additional GBP200 for each year of service up to a
maximum award of GBP1,000. The shares are subject to a minimum
holding period of the shorter of three years from their award date
or the date to when the employee ceases to be employed. There are
no performance conditions associated with the share awards.
Awards granted, forfeited and vested
The table below details the number of awards granted, forfeited
and vested during the period, the number outstanding as at 30 June
2015 and the average fair values at grant date of the awards made
during the period:
Plan Awards Awards Awards Awards Average Total
granted forfeited vested outstanding fair fair value
at 30 value to be
June per recognised
2015 award over the
at grant vesting
date period
(rounded)
----------------- ---------- ----------- ---------- ------------- ----------- ------------
Number Number Number Number GBP GBP'000
----------------- ---------- ----------- ---------- ------------- ----------- ------------
Performance
Share Plan 1,537,822 (54,360) - 1,483,462 1.13 1,676
----------------- ---------- ----------- ---------- ------------- ----------- ------------
Pre IPO award
under the PSP 7,549,101 (115,092) - 7,434,009 0.31 2,305
----------------- ---------- ----------- ---------- ------------- ----------- ------------
Restricted
Share Plan 105,753 - - 105,753 1.92 203
----------------- ---------- ----------- ---------- ------------- ----------- ------------
Share Incentive
Plan 174,920 - (174,920) - 2.41 422
----------------- ---------- ----------- ---------- ------------- ----------- ------------
The B, C and E ordinary shares granted to employees in previous
periods were included in the reorganisation of the Company's share
capital which took place on 13 March 2015 in preparation for the
Company's listing on the LSE. Of the 132 million C ordinary shares
granted to employees, 113,593,114 were converted to deferred shares
on 13 March 2015, which the Company repurchased for total
consideration of GBP1 and the remaining C shares were converted
into ordinary shares on the same date.
Determination of grant date fair values
Share awards are not entitled to dividends until the awards
vest, but the number of shares subject to vested PSP and RSP awards
may be increased to reflect the value of dividends that would have
been paid up to the end of the holding period for the awards. This
is designed to deliver a benefit similar to that which ordinary
shareholders may receive in respect of any dividends paid during
the vesting period. Accordingly, the grant date fair value of the
awards with no performance conditions other than service conditions
has been taken as the market value of the Company's ordinary shares
at the grant date.
In respect of awards for which there are non-market performance
conditions (e.g. EPS), the grant date fair value per award has been
taken as the market value of an ordinary share at the grant date. A
forecast is made of the number of awards expected to vest in order
to determine the overall share based payment charge to be
recognised over the vesting period.
In respect of awards for which there are market performance
conditions (e.g. TSR), the grant date fair value of each award is
required to reflect the likelihood of achieving the market
conditions within the valuation. For the awards concerned, the
grant date fair values for each award were determined using
stochastic simulation models with the following significant
inputs:
Pre IPO PSP
----------------------- ----------- -----------
Ordinary share GBP1.92 GBP1.92
price
----------------------- ----------- -----------
Risk free rate 0.59% 0.90% p.a.
p.a.
----------------------- ----------- -----------
Probability Log normal Log normal
distributions
of TSRs for
Aldermore and
the median FTSE
350 (excluding
Investment Trust
companies)
----------------------- ----------- -----------
Annual volatility
(of logarithm
of TSR) for
Aldermore share
price (based
on recently
floated banks) 24% 24%
----------------------- ----------- -----------
Annual volatility
(of logarithm
of TSR) for
median of FTSE
350 (excluding
Investment Trust
companies) (based
on 5 years data) 15% 15%
----------------------- ----------- -----------
Correlation None None
between volatilities
----------------------- ----------- -----------
The share based payment charge for the six months ended 30 June
2015 totalled GBP1,046,000 (six months ended 30 June 2014:
GBP280,000). In addition, there was a tax credit of GBP71,000 (six
months ended 30 June 2014: GBPnil) reflected directly in retained
earnings.
18. Statement of cash flows
(a) Adjustments for non-cash items and other adjustments
included within the income statement
Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Depreciation and amortisation 2,192 1,789
Amortisation of securitisation
issuance cost 263 139
Discount accretion on subordinated
notes 648 546
Impairment losses on loans and
advances 5,184 5,924
Unwind of discounting (1,653) (791)
Write off net of recoveries (5,780) (1,074)
Net loss/(gain) on debt securities
designated at fair value through
profit or loss 177 (1,548)
Net gain on disposal of available
for sale debt securities (2,466) (236)
Net losses on available for sale
assets held in fair value hedges 7,799 428
Interest expense on subordinated
notes 2,554 2,554
Interest income on debt securities (6,353) (5,174)
Interest expense on debt securities
in issue 1,596 933
Equity settled share based payment
charge 1,046 280
5,207 3,770
----------------------------------------- -------- --------
(b) Increase in operating assets
Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Loans and advances to customers (632,945) (639,135)
Loans and advances to banks 15,858 (18,143)
Derivative financial instruments (803) (714)
Fair value adjustments for portfolio
hedged risk 4,652 1,570
Other operating assets 1,817 (2,587)
(611,421) (659,009)
(MORE TO FOLLOW) Dow Jones Newswires
August 27, 2015 02:03 ET (06:03 GMT)
------------------------------------- --------- ---------
(c) Increase in operating liabilities Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Amounts due to banks 144,535 (193,798)
Customers' accounts 508,378 394,515
Derivative financial instruments (16,250) 7,842
Fair value adjustments for portfolio
hedged risk (2,571) (1,592)
Other operating liabilities 248 879
634,340 207,846
-------------------------------------- -------- ---------
(d) Cash and cash equivalents Period Period
ended ended
30 June 30 June
2015 2014
GBP'000 GBP'000
Cash and balances at central
banks 36,591 30,768
Less excluded balances (6,618) (4,989)
Loans and advances to banks 65,087 89,831
95,060 115,610
------------------------------ -------- --------
For the purpose of the statement of cash flows, cash and cash
equivalents comprise cash on demand and overnight deposits
classified as cash and balances at central banks (unless
restricted) and balances within loans and advances to banks.
Excluded balances comprise minimum balances required to be held at
the Bank of England as they are not readily convertible to cash in
hand or demand deposits.
19. Commitments and contingencies
As at 30 June 2015 the Group has undrawn commitments to lend of
GBP515.8 million (31 December 2014: GBP404.6 million). These relate
mostly to irrevocable commitments to lend to customers.
Legislation:
As a financial services Group, Aldermore Group PLC is subject to
extensive and comprehensive regulation. The Group must comply with
numerous laws and regulations, including the Consumer Credit Act,
which significantly affect the way it does business. Whilst the
Group believes there are no unidentified areas of failure to comply
with these laws and regulations which would have a material impact
on the financial statements, there can be no guarantee that all
issues have been identified.
Working Time Directive:
A recent ruling by the European Court of Justice indicated that
under the European Working Time Directive, 'normal pay' for the
purposes of calculating statutory holiday pay, includes contractual
commission rather than being limited to basic salary. A UK
Employment Tribunal is now considering the implications for UK
employers under the Working Time Regulations 1998.
Meanwhile, the UK Employment Tribunal has ruled that
non--guaranteed overtime payments should be included for the
purposes of calculating how much holiday pay a worker should
receive. It is therefore expected that the UK Employment Tribunal
will conclude on a similar basis for certain commissions.
Based on information and advice to date, the Group does not
expect the impact of either the non-guaranteed overtime payments or
commissions to be material; however, in the event that analysis,
judgements and/or appeals are determined to ultimately be
different, the Group expects the likely impact to be
immaterial.
20. Related parties
Related party transactions and transactions with key management
personnel in the six month period to 30 June 2015 are similar in
nature to those for the year ended 31 December 2014. Details of
those transactions can be found in the Group's 2014 Annual Report
and Accounts.
Significant changes to those relationships and transactions are
as follows:
(a) Controlling parties
The Group was previously controlled by AnaCap Financial
Partners, II L.P. (52.3 per cent. of voting rights) and AnaCap
Financial Partners, L.P. (47.7 per cent. of voting rights) who were
the sole voting shareholders of Aldermore Group PLC.
On 13 March 2015, the Company was admitted to the LSE, offering
117,934,783 Ordinary shares, of which 78,872,283 shares were sold
by the selling shareholders.
At 30 June 2015, AnaCap Financial Partners L.P., AnaCap
Financial Partners II L.P., AnaCap Derby Co-Investment (No.1.) L.P.
and AnaCap Derby Co-Investment (No.2.) L.P (collectively: the
'Principal Shareholders') held 11.0 per cent, 14.5 per cent, 14.8
per cent and 12.6 per cent of the Company's ordinary share capital
respectively. Upon admission, the Principal Shareholders and the
Company entered into the 'Relationship agreement'. Details of the
Relationship agreement were provided within the Prospectus issued
prior to the admission to the LSE.
b) Key management personnel
Transactions with key management personnel ('KMP') remain
consistent with those disclosed at 31 December 2014. KMP at 30 June
2015 continue to comprise Directors of the Group and members of the
Executive Committee.
There were a number of new transactions which occurred during
the six month period ended 30 June 2015. These transactions are
described below:
Share Based Payments ('SBP')
As at 31 December 2014, certain KMP held a number of shares in
the B, C and E classes. In preparation for the IPO, the rights to
these shares were varied and the holdings re-designated.
A number of KMP were awarded shares in the Group under new share
incentive plans created upon IPO. In total, KMP were granted awards
over 5,938,906 shares. Further details of the share schemes,
including performance conditions are provided in Note 17.
Loan forgiveness
Upon admission to the LSE, the Company forgave loans which KMP
owed to the Company totalling GBP162,000. A number of KMP continue
to have loans and deposits in the ordinary course of business with
the Group.
21. Financial instruments and fair values
The following table summarises the classification and carrying
amounts of the Group's financial assets and liabilities:
Loans Available Designated Fair Fair Liabilities Total
and receivables for at fair value value at amortised
sale value through hedges cost
through profit
profit or loss
or loss (required)
30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cash and balances
at central banks 36,591 - - - - - 36,591
Loans and
advances
to banks 106,259 - - - - - 106,259
Debt securities - 584,240 45,651 - - - 629,891
Derivatives
held for risk
management - - - 8,971 - - 8,971
Fair value
adjustments
for portfolio
hedged risk - - - - 2,523 - 2,523
Loans and
advances
to customers 5,436,258 - - - - - 5,436,258
Other assets 781 - - - - - 781
Total financial
assets 5,579,889 584,240 45,651 8,971 2,523 - 6,221,274
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Non-financial
assets 40,442
Total assets 6,261,716
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Amount due to
banks - - - - - 450,442 450,442
Customers'
accounts - - - - - 4,967,340 4,967,340
Derivatives
held for risk
management - - - 37,948 - - 37,948
Fair value
adjustment
for portfolio
hedged risk - - - - (1,043) - (1,043)
Other liabilities - - - - - 16,640 16,640
Debt securities
in issue - - - - - 238,630 238,630
Subordinated
notes - - - - - 37,385 37,385
Total financial
liabilities - - - 37,948 (1,043) 5,710,437 5,747,342
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Non-financial
liabilities 34,059
Total liabilities 5,781,401
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Loans Available Designated Fair Fair Liabilities Total
and receivables for at fair value value at amortised
sale value through hedges cost
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through profit
profit or loss
or loss (required)
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2014
Cash and balances
at central banks 79,567 - - - - - 79,567
Loans and
advances
to banks 117,401 - - - - - 117,401
Debt securities - 355,328 154,356 - - - 509,684
Derivatives
held for risk
management - - - 8,168 - - 8,168
Fair value
adjustments
for portfolio
hedged risk - - - - 7,175 - 7,175
Loans and
advances
to customers 4,801,064 - - - - - 4,801,064
Other assets 1,298 - - - - - 1,298
Total financial
assets 4,999,330 355,328 154,356 8,168 7,175 - 5,524,357
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Non-financial
assets 40,886
Total assets 5,565,243
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Amount due to
banks - - - - - 305,907 305,907
Customers'
accounts - - - - - 4,458,962 4,458,962
Derivatives
held for risk
management - - - 54,198 - - 54,198
Fair value
adjustment
for portfolio
hedged risk - - - - 1,528 - 1,528
Other liabilities - - - - - 14,778 14,778
Debt securities
in issue - - - - - 279,143 279,143
Subordinated
notes - - - - - 36,758 36,758
Total financial
liabilities - - - 54,198 1,528 5,095,548 5,151,274
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
Non-financial
liabilities 35,119
Total liabilities 5,186,393
----------------- ---------------- --------- ---------- ----------- ------- ------------- ---------
The following table summarises the carrying amounts and fair
values of those financial assets and liabilities not presented in
the statement of financial position at fair value. The fair values
in this note are stated at a specific date and may be significantly
different from the amounts which will actually be paid on the
maturity or settlement dates of the instruments. As a wide range of
valuation techniques are available, it may be inappropriate to
compare this fair value information to that of independent market
or other financial institutions.
30 June 2015 31 December 2014
Carrying Fair value Carrying Fair value
value value
GBP'000 GBP'000 GBP'000 GBP'000
Cash and balances at
central banks 36,591 36,591 79,567 79,567
Loans and advances to
banks 106,259 106,259 117,401 117,401
Loans and advances to
customers* 5,436,258 5,490,545 4,801,064 4,830,974
Other assets 781 781 1,298 1,298
Total financial assets 5,579,889 5,634,176 4,999,330 5,029,240
----------------------------- --------- ---------- --------- ----------
Amounts due to banks 450,442 450,442 305,907 305,907
Customers' accounts 4,967,340 4,982,007 4,458,962 4,469,413
Other liabilities 16,640 16,640 14,778 14,778
Debt securities in issue 238,630 241,002 279,143 281,281
Subordinated notes 37,385 46,525 36,758 47,930
Total financial liabilities 5,710,437 5,736,616 5,095,548 5,119,309
----------------------------- --------- ---------- --------- ----------
*During the period the methodology used to calculate the fair
value of loans and advances to customers has been enhanced based on
more granular discounted cash flow calculations. Accordingly, the
31 December 2014 comparatives have been represented on this
basis.
Key considerations in the calculation of the disclosed fair
values for those financial assets and liabilities carried at
amortised cost include the following:
(a) Cash and balances at central banks
These represent amounts with an initial maturity of less than
three months and as such their carrying value is considered a
reasonable approximation of their fair value.
(b) Loans and advances to banks
These represent either amounts with an initial maturity of less
than three months or longer term variable rate deposits placed with
banks, where adjustments to fair value in respect of the credit
risk of the counterparty are not considered necessary. Accordingly
the carrying value of the assets is considered to be not materially
different from their fair value.
(c) Loans and advances to customers
For fixed rate lending products the Group has estimated the fair
value of the fixed rate interest cash flows by discounting those
cash flows by the current appropriate market reference rate used
for pricing equivalent products plus the credit spread attributable
to the borrower. For standard variable rate lending products, and
fixed rate products when they revert to the Group's standard
variable rate, the interest rate on such products is considered
equivalent to a current market product rate and as such the Group
considers the discounted future cash flows of these mortgages to be
equal to their carrying value. The fair value estimations do not
incorporate adjustments for future credit risk, however, incurred
loss provisions are deducted from the fair value amounts.
(d) Other assets and liabilities
These represent short term receivables and payables and as such
their carrying value is not considered to be materially different
from their fair value.
(e) Amounts due to banks
These mainly represent securities sold under agreements to
repurchase which were drawn down from the Bank of England under the
terms of the Funding for Lending Scheme. Transactions are
collateralised by UK Government Treasury Bills, which have a low
susceptibility to credit risk, so adjustments to fair value in
respect of the credit risk of the counterparty are not considered
necessary. Accordingly the carrying value of the liabilities are
not considered to be materially different from their fair
value.
(f) Customers' accounts
The fair value of fixed rate customers' accounts have been
determined by discounting estimated future cash flows based on
rates currently offered by the Group for equivalent deposits.
Customers' accounts at variable rates are at current market rates
and therefore the Group regards the fair value to be equal to the
carrying value. The estimated fair value of deposits with no stated
maturity is the amount repayable on demand.
(g) Debt securities in issue
Where securities are actively traded in a recognised market,
with readily available and quoted prices, these have been used to
value the securities. These securities are therefore regarded as
having Level 1 fair values.
(h) Subordinated notes
The estimated fair value of the subordinated notes is based on
discounted cash flows using interest rates for similar liabilities
with the same remaining maturity, credit ranking and rating. The
calculated fair value takes no account of the warrants issued
separately to the holders of the subordinated notes, which have
been separately accounted for as a capital contribution within
equity on issue.
The following table provides an analysis of financial assets and
liabilities held on the consolidated statement of financial
position at fair value, grouped into Levels 1 to 3 based on the
degree to which the fair value is observable:
30 June 2015 Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets:
Derivatives held for risk management - 8,971 - 8,971
Debt securities:
Asset backed securities - 76,151 - 76,151
UK Gilts and Supranational bonds 431,493 - - 431,493
Corporate bonds 122,247 - - 122,247
553,740 85,122 - 638,862
------------------------------------- ------- ------- ------- -------
Financial liabilities:
Derivatives held for risk management - 37,948 - 37,948
- 37,948 - 37,948
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------------------------------------- ------- ------- ------- -------
31 December 2014 Level Level Level Total
1 2 3
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets:
Derivatives held for risk management - 8,168 - 8,168
Debt securities:
Asset backed securities - 16,328 - 16,328
UK Gilts and Supranational bonds 468,840 - - 468,840
Corporate bonds 24,516 - - 24,516
493,356 24,496 - 517,852
------------------------------------- ------- ------- ------- -------
Financial liabilities:
Derivatives held for risk management - 54,198 - 54,198
- 54,198 - 54,198
------------------------------------- ------- ------- ------- -------
Level Fair value determined using quoted prices (unadjusted)
1: in active markets for identical assets or liabilities.
Level Fair value determined using directly or indirectly
2: observable inputs other than unadjusted quoted
prices included within Level 1 that are observable.
Level Fair value determined using one or more significant
3: inputs that are not based on observable market
data.
The fair values of UK Gilts, Supranational and Corporate Bonds
are based on quoted bid prices in active markets.
The fair value of asset backed securities are based on prices
provided by third party pricing services, but before relying on
these prices, the Group has obtained an understanding of how the
prices were derived to ensure that each investment is assigned an
appropriate classification within the fair value hierarchy.
The fair values of derivative assets and liabilities are
determined using widely recognised valuation methods for
determining the fair values of common derivative financial
instruments such as interest rate swaps that used only observable
market data that require little management judgement and
estimation. Credit value and debt value adjustments have not been
applied as the derivative assets and liabilities are largely
collateralised.
Fair value measurement - financial assets and liabilities held
at amortised cost
All the fair values of financial assets and liabilities carried
at amortised cost are considered to be Level 2 valuations which are
determined using directly or indirectly observable inputs other
than unadjusted quoted prices, except for debt securities in issue
which are Level 1 and loans and advances to customers which are
Level 3.
Fair value of transferred assets and associated liabilities
Securitisation vehicle
The Bank has previously transferred the beneficial ownership of
a number of loans and advances to customers to a securitisation
vehicle as described in the Group's 2014 Annual Report and
Accounts. The loans and advances fail the derecognition criteria
and consequently, these loans remain on the balance sheet of the
seller. The results of the securitisation vehicle are consolidated
in to the results of the Group. There has been no change in the
relationship with the securitisation vehicle since 31 December
2014.
The table below shows the carrying value and fair value of the
assets transferred to the securitisation vehicle and its associated
liabilities. The carrying value presented below is the carrying
amount recorded in the consolidated Group accounts. Some of the
notes are held internally by the Group and as such are not shown in
the consolidated statement of financial position of the Group.
Carrying Carrying Fair value Fair value Net
amount amount of transferred of associated position
of transferred of associated assets liabilities
assets liabilities not derecognised
not derecognised
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Oak No. 1 Plc 253,624 238,630 259,149 241,002 18,147
--------------- ----------------- -------------- ----------------- -------------- ---------
22. Risk management
A key component of the Group's business strategy is the
effective management of risk in order to ensure that the Group runs
a sustainable, safe and sound bank that conducts its activities in
a prudent and reputable manner, taking in account the interests of
customers and also ensuring our obligations to key stakeholders are
met.
The Group manages its risks under the Group's Risk Management
Framework ('RMF'). Further details of the RMF, the principal risks
and the way in which the Group manages these risks are available in
the Group's 2014 Annual Report and Accounts.
There have been no significant changes to the principal risks
faced by the Group. The principal risks are strategic risk, credit
risk, capital risk, liquidity risk, interest rate risk, market
risk, operational risk and conduct risk.
The Group's RMF, policies and procedures are subject to ongoing
improvement and are regularly reviewed and updated to ensure that
they accurately identify the risks that the Group faces in its
business activities.
During the six month period ended 30 June 2015, the Board has
developed and updated its Risk Appetite Framework ('RAF') and risk
appetite statements to reflect a more holistic forward looking
approach. The risk appetite statements define clearly in advance,
the level and types of risk which the Group is willing and able to
accept in pursuit of business objectives and plans, taking due
account of obligations to key stakeholders and the Group's risk
capacity.
The RAF seeks to demonstrate, amongst other things, a
comprehensive understanding of the key dependencies and risks faced
in pursuing the Group's strategic and commercial objectives and is
directly aligned to the corporate plan. The RAF has been developed
to encompass a holistic view of risk which covers prudential,
credit, operational and conduct risk dimensions. Based on the
Group's corporate plan, objectives, risk strategy and risk choices,
the Board sets the Group's overarching risk appetite. The
overarching risk appetite is used to define and structure more
detailed key risk appetite limits which are supported by bottom up
risk metrics and limits which specifically address each principal
risk.
The following sections provide an overview of the Group's
exposure to credit, liquidity, market and interest rate risk:
(a) Credit risk
Credit risk is the risk of financial loss arising from a
borrower or counterparty failing to meet their financial
obligations to the Group in accordance with agreed terms. This risk
arises from the Group's lending activities as a result of
defaulting mortgage, lease and loan contracts and is the most
significant risk faced by the Group.
The following table presents the Group's maximum exposure to
credit risk of financial instruments on the balance sheet and
commitments to lend before taking into account any collateral held
or other credit enhancements. The maximum exposure to credit risk
for loans, debt securities, derivatives and other on-balance sheet
financial instruments is the carrying amount, and for loan
commitments the full amount of any commitment to lend that is
either irrevocable or revocable only in response to material
adverse change.
30 June 31 December
2015 2014
GBP'000 GBP'000
Included in the statement
of financial position:
Cash and balances at central
banks 36,591 79,567
Loans and advances to banks 106,259 117,401
Debt securities 629,891 509,684
Derivatives held for risk
management 8,971 8,168
Loans and advances to customers 5,456,583 4,823,638
Other assets 781 1,298
6,239,076 5,539,756
Commitments to lend 515,800 404,593
------------------------------------- --------- -----------
Gross credit risk exposure 6,754,876 5,944,349
------------------------------------- --------- -----------
Less: allowance for impairment
losses (20,325) (22,574)
Net credit risk exposure 6,734,551 5,921,775
------------------------------------- --------- -----------
i. Impaired and past due loans
The table below provides information on the payment due status
of loans and advances to customers:
Residential SME Commercial Asset Invoice Total
Mortgages Mortgages Finance Finance
30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Neither past due nor
individually impaired 2,908,049 1,122,576 1,196,382 172,908 5,399,915
Past due but not individually
impaired 20,137 10,685 2,632 - 33,454
Individually impaired 5,488 11,637 3,496 2,593 23,214
2,933,674 1,144,898 1,202,510 175,501 5,456,583
------------------------------ ----------- -------------- --------- -------- ---------
Residential SME Commercial Asset Invoice Total
Mortgages Mortgages Finance Finance
31 December 2014 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Neither past due nor
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individually impaired 2,542,738 994,410 1,039,692 183,324 4,760,164
Past due but not individually
impaired 19,405 16,061 7,167 - 42,633
Individually impaired 6,003 6,292 2,614 5,932 20,841
2,568,146 1,016,763 1,049,473 189,256 4,823,638
------------------------------ ----------- -------------- --------- -------- ---------
Past due but not individually impaired loans are further
analysed as follows:
30 June 31 December
2015 2014
Past due but not individually GBP'000 GBP'000
impaired
- Up to 2 months past
due 22,844 29,989
- 2 to 3 months past
due 10,610 12,644
Total 33,454 42,633
------------------------------------ ------- -----------
Impairment coverage is analysed as follows:
30 June 31 December
2015 2014
Coverage ratio GBP'000 GBP'000
Gross loans and advances 5,456,583 4,823,638
Of which individually
impaired 23,214 20,841
------------------------------- --------- -----------
Impaired as a % of gross
loans and advances 0.43% 0.43%
Allowance for losses
- individual provisions 10,869 14,047
Coverage 46.82% 67.40%
------------------------------- --------- -----------
The coverage ratio has reduced to 46.82% as at 30 June 2015 (31
December 2014: 67.40%). The reduction is predominantly driven by a
single Commercial case where the exposure is impaired but no
provision recorded as the Group achieved full recovery after the
period end. In addition, the coverage ratio has also reduced due to
a number of fully provided loans being written off within Invoice
Finance.
The credit quality of assets that are neither past due nor
individually impaired are analysed internally as follows:
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total
30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Low risk 766,529 1,450,987 2,217,516 238,100 400,038 638,138 30,819 -
Medium risk 441,578 194,413 635,991 274,505 194,222 468,727 1,069,347 4,123
High risk 32,933 21,609 54,542 5,748 9,963 15,711 96,216 168,785
Total 1,241,040 1,667,009 2,908,049 518,353 604,223 1,122,576 1,196,382 172,908
Fair value
of
collateral
held 1,241,021 1,667,008 2,908,029 518,353 603,759 1,122,112 866,386 167,764
------------ ----------- ---------- --------- ---------- ---------- --------- --------- --------
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2014
Low risk 585,826 1,380,644 1,966,470 257,375 369,693 627,068 59,262 -
Medium risk 341,771 172,479 514,250 113,865 105,938 219,803 839,553 6,502
High risk 38,040 23,978 62,018 103,308 44,231 147,539 140,877 176,822
Total 965,637 1,577,101 2,542,738 474,548 519,862 994,410 1,039,692 183,324
Fair value
of collateral
held 965,559 1,576,914 2,542,473 474,548 519,862 994,410 738,390 181,752
-------------- ----------- ---------- --------- ---------- ---------- ------- --------- --------
The above categorisation of low, medium, high is based on
internal grading models. There has been no change in the grading
methodology since 31 December 2014. The methodology to calculate
the fair value of collateral held disclosed also remains unchanged.
Full details of both methodologies are provided in the Group's 2014
Annual Report and Accounts.
Individually impaired balances are further analysed as
follows:
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total
30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Past due 3-6
months 1,240 1,261 2,501 4,036 2,810 6,846 1,360 -
Past due 6-12
months 369 1,009 1,378 63 - 63 1,910 985
Past due over
12 months 125 1,484 1,609 4,365 363 4,728 226 1,608
1,734 3,754 5,488 8,464 3,173 11,637 3,496 2,593
Of which:
Possessions 1,384 - 1,384 - - - 1,742 -
-------------- ----------- ---------- ------- ---------- ---------- ------- -------- --------
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
Residential Buy-to-Let Total Commercial Buy-to-Let Total Total Total
31 December GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
2014
Past due 3-6
months 1,709 1,688 3,397 436 74 510 1,837 -
Past due 6-12
months 186 737 923 2,891 - 2,891 370 3,225
Past due over
12 months 1,407 276 1,683 2,543 348 2,891 407 2,707
3,302 2,701 6,003 5,870 422 6,292 2,614 5,932
Of which:
Possessions 1,376 - 1,376 - - - 1,363 -
-------------- ----------- ---------- ------- ---------- ---------- ------- -------- --------
Movement in impaired loans is analysed as follows:
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
2015 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 6,003 6,292 2,614 5,932
Classified as impaired during
the period 2,904 7,571 3,514 3,200
Transferred from impaired to
unimpaired (2,075) (192) (1,139) -
Amounts written off (240) (684) (653) (4,153)
Repayments (1,104) (1,350) (840) (2,386)
At 30 June 2015 5,488 11,637 3,496 2,593
------------------------------- ----------- -------------- -------- --------
Residential SME Commercial Asset Invoice
Mortgages Mortgages Finance Finance
2014 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 3,634 9,979 3,238 7,914
Classified as impaired during
the year 4,090 1,828 3,517 4,171
Transferred from impaired to
unimpaired (1,147) (581) (630) -
Amounts written off (59) (336) (2,190) (4,246)
Repayments (515) (4,598) (1,321) (1,907)
At 31 December 2014 6,003 6,292 2,614 5,932
------------------------------- ----------- -------------- -------- --------
ii. Collateral held and other enhancements
The principal indicators used to assess the credit security of
performing loans are Loan to Value ratios for commercial and
residential mortgages.
a. Residential Mortgages
Loan to Value on indexed origination information on the Group's
residential mortgage portfolio is set out below:
30 June 31 December
2015 2014
GBP'000 GBP'000
100%+ 1,086 9,167
95-100% 23,277 82,454
90-95% 205,637 151,447
85-90% 144,006 82,427
80-85% 148,906 117,888
75-80% 223,241 219,839
70-75% 375,173 370,024
60-70% 845,756 770,682
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50-60% 546,491 450,194
0-50% 416,638 310,777
2,930,211 2,564,899
--------------------------------------------- --------- -----------
Capital repayment 1,114,676 898,008
Interest only 1,815,535 1,666,891
2,930,211 2,564,899
--------------------------------------------- --------- -----------
Average Loan to Value percentage - all
residential mortgages 65.60% 66.84%
Average Loan to Value percentage - buy-to-let
residential mortgages 62.14% 64.18%
--------------------------------------------- --------- -----------
Residential Mortgages at a Loan to Value of 85% and above have
increased as a result of the Group's participation in the Help to
Buy Scheme. There is a government guarantee in place for those
loans where the LTV is greater than 85%.
b. SME Commercial Mortgages
Loan to Value on indexed origination information on the Group's
commercial mortgage portfolio is set out below:
30 June 31 December
2015 2014
GBP'000 GBP'000
90%+ - -
85-90% - 209
80-85% 456 2,113
75-80% 15,512 26,522
70-75% 78,622 73,065
60-70% 262,793 204,627
50-60% 246,539 252,420
0-50% 535,529 452,335
1,139,451 1,011,291
--------------------------------------------- --------- -----------
Capital repayment 539,005 478,760
Interest only 600,446 532,531
1,139,451 1,011,291
--------------------------------------------- --------- -----------
Average Loan to Value percentage - all
commercial mortgages 51.19% 52.23%
Average Loan to Value percentage - buy-to-let
commercial mortgages 54.61% 55.73%
--------------------------------------------- --------- -----------
c. Invoice Finance
In respect of invoice finance, collateral is provided by the
underlying receivables (e.g. trade invoices). As at 30 June 2015,
the average advance rate against the fair value of sales ledger
balances which have been assigned to the Group, net of amounts
considered to be irrecoverable, is 67.30% (31 December 2014:
68.04%).
d. Asset Finance
In respect of asset finance, collateral is provided by the
Group's right and/or title to the underlying leased assets, which
the Group is able to repossess in the event of default. Where
appropriate, the Group will also obtain additional security, such
as parent company or personal guarantees. Asset finance also
undertakes a small volume of unsecured lending where it has
obtained an understanding of the ability of the borrower's business
to generate cash flows to service and repay the facilities
provided. As at 30 June 2015 the total amount of such unsecured
lending was GBP13.6 million (31 December 2014: GBP17.4
million).
iii. Concentration of credit risk
The Group monitors concentration of credit risk by product type,
geographic location and sector. Analyses of concentrations are
shown below, net of impairment provisions. Details of the Group's
lending by product type are as follows:
30 June 31 December
2015 2014
GBP'000 GBP'000
Finance lease receivables 1,196,120 1,044,298
Invoice financing 170,476 180,576
SME Commercial Mortgage loans 1,139,451 1,011,291
Residential Mortgage loans 2,930,211 2,564,899
5,436,258 4,801,064
------------------------------------------ --------- -----------
Including:
Value of buy-to-let residential mortgages 1,747,601 1,597,255
Value of buy-to-let commercial mortgages 607,158 401,090
----------------------------------------------- --------- -----------
Credit concentration of assets by size analysed as follows:
30 June 2015 31 December
2014
Residential SME Commercial Asset Residential SME Commercial Asset
Mortgages Mortgages Finance Mortgages Mortgages Finance
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
GBP0 - GBP50k 37,201 8,091 526,479 32,485 7,117 460,409
GBP50 - GBP100k 605,904 77,165 268,594 548,053 64,933 224,912
GBP100 - GBP150k 687,790 83,010 121,485 608,382 69,861 108,361
GBP150 - GBP200k 487,083 78,721 64,219 424,686 71,650 59,135
GBP200 - GBP300k 564,247 133,344 79,776 479,799 114,550 73,556
GBP300 - GBP400k 271,914 91,292 37,332 233,269 80,233 36,274
GBP400 - GBP500k 108,938 74,067 27,695 93,509 62,991 21,644
GBP500k - GBP1m 156,725 204,506 47,991 132,502 190,714 39,988
GBP1m - GBP2m 10,409 194,059 17,711 12,214 181,727 12,208
GBP2m+ - 195,196 4,838 - 167,515 7,811
Total 2,930,211 1,139,451 1,196,120 2,564,899 1,011,291 1,044,298
----------------- ----------- -------------- --------- ----------- -------------- ---------
An analysis of the Group's geographical concentration is shown
in the table below:
30 June 31 December
2015 2014
% %
East Anglia 9.3 9.5
East Midlands 6.3 6.3
Greater London 19.6 20.9
North East 2.8 1.6
North West 11.4 11.9
Northern Ireland 0.1 0.1
Scotland 4.6 4.6
South East 18.8 19.5
South West 9.6 9.9
Wales 3.3 3.2
West Midlands 7.3 8.2
Yorkshire And Humberside 6.9 4.3
100 100
------------------------- ------- -----------
An analysis of the Group's loans and advances to customers by
sector is shown in the table below:
30 June 31 December
2015 2014
% %
Agriculture, hunting and forestry 1.3 1.3
Construction 2.9 3.2
Education 0.1 0.1
Electricity, gas and water supply 0.5 0.6
Financial intermediation 1.3 1.4
Health and social work 0.2 0.2
Hotels and restaurants 0.3 0.3
Manufacturing 4.2 4.8
Mining and quarrying 0.2 0.2
Private households with employed persons 0.8 0.8
Public administration and defence; compulsory
social security 0.1 0.1
Real estate, renting and business activities 20.5 18.7
Residential 60.8 61.4
Transport, storage and communication 3.9 3.9
Wholesale & retail trade; repair of motor
vehicles, motorcycles and personal household
goods 2.9 3.0
100 100
---------------------------------------------- ------- -----------
iv. Forbearance
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Occasionally, some borrowers experience financial difficulties
which impact their ability to meet mortgage and/or SME finance
obligations. Management seeks to identify borrowers who are
experiencing financial difficulties as well as contacting borrowers
whose loans have gone into arrears, consulting with them in order
to ascertain the reason for the difficulties, and to establish the
best course of action that can be taken to bring the account up to
date. In certain circumstances where the borrower is experiencing
significant financial distress, management may use forbearance
measures to assist the borrower. These are considered on a
case-by-case basis and must be in the best interest of the
customer. The forbearance measures are undertaken in order to
achieve the best outcome for both the customer and the Group by
dealing with financial difficulties and arrears at an early stage.
Forbearance is defined as any concessionary arrangement that is
made for a period of three months or more where financial
difficulty is present or imminent.
The most widely used methods of forbearance are reduced monthly
payments, loan term extension, deferral of payment and a temporary
or permanent transfer to interest only payments to reduce the
borrower's financial pressures. Where the arrangement is temporary,
borrowers are expected to resume normal payments within six months.
Temporary concessions are counted as forborne for 24 months
following the end of the concession. Permanent concessions are
counted as forborne for 24 months following the end of the
concession. In all cases, the above definitions are subject to no
further concessions being made and the customers' compliance with
new terms.
As at 30 June 2015 and as at 31 December 2014, the Group had
undertaken forbearance measures as follows in each of its lending
divisions, with the values below showing the cumulative levels of
forbearance arrangements in place:
30 June 31 December
2015 2014*
GBP'000 GBP'000
Residential Mortgages
Temporary or permanent switch
to interest only 2,859 2,890
Reduced monthly payments 1,287 1,302
Loan-term extension 36 11
Deferred payment 2,314 1,185
Total Residential Mortgages 6,496 5,388
Total forborne as a percentage of the
total divisional gross lending book (%) 0.22% 0.21%
--------------------------------------------- ------- -----------
SME Commercial Mortgages
Temporary or permanent switch
to interest only 8,668 8,178
Total SME Commercial Mortgages 8,668 8,178
Total forborne as a percentage of the
total divisional gross lending book (%) 0.76% 0.80%
Asset Finance
Capitalisation 61 21
Reduced monthly payments 291 64
Loan-term extension 222 162
Deferred payment 1,007 1,162
Total Asset Finance 1,581 1,409
Total forborne as a percentage of the
total divisional gross lending book (%) 0.11% 0.14%
Total forborne
Capitalisation 61 21
Temporary or permanent switch
to interest only 11,527 11,068
Reduced monthly payments 1,578 1,366
Loan-term extension 258 173
Deferred payment 3,321 2,347
Total forborne 16,745 14,975
Total forborne as a percentage of
the total gross lending book (%) 0.30% 0.31%
------------------------------------------- ------- -----------
*During the period, the Group's definition for determining
whether a loan is forborne has been updated for temporary
concessions. Previously a loan was considered forborne for three
months following the end of the concession. The revised definition
considers a loan to be forborne for the 24 months following the end
of the concession. The 2014 comparatives have been updated
accordingly.
Analysis of forborne accounts is shown in the tables below:
Residential SME Commercial Asset Total
Mortgages Mortgages Finance
30 June 2015 GBP'000 GBP'000 GBP'000 GBP'000
Neither past due nor individually
impaired 4,002 3,600 1,002 8,604
Past due but not individually
impaired 1,790 1,478 209 3,477
Individually impaired 704 3,590 370 4,664
6,496 8,668 1,581 16,745
---------------------------------- ----------- -------------- -------- -------
Residential SME Commercial Asset Total
Mortgages Mortgages Finance
31 December 2014 GBP'000 GBP'000 GBP'000 GBP'000
Neither past due nor individually
impaired 3,166 3,051 1,157 7,374
Past due but not individually
impaired 1,427 5,127 175 6,729
Individually impaired 795 - 77 872
5,388 8,178 1,409 14,975
---------------------------------- ----------- -------------- -------- -------
v. Credit risk - treasury
Credit risk exists with treasury assets where the Group has
acquired securities or placed cash deposits with other financial
institutions. The credit risk of treasury assets is considered to
be relatively low. No assets are held for speculative purposes or
actively traded. Certain liquid assets are held as part of the
Group's liquidity buffer.
The table below sets out information about the credit quality of
financial assets held by the treasury function. The analysis
presented below is derived using ratings provided by Standard and
Poor's where applicable. See page 62 for further details.
30 June 31 December
2015 2014
GBP'000 GBP'000
Cash and balances at central
banks and Loans and advances
to banks
- Rated AAA 36,591 -
- Rated AA+ to AA- - 79,555
- Rated A+ to A- 97,000 100,043
- Rated BBB+ 9,259 17,370
142,850 196,968
--------------------------------------------- ------- -----------
Debt securities: UK Government Gilts and
Treasury Bills, Supranational and Corporate
Bonds
- Rated AAA 359,880 334,927
- Rated AA+ to AA- 183,848 158,429
- Rated A+ to A- 10,011 -
- Rated BBB+ - -
Debt securities: Asset backed
securities
- Rated AAA 74,135 16,328
- Rated AA+ to AA- 2,017 -
- Rated A+ to A- - -
- Rated BBB+ - -
629,891 509,684
--------------------------------------------- ------- -----------
Derivatives held for risk management
purposes
- Rated AAA - -
- Rated AA+ to AA- 1,541 689
- Rated A+ to A- 3,650 4,182
- Rated BBB+ 3,780 3,297
8,971 8,168
--------------------------------------------- ------- -----------
781,712 714,820
--------------------------------------------- ------- -----------
As at 30 June 2015 and at 31 December 2014 none of the treasury
assets were past due or impaired.
(b) Liquidity risk
Liquidity risk is the risk that the Group is not able to meet
its financial obligations as they fall due, or can do so only at
excessive cost.
To protect the Group and its depositors against liquidity risks,
the Group maintains a liquidity buffer which is based on the
Group's liquidity needs under stressed conditions. The liquidity
buffer is monitored on a continual basis to ensure there are
sufficient liquid assets at all times to cover cash flow movements
and fluctuations in funding and to enable the Group to meet all
financial obligations and to support anticipated asset growth.
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