TIDMPAG
RNS Number : 9677H
Paragon Banking Group PLC
21 November 2018
Under stock exchange embargo until 7.00am Wednesday 21 November
2018
DIVERSIFICATION DRIVES STRONG PROFIT GROWTH
Paragon Banking Group PLC ('Paragon' or the 'Group'), the
specialist banking group, today announces its results for the year
ended 30 September 2018.
Commenting on the results, Nigel Terrington, Chief Executive of
Paragon, said:
"We have delivered another strong financial performance, with
increased profits driven by broader lending growth and enhanced
margins, whilst maintaining our high credit standards.
In the last year we have made great strides in our strategy to
become a leading UK based specialist banking group. A combination
of new start-up ventures and acquisitions means we now offer an
increasingly broad range of products, supporting British savers,
homeowners, landlords, consumers and small businesses.
The restructuring of our business last year enabled us to
improve the efficiency of the allocation of our resources and
capital. The broadening of our product range, coupled with our
strong asset quality, leaves us well placed to deliver further
targeted growth in the years ahead."
Financial highlights
-- Underlying profit before tax increased by 7.8% to GBP156.5
million (2017: GBP145.2 million) Statutory profit before tax
increased by 25.3% to GBP181.5 million (2017: GBP144.8 million)
-- Net interest margin increased by 8 basis points to 2.21% (2017: 2.13%)
-- Underlying EPS up 11.3% to 48.2p (2017: 43.3p). EPS up by 29.7% to 55.9p (2017: 43.1p)
-- Underlying RoTE up to 14.0% (2017: 13.5%). RoTE increased to 16.1% (2017: 13.4%)
-- Idem Capital portfolio sale recycles capital to support business growth and acquisitions
-- Capital levels remain strong, with CET1 of 13.8% (2017: 15.9%) following acquisitions
-- Dividend per share up by 23.6% to 19.4p (2017: 15.7p), in
line with policy announced in November 2017
Strong new business flows in Mortgages and Commercial Lending
divisions
-- Mortgage lending up 10.8% to GBP1,623.2 million (2017: GBP1,464.5 million)
-- Buy-to-let lending pipeline up 28.9% to GBP778.9 million (2017: GBP604.2 million)
-- Commercial Lending volumes up 82.6% to GBP710.0 million (2017: GBP388.9 million)
-- Titlestone development finance business acquired in July 2018
-- Acquisition of Iceberg professions finance business in December 2017
-- Net loan book growth of 9.0%
Diversified funding model underpinned by strong retail deposit
flow
-- Deposit balances increased by 46.5% to GBP5.3 billion (2017: GBP3.6 billion)
OVERVIEW AND OUTLOOK
1. Overview
Our results highlight another year of strong financial and
operational progress, alongside significant developments in our
strategy. It has been a year in which we have continued to
proactively position our businesses and product lines to optimise
returns to shareholders, embedding the business' status as one of
the UK's leading specialist banks. We will continue to employ our
deep through-the-cycle experience in our chosen markets to achieve
good growth, greater diversification and an unwavering focus on our
long-held risk principles.
2. Financial Performance
Underlying profits increased by 7.8% to GBP156.5 million, with
growth in each of the Group's operating divisions, the largest
increase occurring in Commercial Lending, where profits rose 41.1%
to GBP19.9 million. Across the year, the combination of
acquisitions and organic growth contributed to a 9.0% growth in net
loan balances, which stood at GBP12.1 billion at September 2018. At
the same time, the change in product mix within the balance sheet
underpinned an 8 basis-point increase in net interest margins to
2.21%.
The Group's cost of risk remained low with a charge of 6 basis
points, reflecting the Group's long term cautious approach to its
risk appetite.
Underlying operating costs increased by GBP9.6 million to
GBP111.9 million which includes part year costs that came with the
acquisitions during the period. Like-for-like costs included
increased levels of technology investment to increase our digital
engagement with customers and intermediaries, enhance operational
resilience, support growth in the newer divisions and deliver
projects such as GDPR and the Group's IRB development.
Consequently, the cost:income ratio was stable at 40.6%, and we
remain focussed on delivering our medium target of low 30s%.
From 1 October 2018, the Group's impairment calculations will be
based upon the IFRS9 methodology. A full transition document will
be distributed ahead of the 2019 interim results, with the impact
on provisions at 1 October 2018 expected to be approximately GBP27
million, which will be reflected through a movement in
reserves.
3. New Business Activity
The Group's existing Mortgage and Commercial Lending divisions
generated strong new lending growth in 2018 of 25.9%, with the core
buy-to-let business showing good volume performance in the complex
segment of the market, with complex completions increasing to 79.3%
of advances in the year and representing 87.8% of the year end
buy-to-let pipeline. The various Commercial Lending products saw
good underlying lending growth of 45.4% in 2018.
The acquisitions of Iceberg (professions finance) in December
2017 and Titlestone (development finance) in July 2018 provide
further capabilities and scale to the Group's Commercial Lending
area. The total volume generated from these businesses in their
first part year were GBP95.5 million (Iceberg) and GBP49.1 million
(Titlestone).
The focus on specialist markets and the maintenance of the
Group's cautious approach to credit is a core element of the
Group's strategy. The change in product mix as legacy lending is
replaced by complex buy-to-let and commercial lending supports
growth in the Group's net interest margin. Greater new business
volumes are starting to improve the operational leverage made
possible by recent investments in infrastructure and capabilities,
most notably in the Commercial Lending segment. This will be a key
driver in moving the Group's cost:income ratio towards its
medium-term target level.
The Group's retail deposit franchise has made further progress
over the last year with balances reaching GBP5.3 billion, a 46.5%
increase on last year. High retention levels have been achieved,
supported by stronger customer engagement and improvements in our
savings customer service metrics, including further improvements in
our Net Promoter Score.
We have accessed the capital markets opportunistically during
the year, issuing our first mortgage backed security for over 2
years, with a transaction that was the largest for over a decade
and at the lowest price since the financial crisis. We have also
completed a GBP200.0 million warehouse facility with Bank of
America Merrill Lynch which will provide a source of cost-effective
standby funding. Separately we received an upgrade in our corporate
debt rating from Fitch to BBB which could facilitate further new
debt issuance at efficient pricing.
4. Capital Management
Our capital ratio remains strong and comfortably ahead of our
minimum regulatory requirements. The CET1 ratio stands at 13.8%
(2017: 15.9%), with a total capital ratio of 16.2% (2017: 18.7%). A
key part of our strategy has been to strike an appropriate balance
between maintaining robust capital levels to support our immediate
requirements and future growth prospects, whilst actively managing
these levels to optimise returns for shareholders. We have made
good progress on IRB and remain on track to submit our application
to the PRA in early 2019.
Capital was recycled from Idem Capital to Commercial Lending in
2018, with the sale of a portfolio at a premium supporting the
growth in capital requirements following the Titlestone
acquisition. In addition to financing its growing loan portfolio
and the goodwill associated with the two acquisitions, the Group
also completed GBP25.0 million of share buy-backs (before costs) in
the year and increased dividends by 23.6% to 19.4 pence per share.
The dividend cover ratio is now at its target level of 2.5x. We
believe there is significant optionality available to employ the
Group's capital to support our ongoing growth prospects.
Consequently no buy-back is expected in 2019, although it will
remain an option to be employed in the future to enhance
shareholder returns.
5. Diversification, Growth and Capital Optimisation
The restructuring of the Group, which effectively resulted in
the Bank subsuming the rest of the organisation, took effect at the
beginning of this year. It has worked well. We now have much
greater mobility of capital, funding flexibility and greater
operational centralisation, something which is a genuine advantage
when actively managing the Group's various business lines. We have
always been disciplined in not chasing business simply for the sake
of growth. This is particularly true at the moment with strong
competition in UK banking markets. We are a specialist bank and
create points of differentiation through having a better
understanding of our markets, our customers and the application of
credit risk. Our centralised bank operating model and greater
mobility of capital enables us to allocate resources more
efficiently to where we can achieve the most optimal balance
between growth, returns and risk.
Alongside the two acquisitions we have also sold assets. Idem
Capital sold a portfolio of loans, generating a significant capital
gain, demonstrating our ability to recycle capital away from areas
where we believe the risk return equation is currently sub-optimal,
towards areas offering more attractively balanced prospects.
6. Outlook
The Group's strategy remains unchanged, focusing on using its
extensive credit experience to enable it to operate effectively and
with a low-risk appetite in its chosen range of specialist markets.
The deep understanding in these sectors, combined with the
flexibility of the operating model, enables the Group to focus
resources to optimise growth, risk and reward. The diversification
delivered by a series of organic and acquisitive developments over
the past five years, combined with a broadly-based funding approach
leaves the business well placed to deliver further value to its
shareholders over the coming years.
The Group enters 2019 with a strong new business pipeline, is
well positioned in its chosen markets and equipped with high levels
of liquidity. Despite the potential for economic uncertainties
arising from Brexit and elsewhere, the Group remains confident of
its future prospects.
KEY PERFORMANCE INDICATORS
2018 2017 Change % change
Profit before tax GBP181.5m GBP144.8m +36.7m +25.3%
---------- ---------- ------- ---------
Underlying profit* GBP156.5m GBP145.2m +11.3m +7.8%
---------- ---------- ------- ---------
Basic EPS 55.9p 43.1p +12.8p +29.7%
---------- ---------- ------- ---------
Underlying EPS* 48.2p 43.3p +4.9p +11.3%
---------- ---------- ------- ---------
Dividend per share 19.4p 15.7p +3.7p +23.6%
---------- ---------- ------- ---------
Return on Tangible
Equity ('RoTE') 16.1% 13.4%
---------- ---------- ------- ---------
Underlying RoTE* 14.0% 13.5%
---------- ---------- ------- ---------
Cost:income ratio 40.6% 40.5%
---------- ---------- ------- ---------
Core Tier 1 ratio 13.8% 15.9%
---------- ---------- ------- ---------
Total capital ratio 16.2% 18.7%
---------- ---------- ------- ---------
UK leverage ratio 6.4% 6.6%
---------- ---------- ------- ---------
Share buy-backs GBP25.0m GBP50.0m
---------- ---------- ------- ---------
* Appendix A
New Business Advances and investments Pipeline
2018 2017 2018 2017
------------- ------------ ------ ------
Buy-to-let 1,495.5 1,399.9 778.9 604.2
------------- ------------ ------ ------
Other mortgage lending 127.7 64.6
------------- ------------ ------ ------
Total Mortgages 1,623.2 1,464.5
------------- ------------ ------ ------
Asset finance 354.7 220.0
------------- ------------ ------ ------
Other commercial lending 355.3 168.9
------------- ------------ ------ ------
Total Commercial Lending 710.0 388.9
------------- ------------ ------ ------
Total advances 2,333.2 1,853.4
------------- ------------ ------ ------
Portfolio acquisitions 83.4 98.0
------------- ------------ ------ ------
Total new business 2,416.6 1,951.4
------------- ------------ ------ ------
For further information, please contact:
Paragon Banking Group PLC Headland
Nigel Terrington, Chief Executive Lucy Legh and Del Jones
Richard Woodman, Chief Financial
Officer
Tel: 020 7786 8455 / 020 7786 Tel: 020 3805 4810 / 020 3805
8494 4860
Paragon will be holding a results presentation for analysts on
21 November 2018 at 9:30 am at UBS, 5 Broadgate, London EC2M 2QS.
The presentation material will be available on the Group's website
at www.paragonbankinggroup.co.uk/investors from 11:00 am on the
same day.
CAUTIONARY STATEMENT
Sections of this preliminary announcement, including but not
limited to the Management Report, may contain forward-looking
statements with respect to certain of the plans and current goals
and expectations relating to the future financial condition,
business performance and results of the Group. These have been made
by the directors in good faith using information available up to
the date on which they approved this report. By their nature, all
forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances that are beyond the
control of the Group and depend upon circumstances that may or may
not occur in the future. There are a number of factors that could
cause actual future financial conditions, business performance,
results or developments to differ materially from the plans, goals
and expectations expressed or implied by these forward-looking
statements and forecasts. Nothing in this document should be
construed as a profit forecast.
MANAGEMENT REPORT
STRATEGY REVIEW
The past five years have seen the Group transition from being a
monoline centralised lender to a diversified specialist banking
group. This process has generated a closer alignment of the Group's
cash and capital resources, facilitated growth and diversification,
both organically and via acquisition, and accessed a broader and
more stable funding base. Across this period the Group has improved
returns to its shareholders and optimised its flexibility to
recycle capital internally to support the needs of its growth
businesses.
The past year has evidenced the strengths of this strategic
approach, which will continue to drive the Group's development
going forward.
The Group supports the needs of its consumer and SME customers
and seeks to develop its presence in these markets through a
combination of specialist product design, distribution and
underwriting supported by its efficient centralised operating
platform and resilient technology. Organic growth has been strong
during the year, augmented by business and portfolio acquisitions.
The Group has an outstanding through-the-cycle record in
challenging markets with excellent risk metrics, reflective of the
cautious and prudent approach it takes to its risk appetite
alongside its highly effective operating model.
We expect growth to remain strong in the future, with a focus on
the delivery of our organic strategy being augmented by proposition
expansion, where such developments provide an attractive risk
profile and shareholder return.
During the year the activities of the Commercial Lending
division have been strengthened by two acquisitions. Iceberg,
completed in December 2017, expanded the Group's lending to
professional firms and Titlestone, completed in July 2018,
generated a step-change in the size and scope of the Group's
development finance presence. Both acquisitions were funded by a
combination of retail deposits and internally generated capital
resources. Capital for the Titlestone purchase was also partly
provided by a recycling of capital from Idem Capital, where a
portfolio of loans was sold during the final quarter of 2018,
generating a significant gain that has been separately identified
in this year's accounts.
Alongside the strategic progress demonstrated in the year, the
Group has delivered strong results for its shareholders. The table
below summarises these on both a statutory and an underlying basis,
the latter excluding the costs and benefits arising from the
acquisitions and asset sales mentioned above which do not form part
of the day-to-day activities of the Group. The underlying results,
therefore, should provide greater clarity on the Group's operating
performance.
Statutory Underlying
(Appendix A)
Profit before tax Up 25.3% to GBP181.5 Up 7.8% to GBP156.5
million million
(2017: GBP144.8 million) (2017: GBP145.2 million)
-------------------------- --------------------------
Basic EPS Up 12.8 pence to 55.9 Up 4.9 pence to 48.2
pence pence
(2017: 43.1 pence) (2017: 43.3 pence)
-------------------------- --------------------------
RoTE Up 2.7 pps to 16.1% Up 0.5 pps to 14.0%
(2017: 13.4%) (2017: 13.5%)
-------------------------- --------------------------
Lending
Strong and targeted growth in organic business volumes has been
delivered during 2018. The scale of our Commercial Lending division
has been supplemented by business acquisitions, while Idem Capital
also completed a loan portfolio purchase transaction of commercial
lending assets. Excluding the contribution from the acquired
businesses, organic originations grew 18.1% to GBP2,188.6 million
(2017: GBP1,853.4 million). Including post-acquisition lending from
the acquired businesses, total lending increased by 25.9% to
GBP2,333.2 million.
The Group's largest business remains its buy-to-let franchise.
The UK private rented sector continues to see strong levels of
demand from tenants, which is expected to continue for the
foreseeable future. The buy-to-let market has experienced a period
of disruption following a series of fiscal and regulatory changes
aimed at both landlords and lenders. Against this backdrop the
Group's performance has remained strong, with over twenty years'
experience of servicing the needs of professional landlords
differentiating it from other lenders and allowing the business to
make market share gains during the year. New buy-to-let origination
levels increased by 6.8% from the previous year's level to
GBP1,495.5 million in the year to September 2018 (2017: GBP1,399.9
million), with the Group's market share, as measured by the figures
reported by UK Finance, increasing from 3.93% to 4.11%.
However, survey data suggests that the Group has a more material
share of the professional landlord market. With this sector
comprising approximately 23% of the market as a whole, the survey
results indicate the Group's share of its target market was in the
region of 14%.
The most recent regulatory changes in the buy-to-let market
require lenders to collect and analyse more information about the
landlord's property portfolio and wider business than has
previously been common in the market. Consequently, some lenders
have restricted their buy-to-let activity as a result of the
increased demands of such a complex underwriting process. The
Group's expertise in this particular market segment has positioned
the business well to benefit from these changes and further
increase its market share.
The Group's other mortgage businesses comprise its second
mortgage activities, where new origination levels rose 17.3% to
GBP71.2 million during the year (2017: GBP60.7 million) and a
specialist residential lending operation, which remains in its
pilot phase with distribution limited to a small number of brokers
pending final product reviews and associated systems and process
enhancements. New specialist residential volumes totalled GBP56.5
million during the year (2017: GBP3.9 million).
Further asset and income diversification is generated by the
Group's Commercial Lending division. The division's asset finance
activities have been transformed to service a broader mid-market
range of SME customers, as opposed to restricting lending solely to
the more limited niches originally serviced. Customer credit
profiles are generally stronger in this larger sector, with margins
commensurately lower. This strategy has resulted in higher new
business volumes (up 61.2% on the year ended 2017 to GBP354.7
million in 2018, including GBP95.5 million generated by the
acquired Iceberg operation).
The motor finance business also saw strong growth in 2018.
Operating in the hire and lease purchase segments of the market
(with no exposure to personal contract purchase products), new
business origination grew by 48.3% to GBP177.9 million during the
year (2017: GBP120.0 million).
The division's development finance operation was enhanced by the
acquisition of Titlestone in the year, accelerating its expansion.
This operation provides funding, principally to smaller property
developers, and new drawings totalled GBP136.8 million (2017:
GBP48.9 million), with GBP49.1 million of this arising in
Titlestone.
The Group's structured lending unit, which provides lending
solutions to non-bank financial institutions, agreed its first
facilities in the year with three arrangements active by the year
end. Drawings in the year were GBP40.6 million with a balance of
GBP38.7 million by the year end. By the end of 2018 the business
was operating at breakeven, with a positive contribution to Group
profit expected in 2019.
The Group's portfolio purchase business, Idem Capital, is an
established purchaser of loan portfolios. Gross purchases in 2018
were GBP83.4 million (2017: GBP98.0 million). The sector has proved
increasingly popular for both specialist purchasers and credit
funds in recent years, with available returns reducing accordingly.
Idem Capital has retained its credit and pricing discipline across
the past year, but as a consequence, current year activity has been
focussed on augmenting the organic asset and motor finance advances
made elsewhere in the Group though the purchase of such loans from
other lenders.
Funding
The Group continued to expand its retail deposit funding base
and increased its access to Bank of England facilities during the
year. At 30 September 2018, retail savings balances were GBP5.3
billion and the Term Funding Scheme ('TFS') and other central bank
drawings totalled GBP1.0 billion, compared with savings deposits of
GBP3.6 billion and GBP0.7 billion TFS drawings a year earlier. In
addition to funding new advances, the Group refinanced a number of
previously securitised or warehoused portfolios using retail
deposits. Similar refinancing activity is expected over the coming
years.
The Group also launched its first securitisation since 2015,
raising GBP435.3 million through the Paragon Mortgages (No. 25)
transaction.
The Group's funding has become increasingly diversified in the
years following the financial crisis. Funding for pre-2010 balances
is still primarily provided by securitisation funding arranged
around the time of advance.
Retail deposits represent the Group's primary source of funding
for new lending, whilst securitisation approach is used and when
conditions in that market are attractive, as they were during the
year, allowing the Group to maintain a diversified approach to its
funding.
Capital
The Group's CET1 ratio was managed down to 13.8% in 2018 (2017:
15.9%), reflecting balance sheet growth, product diversification,
acquisitions and higher distributions to shareholders through
buy-backs and enhanced dividend levels. The Group's total capital
ratio was 16.2% at September 2018 (2017: 18.7%).
Enhancing shareholder returns on a sustainable basis is a key
objective for the Group and during the year underlying basic EPS
increased by 11.3% (29.7% on the statutory basis). Following a
reduction to a 2.75 times dividend cover ratio in 2017 the Group
targeted a further reduction to 2.5 times in 2018. The dividend for
the year of 19.4 pence reflects the new target, based on underlying
performance, and has increased by 23.6% (2017: 15.7 pence).
The Group has adopted a formulaic approach to its interim
dividend levels going forward, with the interim dividend per share
from the 2018 interim being one half of the final dividend declared
in the preceding period in normal circumstances.
The Group's share buy-back programme progressed in the year,
with GBP25.2 million having been invested, enhancing shareholder
returns, until the programme was suspended to reflect the capital
requirements of the Titlestone acquisition. The Group is not
anticipating a share buy-back in 2019, but will seek the normal
shareholder approvals at its February 2019 Annual General Meeting
('AGM') to allow flexibility if conditions change and surplus
capital becomes available.
The business remains well funded, strongly capitalised and
effectively placed to continue to deliver long term, sustainable
returns through its robust operating model. The Group is positioned
to respond quickly to the challenges and to take advantage of the
opportunities that will arise given changes in the broader
operating environment.
A more detailed discussion of the Group's performance is given
below covering:
Lending review Funding review Financial review Operational review
Lending, performance Retail deposits, Results for the People, risk
and markets wholesale funding year and regulation
and capital management
------------------------ ----------------- -------------------
LING REVIEW
The Group's operations are organised into three divisions, based
on product type, origination and servicing capabilities. This
organisational and management structure has been in place
throughout the year.
New business advances and investments in the year, together with
the year end loan balances, by division, are summarised below:
Advances and Net loan
investments balances
in the year at the year end
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Mortgages 1,623.2 1,464.5 10,473.5 9,953.9
Commercial Lending 710.0 388.9 1,133.2 558.8
Idem Capital 83.4 98.0 521.1 611.4
-------- -------- --------- ---------
2,416.6 1,951.4 12,127.8 11,124.1
======== ======== ========= =========
The Group's loan book increased by 9.0% in the year, with new
advances and investments 23.8% higher than in the previous
financial year.
Mortgages
The Group's Mortgages division offers buy-to-let first charge
and owner-occupied first and second charge mortgages on residential
property in the UK. In all its offerings, it targets niche markets
where its focus on detailed case-by-case underwriting and its
robust and informed approach to property risk differentiate it from
mass market and other specialist lenders.
Housing and mortgage market
The UK mortgage and housing market remains finely balanced and
activity remains subdued, with this position having continued
throughout the financial year. New mortgage approvals, reported by
the Bank of England, in the year ended 30 September 2018, at
GBP255.4 billion had increased by only 2.1% from the previous year,
(2017: GBP250.1 billion), with remortgaging increasing by 9% and
house purchase mortgages declining by 2%. This level of
transactions remains some 30% below the 2007 peak in the
market.
The Nationwide House Price Index reported annual growth of only
2.0%, similar to the 2.0% seen in 2017, with London seeing a
decline in prices, although house prices there remain close to
their 2007 peak. Growth has been at this level for the past
eighteen months, with expectations of future increases remaining
modest. The most recent Nationwide analysis forecasts an increase
of only 1.0% over 2018 as a whole.
These market trends were supported by the latest survey data
from the Royal Institution of Chartered Surveyors ('RICS') UK
Residential Market Survey, which highlighted a lack of market
momentum with market confidence drifting downwards, but with a
mixed picture on house price expectations across the country.
For the mortgage industry, the interest rate environment, which
is still low by historic levels despite recent rises, has led to
benign credit conditions, with low arrears and a negligible level
of forced sales. Overall the economic environment for the mortgage
market currently appears both positive and sustainable.
The impact of a potential economic downturn, whether as a result
of the Brexit process or otherwise, remains an area of focus across
all lending markets. The Group seeks to mitigate its exposure to
such conditions through a robust approach to property valuation,
employing an experienced in-house property team who undertake
around two thirds of valuations and conduct validation work on 100%
of valuations performed by third party surveyors. The internally
conducted surveys are subject to regular monitoring and the Risk
and Compliance function includes qualified property risk resource.
The weighted average loan to value ratio across the Group's first
mortgage books at 66.0% (2017: 66.3%) (note 5) provides significant
protection in the event of a future downturn.
Buy-to-let
The year has seen the buy-to-let mortgage market continuing to
reshape following a period of sustained regulatory intervention.
Following changes to tax and stamp duty affecting landlords, the
Prudential Regulation Authority ('PRA') introduced new rules on the
conduct of buy-to-let underwriting, which came into force partly in
the 2017 financial year and partly at the start of the current
period.
The regulatory changes were implemented in two phases:
-- From 1 January 2017 the PRA imposed common standards for
affordability testing in the buy--to-let sector, similar, in
principle, to the approach adopted by the Financial Conduct
Authority ('FCA') for owner-occupied lending under the Mortgage
Conduct of Business ('MCOB') rules.
-- From 1 October 2017, lenders were required to underwrite
portfolio buy-to-let cases on a much more specialised basis,
differentiating between portfolio and non-portfolio landlords,
based on the number of properties owned with buy-to-let
finance.
UK Finance ('UKF') reported that completions in the year ended
30 September 2018 were GBP36.4 billion, compared to GBP35.7 billion
in the same period in 2017. Within this total, new lending for
buy-to-let property purchases saw a decrease, from GBP9.9 billion
to GBP8.8 billion. Remortgaging levels grew, from GBP24.6 billion
in 2017 to GBP26.1 billion in 2018. However, with more customers
choosing longer term fixed rate loans, the potential capacity for
remortgage activity is expected to reduce in the medium term.
Almost all new buy-to-let lending continues to be at initially
fixed rates, but the preference for longer fixed periods, driven by
customer expectations of interest rate rises to come, has been one
of the most significant market trends over recent years, with 49%
of market-wide completions in September 2018 having a five year
fixed term or longer, compared to around 40% of the September 2017
completions and around 20% of completions a year earlier.
Activity in the market supports the Group's analysis of the
likely impact of the regulatory changes, with clear evidence of a
polarisation of the landlord population between portfolio landlords
and those with single properties. The proportion of portfolio
landlords operating through corporate structures has also continued
to increase.
In response to this, the positions of the lenders active in the
market have also become more clearly defined, with some major
lenders, including some of the largest, not offering a portfolio
landlord proposition, some addressing portfolio landlords only in a
limited way and a smaller group of specialised lenders, including
the Group, offering a full range of products. This has been driven
by the availability of experienced resource, system and process
capability.
Overall the Group considers these changes to be positive, with a
more sharply focussed class of buy-to-let landlords emerging. These
should be motivated to provide a better service to tenants and
their funding requirements are a good match for the products
offered by the Group, providing an opportunity for the Group to
grow its market share, albeit in a potentially smaller market.
The impact of these, and previous, changes on the lettings
market is less easy to determine at this stage. The tenure
distribution of households remained stable in the latest English
Housing Survey 2016-17, with the private rented sector continuing
to house 20% of all households. The September 2018 RICS UK
Residential Market Survey reports increasing tenant demand against
lower levels of landlord instructions, creating upward pressure on
rents, which RICS expects will increase by over 2% in the current
year, accelerating to a rate of 3.5% per annum over the next five
years. This should have a positive impact on affordability for
buy-to-let landlords.
Lending activity
The Group's new lending activity in the segment during the year
is set out below.
2018 2017
GBPm GBPm
First charge buy-to-let 1,495.5 1,399.9
First charge owner-occupied 56.5 3.9
Second charge 71.2 60.7
-------- --------
1,623.2 1,464.5
======== ========
Total mortgage lending in the Group increased by 10.8% in the
year. The majority of this increase arose from the division's core
buy-to-let products, but other mortgage offerings also
contributed.
Buy-to-let
The Group's buy-to-let lending increased by 6.8% year on year,
despite the disruption in the market described above and the
consequent pressure on volumes. The pipeline of buy-to-let loans in
process at the year end was GBP778.9 million, an increase of 28.9%
on the position a year earlier (2017: GBP604.2 million).
The changes in the way in which buy-to-let landlords are
addressing the market, driven by the recent regulatory changes, can
be seen in the analysis of the Group's new buy-to-let lending by
customer type, compared to the previous year. In the table below,
complex customers are those with portfolios of four properties or
more, or specialist properties, and corporate customers are those
operating through limited companies. Other complex customers are
non-corporate customers with portfolios of four properties or more
or with specialist properties.
30 September 30 September 30 September 30 September
2018 2018 2017 2017
GBPm % GBPm %
Buy-to-let advances
Corporate customers 656.7 43.9% 293.5 21.0%
Other complex customers 528.8 35.4% 609.4 43.5%
------------- ------------- ------------- -------------
Total corporate and
complex 1,185.5 79.3% 902.9 64.5%
Non-complex customers 310.0 20.7% 497.0 35.5%
------------- ------------- ------------- -------------
1,495.5 100.0% 1,399.9 100.0%
============= ============= ============= =============
These advances showed the impact on the Group's business of the
concentration of buy-to-let activity among more professional
investors, many operating through corporate structures. This trend
is set to continue into the next financial year, with 87.8% of
pipeline cases being either corporate or complex (2017: 70.4%).
In common with the wider buy-to-let market, the Group has seen a
significant increase in customer preference for new buy-to-let
mortgage loans which have an initial fixed rate period of five
years, rather than the shorter terms typically chosen previously.
The proportion of five-year products, by number, in the Group's new
buy-to-let lending, at 72.9% had increased significantly since last
year (2017: 50.8%). This should increase the stability of the
Group's balance sheet going forward, with longer-dated product
maturities supporting higher growth rates in the loan portfolio in
the medium term.
Other mortgage lending
The Group's second charge mortgage lending has increased 17.3%
during the year, but remains at modest levels. The second charge
market is currently not large, with total lending of GBP1,031
million in the financial year reported by the Finance and Leasing
Association ('FLA') little changed from the previous year (2017:
GBP1,003 million). A significant part of this total does not fall
within the Group's risk appetite and the Group seeks to target only
that population of customers with the strongest credit quality in
this area, avoiding any form of sub-prime business, which
necessarily limits the addressable market.
The Group continued to develop its offering in specialist
sectors of the owner-occupied mortgage market during the period.
This lending remains in a pilot phase, with it yet to be
established whether a sufficiently large opportunity exists which
would generate satisfactory returns at acceptable risk levels.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
30 September 2018 30 September 2017
GBPm GBPm
Post-2010 assets
First charge buy-to-let 4,481.8 3,661.1
First charge owner-occupied 59.4 3.9
Second charge 141.3 98.4
------------------ ------------------
4,682.5 3,763.4
Legacy assets
First charge buy-to-let 5,779.8 6,175.4
First charge owner-occupied 11.2 15.1
------------------ ------------------
10,473.5 9,953.9
================== ==================
At 30 September 2018 the balance on the Group's mortgage
portfolio was 5.2% higher than a year earlier, with the post-2010
buy-to-let book having grown by 22.4%.
The annualised redemption rate on post-2010 buy-to-let mortgage
assets at 16.7% (2017: 22.7%), has reduced from the high level seen
in 2017, reflecting both the profile of product maturities and the
changing focus towards complex landlord customers. The annualised
redemption rate on pre-crisis lending, at 6.0%, is the same as that
seen in the year ended 30 September 2017, reflecting the properties
of those loans relative to current market offerings.
The redemption rate was also reduced by greater numbers of the
Group's customers opting to re-fix their loans during the period,
rather than redeem and refinance elsewhere. This affected both
customers on products which reached the end of their initial fixed
rates and also on those already on reversionary rates. This process
was enhanced by systems developments to make the process as easy as
possible for customers. While the Group earns a smaller margin on
these switch products, the customers should then stay with the
Group for a longer period on their new fixed rates, offsetting the
reduction in margin over the medium term.
Arrears on the buy-to-let book as a whole have marginally
increased in the year to 0.11% (2017: 0.08%), with arrears on
post-2010 lending standing at 0.01% (2017: 0.02%). These arrears
remain very low compared to the national buy-to-let market, with
UKF reporting arrears of 0.42% across the buy-to-let sector at 30
September 2018 (2017: 0.45%). This exemplary performance reflects
the Group's focus in underwriting on the credit quality and
financial capability of its customers, underpinned by a detailed
and thorough assessment of the value and suitability of the
property as security.
Second charge arrears increased to 0.21% from 0.06% in the year,
as the book began to season, with performance remaining strong,
while the new residential lending has yet to see any arrears,
although the loans are still comparatively unseasoned.
The Group's receiver of rent process for buy-to-let assets helps
to reduce the level of losses by giving direct access to the rental
flows from the underlying properties, while allowing tenants to
stay in their homes. At the year end 770 properties were managed by
a receiver on the customer's behalf, a reduction of 6.2% since 2017
(2017: 821 properties) as cases on the old book resolve and
post-2010 cases perform well.
Outlook
Looking forward, the Group's mortgage business is strongly
positioned as a specialist participant in a market which is still
restructuring following fiscal and regulatory change. Its focus on
specific customer requirements is key to growing volumes and
enhancing earnings.
An important part of the division's strategy going forward will
be to continue to enhance systems to improve the experience of
customers and brokers. This will include increasing opportunities
for customer 'self-service' and more direct system links to major
brokers.
The business is well placed to withstand potential instability
in the UK economy, with its strong credit standards and robust
assessment of security condition and value affording it a high
degree of protection. Average loan-to-value ratios on new
buy-to-let lending were 71.8% for the year ended 30 September 2018,
with stressed affordability levels in line with or above the PRA
requirements. Continued strong rental demand and good affordability
suggests the Group's customers will be resilient in the face of
anticipated rate rises or broader economic uncertainty. Exposure on
owner-occupied lending is low, and the risk position on second
charge lending has been carefully managed.
Overall the Group supports the provision of housing in the UK in
a controlled and sustainable way, and through its relationships
with landlords and trade bodies seeks to promote higher standards
in the private rented sector.
Commercial Lending
The Group's Commercial Lending division brings together a number
of streams of mostly asset backed lending to, or through,
commercial organisations. The principal customer focus of the
division is on lending to SME and mid-sized corporate customers,
which is an important differentiator from the rest of the Group's
business.
During the year the Commercial lending division significantly
broadened its activities. The acquisition of Titlestone added
substantial volume and capacity to the division's development
finance unit, the acquisition of Iceberg expanded short-term
business lending and the new structured lending offering was
launched in the year.
The asset finance market in the UK is substantial, covering some
GBP75.1 billion of outstanding balances at 30 September 2018 (2017:
GBP74.7 billion) and GBP32.1 billion of advances in the year then
ended (2017: GBP31.2 billion). It is the Group's strategy to target
niches within this market where its particular skill sets can be
best applied, and its capital effectively deployed to optimise the
relationship between growth, risk and return.
Examples of such niches are the financing of waste collection
vehicles for local authorities, construction equipment and complex
veterinary equipment. Outside the leasing market the division also
has niche offerings providing other forms of funding, generally to
SME businesses.
Access to customers is generally through specialist brokers,
including the Group's in-house brokerage, Premier Asset Finance
('Premier'), or equipment suppliers and the markets in which the
division operates tend to be fragmentary, with different brokers
focussed on different asset types.
The common themes of these diverse business lines are a reliance
on understanding and engaging with the customer and the valuation
of any security, together with expertise in collections and
security realisation. In common with the rest of the Group, the
division's focus is on the maintenance of strong credit standards
and it does not pursue business volumes at the expense of margins.
The division relies heavily on specialist teams to address the
separate business lines, either sourced externally or internally
developed.
Acquisition of Titlestone
During July 2018 the Group acquired the entire share capital of
Titlestone Property Services Limited and a portfolio of loan assets
from its related companies (together 'Titlestone'). Titlestone
provide development finance loans to smaller property developers, a
field in which the Group already had a presence. The acquired loan
portfolio was valued at GBP227.4 million, but there were no other
significant tangible assets in the acquired business. The
consideration paid was GBP274.3 million in cash (note 7).
The addition of the Titlestone team to the Group's existing
development finance unit offers the opportunity for the Group to
reach critical mass in this market much more swiftly than would be
possible through purely organic growth, and the team's network of
relationships with developers, brokers and other professionals will
provide a solid foundation for the further expansion of this
business.
Following the acquisition, the Titlestone and Paragon teams were
merged and the business rebranded as Paragon Development Finance.
The Group's strategic objective is to expand its lending to cover a
larger part of the UK as the Titlestone business, in common with
the Group's initial development finance offering, was focussed on
the South East of England and the Group sees additional promising
opportunities outside this area.
The combined operation is focussed primarily on smaller
residential developments, where assets are likely to be more liquid
and where demand is likely to be more resilient under economic
stress. This area has also been identified as one where there is a
shortage of available funding. It also aligns with the UK's public
policy priority of increasing house building, where the Help to Buy
scheme is acting to support prices of completed developments.
A project is currently taking place to integrate the new
operation into the Group, which will continue into the new
financial year. Progress so far has been encouraging and the
acquired business has generated GBP49.1 million of new lending
since acquisition. The Group is confident that this business will
form a significant and profitable part of the division's activity
in future periods.
Acquisition of Iceberg
During December 2017 the Group acquired the assets and business
of Iceberg, a specialist broker and lender, which had previously
operated through two limited liability partnerships (note 6).
Iceberg focuses principally on short-term unsecured business
funding for professionals such as solicitors and accountants and,
through solicitors, in lending to parties in inheritance and
matrimonial proceedings based upon the strength of their prospects.
The consideration paid was GBP6.8 million in cash, with deferred
consideration of up to GBP13.0 million payable, dependent upon
performance.
The combination of the market intelligence and contacts in the
Iceberg business with the Group's funding capabilities is expected
to create additional value in the asset finance business over time,
adding higher lending volumes to this specialist product set.
At acquisition Iceberg was acting as a broker, passing on the
majority of its originations for funding by other lenders. Access
to Group funding will enable the value of the Iceberg loan
portfolio to grow over time with a consequent increase in revenues
and contribution.
Loan balances of GBP2.0 million were acquired with the business
and, by 30 September 2018, there were GBP32.9 million of Iceberg
generated assets on the Group's balance sheet. Advances in the nine
months since acquisition were GBP95.5 million.
The process of integrating the Iceberg operations with those of
the Group continues. Progress in the first nine months has been
good and the prospects for future benefits from the acquisition are
encouraging.
Lending activity
The division's SME customer base has had a broadly stable year
with no indications of a Brexit impact so far, however recent
surveys indicate nervousness going forward, which may start to
impact on the investment decisions of small and medium sized
firms.
The new lending activity in the segment during the year is set
out below.
2018 2018 2017
GBPm GBPm GBPm
Asset finance - ongoing operations 259.2
Asset finance - Iceberg 95.5
------
Asset finance 354.7 220.0
Motor finance 177.9 120.0
Development finance - ongoing 87.7
Development finance - Titlestone 49.1
------
Development finance 136.8 48.9
Structured lending 40.6 -
------ ------
710.0 388.9
====== ======
The asset finance business has seen a 17.8% like-for-like growth
in the period as the business continues to develop following
strategic changes introduced over the past two years. Including
Iceberg, the value of new lending in the book was up 61.2%. This
result is significantly in excess of the guidance of GBP0.6 billion
given at the half year, even excluding the Titlestone business.
Significantly, the developments in the year have led to greater
diversity in 2018's advances than was seen in 2017, in line with
the Group's strategy.
The Asset Finance business has remained competitive in its core
'hard asset' (i.e. construction equipment) market despite pricing
pressure from new entrants. It has maintained its focus on margins
and sought to support its business levels through good customer
relationships and service standards.
Asset finance advances include the Group's first aviation loans,
where GBP12.4 million was outstanding at the year end, and although
the operation is still in its early stages, the credit quality of
customers is good. This business provides a good example of the
niche focus employed by the Group within the wider asset finance
space.
The asset finance business also made a significant investment in
assets for hire under operating leases, both term and spot,
acquiring GBP19.3 million of assets to generate future income
(2017: GBP12.9 million). Following the last two years of
investment, net operating lease income increased by 26.7% to GBP3.8
million for the year (2017: 3.0 million).
This growth has taken place against a backdrop of aggressive
competition in the market and continuing economic nervousness in UK
industry, leading to some reluctance by SMEs to take on new finance
commitments, especially longer-term arrangements, at least until
the UK's future trading relationship with Europe becomes
clearer.
The motor finance business continues to develop with a 48.3%
increase in new lending. Product offerings remain carefully
targeted to avoid the riskier and mass market and the Group has no
exposure to the personal contract purchase and similar product
types which have caused concern to commentators and regulators
during the year. The business addresses specialist propositions in
the motor finance market where distinctive products can generate
appealing returns and make effective use of the Group's capital.
This includes funding less mainstream vehicle types, such as light
commercial vehicles and motorhomes. The current rate of growth is
expected to moderate as the business becomes more mature, with the
specialist segment of the market always being limited to some
degree.
The Group's organically grown development finance business
provided funding for small-scale property developments with an
average facility size of around GBP2.0 million, a significantly
underserved market. Advances grew by 79.3% in the year as the
business expanded into new areas of the country including Yorkshire
and the Midlands. This experience served to confirm the viability
of the business stream and provided support to the decision to
acquire Titlestone in July 2018. Post-acquisition the larger
development finance business presents a significant growth
opportunity, with undrawn facilities and pipeline commitments of
GBP366.7 million providing a springboard for the start of the new
financial year.
During the second half of the year, the first of the Group's
structured lending facilities, with Liberis, the business cash flow
lender, went live. This was followed by a further two facilities
during the year with more scheduled to complete after the year end.
Initial returns appear promising, with the team building a good
relationship in the market place.
The structured lending unit provides senior debt to the UK
non-bank lending market and deploys loans to help support
'best-in-class' businesses working across consumer and commercial
lending. Transactions are secured on underlying assets and
structured using established robust methodologies. The business
addresses certain segments where the Group may be under-weight or
has no exposure at all and where working with a recognised industry
expert is preferable to organic expansion. Outstanding facilities
at 30 September 2018 have reached GBP52.5 million, of which
GBP38.7m had been drawn at the year end.
Across all business lines growth has been carefully controlled
with credit quality and margins prioritised over expansion and care
has been taken to focus effort on those sectors or subsectors of
the market most suited to the Group's business model and most
likely to provide it with a good return on capital.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
30 September 2018 30 September 2017
GBPm GBPm
Asset finance 403.4 323.6
Motor finance 256.6 163.0
Development finance 352.8 42.3
Structured lending 38.7 -
Invoice factoring 21.8 14.8
Professions finance 42.6 1.4
Unsecured business lending 13.1 9.0
Other loans 4.2 4.7
------------------ ------------------
1,133.2 558.8
================== ==================
Professions finance includes Iceberg assets and similar assets
generated in the ongoing business, with receivables financing and
other unsecured lending to business included as 'other loans'
above.
Margins in the segment have remained strong but have reflected
both the changing business mix and the strategic repositioning of
the asset finance to address the larger, higher quality but lower
margin mid-range segment of the asset finance market.
Arrears on the segment's business remain low with arrears in the
asset finance business at 0.78% and motor finance at 0.93% (2017:
0.97% and 0.56% respectively), comparable to those in the wider
sector, with the FLA reporting average arrears for asset finance at
0.70% and car finance at 2.50% at 30 September 2018 (2017: 0.60%
and 2.20%).
Credit quality in both the organic and acquired Development
Finance books has been good, and the overall performance of the
projects has been in line with expectations. These accounts are
monitored on a case-by-case basis by the Credit Risk function. At
30 September 2018 no accounts had been identified by the monitoring
process as being likely to result in a loss, beyond a small number
of Titlestone accounts identified on acquisition and allowed for in
the purchase price. The average loan to gross development value for
the portfolio at the year end, a measure of security cover, was
63.2% (2017: 60.6%). This increase reflects the initially cautious
launch of the product in 2017 and the mix effect from the acquired
portfolio.
Overall the charge for impairment in the segment was GBP2.0
million (2017: GBP0.1 million), which remains low relative to the
book size.
Outlook
The Group's intention is to continue to develop its businesses,
selectively focussing on those areas where the greatest return can
be achieved. This will involve both increasing the reach of its
existing offerings and adding further product lines or specialisms,
to improve the diversity of its loan book. It will also prioritise
maintaining margins and customer relationships in the existing
books. The division seeks to be responsive and flexible in
addressing the market, but its UK focus means that it is exposed to
a downturn in investment amongst UK business as a whole.
The coming year will see the continuation of the integration of
the Group's development finance operations and the geographical
expansion of the proposition within the UK. The continued growth of
the aviation finance and structured lending products is also
anticipated. A particular priority will be the on-going integration
of the acquired operations into the division.
Overall the division has a good platform on which to build and
increasing scale and diversity will enable a better return to be
generated from its resources, control framework and investments in
systems.
Idem Capital
The Group's Idem Capital division includes its acquired loan
portfolios, together with its pre-2010 legacy consumer
accounts.
Idem Capital has a strong capability in loan administration and
an ability to self-develop systems, allowing it to respond to
regulatory developments and more specialised portfolio
requirements. Unlike many market participants, Idem Capital is able
to deploy securitisation and particularly retail funding to support
its investment.
The division's focus is on acquiring portfolios where it can
enhance value through its collections process and access to
funding, and which will augment the organic origination activities
of the Group. It uses its analytical skills base, which it sees as
a core differentiator, to identify and evaluate portfolios brought
to market against these criteria. Its principal area of focus over
recent years has been on portfolios of UK paying secured and
unsecured consumer finance balances, but it has the capability to
leverage Group expertise in other asset classes which was used in
the year.
It is also willing to consider transactions, deal by deal, on a
partnership basis, having acted as a co-investor, servicer or both
in various deals in the past. All opportunities are considered.
Overall Idem Capital's success rests on understanding assets,
strong analytics, advanced servicing capabilities and the efficient
use of funding.
Lending activity
Towards the end of the year the Group completed a GBP83.4
million portfolio purchase of primarily motor finance receivables.
The loans, acquired from a UK bank, were predominantly performing,
asset-backed, UK loans and have been successfully migrated on to
the Group's systems where they will be managed through their normal
contractual lives. This was the sole purchase in the year and
represents Idem Capital's first purchase outside its traditional
target areas of secured and unsecured consumer loans, providing an
excellent example of the division acquiring portfolios of recently
originated and performing loans to complement the Group's broader
new business flows.
The portfolio purchase market has continued to be busy with a
large number of participants bidding on transactions. The operation
participated in all of the significant bid processes in its target
asset classes, including some very large transactions, but market
pricing has generally been aggressive and has driven up bidding on
some transactions beyond levels where the Group considers them to
be capable of achieving satisfactory return levels within its risk
appetite. Activity in the asset sales market tends to be 'lumpy'
and the Group's level of investment in any period will reflect the
number, type and quality of portfolios offered, together with the
levels of return other market participants are willing to
accept.
The Group believes that its ability to accurately evaluate a
potential acquisition is a core strength and it is not willing to
compromise on credit quality or target return levels in pursuit of
volumes. Idem Capital remains on the panels of all the principal UK
vendors.
The Group completed a disposal of assets with a carrying value
of GBP54.7 million in the final quarter of the year, realising a
profit of GBP28.0m against book value. The Group took the decision
to crystallise the opportunity presented by a strong market price
for the assets sold to realise a capital gain and to recycle this
capital to support further growth in the commercial lending
division, where the acquisition of Titlestone took place in the
same quarter.
The sale also enabled the repayment of Idem Capital's external
funding facility, incurring exit costs of GBP1.2m, including break
fees and accelerated amortisation of capital structuring costs.
Performance
The value of the loan balances in the segment are set out below,
analysed by business line.
30 September 2018 30 September 2017
GBPm GBPm
Second charge mortgage loans 274.6 392.3
Unsecured consumer loans 173.7 219.1
Motor finance 72.8 -
------------------ ------------------
521.1 611.4
================== ==================
The reduction in balances is a result of the scale of
realisations from the brought forward consumer loans portfolios,
together with the asset disposals in the year. This was offset,
partially, by the asset finance portfolio acquisition.
120 month Estimated Remaining Collections ('ERC') on acquired
consumer assets reduced from GBP688.8 million at 30 September 2017
to GBP489.6 million at the year end, for the same reasons. It
should be noted, however, that as the asset finance portfolio
acquired during the year was not acquired at a discount and valued
on a cash flow basis, its future recoveries are not included in the
ERC amounts.
Margins achieved by Idem Capital vary materially by portfolio
and are also impacted by the strength of cash generation,
particularly when this exceeds expectations for assets acquired at
a discount. Where purchases are focussed on performing portfolios,
the margin dynamics will more closely resemble those achieved by
similar originated assets. The sale of loan balances during
September will serve to accelerate this mix-led change in margin
profile for the division.
Maintaining a high level of customer service is key to the
success of Idem Capital and complaints and compliance issues in the
acquired portfolios remained low in the period. Flows of redress
cases, where the original lender is required to compensate the
customer for conduct issues on acquired accounts, have increased in
the period. It should be noted that the terms of loan acquisitions
generally leave responsibility for pre-acquisition conduct issues,
such as Payment Protection Insurance ('PPI'), with the vendor, not
the Group. The Group's recorded complaint levels, on the measures
published by the Financial Ombudsman Service, remain very low with
only 58 new complaints in the six months ended 30 June 2018, while
the Group's overturn rate in the same period, where the ombudsman
reversed the Group's decision, at 35%, is broadly in line with the
30% average for the industry. Operational improvements have
continued to be made in systems, processes and employment patterns
which are expected to generate operational efficiencies in future
periods.
Arrears on the segment's secured lending business have improved
to 15.8% (2017: 17.5%), the reduction arising from the sale of some
of the poorer performing accounts in the year. These arrears levels
remain higher than the average for the sector, but this reflects
the seasoning of the balances, which are mostly more than ten years
old and the inclusion of accounts which are currently making full
monthly payments but had missed payments at some point in the past.
Average arrears for secured lending of 9.4% at 30 September 2018
were reported by the FLA (2017: 11.2%).
None of the division's remaining portfolios at the year end were
regarded as materially underperforming, with strong overall cash
generation. The Group monitors actual cash receipts from acquired
portfolios against those forecast in the evaluation which informed
the purchase price. Up to 30 September 2018 such collections were
109.7% of those forecast to that point (2017: 109.3%).
Overall the segment had a credit for impairment of GBP0.1
million (2017: GBP1.5 million charge), representing the stable
arrears position and the impact of improving house prices on
secured provisioning.
Outlook
While the Group expects that flows of assets for disposal will
continue to build, increasing economic uncertainty may restrict the
scope for vendors and purchasers to arrive at mutually acceptable
pricing, especially for unsecured assets and the flow of completed
deals in the market may slow down.
The division's strategy in this market will continue to focus on
transactions which are more idiosyncratic in nature and therefore
make best use of its core skills in pricing, data, operations and
account management in generating value, together with the purchase
of portfolios of performing loans similar in nature to those being
originated within the Group's Mortgages and Commercial Lending
divisions.
The business will continue to maintain its detailed and
disciplined approach to evaluating, pricing and bidding on
portfolios, not compromising on margins and risk, ensuring that the
Group's capital is appropriately deployed and thereby generating
appropriate shareholder value.
The division is well placed to manage its assets going forward,
and the refocus of the portfolio in the period should reduce credit
exposures if economic conditions in the UK deteriorate.
FUNDING REVIEW
Over the past five years the Group has transitioned from being
entirely wholesale funded to its present broadly diversified
funding model, focussed around its retail savings deposit
flows.
Debt and deposit funding
During the year, the Group continued its strategy of focussing
its funding on its retail savings capability. However, having also
optimised its use of central bank funding at attractive rates to
support lending during the early part of the year, the Group
completed a securitisation transaction in April 2018, taking
advantage of strong investor demand and the attractive rates then
available to structure its first deal since 2015. The growth of
retail deposit funding flows also allowed the Group to reduce the
amount of warehouse funding facilities required to support for new
lending during the year.
The Group's funding at 30 September 2018 is summarised as
follows:
2018 2017 2016
GBPm GBPm GBPm
Retail deposit balances 5,296.6 3,615.4 1,873.9
Securitised and warehouse funding 6,490.3 7,781.8 9,947.1
Central bank facilities 1,024.4 700.0 -
Tier 2 and retail bonds 445.4 444.8 554.3
--------- --------- ---------
Total on balance sheet funding 13,256.7 12,542.0 12,375.3
Off balance sheet central bank facilities 108.7 109.0 108.8
--------- --------- ---------
13,365.4 12,651.0 12,484.1
========= ========= =========
The Group actively prepares its interest rate exposure position
for likely increases in UK interest rates indicated by Bank of
England guidance. The risk of a downward movement in rates in
recent years has been limited by an apparent absolute lower bound
on market rates. This will cease to be the case as rates rise and
this is addressed by the Group's treasury policy. The Group's
funding and hedging policies are also influenced by the levels of
longer-dated fixed rate products now being offered, and it is
seeking, where possible, to increase the levels of maturity
matching in its overall balance sheet position.
Retail funding
The Group's savings business provides customers with a range of
deposit options, offering value for money and competitive rates,
combined with the protection provided by the Financial Services
Compensation Scheme ('FSCS'). The business currently sources all
deposits through its website, with its strong repeat business and
net promoter scores complemented by access to price comparison
websites and recommendations from industry savings experts. The
business model provides the Group with a stable funding platform,
with a focus on term funding to manage interest rate risk and the
ability to limit product availability to short periods of time. At
the end of the period 74.5% of deposits were term or notice
accounts (2017: 83.3%).
Retail deposits continue to represent a reliable, cost-effective
and scalable source of finance for the Group. As a consequence of
the preference for retail funding in the Group funding strategy,
the volume of retail deposits has continued to grow significantly
during the period, with balances at 30 September 2018, at
GBP5,296.6 million, having increased by 46.5% over the year (2017:
GBP3,615.4 million).
However, this represents only a small proportion of the UK
savings market, with household savings balances reported by the
Bank of England increasing by 4.9% in the year ended 30 September
2018 to GBP1,174.6 billion (2017: GBP1,119.2 billion), although
these deposits remain overwhelmingly with clearing banks and
building societies. The strong supply has helped to maintain the
recent trend for low savings rates with the average annual interest
on two-year fixed interest bonds, reported by the Bank of England,
having increased from 1.26% in September 2017 to 1.42% in September
2018, with rates on one-year bonds increasing slightly from 0.78%
in September 2017 to 0.95% in September 2018, the increases being
less than the base rate increases in the same period. It does not
appear, therefore, that the closure of the TFS to new drawings in
February 2018 has had any material impact on rates in the savings
market although the trend of rates has been generally upwards.
New entrants to the banking market have adopted similar
approaches to the savings market as the Group, and therefore
competition for internet-sourced deposits is increasing. The level
of competition forces the Group to remain competitive on pricing,
products and service. Even so, rates may be influenced by the
funding needs of other participants in the market, which are beyond
the Group's control.
During the year the savings business has continued to develop to
address these competitive challenges, with improvements to
customers' ability to access their accounts, improved service from
the website and enhanced opening hours of our telephone support
group.
Savings balances at the year end are analysed below.
Average interest Average initial Proportion of
rate balance deposits
2018 2017 2018 2017 2018 2017
% % GBP000 GBP000 % %
Fixed rate deposits 1.94% 1.89% 19 24 68.8% 74.0%
Variable rate deposits 1.36% 1.21% 16 19 31.2% 26.0%
--------- -------- -------- -------- ------- -------
All balances 1.76% 1.71% 18 23 100.0% 100.0%
========= ======== ======== ======== ======= =======
The average initial term of fixed rate deposits was 27 months
(2017: 28 months).
The proportion of short term deposits (easy access and those
available at three months' notice or less) has increased in the
period to 30.3% (2017: 22.6%), representing GBP1,606.0 million of
the balance (2017: GBP1,035.4 million). This has been driven by
market requirements, as customer anticipation of rate rises in the
near term leads to a preference for short-dated deposits.
The Group's products process and approach have been recognised
in the industry and by customers and during the year it won the
'Best Monthly Interest Provider' award in the 2018 Moneynet awards
and was named as the 'Best Long-term Fixed Rate Cash ISA Provider'
in the 2018 SavingsChampion.co.uk awards.
In customer feedback 90% of those opening a savings account with
the Group in the year, who provided data, stated that they would
'probably' or 'definitely' take a second product (2017: 87%). The
net promoter score in the same survey was +61, up from +59 for the
2017 financial year.
When customers with maturing savings balances in the year were
surveyed 90% stated that they would 'probably' or 'definitely'
consider taking out a replacement product with the Group (2017:
89%) with a net promoter score (the excess of positive over
negative feedback per 100 respondents) at maturity of +50, up from
+42 for the 2017 financial year. This performance is particularly
valuable to the Group, given the benefits of customer, and deposit,
retention.
The Group's outsourced administration platform continues to meet
its needs and provides a cost-effective, stable and scalable
solution in the medium to long term, with a new agreement having
been signed in the period to provide longer-term security to this
important commercial relationship.
In order to broaden the franchise and reduce dependence on
price-comparison websites as a source of customers, the Group has
been working to develop alternative routes to market, which are
expected to be rolled out during the coming year. This includes the
launch of the Group's savings products on the Hargreaves Lansdown
Active Savings platform after the year end. It is also
investigating potential new savings products and customer groups,
in order to mitigate the pressure on rates which is imposed by
competitive pressures, and to ensure it manages its increasing
levels of maturing retail balances effectively.
The size and diversity of the Group's deposit base is expected
to continue to expand, forming the principal funding source for new
lending activities. The guarantee provided by the FSCS scheme is
likely to reduce the potential for an economic downturn to impact
liquidity and the profile of the Group's target customers suggests
that they are likely to be resilient in those circumstances.
Wholesale funding
The performance of the UK wholesale funding markets over the
year has been mixed, with more activity than in recent periods,
particularly following the cessation of the TFS. Pricing has,
however, been subject to some volatility, being attractive in the
early part of the year, while becoming more expensive again towards
the end of the period, with increases driven by increasing UK
inflation, concerns over international trade, the impact of
uncertainty in Italy and a lack of clarity on the terms of the UK's
exit from the EU.
The Group's strategic objective of creating a broader-based
funding structure, coupled with the availability of attractively
priced funding from the Bank of England during the first half of
the period, has meant that its use of securitisation and similar
funding tools is presently limited to those instances where a
particularly compelling case can be made in terms of the tenor,
cost and availability of the funding. As a result, the Group did
not access the public securitisation market after November 2015
until April 2018, when Paragon Mortgages (No. 25) PLC ('PM25') was
launched. This was the largest value and lowest interest margin
transaction completed by the Group since 2007.
PM25, backed by a mixture of new and legacy buy-to-let mortgage
assets, raised GBP435.3 million of external funding in sterling
Mortgage Backed Floating Rate Notes. The senior notes were rated
AAA by Fitch and Aaa by Moodys and bear interest at London
Interbank Offered Rate ('LIBOR') plus a margin of 0.65%. The
initial average rate on the external notes was 0.72% above
LIBOR.
The transaction contained several novel features, which enhanced
its value to the Group's funding strategy. It has the capacity to
accept further loans, rather than repaying redemption monies
immediately. This extends the expected life to five years, rather
than four and makes the funding both more cost-effective and more
suitable for the five-year fixed rate mortgage products which are
becoming increasingly popular in the market. The deal also
generated internally held rated notes which may either be sold
later or used as collateral for Bank of England facilities, giving
the Group significantly enhanced funding and liquidity options.
During the year the Group paid down two securitisation
transactions, one funding legacy mortgages and one funding
post-2010 mortgages. These assets were refinanced, principally with
retail deposits, releasing significant cash balances for use
elsewhere in the Group. After the year end notice was given on a
further legacy mortgage transaction and the Group's remaining
consumer finance transaction. Further such refinancing transactions
should be expected over the coming years.
As a consequence of the increased focus on retail deposit
funding, the Group's warehouse capacity, which had been used to
fund buy-to-let mortgage originations, was rationalised, with the
GBP550.0 million of capacity which existed at 30 September 2017
being closed out in the year. The Group recognises the benefit of
wholesale warehouse funding to provide standby capability,
particularly in the event of market disruption elsewhere, and as an
alternative to retail deposit funding for liquidity purposes.
Following the year end a new GBP200.0 million facility was agreed
with Bank of America Merrill Lynch. With an interest rate of LIBOR
plus 0.95%, this will provide a source of cost-effective standby
funding.
The Group continues to regard wholesale and structured lending
as an important part of its funding mix, but these markets will
only be accessed where it is appropriate and cost effective to do
so.
Central bank facilities
The Group has continued to access the funding facilities offered
by the Bank of England, which provide flexible, low-cost
collateralised loans designed to reinforce the transmission of low
base rates to households and businesses.
The most significant of these facilities for the Group has been
the TFS, which was available for new drawings until February 2018
and was used by the Group to support new lending. Drawings on this
facility were made against the security of pools of mortgage loans.
The interest cost of new TFS funding was very attractive, compared
with either retail deposits or securitisation, and repayment is due
four years after the drawing, in 2021/22. In common with many UK
institutions, the Group made extensive use of the TFS up to its
withdrawal and drawings by the scheme's closure had increased to
GBP944.4 million, which remained in place at the year end (2017:
GBP700.0 million), providing 7.1% of the Group's external funding.
The Group also has access to the short term Indexed Long-Term Repo
scheme ('ILTR'), which gives access to six-month liquidity from the
Bank of England, secured against pre-positioned pools of
assets.
The Group's liquidity drawdown under the Funding for Lending
Scheme ('FLS'), which provides liquidity of GBP108.7 million (2017:
GBP109.0 million) remained in place throughout the period. The
terms of this facility are such that neither the drawing nor the
liquidity provided appear on the Group's balance sheet.
The Group has also pre-positioned further mortgage loans and
certain other assets with the Bank of England to act as collateral
for further drawings on central bank funding lines, if and when
required.
The Group will continue to access these facilities in future, as
part of its overall funding framework.
Funding for Idem Capital assets
Idem Capital utilised retail deposit financing for its GBP83.4
million portfolio purchase in July 2018. This was made possible by
the quality of the portfolio acquired, with the profile of the
loans acquired more closely matching new motor and asset finance
originations in the Commercial Lending segment and therefore
meeting the Bank's risk appetite.
During the year Idem Capital has had a non-recourse funding
facility with Citibank, which was used to fund assets from time to
time. This facility was paid down in September 2018, when the loans
it had funded were either sold or refinanced, more
cost-effectively, with retail deposits. Idem Capital's strategic
focus on better quality portfolios, which are more suitable for
retail deposit funding, meant that the facility was less relevant
to its on-going operations.
Certain legacy assets, principally second charge mortgage
balances, are also funded through pre-credit crisis securitisation
structures.
Corporate funding
While the Group's working capital has been primarily provided by
equity since 2008, in recent years it has expanded its use of
corporate debt funding, issuing both retail bonds and Tier 2
corporate bonds. All the Group's working capital debt funding has
been raised since the credit crisis and therefore there are no
legacy issues relating to these borrowings.
The Group is rated by Fitch Ratings, which reviewed its rating
in the light of the Group's 2017 reorganisation and, on 6 April
2018, upgraded its Long-Term Issuer Default Rating to BBB from BBB-
rating with a stable outlook. The BB+ rating on the Group's GBP150
million Tier 2 Bond was also upgraded to BBB- at the same time.
Although no corporate debt was issued in the period, such
borrowings continue to form part of the Group's long-term funding
strategy and the enhanced rating will support further long-dated
corporate debt issuance in both scale and pricing terms.
Summary
The Group's overall funding position remains strong. Retail
deposit flows represent the core element in the funding programme,
however the successful securitisation in the year demonstrates the
continuing benefits delivered by a diversified funding base.
Further information on all the above borrowings is given in note
21.
Capital management
The Group's funding model places primary reliance on retail
deposit funding, which has fundamentally changed the working
capital cycle of the Group, reducing the variability in working
capital demand and hence enabling an on-going reduction in working
capital levels relative to the size of the balance sheet.
Dividend and dividend policy
In its 2017 results announcement the Company announced a policy
of targeting a dividend cover ratio of 2.75 times in 2017 and 2.50
times in the current financial year and thereafter, subject to the
requirements of the business and the availability of cash
resources. The final dividend for the year ended 30 September 2017,
paid in the year, was declared in accordance with that policy.
To provide greater transparency, the Company also indicated that
its interim dividend per share will normally be 50% of the previous
final dividend, in the absence of any indicators which might make
such a level of payment inappropriate and an interim dividend for
the year of 5.5 pence per share was paid in July 2018 in accordance
with this policy.
In determining the level of dividend for the year, the Board has
considered the dividend policy, but has also taken into account the
Group's strategy, capital requirements, principal risks, the level
of available retained earnings in the Company, its cash resources
and the objective of enhancing shareholder value. In particular the
Board considered the capital requirements of the businesses
acquired in the year and the nature of the significant one-off
items of cost and income included in the result for the year. The
Board determined that the existing policy remained appropriate, but
that the one-off items, which do not relate to ongoing earnings
generation would be excluded from the earnings used to derive the
dividend.
On this basis, the Board is proposing, subject to approval at
the Annual General Meeting on 14 February 2019, a final dividend of
13.9 pence per share which, when added to the interim dividend,
gives a total dividend of 19.4 pence per share for the year. This
represents an increase of 23.6% from 2017, bringing the dividend
cover to 2.5 times, based on earnings excluding one-off items
(2017: 2.75 times) (note 4(a)).
Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision, the regulator will issue individual capital guidance
setting an amount of regulatory capital, defined under the
international Basel III rules, implemented through the Capital
Requirements Regulation and Directive ('CRD IV'), which the Group
is required to hold relative to its risk weighted assets in order
to safeguard depositors in the event of severe losses being
incurred by the Group. During the year the PRA determined that the
amount of the regulatory capital required should be disclosed by
firms in their public reporting.
The Group maintains extremely strong capital and leverage
ratios, with a total capital ratio of 16.2% at 30 September 2018
(2017: 18.7%) and a UK leverage ratio at 6.4% (2017: 6.6%) (note
4(d)). The CET1 ratio, 13.8% at 30 September 2018, reduced during
the period (2017: 15.9%), reflecting the growth in the balance
sheet, acquisition of goodwill and distributions to shareholders
though buy-backs and dividends. The Group's medium term CET1 target
remains at 13.0%.
The Group's total regulatory capital at 30 September 2018 was
GBP1,045.7 million (2017: GBP1,030.5 million), a level in excess of
the amount required by the PRA guidance, including the GBP727.7
million required in respect of Pillar 1 and Pillar 2a. This amount
includes variable and fixed components and further capital buffers,
either specific to the Group or applicable across the sector, may
also be required.
In December 2017, the BCBS published its final proposals
regarding amendments to the assessment of institutions' capital
adequacy, in its document 'Basel III: Finalising post-crisis
reforms'. This addresses both the Standardised Approach ('SA') for
credit risk, presently used by the Group and the Internal Ratings
Basis ('IRB'), which is based on firms' own internal calculations
and subject to supervisory approval.
The new BCBS rules are scheduled to take effect from 1 January
2021 and the most material change for the Group relates to an
increase in the risk weightings applicable to buy-to-let lending
assets. The proposals may also serve to limit the comparative
advantage available to IRB users over SA users through the use of
floors, setting minimum capital requirements where the IRB is used.
The final proposals are much less severe in their treatment of
buy-to-let, amongst other asset classes, than the proposals
published two years earlier, but would still require the Group to
carry increased capital. The final version of the framework still
needs to be enacted into EU law to take effect and there are
important areas where discretion is given to national supervisors
or other competent bodies. Therefore, the full impact of the
reforms will not be certain until the legislative process is
complete, and the appropriate bodies have made their intended use
of their discretions clear. The Group will be closely monitoring
developments as this process progresses.
The Group also notes the steps taken by the PRA towards using
its assessment of Pillar 2 capital to reduce the perceived capital
disadvantage of banks using the SA compared to IRB banks, which the
regulator regards as distortive to the market. The PRA published
its final policy statement on this in October 2017, and the Group
is considering its potential impact, when taken with the Basel
reforms described above.
IRB approach
The Group continues to develop its own IRB approach to credit
risk, notwithstanding the outcome of the CRD and PRA processes. It
has substantial performance data, excellent credit metrics and core
competences in credit risk and analytics to support the adoption of
an IRB approach for determining appropriate risk weightings for its
assets.
In addition to the potential capital advantages from adopting
the IRB approach, the Group sees broader business benefits from
adopting the disciplines required by IRB as a core part of its risk
management structure, which should lead to further enhancements in
the internal risk governance framework.
Other UK institutions currently using an IRB approach for their
buy-to-let portfolios achieve materially lower risk weightings than
the 35% required by the present SA, with PRA benchmark figures,
most recently updated in October 2017, being typically in the low
to mid-teen percentages.
The Group expects to be in a position to apply formally to the
PRA for IRB authorisation for its buy-to-let and development
finance portfolios in early 2019. These will be the first portfolio
for which authorisation is sought, with development work continuing
for further asset classes which will be added on a phased basis to
achieve the coverage required by the IRB rules.
Liquidity
The Group's operational capital and funding requirements are
also influenced by the need to retain sufficient liquidity in the
business to meet its cash requirements in the short and long term,
as well as to provide a buffer under stress. There is also a
regulatory requirement to hold liquidity in Paragon Bank. The Board
regularly reviews liquidity risk appetite and closely monitors a
number of key internal and external measures. The most significant
of these, which are calculated for the Paragon Bank regulatory
group on a basis which is standardised across the banking industry
are set out below.
Indicator 2018 2017 Regulatory minimum
LCR - Liquidity coverage ratio 144% 246% 100%
NSFR - Net stable funding requirement 113% 118% 100% ++
===== ===== ===================
++ From 1 January 2019
This shows the available liquidity at the year end to be well in
excess of regulatory minimums.
Gearing and share buy-backs
The Group's reorganisation completed in 2017, coupled with the
strong capital base and low leverage, provide the opportunity for
the business to reduce its over-reliance on equity capital,
improving returns for shareholders. The future requirement to raise
debt for liquidity purposes has been reduced by its access to
retail deposit funding and the Group is able to take a long--term
view of opportunities available to it in the corporate debt markets
to optimise its funding, working capital and regulatory capital
position over time.
At the same time the Group will carefully monitor any excess
equity position and consider whether any adjustment is required,
either through further changes in the dividend policy or through
share buy--backs.
In November 2014 the Company announced a share buy-back
programme, which had been extended to GBP215.0 million by November
2017. During the year the Group bought back 5.1 million of its
ordinary shares at a cost of GBP25.2 million, including stamp duty
and transaction expenses (note 26); these shares being held in
treasury. Treasury shares may subsequently be cancelled.
Since the programme commenced in 2014 the issued share capital
has reduced from 306.6 million shares to 260.7 million shares, a
decrease of 15.0%. The size and timing of the programme is reviewed
periodically to take account of anticipated investment
opportunities and the balance of the Group's debt and equity
capital resources.
As a result of the potential capital requirements of the
Titlestone acquisition the programme was suspended during the year
and no further buy-backs are proposed in the short term.
Capital outlook
The appropriate level of capital for the business to meet its
operational requirements and strategic development objectives is
kept under review by the Board, in particular when major
acquisitions or other significant changes take place. The strength
of the Group's business lines, the diversification which has been
achieved in the funding base in recent years and the further
opportunities for growth and sustainability opened up by the group
reorganisation in 2017, provide the foundations for the capital
base to sustain the Group going forward.
FINANCIAL REVIEW
The financial year ended 30 September 2018 saw the Group's
underlying profit (appendix A) increase by 7.8% to GBP156.5 million
(30 September 2017: GBP145.2 million) while on the statutory basis
profit before tax increased by 25.3% to GBP181.5 million (30
September 2017: GBP144.8 million) including a gain on the scale of
financial assets of GBP28.0m. Earnings per share increased by 29.7%
to 55.9 pence on the statutory basis (30 September 2017: 43.1
pence) and by 11.3% to 48.2 pence on an underlying basis (30
September 2017: 43.3 pence).
Results for the year
CONSOLIDATED RESULTS
For the year ended 30 September 2018
2018 Underlying 2018 Adjustments 2018 2017
(App. A) Total
GBPm GBPm GBPm GBPm
Interest receivable 451.7 0.2 451.9 409.2
Interest payable and similar
charges (195.2) (2.1) (197.3) (176.6)
---------------- ----------------- --------- ---------
Net interest income 256.5 (1.9) 254.6 232.6
Net leasing income 3.8 - 3.8 3.0
Gain on disposal of financial
assets - 28.0 28.0 -
Other income 15.5 - 15.5 17.2
---------------- ----------------- --------- ---------
Total operating income 275.8 26.1 301.9 252.8
Operating expenses (111.9) (2.3) (114.2) (102.3)
Provisions for losses (7.4) - (7.4) (5.3)
---------------- ----------------- --------- ---------
156.5 23.8 180.3 145.2
Fair value net gains /
(losses) - 1.2 1.2 (0.4)
---------------- ----------------- --------- ---------
Operating profit being
profit on ordinary activities
before taxation 156.5 25.0 181.5 144.8
================ =================
Tax charge on profit on
ordinary activities (35.7) (27.6)
--------- ---------
Profit on ordinary activities
after taxation 145.8 117.2
========= =========
2018 2017
Dividend - rate per share
for the year 19.4p 15.7p
Basic earnings per share 55.9p 43.1p
Diluted earnings per share 54.2p 41.9p
========= =========
The exclusions from underlying results above (appendix A) relate
principally to the acquisitions and asset sales in the period which
do not form part of the day-to-day activities of the Group. The
adjustments reduce earnings and related measures but have been made
to provide greater clarity to users on the operating performance of
the business.
The acquired Iceberg and Titlestone businesses contributed
GBP4.1 million to underlying profits and GBP1.9 million to
statutory profits. This contribution is expected to increase going
forward.
Total underlying operating income increased by 9.1% to GBP275.8
million (2017: GBP252.8 million). Total operating income on the
statutory basis, at GBP301.9 million (2017: GBP252.8 million) also
included the GBP28.0m one off gain on Idem Capital asset disposals
arising in the year. Net interest income increased by 9.5% to
GBP254.6 million from the GBP232.6 million recorded in the year
ended 30 September 2017. The increase reflects growth in the size
of the average loan book, which rose by 6.4% to GBP11,626.0 million
over the year (2017: GBP10,930.8 million) (appendix B).
Underlying net interest margin ('NIM') in the year ended 30
September 2018 increased to 2.21% compared to the 2.13% in the
previous year (appendix C). On the statutory basis, which includes
the costs of building up the cash balances required for the
Titlestone acquisition and the break costs of the Idem funding
facility, the NIM was 2.19% (2017: 2.13%) (appendix C). The
increase in NIM is in line with guidance given at the half
year.
During the year, a gain of GBP28.0 million, was realised on the
sale of long-standing Idem Capital consumer loan assets where the
EIR based accounting, coupled with movements in the debt purchase
market caused the carry and market values to diverge markedly.
After costs incurred on the settlement of related funding
arrangements the net gain was GBP26.8 million. This disposal
represents a major refocus of the Idem Capital operation and
included assets purchased in a large number of different
transactions. It also supports the redistribution of capital to the
Group's growth businesses, with the Titlestone acquisition
occurring in the same quarter. As such, this gain is unlikely to be
repeated in future periods.
Excluding the gain on disposal, other operating income was
little changed at GBP19.3 million for the year, compared with
GBP20.2 million in 2017.
Underlying operating expenses increased by 9.4% to GBP111.9
million from GBP102.3 million reported in the previous year, partly
reflecting the increase in the average number of employees to
1,349, a 2.4% rise (2017: 1,317) and the level of employees joining
the payroll in the period, which saw employment costs increase by
13.3% year on year. The year has also seen significant investments
in systems and personnel in order to support the development,
launch and start up phases of new product lines such as development
finance, structured lending and aviation finance. Further
investment was made to support the expansion of existing business
lines, to enhance the Group's operational resilience, to improve
its cyber security and to meet its General Data Protection
Requirements ('GDPR') requirements. Despite this, the overall
underlying cost:income ratio remained stable at 40.6% (2017: 40.5%)
(appendix C) and remains significantly below the industry
average.
The Board remains focussed on controlling operating costs
through the application of rigorous budgeting and monitoring
procedures and the underlying costs for the period and in line with
guidance given to the market. The Group expects the overall
cost:income ratio to improve over time as acquired and start-up
operations are integrated into the Group and it starts to see the
benefits of income growth from its new and expanded operations.
Total operating expenses, which included the costs of the
Iceberg and Titlestone acquisition transactions, increased by 11.6%
to GBP114.2 million (2017: GBP102.3 million), giving a cost:income
ratio on a statutory basis of 37.8% (appendix C).
The charge of GBP7.4 million for loan impairment has increased
from that for 2017 (2017: GBP5.3 million). As a percentage of
average loans to customers (appendix B) the impairment charge
remains broadly stable at 0.06% compared to 0.05% in 2017. The
Group has seen favourable trends in arrears performance over the
period, both in terms of new cases reducing and customers
correcting past arrears, whilst increasing property values have
served to reduce overall exposure to losses on enforcement of
security. The loan books continue to be carefully managed and the
credit performance of the buy-to-let book remains exemplary.
Yield curve movements during the period resulted in hedging
instrument fair value net gains of GBP1.2 million (2017: GBP0.4
million net losses), which do not affect cash flow. The fair value
movements of hedged assets or liabilities are expected to trend to
zero over time, as such this item represents a timing difference.
The Group remains economically and appropriately hedged.
Corporation tax has been charged at the rate of 19.6%, increased
from 19.1% for the previous year. The reduction in the underlying
rate of UK corporation tax applying to the Group in the year, from
19.5% to 19.0%, has been offset by the increased proportion of the
Group's profit to which the 8.0% Bank Tax Surcharge applies.
Profits after taxation of GBP145.8 million (2017: GBP117.2
million) have been transferred to consolidated equity, which
totalled GBP1,095.9 million at the year end (2017: GBP1,009.4
million), representing a tangible net asset value of GBP3.59 per
share (2017: GBP3.45 per share) and an unadjusted net asset value
of GBP4.25 per share (2017: GBP3.84 per share) (appendix D).
Segmental results
The Group analyses its results between three segments, which are
the principal divisions for which performance is monitored:
-- Mortgages, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's equipment and motor
finance leasing activities, together with development finance,
structured lending and other offerings targeted towards SME
customers
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
The Group's central administration and funding costs,
principally the costs of service areas, establishment costs, and
bond interest have not been allocated. Items excluded from
underlying profit have also been included in unallocated costs, as
these are not included in divisional results internally.
The underlying operating profits of these business segments are
detailed fully in note 8 to the accounts and are summarised
below.
2018 2018 2018 2017
Segment One off Total
GBPm GBPm GBPm GBPm
Segmental profit
Mortgages 144.8 - 144.8 143.3
Commercial Lending 19.9 (0.1) 19.8 14.1
Idem Capital 78.2 26.8 105.0 75.9
-------- -------- ------- -------
242.9 26.7 269.6 233.3
Unallocated central
costs (86.4) (2.9) (89.3) (88.1)
-------- -------- ------- -------
156.5 23.8 180.3 145.2
======== ======== ======= =======
Mortgages
Trading activity during the year in the Mortgages division
delivered further growth during the year, with the segmental profit
at GBP144.8 million, up 1.0% from the previous year (2017: GBP143.3
million). Net interest income increased by 4.3% to GBP157.6 million
(2017: GBP151.1 million), broadly in line with the growth in the
loan book of 5.2%. The costs of the division increased as a result
of higher activity levels while other income reduced during the
period, in part reflecting an increasing trend for borrowers to
choose fee-free loan products. The overall result was also affected
by a GBP1.8 million increase in impairment provision in the year,
with the variance arising on a small number of legacy loans.
Commercial Lending
Segmental profit in Commercial Lending increased 41.1% in the
year to GBP19.9 million (2017: GBP14.1 million). The operations
acquired in the year, Iceberg and Titlestone contributed GBP4.1
million to the divisional operating result. Excluding the GBP229.3
million of acquired assets, the loan book grew 61.8% in the year,
and reached GBP1,133.2 million at 30 September 2018, driving the
increase in net interest income.
A number of business units within the Commercial Lending segment
remain in start-up phase, including the structured lending area,
which made a loss during the period and is expected to make a
positive contribution during 2019.
Idem Capital
The Idem Capital division's portfolios continued to perform well
in the year to 30 September 2018. Strong cash performance in the
year supported an increase in segmental profit of 3.0% to GBP78.2
million (2017: GBP75.9 million).
In September a sale of some non-core low-quality balances from
the division's older portfolios realised a net gain of GBP26.8
million, after allowing for break costs in associated funding
arrangements.
Assets and liabilities
SUMMARY BALANCE SHEET
30 September 2018
2018 2017
GBPm GBPm
Intangible assets 169.3 104.4
Investment in customer loans 12,127.8 11,124.1
Derivative financial assets 855.7 906.6
Free cash 238.0 305.5
Other cash 1,072.6 1,191.4
Other assets 51.7 50.2
--------- ---------
Total assets 14,515.1 13,682.2
========= =========
Equity 1,095.9 1,009.4
Retail deposits 5,296.6 3,615.4
Borrowings 7,961.2 8,927.2
Pension deficit 19.5 29.8
Other liabilities 141.9 100.4
--------- ---------
Total equity and liabilities 14,515.1 13,682.2
========= =========
The increase in intangible assets results from GBP65.5 million
of intangible assets and goodwill recognised on the Iceberg and
Titlestone acquisitions in the year. The valuation of these assets
was reconsidered at the year end and is presently considered to be
appropriate.
The Group's loan assets include:
-- Buy-to-let and owner-occupied first mortgage assets in the Mortgages segment
-- Second charge mortgages, with new originations in Mortgages
and purchased and similar legacy assets in Idem Capital
-- Other unsecured consumer lending in Idem Capital
-- Asset finance and motor finance loans in the Commercial
Lending segment, with similar purchased accounts in the Idem
Capital segment
-- Development finance loans in the Commercial Lending segment
-- Structured lending loans in the Commercial Lending segment
-- Professions finance, invoice finance and other finance for
SME businesses in the Commercial Lending segment
The allocation of these loan assets between segments is set out
below.
2018 2017
GBPm GBPm
Mortgages 10,473.5 9,953.9
Commercial Lending 1,133.2 558.8
Idem Capital 521.1 611.4
--------- ---------
12,127.8 11,124.1
========= =========
An analysis of the Group's financial assets by type is shown in
note 16. Movements in the Group's loan asset balances are discussed
in the lending review section.
Movements in derivative financial assets arise principally as a
result of the effect of changes in exchange rates on instruments
forming cash flow hedges for the Group's floating rate notes. These
movements do not impact on the Group's results.
Cash flows from the Group's loan portfolios remained strong
during 2018. These flows, together with an increased deposit base,
financed the expansion of the Group's loan book, supported
portfolio and business acquisitions and underpinned an increased
dividend payment to the Group's shareholders. Cash was also
utilised in the share buy-back programme, which commenced during
December 2014 and where GBP25.2 million (including costs) was
deployed in the year. Free cash balances were GBP238.0 million at
30 September 2018 (2017: GBP305.5 million) following the
acquisitions towards the end of the period (note 15).
Movements in the Group's funding are discussed in the funding
review section.
The accounting value of the deficit in the Group's defined
benefit pension plan has reduced significantly over the year ended
30 September 2018. Gilt yields increased over the year and more
recent market mortality assumptions were adopted and together these
resulted in the deficit under International Accounting Standard
('IAS') 19 falling to GBP19.5 million (2017: GBP29.8 million). A
corresponding actuarial gain of GBP8.9 million before tax was
recognised in other comprehensive income (2017: gain of GBP29.0
million).
During the year a Pension Funding Partnership ('PFP')
arrangement was agreed with the Trustee, effectively granting The
Paragon Pension Plan ('the Plan') a charge over the Group's head
office building as security for its agreed contributions and
thereby reducing the Plan's funding risk.
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004 to
measure scheme liabilities. On this basis, the deficit at the
triennial valuation date was GBP18.0 million and this had reduced
to GBP15.2 million at 30 September 2018 excluding the benefit to
the plan of the PFP (30 September 2017: GBP14.9 million),
representing an 87% funding level (30 September 2017: 87%).
Including the benefit of the PFP the deficit was GBP3.7 million, a
97% funding level.
Accounting changes
On 1 October 2018 the Group adopted the provisions of
International Financial Reporting Standard ('IFRS') 9, which will
require loss provisions on financial assets to be calculated on the
basis of expected rather than incurred losses. This will result in
the Group's impairment provisions increasing by approximately GBP27
million at that date and its equity reducing by GBP22 million after
tax.
For regulatory capital purposes the CRR allows the impact of the
transition to be phased in over a five year period, so that the
initial impact on capital ratios will be negligible. On a fully
loaded basis the transition to IFRS 9 will result in the Group's
CET1 ratio reducing from 13.8% to 13.5%.
It should be noted that this movement represents principally an
acceleration of the impairment charge and is therefore a timing
difference, rather than an additional loss.
The Group continues to develop, test and validate its IFRS 9
approach and therefore these estimates are provisional and may be
revised on the basis of this further analysis.
OPERATIONAL REVIEW
Management and people
The Group's people are both its most significant cost and the
key to its future growth and development. Over 1,300 people worked
for the Group throughout the period, at its Solihull headquarters
and other locations across the UK. The training and development of
these people together with a rigorous recruitment and selection
process are a key part of the Group's organic growth strategy and
underpin the strong progress made and the Group's Investors in
People Champion status.
Governance and management
As had been announced during February 2018, on 10 May 2018
Robert Dench, resigned as both Chairman and director after fourteen
years on the Board, having become Chairman in 2007. His tenure in
the chair has seen major challenges and changes for the Group,
covering the credit crisis, the Group's return to lending, the
launch of Paragon Bank and most recently the transition to a
specialist banking group. Throughout these events Bob has chaired
the Board in a collegiate, but challenging way and has been a
supportive Chairman to the management team, with his wealth of
banking experience being an invaluable asset to the Group
throughout his tenure. He left the Group in a strong strategic
position and excellent financial health.
Bob left to take up a new challenge as Chairman of The
Co-operative Bank p.l.c., and departed with the sincere thanks and
good wishes of his fellow directors and other colleagues.
Fiona Clutterbuck succeeded Bob as Chairman on 10 May 2018,
having previously been Senior Independent Director and an
independent non-executive director of the Group. She also succeeds
Bob as Chairman of the Nomination Committee.
This appointment was the result of a thorough and independent
recruitment process, involving both internal and external
candidates, during which it became clear that Fiona was the best
candidate to become Chairman. She has a strong knowledge of the
Group, having served on the Board since 2012 and has a wealth of
financial services experience, having held senior positions at
leading UK and international banks. She was most recently Head of
Strategy, Corporate Development and Communications at the Phoenix
Group, until March 2018, while also serving as a non-executive
director at a number of prominent listed companies.
Following Fiona's appointment, Peter Hartill, an independent
non-executive director since 2011, was appointed to succeed her as
Senior Independent Director, in addition to his responsibilities as
Chairman of the Audit Committee, while Hugo Tudor, an independent
non-executive director since 2014, succeeded Fiona as Chairman of
the Remuneration Committee.
On 31 December 2018 Alan Fletcher and Patrick Newberry will step
down from the Board. Alan has served as a director since 2009,
including a lengthy term as Chairman of the Remuneration Committee,
ceasing to be independent for corporate governance purposes earlier
this year. Pat served first as an independent director of Paragon
Bank PLC from its earliest months of operation in 2014, serving as
chairman of its audit committee, and joined the Board of Paragon
Banking Group in 2017. They will leave with the thanks of the Group
and their fellow directors for their support and dedication in the
development of both the Group and Paragon Bank PLC, and the best
wishes of their colleagues for the future.
The Group's second annual statement under the Modern Slavery Act
2015 was published on its website in March 2018. Relevant policies
have been reviewed and updated as appropriate. All employees have
completed an annual e-learning module on this subject to raise
awareness and understanding.
People and development
The Group continues to focus on maintaining an efficient and
effective workforce, increasing employee numbers by 1.7% over the
year. This increase includes those who joined the Group as a result
of the Iceberg and Titlestone acquisitions and bringing these
people into the Group has been an important priority during the
year. The Group maintains its accreditation from the UK Living Wage
Foundation and minimum pay continues to meet the levels set by the
Foundation.
The Group prides itself on the fact that its people remain with
it for a long time. Its annual employee attrition rate of 16.1% is
below the national average and 26.8% of its people have over ten
years service, with 10.9% having achieved over 20 years with the
Group. We believe this is due to providing quality development
opportunities and creating a place where people want to work, which
has meant that knowledge and experience have been retained in each
of our specialist areas. We believe our people are well positioned
to support the Group's future growth strategy.
The Group was proud to have signed the Women in Finance Charter,
sponsored by HM Treasury, in 2017. The Charter's objectives reflect
the Group's own aspirations in the field of gender diversity and in
January 2017, the Group published its first set of internal targets
under the Charter.
The Group published an interim update in January 2018 and the
latest update at 30 September 2018 confirms the Group is making
good progress towards its targets:
-- 52.3% of employees receiving management career
development/leadership training are female (target 50%)
-- 58.4% of the workforce are on flexible working contracts (target 10%)
-- 32.3% of the flexible working available is on a part time basis (target 50%)
The Group notes the publication of the Hampton-Alexander review
on gender diversity during the year. The Group believes that its
Women in Finance primary objective is consistent with the review's
recommendation and notes that its proportion of female senior
managers at the year end, as defined by HA, was 29.1% (2017:
31.4%).
The Group has calculated its gender pay gap at April 2018, as
required by law. This calculation shows that median female pay in
the Group was 30.8% less than the median male pay. This is broadly
in line with the results reported by other financial services
companies and narrower than the 39.8% gap for the sector reported
by the Office of National Statistics in their Annual Survey of
Hours and Earnings published in October 2018.
The Group will be analysing its gender pay gap data as part of
its Women in Finance initiative to determine if there are areas
where urgent action is required, but preliminary results suggest
where groups of similar positions exist, there is no evidence of
systematic gender bias on pay.
The Group's succession planning strategy has also been an
important area of focus during the year, with all Board and
executive management roles together with their direct reports
identified from a leadership and specialist perspective. Immediate
successors are in place for these roles for the short term to
provide business continuity and longer-term succession plans are
being developed for those with career aspirations and strong
potential. This area will remain a priority for the Board, with the
assistance of the Nomination Committee, during the forthcoming
year.
Risk
The effective management of risk is crucial to the achievement
of the Group's strategic objectives. To ensure this is achieved the
Group operates a risk governance framework, structured around a
formal three lines of defence model (business areas, Risk and
Compliance function and Internal Audit) supervised at Board
level.
During the year the Group's risk governance framework has worked
effectively to manage and mitigate the risks to which the Group is
exposed from its various operational activities, while continuing
to enhance its ability to manage all categories of risk. In
particular this has been focussed on:
-- The continuing evolution of the Group's risk appetite
statements and embedding them in the processes of the
businesses
-- The embedding of a new operational risk management system in
business areas for use on a day-to-day basis
-- The review of cyber security controls and the evaluation of
ongoing investments in systems resilience and security
-- Support for the integration of acquired operations and the
development of new businesses and product types, to ensure they are
fully captured by the risk management framework
The principal challenges in the risk environment faced by the
Group during the year included:
-- The potential impact of the proposals on capital regulation from the BCBS
-- Execution and transitional risks arising from recent
acquisitions, particularly the acquisitions of Titlestone and
Iceberg in the period
-- The impact of continuing uncertainty as to the terms on which
the UK will leave the EU in March 2019
-- The impact of fiscal changes over recent years on the demand
for buy-to-let mortgages in the UK
-- Changes in the regulatory environment relating to the underwriting of buy-to-let mortgages
-- Heightened cyber-security risks as a result of the increasing
sophistication and frequency of cyber-attacks affecting the
financial services sector
-- Major regulatory developments including the implementation of the GDPR
-- The level of business change required in respect of a move away from LIBOR linked products
The Group continues to closely monitor its exposure to current
and emerging risks as they develop, and a particular focus
continues to be the risks arising from the present uncertainties
surrounding the UK's future relationship with the European Union.
At this point the Group considers itself well placed to mitigate
the impact of the risks to which it is exposed.
Regulation
The Bank is authorised by the PRA and regulated by the PRA and
the FCA. The Group is subject to consolidated supervision by the
PRA and a number of its subsidiaries are authorised and regulated
by the FCA. As a result, current and projected regulatory changes
continue to pose a significant risk for the Group. The governance
and risk management framework within the Group continues to be
developed to ensure that the impacts of all new regulatory
requirements are clearly understood and mitigated as far as
possible. Regular reports on key regulatory developments are
received at both executive and board risk committees.
Whilst the Group is impacted by a broad range of prudential and
conduct regulations, given the nature of its operations, the
following are of particular note:
-- In March 2017, the FCA issued a policy statement to complete
the consultation process regarding PPI that it began in 2015. This
included setting a deadline of 29 August 2019 by which consumers
will need to make PPI complaints and new rules and guidance on the
handling of PPI complaints. Impacts from this process have, so far,
been minimal and this is expected to remain the case.
-- The impacts of the Second Payment Services Directive ('PSD2')
have been evaluated with the support of external advice. It was
determined that the Group is compliant with the regulations based
on the current product suite. Consideration of PSD2 will form part
of all future product development.
-- The Senior Managers and Certification Regime ('SMCR') will be
extended to cover a wider section of persons employed in the
financial services sector during 2019. This will increase the
number of the Group's employees within the SMCR and the oversight
activities required to ensure compliance with the extended rules.
These systems have been developed in the period and training
modules for all impacted people have been delivered across the
Group.
-- The development of proposals, led by the Bank of England and
the FCA, to establish SONIA (the Sterling Overnight Index Average)
administered by the Bank of England as the primary sterling
interest rate benchmark by the end of 2021, in place of LIBOR,
continues to be monitored to assess any potential impact on the
Group. In November 2017 the regulators announced that the latest
stage of this process would commence in January 2018, with
consultations taking place during the year.
-- In December 2017 the BCBS published its 'Basel III:
Finalising post-crisis reforms' document. This has clarified the
proposed increase to the capital risk weights for buy-to-let
lending under the revised standardised approach and the
introduction of a capital output floor based on the revised
standardised approach. The proposed changes had been anticipated
within the Group's IRB project.
-- GDPR came into force with effect from May 2018, representing
the most significant revision to data protection legislation for
several decades. The Group continues to take appropriate steps to
ensure that it is compliant with the new legislation.
Whilst the Group, along with the rest of the UK corporate
sector, does not have clear visibility on potential regulatory
changes that may be introduced following the UK's decision to leave
the EU, it does not have any EU passporting issues that need to be
considered.
Certain regulations applying in the financial services sector
only affect entities over a certain size. The Group considers
whether and when these regulations might apply to it in the light
of the growth implicit in its business plans and puts appropriate
arrangements in place to ensure it would be able to comply at that
point.
Overall, the Group considers that it is well placed to address
all the regulatory changes to which it is presently exposed.
CONCLUSION
The Group intends to maintain its current strategic approach
moving forward, focussing on using its extensive credit experience
to enable it to operate effectively and with a low-risk appetite in
its chosen range of specialist markets. The deep understanding in
these sectors, combined with the flexibility of the operating
model, enables the Group to focus resources to optimise the
relationship between growth, risk and reward. The diversification
delivered by a series of organic and acquisitive developments over
the past five years, combined with a broadly-based funding approach
leaves the business well placed to deliver further value to its
stakeholders over the coming years.
The Group enters 2019 with a strong new business pipeline, is
well positioned in its chosen markets and equipped with high levels
of liquidity. Despite the potential for economic uncertainties
arising from Brexit and elsewhere, the Group remains confident of
its future prospects.
PRINCIPAL RISKS
There are a number of potential risks and uncertainties to which
the Group is exposed and which could impact significantly on its
ability to conduct its business successfully. In the opinion of the
directors these have not changed materially from those described in
section A2.2 of the last annual report and accounts of the Company
for the year ended 30 September 2017. These are summarised
below.
Category Risk Description
Business Economic The Group could be materially affected
by a severe downturn in the UK economy,
as its income is wholly derived from activities
within the country. The likelihood of
this occurring has become more difficult
to forecast given the continuing material
uncertainties as to the terms on which
the UK will leave the European Union ('EU')
in March 2019.
A material downturn in economic performance
could reduce demand for the Group's loan
products, increase the number of customers
that default on their loans and cause
security asset values to fall.
-------------- -------------------------------------------------
Concentration The Group's business plans could be particularly
affected by any material change in the
operation of the UK private rented sector
and / or further regulatory intervention
to control buy-to-let lending.
-------------- -------------------------------------------------
Transition Failure to manage major internal reorganisations
or integrate acquired businesses, such
as Titlestone, safely and effectively
could adversely affect the Group's business
plans and damage its reputation.
-------------- -------------------------------------------------
Credit Customer Failure to target and underwrite credit
decisions effectively could result in
customers becoming less able to service
debt, exposing the Group to unexpected
material losses.
-------------- -------------------------------------------------
Counterparty Failure of an institution holding the
Group's cash deposits or providing hedging
facilities for risk mitigation could expose
the Group to loss or liquidity issues.
-------------- -------------------------------------------------
Conduct Fair outcomes Failure to deliver fair outcomes for its
customers could impact on the Group's
reputation, its ability to meet its regulatory
obligations and its financial performance.
-------------- -------------------------------------------------
Operational People Failure to attract or retain appropriately
skilled key employees at all levels could
impact upon the Group's ability to deliver
its business plans and strategic objectives.
-------------- -------------------------------------------------
Systems The inability of the Group's systems to
support its business operations effectively
and/or guard against cyber security risks
could result in reputational damage and
financial loss.
-------------- -------------------------------------------------
Regulation Given the highly regulated sectors in
which the Group operates, compliance failures
or failures to respond effectively to
new and emerging regulatory and legal
developments could result in reputational
damage and financial loss.
-------------- -------------------------------------------------
Liquidity Funding If access to funding became restricted,
and Capital either through market movements or regulatory
intervention, this could result in the
scaling back or cessation of some business
lines.
-------------- -------------------------------------------------
Capital Proposals by the Basel Committee on Banking
Supervision ('BCBS') to change capital
requirements for lending secured on residential
property could have adverse financial
implications for the Group.
-------------- -------------------------------------------------
Market Interest Reduction in margins between market lending
rates and borrowing rates or mismatches in the
Group balance sheet could impact profits.
-------------- -------------------------------------------------
Pension Pensions The obligation to support the Group's
Obligation defined benefit pension plan might deplete
resources.
-------------- -------------------------------------------------
The Group has considered and responded to all of these risks,
mitigating the exposure as far as is practicable to ensure that its
risk profile remains within the Board's stated risk appetite.
STATEMENT OF DIRECTORS' RESPONSIBILITES
in relation to financial statements
The responsibility statement below has been prepared in
connection with the full annual accounts of the Company for the
year ended 30 September 2018. Certain parts of these accounts are
not presented within this announcement.
The directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. The directors are required to prepare accounts for the
Group in accordance with IFRS and have also elected to prepare
company financial statements in accordance with IFRS. In respect of
the financial statements for the year ended 30 September 2018,
company law requires the directors to prepare such financial
statements in accordance with IFRS, the Companies Act 2006 and
Article 4 of the IAS Regulation.
International Accounting Standard 1 - 'Presentation of Financial
Statements' requires that financial statements present fairly for
each financial year the Company's financial position, financial
performance and cash flows. This requires the faithful
representation of the effects of transactions, other events and
conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in
the International Accounting Standards Board's ('IASB') 'Framework
for the Preparation and Presentation of Financial Statements'. In
virtually all circumstances, a fair presentation will be achieved
by compliance with all applicable IFRS. In preparing each of the
Group and Company financial statements the directors are also
required to:
-- Properly select and apply suitable accounting policies consistently
-- Make an assessment of the Group's and the Company's ability to continue as a going concern
-- Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
-- Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the entity's financial position and financial
performance
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and the
Group's profit or loss for the year.
The directors are responsible for keeping adequate accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company, for safeguarding the assets, for
the Group's systems of Internal Control and for taking reasonable
steps for the prevention and detection of fraud and other
irregularities. They are also responsible for the preparation of a
strategic report, directors' report, directors' remuneration report
and corporate governance statement which comply with the applicable
requirements of the Companies Act 2006.
The directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the UK governing the
preparation and dissemination of financial statements differs from
legislation in other jurisdictions
Each of the current directors confirms that, to the best of
their knowledge:
-- The financial statements, prepared in accordance with IFRS as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and of the Group taken as a whole
-- The Directors' Report, including those other sections of the
Annual Report incorporated by reference, comprises a management
report for the purposes of the Disclosure Guidance and Transparency
Rules, which includes a fair review of the development and
performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and
uncertainties that they face
-- The Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Group's performance, business model and
strategy
Approved by the Board of Directors and signed on behalf of the
Board.
PANDORA SHARP
Company Secretary
21 November 2018
Board of Directors
F J Clutterbuck A K Fletcher B A Ridpath
N S Terrington P J N Hartill F F Williamson
R J Woodman H R Tudor G H Yorston
J A Heron P J Newberry
CONSOLIDATED INCOME STATEMENT
For the year ended 30 September 2018
2018 2018 2017 2017
Note GBPm GBPm GBPm GBPm
Interest receivable 9 451.9 409.2
Interest payable and
similar charges 10 (197.3) (176.6)
--------- ---------
Net interest income 254.6 232.6
Other leasing income 16.3 14.4
Related costs (12.5) (11.4)
------- -------
Net leasing income 3.8 3.0
Gain on disposal of financial
assets 11 28.0 -
Other income 12 15.5 17.2
------- -------
Other operating income 47.3 20.2
--------- ---------
Total operating income 301.9 252.8
Operating expenses (114.2) (102.3)
Provisions for losses (7.4) (5.3)
--------- ---------
Operating profit before
fair value items 180.3 145.2
Fair value net gains
/ (losses) 13 1.2 (0.4)
--------- ---------
Operating profit being
profit on ordinary activities
before taxation 181.5 144.8
Tax charge on profit
on ordinary activities (35.7) (27.6)
--------- ---------
Profit on ordinary activities
after taxation for the
financial year 145.8 117.2
========= =========
2018 2017
Note
Earnings per share
- basic 14 55.9p 43.1p
- diluted 14 54.2p 41.9p
========= =========
The results for the current and preceding years relate entirely
to continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 September 2018
2018 2017
Note GBPm GBPm GBPm GBPm
Profit for the year 145.8 117.2
-------- --------
Other comprehensive income
Items that will not be reclassified
subsequently to profit or
loss
Actuarial gain on pension
scheme 23 8.9 29.0
Tax thereon (1.7) (5.5)
------ ------
7.2 23.5
Items that may be reclassified
subsequently to profit or
loss
Cash flow hedge gains taken
to equity 1.0 0.5
Tax thereon (0.2) (0.1)
------ ------
0.8 0.4
-------- --------
Other comprehensive income
for the year net of tax 8.0 23.9
-------- --------
Total comprehensive income
for the year 153.8 141.1
======== ========
CONSOLIDATED BALANCE SHEET
30 September 2018
2018 2017 2016
Note GBPm GBPm GBPm
Assets
Cash - central banks 15 895.9 615.0 315.0
Cash - retail banks 15 414.7 881.9 922.6
Short term investments - - 7.1
Loans to customers 16 12,103.7 11,115.4 10,750.0
Derivative financial assets 18 855.7 906.6 1,366.4
Sundry assets 19.0 12.7 12.7
Property, plant and equipment 56.8 46.2 39.2
Intangible assets 19 169.3 104.4 105.4
--------- ---------- ---------
Total assets 14,515.1 13,682.2 13,518.4
========= ========== =========
Liabilities
Short term bank borrowings 1.1 0.6 1.2
Retail deposits 20 5,292.4 3,611.9 1,874.7
Derivative financial liabilities 18 4.7 7.1 15.8
Asset backed loan notes 21 5,554.7 6,475.8 8,374.1
Secured bank borrowings 21 935.6 1,306.0 1,573.0
Retail bond issuance 21 296.1 295.7 295.3
Corporate bond issuance 21 149.3 149.1 259.0
Central bank facilities 21 1,024.4 700.0 -
Sundry liabilities 22 114.4 74.6 78.7
Current tax liabilities 21.4 17.4 16.7
Deferred tax liabilities 5.6 4.8 2.0
Retirement benefit obligations 23 19.5 29.8 58.4
--------- ---------- ---------
Total liabilities 13,419.2 12,672.8 12,548.9
========= ========== =========
Called up share capital 24 281.6 281.5 295.9
Reserves 25 918.3 811.0 736.1
Own shares 26 (104.0) (83.1) (62.5)
--------- ---------- ---------
Total equity 1,095.9 1,009.4 969.5
========= ========== =========
Total liabilities and equity 14,515.1 13,682.2 13,518.4
========= ========== =========
Approved by the Board of Directors on 21 November 2018.
Signed on behalf of the Board of Directors
N S Terrington R J Woodman
Chief Executive Chief Financial Officer
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 30 September 2018
2018 2017
Note GBPm GBPm
Net cash generated by operating
activities 28 1,074.4 1,474.7
Net cash (utilised) / generated
by investing activities 29 (282.8) 3.2
Net cash (utilised) by financing
activities 30 (978.4) (1,218.0)
---------- ----------
Net (decrease) / increase in
cash and cash equivalents (186.8) 259.9
Opening cash and cash equivalents 1,496.3 1,236.4
---------- ----------
Closing cash and cash equivalents 1,309.5 1,496.3
========== ==========
Represented by balances within:
Cash 14 1,310.6 1,496.9
Short term bank borrowings (1.1) (0.6)
---------- ----------
1,309.5 1,496.3
========== ==========
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the year ended 30 September 2018
Year ended 30 September 2018
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 145.8 - 145.8
Other
comprehensive
income - - - - 0.8 7.2 - 8.0
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - 0.8 153.0 - 153.8
Transactions
with owners
Dividends paid
(note 27) - - - - - (43.1) - (43.1)
Shares - - - - - - - -
cancelled
Own shares
purchased - - - - - - (31.4) (31.4)
Exercise of
share awards 0.1 0.3 - - - (10.9) 10.5 -
Charge for
share based
remuneration - - - - - 6.1 - 6.1
Tax on share
based
remuneration - - - - - 1.1 - 1.1
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year 0.1 0.3 - - 0.8 106.2 (20.9) 86.5
Opening equity 281.5 65.5 28.7 (70.2) 2.5 784.5 (83.1) 1,009.4
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing equity 281.6 65.8 28.7 (70.2) 3.3 890.7 (104.0) 1,095.9
=========== =========== =========== =========== ========== =========== =========== ===========
Year ended 30 September 2017
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 117.2 - 117.2
Other
comprehensive
income - - - - 0.4 23.5 - 23.9
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - 0.4 140.7 - 141.1
Transactions
with owners
Dividends paid
(note 27) - - - - - (38.0) - (38.0)
Shares
cancelled (15.0) - 15.0 - - (45.1) 45.1 -
Own shares
purchased - - - - - - (69.7) (69.7)
Exercise of
share awards 0.6 0.9 - - - (4.0) 4.0 1.5
Charge for
share based
remuneration - - - - - 4.2 - 4.2
Tax on share
based
remuneration - - - - - 0.8 - 0.8
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the year (14.4) 0.9 15.0 - 0.4 58.6 (20.6) 39.9
Opening equity 295.9 64.6 13.7 (70.2) 2.1 725.9 (62.5) 969.5
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing equity 281.5 65.5 28.7 (70.2) 2.5 784.5 (83.1) 1,009.4
=========== =========== =========== =========== ========== =========== =========== ===========
NOTES TO THE FINANCIAL INFORMATION
For the year ended 30 September 2018
1. GENERAL INFORMATION
The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 30
September 2016, 30 September 2017 or 30 September 2018, but is
derived from those statutory accounts, which have been reported on
by the Company's auditors. Statutory accounts for the years ended
30 September 2016 and 30 September 2017 have been delivered to the
Registrar of Companies and those for the year ended 30 September
2018 will be delivered to the Registrar following the Company's
Annual General Meeting. The reports of the auditors in each case
were unqualified, did not draw attention to any matters by way of
emphasis and did not contain an adverse statement under sections
498(2) or 498(3) of the Companies Act 2006.
Sections of this preliminary announcement, including but not
limited to the Management Report, may contain forward-looking
statements with respect to certain of the plans and current goals
and expectations relating to the future financial condition,
business performance and results of the Group. These have been made
by the directors in good faith using information available up to
the date on which they approved this report. By their nature, all
forward-looking statements involve risk and uncertainty because
they relate to future events and circumstances that are beyond the
control of the Group and depend upon circumstances that may or may
not occur in the future. There are a number of factors that could
cause actual future financial conditions, business performance,
results or developments to differ materially from the plans, goals
and expectations expressed or implied by these forward-looking
statements and forecasts. Nothing in this document should be
construed as a profit forecast.
Copies of the Annual Report and Accounts for the year ended 30
September 2018 will be distributed to shareholders in due course.
Copies of this announcement can be obtained from the Company
Secretary, Paragon Banking Group PLC at 51 Homer Road, Solihull,
West Midlands, B91 3QJ and on the Group's website at
www.paragonbankinggroup.co.uk.
2. ACCOUNTING POLICIES
The annual financial statements of the Group for the year ended
30 September 2018 have been prepared in accordance with
International Financial Reporting Standards ('IFRS') as adopted for
use in the European Union. Accordingly, the preliminary financial
information has been prepared in accordance with the recognition
and measurement criteria of IFRS. The particular accounting
policies adopted are those described in the Annual Report and
Accounts of the Group for the year ended 30 September 2017.
The critical accounting estimates and judgements affecting the
condensed financial information are the same as those described in
note 6 to the accounts of the Group for the year ended 30 September
2017.
New and revised reporting standards
No new or revised reporting standards significantly affecting
the Group's accounting have been issued since the approval of the
Group's financial statements for the year ended 30 September
2017.
IFRS 9
IFRS 9, which will be implemented in the Group's accounting from
of 1 October 2018 changes the basis of recognition of impairment of
financial assets from an incurred loss to an expected credit loss
('ECL') approach for financial assets held at amortised cost. This
introduces a number of new concepts and changes to the approach to
provisioning set out in IAS 39.
The Group's IFRS 9 project, described in note 2 of the 2017
financial statements, continues to make progress to implement the
new rules. A more detailed report on progress will be given in the
Annual Report and Accounts for the year ending 30 September
2018.
It is estimated that the Group's new IFRS 9 provisioning
approach will result in an increase in provisions of approximately
GBP27m. The total impact on equity, net of tax is expected to be a
reduction of GBP22m. This estimate is provisional and may be
subsequently changed as the Group continues to further develop,
calibrate and test its provisioning models, as described above.
The Group intends to take advantage of the transitional relief
on regulatory capital, which will spread the impact of the
introduction of IFRS 9 on capital over a five year period.
Going concern
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Management Report. The principal
risks and uncertainties affecting the Group are described on pages
46 and 47.
Note 6 to the accounts for the year ended 30 September 2017
includes an analysis of the Group's working and regulatory capital
position and policies, while note 7 includes a detailed description
of its funding structures, its use of financial instruments, its
financial risk management objectives and policies and its exposure
to credit, interest rate and liquidity risk. Critical accounting
estimates affecting the results and financial position disclosed in
that annual report are discussed in note 5. The position and
polices described in these notes remain materially unchanged to the
date of this preliminary announcement.
The Group has a formalised process of budgeting, reporting and
review. The Group's planning procedures forecast its profitability,
capital position, funding requirement and cash flows. Detailed
annual plans are produced for two-year periods with longer term
forecasts covering a five-year period, which include detailed
income forecasts. These plans provide information to the directors
which is used to ensure the adequacy of resources available for the
Group to meet its business objectives, both on a short term and
strategic basis.
The Group's retail deposits of GBP5,296.6 million (note 20),
accepted through Paragon Bank, are repayable within five years,
with 68.5% of this balance (GBP3,630.7 million) payable within
twelve months of the balance sheet date. The liquidity exposure
represented by these deposits is closely monitored; a process
supervised by the Asset and Liability Committee. The Group is
required to hold liquid assets in Paragon Bank to mitigate this
liquidity risk. At 30 September 2018 Paragon Bank held GBP724.9
million of balance sheet assets for liquidity purposes, in the form
of central bank deposits (note 15). A further GBP108.7 million of
liquidity was provided by the Bank of England FLS, bringing the
total to GBP833.6 million.
Paragon Bank manages its liquidity in line with the Board's risk
appetite and the requirements of the PRA, which are formally
documented in the Board's approved ILAAP. The Bank maintains a
liquidity framework that includes a short to medium term cash flow
requirement analysis, a longer-term funding plan and access to the
Bank of England's liquidity insurance facilities, where
pre-positioned assets would support drawings of GBP716.0m.
The Group's securitisation funding structures ensure that a
substantial proportion of its originated loan portfolio is
match-funded. This proportion was increased by the issue of the
Paragon Mortgages (No. 25) PLC securitisation in April 2018.
Repayment of the securitisation borrowings is restricted to funds
generated by the underlying assets and there is limited recourse to
the Group's general funds. Recent and current loan originations are
financed through retail deposits and may be refinanced through
securitisation where this is appropriate and cost effective.
The earliest maturity of any of the Group's working capital debt
is in December 2020, when the oldest of the Group's retail bond
issues matures.
The Group's cash analysis continues to show a strong cash
position, even after allowing for significant discretionary
payments, and its securitisation investments produce substantial
cash flows.
The Group has demonstrated its ability to raise retail and
corporate bond debt when required through its Euro Medium Term Note
Programme and other programmes. The Group's access to debt is also
enhanced by its corporate BBB rating, upgraded from BBB- by Fitch
Ratings in April 2018, and its status as an issuer is evidenced by
the BBB- rating of its GBP150.0 million Tier-2 bond issue (upgraded
from BB+ in April 2018).
In order to assess the appropriateness of the going concern
basis the directors considered the Group's financial position, the
cash flow requirements laid out in its forecasts, its access to
funding, the assumptions underlying the forecasts and the potential
risks affecting them.
After performing this assessment, the directors concluded that
it was appropriate for them to continue to adopt the going concern
basis in preparing the Annual Report and Accounts.
3. Fair values of financial assets and financial liabilities
IFRS 7 - 'Financial Instruments: Disclosures' requires that
where assets are measured at fair value these measurements should
be classified using the fair value hierarchy set out in IFRS 13 -
'Fair Value Measurement'. This hierarchy reflects the inputs used,
and defines three levels.
-- Level 1 measurements are unadjusted market prices
-- Level 2 measurements are derived from directly or indirectly
observable data, such as market prices or rates
-- Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3
measurements, the valuation is derived from cash flow models based,
where possible, on independently sourced parameters. The accuracy
of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the
assumptions used.
The Group had no financial assets or liabilities in the year
ended 30 September 2018 or the year ended 30 September 2017 carried
at fair value and valued using level 3 measurements, other than
contingent consideration amounts (note 22).
The Group has not reclassified any of its measurements during
the year.
The methods by which fair value is established for each class of
financial assets and liabilities are set out below.
a) Assets and liabilities carried at fair value
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values
in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which
observable prices in active markets are not available. These are
principally present value calculations based on estimated future
cash flows arising from the instruments, discounted using a risk
adjusted interest rate. The principal inputs to these valuation
models are LIBOR benchmark interest rates for the currencies in
which the instruments are denominated, being sterling, euros and
dollars. The cross-currency basis swaps have a notional principal
related to the outstanding currency borrowings and therefore the
estimated rate of repayment of these notes also affects the
valuation of the swaps. In order to determine the fair values the
management applies valuation adjustments to observed data where
that data would not fully reflect the attributes of the instrument
being valued, such as particular contractual features or the
identity of the counterparty. The management reviews the models
used on an ongoing basis to ensure that the valuations produced are
reasonable and reflect all relevant factors. These valuations are
based on market information and they are therefore classified as
level 2 measurements. Details of these assets are given in note
18.
Contingent consideration
The value of the contingent considerations shown in note 22 are
required to be stated at fair value in the accounts. These amounts
are valued based on the expected outcomes of the performance tests
set out in respective sale and purchase agreements, discounted as
appropriate. The most significant inputs to these valuations are
the Group's forecasts on future activity relating to the businesses
or individuals concerned, which are drawn from the overall Group
forecasting model. As such, these are classified as unobservable
inputs and the valuations classified as level 3 measurements.
Short term investments
The short-term investments are freely traded securities for
which a market price quotation is available and are classified as
level 1 measurements.
b) Assets and liabilities carried at amortised cost
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and
overdrafts and asset backed loan notes, which are carried at
amortised cost are considered to be not materially different from
their book values. In arriving at that conclusion market inputs
have been considered but because all the assets mature within three
months of the year end and the interest rates charged on financial
liabilities reset to market rates on a quarterly basis, little
difference arises. This also applies to the parent company's loans
to its subsidiaries.
While the Group's asset backed loan notes are listed, the quoted
prices for an individual note may not be indicative of the fair
value of the issue as a whole, due to the specialised nature of the
market in such instruments and the limited number of investors
participating in it.
As these valuation exercises are not wholly market based they
are considered to be level 2 measurements.
Corporate debt
The Group's retail and corporate bonds are listed on the London
Stock Exchange and there is presently a reasonably liquid market in
the instruments. It is therefore appropriate to consider that the
market price of these borrowings constitutes a fair value. As this
valuation is based on a market price, it is considered to be a
level 1 measurement.
Retail deposits
To assess the likely fair value of the Group's retail deposit
liabilities, the directors have considered the estimated cash flows
expected to arise based on a mixture of market based inputs, such
as rates and pricing and non-market based inputs such as withdrawal
rates. Given the mixture of observable and non-observable inputs,
these are considered to be level 3 measurements.
Loan assets
To assess the likely fair value of the Group's loan assets in
the absence of a liquid market, the directors have considered the
estimated cash flows expected to arise from the Group's investments
in its loans to customers based on a mixture of market based
inputs, such as rates and pricing and non-market based inputs such
as redemption rates. Given the mixture of observable and
non-observable inputs these are considered to be level 3
measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as
sundry assets and sundry liabilities are not considered to be
materially different to their carrying values.
These assets and liabilities are of relatively low value and may
be settled at their carrying value at the balance sheet date or
shortly thereafter.
The Group has reviewed its classification of the level of
valuations for retail deposits and loan assets, where valuations
are derived from a mixture of observable and non-observable
outputs, and concluded it is more in line with market practice to
classify them as level 3 measurements rather than, as previously,
level 2.
The fair values for financial assets and liabilities held at
amortised cost, other than those where carrying values are so low
that any difference would be immaterial, determined in accordance
with the methodologies set out above, are summarised below.
2018 2018 2017 2017
Carrying Fair value Carrying Fair value
amount amount
GBPm GBPm GBPm GBPm
The Group
Financial assets
Loans and receivables
Loans to customers 12,127.8 12,222.9 11,124.1 11,191.9
Cash 1,310.6 1,310.6 1,496.9 1,496.9
--------- ----------- --------- -----------
13,438.4 13,533.5 12,621.0 12,688.8
========= =========== ========= ===========
Financial liabilities
Other liabilities
Asset backed loan notes 5,554.7 5,554.7 6,475.8 6,475.8
Corporate and retail bonds 445.4 478.3 444.8 480.4
Retail deposits 5,296.6 5,301.7 3,615.4 3,615.1
Secured bank borrowings 935.6 935.6 1,306.0 1,306.0
--------- ----------- --------- -----------
12,232.3 12,270.3 11,842.0 11,877.3
========= =========== ========= ===========
The fair value of retail deposits shown above will include
amounts for the related accrued interest.
4. Capital management
(a) Dividend policy
The Board reviewed its dividend policy in September 2017,
concluding that the changes made would make the Group's use of
working capital more efficient and that there was, therefore, less
need to retain earnings to support future growth. It therefore
determined that the targeted dividend cover ratio (on the basis set
out below) would be reduced from 3.00 times, initially to 2.75
times for the year ended 30 September 2017 and then, subject to the
requirements of the business, to 2.5 times for the current year.
The Company considers it has access to sufficient cash resources to
pay dividends at this level and that its distributable reserves are
abundant for this purpose.
The most recent review, in September 2018, confirmed this policy
but concluded that the significant one-off income and costs arising
in the year, principally relating to asset sales and acquisitions
should be excluded from earnings for this purpose. The interim and
final dividends for the year ended 30 September 2018 have been
declared in accordance with the policy, as amended.
For the purposes of dividend policy the Group defines dividend
cover based on earnings per share, adjusted where considered
appropriate and dividend per share. This is the most common measure
used by financial analysts.
The derivation of the dividend for the year, which is subject to
approval at the forthcoming AGM is set out below.
Note 2018 2017
Earnings per share (p) 14 55.9 43.1
Adjustment for one off items (p) (7.3) -
------ -----
Adjusted earnings per share (p) 48.6 43.1
------ -----
Dividend cover target (times) 2.5 2.75
Proposed dividend per share in
respect of the year (p) 27 19.4 15.7
====== =====
(b) Return on tangible equity ('RoTE')
RoTE is a measure of an entity's profitability used by
investors. RoTE is defined by the Group by comparing the profit
after tax for the year, adjusted for amortisation charged on
intangible assets, to the average of the opening and closing equity
positions, excluding intangible assets and goodwill.
The Group's consolidated RoTE for the year ended 30 September
2018 is derived as follows:
Note 2018 2017
GBPm GBPm
Profit for the year after tax 145.8 117.2
Amortisation of intangible assets 2.1 1.6
-------- --------
Adjusted profit 147.9 118.8
-------- --------
Divided by
Opening equity 1,009.4 969.5
Opening intangible assets 19 (104.4) (105.4)
-------- --------
Opening tangible equity 905.0 864.1
-------- --------
Closing equity 1,095.9 1,009.4
Closing intangible assets 19 (169.3) (104.4)
-------- --------
Closing tangible equity 926.6 905.0
-------- --------
Average tangible equity 915.8 884.5
-------- --------
Return on Tangible Equity 16.1% 13.4%
======== ========
This table is not subject to audit
(c) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision the regulator will issue individual capital guidance
setting an amount of regulatory capital, which the Group is
required to hold relative to its risk weighted assets in order to
safeguard depositors from loss in the event of severe losses being
incurred by the Group. This is defined by the international Basel
III rules, set by the Basel Committee on Banking Supervision
('BCBS') and currently implemented in UK law by EU Regulation
575/2013, referred to as the Capital Requirements Regulation
('CRR').
The Group's regulatory capital is monitored by the Board, its
Risk and Compliance Committee and the Asset and Liability
Committee, who ensure that appropriate action is taken to ensure
compliance with the regulator's requirements. The future regulatory
capital requirement is also considered as part of the Group's
forecasting and strategic planning process.
The tables below demonstrate that at 30 September 2018 the
Group's regulatory capital of GBP1,045.7m (2017: GBP1,030.5m) was
comfortably in excess of the amounts required by the regulator,
including GBP727.7m in respect of Pillar 1 and Pillar 2a capital,
which is comprised of fixed and variable elements. The CRR also
requires firms to hold additional capital buffers, including a
Capital Conservation Buffer of 1.875% of risk weighted assets (at
30 September 2018) and a Counter-Cyclical Buffer, currently 0.5% of
risk weighted assets. Firm specific buffers may also be
required.
The Group's regulatory capital differs from its equity as
certain adjustments are required by the regulator. A reconciliation
of the Group's equity to its regulatory capital determined in
accordance with CRD IV at 30 September 2018 is set out below.
Note 2018 2017
GBPm GBPm
Total equity 1,095.9 1,009.4
Deductions
Proposed final dividend 27 (35.8) (28.9)
Intangible assets 19 (169.3) (104.4)
-------- --------
Common Equity Tier 1 ('CET1')
capital 890.8 876.1
Other tier 1 capital - -
-------- --------
Total Tier 1 capital 890.8 876.1
-------- --------
Corporate bond 21 150.0 150.0
Less: amortisation adjustment - -
-------- --------
150.0 150.0
Collectively assessed credit
impairment allowances 4.9 4.4
-------- --------
Total Tier 2 capital 154.9 154.4
-------- --------
Total regulatory capital 1,045.7 1,030.5
======== ========
When tier 2 capital instruments have less than five years to
maturity the amount eligible as regulatory capital reduces by 20%
per annum. No such adjustment is required in respect of the
Corporate Bond issued in the year ended 30 September 2016, which
matures in 2026.
The total exposure amount calculated under the CRD IV framework
against which this capital is held, and the proportion of these
assets it represents, are calculated as shown below.
2018 2017
GBPm GBPm
Credit risk
Balance sheet assets 5,767.3 4,907.7
Off balance sheet 87.8 68.3
-------- --------
Total credit risk 5,855.1 4,976.0
Operational risk 485.1 464.9
Market risk - -
Other 105.1 67.8
-------- --------
Total exposure amount 6,445.3 5,508.7
======== ========
% %
Solvency ratios
CET1 13.8 15.9
Total regulatory capital 16.2 18.7
======== ========
This table is not subject to Audit
The table below shows the calculation of the UK leverage ratio,
based on the consolidated balance sheet assets adjusted as shown.
The PRA has proposed a minimum UK leverage ratio of 3.25% for UK
firms.
Note 2018 2017
GBPm GBPm
Total balance sheet assets 14,515.1 13,682.2
Add: Credit fair value adjustments
on loans to customers 16 24.1 8.7
Debit fair value adjustments on retail
deposits 20 4.2 3.5
--------- ---------
Adjusted balance sheet assets 14,543.4 13,694.4
Less: Derivative assets 18 (855.7) (906.6)
Central bank deposits 15 (895.9) (615.0)
CRDs (6.2) (1.6)
Accrued interest on sovereign exposures (0.4) -
--------- ---------
On-balance sheet items 12,785.2 12,171.2
Less: Intangible assets 19 (169.3) (104.4)
--------- ---------
Total on balance sheet exposures 12,615.9 12,066.8
--------- ---------
Derivative assets 18 855.7 906.6
Potential future exposure on derivatives 172.1 191.3
--------- ---------
Total derivative exposures 1,027.8 1,097.9
--------- ---------
Post offer pipeline at gross notional
amount 817.7 417.9
Adjustment to convert to credit equivalent
amounts (569.2) (208.9)
--------- ---------
Off balance sheet items 248.5 209.0
--------- ---------
Tier 1 capital 890.8 876.1
Total leverage exposure 13,892.2 13,373.7
--------- ---------
UK leverage ratio 6.4% 6.6%
========= =========
This table is not subject to audit
The UK leverage ratio is prescribed by the PRA and differs from
the leverage ratio defined by Basel and the CRR due to the
exclusion of central bank balances from exposures.
5. Credit risk
The Group's business objectives rely on maintaining a
high-quality customer base and place strong emphasis on good credit
management, both at the time of acquiring or underwriting a new
loan, where strict lending criteria are applied, and throughout the
loan's life.
The Group's credit risk is primarily attributable to its loans
to customers. There are no significant concentrations of credit
risk to individual counterparties due to the large number of
customers included in the portfolios.
The Group's balance sheet loan assets at 30 September 2018 are
analysed as follows:
2018 2018 2017 2017
GBPm % GBPm %
Buy-to-let mortgages 10,261.6 84.6% 9,836.5 88.4%
Owner-occupied mortgages 70.6 0.6% 19.0 0.2%
--------- ------- --------- -------
Total first charge residential
mortgages 10,332.2 85.2% 9,855.5 88.6%
Second charge mortgage loans 415.9 3.5% 490.7 4.4%
--------- ------- --------- -------
Loans secured on residential
property 10,748.1 88.7% 10,346.2 93.0%
Development finance 352.8 2.9% 42.3 0.4%
--------- ------- --------- -------
Loans secured on property 11,100.9 91.6% 10,388.5 93.4%
Motor finance loans 329.4 2.7% 163.0 1.5%
Other consumer loans 173.7 1.4% 219.1 2.0%
Asset finance loans 403.4 3.3% 323.6 2.9%
Factoring and discounting
balances 34.9 0.3% 23.8 0.2%
Professions finance 42.6 0.4% 1.4 -
Structured lending 38.7 0.3% - -
Other commercial loans 4.2 - 4.7 -
--------- ------- --------- -------
Total loans to customers 12,127.8 100.0% 11,124.1 100.0%
========= ======= ========= =======
Other consumer loans include unsecured loans either advanced by
Group companies or acquired from their originators at a
discount.
Professions Finance includes loans originated by the acquired
Iceberg business note 6. These are generally short term unsecured
loans made to lawyers and accountants for working capital
purposes.
An analysis of the indexed loan to value ratio ('LTV') for those
loan accounts secured on residential property by value at 30
September 2018 is set out below. LTVs for second charge mortgages
are calculated allowing for the interest of the first charge
holder, while for acquired accounts the effect of any discount on
purchase is allowed for.
2018 2018 2017 2017
First Secured First Secured
mortgages loans mortgages loans
% % % %
Loan to value ratio
Less than 70% 60.6 66.1 62.1 56.7
70% to 80% 29.7 17.4 25.0 17.5
80% to 90% 7.1 9.3 9.5 11.5
90% to 100% 0.8 3.5 1.3 7.1
Over 100% 1.8 3.7 2.1 7.2
----------- -------- ----------- --------
100.0 100.0 100.0 100.0
=========== ======== =========== ========
Average loan to value ratio 66.0 65.9 66.3 70.0
=========== ======== =========== ========
Of which:
Buy-to-let 66.1 66.4
Owner-occupied 51.3 30.9
=========== ===========
The regionally indexed LTVs shown above are affected by changes
in house prices, with the Nationwide house price index, for the UK
as a whole, registering an annual increase of 2.0% in the year
ended 30 September 2018 (2017: 2.0%).
The increase in the LTV ratio for the owner-occupied accounts
relates to the greater number of new lending accounts, which have
higher LTV levels than legacy cases.
The number of accounts in arrears by asset class, based on the
most commonly quoted definition of arrears for the type of asset,
at 30 September 2018 and 30 September 2017, compared to the
industry averages at those dates published by UK Finance ('UKF')
and the FLA, was:
2018 2017
% %
First mortgages
Accounts more than three months in arrears
Buy-to-let accounts including receiver
of rent cases 0.11 0.08
Buy-to-let accounts excluding receiver
of rent cases 0.03 0.02
Owner-occupied accounts 3.15 3.55
UKF data for mortgage accounts more than
three months in arrears
Buy-to-let accounts including receiver
of rent cases 0.42 0.45
Buy-to-let accounts excluding receiver
of rent cases 0.38 0.41
Owner-occupied accounts 0.86 0.95
All mortgages 0.78 0.86
------ ------
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts 13.64 17.55
Post-2010 originations 0.21 0.06
Legacy cases (Pre-2010 originations) 17.91 16.75
Purchased assets 14.81 19.69
FLA data for secured loans 9.40 11.20
------ ------
Car loans
Accounts more than 2 months in arrears 3.91 0.67
FLA data for point of sale hire purchase 2.50 2.20
------ ------
Asset finance loans
Accounts more than 2 months in arrears 0.78 0.97
FLA data for business lease / hire purchase
loans 0.70 0.60
====== ======
No published industry data for asset classes comparable to the
Group's other books has been identified. Where revised data at 30
September 2017 has been published by the FLA or UKF, the
comparative industry figures above have been amended.
Arrears information is not given for development finance or
factoring activities as the structure of the products means that
such a measure is not relevant.
The Group calculates its headline arrears measure for buy-to-let
mortgages, shown above, based on the numbers of accounts three
months or more in arrears, including purchased Idem Capital assets,
but excluding those cases in possession and receiver of rent cases
designated for sale. This is consistent with the methodology used
by UKF in compiling its statistics for the buy-to-let mortgage
market as a whole.
The number of accounts in arrears will naturally be higher for
legacy books, such as the Group's legacy second charge mortgages
and residential first mortgages than for comparable active ones, as
performing accounts pay off their balances, leaving arrears
accounts representing a greater proportion of the total.
The figures shown above for secured loans incorporate purchased
portfolios which generally include a high proportion of cases in
arrears at the time of purchase and where this level of performance
is allowed for in the discount to current balance represented by
the purchase price. However this will lead to higher than average
reported arrears.
The payment status of the carrying balances of the Group's live
loan assets, at 30 September 2018 and at 30 September 2017, split
between those accounts considered as performing and those included
in the population for impairment testing, is shown below. Balances
for immaterial asset classes are not shown. 'Asset finance loans'
below includes other related loan balances. Fully provided non-live
accounts shown in note 17 are excluded from the tables below.
Days past due is not a relevant measure for the development
finance, structured lending or invoice discounting businesses, due
to their particular contractual arrangements.
First mortgages
2018 2017
GBPm GBPm
Not past due 10,211.1 9,724.2
Arrears less than
3 months 101.7 112.6
--------- --------
Performing accounts 10,312.8 9,836.8
--------- --------
Arrears 3 to 6 months 3.0 1.1
Arrears 6 to 12 months 2.2 1.9
Arrears over 12 months 5.7 7.7
Possessions and similar
cases 22.1 22.5
--------- --------
Impairment population 33.0 33.2
--------- --------
Total gross balances 10,345.8 9,870.0
Impairment provision on
live cases (12.7) (12.7)
Timing adjustments (0.9) (1.8)
--------- --------
Carrying balance 10,332.2 9,855.5
========= ========
Consumer and asset finance
Second Motor Asset Total
charge finance finance
mortgage loans loans
loans
GBPm GBPm GBPm GBPm
30 September 2018
Not past due 350.7 310.8 388.6 1,050.1
Arrears less than
2 months 19.4 13.2 13.8 46.4
---------- --------- --------- --------
Performing accounts 370.1 324.0 402.4 1,096.5
---------- --------- --------- --------
Arrears 2 to 6 months 11.0 3.2 1.3 15.5
Arrears 6 to 9 months 4.1 0.9 0.7 5.7
Arrears 9 to 12 months 3.3 0.6 - 3.9
Arrears over 12 months 29.9 2.1 0.6 32.6
Specifically impaired asset finance
cases - - 0.5 0.5
---------- --------- --------- --------
Impairment population 48.3 6.8 3.1 58.2
---------- --------- --------- --------
Total gross balances 418.4 330.8 405.5 1,154.7
Impairment provision on
live cases (1.5) (1.7) (1.7) (4.9)
Timing adjustments (1.0) 0.3 (0.4) (1.1)
---------- --------- --------- --------
Carrying balance 415.9 329.4 403.4 1,148.7
========== ========= ========= ========
30 September 2017
Not past due 400.8 158.0 315.3 874.1
Arrears less than
2 months 20.5 5.0 10.0 35.5
---------- --------- --------- --------
Performing accounts 421.3 163.0 325.3 909.6
---------- --------- --------- --------
Arrears 2 to 6 months 14.9 0.7 0.5 16.1
Arrears 6 to 9 months 7.1 0.2 0.7 8.0
Arrears 9 to 12 months 5.4 0.1 - 5.5
Arrears over 12 months 46.2 0.3 0.1 46.6
Specifically impaired asset finance
cases - - 2.7 2.7
---------- --------- --------- --------
Impairment population 73.6 1.3 4.0 78.9
---------- --------- --------- --------
Total gross balances 494.9 164.3 329.3 988.5
Impairment provision on
live cases (2.1) (1.2) (3.1) (6.4)
Timing adjustments (2.1) (0.1) (1.2) (3.4)
---------- --------- --------- --------
Carrying balance 490.7 163.0 325.0 978.7
========== ========= ========= ========
Arrears in the tables above are based on the contractual payment
status of the customers concerned. Where assets have been purchased
by the Group, customers may already have been in arrears at the
time of acquisition and an appropriate adjustment made to the
consideration paid.
Acquired assets
Almost all of the Group's unsecured consumer loan assets are
part of purchased debt portfolios where the consideration paid will
have been based on the credit quality and performance of the loans
at the point of the transaction. Collections on purchased accounts
have been comfortably in excess of those implicit in the purchase
prices.
In the debt purchase industry, Estimated Remaining Collections
('ERCs') is commonly used as a measure of the value of a portfolio.
This is defined as the sum of the undiscounted cash flows expected
to be received over a specified future period. In the Group's view,
this measure may be suitable for heavily discounted, unsecured,
distressed portfolios, but is less applicable for the types of
portfolio in which the Group has invested, where cash flows are
higher on acquisition, loans may be secured on property and
customers may not be in default. In such cases, the IAS 39
amortised cost balance, at which these assets are carried in the
Group balance sheet, provides a better indication of value.
However, to aid comparability, the 84 and 120 month ERC values
for the Group's purchased consumer loan assets, are set out below.
These are derived using the same models and assumptions used in the
EIR calculations, but the differing bases of calculation lead to
different outcomes.
2018 2018 2018 2017 2017 2017
Carrying 84 month 120 month Carrying 84 month 120 month
value ERC ERC value ERC ERC
GBPm GBPm GBPm GBPm GBPm GBPm
Loans to customers 364.2 434.9 489.6 503.5 608.9 688.8
========= ========= ========== ========= ========= ==========
Amounts shown as loans to customers above include loans
disclosed as first mortgages and other loans (note 16) and are
included in the aging tables above at their carrying values.
Development finance
Development finance cases include both originated accounts and
accounts recognised on the Titlestone acquisition note 7.
Development finance loans do not require customers to make
payments during the life of the loan, therefore arrears and past
due measures cannot be used to monitor credit risk. Instead, cases
are monitored on an individual basis by management and Credit Risk.
The average loan to gross development value ('LTGDV') ratio for the
portfolio at year end, a measure of security cover, is analysed
below.
2018 2018 2017 2017
By value By number By value By number
LTGDV % % % %
50% or less 3.4 4.4 4.2 7.3
50% to 60% 18.9 22.8 36.6 39.0
60% to 65% 63.3 59.6 42.6 41.5
65% to 70% 7.1 9.6 16.6 12.2
70% to 75% 0.7 0.7 - -
Over 75% 6.6 2.9 - -
--------- ---------- --------- ----------
100.0 100.0 100.0 100.0
========= ========== ========= ==========
The average LTGDV cover at the year end was 63.2% (2017:
60.6%).
LTGDV is calculated by comparing the current expected end of
term exposure with the latest estimate of the value of the
completed development based on surveyors' reports.
At 30 September 2018 the development finance portfolio comprised
136 accounts (2017: 41) with a total carrying value of GBP352.8m
(2017: GBP42.3m). Of these accounts only four were considered at
risk of loss (2017: none). These accounts had been acquired in the
Titlestone purchase where an allowance for losses was made in the
IFRS 3 fair value calculation. There was, therefore, no impairment
provision under IAS 39 (2017: GBPnil).
6. Acqusition Of Iceberg
On 13 December 2017 the Group acquired the trade and assets of
The Iceberg Partnerships LLP and on 20 December 2017 it acquired
the trade and assets of Iceberg Client Credit LLP. These entities
(together 'Iceberg') were related to each other. Iceberg is a
finance broker and lender dealing with specialist business lending
to mid-sized UK law firms and similar concerns. The acquisition
allows the Group to increase the reach of its commercial finance
operations to new products and customer groups.
The consideration for the acquisition will be satisfied entirely
in cash. Cash transferred on completion was GBP6.6m, with a further
payment made, following the agreement of completion accounts, of
GBP0.2m.
Further contingent consideration, of between GBPnil and
GBP13.0m, is payable in cash based on volumes and pricing of
lending generated by the acquired business over a five year period.
GBP11.8m has been provided in the accounts in respect of this
contingent consideration, based on the net present value of the
maximum amount. This is considered to be the fair value of the
consideration at the transaction date, based on initial forecasts
for the business. Transaction costs of GBP0.2m have been included
in operating expenses for the year ended 30 September 2018.
The post-acquisition contribution of Iceberg to consolidated
revenue for the year ended 30 September 2018 was GBP1.8m and its
contribution to consolidated profit before tax for the period was
GBP0.1m.
The amounts recognised in the consolidated accounts on
acquisition in respect of the identifiable assets acquired are set
out below. The amounts presented are considered to be materially
consistent with the existing accounting policies of the Group. The
Group has yet to finalise its exercise to determine these balances
and therefore the amounts presented in this note should be
considered as provisional. Final amounts will be presented with the
Group's annual results for the year ending 30 September 2019.
Note GBPm
Assets
Loans to customers a 2.0
Intangible assets b 0.1
-----
Total net identifiable assets 2.1
Goodwill c 16.5
-----
Consideration d 18.6
=====
a) Loans to customers
The financial assets acquired comprised loans to individuals in
advance of amounts which become payable in respect of probate and
matrimonial legal processes. Their fair value was GBP2.0m, the
gross contractual value was GBP2.1m and the contractual flows not
to be collected were GBP0.1m.
b) Intangible assets
Identifiable intangible assets acquired represent broker
networks and trading arrangements. They will be amortised over a
ten year period.
c) Goodwill
The goodwill of GBP16.5m arising from the acquisition consists
of the values of the business relationships, market positions and
knowledge base inherent in the business which do not qualify for
recognition as intangible assets. These will be utilised in the
future development of the acquired business and in expanding the
Group's asset finance activities. None of the goodwill is expected
to be deductible for tax purposes.
The goodwill has been allocated to the Asset Finance cash
generating unit ('CGU') for impairment testing period as its
activities have become part of the activities of the wider Asset
Finance business.
d) Consideration
The total consideration accounted for on acquisition was:
Total
GBPm
Consideration paid on completion 6.6
Consideration paid on agreement of completion
accounts 0.2
Contingent consideration 11.8
------
Total consideration 18.6
======
7. ACquisition of titlestone
On 3 July 2018 the Group acquired the entire share capital of
Titlestone Property Finance Limited ('TPF'), together with a
portfolio of loans held by companies related to it, (together
'Titlestone'). Titlestone is a development finance business, active
in similar markets to the Group's own development finance
operation, and its acquisition allows the Group to increase the
reach of its proposition and to reach a more economic scale more
rapidly than would be possible through organic growth alone.
The Group acquired 100% of the voting interests in TPF and the
consideration for the shares and the loan portfolio was satisfied
entirely in cash. Cash transferred on completion was GBP274.3m and
there are no deferred or contingent consideration arrangements.
Transaction costs of GBP1.1m have been included in operating
expenses for the year ended 30 September 2018.
The contribution of Titlestone to consolidated revenue for the
year ended 30 September 2018 was GBP6.6m and its contribution to
consolidated profit before tax for the period is set out below.
GBPm GBPm
Contribution to consolidated profit excluding
costs of acquisition 3.8
Transaction costs (1.1)
Other acquisition related expenses (0.9)
------
Total costs of acquisition (2.0)
------
Contribution to consolidated profit after
costs of acquisition 1.8
======
The amounts recognised in the consolidated accounts on
acquisition in respect of the identifiable assets acquired and
liabilities assumed are set out below. The amounts presented are
considered to be materially consistent with the existing accounting
policies of the Group. The Group has yet to finalise its exercise
to determine these balances and therefore the amounts presented in
this note should be considered as provisional. Final amounts will
be presented with the Group's annual results for the year ending 30
September 2019.
Note GBPm GBPm
Cash c 0.1
Loans to customers a 227.4
Sundry Assets 0.2
Intangible assets b 1.3
-------
Total assets 229.0
Sundry liabilities (2.0)
Deferred tax (0.3)
------
Total liabilities (2.3)
-------
Total net identifiable assets 226.7
Goodwill d 47.6
-------
Consideration c 274.3
=======
a) Loans to customers
The financial assets acquired at 3 July 2018 comprised
development finance loans. Their fair value was GBP227.4m, the
gross contractual value was GBP231.0m and the total value expected
not to be collected was GBP5.9m
b) Intangible assets
Identifiable intangible assets acquired represent broker
networks and trading arrangements. They will be amortised over a
ten year period
c) Cashflow on acquisition
GBPm
Net cashflow on acquisition were
Payment for shares 46.7
Payments for loans 227.6
------
Total payments on completion 274.3
Cash (0.1)
------
Net cash outflow 274.2
======
The fair value and the gross contractual value of the cash
balances acquired were equal to their book value. There are no
contractual cash flows which are expected not to be
collectible.
d) Goodwill
The goodwill of GBP47.6m arising from the acquisition consists
of the values of the business relationships, market positions and
knowledge base inherent in the business which do not qualify for
recognition as intangible assets. These will be utilised in the
future development of the Group's development finance operations,
with which the acquired activities are being merged. None of the
goodwill is expected to be deductible for tax purposes.
The acquired goodwill has been allocated to a CGU including both
the acquired operations and the Group's organically generated
development finance business with which it has been merged.
8. SEGMENTAL INFORMATION
The Group analyses its operations, both for internal management
reporting and external financial reporting, on the basis of the
markets from which its assets are generated. The segments used are
described below:
-- Mortgages, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's motor finance and
other equipment leasing activities, together with development
finance and other offerings targeted towards SME customers
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
Dedicated financing and administration costs of each of these
businesses are allocated to the segment. Shared central costs are
not allocated between segments, nor is income from central cash
balances or the carrying costs of unallocated savings balances.
Loans to customers and operating lease assets are allocated to
segments as are dedicated securitisation funding arrangements and
their related cross-currency basis swaps and cash balances.
Retail deposits and their related costs are allocated to the
segments based on the utilisation of those deposits. Retail
deposits raised in advance of lending are not allocated.
Other assets and liabilities are not allocated between
segments.
The costs arising in the year ended 30 September 2018 from the
Iceberg and Titlestone acquisitions of GBP2.2m have not been
allocated as they are not directly related to customer facing
activity, nor has the gain relating to the sale of financial
assets.
All of the Group's operations are conducted in the UK, all
revenues arise from external customers and there are no
inter-segment revenues. No customer contributes more than 10% of
the revenue of the Group.
Financial information about these business segments, prepared on
the same basis as used in the consolidated accounts of the Group,
is shown below.
Year ended 30 September 2018
Mortgages Commercial Idem Unallocated Total Segments
Lending Capital Items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 299.1 50.1 97.9 4.8 451.9
Interest payable (141.5) (17.9) (10.1) (27.8) (197.3)
---------- ----------- --------- ------------ ---------------
Net interest income 157.6 32.2 87.8 (23.0) 254.6
Other operating
income 7.6 10.9 0.7 28.1 47.3
---------- ----------- --------- ------------ ---------------
Total operating
income 165.2 43.1 88.5 5.1 301.9
Direct costs (14.9) (21.2) (10.4) (67.7) (114.2)
Provisions for
losses (5.5) (2.0) 0.1 - (7.4)
---------- ----------- --------- ------------ ---------------
144.8 19.9 78.2 (62.6) 180.3
========== =========== ========= ============ ===============
Year ended 30 September 2017
Mortgages Commercial Idem Unallocated Total Segments
Lending Capital Items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 274.7 33.8 98.9 1.8 409.2
Interest payable (123.6) (10.6) (11.4) (31.0) (176.6)
---------- ----------- --------- ------------ ---------------
Net interest income 151.1 23.2 87.5 (29.2) 232.6
Other operating
income 9.6 9.9 0.7 - 20.2
---------- ----------- --------- ------------ ---------------
Total operating
income 160.7 33.1 88.2 (29.2) 252.8
Direct costs (13.7) (18.9) (10.8) (58.9) (102.3)
Provisions for
losses (3.7) (0.1) (1.5) - (5.3)
---------- ----------- --------- ------------ ---------------
143.3 14.1 75.9 (88.1) 145.2
========== =========== ========= ============ ===============
The segmental profits disclosed above reconcile to the group
results as shown below.
2018 2017
GBPm GBPm
Results shown above 180.3 145.2
Fair value items 1.2 (0.4)
------ ------
Operating profit 181.5 144.8
====== ======
The assets and liabilities attributable to each of the segments
at 30 September 2018 and 30 September 2017 on the basis described
above were:
Note Mortgages Commercial Idem Total Segments
Lending Capital
GBPm GBPm GBPm GBPm
30 September 2018
Segment assets
Loans to customers 16 10,473.5 1,133.2 521.1 12,127.8
Operating lease
assets - 35.4 - 35.4
Cross-currency
basis swaps 18 829.7 - - 829.7
Securitisation
cash 15 319.0 - 19.8 338.8
---------- ----------- --------- ---------------
11,622.2 1,168.6 540.9 13,331.7
========== =========== ========= ===============
Segment liabilities
Allocated deposits 4,702.4 1,443.5 411.0 6,556.9
Securitisation
funding 6,457.2 - 33.1 6,490.3
---------- ----------- --------- ---------------
11,159.6 1,443.5 444.1 13,047.2
========== =========== ========= ===============
Note Mortgages Commercial Idem Total Segments
Lending Capital
GBPm GBPm GBPm GBPm
30 September 2017
Segment assets
Loans to customers 16 9,953.9 558.8 611.4 11,124.1
Operating lease
assets - 23.4 - 23.4
Cross-currency
basis swaps 18 896.3 - - 896.3
Securitisation
cash 15 543.0 - 31.0 574.0
---------- ----------- --------- ---------------
11,393.2 582.2 642.4 12,617.8
========== =========== ========= ===============
Segment liabilities
Allocated deposits 3,401.2 686.9 249.8 4,337.9
Securitisation
funding 7,597.1 - 184.7 7,781.8
---------- ----------- --------- ---------------
10,998.3 686.9 434.5 12,119.7
========== =========== ========= ===============
An analysis of the Group's financial assets by type and segment
is shown in note 16. All of the assets shown above were located in
the UK.
The additions to non-current assets, excluding financial assets,
in the year which are included in segmental assets above are
investments of GBP19.3m (2017: GBP12.9m) in assets held for leasing
under operating leases, included in the Commercial Lending segment.
No other fixed asset additions were allocated to segments.
The segmental assets and liabilities may be reconciled to the
consolidated balance sheet as shown below.
2018 2017
GBPm GBPm
Total segment assets 13,331.7 12,617.8
Unallocated assets
Central cash and investments 971.8 922.9
Unallocated derivatives 26.0 10.3
Operational property, plant and
equipment 21.4 22.8
Intangible assets 169.3 104.4
Other (5.1) 4.0
--------- ---------
Total assets 14,515.1 13,682.2
========= =========
2018 2017
GBPm GBPm
Total segment liabilities 13,047.2 12,119.7
Unallocated liabilities
Unallocated retail deposits (1,260.3) (722.5)
Derivative financial instruments 4.7 7.1
Central borrowings 1,470.9 1,145.4
Tax liabilities 27.0 22.2
Retirement benefit obligations 19.5 29.8
Other 110.2 71.1
---------- ---------
Total liabilities 13,419.2 12,672.8
========== =========
9. Interest receivable
2018 2017
GBPm GBPm
Interest receivable in respect
of
Loans and receivables 408.9 375.1
Finance leases 34.4 28.8
Factoring income 2.2 2.2
------ ------
Interest on loans to customers 445.5 406.1
Other interest receivable 6.4 3.1
------ ------
Total interest on financial
assets 451.9 409.2
====== ======
10. Interest payable and similar charges
Note 2018 2017
GBPm GBPm
On retail deposits 83.1 47.9
On asset backed loan notes 60.3 70.2
On bank loans and overdrafts 16.5 22.7
On corporate bonds 10.9 13.1
On retail bonds 18.6 18.6
On central bank facilities 5.2 1.1
------ ------
Total interest on financial
liabilities 194.6 173.6
On pension scheme deficit 23 0.8 1.3
Discounting on contingent
consideration 22 0.5 0.3
Other finance costs 1.4 1.4
------ ------
197.3 176.6
====== ======
11. Gain on disposal of financial assets
During the year, the Group realised a gain of GBP28.0m on the
disposal of second charge mortgages and unsecured consumer loans
held in its Idem Capital division. The loans were originally
acquired from various third parties as part of a number of
portfolio purchases over time.
As a consequence of this transaction, facility break costs of
GBP1.2m were incurred. These have been included within interest
payable on asset backed loan notes.
12. OTHER INCOME
2018 2017
GBPm GBPm
Loan account fee income 9.0 9.0
Broker commissions 2.1 3.6
Third party servicing 3.4 3.3
Other income 1.0 1.3
----- -----
15.5 17.2
===== =====
13. FAIR VALUE NET gains / (losses)
The fair value net gain / (loss) represents the accounting
volatility on derivative instruments which are matching risk
exposure on an economic basis generated by the requirements of IAS
39. Some accounting volatility arises on these items due to
accounting ineffectiveness on designated hedges, or because hedge
accounting has not been adopted or is not achievable on certain
items. The losses and gains are primarily due to timing differences
in income recognition between the derivative instruments and the
economically hedged assets and liabilities. Such differences will
reverse over time and have no impact on the cash flows of the
Group.
14. Earnings per share
Earnings per ordinary share is calculated as follows:
2018 2017
Profit for the year (GBPm) 145.8 117.2
-------- --------
Basic weighted average number of ordinary
shares ranking for dividend during the year
(million) 260.8 271.6
Dilutive effect of the weighted average
number of share options and incentive plans
in issue during the year (million) 8.4 8.0
-------- --------
Diluted weighted average number of ordinary
shares ranking for dividend during the year
(million) 269.2 279.6
======== ========
Earnings per ordinary share - basic 55.9p 43.1p
- diluted 54.2p 41.9p
======== ========
15. Cash and CASH EQUIVALENTS
2018 2017 2016
GBPm GBPm GBPm
Balances with central banks 895.9 615.0 315.0
Balances with other banks 414.7 881.9 922.6
-------- -------- --------
Cash and cash equivalents 1,310.6 1,496.9 1,237.6
======== ======== ========
Only 'Free Cash' is unrestrictedly available for the Group's
general purposes. Cash received in respect of loan assets funded
through warehouse facilities and securitisations is not immediately
available, due to the terms of those arrangements. This cash is
shown as 'securitisation cash' below.
Balances with central banks form part of the liquidity buffer of
Paragon Bank PLC and are therefore not available for the Group's
general purposes. Free cash may also be deposited at the Bank of
England.
Cash held by the Trustee of the Group's employee share ownership
plan may only be used to invest in the shares of the Company,
pursuant to the aims of that plan. This is shown as 'ESOP cash'
below.
The total consolidated 'Cash and Cash Equivalents' balance may
be analysed as shown below:
2018 2017 2016
GBPm GBPm GBPm
Free cash 238.0 305.5 383.1
Securitisation cash 338.8 574.0 537.1
Liquidity buffer 724.9 615.0 315.0
ESOP cash 8.9 2.4 2.4
-------- -------- --------
1,310.6 1,496.9 1,237.6
======== ======== ========
16. loans to customers
2018 2017 2016
GBPm GBPm GBPm
Loans to customers 12,127.8 11,124.1 10,737.5
Fair value adjustments from
portfolio hedging (24.1) (8.7) 12.5
--------- --------- ---------
12,103.7 11,115.4 10,750.0
========= ========= =========
The Group's loan assets at 30 September 2018, analysed between
the segments described in note 8 are as follows:
Commercial Idem Capital
Mortgages Lending Total
GBPm GBPm GBPm GBPm
At 30 September 2018
First mortgages 10,332.2 - - 10,332.2
Consumer loans 141.3 - 448.3 589.6
Motor finance - 256.6 72.8 329.4
Asset finance - 403.4 - 403.4
Development finance - 352.8 - 352.8
Other loans - 120.4 - 120.4
------------ ----------- ------------- ---------
Loans to customers 10,473.5 1,133.2 521.1 12,127.8
============ =========== ============= =========
At 30 September 2017
First mortgages 9,855.5 - - 9,855.5
Consumer loans 98.4 - 611.4 709.8
Motor finance - 163.0 - 163.0
Asset finance - 325.0 - 325.0
Development finance - 42.3 - 42.3
Other loans - 28.5 - 28.5
------------ ----------- ------------- ---------
Loans to customers 9,953.9 558.8 611.4 11,124.1
============ =========== ============= =========
The Group's purchased loan portfolios include GBP11.7m of first
mortgages in the Mortgages segment (2017: GBP12.6m), and GBP352.5m
of consumer loan and GBP72.8m of motor finance loans in the Idem
Capital segment (2017: GBP490.9m and GBPnil). Information on the
ERCs for first mortgages and consumer loans is given in note 5. All
other loans above are internally generated or arise from acquired
operations.
17. IMPAIRMENT PROVISIONS ON LOANS TO CUSTOMERS
The following amounts in respect of impairment provisions, net
of allowances for recoveries of written off assets, have been
deducted from the appropriate assets in the balance sheet.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
At 1 October 2016 88.8 22.6 1.2 112.6
Amounts provided in the period 3.8 2.3 2.2 8.3
Amounts written off (3.5) (6.6) (0.2) (10.3)
----------- ----------------- -------- -------
At 30 September 2017 89.1 18.3 3.2 110.6
Amounts provided in the period 5.6 0.6 2.9 9.1
Amounts written off (3.7) (7.6) (1.0) (12.3)
----------- ----------------- -------- -------
At 30 September 2018 91.0 11.3 5.1 107.4
=========== ================= ======== =======
Of the above balances, the following provisions were held in
respect of realised losses not charged off, which remain on the
balance sheet and provided for in full.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
At 30 September 2018 78.2 - 0.9 79.1
At 30 September 2017 76.4 0.3 0.3 77.0
=========== ================= ======== ======
The amounts charged to the profit and loss account, net of
recoveries of previously provided amounts are set out below.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
Year ended 30 September 2018
Amounts provided in the year 5.6 0.6 2.9 9.1
Recovery of amounts previously
provided (0.1) (0.5) (1.1) (1.7)
----------- ----------------- -------- ------
Net impairment for year 5.5 0.1 1.8 7.4
=========== ================= ======== ======
Year ended 30 September 2017
Amounts provided in the year 3.8 2.3 2.2 8.3
Recovery of amounts previously
provided (0.1) (0.7) (2.2) (3.0)
----------- ----------------- -------- ------
Net impairment for year 3.7 1.6 - 5.3
=========== ================= ======== ======
18. Derivative Financial Assets and Liabilities
Note 2018 2017 2016
GBPm GBPm GBPm
Derivative financial
assets 855.7 906.6 1,366.4
Derivative financial
liabilities (4.7) (7.1) (15.8)
------ ------ --------
851.0 899.5 1,350.6
====== ====== ========
Of which:
Foreign exchange basis
swaps 829.7 896.3 1,364.8
Other derivatives 21.3 3.2 (14.2)
------ ------ --------
851.0 899.5 1,350.6
====== ====== ========
The Group's securitisation borrowings are denominated in
sterling, euros and US dollars. All currency borrowings are swapped
at inception so that they have the effect of sterling borrowings.
These swaps provide an effective hedge against exchange rate
movements, but the requirement to carry them at fair value leads,
when exchange rates have moved significantly since the issue of the
notes, to large balances for the swaps being carried in the balance
sheet. This is currently the case with both euro and US dollar
swaps, although the debit balance is compensated for by
retranslating the borrowings at the current exchange rate.
19. INTangible assets
2018 2017 2016
GBPm GBPm GBPm
Goodwill 162.2 98.1 98.4
Computer software 2.1 2.0 2.1
Other intangible assets 5.0 4.3 4.9
------ ------ ------
169.3 104.4 105.4
====== ====== ======
Other intangible assets comprise brands and the benefit of
business networks recognised on the acquisition of subsidiary
companies.
20. Retail deposits
The Group's retail deposits, held by Paragon Bank PLC, were
received from customers in the UK and are denominated in sterling.
The deposits comprise principally term deposits and 120 day notice
accounts. The method of interest calculation on these deposits is
analysed as follows:
2018 2017 2016
GBPm GBPm GBPm
Fixed rate 3,643.1 2,675.9 1,332.5
Variable rates 1,653.5 939.5 541.4
-------- -------- --------
5,296.6 3,615.4 1,873.9
======== ======== ========
The weighted average interest rate on retail deposits at 30
September 2018, analysed by charging method, was:
2018 2017 2016
% % %
Fixed rate 1.94 1.89 2.11
Variable rates 1.36 1.21 1.65
===== ===== =====
The contractual maturity of these deposits is analysed
below.
2018 2017 2016
GBPm GBPm GBPm
Amounts repayable
In less than three months 256.8 211.4 55.7
In more than three months,
but not more than one year 2,024.7 1,399.6 690.3
In more than one year, but
not more than two years 1,010.6 770.0 572.9
In more than two years,
but not more than five years 655.3 629.7 283.9
---------- ---------- --------
Total term deposits 3,947.4 3,010.7 1,602.8
Repayable on demand 1,349.2 604.7 271.1
---------- ---------- --------
5,296.6 3,615.4 1,873.9
Fair value adjustments for
portfolio hedging (4.2) (3.5) 0.8
---------- ---------- --------
5,292.4 3,611.9 1,874.7
========== ========== ========
21. BORROWINGS
All borrowings described in the Group Accounts for the year
ended 30 September 2017 remained in place throughout the period,
except as noted below.
On 6 April 2018 Fitch Ratings announced an upgrade of the
Group's Long-Term Issuer Default Rating and its senior unsecured
debt rating to BBB from BBB-. Consequentially the rating of the
Group's GBP150.0m Tier 2 Bond was also upgraded one notch from BB+
to BBB-.
During the period the Group continued to access facilities
provided by the Bank of England. The Term Funding Scheme ('TFS')
continued to be drawn upon until it ceased to be available for new
drawings in February 2018 and since that time the Indexed Long-Term
Repo ('ILTR') scheme has been accessed.
Of the Group's borrowings at 30 September 2017, the mortgage
backed floating rate notes issued by Paragon Mortgages (No. 8) PLC
were repaid in January 2018, following the purchase of its loan
assets by other group companies, principally Paragon Bank PLC.
During the period, the warehouse facility in Paragon Seventh
Funding Limited was not renewed and was paid down. This has reduced
the Group's available warehouse capacity by GBP200.0m.
On 25 April 2018, a Group company, Paragon Mortgages (No. 25)
PLC, issued GBP435.3m of sterling mortgage backed floating rate
notes to external investors at par. GBP375.0m of the notes were
class A notes, rated AAA by Fitch and Aaa by Moody's, GBP31.8m were
class B notes, rated AA by Fitch and Aa1 by Moody's and GBP28.5m
were class C notes rated A- by Fitch and A1 by Moody's. The
interest rates above LIBOR on the notes were 0.65% on the A notes,
0.95% on the B notes and 1.30% on the C notes. The initial average
interest margin on the transaction was 0.72% and the proceeds were
used to refinance existing short term liabilities. The Group
retained GBP289.4m of notes of various classes meaning that its
investment represented 39.9% of the issued notes.
Repayments made in respect of the Group's borrowings are shown
in note 30.
22. Sundry Liabilities
Sundry liabilities include GBP40.8m of amounts falling due after
more than one year (2017: GBP23.5m). Contingent consideration of
GBP25.7m, falling due after more than one year, is included in the
sundry liabilities balance (2017: GBP14.0m).
23. RETIREMENT BENEFIT OBLIGATIONS
Since the last IAS 19 actuarial valuation at 30 September 2017
there have also been movements in financial conditions, requiring
an adjustment to the actuarial assumptions underlying the
calculation of the defined benefit obligation at 30 September 2018.
In particular, over the period since the 30 September 2017
actuarial valuation, the discount rate has increased by 0.3% per
annum, whereas expectations of long term inflation have increased
by 0.1% per annum.
The net effect of these changes has resulted in a decrease in
the value of the defined benefit obligation at 30 September
2018.
The movements in the deficit on the defined benefit plan during
the year ended 30 September 2018 are summarised below.
Year to Year to
30 September 30 September
2018 2017
GBPm GBPm
Opening pension deficit 29.8 58.4
Service cost 1.8 2.4
Net funding cost 0.8 1.3
Administrative expenses 0.5 0.4
Employer contributions (4.5) (3.7)
Amounts posted to other comprehensive
income
Return on plan assets not included in
interest (1.1) (7.4)
Actuarial (gain) arising from demographic
assumptions (1.8) (6.7)
Actuarial (gain) arising from experience
adjustments - (4.2)
Actuarial (gain)/loss from changes in
financial assumptions (6.0) (10.7)
------------- -------------
Closing pension deficit 19.5 29.8
============= =============
24. Called-up share capital
The share capital of the Company consists of a single class of
GBP1 ordinary shares.
Movements in the issued share capital in the year were:
2018 2017
Number Number
Ordinary shares
At 1 October 2017 281,489,701 295,852,094
Shares issued 107,235 637,607
Shares cancelled - (15,000,000)
------------ -------------
At 30 September 2018 281,596,936 281,489,701
============ =============
During the year the Company issued 107,235 shares (2017:
637,607) to satisfy options granted under Sharesave schemes for a
consideration of GBP360,031 (2017: GBP1,575,925).
25. RESERVES
2018 2017 2016
GBPm GBPm GBPm
Share premium account 65.8 65.5 64.6
Capital redemption reserve 28.7 28.7 13.7
Merger reserve (70.2) (70.2) (70.2)
Cash flow hedging reserve 3.3 2.5 2.1
Profit and loss account 890.7 784.5 725.9
------- ------- -------
918.3 811.0 736.1
======= ======= =======
26. own shares
2018 2017
GBPm GBPm
Treasury shares
At 1 October 2017 66.6 46.2
Shares purchased 25.2 65.5
Shares cancelled - (45.1)
------- -------
At 30 September 2018 91.8 66.6
------- -------
ESOP shares
At 1 October 2017 16.5 16.3
Shares purchased 6.2 4.2
Options exercised (10.5) (4.0)
------- -------
At 30 September 2018 12.2 16.5
------- -------
Balance at 30 September
2018 104.0 83.1
======= =======
Balance at 1 October 2017 83.1 62.5
======= =======
At 30 September 2018 the number of the Company's own shares held
in treasury was 20,800,284 (2017: 15,693,643). These shares had a
nominal value of GBP20,800,284 (2017: GBP15,693,643). These shares
do not qualify for dividends.
The Employee Share Ownership Plan ('ESOP') shares are held in
trust for the benefit of employees exercising their options under
the Company's share option schemes and awards under the Paragon
Performance Share Plan and Deferred Share Bonus Plan. The trustees'
costs are included in the operating expenses of the Group.
At 30 September 2018, the trusts held 2,874,825 ordinary shares
(2017: 3,180,661) with a nominal value of GBP2,874,825 (2017:
GBP3,180,661) and a market value of GBP13,764,662 (2017:
GBP13,975,824). Options, or other share-based awards, were
outstanding against all of these shares at 30 September 2018 (2017:
all). The dividends on all of these shares have been waived (2017:
all).
27. equity Dividend
Amounts recognised as distributions to equity shareholders in
the Group in the period:
2018 2017 2018 2017
Per share Per share GBPm GBPm
Equity dividends on ordinary
shares
Final dividend for the year
ended 30 September 2017 11.0p 9.2p 28.9 25.5
Interim dividend for the
year ended 30 September
2018 5.5p 4.7p 14.2 12.5
---------- ---------- ------- -------
16.5p 13.9p 43.1 38.0
========== ========== ======= =======
Amounts paid and proposed in respect of the year:
2018 2017 2018 2017
Per share Per share GBPm GBPm
Interim dividend for the
year ended 30 September
2018 5.5p 4.7p 14.2 12.5
Proposed final dividend
for the year ended 30 September
2018 13.9p 11.0p 35.8 28.9
---------- ---------- ------- -------
19.4p 15.7p 50.0 41.4
========== ========== ======= =======
The proposed final dividend for the year ended 30 September 2018
will be paid on 18 February 2019, subject to approval at the Annual
General Meeting, with a record date of 11 January 2019. The
dividend will be recognised in the accounts when it is paid.
28. net cash flow from operating activities
2018 2017
GBPm GBPm
Profit before tax 181.5 144.8
Non-cash items included in profit and other
adjustments:
Depreciation of operating property, plant
and equipment 1.9 1.9
Profit on disposal of operating property,
plant and equipment (0.2) (0.1)
Amortisation of intangible assets 2.1 1.6
Foreign exchange movement on borrowings (67.6) (468.9)
Other non-cash movements on borrowings 6.0 6.4
Impairment losses on loans to customers 7.4 5.3
Charge for share based remuneration 6.1 4.2
Net (increase) / decrease in operating assets:
Operating lease assets (12.0) (7.4)
Loans to customers (781.7) (391.9)
Derivative financial instruments 50.9 459.8
Fair value of portfolio hedges 15.4 21.2
Other receivables (6.1) -
Net increase / (decrease) in operating liabilities:
Retail deposits 1,681.2 1,741.5
Derivative financial instruments (2.4) (8.7)
Fair value of portfolio hedges (0.7) (4.3)
Other liabilities 24.6 (1.8)
-------- --------
Cash generated by operations 1,106.4 1,503.6
Income taxes (paid) (32.0) (28.9)
-------- --------
1,074.4 1,474.7
======== ========
Cash flows relating to plant and equipment held for leasing
under operating leases are classified as operating cash flows.
29. net cash flow from investing activities
2018 2017
GBPm GBPm
Proceeds from sales of operating property,
plant and equipment 0.5 0.3
Purchases of operating property, plant and
equipment (0.8) (1.7)
Purchases of intangible assets (1.5) (0.9)
Decrease in short term investments - 7.1
Movement in loans to subsidiary undertakings - -
Acquisitions (281.0) (1.6)
-------- ------
Net cash (utilised) / generated by investing
activities (282.8) 3.2
======== ======
30. net cash flow from financing activities
2018 2017
GBPm GBPm
Shares issued (note 24) 0.4 1.5
Dividends paid (note 27) (43.1) (38.0)
Issue of asset backed floating rate
notes 432.5 69.8
Repayment of asset backed floating
rate notes (1,289.7) (1,503.0)
Repayment of corporate bonds - (110.0)
Movement on central bank facilities 324.4 700.0
Movement on other bank facilities (371.1) (268.6)
Purchase of shares (note 26) (31.8) (69.7)
---------- ----------
Net cash (utilised) by financing
activities (978.4) (1,218.0)
========== ==========
31. RELATED PARTY TRANSACTIONS
In the year ended 30 September 2018, the Group has continued the
related party relationships described in note 64 on page 215 of the
Annual Report and Accounts of the Group for the financial year
ended 30 September 2017. Related party transactions in the period
comprise the compensation of the Group's key management personnel,
transactions with the Group Pension Plan and fees paid to a
non-executive director in respect of his appointment as a director
of the Corporate Trustee of the Group Pension Plan. There have been
no changes in these relationships which could have a material
effect on the financial position or performance of the Group in the
period.
During the year certain of the non-executive directors of the
Group were beneficially interested in savings deposits made with
Paragon Bank, on the same terms as were available to members of the
public. The amount of such deposits outstanding at the year end was
GBP250,000 (2017: GBPnil).
Save for the transactions referred to above, there have been no
related party transactions in the year end 30 September 2018.
APPICES - ADDITIONAL FINANCIAL INFORMATION
For the year ended 30 September 2018
A. Underlying results
The Group reports underlying profit excluding fair value
accounting adjustments arising from its hedging arrangements and
certain one-off items of income and costs relating to asset sales
and acquisitions. These include the direct transaction cost of the
acquisitions, the additional net funding costs of deposits built up
over time to satisfy consideration on acquisitions and the break
costs of the Idem Capital facility.
The transactions relating to the acquisitions and asset sales do
not form part of the day-to-day activities of the Group and,
therefore, their removal provides greater clarity on the Group's
operational performance. There were no corporate acquisitions or
significant asset sales in the year ended 30 September 2017.
This measure has been chosen following consideration of the
needs of investors and analysts following the Group's shares, and
because management feel it better represents the underlying
economic performance of the Group's business.
2018 2018 2017
GBPm GBPm GBPm
Profit on ordinary activities
before tax 181.5 144.8
Less: Gain on disposal of financial (28.0) -
assets
Add back: Acquisition related -
funding costs included in net 0.7
interest
Add back: Overhead costs related
to acquisition related funding 0.2
Add back: Transaction costs 1.3 -
------
Add back: Acquisition related 2.2 -
costs
Add back: Facility break costs 1.2 -
Add back: Other one-off costs 0.8 -
Add back: Fair value adjustments (1.2) 0.4
------- ------
Underlying profit 156.5 145.2
======= ======
Underlying basic earnings per share, calculated on the basis of
underlying profit, charged at the overall effective tax rate, is
derived as follows.
2018 2017
GBPm GBPm
Underlying profit 156.5 145.2
Tax at effective rate (30.8) (27.7)
-------- --------
Underlying earnings 125.7 117.5
======== ========
Basic weighted average number
of shares (note 14) 260.8 271.6
-------- --------
Underlying earnings per share 48.2p 43.3p
======== ========
Underlying return on tangible equity is derived using underlying
earnings calculated on the same basis.
2018 2017
GBPm GBPm
Underlying earnings 125.7 117.5
Amortisation of intangible assets 2.1 1.6
------ ------
Adjusted underlying earnings 127.8 119.1
====== ======
Average tangible equity (note
4(b)) 915.8 884.5
------ ------
Underlying RoTE 14.0% 13.5%
====== ======
B. income statement ratios
The average net interest margin is calculated as follows:
Note 2018 2017
GBPm GBPm
Opening loans to customers 16 11,124.1 10,737.5
Closing loans to customers 16 12,127.8 11,124.1
--------- ---------
Average loans to customers 11,626.0 10,930.8
--------- ---------
Net interest 254.6 232.6
Net interest margin 2.19% 2.13%
========= =========
Impairment provision 7.4 5.3
Impairment as a percentage of average
loan balance 0.06% 0.05%
========= =========
Net interest margin on an underlying basis is derived as shown
below
2018 2017
GBPm GBPm
Net interest (as above) 254.6 232.6
One off items related to interest
Acquisition funding costs 0.7 -
Facility break costs 1.2 -
--------- ---------
Underlying net interest 256.5 232.6
--------- ---------
Average loans to customers (as
above) 11,626.0 10,930.8
--------- ---------
Underlying net interest margin 2.21% 2.13%
========= =========
C. COST:INCOME RATIO
Cost:income ratio is derived as follows:
Note 2018 2017
GBPm GBPm
Cost - operating expenses 114.2 102.3
Total operating income 301.9 252.8
------ ------
Cost / Income 37.8% 40.5%
====== ======
Underlying cost:income ratio is derived as follows:
2018 2017
GBPm GBPm
Cost - as above 114.2 102.3
Acquisition costs expensed (1.5) -
Other one-off costs (0.8) -
------- ------
Adjusted cost 111.9 102.3
------- ------
Income - as above 301.9 252.8
Gain on disposal of financial (28.0) -
asset
Acquisition net funding costs 0.7 -
Facility break costs 1.2 -
------- ------
Adjusted income 275.8 252.8
------- ------
Underlying cost:income ratio 40.6% 40.5%
======= ======
D. Net asset value
Note 2018 2017
Total equity (GBPm) 1,095.9 1,009.4
-------- --------
Outstanding issued shares (m) 24 281.6 281.5
Treasury shares (m) 26 (20.8) (15.7)
Shares held by ESOP schemes (m) 26 (2.9) (3.2)
-------- --------
257.9 262.6
-------- --------
Net asset value per GBP1 ordinary GBP4.25 GBP3.84
share
======== ========
Tangible equity (GBPm) 4 926.6 905.0
-------- --------
Tangible net asset value per GBP1 GBP3.59 GBP3.45
ordinary share
======== ========
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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