TIDMSTB
RNS Number : 1947M
Secure Trust Bank PLC
07 May 2020
PRESS RELEASE
Thursday 7 May 2020
For immediate release
SECURE TRUST BANK PLC
Audited Final Results for the year ended 31 December 2019
Continued strong performance in 2019 delivering increased
profits
Secure Trust Bank PLC ("STB", the "Bank" or the "Group") is
pleased to announce an 11.5% increase in Group profit before tax to
GBP38.7m for the year ended 31 December 2019.
Controlled growth in both our Business Finance and Consumer
Finance businesses continued to deliver increased profits in 2019.
Customer numbers, lending balances and income increased whilst the
cost of risk continued to decrease. These factors have driven
strong growth in reported and adjusted earnings despite the
slowdown in UK economic activity in the second half of 2019.
The first two phases of the Motor Finance transformation
programme were successfully completed in 2019. The Group expanded
its savings offering with the launch of its fixed term Cash ISA in
2019 and the Access product range developed for launch in 2020.
Capital and liquidity positions remain healthy.
In the light of the COVID-19 outbreak, the Group has implemented
contingency plans to ensure the wellbeing of its workforce, the
majority of whom are now working from home, while focusing on
supporting its customers and business partners, managing risks and
safeguarding capital. HM Government's lockdown strategy has led to
diminished Consumer Finance new business, with no new Motor Finance
lending being written at present and Retail Finance running at
circa 50% of normal, supported by demand for sports equipment and
consumer electronics such as laptops. Significantly increased
impairment charges are likely due to higher unemployment and falls
in asset values and will impact the 2020 result. Additional stress
testing has been undertaken and is continuing to assess the
potential impact of the crisis on capital and liquidity positions,
which remain healthy. Assessments to date indicate that the short
duration of the loan books helps to maintain capital and liquidity
levels above regulatory requirements. Given the uncertain impact of
the outbreak on the UK economy, the Group has currently suspended
forward guidance for 2020 and has decided not to recommend a final
dividend for 2019.
FINANCIAL HIGHLIGHTS
-- Statutory profit before tax up 11.5% to GBP38.7m (2018: GBP34.7m)
-- Adjusted profit before tax of GBP41.1m (2018: GBP36.7m), up 12.0%
-- Continued improvement in loan book quality has reduced cost of risk to 1.4% (2018: 1.8%)
-- Healthy common equity tier 1 ratio of 12.7% (2018: 13.8%*)
supporting the strong growth in the loan portfolios
-- Total capital ratio of 15.0% (2018: 16.3%*)
-- Operating income GBP165.5m (2018: GBP151.6m) up 9.2%
-- Basic earnings per share 168.3p (2018: 153.2p) up 9.9%
-- Adjusted earnings per share 178.6p (2018: 161.8p) up 10.4%
-- Adjusted return on average equity of 13.5% (2018: 13.1%)
-- Total assets GBP2,682.8m (December 2018: GBP2,444.3m) up 9.8%
-- No final dividend recommended for 2019 (2019 interim
dividend: 20p per share; 2018 total dividend: 83p per share)
* Note: After accounting for the 2018 dividend, the CET 1 ratio
for 2018 is 13.2% and the total capital ratio for 2018 is 15.7%
OPERATIONAL HIGHLIGHTS
-- Total customer numbers increased by 24.9% to 1,598,256 (2018: 1,279,783)
-- Customer satisfaction scores, as measured by Feefo, continue to be above 90%
-- New Cash ISA products launched in April 2019
-- V12 Vehicle Finance brand launched and first two phases of
Motor Transformation Programme implemented
-- Overall loan book GBP2,450.1m (2018: GBP2,028.9m) up 20.8%
-- Total annual new business lending volumes grew 12.0% to GBP1,413.0m (2018: GBP1,261.9m)
-- Total Consumer Finance balances now exceed GBP1,200.9m (2018:
GBP990.4m), with Retail Finance balances growing by 15.4% since
December 2018 to GBP688.9m
-- Total Business Finance balances rose to GBP1,241.6m following
continued strong growth in Real Estate Finance and Commercial
Finance balances
-- The Commercial Finance invoice financing operation has now
funded over GBP3bn of customer invoices since inception in 2014
-- Customer deposits increased to GBP2,020.3m (2018: GBP1,847.7m) up 9.3%
Lord Forsyth, Chairman, said:
"2019 was another successful year for the Group with double
digit growth in profits before tax delivered for the second
successive year. This and a strong start to 2020 would ordinarily
see the Board recommend an increased dividend. However we have
rapidly entered a period of extreme uncertainty driven by the
COVID-19 outbreak and in these exceptional circumstances the Board
considered that it was more prudent to preserve capital.
Accordingly, the Board is not recommending a final dividend for
approval by shareholders at the Annual General Meeting. The Board
will keep this under review. The Group has plans in place which
seek to mitigate business disruption as far as practical and to
continue supporting customers, colleagues and business partners
during this unsettling period."
Paul Lynam, Chief Executive, said:
"In 2019 we delivered a strong performance across a broad range
of customer, staff and financial metrics and delivered 11.5% growth
in profit before tax, notwithstanding the marked slowdown of the UK
economy in the second half of the year and a substantial fall in
used motor car values during the summer. The Group entered 2020
aspiring to deliver double digit profit before tax growth for the
third successive year. After the first quarter the group was
trading in line with management expectations, despite increasing
impairment provisions to recognise the threat of COVID-19. From
mid-March we have seen a slowdown in demand for our products,
particularly in respect of our Consumer Finance lending. The extent
to which this contraction continues will be influenced by any
revival in economic activity and our credit risk appetites which
will remain cautious. Healthy capital and liquidity positions,
combined with the Group's flexible business model, means it is well
placed to navigate the current crisis."
This announcement together with the associated investors'
presentation are available on:
www.securetrustbank.com/results-reports/results-reports-presentations
Enquiries:
Secure Trust Bank PLC
Paul Lynam, Chief Executive Officer
Tel: 0121 693 9100
Stifel Nicolaus Europe Limited (Joint Broker)
Robin Mann
Gareth Hunt
Stewart Wallace
Tel: 020 7710 7600
Canaccord Genuity Limited (Joint Broker)
Sunil Duggal
David Tyrrell
Tel: 020 7523 8000
Tulchan Communications
Tom Murray
Sheebani Chothani
Tel: 020 7353 4200
Forward looking statements
This document contains forward looking statements with respect
to the business, strategy and plans of Secure Trust Bank PLC and
its current goals and expectations relating to its future financial
condition and performance. Statements that are not historical
facts, including statements about Secure Trust Bank PLC's or
management's beliefs and expectations, are forward looking
statements. By their nature, forward looking statements involve
risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. Secure Trust Bank
PLC's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a
result of a variety of factors. These include UK domestic and
global economic and business conditions, risks concerning borrower
credit quality, market related risks including interest rate risk,
inherent risks regarding market conditions and similar
contingencies outside Secure Trust Bank PLC's control, any adverse
experience in inherent operational risks, any unexpected
developments in regulation or regulatory and other factors. The
forward looking statements contained in this document are made as
of the date hereof, and Secure Trust Bank PLC undertakes no
obligation to update any of its forward looking statements.
Chairman's statement
Despite some headwinds, 2019 has been another successful year
for the Group.
Statutory profit before tax grew by 11.5% to GBP38.7 million,
basic earnings per share by 9.9% and lending balances exceeded
GBP2.4 billion at the end of the year.
By the end of the year we had more than 1.5 million customers,
deposits of GBP2,020.3 million and the cost of risk had fallen from
1.8% in 2018 to 1.4% (see page 190 for definition).
COVID-19 will cause substantial damage to the UK and global
economy. The Group has plans in place which seek to mitigate
business disruption, protect the welfare of our employees and
continue supporting customers and business partners during this
unsettling period.
The strong start to 2020 would ordinarily see the Board
recommend an increased dividend. We have now entered a period of
extreme uncertainty driven by the COVID-19 outbreak, however, and
in these exceptional circumstances the Board considers that it is
prudent to preserve capital and is not recommending a final
dividend for approval by shareholders at the Annual General
Meeting.
In accordance with the current UK Government guidance on social
distancing, prohibition on non-essential travel and public
gatherings, the Board regrets that it will not be possible for
shareholders to attend this year's AGM in person. We would
encourage all shareholders to vote on the resolutions proposed at
the AGM however, and further details are set out in the Notice of
AGM.
The Group Employee Council established last year is working well
and the Group was ranked as the 29th best large company to work for
by Great Place to Work(R) in 2019. We have made changes to benefits
and to flexible working to help encourage diversity in our
workforce. Our matched giving scheme has been extended to support
the impressive charitable work undertaken by our employees.
As a responsible business, we are determined to make a positive
contribution to the communities in which we operate, the impact of
climate change features on our agenda and you can see the
impressive activities conducted by our employees set out on page 55
of the annual report and accounts.
As a Board we are committed to good governance and will continue
to strive to ensure our committees, our Directors' Remuneration
Policy and our actions maintain compliance with best practice.
At the year-end we announced changes to the composition of the
Board and its Committees arising from the appointment of David
McCreadie as a Non-Executive Director, the resignation of Neeraj
Kapur as Chief Financial Officer and the prospective retirement of
Paul Marrow at the 2020 AGM. Paul is deemed to be no longer
independent under the Corporate Governance Code after nine years'
service. He will be much missed and has made an outstanding
contribution to our business. I should also like to wish Neeraj
well in his new role at Provident Financial. I am especially
grateful to Ann Berresford, Paul Myers, Victoria Stewart, Lucy
Neville-Rolfe and David McCreadie for taking on additional Board
responsibilities.
Finally, I would like to thank all my colleagues for another
year of achievement and for their continued dedication and
commitment and especially our Chief Executive Paul Lynam who has
delivered double-digit growth in profits before tax for the second
year in succession. I am grateful too for the resilience my
colleagues at STB have shown as we navigated the troubled waters of
COVID-19 to continue to serve our customers and support our wider
workforce.
Given the resources at our disposal, the talents of our people,
the flexibility of our business model and our clear strategy, we
are well placed to tackle the exceptional challenges arising from
COVID-19.
Lord Forsyth
Chairman
6 May 2020
Chief Executive's statement
I am delighted to report a strong year's performance for 2019
when viewed across a broad range of customer, staff and financial
metrics. I would like to thank the entire STB team for their
commitment and professionalism last year and for the way they have
continued delivering good outcomes for our customers.
As expected, the strategic repositioning of the business model,
initiated in 2017 towards lower risk lending, and ongoing growth in
both Business Finance and Consumer Finance, have continued to
deliver benefits. Customer numbers, lending balances and income
have grown whilst the cost of risk (see page 190 for definition)
has continued to fall. These factors have driven strong growth in
reported and adjusted earnings.
The financial results for 2019 show the Group statutory profit
before tax increasing by 11.5% to GBP38.7 million compared to the
GBP34.7 million of profit before tax generated during 2018.
Adjusted profit before tax on the same basis has increased by 12.0%
to GBP41.1 million. Adjusted earnings per share increased by 10.4%
over the same period with basic earnings per share increasing by
9.9%.
It is noteworthy that the profit growth above was achieved after
accommodating a significant fall in used car values in the summer
of 2019, which impacted impairment provisions, and a very marked
slowdown in UK economic activity last autumn ahead of the planned
Brexit date of 31 October and then the General Election.
The Group entered 2020 aspiring to deliver double digit profit
before tax growth for the third successive year. After the first
quarter performance was in line with management expectations, with
strong performance achieved despite increased impairment
provisioning to recognise the threat of COVID-19. However in recent
weeks the UK and global economies have become exposed to
unprecedented levels of uncertainty with recessions looking
inevitable in many countries. Therefore, notwithstanding a very
positive start to the year it is currently impossible to estimate
with any degree of accuracy how damaging this virus will be for the
UK economy. The lockdown imposed by HM Government in late March
2020 has resulted in demand for the Group's Motor Finance products
drying up completely and our Retail Finance lending volumes are
circa 50% of expectations. Demand for new Invoice Finance and Real
Estate Finance has largely evaporated. The consequence of the
material falls in new lending business being written means that the
Group's customer lending balances have started to contract for the
first time in many years. This contraction is likely to persist and
will be influenced by any revival in economic activity and our
credit risk appetites which will remain cautious. In light of the
rapidly evolving situation the Group has undertaken significant
additional stress testing to assess the potential impact of the
crisis on capital and liquidity positions which remain healthy.
Assessments to date indicate that the short duration of loan books
helps to maintain capital and liquidity levels above regulatory
requirements throughout a very severe recession. Given the extreme
uncertainty we are not providing forward guidance for 2020 at this
time.
The Group's immediate focus is on supporting colleagues,
customers and business partners and a range of plans is in place to
seek to mitigate the operational and economic impact of COVID-19.
The Group expects that once through the worst of the outbreak, and
assuming a trade deal is agreed with the EU, the UK economic
outlook will improve strongly which the Group will seek to leverage
as it continues to execute its clearly defined growth strategy. We
are well placed to support an increase in demand for working
capital funding from businesses and residential development finance
from house builders. The latter is aided by a regulatory capital
efficient Enable Guarantee we have agreed with the British Business
Bank. We are progressing significant investment in our Motor
Finance business which will see this portfolio grow considerably
over the next five years via the provision of dealer stocking
finance (now live) and a prime motor proposition for consumers.
Ongoing growth in customer base with satisfaction levels
remaining very positive
Across our consumer and SME business products we are serving
well over 1.5 million customers. Total customer numbers are a
record 1,598,256 customers which is an increase of 24.9% on the
total customer base of 1,279,783 as at 31 December 2018.
We continue to focus on consistently delivering good outcomes
for customers and ensuring that the design of our products is
appropriate for their needs. From a conduct and behaviour
perspective, we do not cross-subsidise losses or low profits on
some products with super profits on others. Nor do we discriminate
between customers by, for example, paying very low deposit interest
rates to existing loyal customers whilst offering much higher rates
to new ones. We believe that our approach is the appropriate way to
interact with our customers for the long-term benefit of all
parties.
Customer satisfaction is measured in a number of ways. It is
reassuring that 2019 has once again seen us consistently achieve
customer satisfaction ratings in excess of 90% across all of our
products as measured by Feefo. We also use Net Promoter Scores to
assess our customer service and these scores exhibit similar
positive trends to those derived from Feefo.
I am delighted to confirm that for the seventh year running we
have retained the Customer Service Excellence standard. This
indicates our customer service has been judged to meet Government
standards of excellence which are benchmarked against
high-performing organisations.
Whilst being pleased with external accolades and ongoing high
customer satisfaction scores we are in no way complacent. We are
focused on improving our existing service and products and
diversifying our customer proposition via targeted investment in
people, systems, processes and products.
Operational progress
Operational resilience remains a key matter for regulatory
scrutiny and we have adopted a proactive approach. Having carefully
considered the various discussion and consultation papers published
by the regulators we have updated our operational risk plans in
relation to the identification, assessment and management of risks.
This extends to managing the third party risks that arise when
outsourcing activities. I am pleased to note that the Group
received Cyber Essentials Plus accreditation in the second half of
2019, which is a good reflection on our continued cyber security
focus.
Given the continuing growth across the Group and our ongoing
ambitions, we acquired new freehold premises in Solihull very close
to the existing Head Office building. This is now operational and
with an eye on the future, this is geared to accommodate more agile
working practices, including those which will reduce our carbon
footprint. These practices, and our well-established business
continuity plans, will help us deal with the impact of
COVID-19.
Healthy capital position
Our ongoing priority is to safeguard the reputation and
sustainability of the Group through conservative balance sheet
management, investment for long-term sustainable growth and robust
risk and operational controls.
Our year-end CET1 capital levels are healthy with a CET1 ratio
of 12.7% compared to the 2018 year-end position of 13.8%. The Total
Capital Ratio was 15.0% (2018: 16.3%) and our leverage ratio as at
31 December 2019 was 9.8% (2018: 10.0%). The year-on-year movement
in CET1 is a function of the investment of capital to support the
strong growth in the loan portfolios.
In December 2019 the Bank of England announced an increase in
the countercyclical capital buffer from 1% of risk-weighted assets
to 2%, with effect from December 2020, and its intention to consult
on offsetting this increase via reductions in variable Pillar 2A
add-ons, to ensure the levels of capital in the system stay broadly
unchanged. Since then, as part of the package of measures
introduced to mitigate the impact of COVID-19, the buffer has been
reduced to 0%. This intervention is welcomed and we will continue
to monitor capital levels closely throughout the period affected by
the outbreak.
Prudent liquidity management
Our year-end loan to deposit ratio was 121.3% (2018: 109.8%).
This ratio was higher than normal due to the strong conversion of
new business pipeline ahead of year-end. The ratio has reverted to
normal levels in the first part of 2020. Customer demand for our
deposit products remains very strong, and I am pleased to continue
to note that the majority of customers with maturing medium-term
savings bonds continue to reinvest their funds into deposit
products with us.
The Bank has continued broadly to match-fund its customer
lending with customer deposits. This strategy seeks to mitigate
maturity transformation and interest basis risks. Given the growth
in the balance sheet in recent years, we have continued to invest
in our Treasury function and capabilities to further mitigate
interest rate risks via the use of hedging instruments. This is a
significant step in the development of the Group's
capabilities.
We continued to leverage the benefits from the deposit platform
installed in 2017 via the launch of a new Cash ISA product to
coincide with the new tax year in April 2019. Cash ISAs are the
second biggest pool of consumer deposit liquidity in the UK and
typically attract margins around 20% below non-cash ISA deposits.
Access Account products have also been developed and tested and are
ready for launch.
Usage of the Term Funding Scheme ('TFS') is broadly unchanged
over the last 12 months. This remains a modest part of the Bank's
funding. We note the extension to this funding in light of COVID-19
and will be considering whether the Group will take advantage of
it.
Income grew and cost of risk reduced
The Group's operating income grew by 9.2% to a record level of
GBP165.5 million compared to GBP151.6 million in 2018. Operating
costs rose 11.5% to GBP94.2 million from GBP84.5 million in 2018,
reflecting continued investment in the business. The cost to income
ratio has increased to 56.9% (2018: 55.7%) for reasons explained on
the following page.
In overall terms the loan portfolios have performed as expected
with the benefits of the strategic repositioning remaining evident.
This is reflected in a reduction in the cost of risk to 1.4% in
2019 compared to 1.8% for 2018. This is driven by the improving
book quality and consequent reduction in probability of default.
This improvement would have been more pronounced save for the UK
car market experiencing unusually severe seasonal falls in asset
values during the summer of 2019.
During the year we have recognised GBP2.1 million of
improvements in credit quality relating to our debt collection
business as an impairment gain, whereas in the previous year we
included the equivalent GBP2.0 million of improvements in income.
This makes no difference to the profit figures but does serve to
reduce both income and the cost of risk. Adjusting for this and for
costs relating to our freehold property purchase, on a
like-for-like basis compared to 2018, the 2019 cost income ratio is
stable at 55.5% and the 2019 cost of risk is 1.5%, still well below
the 2018 level of 1.8%.
We have continued to refine our credit risk appetite and
acceptance criteria over 2019. As a matter of course, we regularly
review our credit criteria and pricing to take into account our
view of the current and future economic conditions. We have also
continued to develop our ability to use artificial intelligence and
machine learning to further refine our credit decisions.
Customer lending activities
Once again, double digit percentage growth was achieved across
the Group's loan portfolio in 2019, notwithstanding the closure of
the consumer mortgage operations in the spring. Total annual new
business lending volumes grew 12.0% to GBP1,413 million (2018:
GBP1,262 million) which translated to an increase of 20.8% in
overall balance sheet customer lending assets to GBP2,450 million (2018: GBP2,029 million).
Consumer Finance
In 2019 total consumer lending, excluding mortgages, increased
20.9% to GBP1,095.0 million (2018: GBP905.7 million). Our Consumer
Finance lending strategy during 2019 was to cease new mortgage
originations and continue to allocate capital to support the strong
ongoing growth in Retail Finance, which is shorter term in duration
and prime in nature, and to progress the investment in Motor to
support the entry into dealer and prime consumer finance.
The Retail Finance point of sale business grew strongly as
intended, with net customer lending balances at 31 December 2019
increasing 15.4% to GBP688.9 million (2018: GBP597.0 million). Our
Retail Finance business has continued to evolve as we have grown
into one of the largest participants in this market. The average
loan duration has remained short and provides optionality in the
event of worsening economic conditions, such as those arising due
to the COVID-19 outbreak. On the assumption the government
negotiates a trade deal with the EU which is not economically
disruptive, clear scope exists for us to offer Retail Finance in
long duration loan sectors that we have not heavily targeted in the
past.
2019 was a busy year for our Motor business which was
successfully rebranded as V12 Vehicle Finance in the summer. The
first two phases of our Motor Transformation Programme focused on
the provision of auction and dealer stocking finance. These were
successfully completed in 2019. The next phase is the launch of a
prime lending proposition for consumers towards the end of 2020
with the final phase being the re-platforming of the existing near
prime portfolio. This will give us a very strong dealer and
consumer proposition allowing us to compete directly with the likes
of Close, Blue and Startline. We will also continue to grow the
near prime book. As noted above, the very large fall in used car
prices during the summer increased the Motor Finance impairment
charge. The improvement in the underlying credit quality of the
customers has been such that we have been able to accommodate this
unexpected charge and still deliver a broadly on plan performance
for Motor in 2019.
Motor net lending balances have increased by 17.1% to GBP323.7
million at 31 December 2019 compared to GBP276.4 million in the
prior year.
Debt Managers (Services) Limited ('DMS'), which is active in
third party debt collection and portfolio acquisition, continued to
perform well during 2019. DMS revenue from external customers
increased to GBP8.4 million from GBP7.0 million in 2018.
When announcing our decision to cease originating consumer
mortgage lending last year, I noted my expectation that the trend
of increasing loan-to-value metrics and lower new net lending
margins was likely to be sustained throughout 2019. This has proved
to be the case with net interest margins in the sector being
squeezed despite the risk indicators including Loan to Value, Loan
to Income and average loan duration all increasing. These market
dynamics show no sign of abating given the ambitions of the
ring-fenced banks to grow market share in UK mortgages. 2019 was
the first year since 2009 when the 'big 6' lenders grew their share
of gross new mortgage lending. Inevitably this has squeezed other
lenders.
This would seem to vindicate our decision to deploy capital
elsewhere across our business model. The decision to cease lending
was obviously very tough on the staff members impacted who behaved
very professionally during this difficult period. Fulfilment of our
pipeline led to our mortgage lending balances increasing from
GBP84.7 million as at 31 December 2018 to GBP105.9 million as at 31
December 2019, representing growth of 25.0%. This book is
performing in line with our expectations. As expected the cessation
of new lending did not have a material impact on the Group's
earnings in 2019.
Business Finance
The Group's SME lending operations have grown strongly, as
targeted, and I expect further positive progress in 2020 (subject
to the impact of COVID-19) given we started the year with a strong
new business pipeline. Total business customer lending balances in
2019 increased by 20.9% to GBP1,241.6 million (2018: GBP1,027.3
million). Real Estate Finance lending balances increased by 25.0%
to GBP962.2 million as at 31 December 2019 (2018: GBP769.8
million).The loan book is performing well and remains biased in
favour of modestly leveraged residential investment lending. This
is reflected in the portfolio composition, which in round terms is
split 75% / 25% in favour of investment lending versus development
lending. We have continued to adopt a cautious stance towards
Central London house building finance. Demand for property
development finance slowed during 2019 albeit the units we have
financed have continued to sell well with the underlying loans
being satisfactorily repaid. We had seen an increase in enquires
about housing development finance since the general election and
expected this to translate into increased lending here in 2020. The
economic shock arising from COVID-19 has seen this demand fall away
and the extent and speed at which this returns remains to be seen.
The average LTV across the whole Real Estate Finance portfolio
remains less than 60% which means we are very well placed to
support customers disrupted by COVID-19 without materially
increasing our risk profile.
The asset finance market continued to see very aggressive risk
appetites and pricing during 2019. We have allocated capital to our
other products in 2019 and allowed Asset Finance lending balances
to contract rapidly to GBP27.7 million as at 31 December 2019
compared to GBP62.8 million a year ago. At these trajectories these
balances will be de minimis by the end of 2020. We will revisit our
appetite for recommencing new lending, possibly via inorganic
routes, in light of developments in this market post COVID-19.
Secure Trust Bank Commercial Finance, the invoice finance
division of the Bank, had another excellent year and has now funded
over GBP3.0 billion of customers' invoices since launch. Excluding
the high street banks, based on customer lending balances we are
now the 9th largest operator in the invoice finance market but
given the fragmented nature of the market we have substantial
opportunities to continue to grow very strongly in this sector.
This is evidenced by net customer lending balances, which grew
29.3% to GBP251.7 million at 31 December 2019 (2018: GBP194.7
million). This growth would have been more pronounced but for the
insolvencies of two large steel businesses where we avoided any
credit losses despite lending facilities of circa GBP60 million.
These are good examples of why I believe we have one of the most
capable teams of invoice financiers in the UK, supported by a
scalable modern IT platform. This, coupled with Group management's
experience in SME and corporate lending, gives STB a distinct
advantage when it comes to structuring transactions and responding
rapidly to opportunities. Impairment levels here have been
immaterial reflecting very robust credit management
disciplines.
Fee-based accounts
As expected, the legacy OneBill product, which closed for new
business in 2009, continues to see customer numbers decline over
time. Customer numbers fell to 17,024 by 31 December 2019 compared
to 18,032 a year earlier.
Evolving regulatory and competitive environment
It has been a very busy year from a Prudential Regulation and
Conduct Regulation perspective. Regulatory expectations have
continued to become more demanding in respect of issues such as
operational resilience, financial crime, regulatory reporting and
cyber security. The Group is continuing to invest and evolve to
ensure it meets these changing expectations.
The UK's exit from the EU could have far reaching consequences
for the Finance industry in this country. As a UK only firm, we do
not expect to be directly impacted by any trade deal reached but
will remain very alert to developments.
Another significant challenge facing the industry in the next
year or so is the transition from LIBOR to SONIA, which
will be very demanding for many firms. Given our very short
duration balance sheet, we have been able to manage our exposure to
LIBOR such that the move to SONIA is not an issue for us.
The large banks were required to implement ring-fencing of most
of their UK operations with effect from 1 January 2019. These firms
can no longer move surplus capital and funding around their
operations overseas to maximise marginal returns. Instead, surplus
capital and funding is effectively trapped in the UK. The
introduction of the ring-fencing has usefully highlighted the sheer
scale of the advantages enjoyed by these firms in terms of capital
requirements and funding costs. As a result these firms are able to
offer extremely low priced mortgages to new customers in order to
gain market share. As I've noted above, 2019 saw the 'big 6'
lenders grow their share of the new mortgage lending market for the
first time since 2009. These firms are clearly interested in
growing in the scale lending markets in the UK and it seems likely
returns for lenders in mortgages will remain under pressure.
In the short term from a consumer perspective ever-cheaper
mortgages will be seen as a good thing. However, it is not
difficult to see how continued competitive aggression by the
largest firms, with the lowest capital requirements and cheapest
funding costs, will see them continuing to gain market share at the
expense of smaller firms. So, absent of steps to create a genuinely
level playing field, it is not difficult to envisage a future where
UK banking becomes extremely polarised with systemic firms on one
side holding the vast majority of the market in the scale lending
sectors, small specialist lenders, like the Group, operating in
niches that are sub-scale for the large firms on the other side
with no medium-sized firms in the middle ground.
The very tight concentration of UK banking market share in the
hands of a small number of 'too big to fail' banks was a key factor
in the severity and duration of the last UK recession. It is
therefore encouraging to note that the regulators and the new
Government recognise that more needs to be done to safeguard and
promote competition in UK banking without making the system weaker.
As I have noted before, post-Brexit the Government could choose to
adopt a much more proportionate approach to the regulation of
smaller non-internationally active banks than is possible today.
One option could be for the UK to adopt a similar approach to that
in the US where there are five tiers of regulation rather than the
largely 'one size fits all' Capital Requirements Regulation
implementing the Capital Requirements Directive IV, in the UK at
present.
In summary, whilst the situations above remain somewhat fluid, I
am increasingly optimistic that key stakeholders will take the
opportunity arising from the UK's exit from the EU to take action
to help improve the competitive positioning of smaller banks in the
UK. I expect the need for a level competitive playing field will
become very obvious as the UK navigates the economic effects of
COVID-19. Clearly any changes in the regulatory regimes that enable
non systemic banks to offer more choice to consumers and SMEs to
support economic growth will be a positive development for the UK
and for the smaller firms.
Strategic priorities
The Group's medium-term strategy remains unchanged, albeit for
obvious reasons our number one priority is to support colleagues,
customers and business partners as we navigate the challenges
arising from the COVID-19 virus outbreak. The benefits of a
diversified business model have been evident over the last two
years. Despite a slowing economy and a fierce price war in
mortgages, the largest lending market in the UK, we have been able
to continue to increase customer lending balances and profit before
tax by taking market share in our chosen market segments, without
compromising our targeted risk parameters.
Once the virus has passed we plan to refocus the Group on the
strategic priorities of:
1. Organic growth in responsible lending across a diverse
portfolio of attractive segments
2. Continued investment in broadening our product offerings to customers
3. Pursuing M&A activity in line with our strategy
4. Optimising our capital and liquidity strategies
5. Continuing to target delivery of profit growth in the medium
term to create shareholder value
We have been active across all five of these areas during 2019
and will remain disciplined and focused here in
the year ahead and beyond.
Current trading and outlook
Notwithstanding the slowing in UK economic activity in the
second half of 2019, we delivered a strong set of results for the
year. 2020 started well with trading being in line with management
expectations.
Management and the Board are very carefully monitoring the
ongoing trade negotiations between the UK and EU. Whilst I believe
these parties will agree at least a limited agreement before the
transitional period expires at the end of the year, there is the
potential for an economic shock should this not be the case. We
have a range of early warning indicators ('EWIs') and contingency
plans in place in the event that the absence of a robust trading
agreement with the EU leads to an economic downturn.
As noted earlier in this statement, it is difficult to predict
the economic impact of the COVID-19 outbreak, though it will
clearly be significant. The imposition of the UK lockdown has
materially reduced our new lending volumes. As a result our short
duration lending portfolio has started to contract. This
contraction is likely to persist and will be influenced by any
revival in economic activity and our credit risk appetites which
will remain cautious. In light of the rapidly evolving situation
the Group has undertaken significant additional stress testing to
assess the potential impact of the crisis on capital and liquidity
positions which remain healthy. Assessments to date indicate that
short duration of loan books help to maintain capital and liquidity
levels above regulatory requirements throughout a very severe
recession. Plans are in place which seek to limit the operational
and economic impact of COVID-19 but, given the highly fluid
situation, at this stage it is impossible to quantify potential
impacts with certainty.
In summary, the Group's lending portfolio is appropriately
positioned for the current conditions and the short duration
nature
of the asset portfolio means the Group can react quickly to both
opportunities and threats.
The Group entered 2020 on the back of successful years in 2018
and 2019. With sufficient capital and liquidity positions, we are
now extremely focused on supporting customers, colleagues and
business partners as we navigate the COVID-19 induced economic
challenges, and are prioritising the safeguard of capital and
liquidity resources over balance sheet growth at this time. Once
the COVID-19 storm has passed we will look to refocus on the
pursuit of our strategic priorities.
Paul Lynam
Chief Executive Officer
6 May 2020
Key performance indicators
The following key performance indicators are the primary
measures used by management to assess the performance of the
Group.
Certain KPIs represent alternative performance measures that are
not defined or specified under IFRS. Definitions of the financial
KPIs, their calculation and an explanation of the reasons for their
use can be found in the Appendix to this preliminary announcement.
In the narrative of this financial review, KPIs are identified by
being in bold font.
Margin ratios
2019 2018
---------------------- ---- ----
Net interest margin % 6.5 7.4
---------------------- ---- ----
Why we measure this
Shows the interest margin earned on the Group's loan books, net
of funding costs
2019 2018
--------------------- ---- ----
Net revenue margin % 7.3 8.3
--------------------- ---- ----
Why we measure this
Shows the overall net margin earned on the Group's loan books,
including fees and commissions
2019 2018
----------------------- ---- ----
Gross revenue margin % 9.4 10.4
----------------------- ---- ----
Why we measure this
Shows the yield of the Group's loan books, including fee and
commission income
Cost ratios
2019 2018
---------------- ---- ----
Cost of funds % 2.0 2.0
---------------- ---- ----
Why we measure this
Measures the cost of the Group's customer deposits and other
funding sources
2019 2018
----------------------- ---- ----
Cost to income ratio % 56.9 55.7
----------------------- ---- ----
Why we measure this
Measures how efficiently the Group utilises its cost base to
produce income
2019 2018
--------------- ---- ----
Cost of risk % 1.4 1.8
--------------- ---- ----
Why we measure this
Measures how effectively the Group manages impairment losses
Loans
2019 2018
------------------------------------- ------- -------
Loans and advances to customers GBPm 2,450.1 2,028.9
------------------------------------- ------- -------
Why we measure this
Shows the growth in the Group's lending balances, which generate
income
2019 2018
------------------------ ----- -----
Loan to deposit ratio % 121.3 109.8
------------------------ ----- -----
Why we measure this
Measures the adequacy of liquidity by comparing loan balances to
customer deposits
2019 2018
---------------------- ----- -----
Total funding ratio % 107.5 118.2
---------------------- ----- -----
Why we measure this
Measures the adequacy of liquidity by comparing all funding held
by the Group to loan balances
Adjusted profit
2019 2018
----------------------------- ---- ----
Adjusted profit before tax % 41.1 36.7
----------------------------- ---- ----
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
2019 2018
---------------------------- ---- ----
Adjusted profit after tax % 33.0 29.9
---------------------------- ---- ----
Why we measure this
Adjusts profit to improve comparability of information between
reporting periods
EPS
2019 2018
------------------------------- ----- -----
Basic earnings per share pence 168.3 153.2
------------------------------- ----- -----
Why we measure this
Demonstrates the earnings attributable to each shareholder
2019 2018
---------------------------------------- ----- -----
Adjusted basic earnings per share pence 178.6 161.8
---------------------------------------- ----- -----
Why we measure this
Demonstrates the earnings attributable to each shareholder,
adjusted to improve comparability of information between reporting
periods
Return ratios
2019 2018
------------------------------------ ---- ----
Adjusted return on average equity % 13.5 13.1
------------------------------------ ---- ----
Why we measure this
Measures the Group's ability to generate profit from the equity
available to it
2019 2018
------------------------------------- ---- ----
Adjusted return on required equity % 14.1 14.8
------------------------------------- ---- ----
Why we measure this
Relates profitability to the capital that the Group is required
to hold
2019 2018
------------------------------------ ---- ----
Adjusted return on average assets % 1.3 1.4
------------------------------------ ---- ----
Why we measure this
Demonstrates how profitable the Group's assets are in generating
revenue
Non-financial KPIs
2019 2018
----------------------------- ---- ----
Customer FEEFO ratings Stars 4.7 4.7
----------------------------- ---- ----
(mark out of 5 based on star rating from 1,754 reviews. 2018:
1,175 reviews)
Why we measure this
Indicator of customer satisfaction with the Group's products and
services
2019 2018
------------------------------------ ---- ----
Employee survey trust index score % 79 77
------------------------------------ ---- ----
(based on 2019 all staff survey)
Why we measure this
Indicator of employee engagement and satisfaction
2019 2018
---------------------------------- ---- ----
Environmental intensity indicator 4.7 3.5
---------------------------------- ---- ----
(tonnes carbon dioxide per GBP1 million Group income)
Why we measure this
Indicator of the Group's impact on the environment.
Please see page 58 of the annual report and accounts for an
explanation of the movement in this indicator, which is due to a
change in measurement methodology
Financial review
2019 Total 2018 Total
Adjusted profit reconciliation GBPmillion GBPmillion
-------------------------------------------------- -------------- -----------
Interest, fee and commission income 212.3 188.6
-------------------------------------------------- -------------- -----------
Interest, fee and commission expense (46.8) (37.0)
-------------------------------------------------- -------------- -----------
Operating income 165.5 151.6
-------------------------------------------------- -------------- -----------
Impairment losses (32.6) (32.4)
-------------------------------------------------- -------------- -----------
Operating expenses (94.2) (84.5)
-------------------------------------------------- -------------- -----------
Profit before tax 38.7 34.7
-------------------------------------------------- -------------- -----------
Adjustments to profit before tax (see below) 2.4 2.0
-------------------------------------------------- -------------- -----------
Adjusted profit before tax 41.1 36.7
-------------------------------------------------- -------------- -----------
Adjusted tax (8.1) (6.8)
-------------------------------------------------- -------------- -----------
Adjusted profit after tax 33.0 29.9
-------------------------------------------------- -------------- -----------
Adjusted basic earnings per share (pence) 178.6 161.8
-------------------------------------------------- -------------- -----------
Statutory results
-------------------------------------------------- -------------- -----------
Profit before tax 38.7 34.7
-------------------------------------------------- -------------- -----------
Tax (7.6) (6.4)
-------------------------------------------------- -------------- -----------
Profit after tax 31.1 28.3
-------------------------------------------------- -------------- -----------
Basic earnings per share (pence) 168.3 153.2
-------------------------------------------------- -------------- -----------
Adjustments to profit before tax
-------------------------------------------------- -------------- -----------
Fair value amortisation 0.2 0.3
-------------------------------------------------- -------------- -----------
Transformation costs 1.0 0.4
-------------------------------------------------- -------------- -----------
Bonus payments 0.1 1.3
-------------------------------------------------------- -------- -----------
Revaluation deficit 1.1 -
-------------------------------------------------------- -------- -----------
Adjustments to profit before tax 2.4 2.0
-------------------------------------------------------- -------- -----------
Profit and earnings
We have continued to deliver strong profit growth, despite the
slowing of economic growth in the second half of the year.
Statutory profit before tax rose to GBP38.7 million (2018: GBP34.7
million) and adjusted profit before tax rose to GBP41.1 million
(2018: GBP36.7 million). This represents increases of 11.5% and
12.0% respectively.
Consequently, earnings per share rose from 153.2p per share to
168.3p per share. On an adjusted earnings per share basis, the
increase was from 161.8p per share to 178.6 per share. Detailed
disclosures of earnings per ordinary share are shown in Note 9.
Return measures
We measure adjusted returns on average assets, average equity
and required equity as set out in the KPIs table on page 18.
The increase in profit year-on-year led to an increase in the
adjusted return on average equity. The small decrease in the
adjusted return on average assets was primarily due to the
significant growth in assets over 2018 (29.2%). In 2019, the growth
in profit was slightly higher than the growth of assets over the
year (9.2%). As expanded upon below, the increase in loans and
advances to customers was greater than the increase in profit,
which led to a fall in the adjusted return on required equity.
The components of our profit are analysed in the following
sections.
Interest, fee and commission income
Interest, fee and commission income is made up of interest
income, which is predominantly earned on loans and advances to
customers, and fee and commission income, which consists
principally of fees from the OneBill, Commercial Finance, Retail
Finance and Motor Finance products and commissions earned on debt
collection activities in DMS.
Interest income was GBP191.4 million for 2019, increasing by
13.1% (2018: GBP169.2 million), which was driven by the growth of
our loan books over the year. Loans and advances to customers
increased from GBP2,028.9 million to GBP2,450.1 million over
the year, a 20.8% increase.
Fee and commission income increased by 7.7% to GBP20.9 million (2018: GBP19.4 million).
The gross revenue margin reduced from 10.4% to 9.4%. This
reflects two factors: the continued shift of our Consumer Finance
business to lower risk lower return lending, the impact of which on
impairments is noted below, and the change in the overall mix of
lending during the year. While growth in higher margin Motor
Finance and Retail Finance lending balances exceeded 15%
year-on-year, this was lower than the more significant growth in
the lower risk Business Finance portfolios.
Interest, fee and commission expense
Interest, fee and commission expenses is made up of interest
expense, which is incurred in respect of deposits from customers,
subordinated liabilities, TFS and index long-term repo ('ILTR')
borrowings, and fee and commission expense, comprising mainly fees
and commissions on the Motor product and commissions paid on debt
collection activities in DMS.
Interest expense was GBP46.0 million (2018: GBP35.5 million for
2018), an increase of 29.6%. The cost of funds remained stable at
2.0% (2018: 2.0%). The increase in interest expense arises due to
the Bank of England base rate rise during 2018 applying throughout
2019, and interest on the Tier 2 capital issued in 2018 also
applying throughout the year.
Fee and commission expense was GBP0.8 million (2018: GBP1.5
million). The main reductions were in DMS and OneBill.
The Group's net interest margin reduced from 7.4% in 2018 to
6.5%% in 2019, primarily due to the continued shift to lower risk
lending and the mix of business referred to above.
Operating income
Operating income increased by 9.2% to GBP165.5 million (2018: GBP151.6 million).
The net revenue margin for 2019 was 7.3% compared with 8.3% for
2018. The reduction in this margin is due to
the factors referred to above.
Impairment losses
Impairment losses during the year were GBP32.6 million (2018:
GBP32.4 million). The very modest increase in impairment losses,
given the 20.8% increase in loans and advances to customers over
the year, demonstrates the continued improvement of the quality of
the loan book. The cost of risk reduced significantly from 1.8% in
2018 to 1.4%.
This improvement has arisen despite the fall in used vehicles
valuations, noted in the 2019 Interim Report, which had increased
credit loss provisions in respect of the Motor Finance portfolio.
The impairment charge in respect of Motor Finance increased by
23.9% from GBP11.3 million to GBP13.8 million, driven in part by
these valuations, on a book which grew by 17.1%. The credit quality
of Motor Finance borrowers continued to improve over 2019. The
accelerated recognition of losses brought about by the requirements
of IFRS 9, particularly for growing books, has also been offset by
the improvement in performance.
As in previous years, our impairment losses are focused almost
entirely on the Consumer Finance businesses, with negligible losses
incurred in the Business Finance portfolio.
The provision charge includes the impact of applying expert
credit judgement, resulting in overlays being added to provision
levels estimated using the Group's models. A breakdown of the
charge by product is shown in Note 3.
Further analysis of the Group's loan book and its credit risk
exposures is provided in Notes 12,13,14 and 34.
Operating expenses
Operating expenses increased by 11.5% to GBP94.2 million (2018:
GBP84.5 million). This growth is proportionately lower than the
increase in our lending balances as efficiencies have been derived
from increasing scale. Investment in lending businesses to support
growth and in the Savings team to widen the product and digital
offering have continued. We have also continued to invest in our
compliance and risk functions, particularly in respect of the
prevention of financial crime, and in IT infrastructure.
The Group's cost to income ratio increased from 55.7% in 2018 to
56.9%. However, the ratio for 2019 is impacted
by two factors: one-off costs of GBP1.1 million in respect of
the purchase of our Yorke House property in the year; and a change
in accounting treatment for DMS which has classified GBP2.1 million
of improvement in credit quality as an impairment gain, whereas in
2018 the equivalent improvement was treated as income. Without
these two factors, the cost to income ratio would have improved
slightly to 55.5%, with the cost of risk moving to 1.5%.
Derivatives and hedge accounting
Over 2019 we developed interest rate hedging capability and
entered into a portfolio of derivatives, in order to manage
interest rate risk. We adopted hedge accounting in order to
mitigate the potential profit and loss volatility arising from
movements in the fair value of derivatives. The Group's hedge
accounting policy is described in Note 1.
Interest income and interest expense arising from the
derivatives are disclosed in Note 4.
Taxation
The effective adjusted tax rate rose to 19.7%, which is higher
than the currently enacted rate of 19%:
2019 2019 2018 2018
Effective Effective Effective Effective
adjusted statutory adjusted statutory
tax rate tax rate tax rate tax rate
GBPmillion GBPmillion GBPmillion GBPmillion
------------------- ----------- ----------- ----------- -----------
Tax 8.1 7.6 6.8 6.4
------------------- ----------- ----------- ----------- -----------
Profit before tax 41.1 38.7 36.7 34.7
------------------- ----------- ----------- ----------- -----------
Effective rate (%) 19.7% 19.6% 18.5% 18.4%
------------------- ----------- ----------- ----------- -----------
The tax charge reflects Bank Corporation Tax Surcharge of 8% on
taxable profits of Secure Trust Bank PLC in excess of GBP25.0
million. The effective rate in the year was also increased by a
deferred tax debit of GBP0.2m arising from a reassessment of the
rates that the deferred tax asset on the IFRS 9 transition
adjustment will reverse out at over the next eight years. Future
effective tax rates for the Group will be sensitive to the level of
projected profit in the Bank and in other Group companies as well
as the level of corporation tax. The tax charge reflects the
enacted reduction in the corporation tax rate to 17% on 1 April
2020. The announcement in the Budget to reverse this reduction will
cause the deferred tax asset to increase by GBP0.7 million. Current
forecasts show the effective tax rate is expected to increase by up
to 5%, given the reversal of the corporation tax rate reduction,
over the forecast period as the effect of the banking surcharge
becomes more significant.
Distributions to shareholders
Given the uncertainty in UK and global markets arising from the
COVID-19 outbreak, the Directors do not recommend the payment of a
final dividend for 2019. An interim dividend of 20 pence per share
was paid on 27 September 2019. The total dividend for 2018 was 83
pence per share.
Balance sheet
Our assets increased by 9.8% to GBP2,682.8 million. This was
driven by the 20.8% growth in our loan portfolios, with levels of
cash and debt securities lower than at the end of 2018.
Liabilities increased by 10.0% to GBP2,428.7 million. Deposits
from customers increased by 9.3% and other funding by 17.1%, the
latter primarily due to the raising of ILTR borrowings towards the
end of 2019. Further details are provided in respect of this
funding in the sections below.
Summarised balance sheet
2019 2018
GBPmillion GBPmillion
----------------------------------- ----------- -----------
Assets
----------------------------------- ----------- -----------
Cash and balances at central banks 105.8 169.7
----------------------------------- ----------- -----------
Debt securities 25.0 149.7
----------------------------------- ----------- -----------
Loans and advances to banks 48.4 44.8
----------------------------------- ----------- -----------
Loans and advances to customers 2,450.1 2,028.9
----------------------------------- ----------- -----------
Derivative financial instruments 0.9 -
----------------------------------- ----------- -----------
Other assets 52.6 51.2
----------------------------------- ----------- -----------
2,682.8 2,444.3
----------------------------------- ----------- -----------
Liabilities
----------------------------------- ----------- -----------
Due to banks 308.5 263.5
----------------------------------- ----------- -----------
Deposits from customers 2,020.3 1,847.7
----------------------------------- ----------- -----------
Tier 2 subordinated liabilities 50.6 50.4
----------------------------------- ----------- -----------
Derivative financial instruments 0.6 -
----------------------------------- ----------- -----------
Other liabilities 48.7 45.6
----------------------------------- ----------- -----------
2,428.7 2,207.2
----------------------------------- ----------- -----------
Loans and advances to customers
Loans and advances to customers include secured and unsecured
loans and finance lease receivables. The composition of the loan
book remains broadly consistent with 2018, with the Consumer
Finance book being approximately 49% of total lending (2018: 49%
including Consumer Mortgages), and the Business Finance book being
approximately 51% (2018: 51%).
Loan originations in the year, being the total of new loans and
advances to customers entered into during the year, increased by
12.0% to GBP1,413.0 million (2018: GBP1,261.9 million). As in 2018,
over half of the new business volume (GBP716.6 million) was
generated by the Retail Finance business.
Further analysis of loans and advances to customers, including a
breakdown of the arrears profile of our loan books, is provided in
Notes 12,14 and 34.
Debt Securities
Debt Securities consist solely of sterling UK Government
treasury bills ('T-bills'). The number of T-bills held reduced
significantly over the year, from GBP149.7 million to GBP25
million, the higher level no longer being required as collateral
against TFS drawings with the Bank of England.
Due to banks
At 31 December 2018, the amount due to banks consisted solely of
drawings from the TFS. Towards the end of 2019, we added to this
funding with GBP45 million of ILTR. This serves to provide the
Group with an additional inexpensive funding buffer that can be
used to fund new business.
Deposits from customers
Customer deposits include term, notice and sight deposits, as
well as the OneBill product. A Fixed Term Cash ISA was added to the
product set in 2019. Customer deposits grew by 9.3% during the year
to close at GBP2,020.3 million, to fund increasing lending
balances. As set out in the Capital and Liquidity section on page
24, we have managed down our funding balances in relation to
lending balances. Deposit growth is therefore significantly lower
than the growth in lending assets over 2019.
Tier 2 subordinated liabilities
Tier 2 subordinated liabilities represent two GBP25 million
tranches of 6.75% Fixed Rate Callable Subordinated Notes, including
interest accrued. Further details of the note issuances are
provided in Note 28. The notes qualify as Tier 2 capital.
New accounting standards
IFRS 16 'Leases' became effective for the period beginning on 1
January 2019 and was adopted by the Group from that point. The
standard replaces IAS 17 'Leases' and related interpretations, and
sets out principles for the recognition, measurement, presentation
and disclosure of leases for both parties to a contract: the lessee
and lessor. Adoption of the standard has changed how the Group
accounts for a number of its property leases and motor vehicle
leases, where the Group is the lessee. The standard requires such
leases to be recognised on the balance sheet as 'the lease
liability' with the right to use the underlying asset ('the
right-of-use asset') also recognised. We have elected to recognise
the initial impact of implementing IFRS 16 through the opening
balance of retained earnings and have not restated comparatives.
Further detail is provided in Note 1.
Capital and liquidity
2019 2018
GBPmillion GBPmillion
-------------------------------------------- ----------- ----------------
Capital
-------------------------------------------- ----------- ----------------
CET1 capital 268.0 251.8
-------------------------------------------- ----------- ----------------
Total Tier 2 capital 50.0 45.7
-------------------------------------------- ----------- ----------------
Total capital 318.0 297.5
-------------------------------------------- ----------- ----------------
Proposed dividend - 11.8
-------------------------------------------- ----------- ----------------
Total capital after proposed dividend 318.0 285.7
-------------------------------------------- ----------- ----------------
Total Risk Exposure 2,118.1 1,824.6
-------------------------------------------- ----------- ----------------
2019 2018
% %
-------------------------------------------- ----------- ----------------
CRD IV ratios - excluding proposed dividend
-------------------------------------------- ----------- ----------------
CET1 capital ratio 12.7 13.8
-------------------------------------------- ----------- ----------------
Total capital ratio 15.0 16.3
-------------------------------------------- ----------- ----------------
Leverage ratio 9.8 10.0
-------------------------------------------- ----------- ----------------
CRD IV ratios - after proposed dividend
-------------------------------------------- ----------- ----------------
CET1 capital ratio 12.7 13.2
-------------------------------------------- ----------- ----------------
Total capital ratio 15.0 15.7
-------------------------------------------- ----------- ----------------
Leverage ratio 9.8 9.5
-------------------------------------------- ----------- ----------------
Typical risk weighting
Risk weighting %
-------------------------------------------- ----------- ----------------
Standard on-balance sheet risk weighting
-------------------------------------------- ----------- ----------------
Real Estate Finance: residential investment 35
-------------------------------------------- ----------- ----------------
Real Estate Finance: commercial investment 100
-------------------------------------------- ----------- ----------------
Real Estate Finance: development* 150
-------------------------------------------- ----------- ----------------
Commercial Finance** 100
-------------------------------------------- ----------- ----------------
Retail Finance 75
-------------------------------------------- ----------- ----------------
Motor Finance 75
-------------------------------------------- ----------- ----------------
Debt Management 100
-------------------------------------------- ----------- ----------------
Consumer Mortgages (up to 80% LTV) 35
-------------------------------------------- ----------- ----------------
* The Group has entered into an ENABLE Guarantee with the
British Business Bank, whereby the UK Government will take on a
portion of the risk on a portfolio of loans to smaller business in
return for a fee. When the Guarantee is triggered it will reduce
the net risk weighting applied to Real Estate Finance development
lending.
** A lower risk weighting than 100% is applied to Commercial
Finance lending where the customer is a small to medium enterprise
due to applying an 'SME factor'.
The CET1 capital ratio is the ratio of CET1 capital divided by
the Total Risk Exposure. The total capital ratio is total capital
divided by Total Risk Exposure. Figures for 2019 and 2018
comparatives are both presented to reflect IFRS 9 transitional
rules, details of which are provided below.
The Basel III leverage ratio is defined by the Capital
Requirements Regulation as Tier 1 capital divided by on and off
balance sheet asset exposure values, expressed as a percentage. The
UK leverage ratio framework sets a minimum ratio of 3.25%. As shown
in the table above, our leverage ratio remains comfortably ahead of
the minimum requirement.
We have applied the IFRS 9 transitional rules. For 2019, this
allows 85% (2018: 95%) of the initial IFRS 9 transition adjustment,
net of attributable deferred tax, to be added back to eligible
capital. Further information is provided in Note 37.
The Group's regulatory capital is divided into:
-- CET1 which comprises shareholders' funds, after adding back
the IFRS 9 transition adjustment and deducting intangible assets,
both of which are net of attributable deferred tax
-- Tier 2 capital, which is solely subordinated debt net of
unamortised issue costs, capped at 25% of the capital
requirement
Capital resources increased over 2019, from GBP297.5 million to
GBP318.0 million. This was driven by retained earnings growth, with
the Group's subordinated notes issued in 2018 also becoming fully
eligible as Tier 2 capital. The year-on-year reduction in the IFRS
9 adjustment restricted the increase in capital resources.
The Group has continued to invest capital to support lending
growth. This investment, plus the impact of the IFRS 9 adjustment,
results in lower CET1 and total capital ratios at the end of 2019
compared with the end of 2018. Ratios remain ahead of regulatory
requirements.
The Group operates the standardised approach to credit risk,
whereby risk weightings are applied to our on and off balance sheet
exposures. The weightings applied are those stipulated in the
Capital Requirements Regulation.
The Group's Individual Capital Adequacy Assessment Process
('ICAAP') includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated entities within
the Group have complied during the year with all of the externally
imposed capital requirements to which they are subject.
The Total Capital Requirement, set by the PRA, includes both the
calculated requirement derived using the standardised approach and
the additional capital derived in conjunction with the ICAAP. In
addition, capital is held to cover generic buffers set at a
macro-economic level by the PRA. These buffers have risen
significantly
in recent years, with the requirement at 31 December 2019 being GBP74.0 million.
Capital requirements
2019 2018
GBPmillion GBPmillion
------------------------------- ----------- -----------
Total Capital Requirement 212.0 182.7
------------------------------- ----------- -----------
Capital conservation buffer 52.9 34.2
------------------------------- ----------- -----------
Countercyclical capital buffer 21.1 18.2
------------------------------- ----------- -----------
Total 286.0 235.1
------------------------------- ----------- -----------
Liquid assets
2019 2018
GBPmillion GBPmillion
------------------------------- ----------- -----------
Aaa - Aa3 130.8 319.4
------------------------------- ----------- -----------
A1 - A3 3.8 39.7
------------------------------- ----------- -----------
Baa2 39.5 -
------------------------------- ----------- -----------
Unrated 5.1 5.1
------------------------------- ----------- -----------
Liquidity exposures 179.2 364.2
------------------------------- ----------- -----------
Management of capital
Our capital management policy is focused on optimising
shareholder value over the long term. Capital is allocated
to achieve targeted risk adjusted returns whilst ensuring
appropriate surpluses are held above the minimum regulatory
requirements.
Key factors influencing the management of capital include:
-- the level of buffers set by the PRA
-- estimated credit losses calculated using IFRS 9 methodology,
and the applicable transitional rules
-- new business volumes
-- the product mix of new business
These last two factors are actively managed by the Group in
order to balance growth, profitability and conservation of capital.
The variation in the risk weightings applied to our key lending
assets, and our willingness and ability to adapt our lending
volumes and mix, provide significant flexibility in our management
of capital. The recent announcements from the PRA, regarding the
level of the countercyclical capital buffer have been factored into
our plans.
Liquidity
We continued to hold significant surplus liquidity over the
minimum requirements throughout 2019. High Quality Liquid Assets
('HQLA') are held in the Bank of England Reserve Account and UK
Treasury Bills. Levels of HQLA reduced over the year, as we
introduced more sophisticated analysis of liquidity requirements
for new and existing products, allowing funding levels to be set on
a more efficient basis. As a consequence, total liquid
resources reduced from GBP364.2 million to GBP179.2 million.
The Group uses a number of measures to manage liquidity. These include:
-- the Overall Liquidity Adequacy Requirement ('OLAR'), which is
the Board's view of the Group's liquidity needs as set out in the
Board approved Internal Liquidity Adequacy Assessment Process
('ILAAP')
-- the Liquidity Coverage Ratio ('LCR'), which is a regulatory
measure that assesses net 30-day cash outflows as a proportion of
HQLA
-- total funding ratio, as defined in the Appendix to the preliminary announcement
-- for LCR purposes the HQLA excludes UK Treasury Bills which
are encumbered to provide collateral as part of the Group's Term
Funding Scheme with the Bank of England. On this basis, the HQLA at
31 December 2019 was
GBP96.4 million (31 December 2018: GBP240.8 million)
We continue to manage liquidity on a conservative basis by
holding HQLA and utilising predominantly retail funding from
customer deposits. Details of how our savings product set and
digital proposition have developed are provided in the Savings
section of the Strategic Report.
Secure Trust Bank is a participant in the Bank of England's
Sterling Money Market Operations under the Sterling Monetary
Framework and has drawn GBP263.0 million under the TFS, this level
being unchanged from that reported at 31 December 2018. Towards the
end of 2019 we added GBP45 million of ILTR.
We have no liquid asset exposures outside of the United Kingdom
and no amounts that are either past due or impaired.
Business review
Business Finance
Real Estate Finance
Revenue and lending performance vs prior years
2019 2018 2017
------------------ ----- ----- -----
Lending revenue 48.9 41.2 32.3
------------------ ----- ----- -----
Lending balance 962.2 769.8 580.8
------------------ ----- ----- -----
Impairment charge 0.1 0.5 (0.2)
------------------ ----- ----- -----
What we do: Residential Development
We lend to enable the development of new build property,
commercial to residential conversions (including those with
permitted development rights) and refurbishment projects.
Residential Investment
We lend on portfolios of residential property where the rental
income will repay the underlying borrowing over a fixed term
period. This excludes the regulated buy-to-let mortgage sector.
Other lending
We have limited appetite for other commercial lending (either
development or investment) and have limited exposure to mixed
development schemes.
How we do it
Financing is typically provided over a term of up to five years
with conservative loan-to-value criteria, with a 60% Loan to Gross
Development Value to residential house builders. More restrictive
policies are implemented from time-to-time as required. Our Loan to
Gross Development Value/Loan to Value ratios continue to average
below 60% across all lending areas. We have no significant exposure
to any one property scheme or developer.
The Real Estate Finance team is staffed by experienced bankers
with proven property lending expertise. The team provides full
support to customers and introducers over the life of the
products.
2019 performance
We have continued to grow our Real Estate Finance business, with
balances up 25% in 2019, generating a 19% increase in revenue. The
rate of growth slowed in 2019 due to an increase in repayments in
the year, coupled with the impact of
the change in mix of the book, with development lending reducing
to 25% of the book during 2019.
The credit quality of the book has however remained strong, with
no crystallised impairments. In addition, we have been able to
successfully manage two cases with full repayment. The overall LTV
of the portfolio has also remained stable, reflecting the cautious
approach taken by the business in 2019 due to the uncertain market
conditions. The effect of the above has been to see no increase in
impairment provisions in the year.
Looking forward
The business remains focused on effective risk management, and
ensuring that we continue to support our customers. Our experienced
team remains able to manage opportunities and threats in a timely
manner. We will manage our appetite in respect of growth
opportunities to reflect market conditions.
Commercial Finance
Revenue and lending performance vs prior years
2019 2018 2017
------------------ ----- ----- -----
Lending revenue 16.8 13.4 7.2
------------------ ----- ----- -----
Lending balance 251.7 194.7 126.5
------------------ ----- ----- -----
Impairment charge 0.1 - 0.1
------------------ ----- ----- -----
What we do
Commercial Finance specialises in providing a full range of
invoice financing solutions to UK businesses including invoice
discounting and factoring.
Invoice discounting services provide access to funding and
release typically up to 90% of the value of qualifying invoices, in
confidence and allowing clients to stay in control of sales ledger
management.
Factoring services, where the sales ledger management is passed
on to the Group, may also provide access to funding of typically up
to 90% of the value of qualifying invoices and often results in the
Group managing credit control, cash allocation, statement and
reminder letter distribution.
Other assets can also be funded either long or short term and
for a range of loan-to-value ratios alongside these facilities.
How we do it
Commercial Finance complements the broader SME lending
proposition which has been developed by the Group. The business
also provides SME commercial owner occupiers with finance to buy
the property they trade from in conjunction with other financing
facilities.
We have built a strong team of proven business development,
credit and operational professionals who have delivered a robust
and compliant operational model.
2019 performance
We have continued to grow the Commercial Finance business, with
lending balances again increasing significantly by 29% in 2019,
generating a 25% increase in revenue. The close management and
prudent approach to credit risk has ensured that where client
administrations have occurred the related collect out fees have far
exceeded any actual impairment losses, which are much lower than
industry average, well below 0.1% of lending balances.
Whilst the cost base is proportionally very low, the regional
presence of the business was extended in the year with key recruits
across its Manchester, Leeds, Birmingham and London offices.
Looking forward
The success of the implementation of the regional model seen in
the year will be built on in 2020. Whilst we plan to expand the
product base to further penetrate the existing market we operate
in, the immediate focus is on the impact of COVID-19. The close
management of our existing client base will be key and we are
already supporting businesses via Coronavirus Business Interruption
Loan Scheme lending.
Asset Finance
Revenue and lending performance vs prior years
2019 2018 2017
------------------ ---- ---- -----
Lending revenue 3.2 6.6 8.5
------------------ ---- ---- -----
Lending balance 27.7 62.8 116.7
------------------ ---- ---- -----
Impairment charge 0.7 2.2 1.0
------------------ ---- ---- -----
What we do
The Asset Finance business provides funding to support SME
businesses in acquiring commercial assets, such as building
equipment, commercial vehicles and manufacturing equipment.
How we do it
The Asset Finance business is operated via a joint venture with
Haydock, a well-established asset finance company operating across
the UK. Following the change in ownership of Haydock in January
2018, we have ceased writing new business through the joint
venture, although Haydock continues to provide a full business
process outsourcing service
to the Group in relation to the portfolio we fund.
The current portfolio reflects hire purchase and finance lease
arrangements with terms of up to five years.
2019 performance
Following the decision to cease new business in 2018, the
portfolio has continued to run off with lending balances continuing
to reduce in 2019, down by 56% against 2018, and 36% in H2 2019.
This reduction in balances has then led to the drop-off of income
seen in 2019 with income being 52% lower in 2019. The overall
contribution from the business has however been aided by lower
impairment levels, with the charge reducing by GBP1.5 million (68%)
in 2019, reducing the cost of risk by 55 bps. This reflects the
continued robustness of the portfolio and the close management of
collections.
Looking forward
We ceased originating Asset Finance business in 2018. We expect
the book to continue to reduce in 2020.
Consumer Finance
Retail Finance
Revenue and lending performance vs prior years
2019 2018 2017
------------------ ----- ----- -----
Lending revenue 74.7 62.8 50.7
------------------ ----- ----- -----
Lending balance 688.9 597.0 452.3
------------------ ----- ----- -----
Impairment charge 19.8 19.3 13.8
------------------ ----- ----- -----
What we do
The Retail Finance business, branded as 'V12', provides
unsecured, prime lending products to the UK customers of its retail
partners to facilitate the purchase of a wide range of consumer
products across in-store, mail order and online channels. This
business is driven by V12 Retail Finance, which was acquired in
2013 and has provided finance in cooperation with its retail
partners for more than 20 years. The V12 point of sale system is
used by the Group's retail partners and Retail Finance is
administered from the V12 offices in Cardiff.
Retail Finance products are unsecured, fixed rate and fixed term
loans, to UK residents with a good credit history, of up to 84
months in duration with a standard maximum loan size of GBP25,000.
The average new loan is for GBP1,100 over a 24-month term.
The finance products are either interest bearing or have
promotional credit subsidised by retailers, allowing customers to
spread the cost of purchases into more affordable monthly
payments.
How we do it
We operate an online e-commerce service to retailers, providing
finance to customers of those retailers. The online processing
system allows customers to digitally sign their credit agreements,
thereby speeding up the pay-out process, and removing the need to
handle and copy sensitive personal documents through electronic
identity verification.
Retail Finance serves retailers across a broad range of sectors
including cycle, music, furniture, outdoor/leisure, electronics,
dental, jewellery, home improvements and football season
tickets.
We provide finance to customers of a large number of retailers
including household names such as Beaverbrooks, Watches of
Switzerland, DFS, Sofology and Watchfinder.
2019 performance
Growth across each of the three largest sub-markets for the
Retail Finance business (sports and leisure, furniture and
jewellery) has resulted in new gross lending volumes increasing to
GBP716.6 million, an increase of 10% on the previous year. This has
driven a further significant increase in lending assets, which
during the year rose to GBP688.9 million (December 2018: GBP597.0
million). Overall
growth has been achieved through a combination of gaining
increased market share and sector growth.
A combination of continued investment in technology, focus on
customer experience and retailer needs has led to us increasing
market share from 6.8% in 2018 to 8.0%% in 2019 (based on Finance
& Leasing Association new business values within retail store
and online credit).
Despite margin pressures from new entrants to the market, the
growth in lending assets has increased revenue by
19% to GBP74.7 million (2018: GBP62.8 million).
Improvements in credit quality have limited impairment losses to
GBP19.8 million (2018: GBP19.3 million) despite the significant
loan book growth.
Customer feedback, measured by Feefo, provided the business with
a consistent score of 4.8 out of 5 for the year, based on 1,000
reviews (2018: 4.8 based on 400 reviews). Customer feedback,
measured by Trustpilot, provided the business with a five star
rating based on 1,200 reviews.
Looking forward
During 2020 we envisage reduced volumes across the majority of
retail sectors impacted by COVID-19 due to social distancing rules
which have led to the closure of shops and placed restrictions on
some warehouse and manufacturing facilities. Our online e-commerce
service to retailers mitigates the impact of COVID-19 in many
sectors, especially cycle, outdoor/leisure and electronics.
We will continue to invest in initiatives to further enhance
systems capabilities, to ensure that quality of service to both
retailers and customers is maintained or improved as well as
generating operational efficiencies. This includes the rollout of
improved telephony systems across customer facing staff and
enhancements to the customer application process. This will provide
a slicker customer journey by recognising returning customers of
V12 Retail Finance in order to reduce customer time inputting their
details.
V12 has been awarded the Feefo Platinum Award in the Feefo 2020
Annual Trusted Service Awards. The platinum award recognises
businesses that have achieved three consecutive years of Gold
Trusted Service ratings of 4.5 or higher.
Motor Finance
Lending performance v prior years
2019 2018 2017
------------------ ----- ----- -----
Revenue 49.7 48.5 47.1
------------------ ----- ----- -----
Lending balance 323.7 276.4 274.6
------------------ ----- ----- -----
Impairment charge 13.8 11.3 20.8
------------------ ----- ----- -----
What we do
Our Motor Finance business began lending in 2008 under the
Moneyway brand and provides hire purchase lending products to a
wide range of customers including those who might otherwise be
declined by other finance companies. This helps our customers to
gain the freedom and flexibility that motoring gives to their lives
as well as helping introducers to sell more cars.
In 2019 the Motor Finance business launched a new brand, V12
Vehicle Finance, and a new Used Vehicle Stocking product in
partnership with Aston Barclay Auctions. The product allows dealers
to finance vehicles on their forecourt which have been purchased
through Aston Barclay Auctions.
Motor Finance agreements are secured against the vehicle being
financed.
We ceased writing new business in the subprime market and
predominantly lend to finance the purchase of volume franchise used
cars in the near-prime market.
How we do it
We distribute our Motor Finance products via UK motor dealers,
brokers and internet introducers. New dealer relationships are
established and managed by our UK-wide Motor Finance sales team
with all introducers subject to a strict vetting policy, which is
reviewed on a regular basis.
The technology platform used allows us to: receive applications
online from introducers; provide an automated decision; facilitate
document production through to pay-out to dealer; and manage
in-life loan accounts.
Motor lending is administered in Solihull, however the UK motor
dealers and brokers are UK-wide.
2019 performance
Our business has continued to focus on narrowed credit
parameters in order to reduce potential future impairment losses.
New business volumes in 2019 reflect lower margins but higher
credit quality. New business volumes from consumers increased from
GBP141.3 million in 2018 to GBP178.2 million for 2019. Revenue
increased slightly, by 2.5%, reflecting the reduction in margin for
higher credit quality business.
The impairment charge for the period has increased from GBP11.3
million in 2018 to GBP13.8 million in 2019. The level of charge was
impacted by the reduction in used vehicle prices seen in 2019.
Overall credit quality has improved as noted above,
and the probability of default of the portfolio has reduced
significantly since the implementation of IFRS 9 at the beginning
of 2018.
Following the launch of the new Used Vehicle Stocking product in
July 2019, there were GBP1.5 million of lending balances in respect
of this product at the end of 2019.
Looking forward
Restrictions imposed during the COVID-19 lockdown have resulted
in used vehicle sales, and as a result new used vehicle finance,
largely halting. The Motor Finance business has therefore taken the
decision to cease funding new agreements during this period and to
focus on servicing existing customers.
Looking forward we retain the view that a clear opportunity
exists to deliver prime and near-prime products and services in the
Motor lending market for an innovative and technology-led funding
provider. Our Motor Finance business will re-enter the near prime
credit market and will also be expanding into the prime credit
market. A programme of work is underway to deliver a new platform
and business transformation through 2019/2020 with GBP6.5 million
already invested since the programme started in 2018. As part of
this programme we are enhancing system capabilities to deliver a
broader range of products. Planned product development includes
launch of a PCP and Prime Hire Purchase product and technology
integrations with a panel of auction partners. We have also
integrated with a leading dealer management system provider in the
independent dealer space, to make dealing with our Motor Finance
business an easy process. Overall, these investments are expected
to improve the credit quality of the portfolio, drive business
growth and deliver stable earnings. Alongside these initiatives, we
will continue to focus on the near-prime market sector through our
existing introducer channels.
Debt Managers (Services) Limited
Revenue and lending performance vs prior years
2019 2018 2017
------------------- ----------------- ------ ------
Lending revenue 8.4 7.0 4.9
------------------- ----------------- ------ ------
Lending balance 82.4 32.3 15.6
------------------- ----------------- ------ ------
Impairment charges negative (GBP2.1) GBPnil GBPnil
------------------- ----------------- ------ ------
What we do
DMS is the Group's debt collection business. DMS collects debt
on behalf of a range of clients as well as for Group companies. It
also selectively invests in purchased debt portfolios from fellow
subsidiary undertakings and external
third parties.
How we do it
Debt Managers (Services) offers three services across credit
management and in order to meet the needs of its clients:
-- Business process outsourcing allows DMS to assist in the
performance of early arrears accounts on behalf of clients
-- Contingent collection allows a client to place accounts for
DMS to manage those accounts in its own name
-- Debt purchase allows DMS to acquire accounts and choose how
to liquidate those accounts over a period of 10 years
We aim to provide all customers with the best possible customer
service by recognising every customer is different. All customer
facing staff receive training on how to effectively use industry
recognised techniques such as TEXAS and IDEA to help identify signs
of vulnerability and on how to use tailored signposting relevant to
customers' circumstances. Customers that need additional support
are managed by a specialist Customer Care Team. We work closely
with debt charities such as StepChange, Payplan and Christians
Against Poverty and a range of other third parties including the
Samaritans, MIND and Marie Curie to ensure that customers receive
an appropriate service.
2019 performance
2019 saw significant levels of growth for DMS due to the
entering of new target markets assisted by leveraging its
commitment to customer service and new technologies. Lending
balances more than doubled which delivered strong revenue and
profit growth in 2019.
In the year performance of externally purchased portfolios
continued to be very strong, with actual collections far exceeding
those forecast at the pricing stage. Consequently an impairment
credit of GBP2.1 million was taken, recognising that
outperformance.
Looking forward
The start of 2020 was very positive as a result of the high
lending balance brought forward. This, together with excellent
client and customer feedback, will help us to continue to develop
the business and support our customers throughout the challenging
period ahead.
Consumer Mortgages
Revenue and lending performance vs prior years
2019 2018 2017
------------------- ----- ---- ------
Lending revenue 3.7 1.5 0.1
------------------- ----- ---- ------
Lending balance 105.9 84.7 16.5
------------------- ----- ---- ------
Impairment charges 0.1 0.2 GBPnil
------------------- ----- ---- ------
Consumer mortgages represents fixed rate mortgages provided to
individuals, to purchase a property or remortgage their current
property. We ceased originating new consumer mortgages in the first
quarter of 2019. The pipeline of new business was fulfilled in the
first half of the year and balances at the end of year were
GBP105.9
million (31 December 2018: GBP84.7 million).
Savings
Savings balances vs prior years
2019 2018 2017
---------------------------- ------- ------- -------
Notice deposits 663.7 516.4 455.3
---------------------------- ------- ------- -------
Fixed term savings 1,295.6 1,316.8 1,013.4
---------------------------- ------- ------- -------
Sight/instant access 22.6 14.5 14.5
---------------------------- ------- ------- -------
Individual savings accounts 38.4 GBPnil GBPnil
---------------------------- ------- ------- -------
Total 2,020.3 1,847.7 1,483.2
---------------------------- ------- ------- -------
What we do
We offer a range of savings, including simple and
straightforward Notice and Fixed Bond accounts. We extended our
product offering in 2019, launching our first Fixed Term Cash ISA
in April and developing an Access Account for launch in 2020. These
products are all available to UK-based individuals saving with a
minimum deposit of GBP1,000. We have also historically offered
business accounts priced to reflect the associated costs and
risks.
All products offered by the Group are covered under the UK
Financial Services Compensation Scheme, up to the specified limit
of GBP85,000. The full suite of accounts are made consistently
available and are priced in line with our ongoing funding needs,
allowing individuals to hold a maximum balance of GBP1 million, and
GBP2 million for joint and business accounts.
In addition to savings, we continue to service OneBill for
existing customers; this has been closed to new customers since
2009. This service is designed to help customers with household
budgeting. For a monthly fee, details of annual bills are
aggregated and calculated into a fixed weekly or monthly schedule.
This enables customers to spread the cost of their bills throughout
the year, accessing direct debit discounts as well as support in
liaising with providers.
How we do it
The continued approach of not cross-subsidising loss-making
products with profitable ones, maintaining a stable funding base
and utilising an operational model based on digital self-service
rather than a branch network, enables us to offer competitive rates
and attract high volumes of deposits quickly, from a broad range of
customers.
We aim to maintain a full suite of savings products at all
times, covering Access, 14 to 180 day Notice, 1 to 7 year Fixed
Bonds and Fixed Rate ISAs. This enables us to access most of the UK
personal savings market and compete for significant liquidity
pools, achieving a lower marginal cost with the volume, mix and the
rates offered optimised to the demand of our funding needs.
Product terms and rates broadly match the term and tenor of
customer savings to the desired maturity profiles of the Group,
which are primarily determined by the interest rates and terms
offered on loans and advances to customers. This strategy aims to
help mitigate maturity transformation and interest rate risks.
All of the above provides us with a funding profile which gives
additional financial security, diversification and flexibility to
the Group.
As well as attracting and retaining customers with competitive
rates of interest, customers choose us based on our financial
standing, independent customer review scores and award-winning
digital services and UK-based operation with high standards of
cyber and operational security.
2019 performance
Following the implementation of the core banking platform in
late 2017, and positive results in 2018, 100% of our new customers
now apply for a savings product online and all register for
Internet Banking as part of the process, demonstrating an important
shift in operational efficiency. Indeed, over 38,000 customers are
now registered for Internet Banking, representing 81% of the total
customer base.
Savings balances are growing at a strong pace. In 2019, we grew
our retail savings by GBP172.6 million, an increase of 9% -
equivalent to nearly GBP5.50 every second. Over 58% of our
customers chose to reinvest their savings into Secure Trust Bank
retention product offerings, equating to almost GBP280 million. At
year-end, the total balance of savings customer deposits was over
GBP2 billion, GBP560 million of which was received during the year
across over 40,000 deposit transactions.
Following the launch of short-dated Notice Accounts in 2018,
balances increased throughout 2019 whilst we also launched our
Fixed Term Cash ISA and developed our Access Account. The ISA
contributed to the largest monthly inflow of new funds on record,
with over GBP122 million deposited in Savings accounts during June
2019.
We once again won a number of independent awards, including Best
Savings Provider, Best Fixed Rate Bond Provider and Best Notice
Account Provider from Savings Champion, as well as Best Notice
Account Provider from Moneyfacts. Customer experience is of great
importance, which is why the Savings team was delighted to have
achieved a rating of 4.5 out of 5 on Feefo and 4.3 out of 5 on
Trustpilot, making the Group one of the best providers amongst
savings brands.
Looking forward
In 2020, we are focused on continuing to improve all aspects of
our digital services for both new and existing Savings customers.
Key areas of focus will be streamlining the application journey for
both new and existing customers, making it easier for customers to
stay with us when their bond matures, and introducing new
functionality for customers servicing their accounts online.
This move, as well as the digitisation of large scale customer
communications, should continue to improve customer experience
leading to cost efficiency.
Our recently developed Access Account is now ready to offer to
both existing and new customers and we plan to continue to
investigate how to help more people access our products and broaden
our product range to support those customers who want to drawdown
their savings in retirement. These offerings will help to deliver
our aim of increasing product holdings to improve the stability of
funds through deeper customer relationships.
Secure Trust Bank has already been recognised by customers
through its strong levels of online review scores as well as in the
Savings Champion Awards 2020, winning the Best Notice Account
Provider category and also being highly commended in the Best
Savings Provider category. We look to continue this recognition
through the ongoing delivery of simple, competitive products and
great customer experience throughout 2020.
Principal risks and uncertainties
Risk overview
On an ongoing basis, the Directors carry out a robust assessment
of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency or
liquidity. The following were considered to be the principal risks
facing the Group in 2019:
Movement
from Prior
Principal Risk year
------------------------------------------------------------------------------------------- -----------
Credit Risk
The risk that a counterparty will be unable to pay amounts in full when due. Improved
------------------------------------------------------------------------------------------- -----------
Liquidity and Funding Risk
The risk that the Group is unable to meet its obligations as they fall due or can only do
so at excessive cost. Improved
------------------------------------------------------------------------------------------- -----------
Operational Risk
The risk of direct or indirect loss arising from a wide variety of causes associated with
the Group's processes, personnel, technology and infrastructure, and from external factors
other than the risks identified above. Stable
------------------------------------------------------------------------------------------- -----------
Capital Risk
The risk that the Group will have insufficient capital resources to support the business. Stable
------------------------------------------------------------------------------------------- -----------
Market Risk
The risk that the value of, or revenue generated from, the Group's assets and liabilities
is impacted as a result of market movements, predominantly interest rates. Improved
------------------------------------------------------------------------------------------- -----------
Conduct Risk
The potential for customers (and the business) to suffer financial loss or other detriment
through the actions and decisions made by the business and its staff. Stable
------------------------------------------------------------------------------------------- -----------
Regulatory Risk
The risk that the Group fails to be compliant with all relevant regulatory requirements. Stable
------------------------------------------------------------------------------------------- -----------
Notes 34 to 37 provide further analysis of certain financial
risks.
Further details of the principal risks, the changes in risk
profile during the 2019 financial year and the Group's risk
management framework are set out in the following section. There is
also analysis of the key strategic and emerging risks which impact
the Group. As for the previous year, these risks also include the
UK's withdrawal from the European Union, the direct impacts of
which are considered to be limited given the Group's UK operation
and focus. Consideration is also given to risks arising from
climate change. Emerging risks include the impact of COVID-19,
which as a matter emerging post year-end, is not reflected in the
risk status movements shown above.
Credit Risk - IMPROVED
-----------------------------------------------------------------------------------------------------
Description
Credit Risk is the risk that a counterparty will be unable to satisfy their debt servicing
commitments when due. Counterparties include the consumers to whom we lend on a secured and
unsecured basis and the SMEs to whom we lend on a secured basis as well as the market counterparties
with whom we deal.
-----------------------------------------------------------------------------------------------------
Mitigation
We manage Credit Risk through internal controls and through a
three lines of defence model. The first line is the business
operation team with the Credit Risk team being the second line and
Internal Audit being the third line. The Consumer Credit Risk
Committee and SME Credit Committees, which are the monitoring
committees for credit risk, report to the Board Risk Committee. The
Board Risk Committee also approves lending authorities in respect
of SME lending. Each consumer lending product has a monthly
portfolio review which analyses business performance from new
application metrics through to loss performance by business type
and introducer. Policy and scorecard changes are approved at the
Consumer Credit Risk Committee.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is managed via a joint venture with
Haydock, who operate in line with the Group's credit policies and
risk appetite. Since the change in ownership of Haydock in January
2018, we have allowed the Asset Finance portfolio to reduce in line
with contractual repayments from customers.
Exposure to Credit Risk is also managed in part by obtaining
security. Motor Finance loans are secured against motor vehicles.
Mortgages are secured against land/property and Real Estate Finance
and Asset Finance loans are secured against property and tangible
assets respectively. Commercial Finance advances are secured
against a debtor book, inventory or property if a commercial
mortgage is provided.
Management monitors the ratings of the counterparties in
relation to the Group's loans and advances to banks. There is no
direct exposure to the Eurozone and peripheral Eurozone
countries.
Forbearance
Throughout 2019, our policy was not to routinely reschedule
contractual arrangements where customers defaulted on their
repayments. In cases where customers were offered the option to
reduce or defer payments for a short period, the loan retained the
normal contractual payment due dates and would be treated the same
as any other defaulting cases for impairment purposes. Forbearance
arrangements in respect of Consumer Mortgages customers are
described in Note 34.2.
Change
Consumer Finance Credit Risk
Application trends, arrears and loss trends for the Retail
Finance Portfolio are monitored monthly by the Credit Risk Team.
The portfolio quality has been improving throughout 2019, leading
to a reduction in cost of risk from 1.8% to 1.4%, and we
implemented a new artificial intelligence scorecard in the third
quarter of 2019 which is expected to reduce impairments even
further. Recent changes to the mix of retail market segments served
by Retail Finance are expected to improve portfolio quality over
time.
Our Motor Finance business has continued to grow despite a very
competitive landscape. We have continued our strategy of
repositioning the Motor Finance business away from those customers
that are most susceptible to an economic downturn. We have expanded
the Motor Finance product range to include a unit stocking product,
to provide short-term finance to motor dealers so that they can buy
stock. In 2020, the Group expects to launch a prime Hire Purchase
('HP') and Personal Contract Purchase ('PCP') product offering. The
PCP offering will introduce a new risk for the Group, with
potential for losses should the residual value of the vehicles at
the end of the agreement be less than expected at inception of the
contract. We have recruited specialists, introduced additional
governance over acceptance criteria and specified appropriate
levels of buffer within residual value calculations, to mitigate
this risk.
In the first quarter of 2019 due to the difficult economic
climate, increased competition and continued uncertainties we
announced the decision to cease new mortgage originations until
market conditions improve.
Business Finance Credit Risk
Lending balances in both the Real Estate Finance and Commercial
Finance portfolios have continued to grow, with both portfolios
remaining well within all key risk appetite measures. The ongoing
focus on high quality, secured lending has continued to serve the
Group well.
Following the change in ownership of Haydock, in January 2018,
the Asset Finance portfolio has continued to run-off over the
course of the year in line with expectations. We continue to assess
its options with regards to future opportunities within the Asset
Finance market.
We have not relaxed any of our key risk appetite parameters
during the year and thanks to the continued adherence to our robust
lending policies, alongside the significant experience within the
lending teams, impairments within the Business Finance portfolios
have remained minimal in the period. Management continues to
monitor each of the portfolios closely and regularly reviews the
external events and changes to the wider environment that could
have a material impact on any of them.
Concentration Risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
well diversified nature of its lending operations, we do not
consider there to be a material exposure arising from concentration
risk.
Liquidity and Funding Risk - IMPROVED
-------------------------------------------------------------------------------------------------
Description
Liquidity and Funding Risk is the risk that the Group is unable to meet its obligations as
they fall due or can only do so at excessive cost. We maintain adequate liquidity resources
and a prudent stable funding profile at all times to cover liabilities as they fall due in
normal and stressed conditions.
We manage our liquidity in line with internal and regulatory requirements, and at least annually
assess the robustness of the liquidity requirements as part of the Group's Internal Liquidity
Adequacy Assessment Process ('ILAAP').
-------------------------------------------------------------------------------------------------
Mitigation
Risk tolerance
In line with the PRA's self-sufficiency rule (the Overall
Liquidity Adequacy Rule ('OLAR')) we seek to at all times maintain
liquidity resources which are adequate, both as to amount and
quality, to ensure that there is no significant risk that our
liabilities cannot be met as they fall due under stressed
conditions. We define liquidity adequacy as the:
-- ongoing ability to accommodate the refinancing of liabilities
upon maturity and other means of withdrawal
-- ability to fund asset growth,
-- capacity to otherwise meet contractual obligations through
unconstrained access to funding at reasonable market rates
To meet our liquidity requirements we maintain a buffer of
unencumbered High Quality Liquid Assets ('HQLA').
The Group's Liquidity Risk Appetite and Funding Risk Appetite
are approved by the Board:
-- Liquidity Risk Appetite: to maintain a sufficient pool of
high quality liquid resources at all times to survive a combined
stress event for a minimum survival horizon of at least 90 days,
including any peak requirement over the 90-day stress period; and
meet the higher of the internal stress test (OLAR) and the
regulatory requirement (LCR) plus any applicable Pillar 2
add-ons
-- Funding Risk Appetite: STB's Funding Risk Appetite is to
ensure that the Group has access to stable funding markets and is
not reliant on any single source of funding. STB places no material
reliance on wholesale funding markets. The Group's primary source
of funding is retail deposits from individuals and SMEs
We assess and formally demonstrate the adequacy of our liquidity
through the ILAAP. As part of the ILAAP, we conduct regular and
comprehensive liquidity stress testing to ensure compliance with
internal and regulatory requirements.
Structure and responsibilities for Liquidity Risk management
The Group has a formal governance structure in place to manage
and mitigate Liquidity and Funding Risk on a day-to-day basis. The
Board sets and approves the Group's Liquidity and Funding Risk
appetites. The Assets and Liabilities Committee ('ALCO'),
comprising senior management and executives of the Group, meets
monthly to review Liquidity and Funding Risk against set thresholds
and risk indicators including early warning indicators. These
metrics are managed on a day-to-day basis by the Group's Treasury
function. The Risk function is responsible for ensuring that
appropriate risk management processes and controls are in place,
and that they are sufficiently robust, so as to ensure that key
risks are identified, assessed, monitored and mitigated.
Internal liquidity reporting
Liquidity and funding metrics are monitored daily through
liquidity reporting and on an ongoing basis through monthly ALCO
meetings. Metrics are also included in the Monthly Financial
Information pack tabled at the Group's Executive Committee, Board
Risk Committee and the Board.
The Liquidity Working Group ('LWG'), a working group of ALCO,
embeds the identification, monitoring, measurement and management
of Liquidity and Funding Risks in the day-to-day activities of the
Bank.
The aim is not to measure liquidity and funding with a single
metric but rather a range of principles and metrics which, when
taken together, helps ensure that our Liquidity and Funding Risk is
maintained at an acceptable level.
The primary measure used by management to assess the adequacy of
liquidity is the OLAR which, in line with the PRA's
self-sufficiency rule described above, is the Board's own view of
the Group's liquidity needs as set out in the Board approved
ILAAP.
Communication of Liquidity Risk strategy, policies and practices
across business lines and with the Board
The Group's ALCO is responsible for implementing and controlling
the Liquidity and Funding Risk appetite established by the Board.
ALCO monitors compliance with the Group's policies and oversees the
overall strategy, guidelines and limits so that the Group's future
plans and strategy can be achieved within
risk appetite.
Liquidity and Funding Risk management framework
We maintain a comprehensive internal reporting framework which
seeks to mitigate Liquidity and Funding Risk:
-- Risk Identification: activities are embedded through
integration with key business processes to ensure the Group:
-- Considers how existing activities may impact the current and
future Liquidity and Funding Risk profile
-- Considers the implications of new products
-- Has an awareness of how external influences may affect the
liquidity position.
-- Risk Management: focuses on the application of tools,
techniques and processes to quantify risks in order to effectively
measure the Group's Liquidity and Funding Risk
-- Risk Monitoring: Board and senior management are provided
with timely identification of the Group's liquidity and funding
position, current emerging risks, material threats and
opportunities to enable appropriate management actions
-- Risk Reporting: the Board, relevant Committees, and senior
management are informed of any changes in the Group's Liquidity and
Funding Risk profile or position and necessary actions via regular
liquidity reporting. In addition, ad hoc reporting to address any
specific concerns affecting Liquidity and Funding Risk management
or strategies is available
Stress testing
A comprehensive stress testing framework is used to support
Liquidity and Funding Risk measurement and takes into account all
known sources of liquidity and funding risks as documented within
the ILAAP (and as updated upon changes in material risks). The
stress testing covers Idiosyncratic, Marketwide and Combined stress
scenarios, with additional stress scenarios including reverse
stresses, tailored to our business model and operating
environment.
Stress testing is conducted to identify sources of potential
liquidity strain and to ensure that the Group's liquidity position
remains within the Board Risk Appetite and prudential regulatory
requirements and limits. Stress testing and sensitivity analyses
are performed on a regular basis to assess the key business
vulnerabilities.
We use various short- and medium-term forecasts to monitor
future liquidity requirements and these include stress testing
assumptions to identify the required levels of liquidity. Stress
testing is performed on a daily basis and levels of liquidity under
stress are forecast regularly and monitored by ALCO and
management.
Contingency funding plans
If, for reasons which may be beyond the business's control, the
Group was to encounter a significant and sustained outflow of
deposits or other stress on liquidity resource, the Recovery Plan
incorporates the Group's plans to ensure that it remains
sufficiently liquid to remain a viable independent financial
institution during a severe liquidity stress event. Recovery Plan
Early Warning Indicators and Invocation Trigger Points ('ITP') are
regularly monitored and reported against.
The Recovery Plan is applied consistently with the Group's ILAAP
as part of the overall liquidity risk management framework dealing
with contingent funding requirements as they arise. The Group also
retains access to the Bank of England liquidity schemes, including
the Discount Window Facility.
Change
We have maintained our liquidity ratios in excess of regulatory
requirements throughout the year and continue to hold significant
levels of HQLA.
We made a number of enhancements to the liquidity and funding
risk governance framework in 2019. These include approval of a
revised policy framework by the Board and additional analysis of
liquidity requirements for new and existing products.
The stress tests performed as part of the ILAAP confirmed that
the Group has sufficient funds to satisfy the OLAR requirement and
there is no significant risk that liabilities cannot be met as they
fall due. Our LCR at 31 December 2019 was significantly higher than
the regulatory requirement.
Operational Risk - STABLE
---------------------------------------------------------------------------------------------------
Description
Operational Risk is the risk that the Group may be exposed to direct or indirect loss arising
from inadequate or failed internal processes, personnel and succession, technology/infrastructure,
or from external factors.
The scope of Operational Risk is broad and includes Business process, Business Continuity,
Third party, Financial Crime, Change, Human Resources, Information Security and IT risk, including
Cyber Risk.
---------------------------------------------------------------------------------------------------
Mitigation
We have adopted an Operational Risk Policy and Framework
designed in accordance with the 'Principles for the Sound
Management of Operational Risk' issued by the Basel Committee on
Banking Supervision.
The approach ensures appropriate governance is in place to
provide adequate and effective oversight of the Group's Operational
Risk. The governance framework includes the Board Risk Committee
and Group Operational Risk Committee.
We have a defined set of qualitative and quantitative
Operational Risk appetite measures. Quantitative measures cover
operational losses, complaints, key operational risks, systems
availability and information security. The appetite measures are
reported and monitored on a monthly basis.
Change
In 2018 the Group successfully transitioned to 'The Standardised
Approach' for assessing its operational risk capital, in
recognition of the enhancements made to its framework and embedding
this across the Group. In 2019 we have continued to enhance these
standards and have introduced a number of improvements to the
control frameworks in place across our principal operational
risks.
Key risk themes of Operational Risk focus in 2019 include:
-- Supplier Management - The Group uses a number of third
parties to support its IT and operational processes. We recognise
that it is important to effectively manage these suppliers and have
embedded a suite of standard controls for all our material
suppliers to reduce the risk of operational impacts on these
critical services. Further tools have been developed, and are being
rolled out, to help understand the quality of the resilience
controls in operation at our critical suppliers. We have also
enhanced our assurance capability with the recruitment of a
dedicated resource in this area. This will continue to be an area
of focus for 2020
-- Operational and IT Resilience - Many elements of the
Operational Risk Framework support the ongoing resilience of our
operational and IT services, including Business Continuity
Management, Disaster Recovery, Incident Management, Process
Management and the Cyber Strategy. We have defined a formal plan to
respond to the new requirements of the Consultation Papers issued
on this subject by the FCA and PRA. Compliance with these
requirements and continuing to enhance the resilience of our
services will be a key priority in 2020
-- Information Security and Cyber Risk - We have paid
considerable attention to ensuring the effective management of
risks arising from a failure or breach of our information
technology systems that could result in customer exposure, business
disruption, financial losses, or reputational damage
-- Change Management - The effective delivery of Change
Management programmes plays an important role in meeting our
regulatory requirements, improving services and implementing
strategic decisions. Ineffective change management processes could
lead to poor customer outcomes, business disruption, financial loss
and regulatory breaches. Change Management processes and governance
are defined and embedded within the Group. Significant changes are
planned in 2020, including delivery of dealer stocking and the
prime proposition as part of the Motor Finance transformation, and
these will be a key area of focus to ensure we maintain our
customer and operational service standards and deliver our
strategic objectives
Capital Risk - STABLE
--------------------------------------------------------------------------------------------------
Description
Capital Risk is the risk that the Group will have insufficient capital resources to meet minimum
regulatory requirements and to support the business. We adopt a conservative approach to managing
capital and at least annually assess the robustness of the capital requirements as part of
the Group's Internal Capital Adequacy Assessment Process ('ICAAP').
--------------------------------------------------------------------------------------------------
Mitigation
Capital Management is defined as the operational and governance
processes by which capital requirements are established and capital
resources maintained and allocated, such that regulatory
requirements are met while maximising returns. These processes and
associated roles and responsibilities are set out in the Group's
Capital Management Policy, which is approved by the Risk Committee.
The Board regularly reviews the current and forecast capital
position to ensure capital resources are sufficient to support
planned levels of growth.
In accordance with the EU's Capital Requirements Directive IV
('CRD IV') and the required parameters set out in the EU's Capital
Requirement Regulation, the Group maintains an ICAAP which is
updated at least annually.
The ICAAP is a process that brings together the management
framework (i.e. the policies, procedures, strategies and systems
that the Group has implemented to identify, manage and mitigate its
risks) and the financial disciplines of business planning and
capital management.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted an approach to
determine the level of capital we need to hold. This method takes
the Pillar 1 capital formula calculations (standardised approach
for credit, market and operational risk) as a starting point, and
then considers whether each of the calculations delivers a
sufficient capital sum adequate to cover management's assessment of
anticipated risks. Where it is considered that the Pillar 1
calculations do not reflect the risk, an additional capital add-on
in Pillar 2 is applied, as per the Total Capital Requirement issued
by the PRA.
A complete assessment of the Group's capital requirement is
contained in its Pillar 3 disclosures. Pillar 3 disclosures for the
Group for the year ended 31 December 2019 are published as a
separate document on our website.
Change
We maintained our capital ratios in excess of regulatory
requirements throughout the year. At 31 December 2019, the CET1
ratio was 12.7% (2018: 13.8%), the total capital ratio was 15.0%
(2018: 16.3%) and the leverage ratio was 9.8% (2018: 10.0%) on a
Group consolidated basis. We have continued to invest capital to
support lending growth.
Capital resources increased during the year to GBP318.0 million
as at 31 December 2019 (31 December 2018: GBP297.5 million) on a
Group consolidated basis. The increase was due to retained
earnings.
We have continued to explore options available to raise
alternative forms of capital as and when such is required. The
recent announcements from the PRA regarding the countercyclical
capital buffer, which has now been reduced to 0% as part of the
COVID-19 response, have been considered and factored into our
plans.
The 2019 ICAAP demonstrated the Group's continued ability to
meet its minimum capital requirements, even in severe stress
scenarios. Our forecasting capability covers a five-year time
horizon, with modelling of capital resources and requirements
provided over that period. The relatively short duration of our
lending portfolios allows us to flex balance sheet growth if
required in times of stress, thereby conserving capital.
We adopted transitional provisions in respect of the
implementation of IFRS 9, as set out by the European Banking
Authority. These provisions allow the capital impact of the
standard to be phased in over a five-year period. Further details
are provided in Note 37.
Market Risk - IMPROVED
-------------------------------------------------------------------------------------------------
Description
For the Group, Market Risk is primarily limited to interest rate risk. Interest rate risk
refers to the exposure of the Bank's financial position to adverse movements in interest rates.
When interest rates change, the present value and timing of future cash flows can change.
This in turn changes the underlying value of the Group's assets, liabilities and off-balance
sheet instruments and hence its economic value. Changes in interest rates also affect our
earnings by altering interest-sensitive income and expenses, affecting our net interest income.
The principal currency in which the Group operates is Sterling, although a small number of
transactions are completed in US Dollars, Euros and other currencies in the Commercial Finance
business. We have no significant exposures to foreign currencies and hedge any residual currency
risks to Sterling.
-------------------------------------------------------------------------------------------------
Mitigation
We maintain a comprehensive internal reporting framework which
seeks to mitigate interest rate risk:
-- Risk identification: activities are embedded through
integration with key business processes to ensure the Group:
-- Considers how existing activities may impact the current and
future interest rate risk profile
-- Considers the implications of new products
-- Has an awareness of how external influences may affect the
market risk position
-- Risk Management: focuses on the application of tools,
techniques and processes to quantify risks in order to effectively
manage the Group's interest rate risk
-- Risk Monitoring: the Board and senior management are provided
with timely identification of the Group's interest rate risk
position, current emerging risks, material threats and
opportunities to enable appropriate management actions
-- Risk Reporting: the Board, Committees, and senior management
are informed of any changes in the Group's interest rate risk
profile or position and necessary actions via regular reporting. In
addition, ad hoc reporting to address any specific concerns
affecting interest rate risk management or strategies must be
available
Market Risk is managed by the Group's Treasury function and is
overseen by the ALCO. We do not take significant unmatched
positions and do not operate a trading book.
Our risk management framework, policies and procedures are
regularly reviewed and updated to ensure that they accurately
identify the risks that we face in our business activities and are
appropriate for the nature, scale and complexity of our
business.
The Group uses an Interest Rate Sensitivity Gap analysis to
identify mismatched interest rate risk positions that require
hedging. The Group reports the interest rate mismatch to ALCO and
the Board on a monthly basis in the form of a Market Value
Sensitivity and Economic Value of Equity to a parallel 200 basis
point rise and fall in the yield curve. Risk appetite for Market
Value Sensitivity is calibrated against the amount of capital
resource available to the Group. The Group's Earnings at Risk is
also calculated monthly against a 100 basis point parallel stress
and reported to ALCO and the Board.
All such exposures are maintained within the risk appetite set
by the Board and are monitored by ALCO. The Group also monitors its
exposure to optionality and basis risk.
Change
The Group's exposure to Market Risk continues to be limited
primarily to interest rate risk, with only modest exposures to
foreign exchange risk. The Group remained within risk appetite in
respect of interest rate risk throughout the year.
The increasing size of our balance sheet increases the inherent
level of interest rate risk, and we have responded by enhancing our
Treasury capabilities and risk framework. The Group has developed
its capability to use interest rate swaps to further mitigate
interest rate risk in 2019.
The Group is embedding new regulatory guidance on Interest Rate
Risk in the Banking Book, as prescribed by the European Banking
Authority.
We consider the enhanced framework, and particularly the
introduction of derivatives capability, to have led to a reduction
in the Group's market risk position.
Conduct Risk - STABLE
--------------------------------------------------------------------------------------------
Description
We define Conduct Risk as the risk that the Group's products and services, and the way they
are delivered, result in poor outcomes for customers, or harm to the Group. This could be
as a direct result of poor or inappropriate execution of the Group's business activities or
staff behaviour.
--------------------------------------------------------------------------------------------
Mitigation
We take a principles-based approach and include retail and
commercial customers in our definition of 'customer', which covers
all business units and both regulated and unregulated
activities.
Across the Group, Conduct Risk exposure is managed via monthly
review of key risk indicators ('KRIs') at business units' executive
committee meetings and aggregated reporting to the Group Executive
Committee. Oversight is provided by the Customer Focus Committee,
which considers complaints, Feefo and Customer Service Excellence
as well as Conduct Risk.
The KRIs vary across the business units to reflect the relevant
conduct risks; the business units' key risk indicators are
aggregated for measurement against our risk appetite, which is also
reported to the Risk Committee and the Board.
Change - STABLE
Review of Conduct Risk and controls within the business units is
managed through the regular cycle of risk and control
self-assessments, in line with other operational risk
categories.
Members of the Customer Focus Committee review key risk
indicators across all business units, and meet on a quarterly basis
for oversight and challenge of the first line activities to assure
senior management that the first line is identifying conduct risks
when they arise and taking appropriate actions to mitigate
them.
Training on Conduct Risk continues to be delivered to new
starters, with an eLearning module completed by all staff during
the year.
Regulatory Risk - STABLE
------------------------------------------------------------------------------------------------
Description
Regulatory Risk is the risk that the Group fails to be compliant with all relevant regulatory
requirements. This could occur if the Group failed to interpret, implement and embed processes
and systems to address regulatory requirements, emerging risks, key focus areas and initiatives
or deal properly with new laws and regulations.
------------------------------------------------------------------------------------------------
Mitigation
We seek to manage regulatory risks through the Group-wide risk
management framework. The Group Compliance and Regulatory Risk
Committee is responsible for reviewing and monitoring regulatory
changes, and ensuring that appropriate actions are taken, and also
reviewing and approving the Compliance universe and risk management
framework. Further details can be found on the Group's website:
www.securetrustbank.com
/our-corporate-information/risk-management.
Change
In the year ended 31 December 2019, we have delivered changes to
address new and revised regulations and legislation that have come
into force including extending the Senior Managers and
Certification Regime to the Group's regulated subsidiaries;
European Banking Authority guidelines on security measures for
operational and security risks and fraud reporting under PSD2; Buy
Now Pay Later and Financial Promotions changes in consumer credit;
widening access to the Financial Ombudsman for small businesses;
supporting the Group through the management of the PPI deadline in
August 2019.
Projects and initiatives are in place for changes required in
2020 including disclosures of commission models in consumer credit,
breathing space, regulatory returns, the FCA directory and
operational resilience.
Strategic and emerging risks
In addition to the principal risks disclosed above, the Board
considers strategic and emerging risks, including key factors,
trends and uncertainties which can influence our results. These
risks include the following:
COVID-19
The impact of the outbreak on the economy and on the Group's
operations is subject to close monitoring by the Group's Crisis
Management Team ('CMT') and Group and business unit Executive
Committees. Contingency plans have been established for each
business unit and are overseen by the CMT. Where process changes
have been required in order to maintain services, these have been
subject to formal risk review with the CEO, under authority
delegated from the Board, accountable for risk acceptance.
It is now clear that the COVID-19 outbreak will have a
significant impact on economic activity. The main impacts on the
Group are expected to be in relation to reduced demand for new
business, particularly for Consumer Finance products, and to
increase impairment losses. Stress testing has been undertaken to
assess the potential impact of future economic conditions, brought
about by COVID-19, on the Group's financial performance and
position, including consideration of capital and liquidity. Details
of the stress testing and conclusions drawn are set out in the
Viability and Going Concern Statement on page 50.
From an operational perspective, the Group has focused on the
following potential impacts arising from COVID-19:
-- Supply chain failure
-- Restricted distribution channels
-- Restricted ability to operate due to public policy changes
and requirement to respond to regulatory and government
measures
-- Geographical impacts on markets and key operating locations
-- Employee absence or home working
The restricted distribution channels refers to introducers and
intermediaries used by the Group to source new business, as well as
retailers and motor dealers which are integral to the Consumer
Finance business. The resultant reduction in new business activity
is considered in the stress testing referred to above, and has
allowed business areas to redeploy resource to support existing
customers and collections activity.
In respect of the other items listed above, the CMT has assessed
the actions undertaken both centrally and in individual business
areas and considers them to be working well in mitigating the
operational risks brought by COVID-19. These actions include: the
rollout of technology solutions which have enabled a significant
number of employees to work from home; introduction of social
distancing policies for employees who are currently required to
work from an STB office; review of key supplier business continuity
arrangements and identification of alternative suppliers; and
implementation of payment holiday processes.
The Board has considered these potential impacts and the actions
undertaken in response and has taken them into account when making
its assessment of Viability and Going Concern. Frequent reports
have been provided to the Board on the operational impacts of
COVID-19 and the Group's responses to mitigate. In addition the CEO
provides regular updates on progress to Board members.
Macroeconomic environment and market conditions
Political and economic uncertainty continued throughout 2019. UK
economic fundamentals demonstrably weakened in the second half of
the year, as businesses and consumers became more cautious and less
active whilst they awaited the impact of the planned Brexit date of
31 October, and when this did not happen, the outcome of the
General Election. Growth of GDP flat-lined in the autumn and turned
negative in November which dampened demand for consumer and house
building finance. Some degree of recovery followed the decisive
result of the election.
UK withdrawal from European Union
Following the passing of the UK Withdrawal Agreement and the
withdrawal itself on 31 January 2020, the UK remains in a
transitional arrangement with the European Union. Uncertainty
remains as to whether a new trade deal between the UK and the
European Union can be struck before the transitional arrangement
ends on 31 December 2020. The UK Government has indicated that it
will not extend the deadline, and indeed passed legislation to that
effect. The risk of leaving without a robust new trade deal with
the EU therefore remains.
Our core business planning assumption is that the transitional
arrangement will conclude in an orderly basis and that the direct
impact of a disorderly scenario is limited. All continuing trade is
within the UK and the lending sectors that the Group operates in
are not significantly reliant on cross border arrangements. The
indirect impact however could be material. Details of the indirect
consequences of a no deal scenario were set out in the Principal
risks and uncertainties section
of the 2018 Annual Report. Our view of these indirect impacts
has not materially changed, and the potential impact on our most
significant business units is set out on page 49 of the 2019 Annual
Report.
We consider the most significant potential impact of a failure
to agree a robust trading agreement to be that on credit risk. The
Principal risks and uncertainties section of the 2018 Annual Report
sets out details of how the Group worked with external consultants
to assess the likely impact of a no deal scenario on its Consumer
Finance portfolios. The stress test modelling undertaken showed
higher impairment provisions than those set out in our central
plan, but not at a level that was considered to compromise the
Group's viability. It was concluded at that time that the Group did
not need to change strategy in the anticipation of a potential no
deal exit from the EU. This continues to be the case, and our view
of the impact of a disorderly scenario remains unchanged from that
set out in the 2018 analysis.
Additional early warning indicators, that could indicate the
need to change strategy, were set up following the work undertaken
in 2018 and these have been monitored throughout 2019. Continuing
stress test modelling, including that undertaken in respect of our
ICAAP, has continued to demonstrate that the Group can withstand
significant macroeconomic shocks, including those significantly
more adverse than that expected to arise from a disorderly exit
from the European Union. The short duration of our balance sheet
provides significant flexibility, should we need to reduce our
lending activity in the event of such a stress.
Business unit Potential indirect impact of no deal exit, assessed in 2018
------------------- -------------------------------------------------------------------------------------------------
Real Estate Finance Direct consequences on the procedures for the transfer, renting and mortgaging of property
are considered unlikely.
If there is a reduction in UK finance providers, then contraction of supply could affect the
choice and terms of funding available for investment or development projects. The timing or
cost of development projects could be affected by price increases and/or shipping delays.
Developers on some, particularly larger projects, may be more cautious about committing to
dates and costs without scope for adjustment for the effect of a no deal withdrawal. An increase
in the cost of borrowing and weaker demand could push UK property prices lower. These factors
could reduce demand for the Group's products whilst increasing credit risk.
------------------- -------------------------------------------------------------------------------------------------
Commercial Finance No direct consequence is expected due to this division's UK customer base. Invoice financing
has some countercyclical characteristics, though its medium-term performance is directly linked
to macroeconomic conditions, given lending balances are secured against the customer's sales
ledger.
------------------- -------------------------------------------------------------------------------------------------
Retail Finance The key market sectors funded by Retail Finance could be impacted by rising raw material or
finished goods input prices. Retailers would need to decide whether to pass on costs or absorb
them into margins.
Rising consumer prices would likely lead to reduced consumer confidence and demand and reduced
retailer margins would likely lead to retailers halting or slowing UK expansion. These factors
could reduce demand for the Group's products.
Consumer affordability issues could also impact on the Group's profitability through increased
impairment provisions.
------------------- -------------------------------------------------------------------------------------------------
Motor Finance This division serves the UK used car market, which unlike the supply of new vehicles (often
originating from other EU markets and attracting increased tariffs), is largely self-contained.
However, subdued economic conditions and lower consumer confidence or spending power may have
a potential adverse impact on used car demand, and associated demand for the Group's financing.
Affordability issues may also adversely impact the Group's profitability through increased
bad debts.
------------------- -------------------------------------------------------------------------------------------------
Model risk and the impact of IFRS 9
We enhanced our controls around Model Risk and Model Governance
in 2019. Improvements have been made in all aspects of Model
Governance including the Model Governance Policy through to Model
Standards and Model Inventories. Material or high risk models are
reviewed by the Model Governance Committee on an annual basis. The
Group Chief Risk Officer chairs the Model Governance Committee,
with the Committee reporting to the Risk Committee.
We continue to derive the probability of default ('PD'), loss
given default ('LGD') and exposure at default ('EAD') of the
Group's lending portfolios, and therefore impairment provisions,
through a suite of IFRS 9 models. The models have been monitored
throughout the year and found to be working effectively. Minor
enhancements have been made where appropriate. The Group uses a
weighted view comprising a number of macro-economic scenarios
including benign, base, stress and ICAAP cases to provide the
aggregated impairment provision each month.
Climate change
Climate change presents financial risks for the banking industry
and whilst it is difficult to assess how climate change will
unfold, we are assessing our risk exposure in relation to both the
potential 'Physical' effects and the 'Transition' risks from the
adjustment towards a carbon neutral economy.
The risk assessment process has been integrated into existing
Risk Frameworks and will be governed through existing risk
governance structures, including reporting to the Board Risk
Committee.
In accordance with the requirements of the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change', we have allocated
responsibility for identifying and managing the risks from climate
change to the relevant existing Senior Management Function. In
addition, we are evaluating the requirements of the 'Taskforce on
Climate-related Financial Disclosures' and will continue to enhance
our reporting and disclosures in line with these standards.
Risk management
Details of the Group's risk management framework, including risk
appetite, governance arrangements and key committees, can be found
on the Group's website:
www.securetrustbank.com/our-corporate-information/risk-management
.
Viability and Going Concern Year-end 2019
Going concern
In assessing the Group as a going concern, the Directors have
given consideration to the factors likely to affect its future
performance and development, the Group's financial position and the
principal risks and uncertainties facing the Group, as set out in
the Strategic Report. The Group uses various short- and medium-term
forecasts to monitor future capital and liquidity requirements and
these include stress testing assumptions to identify the headroom
on regulatory compliance measures. As set out in the assessment of
business viability, for the 2019 Annual Report and Accounts the
stress testing assumptions have included specific scenarios
relating to the COVID-19 outbreak.
The Directors are satisfied that the Company and the Group have
adequate resources to continue to operate for the foreseeable
future as going concerns. For this reason they continue to adopt
the going concern basis.
Business viability
In accordance with provision 31 of the UK Corporate Governance
Code, the Directors confirm that there is a reasonable expectation
that the Company and the Group will be able to continue in
operation and meet their liabilities as they fall due, for the
period up to 31 December 2022. The assessment of ongoing viability
covers this period as it falls within the Group's five-year
planning horizon and the period covered by the Group's stress
testing.
Given the Group's continuing long-term growth potential, further
improvements in credit quality over 2019 and the Group's flexible
business model, the directors are confident of the Group's
viability over the longer term. However, the continuing
uncertainties regarding the economic, regulatory and market
environment that the Group operates in, particularly those related
to COVID-19, may compromise the reliability of longer range
forecasts. The Board has therefore decided to continue to use a
three-year period for its assessment of viability rather than
extending this over the full planning horizon.
The Directors have based the assessment on:
-- the latest annual budget (approved before the outbreak
started), which contains information on the expected financial
position and performance for the period to 31 December 2024 and by
considering the potential impact of the principal risks facing the
Group
-- the analysis of key sensitivities, undertaken as part of the
budget process, which could impact on profitability over the period
covered by the budget. Assumptions made to calculate risk weighted
assets and capital requirements are clearly stated and additional
scenarios are modelled to demonstrate the potential impact of risks
and uncertainties on capital
-- the Group's ILAAP, which uses stress scenarios to assess the
adequacy of liquidity resources. The results of this scenario
analysis are used to set the Group's OLAR and are also the basis of
the liquidity requirements set by the PRA. The Group has maintained
liquidity levels in excess of regulatory requirements throughout
the year and is forecast to continue to do so
-- the Group's ICAAP, which considers macroeconomic stress and
severe shock scenarios in order to assess the adequacy of capital
resources. The results of the scenario analysis are used to set the
Group's internal and regulatory capital requirements. The Group has
maintained capital levels in excess of regulatory requirements
throughout the year and is forecast to continue to do so. The
macroeconomic stress scenarios were based on the 'rates up' and
'rates down' scenarios set out in the H1 2019 Bank of England
stress test scenario, with the severe shock scenario assuming key
economic variables to be either worsened or accelerated compared to
the rates up scenario
-- consideration of the other principal risks as set out on
pages 40 to 49 of the Annual Report, to identify any other severe
but plausible scenarios that could threaten the Group's business
model, future performance, solvency
or liquidity
-- analysis of further scenarios related to the UK's withdrawal
from the European Union. Further details of this analysis are
provided above
-- analysis of the operational impact of the COVID-19 outbreak
on the Group. Further details are provided above
-- consideration of the potential impact of COVID-19 on future
earnings, capital and liquidity requirements.
COVID-19 stress testing
Although the Group regularly undertakes capital and liquidity
stress testing, particularly to inform the ICAAP and ILAAP, the
nature of the economic impact of COVID-19 is likely to be different
to the scenarios that are normally considered. Most commentators
are suggesting a sharp and deep decline in economic activity,
brought about by Government measures to restrict movement and hence
reduce contagion, followed by a recovery as measures are lifted. In
addition, unlike in the scenarios generally considered in stress
testing, operational restrictions introduced by those Government
measures also have an impact on the Group's performance and
position.
The Group has therefore undertaken bespoke stress testing,
covering capital and liquidity, to consider such scenarios. A range
of market and idiosyncratic variables were used as scenario inputs,
with unemployment levels being the variable to which the Group's
impairment losses are most sensitive. Two plausible but severe core
scenarios were considered:
-- medium stress, whereby unemployment rises to more than 7%,
new business levels decrease significantly due to falling demand,
collection performance is degraded, and the value of the Group's
security against bad debt losses reduces due to house and used car
prices falling
-- hard stress, whereby unemployment rises to more than 10%,
accompanied by more severe falls in demand, collection performance
and asset values.
Given the uncertainty over the true impact of the outbreak, a
range of sensitivities was then applied, to provide comfort that
the Group could withstand even more adverse conditions than those
set out in the Hard stress scenario. These included raising the
unemployment rate to even higher levels, further degrading
collection performance, changing the assessment of the
effectiveness of Government interventions on impairment rates, and
prolonging the period of unemployment. The sensitivities also
served as a reverse stress test, to identify the circumstances that
could cause the Group to fail.
Analysis of the stress testing results showed that the Group did
not breach capital or liquidity requirements, or need to utilise
buffers, in either the Medium or Hard stress scenario. Strategic
management actions such as formal cost reduction programmes were
also not required. The liquidity position remained robust,
indicating the Group's ability to withstand contagion should
another financial institution fail.
The most extreme sensitivities applied would either require the
Group to implement strategic management actions or to temporarily
utilise capital buffers. The PRA has notified financial
institutions that it expects them to utilise buffers if required,
in order to continue lending, and so this is not considered to
compromise the Group's Viability or Going Concern status. The Board
considers that the circumstances required to cause the Group to
fail, as demonstrated by the reverse stress testing, are considered
sufficiently remote.
In undertaking this stress testing analysis the Group has made
use of models. Models are imperfect representations of reality,
reliant on historical data, model inputs and assumptions. These
model risks are exacerbated when dealing with unprecedented
scenarios, such as the COVID-19 pandemic, due to the lack of
credible, reliable historical data to use as a reference point. The
Group has sought to reduce this risk by comparing different model
methodologies, applying expert judgement and senior management
review.
In making this statement, the Board has sought input from the
Audit Committee and the Risk Committee.
Directors' responsibility statement
The responsibility statement below has been prepared in
connection with the full annual accounts of the Company for the
year ended 31 December 2019. Certain parts of these accounts are
not presented within this announcement.
The Directors are responsible for preparing the Annual Report
and the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
company financial statements for each financial year. As required
by the Listing Rules, they are required to prepare the Group
financial statements in accordance with IFRS as adopted by the EU
and applicable law and have elected to prepare the parent company
financial statements on the same basis.
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 parent company and of
their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently
-- make judgements and estimates that are reasonable and prudent
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information
-- state whether they have been prepared in accordance with IFRS as adopted by the EU
-- provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Group and parent company's financial position and
financial performance
-- assess the Group and parent company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern
-- use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent company or to cease
operations, or have no realistic alternative but to do so
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
parent company's transactions and disclose with reasonable accuracy
at any time the financial position of the parent company and enable
them to ensure that its financial statements comply with the
Companies Act 2006. They are responsible for such internal control
as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility to
safeguard the assets of the Group and parent company and for taking
such steps as are reasonably open to them to prevent and detect
fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Corporate Governance Statement
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
We confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Group and parent company and the undertakings included in the
consolidation taken as a whole
-- the Strategic Report includes a fair review of the
development and performance of the business and the position of the
Group and parent 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 and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group and parent company's
performance, business model and strategy
This responsibility statement was approved by the Board of
Directors on 6 May 2020 and signed on their behalf by:
Lord Forsyth
Chairman
Paul Lynam
Chief Executive Officer
Consolidated statement of comprehensive income
2019 2018
Note GBPmillion GBPmillion
-------------------------------------------------------------------------------------- ---- ----------- -----------
Income statement
-------------------------------------------------------------------------------------- ---- ----------- -----------
Interest income and similar income 4.1 191.4 169.2
-------------------------------------------------------------------------------------- ---- ----------- -----------
Interest expense and similar charges 4.1 (46.0) (35.5)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net interest income 4.1 145.4 133.7
-------------------------------------------------------------------------------------- ---- ----------- -----------
Fee and commission income 4.2 20.9 19.4
-------------------------------------------------------------------------------------- ---- ----------- -----------
Fee and commission expense 4.2 (0.8) (1.5)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net fee and commission income 4.2 20.1 17.9
-------------------------------------------------------------------------------------- ---- ----------- -----------
Operating income 165.5 151.6
-------------------------------------------------------------------------------------- ---- ----------- -----------
Net impairment losses on loans and advances to customers (32.6) (32.4)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Operating expenses 6 (94.2) (84.5)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit before income tax 38.7 34.7
-------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 8 (7.6) (6.4)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 31.1 28.3
-------------------------------------------------------------------------------------- ---- ----------- -----------
Other comprehensive income
-------------------------------------------------------------------------------------- ---- ----------- -----------
Items that will not be reclassified to the income statement
-------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation reserve 0.2 (0.3)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Taxation (0.2) 0.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Other comprehensive income for the year, net of income tax - (0.2)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Total comprehensive income for the year 31.1 28.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Profit attributable to:
-------------------------------------------------------------------------------------- ---- ----------- -----------
Equity holders of the Company 31.1 28.3
-------------------------------------------------------------------------------------- ---- ----------- -----------
Total comprehensive income attributable to:
-------------------------------------------------------------------------------------- ---- ----------- -----------
Equity holders of the Company 31.1 28.1
-------------------------------------------------------------------------------------- ---- ----------- -----------
Earnings per share for profit attributable to the equity holders of the Company during
the
year (pence per share)
-------------------------------------------------------------------------------------- ---- ----------- -----------
Basic earnings per share 9.1 168.3 153.2
-------------------------------------------------------------------------------------- ---- ----------- -----------
Diluted earnings per share 9.2 166.4 150.9
-------------------------------------------------------------------------------------- ---- ----------- -----------
All comprehensive income relates to continuing operations.
Consolidated statement of financial position
2019 2018
Note GBPmillion GBPmillion
------------------------------------------------ ---- ----------- -----------
ASSETS
------------------------------------------------ ---- ----------- -----------
Cash and balances at central banks 105.8 169.7
------------------------------------------------ ---- ----------- -----------
Loans and advances to banks 11 48.4 44.8
------------------------------------------------ ---- ----------- -----------
Loans and advances to customers 12 2,450.1 2,028.9
------------------------------------------------ ---- ----------- -----------
Debt securities 15 25.0 149.7
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.9) -
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 0.9 -
------------------------------------------------ ---- ----------- -----------
Investment property 16 4.8 -
------------------------------------------------ ---- ----------- -----------
Property, plant and equipment 17 11.3 11.0
------------------------------------------------ ---- ----------- -----------
Right-of-use assets 18 3.6 -
------------------------------------------------ ---- ----------- -----------
Intangible assets 19 9.0 9.9
------------------------------------------------ ---- ----------- -----------
Deferred tax assets 21 7.5 7.9
------------------------------------------------ ---- ----------- -----------
Other assets 22 17.3 22.4
------------------------------------------------ ---- ----------- -----------
Total assets 2,682.8 2,444.3
------------------------------------------------ ---- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------ ---- ----------- -----------
Liabilities
------------------------------------------------ ---- ----------- -----------
Due to banks 23 308.5 263.5
------------------------------------------------ ---- ----------- -----------
Deposits from customers 24 2,020.3 1,847.7
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.7) -
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 0.6 -
------------------------------------------------ ---- ----------- -----------
Current tax liabilities 3.3 4.2
------------------------------------------------ ---- ----------- -----------
Lease liabilities 25 4.5 -
------------------------------------------------ ---- ----------- -----------
Other liabilities 26 40.9 40.1
------------------------------------------------ ---- ----------- -----------
Provisions for liabilities and charges 27 0.7 1.3
------------------------------------------------ ---- ----------- -----------
Subordinated liabilities 28 50.6 50.4
------------------------------------------------ ---- ----------- -----------
Total liabilities 2,428.7 2,207.2
------------------------------------------------ ---- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------ ---- ----------- -----------
Share capital 30 7.4 7.4
------------------------------------------------ ---- ----------- -----------
Share premium 81.2 81.2
------------------------------------------------ ---- ----------- -----------
Revaluation reserve 1.1 1.1
------------------------------------------------ ---- ----------- -----------
Retained earnings 164.4 147.4
------------------------------------------------ ---- ----------- -----------
Total equity 254.1 237.1
------------------------------------------------ ---- ----------- -----------
Total liabilities and equity 2,682.8 2,444.3
------------------------------------------------ ---- ----------- -----------
Company statement of financial position
2019 2018
Note GBPmillion GBPmillion
------------------------------------------------ ---- ----------- -----------
ASSETS
------------------------------------------------ ---- ----------- -----------
Cash and balances at central banks 105.8 169.7
------------------------------------------------ ---- ----------- -----------
Loans and advances to banks 11 45.2 41.9
------------------------------------------------ ---- ----------- -----------
Loans and advances to customers 12 2,353.6 1,980.3
------------------------------------------------ ---- ----------- -----------
Debt securities 15 25.0 149.7
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.9) -
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 0.9 -
------------------------------------------------ ---- ----------- -----------
Investment property 16 4.8 -
------------------------------------------------ ---- ----------- -----------
Property, plant and equipment 17 6.5 6.0
------------------------------------------------ ---- ----------- -----------
Right-of-use assets 18 2.5 -
------------------------------------------------ ---- ----------- -----------
Intangible assets 19 7.4 8.1
------------------------------------------------ ---- ----------- -----------
Investments 20 4.1 3.9
------------------------------------------------ ---- ----------- -----------
Deferred tax assets 21 8.1 7.8
------------------------------------------------ ---- ----------- -----------
Other assets 22 103.8 65.6
------------------------------------------------ ---- ----------- -----------
Total assets 2,666.8 2,433.0
------------------------------------------------ ---- ----------- -----------
LIABILITIES AND EQUITY
------------------------------------------------ ---- ----------- -----------
Liabilities
------------------------------------------------ ---- ----------- -----------
Due to banks 23 308.5 263.5
------------------------------------------------ ---- ----------- -----------
Deposits from customers 24 2,020.3 1,847.7
------------------------------------------------ ---- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.7) -
------------------------------------------------ ---- ----------- -----------
Derivative financial instruments 0.6 -
------------------------------------------------ ---- ----------- -----------
Current tax liabilities 2.2 3.6
------------------------------------------------ ---- ----------- -----------
Lease liabilities 25 3.3 -
------------------------------------------------ ---- ----------- -----------
Other liabilities 26 42.0 49.1
------------------------------------------------ ---- ----------- -----------
Provisions for liabilities and charges 27 0.7 1.3
------------------------------------------------ ---- ----------- -----------
Subordinated liabilities 28 50.6 50.4
------------------------------------------------ ---- ----------- -----------
Total liabilities 2,427.5 2,215.6
------------------------------------------------ ---- ----------- -----------
Equity attributable to owners of the parent
------------------------------------------------ ---- ----------- -----------
Share capital 30 7.4 7.4
------------------------------------------------ ---- ----------- -----------
Share premium 81.2 81.2
------------------------------------------------ ---- ----------- -----------
Revaluation reserve 0.7 0.6
------------------------------------------------ ---- ----------- -----------
Retained earnings 150.0 128.2
------------------------------------------------ ---- ----------- -----------
Total equity 239.3 217.4
------------------------------------------------ ---- ----------- -----------
Total liabilities and equity 2,666.8 2,433.0
------------------------------------------------ ---- ----------- -----------
The Company has elected to take the exemption under section 408
of the Companies Act 2006 not to present the parent company income
statement. The profit for the parent company for the year of
GBP35.9 million is presented in the Company statement of changes in
equity.
Registered number: 00541132
Consolidated statement of changes in equity
Share Share Retained
capital premium Revaluation reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 1 January 2018 7.4 81.2 1.3 133.4 223.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Profit for 2018 - - - 28.3 28.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Other comprehensive income, net of income tax
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Revaluation reserve - - (0.3) - (0.3)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on revaluation reserve - - 0.1 - 0.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total other comprehensive income - - (0.2) - (0.2)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period - - (0.2) 28.3 28.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Transactions with owners, recorded directly
in equity
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Contributions by and distributions to owners
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Dividends - - - (14.8) (14.8)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Share-based payments - - - 0.8 0.8
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on share-based payments - - - (0.3) (0.3)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total contributions by and distributions to
owners - - - (14.3) (14.3)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 31 December 2018 (as previously
stated) 7.4 81.2 1.1 147.4 237.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
IFRS 16 transition adjustment net of tax (see
Note 1) - - - (0.1) (0.1)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 1 January 2019 (as restated) 7.4 81.2 1.1 147.3 237.0
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Profit for 2019 - - - 31.1 31.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Other comprehensive income, net of income tax
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Revaluation reserve - - 0.2 - 0.2
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on revaluation reserve - - (0.2) - (0.2)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total other comprehensive income - - - - -
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period - - - 31.1 31.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Transactions with owners, recorded directly
in equity
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Contributions by and distributions to owners
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Dividends - - - (15.5) (15.5)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Share-based payments - - - 1.2 1.2
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on share-based payments - - - 0.3 0.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total contributions by and distributions to
owners - - - (14.0) (14.0)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 31 December 2019 7.4 81.2 1.1 164.4 254.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Company statement of changes in equity
Share Share Retained
capital premium Revaluation reserve earnings Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 1 January 2018 7.4 81.2 0.5 121.7 210.8
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Profit for 2018 - - - 20.8 20.8
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Other comprehensive income, net of income tax
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Revaluation reserve - - 0.1 - 0.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total other comprehensive income - - 0.1 - 0.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period - - 0.1 20.8 20.9
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Transactions with owners, recorded directly
in equity
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Contributions by and distributions to owners
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Dividends - - - (14.8) (14.8)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Share-based payments - - - 0.8 0.8
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on share-based payments - - - (0.3) (0.3)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total contributions by and distributions to
owners - - - (14.3) (14.3)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 31 December 2018 (as previously
stated) 7.4 81.2 0.6 128.2 217.4
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
IFRS 16 transition adjustment net of tax (see
Note 1) - - - (0.1) (0.1)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 1 January 2019 (as restated) 7.4 81.2 0.6 128.1 217.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Profit for 2019 - - - 35.9 35.9
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Other comprehensive income, net of income tax
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Revaluation reserve - - 0.1 - 0.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total other comprehensive income - - 0.1 - 0.1
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total comprehensive income for the period - - 0.1 35.9 36.0
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Transactions with owners, recorded directly
in equity
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Contributions by and distributions to owners
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Dividends - - - (15.5) (15.5)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Share-based payments - - - 1.2 1.2
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Tax on share-based payments - - - 0.3 0.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Total contributions by and distributions to
owners - - - (14.0) (14.0)
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Balance at 31 December 2019 7.4 81.2 0.7 150.0 239.3
--------------------------------------------- ----------- ----------- ------------------- ----------- -----------
Consolidated statement of cash flows
2018
2019 Restated
Note GBPmillion GBPmillion
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 31.1 28.3
------------------------------------------------------------------------------------- ---- ----------- -----------
Adjustments for:
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 8 7.6 6.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of property, plant and equipment 17 1.2 1.3
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of right-of-use assets 18 0.9 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Loss on disposal of computer software - 0.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of intangible assets 19 1.9 1.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Impairment losses on loans and advances to customers 14 32.6 32.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Share-based compensation 31 1.2 0.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation loss 17 1.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Lease interest charged 25 0.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of subordinated liabilities issue costs 28 0.2 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating profits before changes in operating assets and liabilities 77.9 71.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Changes in operating assets and liabilities:
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase in loans and advances to customers (453.8) (494.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
- net decrease/(increase) in other assets 4.6 (17.0)
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase in deposits from customers 172.6 364.5
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase/(decrease) in other liabilities 1.3 (0.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax paid (7.8) (6.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash outflow from operating activities (205.2) (83.1)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from investing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption of debt securities 320.1 305.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of debt securities (195.4) (449.7)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of investment property 16 (1.6) -
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of property, plant and equipment 17 (5.5) (1.1)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of intangible assets 19 (1.1) (1.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow/(outflow) from investing activities 116.5 (147.2)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from financing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Increase in amounts due to banks 45.0 150.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Issue of subordinated liabilities - 50.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Subordinated liabilities issue costs - (0.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Dividends paid 10 (15.5) (14.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment of lease liabilities 25 (1.1) -
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow from financing activities 28.4 184.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Net decrease in cash and cash equivalents (60.3) (45.9)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 1 January 214.5 260.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 31 December 32.1 154.2 214.5
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption and purchase of debt securities have been grossed up
and moved from operating activities to investing activities, as
this better represents the nature of the underlying activity.
Company statement of cash flows
2018
2019 Restated
Note GBPmillion GBPmillion
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Profit for the year 35.9 20.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Adjustments for:
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax expense 8 5.3 4.9
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of property, plant and equipment 17 0.7 0.7
------------------------------------------------------------------------------------- ---- ----------- -----------
Depreciation of right-of-use assets 18 0.5 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Loss on disposal of computer software - 0.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of intangible assets 19 1.6 1.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Impairment losses on loans and advances to customers 14 37.5 33.1
------------------------------------------------------------------------------------- ---- ----------- -----------
Share-based compensation 31 1.0 0.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Revaluation deficit 17 1.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Lease interest charged 25 0.1 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Amortisation of subordinated liabilities issue costs 28 0.2 -
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from operating profits before changes in operating assets and liabilities 83.9 61.8
------------------------------------------------------------------------------------- ---- ----------- -----------
Changes in operating assets and liabilities:
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase in loans and advances to customers (410.8) (480.3)
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase in other assets (38.7) (32.4)
------------------------------------------------------------------------------------- ---- ----------- -----------
- net increase in deposits from customers 172.6 364.5
------------------------------------------------------------------------------------- ---- ----------- -----------
- net (decrease)/increase in other liabilities (6.6) 6.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Income tax paid (6.5) (4.3)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash outflow from operating activities (206.1) (84.7)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from investing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption of debt securities 320.1 305.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of debt securities (195.4) (449.7)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of investment property 16 (1.6) -
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of property, plant and equipment 17 (5.3) (0.5)
------------------------------------------------------------------------------------- ---- ----------- -----------
Purchase of intangible assets 19 (1.0) (1.3)
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow/(outflow) from investing activities 116.8 (1.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash flows from financing activities
------------------------------------------------------------------------------------- ---- ----------- -----------
Increase in amounts due to banks 45.0 150.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Issue of subordinated liabilities - 50.0
------------------------------------------------------------------------------------- ---- ----------- -----------
Subordinated liabilities issue costs - (0.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Dividends paid 10 (15.5) (14.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Repayment of lease liabilities 25 (0.8) -
------------------------------------------------------------------------------------- ---- ----------- -----------
Net cash inflow from financing activities 28.7 184.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Net decrease in cash and cash equivalents (60.6) (46.8)
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 1 January 211.6 258.4
------------------------------------------------------------------------------------- ---- ----------- -----------
Cash and cash equivalents at 31 December 32 151.0 211.6
------------------------------------------------------------------------------------- ---- ----------- -----------
Redemption and purchase of debt securities have been grossed up
and moved from operating activities to investing activities, as
this better represents the nature of the underlying activity.
Notes to the preliminary statements
1. Accounting policies
The principal accounting policies applied in the preparation of
this preliminary announcement are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.
1.1. Reporting entity
Secure Trust Bank PLC is a public limited company incorporated
in England and Wales in the United Kingdom (referred to as 'the
Company') and is limited by shares. The Company is registered in
England and Wales and has the registered number 00541132. The
registered address of the Company is One Arleston Way, Solihull,
West Midlands, B90 4LH. The consolidated financial statements of
the Company as at and for the year ended 31 December 2019 comprise
Secure Trust Bank PLC and its subsidiaries (together referred to as
'the Group' and individually as 'subsidiaries'). The Group is
primarily involved in banking and financial services.
1.2. Basis of presentation
The figures shown for the year ended 31 December 2019 are not
statutory accounts within the meaning of section 435 of the
Companies Act 2006. The statutory accounts for the year ended 31
December 2019 on which the auditors have given an unqualified audit
report and did not contain an adverse statement under section
498(2) or 498(3) of the Companies Act 2006 will be delivered to the
Registrar of Companies after the Annual General Meeting. The
figures shown for the year ended 31 December 2018 are not statutory
accounts. A copy of the statutory accounts has been delivered to
the Registrar of Companies, contained an unqualified audit report
and did not contain an adverse statement under section 498(2) or
498(3) of the Companies Act 2006. This announcement has been agreed
with the Company's auditors for release.
The Directors have assessed, in the light of current and
anticipated economic conditions, the Group's ability to continue as
a going concern. The Directors confirm they are satisfied that the
Company and the Group have adequate resources to continue in
business for the foreseeable future. For this reason, they continue
to adopt the 'going concern' basis for preparing accounts, as set
out in the Going concern and viability section of the Strategic
Report starting on page 2.
The consolidated financial statements were authorised for issue
by the Board of Directors on 6 May 2020.
1.3. IFRS 16 'Leases'
IFRS 16 'Leases', which has been issued and endorsed by the EU,
is effective for annual periods beginning on or after 1 January
2019.
The new standard sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties
to a contract i.e. the customer ('lessee') and the supplier
('lessor'). It replaces the previous leases standard, IAS 17
'Leases', and related interpretations.
IFRS 16 uses a new single model that applies to all leases, thus
eliminating the classification of leases as either operating leases
or finance leases for a lessee. Applying that model, on
commencement of a lease, the lessee recognises a liability to make
lease payments ('the lease liability'), an asset representing the
right to use the underlying asset during the lease term ('the
right-of-use asset'), and depreciation of right-of-use assets is
shown separately from interest on lease liabilities in the income
statement.
The lease liability is initially measured based on the net
present value of the lease payments to be made over the remaining
lease term, using the lessee's incremental borrowing rate as the
discount rate. After commencement of the lease, the lease liability
is measured on an amortised cost basis, with interest being
calculated on an effective interest rate basis on the remaining
balance of the liability, and lease payments reducing the lease
liability when paid.
The right-of-use assets are initially measured at cost, being
the amount of the initial measurement of the lease liability,
adjusted for any prepaid rentals less any lease incentives plus any
initial direct costs incurred by the lessee and dismantling or
restoration costs. Subsequently, the right-of-use assets are
amortised on a straight-line basis over the remaining term of the
lease. The right-of-use assets are tested for impairment in
accordance with IAS 36.
In the cash flow statement, lease interest is included in cash
flow from operating activities and repayments of lease liabilities
are included in cash flow from financing activities.
Transition choices
The Group has elected to recognise the cumulative effect of
implementing IFRS 16 as an adjustment to the opening balance of
retained earnings at 1 January 2019. Accordingly, prior year
comparatives shall not be restated. As a practical expedient, the
Group will apply the new standard only to contracts that had
previously been identified as leases. Therefore, the new standard
will not be applied to contracts that had not previously been
identified as leases.
The Group has also elected not to apply IFRS 16 to the
following, as they are not material:
-- Short-term leases of 12 months or less
-- Leases for which the underlying asset is of low value
This has resulted in the new standard only being applicable to a
number of property leases and motor vehicle leases.
The Group has chosen to measure the initial right-of-use asset
for property leases at its carrying amount as if the standard has
been applied since the commencement date, but discounted using the
incremental borrowing rate as at 1 January 2019. The initial
right-of- use asset for all other leases is measured at an amount
equal to the lease liability.
The adjustments (net of tax) arising from the adoption of IFRS
16 on 1 January 2019, and their effect on the 31 December 2018
balance sheet, were as follows:
IFRS 16
As originally stated transition adjustment As restated
31 December 2018 1 January 2019 1 January 2019
GBPmillion GBPmillion GBPmillion
-------------------------------------------- -------------------- ---------------------- ---------------
ASSETS
-------------------------------------------- -------------------- ---------------------- ---------------
Cash and balances at central banks 169.7 - 169.7
-------------------------------------------- -------------------- ---------------------- ---------------
Loans and advances to banks 44.8 - 44.8
-------------------------------------------- -------------------- ---------------------- ---------------
Loans and advances to customers 2,028.9 - 2,028.9
-------------------------------------------- -------------------- ---------------------- ---------------
Debt securities 149.7 - 149.7
-------------------------------------------- -------------------- ---------------------- ---------------
Lease right-of-use asset - 4.5 4.5
-------------------------------------------- -------------------- ---------------------- ---------------
Deferred tax assets 7.9 0.2 8.1
-------------------------------------------- -------------------- ---------------------- ---------------
Other assets 43.3 (0.4) 42.9
-------------------------------------------- -------------------- ---------------------- ---------------
Total assets 2,444.3 4.3 2,448.6
-------------------------------------------- -------------------- ---------------------- ---------------
LIABILITIES AND EQUITY
-------------------------------------------- -------------------- ---------------------- ---------------
Liabilities
-------------------------------------------- -------------------- ---------------------- ---------------
Due to banks 263.5 - 263.5
-------------------------------------------- -------------------- ---------------------- ---------------
Deposits from customers 1,847.7 - 1,847.7
-------------------------------------------- -------------------- ---------------------- ---------------
Lease liabilities - 5.5 5.5
-------------------------------------------- -------------------- ---------------------- ---------------
Other liabilities 45.6 (1.1) 44.5
-------------------------------------------- -------------------- ---------------------- ---------------
Subordinated liabilities 50.4 - 50.4
-------------------------------------------- -------------------- ---------------------- ---------------
Total liabilities 2,207.2 4.4 2,211.6
-------------------------------------------- -------------------- ---------------------- ---------------
Equity attributable to owners of the parent
-------------------------------------------- -------------------- ---------------------- ---------------
Share capital 7.4 - 7.4
-------------------------------------------- -------------------- ---------------------- ---------------
Share premium 81.2 - 81.2
-------------------------------------------- -------------------- ---------------------- ---------------
Revaluation reserve 1.1 - 1.1
-------------------------------------------- -------------------- ---------------------- ---------------
Retained earnings 147.4 (0.1) 147.3
-------------------------------------------- -------------------- ---------------------- ---------------
Total equity 237.1 (0.1) 237.0
-------------------------------------------- -------------------- ---------------------- ---------------
Total liabilities and equity 2,444.3 4.3 2,448.6
-------------------------------------------- -------------------- ---------------------- ---------------
Adjustments to other assets
These relate to the release of rent prepayments that are no
longer required now that the leases are recognised as right-of-use
assets.
Adjustment to other liabilities
This relates to the release of a reverse lease premium, which
under IAS 17 was included in accruals and was being spread over the
term of the lease.
The weighted average incremental borrowing rate applied to lease
liabilities recognised in the statement of financial position on
transition at 1 January 2019 was 2.61%.
The table below presents a reconciliation from operating lease
commitments disclosed at December 2018 to lease liabilities
recognised at 1 January 2019:
GBPmillion
------------------------------------------------------------------- ----------
Operating lease commitment disclosed under IAS 17 at December 2018 7.4
------------------------------------------------------------------- ----------
Effect of discounting (1.9)
------------------------------------------------------------------- ----------
5.5
------------------------------------------------------------------- ----------
In terms of the income statement impact, the application of IFRS
16 resulted in a decrease in other operating expenses and an
increase in depreciation and interest expense compared to IAS 17.
During the year, in relation to leases under IFRS 16 the Group
recognised the following amounts in the consolidated income
statement:
GBPmillion
----------------- ----------
Depreciation 0.9
----------------- ----------
Interest expense 0.1
----------------- ----------
1.0
----------------- ----------
Lessor accounting
Lessor accounting, which comprises Motor Finance, Asset Finance
and the RentSmart business, remains unchanged from IAS 17.
1.4. Consolidation
Subsidiaries
Subsidiaries are all investees controlled by the Group. The
Group controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition, excluding directly attributable
costs, over the fair value of the Group's share of the identifiable
net assets acquired is recorded as goodwill. If the cost of
acquisition is less than the fair value of the net assets of the
subsidiary acquired, the difference is recognised directly in the
income statement.
The parent company's investments in subsidiaries are recorded at
cost less, where appropriate, provision for impairment.
At the year-end, there was no indication that investments in
subsidiaries were impaired, so impairment testing was not
performed.
Inter-company transactions, balances and unrealised gains and
losses on transactions between Group companies are eliminated.
The parent company's expected credit loss on amounts due from
related companies, calculated by applying probability of default
and loss given default the amount outstanding at the year-end, was
not material at 31 December 2019.
Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the
Group.
Discontinued operations
Subsidiaries are de-consolidated from the date that control
ceases. Discontinued operations are a component of an entity that
has been disposed of, and represents a major line of business and
is part of a single co-ordinated disposal plan.
1.5. Interest income and expense
For all financial instruments measured at amortised cost, the
effective interest rate method is used to measure the carrying
value and allocate interest income or expense. The effective
interest rate is the rate that exactly discounts estimated future
cash payments or receipts through the expected life of the
financial instrument to:
-- the gross carrying amount of the financial asset or
-- the amortised cost of the financial liability
In calculating the effective interest rate for financial
instruments, other than assets that were credit-impaired on initial
recognition, the Group estimates cash flows considering all
contractual terms of the financial instrument (for example, early
redemption penalty charges and broker commissions) and anticipated
customer behaviour, but does not consider future credit losses. For
financial assets that were impaired on initial recognition (also
referred to as purchased or originated credit-impaired assets -
'POCI'), a credit adjusted effective interest rate is calculated
using estimated future cash flows, including expected credit
losses.
The calculation of the effective interest rate includes all fees
received and paid that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts. Transaction costs include incremental costs that are
directly attributable to the acquisition or issue of a financial
instrument.
For financial assets that are not considered to be
credit-impaired ('stage 1' and 'stage 2' assets), interest income
is recognised by applying the effective interest rate to the gross
carrying amount of the financial asset. For financial assets that
become credit-impaired subsequent to initial recognition ('stage 3'
assets), from the next reporting period onwards interest income is
recognised by applying the effective interest rate to the amortised
cost of the financial asset. The credit risk of financial assets
that become credit-impaired are not expected to improve such that
they are no longer considered credit-impaired, however, if this
were to occur the calculation of interest income would revert back
to the gross basis. The Group's definition of stage 1, stage 2 and
stage 3 assets is set out in Note 1.9.
For financial assets that were credit-impaired on initial
recognition (POCI assets), income is calculated by applying the
credit adjusted effective interest rate to the amortised cost of
the asset. For such financial assets the calculation of interest
income will never revert to a gross basis, even if the credit risk
of the asset improves.
Further details regarding when an asset becomes credit-impaired
subsequent to initial recognition is provided within Note 1.9.
1.6. Net fee and commission income
Fees and commission income and expenses that are an integral
part of the effective interest rate of a financial instrument are
included in the effective interest rate and presented in the
Statement of Comprehensive Income as interest income or
expense.
Fees and commission income that is not considered an integral
part of the effective interest rate of a financial instrument are
recognised under IFRS 15 when the Group satisfies performance
obligations by transferring promised services to customers.
1.7. Financial assets and financial liabilities
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or where the
Group has transferred substantially all of the risks and rewards of
ownership. There have not been any instances where assets have only
been partially derecognised. The Group derecognises a financial
liability when its contractual obligations are discharged,
cancelled or expire, including in the event of a substantial
modification as described in Note 1.9.
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value of
assets and liabilities traded in active markets are based on
current bid and offer prices respectively. If the market for a
financial instrument is not active the Group establishes a fair
value by using an appropriate valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
Financial assets (with the exception of derivative financial
instruments)
The Group classifies its financial assets at inception into
three measurement categories; 'amortised cost', 'fair value through
other comprehensive income' ('FVOCI') and 'fair value through
profit and loss' ('FVTPL'). A financial asset is measured at
amortised cost if both the following conditions are met and it has
not been designated as at FVTPL:
-- the asset is held within a business model whose objective is
to hold the asset to collect its contractual cash flows
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount
The Group's current business model for all financial assets,
with the exception of derivative financial instruments, is to hold
to collect contractual cash flows and all assets held give rise to
cash flows on specified dates that represent solely payments of
principal and interest on the outstanding principal amount. All the
Group's assets are therefore currently classified as amortised
cost. Loans are recognised when funds are advanced to customers and
are carried at amortised cost using the effective interest
method.
The amortised cost of an instrument is the amount at which it is
measured at initial recognition, less principal repayments, plus or
minus the cumulative amortisation using the effective interest
method of any difference between the initial amount recognised and
the maturity amount, less any expected credit loss allowance. The
gross carrying amount of a financial asset is the amortised cost of
a financial asset before adjusting for any expected credit loss
allowance.
A debt instrument would be measured at FVOCI only if both the
below conditions are met and it has not been designated as
FVTPL:
-- the asset is held within a business model whose objective is
achieved by both collecting its contractual cash flows and selling
the financial asset
-- the contractual terms of the financial asset give rise to
cash flows on specified dates that represent payments of solely
principal and interest on the outstanding principal amount
The Group currently has no financial instruments classified as
FVOCI.
On initial recognition of an equity investment that is not held
for trading, the Group may irrevocably elect to present subsequent
changes in fair value in OCI. This election would be made on an
investment by investment basis. The Group currently holds no such
investments.
All other assets are classified as FVTPL. The Group currently
has no financial assets classified as FVTPL.
Financial assets are not reclassified subsequent to their
initial recognition, except in the period after the Group changes
its business model for managing financial assets. The Group has not
reclassified any financial assets during the reporting period.
Deposits from customers
The Group classifies its financial liabilities as measured at
amortised cost. Such financial liabilities are recognised when cash
is received from depositors and carried at amortised cost using the
effective interest method.
Other financial liabilities (with the exception of derivative
financial instruments)
The subordinated liabilities comprise of 6.75% Fixed Rate Reset
Callable Subordinated Notes due 2028 (the 'Notes'):
-- The notes are redeemable for cash at their principal amount on a fixed date
-- The Company has a call option to redeem the securities early
in the event of a 'tax event' or a 'capital disqualification
event', which is at the full discretion of the Company
-- Interest payments are paid at six monthly intervals and are mandatory
-- The notes give the holders rights to the principal amount on
the notes, plus any unpaid interest, on liquidation. Any such
claims are subordinated to senior creditors, but rank pari passu
with holders of other subordinated obligations and in priority to
holders of share capital
The above features provide the issuer with a contractual
obligation to deliver cash or another financial asset to the
holders, and therefore the notes are classified as financial
liabilities. Further information in respect of the notes is
provided in Note 28
Transaction costs that are directly attributable to the issue of
the notes and are incremental costs that would not have been
incurred if the notes had not been issued are deducted from the
financial liability and expensed to the income statement on an
effective interest rate basis over the expected life of the
notes.
The fair value of other liabilities repayable on demand is
assumed to be the amount payable on demand at the statement of
financial position date.
The Group has not elected to measure any financial liabilities
at fair value.
1.8. Foreign currencies
Transactions in foreign currencies are initially recorded at the
rates of exchange prevailing on the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
are retranslated into the Company's functional currency at the
rates prevailing on the balance sheet date. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of monetary items, are included in the income
statement for the period.
1.9. Impairment of financial assets and loan commitments
The Group recognises loss allowances for Expected Credit losses
('ECLs') on all financial assets carried at amortised cost,
including lease receivables and loan commitments.
Credit loss allowances are measured as an amount equal to
lifetime ECL, except for the following assets, for which they are
measured as 12-month ECL:
-- Financial assets determined to have low credit risk at the reporting date
-- Financial assets which have not experienced a significant
increase in credit risk since their initial recognition
-- Financial assets which have experienced a significant
increase in credit risk since their initial recognition but have
subsequently met the Group's cure policy, as set out below
Such assets are classified as stage 1 assets.
Assets which have experienced a significant increase in credit
risk since their initial recognition and have not subsequently met
the Group's cure policy are classified as stage 2 assets. The
Group's definitions of a significant increase in credit risk and
default are set out below.
A financial asset is considered to have low credit risk when its
credit risk rating is equivalent to the widely understood
definition of 'investment grade' assets. The Group has assessed all
its debt securities, which represents UK Treasury bills, and loans
held in STB Leasing Limited, for which credit risk is retained by
its partner RentSmart, to be low credit risk.
Definition of default/credit-impaired financial assets (Stage 3
loans)
At each reporting date, the Group assesses whether financial
assets carried at amortised cost are credit-impaired (stage 3). A
financial asset is considered to be credit-impaired when an event
or events that have a detrimental impact on estimated future cash
flows have occurred. Evidence that a financial asset is
credit-impaired includes the following observable data:
-- Initiation of bankruptcy proceedings
-- Notification of bereavement
-- Identification of loan meeting debt sale criteria
-- Initiation of repossession proceedings
In addition, a loan that is 90 days or more past due is
considered credit-impaired for all portfolios. The credit risk of
financial assets that become credit-impaired are not expected to
improve such that they are no longer considered
credit-impaired.
For Commercial Finance facilities that do not have a fixed term
or repayment structure, evidence that a financial asset is
credit-impaired includes:
-- the client ceasing to trade
-- unpaid debtor balances that are dated at least six months past their normal recourse period
Significant increase in credit risk (Stage 2 loans)
For Consumer Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk since initial recognition where there has been a significant
increase in the remaining lifetime probability of default of the
asset. The Group may also use its expert credit judgement and where
possible relevant historical and current performance data,
including bureau data, to determine that an exposure has undergone
a significant increase in credit risk.
For Business Finance, the credit risk of a financial asset is
considered to have experienced a significant increase in credit
risk where certain early warning indicators apply. These indicators
may include notification of county court judgements or,
specifically for the Real Estate Finance portfolio, cost over-runs
and timing delays experienced by borrowers.
As a backstop, the Group considers that a significant increase
in credit risk occurs no later than when an asset is more than 30
days past due for all portfolios.
Performing assets which have experienced a significant increase
in credit risk since initial recognition are reclassified from
stage 1, for which loss allowances are measured at an amount equal
to 12-month ECL, to stage 2, for which ECL is measured as lifetime
ECL.
Cure policy
The credit risk of a financial asset may improve such that it is
no longer considered to have experienced a significant increase in
credit risk if it meets the Group's cure policy. The Group's cure
policy for all portfolios requires sufficient payments to be made
to bring an account back within less than 30 days past due and for
such payments to be maintained for six consecutive months.
The Group has determined stage 3 to be an absorbing state. Once
a loan is in default it is not therefore expected to cure back to
stage 1 or 2.
Calculation of expected credit loss
ECLs are probability weighted estimates of credit losses which
are measured as the present value of all cash shortfalls.
Specifically, this is the difference between the contractual cash
flows due and the cash flows expected to be received, discounted at
the original effective interest rate or, for portfolios purchased
outside of the Group by Debt Managers (Services) Limited, the
credit adjusted effective interest rate. For undrawn loan
commitments ECL is measured as the difference between the
contractual cash flows due if the commitment is drawn and the cash
flows expected to be received.
Lifetime ECL is the ECL that results from all possible default
events over the expected life of a financial asset.
12-month ECL is the portion of lifetime ECL that results from
default events on a financial asset that are possible within 12
months after the reporting date.
ECLs are calculated by multiplying three main components: the
probability of default ('PD'), exposure at default ('EAD') and loss
given default ('LGD') discounted at the original effective interest
rate of an asset. These variables are derived from internally
developed statistical models and historical data, adjusted to
reflect forward-looking information and are discussed in turn
further below. Management adjustments are made to modelled output
to account for situations where known or expected risk factors have
not been considered in the modelling process.
Probability of default ('PD') and credit risk grades
Credit risk grades are a primary input into the determination of
the PD for exposures. The Group allocates each exposure to a credit
risk grade at origination and at each reporting period to predict
the risk of default. Credit risk grades are determined using
qualitative and quantitative factors that are indicative of the
risk of default e.g. arrears status and loan applications scores.
These factors vary for each loan portfolio. Exposures are subject
to ongoing monitoring, which may result in an exposure being moved
to a different credit risk grade. In monitoring exposures
information such as payment records, request for forbearance
strategies and forecast changes in economic conditions are
considered for Consumer Finance. Additionally, for Business Finance
portfolios information obtained during periodic client reviews, for
example audited financial statements, management accounts, budgets
and projections are considered, with particular focus on key
ratios, compliance with covenants and changes in senior management
teams.
Exogenous, Maturity, Vintage ('EMV') modelling is used in the
production of forward-looking lifetime PDs. This method entails
modelling the effects of external (exogenous) factors against
cohorts of lending and their time on the books creating a clean
relationship to best demonstrate the movement in default rates as
macro-economic variables are changed. These models are extrapolated
to provide PD estimates for the future, based on forecasted
economic scenarios.
Exposure at default ('EAD')
EAD represents the expected exposure in the event of a default.
EAD is derived from the current exposure and potential changes to
the current amount allowed under the terms of the contract,
including amortisation overpayments and early terminations. The EAD
of a financial asset is its gross carrying amount. For loan
commitments the EAD includes the amount drawn as well as potential
future amounts that may be drawn under the terms of the contract,
estimated based on historical observations and forward-looking
forecasts.
For Commercial Finance facilities that have no specific term, an
assumption is made that accounts close 36 months after the
reporting date for the purposes of measuring lifetime ECL. This
assumption is based on industry experience of average client life.
These facilities do not have a fixed term or repayment structure
but are revolving and increase or decrease to reflect the value of
the collateral i.e. receivables or inventory. The Group can cancel
the facilities with immediate effect, although this contractual
right is not enforced in the normal day-to-day management of the
facility. Typically, demand would only be made on the failure of a
client business or in the event of a material event of default,
such as a fraud. In the normal course of events, the Group's
exposure is recovered through receipt of remittances from the
client's debtors rather than from the client itself.
The ECL for such facilities is estimated taking into account the
credit risk management actions that the Group expects to take to
mitigate against losses. These include a reduction in advance rate
and facility limits or application of reserves against a facility
to improve the likelihood of full recovery of exposure from the
debtors. Alternative recovery routes mitigating ECL would include
refinancing by another funding provider, taking security over other
asset classes or secured personal guarantees from the client's
principals.
Loss given default ('LGD')
LGD is the magnitude of the likely loss in the event of default.
This takes into account recoveries either through curing or, where
applicable, through auction sale of repossessed collateral and debt
sale of the residual shortfall amount. For loans secured by retail
property, loan-to-value ratios are key parameters in determining
LGD. LGDs are calculated on a discounted cash flow basis using the
financial instrument's origination effective interest rate as the
discount factor.
Incorporation of forward-looking data
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss. This is achieved by developing
a number of potential economic scenarios and modelling expected
credit losses for each scenario. To ensure material non-linear
relationships between economic factors and credit losses are
reflected in the calculation of ECL a deeper stress scenario is
used as one of these scenarios. The outputs from each scenario are
combined using the estimated likelihood of each scenario occurring
to derive a probability weighted expected credit loss. The four
scenarios adopted and probability weighting applied are approved by
the Assumptions Committee and are set out in Note 2.
The Group has considered which economic variables impact credit
risk and credit losses. The key drivers of credit risk and credit
losses included in the macro-economic scenarios for all portfolios,
with the exception of Real Estate Finance, have been identified as
annual unemployment rate growth and annual house price index
growth. In addition, for Asset Finance and Commercial Finance,
changes to the consumer price index are also included in the
macro-economic scenarios. For the Real Estate Finance portfolio the
key drivers have been identified as unemployment rate growth and
Bank of England base rates. Base case assumptions applied for each
of these variables have been sourced from external consensus or
Bank of England forecasts. Further details of the assumptions
applied to other scenarios are presented in Note 2.
Presentation of loss allowance
Loss allowances for ECL are presented in the statement of
financial position as follows with the loss recognised in the
statement of comprehensive income:
-- Financial assets measured at amortised cost: as a deduction
from the gross carrying amount of the assets
-- Other loan commitments: generally, as a provision
For the Real Estate Finance and Commercial Finance portfolios,
where a loan facility is agreed that includes both drawn and
undrawn elements and the Group cannot identify the ECL on the loan
commitment separately, a combined loss allowance for both drawn and
undrawn components of the loan is presented as a deduction from the
gross carrying amount of the drawn component, with any excess of
the loss allowance over the gross drawn amount presented as a
provision.
When a loan is uncollectible, it is written off against the
related ECL allowance. Such loans are written off after all
necessary procedures have been completed and the amount of the loss
has been determined.
Motor voluntary termination provision
In addition to recognising allowances for ECLs, the Group holds
a provision for voluntary terminations ('VT') for all Motor Finance
financial assets. VT is a legal right provided to customers who
take out hire purchase agreements. The provision is calculated by
multiplying the probability of VT of an asset by the expected
shortfall on VT discounted back at the original effective interest
rate of the asset. VT allowances are not held against loans in
default (stage 3 loans).
The VT provision is presented in the statement of financial
position as a deduction from the gross carrying amount of Motor
Finance assets with the loss recognised in the statement of
comprehensive income.
Write off
Loans and advances to customers are written off partially or in
full when the Group has exhausted all viable recovery options. The
majority of write offs arise from Debt Relief Orders, insolvencies,
IVAs, deceased customers where there is no estate and vulnerable
customers in certain circumstances. Amounts subsequently recovered
on assets previously written off are recognised in impairment
losses in the income statement.
Modification of loans
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Substantial loan
modifications result in the derecognition of the existing loan, and
the recognition of a new loan at the new origination effective
interest rate ('EIR') based on the expected future cash flows at
origination. Determination of the origination PD for the new loan
is required, based on the PD as at the date of the modification,
which is used for the calculation of the impairment provision
against the new loan. Any deferred fees or deferred interest, and
any difference between the fair value of the derecognised loan and
the new loan, is written off to the income statement on recognition
of the new loan.
Where the modification is not considered to be substantial,
neither the origination EIR nor the origination PD for the modified
loan changes. The net present value of changes to the future
contractual cash flows adjusts the carrying amount of the original
debt with the difference immediately being recognised in profit or
loss. The adjusted carrying amount is then amortised over the
remaining term of the (modified) liability using the original
effective interest rate.
1.10. Derivative financial instruments
The Group enters into derivatives to manage exposures to
fluctuations in interest rates. Derivatives are not used for
speculative purposes. Derivatives are carried at fair value with
movements in fair value recognised in the income statement.
Derivatives are valued by discounted cash flow models using yield
curves based on overnight indexed swap ('OIS') rates. All
derivatives are carried as assets when fair value is positive and
as liabilities when fair value is negative.
The Group does not hold contracts containing embedded
derivatives.
Where cash collateral is received, to mitigate the risk inherent
in the amounts due to the Group, it is included as a liability
within the due to banks line within the statement of financial
position. Where cash collateral is given, to mitigate the risk
inherent in amounts due from the Group, it is included as an asset
in the loans and advances to banks line within the statement of
financial position.
Hedge accounting
Following transition to IFRS 9, the Group has elected to apply
IAS 39 for all of its hedge accounting requirements. When
transactions meet specified criteria the Group can apply two types
of hedge accounting:
-- Hedges of the fair value of recognised assets or liabilities
or firm commitments (fair value hedges)
-- Hedges of highly probable future cash flows attributable to a
recognised asset or liability (cash flow hedges)
The Group does not have cash flow hedges or hedges of net
investments.
At inception of a hedge, the Group formally documents the
relationship between the hedged items and hedging instruments, as
well as its risk management objective and strategy for undertaking
various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of
whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in fair values of the hedged
items (i.e. the fair value offset between the hedged item and
hedging instrument is within the 80% -125% range).
When the European Union adopted IAS 39 in 2004, it removed
certain hedge accounting requirements, commonly referred to as the
EU carve-out. The relaxed requirements under the carve-out allow
the Group to apply the 'bottom up' method when calculating
macro-hedge ineffectiveness. This option is not allowed under full
IFRS. The Group has applied the EU carve-out accordingly.
Fair value hedge accounting
Fair value hedge accounting results in the carrying value of the
hedged item being adjusted to reflect changes in fair value
attributable to the hedged risk, thereby offsetting the effect of
the related movement in the fair value of the derivative. Changes
in the fair value of derivatives and hedged items that are
designated and qualify as fair value hedges are recorded in the
income statement.
In a one-to-one hedging relationship in which a single
derivative hedges a single hedged item, the carrying value of the
underlying asset or liability (the hedged item) is adjusted for the
hedged risk to offset the fair value movement of the related
derivative. In the case of a portfolio hedge, an adjustment is
included in the fair value adjustments for portfolio hedged risk
line in the statement of financial position to offset the fair
value movements in the related derivative. The Group currently only
designates portfolio hedges.
If the hedge no longer meets the criteria for hedge accounting,
expires or is terminated, the cumulative fair value adjustment to
the carrying amount of a hedged item is amortised to the income
statement over the period to maturity of the previously designated
hedge relationship and recorded as net interest income. If the
underlying item is sold or repaid, the unamortised fair value
adjustment is immediately recognised in the income statement.
1.11. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of the acquisition
over the fair value of the Group's share of the net identifiable
assets acquired at the date of acquisition. Goodwill is held at
cost less accumulated impairment losses and is deemed to have an
infinite life.
The Group reviews the goodwill for impairment at least annually
or when events or changes in economic circumstances indicate that
impairment may have taken place. Impairment losses are recognised
in the income statement if the carrying amount exceeds the
recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software.
Costs associated with developing or maintaining computer
software programs are recognised as an expense as incurred unless
the technical feasibility of the development has been demonstrated,
and it is probable that the expenditure will enable the asset to
generate future economic benefits in excess of its originally
assessed standard of performance, in which case they are
capitalised.
These costs are amortised on a straight-line basis over their
expected useful lives, which are between three to ten years.
(c) Other intangibles
The acquisition of subsidiaries was accounted for in accordance
with IFRS 3 'Business Combinations', which requires the recognition
of the identifiable assets acquired and liabilities assumed at
their acquisition date fair values. As part of this process, it was
necessary to recognise certain intangible assets which are
separately identifiable and which are not included on the
acquiree's balance sheet, which are amortised over their expected
useful lives, as set out in Note 19.
The Group applies IAS 36 to determine whether an intangible
asset is impaired.
1.12. Investment property
Investment property, which is property held to earn rentals and
for capital appreciation, is measured initially at cost, including
transaction costs. Subsequent to initial recognition, investment
property is measured at fair value. Gains or losses arising from
changes in the fair value of investment property are included in
the income statement in the period in which they arise.
An investment property is derecognised upon disposal or when the
investment property is permanently withdrawn from use and no future
economic benefits are expected from the disposal. Any gain or loss
arising on derecognition of the property (calculated as the
difference between the net disposal proceeds and the carrying
amount of the asset) is included in the income statement in the
period in which the property is derecognised.
1.13. Property, plant and equipment
Property is held at its revalued amount, being its fair value at
the date of valuation less any subsequent accumulated depreciation.
Revaluations are carried out annually at the reporting date, and
movements are recognised in Other Comprehensive Income, net of any
applicable deferred tax.
Plant and equipment is stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items. Pre-installed
computer software licences are capitalised as part of the computer
hardware it is installed on. Depreciation is calculated using the
straight-line method to allocate their cost to their residual
values over their estimated useful lives, which are subject to
regular review:
Land not depreciated
---------------------- -----------------------------------
Freehold buildings 50 years
---------------------- -----------------------------------
Leasehold improvements shorter of life of lease or 7 years
---------------------- -----------------------------------
Computer equipment 3 to 5 years
---------------------- -----------------------------------
Other equipment 5 to 10 years
---------------------- -----------------------------------
Gains and losses on disposals are determined by comparing
proceeds with carrying amounts. These are included in the income
statement.
The Group applies IAS 36 to determine whether property, plant
and equipment is impaired.
1.14. Leases
(a) As a lessee
The Group assesses whether a contract is or contains a lease at
inception of the contract. The Group recognises a right-of-use
asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term
leases (defined as leases with a lease term of 12 months or less)
and leases of low value assets. For these leases, the Group
recognises the lease payments as an operating expense on a
straight-line basis over the term of the lease unless another
systematic basis is more representative of the time pattern in
which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value
of the future lease payments, discounted by using the rate implicit
in the lease. If this rate cannot be readily determined, the Group
uses its incremental borrowing rate. It is subsequently measured by
increasing the carrying amount to reflect interest on the lease
liability (using the effective interest method) and by reducing the
carrying amount to reflect the lease payments made, and is
presented as a separate line in the consolidated statement of
financial position.
The right-of-use assets comprise the initial measurement of the
corresponding lease liability, lease payments made at or before the
commencement day, less any lease incentives received and any
initial direct costs. They are subsequently measured at cost less
accumulated depreciation and impairment losses, and are depreciated
over the shorter of the lease term and useful life of the
underlying asset. The depreciation starts at the commencement date
of the lease. The right-of-use assets are presented as a separate
line in the consolidated statement of financial position. The Group
applies IAS 36 to determine whether a right-of-use asset is
impaired and accounts for any identified impairment loss as
described in the 'Property, Plant and Equipment' policy.
Rentals made under operating leases for less than 12 months in
duration, and operating leases on low value items, are recognised
in the income statement on a straight-line basis over the term of
the lease.
(b) As a lessor
The present value of the lease payments on assets leased to
customers under agreements which transfer substantially all the
risks and rewards of ownership, with or without ultimate legal
title, are recognised as a receivable. The difference between the
gross receivable and the present value of the receivable is
recognised as unearned finance income. Lease income is recognised
over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.
1.15. Cash and cash equivalents
For the purpose of the statement of cash flows, cash and cash
equivalents comprise cash in hand and demand deposits, and cash
equivalents, being highly liquid investments which are convertible
into cash with an insignificant risk of changes in value with a
maturity of three months or less at the date of acquisition,
including certain loans and advances to banks and short-term highly
liquid debt securities.
1.16. Equity instruments
Equity instruments issued by the Company are recorded at the
proceeds received, net of direct issuance costs. Any amounts
received over nominal value are recorded in the share premium
account, net of direct issuance costs. Costs associated with the
listing of shares are expensed immediately.
1.17. Employee benefits
(a) Post-retirement obligations
The Group contributes to defined contribution schemes for the
benefit of certain employees. The schemes are funded through
payments to insurance companies or trustee-administered funds at
the contribution rates agreed with individual employees. The Group
has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit
expense when they are due. There are no post-retirement benefits
other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised as personnel expenses in
the income statement, with a corresponding increase in equity.
Further details of the valuation methodology is set out in Note
31.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the income statement with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
1.18. Taxation
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits
arise.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. Deferred
tax is determined using tax rates (and laws) that have been enacted
or substantially enacted by the statement of financial position
date and are expected to apply when the related deferred tax asset
is realised or the deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax assets and
liabilities, and they relate to taxes levied by the same tax
authority on the same taxable entity, or on different tax entities,
when they intend to settle current tax liabilities and assets on a
net basis or their tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
1.19. Dividends
Final dividends on ordinary shares are recognised in equity in
the period in which they are approved by shareholders. Interim
dividends on ordinary shares are recognised in equity in the period
in which they are paid.
2. Critical accounting judgements and key sources of estimation
uncertainty
2.1. Judgements
The Group considers the COVID-19 outbreak to be a non-adjusting
event occurring after the balance sheet date. Further information
in respect of this event is provided in Note 42. No other critical
judgements have been identified.
2.2. Key sources of estimation uncertainty
Estimations which could have a material impact on the Group's
financial results and are therefore considered to be key sources of
estimation uncertainty are outlined below. The potential impact of
COVID-19 has been considered in determining reasonably possible
changes in key sources of estimation uncertainty which may occur in
the next 12 months.
2.2.1. Impairment losses on loans and advances to customers
As discussed in Note 1.9 ECLs are calculated by multiplying
three main components: the PD, EAD and LGD. These variables are
derived from internally developed statistical models and historical
data, adjusted to reflect forward-looking information. The
determination of both the PD and LGD require estimation which is
discussed further below.
2.2.2. Probability of default ('PD')
As set out in Note 1.9 Exogenous, Maturity, Vintage ('EMV')
modelling is used in the production of forward-looking lifetime PDs
in the calculation of ECLs. As the Group's performance data does
not go back far enough to capture a full economic cycle, the proxy
series of the quarterly rates of write offs for UK unsecured
lending data is used to build an economic response model ('ERM') to
incorporate the effects of recession.
The portfolios for which external benchmark information
represents a significant input into the measurement of ECL are Real
Estate Finance, Asset Finance and Commercial Finance. The
benchmarks used for all three portfolios are Standard & Poor's
Ratings and Bank of England UK Possessions as proxy data for
ERM.
With the exception of the Motor Finance and Retail Finance
portfolios, sensitivity to reasonably possible changes in PD is not
considered to result in material changes in the ECL allowance. A
10% change in the PD for Motor Finance would immediately impact the
ECL allowance by GBP2.0 million (2018: GBP1.8 million) and a 10%
change in the PD for Retail Finance would immediately impact the
ECL allowance by GBP2.3 million (2018: GBP2.0 million).
The composition of the Retail Finance portfolio remains stable
with minimal movement in PDs and the ECL allowance held for the
Business Finance, Consumer Mortgages and Other portfolios remains
low. Reasonably possible changes in the PD for these portfolios are
not considered to result in a material change in the ECL
allowance.
2.2.3. Loss given default ('LGD')
The Group's policy for the determination of LGD is outlined in
Note 1.9.
With the exception of the Motor Finance portfolio, the
sensitivity of the ECL allowance to reasonably possible changes in
the LGD is not considered material. For the Motor Finance portfolio
a 20% change in the LGD is considered reasonably possible due to
potential difficulties in the vehicle collection process and
reduced asset values brought about by COVID-19. A 20% change in the
vehicle recovery rate assumption element of the LGD for
Motor Finance would impact the ECL allowance by GBP2.6 million (2018: GBP3.2 million).
During 2019, market factors caused used car prices to fall by
more than seasonal norms over the summer months. The fall was
approximately 6% greater than expectations and increased expected
credit losses for the year by GBP0.9 million.
2.2.4. Incorporation of forward-looking data
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of a financial asset has
increased significantly since initial recognition and its
measurement of expected credit loss by developing a number of
potential economic scenarios and modelling expected credit losses
for each scenario. Further detail on this process is provided in
Note 1.9. Whilst not material and therefore not required by IAS 1,
the Group has included the disclosure below as it is considered
useful to readers of the Annual Report and Accounts.
The macroeconomic scenarios and weightings applied on adoption
of IFRS 9 are summarised below:
Scenario Derivation 2019 2018
-------------- ------------------------------------------------------------------------------------------ ---- ----
Derived from external consensus forecasts and used in the Group's strategic planning and
budgeting
Base case processes. 65% 65%
-------------- ------------------------------------------------------------------------------------------ ---- ----
Assumes macroeconomic variables will move with a more positive trajectory than the base
Benign case case. 10% 10%
-------------- ------------------------------------------------------------------------------------------ ---- ----
Management's assessment, based on historic data, of an adverse scenario that could occur
once
Stressed case every 7 to 8 years. 20% 20%
-------------- ------------------------------------------------------------------------------------------ ---- ----
Based on the scenario used by the PRA for the H1 2019 ICAAP. This can be found on the Bank
Deeper stress of England's website: www.bankofengland.co.uk 5% 5%
-------------- ------------------------------------------------------------------------------------------ ---- ----
Weightings applied to the macro economic scenarios were
reconfirmed at the January 2020 Assumptions Committee and remain
unchanged since December 2018.
The sensitivity of the ECL allowance to reasonably possible
changes in macro-economic scenario weighting is presented
below:
Increase in stressed case Increase in deeper stress case weighting by 5% and
weighting by 5% and reduction in base case reduction in base case
--------------- --------------------------------------------- ------------------------------------------------------
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ---------------------- --------------------- -------------------------- --------------------------
Motor Finance 0.1 0.1 0.4 0.3
--------------- ---------------------- --------------------- -------------------------- --------------------------
Retail Finance 0.2 0.1 0.7 0.8
--------------- ---------------------- --------------------- -------------------------- --------------------------
The sensitivity is immaterial for other lending products.
Were each of the macroeconomic scenarios to be applied 100%,
rather than using the weightings set out above, the impact on ECL
for 2019 would be as follows:
2019
Scenario Impact GBPmillion
-------------- ------------------------- -----------
Base case Decrease in provision of 2.3
-------------- ------------------------- -----------
Benign case Decrease in provision of 2.7
-------------- ------------------------- -----------
Stressed case Increase in provision of 4.2
-------------- ------------------------- -----------
Deeper stress Increase in provision of 18.6
-------------- ------------------------- -----------
2.2.5. Debt Management forecast collections on 'POCI' debt
A +/-5.0% change in Debt Management forecast collections, which
the Directors consider to be a reasonable possible change, would
increase or decrease Loans and advances to customers by GBP4.0
million respectively, resulting in a corresponding GBP4.0 million
increase or decrease in profit or loss. A similar change applied to
the December 2018 position would result in an increase or decrease
to Loans and advances to customers of GBP3.5 million respectively,
resulting in a corresponding GBP3.5 million increase or decrease in
profit or loss.
Given the improving quality of the Group's loan books
year-on-year, the Debt Management forecast collections have
improved. The year-on-year improvement resulted in an increase to
Loans and advances to customers of GBP4.5 million, resulting in a
corresponding GBP4.5 million increase in profit or loss.
3. Operating segments
The Group is organised into seven operating segments, which
consist of the different products available, disclosed below:
Business Finance
1) Real Estate Finance: residential and commercial investment
and development loans secured by UK real estate
2) Asset Finance: loans to small and medium sized enterprises to
acquire commercial assets
3) Commercial Finance: invoice discounting and invoice
factoring
Consumer Finance
4) Motor Finance: hire purchase agreements secured against the
vehicle being financed
5) Retail Finance: point of sale unsecured finance for in-store
and online retailers
6) Debt Management: debt collection
7) Residential mortgages for the self-employed, contract
workers, those with complex income and those with a recently
restored credit history, sold via select mortgage
intermediaries
Other
The 'Other' segment includes other products, which are
individually below the quantitative threshold for separate
disclosure and fulfils the requirement of IFRS 8.28 by reconciling
operating segments to the amounts in the annual report.
Other includes principally OneBill (the Group's consumer bill
management service, which has been closed to new customers since
2009) and RentSmart (principally the funding and operation of
finance leases through a disclosed agency agreement with RentSmart
Limited).
Currently, the Debt Management and Consumer Mortgages segments
both fall below the quantitative threshold for separate disclosure,
but the Directors consider that they represent sufficiently
distinct types of business to merit separate disclosure. Also since
the Group ceased new mortgage operations, the Consumer Mortgages
business is now managed as part of Consumer Finance, so the prior
year figures have been restated accordingly.
Management review these segments by looking at the income, size
and growth rate of the loan books, impairments and customer
numbers. Except for these items no costs or balance sheet items are
allocated to the segments.
Net impairment
losses on loans
Interest income Fee and commission Revenue from and advances to Loans and advances
and similar income income external customers customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
31 December 2019
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Real Estate Finance 47.9 1.0 48.9 0.1 962.2
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Asset Finance 3.2 - 3.2 0.7 27.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Commercial Finance 7.5 9.3 16.8 0.1 251.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Business Finance 58.6 10.3 68.9 0.9 1,241.6
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Retail Finance 71.1 3.6 74.7 19.8 688.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Motor Finance 48.7 1.0 49.7 13.8 323.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Debt Management 7.3 1.1 8.4 (2.1) 82.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Mortgages 3.6 0.1 3.7 0.1 105.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Finance 130.7 5.8 136.5 31.6 1,200.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Other 2.1 4.8 6.9 0.1 7.6
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
191.4 20.9 212.3 32.6 2,450.1
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Net impairment
losses on loans
Interest income Fee and commission Revenue from and advances to Loans and advances
and similar income income external customers customers to customers
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
31 December 2018
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Real Estate Finance 41.1 0.1 41.2 0.5 769.8
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Asset Finance 6.6 - 6.6 2.2 62.8
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Commercial Finance 5.5 7.9 13.4 - 194.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Business Finance 53.2 8.0 61.2 2.7 1,027.3
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Retail Finance 58.7 4.1 62.8 19.3 597.0
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Motor Finance 47.4 1.1 48.5 11.3 276.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Debt Management 6.1 0.9 7.0 - 32.3
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Mortgages 1.5 - 1.5 0.2 84.7
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Consumer Finance 113.7 6.1 119.8 30.8 990.4
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Other 2.3 5.3 7.6 (1.1) 11.2
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
169.2 19.4 188.6 32.4 2,028.9
------------------- ------------------ ------------------ ------------------ ----------------- ------------------
Funding costs and operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis. Accordingly, profit
by operating segment has not been disclosed.
All of the Group's operations are conducted wholly within the
United Kingdom and geographical information is therefore not
presented.
4. Operating income
All items below arise from financial instruments measured at
amortised cost unless otherwise stated.
4.1 Net interest income
2019 2018
GBPmillion GBPmillion
-------------------------------------------------------------------------------------- ----------- -----------
Loans and advances to customers 189.6 167.4
-------------------------------------------------------------------------------------- ----------- -----------
Cash and balances at central banks 1.0 1.0
-------------------------------------------------------------------------------------- ----------- -----------
Debt securities 0.7 0.8
-------------------------------------------------------------------------------------- ----------- -----------
191.3 169.2
-------------------------------------------------------------------------------------- ----------- -----------
Derivative financial instruments measured at fair value through profit and loss
-------------------------------------------------------------------------------------- ----------- -----------
On financial instruments hedging assets in a qualifying hedge accounting relationship 0.1 -
-------------------------------------------------------------------------------------- ----------- -----------
Interest income and similar income 191.4 169.2
-------------------------------------------------------------------------------------- ----------- -----------
Deposits from customers (40.4) (32.8)
-------------------------------------------------------------------------------------- ----------- -----------
Due to banks (2.1) (1.5)
-------------------------------------------------------------------------------------- ----------- -----------
Subordinated liabilities (3.4) (1.2)
-------------------------------------------------------------------------------------- ----------- -----------
(45.9) (35.5)
-------------------------------------------------------------------------------------- ----------- -----------
Derivative financial instruments measured at fair value through profit and loss
-------------------------------------------------------------------------------------- ----------- -----------
Net expense on financial instruments hedging liabilities (0.1) -
-------------------------------------------------------------------------------------- ----------- -----------
Interest expense and similar charges (46.0) (35.5)
-------------------------------------------------------------------------------------- ----------- -----------
Net interest income 145.4 133.7
-------------------------------------------------------------------------------------- ----------- -----------
4.2 Net fee and commission income
2019 2018
GBPmillion GBPmillion
------------------------------ ----------- -----------
Fee and disbursement income 17.5 16.3
------------------------------ ----------- -----------
Commission income 1.9 2.0
------------------------------ ----------- -----------
Other income 1.5 1.1
------------------------------ ----------- -----------
Fee and commission income 20.9 19.4
------------------------------ ----------- -----------
Other expenses (0.8) (1.5)
------------------------------ ----------- -----------
Fee and commission expense (0.8) (1.5)
------------------------------ ----------- -----------
Net fee and commission income 20.1 17.9
------------------------------ ----------- -----------
Fees and commissions income consists principally of the
following:
-- weekly and monthly fees from the OneBill product
-- associated insurance commissions and commissions earned on debt collection activities in DMS
-- discounting, service and arrangement fees in Commercial Finance
-- account management and administration fees from retailers in Retail Finance
Fee and commission expenses consist primarily of recovery fees
payable in respect of Motor Finance and Debt Management.
5. Gains/losses from derivatives and hedge accounting
Group and Company
The Group holds interest rate swaps for risk mitigation
purposes. For further information on the Group's risk management
strategy for market risk refer to the Principal risks and
uncertainties section of the Group's Strategic Report. No
comparatives are presented as the Group held no interest rate swaps
during the prior year. Interest rate swaps are designated on
initial recognition as measured at fair value through profit and
loss. The tables below provide an analysis of the notional amount
and fair value of derivatives held:
Changes in fair value used for
calculating hedge ineffectiveness in
Notional Assets Liabilities the period
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- ----------- ----------- --------------------------------------
31 December 2019
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest rate swaps designated as fair
value hedges 987.7 0.8 (0.6) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Interest accruals on interest rate
swaps - 0.1 - -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
987.7 0.9 (0.6) -
--------------------------------------- ----------- ----------- ----------- --------------------------------------
Notional Assets Liabilities
GBPmillion GBPmillion GBPmillion
-------------------------- ----------- ----------- -----------
31 December 2019
-------------------------- ----------- ----------- -----------
In not more than one year 214.5 - (0.1)
-------------------------- ----------- ----------- -----------
In more than one year 773.2 0.9 (0.5)
-------------------------- ----------- ----------- -----------
987.7 0.9 (0.6)
-------------------------- ----------- ----------- -----------
The notional amount represents the amount on which payment flows
are derived and does not represent amounts at risk.
In order to manage interest rate risk arising from fixed rate
financial instruments the Group reviews interest rate swaps
requirements on a monthly basis. The exposure from the portfolio
frequently changes due to the origination of new instruments,
contractual repayments and early prepayments made in each period.
As a result, the Group adopts a dynamic hedging strategy (sometimes
referred to as 'macro' or 'portfolio' hedge) to hedge its exposure
profile by closing and entering into new swap agreements on a
monthly basis. The Group establishes the hedging ratio by matching
the notional of the derivatives with the principal of the portfolio
being hedged.
The following table sets out details of the hedged exposures
covered by the Group's hedging strategies:
Accumulated amount of fair
value adjustments on the
Carrying amount of hedged item hedged item
------------------------------ ------------------------------
Change in fair
value of hedged
item for
ineffectiveness
assessment in
Assets Liabilities Assets Liabilities Balance Sheet the period
GBPmillion GBPmillion GBPmillion GBPmillion line item GBPmillion
--------------- -------------- -------------- -------------- -------------- -------------- ---------------
31 December
2019
--------------- -------------- -------------- -------------- -------------- -------------- ---------------
Interest rate
fair value hedges
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Fixed rate Real Loans and
Estate Finance advances to
loans 296.8 - (0.6) - customers -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Loans and
Fixed rate Motor advances to
Finance loans 100.1 - (0.2) - customers -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Loans and
Fixed rate Retail advances to
Finance loans 66.0 - (0.1) - customers -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Fixed rate Loans and
Consumer advances to
Mortgage loans 9.2 - - - customers -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Fixed rate
customer Deposits from
deposits - 515.6 - 0.6 customers -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
Total 472.1 515.6 (0.9) 0.6 -
----------------- -------------- -------------- -------------- -------------- -------------- ---------------
The accumulated amount of fair value hedge adjustments remaining
in the statement of financial position for hedged items that have
ceased to be adjusted for hedging gains and losses is GBPnil
million.
Fair value gains and losses arising from derivatives and hedge
accounting recognised in the Group income statement was GBPnil
million.
Although the Group uses derivatives exclusively to hedge
interest rate risk exposures, income statement volatility can still
arise due to hedge accounting ineffectiveness or because hedge
accounting is not achievable. This arises from the application of
accounting rules which do not reflect the economic reality of the
business. Where such volatility arises it will trend back to zero
over time.
All derivatives held by the Group have been highly effective in
the period resulting in minimal hedge accounting ineffectiveness
recognised in the income statement. Future ineffectiveness may
arise as a result of:
-- differences between the expected and actual volume of
prepayments, as the Group hedges to the expected repayment date
taking into account expected prepayments based on past
experience
-- hedging derivatives with a non-zero fair value at the date of initial designation
-- differences in the timing of cash flows for the hedged item and the hedging instrument
The following table shows the impact of financial assets and
financial liabilities relating to transactions where:
-- there is an enforceable master netting agreement in place but
the offset criteria are not otherwise satisfied, and
-- financial collateral is paid and received
Gross amount reported on Financial Net amounts
balance sheet Master netting arrangements collateral after offsetting
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------- --------------------------- --------------------------- ----------- -----------------
31 December 2019
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial assets 0.9 (0.6) (0.3) -
---------------------------- --------------------------- --------------------------- ----------- -----------------
Derivative financial
liabilities (0.6) 0.6 (0.1) (0.1)
---------------------------- --------------------------- --------------------------- ----------- -----------------
Master netting arrangements do not meet the criteria for
offsetting in the statement of financial position. This is because
the arrangement creates an agreement for a right of set-off of
recognised amounts which is enforceable only following an event of
default, insolvency or bankruptcy of the Group or counterparties.
Furthermore, the Group and its counterparties do not intend to
settle on a net basis or realise the assets and settle the
liabilities simultaneously.
Financial collateral consists of cash settled, typically daily
or weekly, to mitigate the credit risk on the fair value of
derivatives.
6. Operating expenses
2019 2018
GBPmillion GBPmillion
-------------------------------------------------------- ----------- -----------
Staff costs, including those of Directors:
-------------------------------------------------------- ----------- -----------
Wages and salaries 43.1 39.1
-------------------------------------------------------- ----------- -----------
Social security costs 5.1 6.0
-------------------------------------------------------- ----------- -----------
Pension costs 1.7 1.4
-------------------------------------------------------- ----------- -----------
Share-based payment transactions 1.2 0.8
-------------------------------------------------------- ----------- -----------
Depreciation of property, plant and equipment (Note 17) 1.2 1.3
-------------------------------------------------------- ----------- -----------
Depreciation of lease right-of-use assets (Note 18) 0.9 -
-------------------------------------------------------- ----------- -----------
Amortisation of intangible assets (Note 19) 1.9 1.8
-------------------------------------------------------- ----------- -----------
Operating lease rentals 0.8 1.7
-------------------------------------------------------- ----------- -----------
Other administrative expenses 38.3 32.4
-------------------------------------------------------- ----------- -----------
Total operating expenses 94.2 84.5
-------------------------------------------------------- ----------- -----------
As described in Note 3, operating expenses are not aligned to
operating segments for day-to-day management of the business, so
they cannot be allocated on a reliable basis.
Remuneration of the auditor and its associates, excluding VAT,
was as follows:
2019 2018
GBP'000 GBP'000
------------------------------------------------------------------------------------- -------- --------
Fees payable to the Company's auditor for the audit of the Company's annual accounts 325 233
------------------------------------------------------------------------------------- -------- --------
Fees payable to the Company's auditor for other services:
------------------------------------------------------------------------------------- -------- --------
The audit of the Company's subsidiaries, pursuant to legislation 30 37
------------------------------------------------------------------------------------- -------- --------
Audit related assurance services - -
------------------------------------------------------------------------------------- -------- --------
Other assurance services 57 95
------------------------------------------------------------------------------------- -------- --------
All other non-audit services 12 140
------------------------------------------------------------------------------------- -------- --------
424 505
------------------------------------------------------------------------------------- -------- --------
Other assurance services related to the half year review and
profit certification.
All other non-audit services related to the Financial Services
Compensation Scheme reporting health check (2018: the issue of the
subordinated liabilities, recovery plan support, review of share
scheme documentation and Financial Services Compensation Scheme
reporting health check).
7. Average number of employees
2019 2018
Number Number
--------------- ------- -------
Directors 8 7
--------------- ------- -------
Management 157 88
--------------- ------- -------
Administration 814 766
--------------- ------- -------
979 861
--------------- ------- -------
8. Income tax expense
2019 2018
GBPmillion GBPmillion
--------------------------------------------------------------- ----------- -----------
Current taxation
--------------------------------------------------------------- ----------- -----------
Corporation tax charge - current year 7.0 7.3
--------------------------------------------------------------- ----------- -----------
Corporation tax charge - adjustments in respect of prior years (0.1) 0.3
--------------------------------------------------------------- ----------- -----------
6.9 7.6
--------------------------------------------------------------- ----------- -----------
Deferred taxation
--------------------------------------------------------------- ----------- -----------
Deferred tax charge - current year 0.7 (1.0)
--------------------------------------------------------------- ----------- -----------
Deferred tax charge - adjustments in respect of prior years - (0.2)
--------------------------------------------------------------- ----------- -----------
0.7 (1.2)
--------------------------------------------------------------- ----------- -----------
Income tax expense 7.6 6.4
--------------------------------------------------------------- ----------- -----------
Tax reconciliation
--------------------------------------------------------------- ----------- -----------
Profit before tax 38.7 34.7
--------------------------------------------------------------- ----------- -----------
Tax at 19.00% (2018: 19.00%) 7.4 6.6
--------------------------------------------------------------- ----------- -----------
Permanent differences - -
--------------------------------------------------------------- ----------- -----------
Banking surcharge 0.1 0.3
--------------------------------------------------------------- ----------- -----------
Rate change on deferred tax assets 0.2 (0.6)
--------------------------------------------------------------- ----------- -----------
Prior period adjustments (0.1) 0.1
--------------------------------------------------------------- ----------- -----------
Income tax expense for the year 7.6 6.4
--------------------------------------------------------------- ----------- -----------
The Government has substantively enacted a reduction in the main
rate of UK corporation tax from 19% to 17% (effective 1 April
2020). However, on 17 March 2020, the Government legislated to
retain the current rate of 19%. The Group is also subject to an 8%
surcharge on the profits of banking companies in excess of GBP25
million that is reflected in the 2019 tax charge and
reconciliation.
9. Earnings per ordinary share
9.1 Basic
Basic earnings per ordinary share are calculated by dividing the
profit attributable to equity holders of the parent by the weighted
average number of ordinary shares as follows:
2019 2018
----------------------------------------------------------------- ---------- ----------
Profit attributable to equity holders of the parent (GBPmillion) 31.1 28.3
----------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares (number) 18,476,280 18,475,229
----------------------------------------------------------------- ---------- ----------
Earnings per share (pence) 168.3 153.2
----------------------------------------------------------------- ---------- ----------
9.2 Diluted
Diluted earnings per ordinary share are calculated by dividing
the profit attributable to equity holders of the parent by the
weighted average number of ordinary shares in issue during the
year, as noted above, as well as the number of dilutive share
options in issue during the year, as follows:
2019 2018
--------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares 18,476,280 18,475,229
--------------------------------------------------------- ---------- ----------
Number of dilutive shares in issue at the year-end 216,943 277,234
--------------------------------------------------------- ---------- ----------
Fully diluted weighted average number of ordinary shares 18,693,223 18,752,463
--------------------------------------------------------- ---------- ----------
Dilutive shares being based on:
--------------------------------------------------------- ---------- ----------
Number of options outstanding at the year-end 598,065 511,706
--------------------------------------------------------- ---------- ----------
Weighted average exercise price (pence) 528 678
--------------------------------------------------------- ---------- ----------
Average share price during the period (pence) 1,390 1,489
--------------------------------------------------------- ---------- ----------
Diluted earnings per share (pence) 166.4 150.9
--------------------------------------------------------- ---------- ----------
10. Dividends
2019 2018
GBP'000 GBP'000
----------------------------------------------------------------- -------- --------
2017 final dividend - 61 pence per share (paid May 2018) - 11.3
----------------------------------------------------------------- -------- --------
2018 interim dividend - 19 pence per share (paid September 2018) - 3.5
----------------------------------------------------------------- -------- --------
2018 final dividend - 64 pence per share (paid May 2019) 11.8 -
----------------------------------------------------------------- -------- --------
2019 interim dividend - 20 pence per share (paid September 2019) 3.7 -
----------------------------------------------------------------- -------- --------
15.5 14.8
----------------------------------------------------------------- -------- --------
The Directors do not recommend the payment of a final dividend
for 2019. An interim dividend of 20 pence per share was paid on 27
September 2019. Total dividends for 2018 were 83 pence per
share.
11. Loans and advances to banks
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------------------------ ----------- ----------- ----------- -----------
Placements with banks included in cash and cash equivalents (Note
32) 48.4 44.8 45.2 41.9
------------------------------------------------------------------ ----------- ----------- ----------- -----------
Moody's long-term ratings are as follows:
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------------- ----------- ----------- ----------- -----------
A1 3.8 11.2 3.6 11.1
-------------------------------------------- ----------- ----------- ----------- -----------
A1*/A2 - 28.6 - 25.8
-------------------------------------------- ----------- ----------- ----------- -----------
Baa2 39.5 - 36.5 -
-------------------------------------------- ----------- ----------- ----------- -----------
Arbuthnot Latham & Co., Limited - No rating 5.1 5.0 5.1 5.0
-------------------------------------------- ----------- ----------- ----------- -----------
48.4 44.8 45.2 41.9
-------------------------------------------- ----------- ----------- ----------- -----------
None of the loans and advances to banks are either past due or
impaired.
Loans and advances to banks includes GBP9.1 million in relation
to collateral held under credit support and similar agreements,
with a corresponding payable included within other liabilities.
12. Loans and advances to customers
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
---------------------------------------------------------------- ----------- ----------- ----------- -----------
Gross loans and advances 2,510.7 2,096.0 2,422.3 2,048.9
---------------------------------------------------------------- ----------- ----------- ----------- -----------
Less: allowances for impairment on loans and advances (Note 14) (60.6) (67.1) (68.7) (68.6)
---------------------------------------------------------------- ----------- ----------- ----------- -----------
2,450.1 2,028.9 2,353.6 1,980.3
---------------------------------------------------------------- ----------- ----------- ----------- -----------
The fair value of loans and advances to customers is shown in
Note 39. For a maturity profile of loans and advances to customers,
refer to Note 38.
Group and Company
At 31 December 2019 loans and advances to customers of GBP433.4
million (2018: GBP326.5 million) were pre-positioned under the Bank
of England's liquidity support operations and Term Funding Scheme,
and were available for use as collateral within the schemes.
The following loans are secured upon real estate:
2019 2019 2018 2018
Loan balance Loan-to-value Loan balance Loan-to-value
GBPmillion % GBPmillion %
-------------------- ------------- -------------- ------------- --------------
Real Estate Finance 962.2 59% 769.8 57%
-------------------- ------------- -------------- ------------- --------------
Consumer Mortgages 105.9 56% 84.7 59%
-------------------- ------------- -------------- ------------- --------------
1,068.1 854.5
-------------------- ------------- -------------- ------------- --------------
Under its credit policy, the Real Estate Finance business lends
to a maximum loan-to-value of 70% for investment loans and 60% for
residential development loans and up to 65% for pre-let commercial
development loans (based on gross development value), and the
Consumer Mortgages business lends to a maximum of 90%.
All property valuations at loan inception, and the majority of
development stage valuations, are performed by independent
Chartered Surveyors, who perform their work in accordance with the
Royal Institution of Chartered Surveyors Valuation - Professional
Standards.
Group
GBP2.0 million (2018: GBP1.9 million) of collateral is held from
RentSmart, against loans of GBP7.2 million (2018: GBP10.8 million),
which is not recognised on the balance sheet. This is based upon
the balance of customer receivables and expected new agreements
during the following month.
13. Finance lease receivables
Loans and advances to customers include finance lease
receivables as follows:
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Gross investment in finance lease receivables:
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- No later than 1 year 176.0 175.3 171.6 168.7
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than 1 year and no later than 5 years 338.6 326.9 335.7 322.0
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than 5 years - 0.2 - 0.2
----------------------------------------------------------------- ----------- ----------- ----------- -----------
514.6 502.4 507.3 490.9
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Unearned future finance income on finance leases (144.6) (135.8) (142.9) (132.8)
----------------------------------------------------------------- ----------- ----------- ----------- -----------
Net investment in finance leases 370.0 366.6 364.4 358.1
----------------------------------------------------------------- ----------- ----------- ----------- -----------
The net investment in finance leases may be analysed as follows:
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- No later than 1 year 110.2 112.0 107.0 107.6
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than 1 year and no later than 5 years 259.8 254.4 257.4 250.3
----------------------------------------------------------------- ----------- ----------- ----------- -----------
- Later than 5 years - 0.2 - 0.2
----------------------------------------------------------------- ----------- ----------- ----------- -----------
370.0 366.6 364.4 358.1
----------------------------------------------------------------- ----------- ----------- ----------- -----------
14. Allowances for impairment of loans and advances
Group
Not credit-impaired Credit impaired
------------------------------- ----------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
31 December 2019
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Business
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Real Estate
Finance 0.5 - 0.1 0.6 962.8 0.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Asset Finance - 0.1 1.7 1.8 29.5 6.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Commercial
Finance 0.3 - 0.6 0.9 252.6 0.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Retail Finance 10.0 11.1 4.4 25.5 714.4 3.6%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Motor Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Voluntary
termination
provision 6.8 - - 6.8
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other impairment 3.7 12.9 10.2 26.8
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
10.5 12.9 10.2 33.6 357.3 9.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Debt Management - - (2.1) (2.1) 80.3 (2.6%)
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Mortgages 0.3 - - 0.3 106.2 0.3%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other - - - - 7.6 0.0%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
21.6 24.1 14.9 60.6 2,510.7 2.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Not credit-impaired Credit impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
31 December 2018
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Business Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Real Estate
Finance 0.6 - - 0.6 770.4 0.1%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Asset Finance 0.2 0.1 2.7 3.0 65.8 4.6%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Commercial Finance 0.2 0.2 0.4 0.8 195.5 0.4%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Retail Finance 8.9 9.8 4.3 23.0 620.0 3.7%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Motor Finance:
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Voluntary
termination
provision 6.0 - - 6.0
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other impairment 4.2 13.8 15.4 33.4
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
10.2 13.8 15.4 39.4 315.8 12.5%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Debt Management - - - - 32.3 0.0%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Consumer Mortgages 0.2 - - 0.2 84.9 0.2%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Other - - 0.1 0.1 11.3 0.9%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
20.3 23.9 22.9 67.1 2,096.0 3.2%
------------------ ------------- ------------- --------------- --------------- ----------------- ---------------
Total provisions above include expert credit judgements as
follows:
2019 2018
GBPmillion GBPmillion
-------------------------------------------------------------------------------------------- ----------- -----------
Specific overlays held against credit-impaired secured assets held within the Business
Finance
portfolio 0.5 1.4
-------------------------------------------------------------------------------------------- ----------- -----------
Planned enhancements to LGD elements of the IFRS 9 models (0.8) 0.8
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of PD elements of the IFRS 9 models (0.8) (0.2)
-------------------------------------------------------------------------------------------- ----------- -----------
POCI adjustment (see below) (2.1) -
-------------------------------------------------------------------------------------------- ----------- -----------
Other (0.1) -
-------------------------------------------------------------------------------------------- ----------- -----------
Expert credit judgements over the Group's IFRS 9 model results (3.3) 2.0
-------------------------------------------------------------------------------------------- ----------- -----------
The specific overlays have been estimated on an individual basis
by assessing the recoverability and condition of the secured asset,
along with any other recoveries that may be made.
POCI adjustment
The Group's debt management business purchases credit-impaired
loans from the Company and other unrelated third parties. Under
IFRS 9, these are classified as Purchased and Originated Credit
Impaired ('POCI') loans. As a practical expedient, income on POCI
loans is initially recognised by applying the original
credit-adjusted EIR to the expected future cash flows arising from
the POCI assets. The Group's accounting policy is to recognise POCI
income by applying the original credit-adjusted EIR to the
amortised cost of the assets. Expected changes in cash flows since
the date of purchase are recognised as an impairment gain or loss
in the income statement. At December 2019, improvements in credit
quality resulted in a GBP2.1 million impairment gain.
Provisions included in 'Other' are in respect of various legacy
products. This segment also includes loans of GBP7.2 million (2018:
GBP10.8 million) held in STB Leasing Limited. The credit risk
associated with those loans is retained by its partner, RentSmart.
Accordingly, no provision is held against the RentSmart loans.
The impairment losses disclosed in the income statement can be
analysed as follows:
2019 2018
GBPmillion GBPmillion
----------------------------------------------------------------- ----------- -----------
Incurred loss individual provision: charge for impairment losses 28.1 30.4
----------------------------------------------------------------- ----------- -----------
Loans written off, net of amounts utilised 5.3 4.3
----------------------------------------------------------------- ----------- -----------
Recoveries of loans written off (0.8) (2.3)
----------------------------------------------------------------- ----------- -----------
32.6 32.4
----------------------------------------------------------------- ----------- -----------
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Not credit-impaired Credit impaired
--------------------------------------- ------------------------
Stage 1:
Subject to Stage 2: Stage 3:
12-month ECL Subject to lifetime ECL Subject to lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ------------- ------------------------ ------------------------ -----------
At 1 January 2019 20.3 23.9 22.9 67.1
-------------------------------------- ------------- ------------------------ ------------------------ -----------
(Decrease)/increase due to change in
credit risk
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 2 (5.9) 36.9 - 31.0
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 3 - (23.5) 30.3 6.8
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 1 1.5 (3.5) - (2.0)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Passage of time (10.1) (6.8) (6.3) (23.2)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
New loans originated 17.2 - - 17.2
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Derecognised loans (1.9) (4.7) (0.1) (6.7)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to model methodology 0.7 1.2 (0.2) 1.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to credit risk parameters (1.1) 0.6 (0.1) (0.6)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Other adjustments 3.9 - - 3.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Charge to income statement 4.3 0.2 23.6 28.1
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Allowance utilised in respect of write
offs (3.0) - (31.6) (34.6)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
31 December 2019 21.6 24.1 14.9 60.6
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Not credit-impaired Credit impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to
12-month ECL lifetime ECL lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ------------- ------------- --------------- -----------
At 1 January 2018 18.9 24.9 27.9 71.7
------------------------------------------------- ------------- ------------- --------------- -----------
(Decrease)/increase due to change in credit risk
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 2 (6.3) 33.0 - 26.7
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 3 (0.1) (23.4) 30.8 7.3
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 1 1.5 (3.2) - (1.7)
------------------------------------------------- ------------- ------------- --------------- -----------
Passage of time (6.7) (1.7) (3.9) (12.3)
------------------------------------------------- ------------- ------------- --------------- -----------
New loans originated 17.4 - - 17.4
------------------------------------------------- ------------- ------------- --------------- -----------
Derecognised loans (1.8) (4.0) - (5.8)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to model methodology (1.3) (0.2) - (1.5)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to credit risk parameters (1.2) (1.5) 0.6 (2.1)
------------------------------------------------- ------------- ------------- --------------- -----------
Other adjustments 2.4 - - 2.4
------------------------------------------------- ------------- ------------- --------------- -----------
Charge to income statement 3.9 (1.0) 27.5 30.4
------------------------------------------------- ------------- ------------- --------------- -----------
Allowance utilised in respect of write offs (2.5) - (32.5) (35.0)
------------------------------------------------- ------------- ------------- --------------- -----------
31 December 2018 20.3 23.9 22.9 67.1
------------------------------------------------- ------------- ------------- --------------- -----------
The table above has been prepared based on monthly movements in
the ECL.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represents movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macro-economic scenarios
applied to the models.
Other adjustments represents the movement in the Motor Finance
voluntary termination provision.
Stage 1 write offs arise on Motor Finance accounts where
borrowers have exercised their right to voluntarily terminate their
agreements.
Interest income on loans classified as impaired totalled GBP2.5 million (2018: GBP2.0 million).
A breakdown of the gross receivable by internal credit risk
rating is shown below:
Stage 1 Stage 2 Stage 3 Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------ ----------- ----------- ----------- -----------
31 December 2019
------------------ ----------- ----------- ----------- -----------
Business Finance:
------------------ ----------- ----------- ----------- -----------
Strong 272.1 4.1 - 276.2
-------------------- ----------- ----------- ----------- -----------
Good 770.4 4.7 10.1 785.2
-------------------- ----------- ----------- ----------- -----------
Satisfactory 126.3 23.5 0.3 150.1
-------------------- ----------- ----------- ----------- -----------
Weak 10.2 15.1 8.1 33.4
-------------------- ----------- ----------- ----------- -----------
1,179.0 47.4 18.5 1,244.9
------------------ ----------- ----------- ----------- -----------
Consumer Finance:
------------------- ----- ----- ----- -------
Good 317.1 58.3 3.1 378.5
--------------------- ----- ----- ----- -------
Satisfactory 317.7 54.8 5.9 378.4
--------------------- ----- ----- ----- -------
Weak 229.8 71.3 13.3 314.4
--------------------- ----- ----- ----- -------
Consumer mortgages 105.6 0.3 0.3 106.2
--------------------- ----- ----- ----- -------
Debt management - - 80.7 80.7
--------------------- ----- ----- ----- -------
970.2 184.7 103.3 1,258.2
------------------- ----- ----- ----- -------
Internal credit risk rating is based on the most recent credit
risk score of a customer.
Company
Not credit-impaired Credit impaired
------------------------------- ----------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to Gross loans and
12-month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
31 December 2019
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Business
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Real Estate
Finance 0.5 - 0.1 0.6 962.8 0.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Asset Finance - 0.1 1.7 1.8 29.5 6.1%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Commercial
Finance 0.3 - 0.6 0.9 251.6 0.4%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Retail Finance 10.5 11.6 4.5 26.6 714.4 3.7%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Motor Finance:
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Voluntary
termination
provision 6.8 - - 6.8
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other impairment 4.4 15.2 12.0 31.6
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
11.2 15.2 12.0 38.4 357.3 10.7%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Consumer
Mortgages 0.3 - - 0.3 106.2 0.3%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Other - - 0.1 0.1 0.5 20.0%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
22.8 26.9 19.0 68.7 2,422.3 2.8%
---------------- ------------- ---------------- ---------------- --------------- --------------- ---------------
Not credit-impaired Credit impaired
------------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to 12 Subject to Subject to Gross loans and
month ECL lifetime ECL lifetime ECL Total provision receivables Provision cover
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion %
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
31 December 2018
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Business
Finance:
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Real Estate
Finance 0.6 - - 0.6 770.4 0.1%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Asset Finance 0.2 0.1 2.7 3.0 65.8 4.6%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Commercial
Finance 0.2 0.2 0.4 0.8 191.4 0.4%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Consumer
Finance:
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Retail Finance 9.2 9.8 4.4 23.4 620.0 3.8%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Motor Finance:
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Voluntary
termination
provision 6.0 - - 6.0
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Other impairment 4.3 14.2 16.0 34.5
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
10.3 14.2 16.0 40.5 315.8 12.8%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Consumer
Mortgages 0.2 - - 0.2 84.9 0.2%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Other - - 0.1 0.1 0.6 16.7%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
20.7 24.3 23.6 68.6 2,048.9 3.3%
---------------- ---------------- ------------- --------------- --------------- ---------------- ---------------
Total provisions above include expert credit judgements as
follows:
2019 2018
GBPmillion GBPmillion
-------------------------------------------------------------------------------------------- ----------- -----------
Specific overlays held against credit-impaired secured assets held within the Business
Finance
portfolio 0.5 1.4
-------------------------------------------------------------------------------------------- ----------- -----------
Planned enhancements to LGD elements of the IFRS 9 models (0.8) 0.8
-------------------------------------------------------------------------------------------- ----------- -----------
Management judgement in respect of PD elements of the IFRS 9 models (0.8) (0.2)
-------------------------------------------------------------------------------------------- ----------- -----------
Other (0.1) -
-------------------------------------------------------------------------------------------- ----------- -----------
Expert credit judgements over the Company's IFRS 9 model results (1.2) 2.0
-------------------------------------------------------------------------------------------- ----------- -----------
The specific overlays have been estimated on an individual basis
by assessing the recoverability and condition of the secured asset,
along with any other recoveries that may be made.
Reconciliations of the opening to closing impairment allowance
for losses on loans and advances are presented below:
Not credit-impaired Credit impaired
--------------------------------------- ------------------------
Stage 1:
Subject to Stage 2: Stage 3:
12-month ECL Subject to lifetime ECL Subject to lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ------------- ------------------------ ------------------------ -----------
At 1 January 2019 20.7 24.3 23.6 68.6
-------------------------------------- ------------- ------------------------ ------------------------ -----------
(Decrease)/increase due to change in
credit risk
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 2 (6.2) 39.1 - 32.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 3 - (24.6) 31.7 7.1
-------------------------------------- ------------- ------------------------ ------------------------ -----------
- Transfer to stage 1 1.6 (3.6) - (2.0)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Passage of time (10.3) (5.2) (4.0) (19.5)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
New loans originated 18.4 - - 18.4
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Derecognised loans (1.9) (4.9) (0.1) (6.9)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to model methodology 0.7 1.2 (0.2) 1.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Changes to credit risk parameters (1.1) 0.6 (0.1) (0.6)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Other adjustments 3.9 - - 3.9
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Charge to income statement 5.1 2.6 27.3 35.0
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Allowance utilised in respect of write
offs (3.0) - (31.9) (34.9)
-------------------------------------- ------------- ------------------------ ------------------------ -----------
31 December 2019 22.8 26.9 19.0 68.7
-------------------------------------- ------------- ------------------------ ------------------------ -----------
Not credit-impaired Credit impaired
---------------------------- ---------------
Stage 1: Stage 2: Stage 3:
Subject to Subject to Subject to
12-month ECL lifetime ECL lifetime ECL Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------- ------------- ------------- --------------- -----------
At 1 January 2018 19.0 25.1 28.2 72.3
------------------------------------------------- ------------- ------------- --------------- -----------
(Decrease)/increase due to change in credit risk
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 2 (6.5) 33.9 - 27.4
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 3 (0.1) (24.0) 31.6 7.5
------------------------------------------------- ------------- ------------- --------------- -----------
- Transfer to stage 1 1.5 (3.2) - (1.7)
------------------------------------------------- ------------- ------------- --------------- -----------
Passage of time (6.7) (1.6) (4.6) (12.9)
------------------------------------------------- ------------- ------------- --------------- -----------
New loans originated 17.9 - - 17.9
------------------------------------------------- ------------- ------------- --------------- -----------
Derecognised loans (1.8) (4.1) 2.8 (3.1)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to model methodology (1.3) (0.2) - (1.5)
------------------------------------------------- ------------- ------------- --------------- -----------
Changes to credit risk parameters (1.2) (1.5) 0.6 (2.1)
------------------------------------------------- ------------- ------------- --------------- -----------
Other adjustments 2.4 - - 2.4
------------------------------------------------- ------------- ------------- --------------- -----------
Charge to income statement 4.2 (0.7) 30.4 33.9
------------------------------------------------- ------------- ------------- --------------- -----------
Allowance utilised in respect of write offs (2.5) (0.1) (35.0) (37.6)
------------------------------------------------- ------------- ------------- --------------- -----------
31 December 2018 20.7 24.3 23.6 68.6
------------------------------------------------- ------------- ------------- --------------- -----------
The table above has been prepared based on monthly movements in
the ECL. Stage 1 write offs arise on Motor accounts that have
exercised their right to voluntarily terminate their
agreements.
Passage of time represents the impact of accounts maturing
through their contractual life and the associated reduction in PDs.
For stage 3 assets it represents the unwind of the discount applied
in calculating the ECL.
Changes to model methodology represents movements that have
occurred due to enhancements made to the models during the
year.
Changes to credit risk parameters represents movements that have
occurred due to the Group updating model inputs. This would include
the impact of, for example, updating the macro economic scenarios
applied to the models.
Other adjustments represents the movement in the Motor voluntary
termination provision.
Stage 1 write offs arise on Motor accounts that have exercised
their right to voluntarily terminate their agreements.
Interest income on loans classified as impaired totalled GBP1.8 million (2018: GBP1.1 million).
15. Debt securities
Group and Company
Debt securities of GBP25.0 million (2018: GBP149.7 million)
represent UK Treasury Bills. The Company's intention is to hold
them to maturity and, therefore, they are stated in the statement
of financial position at amortised cost. The decrease over the year
is due to Bills maturing.
All of the debt securities had a rating agency designation at 31
December 2019, based on Moody's long-term ratings of Aa2 (2018:
Aa2). None of the debt securities are either past due or
impaired.
16. Investment property
Group and Company
2019
GBPmillion
-------------------------------------------- -----------
Fair value
-------------------------------------------- -----------
At 1 January 2018 -
-------------------------------------------- -----------
Additions 1.6
-------------------------------------------- -----------
Transfer from property, plant and equipment 3.2
-------------------------------------------- -----------
At 31 December 2019 4.8
-------------------------------------------- -----------
During the year, the Group acquired Yorke House, Arleston Way,
Shirley, Solihull, B90 4LH, half of which was let to third party
occupiers. Accordingly, 50% of this property, excluding land, is
classified as an investment property at its fair value. The
Directors assessed the fair value as being 50% of the original
purchase price excluding land and VAT and stamp duty.
Also during the year, the Group vacated its portion of Secure
Trust House, Boston Drive, Bourne End, SL8 5YS, and let the space
to one of its existing third party occupiers. Accordingly, this
property was transferred from property, plant and equipment to
investment properties at its fair value. The Directors assessed the
fair value as being the same as the valuation at December 2018
performed by Knight Frank LLP.
Investment properties are stated at fair value at December 2019.
The Directors have assessed the value of the freehold property at
the year-end through comparison to current rental yields on similar
properties in the same area.
17. Property, plant and equipment
Group
Freehold land Computer
and buildings and other equipment Total
GBPmillion Leasehold property GBPmillion GBPmillion
-------------------------------- -------------- ------------------ -------------------- -----------
Cost or valuation
-------------------------------- -------------- ------------------ -------------------- -----------
At 1 January 2018 9.0 - 11.7 20.7
-------------------------------- -------------- ------------------ -------------------- -----------
Additions - 0.1 1.0 1.1
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - (2.0) (2.0)
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation (0.8) - - (0.8)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2018 8.2 0.1 10.7 19.0
-------------------------------- -------------- ------------------ -------------------- -----------
Additions 3.5 - 2.0 5.6
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - (4.5) (4.5)
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation (1.1) - - (1.1)
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer from intangible assets - - 0.2 0.2
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer to investment property (3.2) - - (3.2)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 7.4 0.1 8.4 15.9
-------------------------------- -------------- ------------------ -------------------- -----------
Accumulated depreciation
-------------------------------- -------------- ------------------ -------------------- -----------
At 1 January 2018 - - (9.2) (9.2)
-------------------------------- -------------- ------------------ -------------------- -----------
Depreciation charge (0.5) - (0.8) (1.3)
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - 2.0 2.0
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation 0.5 - - 0.5
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2018 - - (8.0) (8.0)
-------------------------------- -------------- ------------------ -------------------- -----------
Depreciation charge (0.2) - (1.0) (1.2)
-------------------------------- -------------- ------------------ -------------------- -----------
Disposals - - 4.5 4.5
-------------------------------- -------------- ------------------ -------------------- -----------
Revaluation 0.2 - - 0.2
-------------------------------- -------------- ------------------ -------------------- -----------
Transfer from intangible assets - - (0.1) (0.1)
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 - - (4.6) (4.6)
-------------------------------- -------------- ------------------ -------------------- -----------
Net book amount
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2018 8.2 0.1 2.7 11.0
-------------------------------- -------------- ------------------ -------------------- -----------
At 31 December 2019 7.4 0.1 3.8 11.3
-------------------------------- -------------- ------------------ -------------------- -----------
Company
Freehold Computer
property and other equipment Total
GBPmillion GBPmillion GBPmillion
-------------------------------- ----------- -------------------- -----------
Cost or valuation
-------------------------------- ----------- -------------------- -----------
At 1 January 2018 4.6 10.1 14.7
-------------------------------- ----------- -------------------- -----------
Additions - 0.5 0.5
-------------------------------- ----------- -------------------- -----------
Disposals - (2.0) (2.0)
-------------------------------- ----------- -------------------- -----------
At 31 December 2018 4.6 8.6 13.2
-------------------------------- ----------- -------------------- -----------
Additions 3.5 1.8 5.3
-------------------------------- ----------- -------------------- -----------
Disposals - (4.5) (4.5)
-------------------------------- ----------- -------------------- -----------
Transfer from intangible assets - 0.2 0.2
-------------------------------- ----------- -------------------- -----------
Transfer to investment property (3.2) - (3.2)
-------------------------------- ----------- -------------------- -----------
Revaluation (1.4) - (1.4)
-------------------------------- ----------- -------------------- -----------
At 31 December 2019 3.5 6.1 9.6
-------------------------------- ----------- -------------------- -----------
Accumulated depreciation
-------------------------------- ----------- -------------------- -----------
At 1 January 2018 - (8.6) (8.6)
-------------------------------- ----------- -------------------- -----------
Depreciation charge (0.4) (0.3) (0.7)
-------------------------------- ----------- -------------------- -----------
Disposals - 2.0 2.0
-------------------------------- ----------- -------------------- -----------
Revaluation 0.1 - 0.1
-------------------------------- ----------- -------------------- -----------
At 31 December 2018 (0.3) (6.9) (7.2)
-------------------------------- ----------- -------------------- -----------
Depreciation charge (0.1) (0.6) (0.7)
-------------------------------- ----------- -------------------- -----------
Disposals - 4.5 4.5
-------------------------------- ----------- -------------------- -----------
Transfer from intangible assets - (0.1) (0.1)
-------------------------------- ----------- -------------------- -----------
Revaluation 0.4 - 0.4
-------------------------------- ----------- -------------------- -----------
At 31 December 2019 - (3.1) (3.1)
-------------------------------- ----------- -------------------- -----------
Net book amount
-------------------------------- ----------- -------------------- -----------
At 31 December 2018 4.3 1.7 6.0
-------------------------------- ----------- -------------------- -----------
At 31 December 2019 3.5 3.0 6.5
-------------------------------- ----------- -------------------- -----------
The Group and Company's freehold properties comprise:
-- the Registered Office of the Company, which is fully utilised for the Group's own purposes
-- Yorke House, Arleston Way, Shirley B90 4LH, 50% of which is used for the Group's own purposes
-- 25 and 26 Neptune Court, Vanguard Way, Cardiff CF24 5PJ,
which is fully utilised for the Group's own purposes
Freehold properties are stated at fair value as at December
2019. The Directors have assessed the value of the freehold
property at the year-end through comparison to current rental
yields on similar properties in the same area, which resulted in
the following revaluation movements:
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------------------------------- ------------ ----------- ----------- -----------
Revaluation surpluses recognised in other comprehensive income 0.2 0.3 0.1 0.1
--------------------------------------------------------------- ------------ ----------- ----------- -----------
Revaluation deficit recognised in the income statement (1.1) - - -
--------------------------------------------------------------- ------------ ----------- ----------- -----------
The revaluation deficit arose from stamp duty and irrecoverable
VAT incurred on the acquisition of a freehold property during the
year.
The carrying value of freehold land which is included in the
total carrying value of freehold land and buildings
and which is not depreciated is GBP1.5 million (2018: GBP1.9 million).
The historical cost of freehold property included at valuation
is as follows:
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
--------------- ----------- ----------- ----------- -----------
Cost 6.8 7.9 9.2 4.1
--------------- ----------- ----------- ----------- -----------
Depreciation (1.6) (1.6) (0.3) (0.2)
--------------- ----------- ----------- ----------- -----------
Net book value 5.2 6.3 8.9 3.9
--------------- ----------- ----------- ----------- -----------
18. Leasing right-of-use assets
Group
Leasehold property Leased motor vehicles Total
GBPmillion GBPmillion GBPmillion
-------------------------------- ------------------ --------------------- -----------
Cost
-------------------------------- ------------------ --------------------- -----------
On transition at 1 January 2019 4.2 0.3 4.5
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 4.2 0.3 4.5
-------------------------------- ------------------ --------------------- -----------
Accumulated depreciation
-------------------------------- ------------------ --------------------- -----------
Depreciation charge (0.7) (0.2) (0.9)
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 (0.7) (0.2) (0.9)
-------------------------------- ------------------ --------------------- -----------
Net book amount
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 3.5 0.1 3.6
-------------------------------- ------------------ --------------------- -----------
Company
Leasehold property Leased motor vehicles Total
GBPmillion GBPmillion GBPmillion
-------------------------------- ------------------ --------------------- -----------
Cost
-------------------------------- ------------------ --------------------- -----------
On transition at 1 January 2019 2.9 0.2 3.1
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 2.9 0.2 3.1
-------------------------------- ------------------ --------------------- -----------
Accumulated depreciation
-------------------------------- ------------------ --------------------- -----------
Depreciation charge 0.5 0.1 0.6
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 0.5 0.1 0.6
-------------------------------- ------------------ --------------------- -----------
Net book amount
-------------------------------- ------------------ --------------------- -----------
At 31 December 2019 2.4 0.1 2.5
-------------------------------- ------------------ --------------------- -----------
19. Intangible assets
Group
Other
Goodwill Computer software intangible assets Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------------- ------------------ -----------
Cost or valuation
------------------------------------------- ----------- ----------------- ------------------ -----------
At 1 January 2018 1.0 16.2 2.3 19.5
------------------------------------------- ----------- ----------------- ------------------ -----------
Additions - 1.4 - 1.4
------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - (0.6) (0.1) (0.7)
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2018 1.0 17.0 2.2 20.2
------------------------------------------- ----------- ----------------- ------------------ -----------
Additions - 1.1 - 1.1
------------------------------------------- ----------- ----------------- ------------------ -----------
Transfers to property, plant and equipment - (0.2) - (0.2)
------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - (1.2) - (1.2)
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 1.0 16.7 2.2 19.9
------------------------------------------- ----------- ----------------- ------------------ -----------
Accumulated amortisation
------------------------------------------- ----------- ----------------- ------------------ -----------
At 1 January 2018 - (7.9) (1.2) (9.1)
------------------------------------------- ----------- ----------------- ------------------ -----------
Amortisation charge - (1.6) (0.2) (1.8)
------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - 0.6 - 0.6
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2018 - (8.9) (1.4) (10.3)
------------------------------------------- ----------- ----------------- ------------------ -----------
Amortisation charge - (1.7) (0.2) (1.9)
------------------------------------------- ----------- ----------------- ------------------ -----------
Transfers to property, plant and equipment - 0.1 - 0.1
------------------------------------------- ----------- ----------------- ------------------ -----------
Disposals - 1.2 - 1.2
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 - (9.3) (1.6) 10.9
------------------------------------------- ----------- ----------------- ------------------ -----------
Net book amount
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2018 1.0 8.1 0.8 9.9
------------------------------------------- ----------- ----------------- ------------------ -----------
At 31 December 2019 1.0 7.4 0.6 9.0
------------------------------------------- ----------- ----------------- ------------------ -----------
Goodwill above relates to the following cash generating units,
which are part of the Retail Finance operating segment:
2019 2018
GBPmillion GBPmillion
--------------- ----------- -----------
Music business 0.3 0.3
--------------- ----------- -----------
V12 0.7 0.7
--------------- ----------- -----------
Total 1.0 1.0
--------------- ----------- -----------
The recoverable amount of these cash generating units are
determined on a value in use calculation which uses cash flow
projections based on financial forecasts covering a three-year
period, and a discount rate of 8% (2018: 8%). Cash flow projections
during the forecast period are based on the expected rate of new
business. A zero growth based scenario is also considered. The
Directors believe that any reasonably possible change in the key
assumptions on which recoverable amount is based would not cause
the aggregate carrying amount to exceed the aggregate recoverable
amount of the cash generating unit.
Other intangible assets were recognised as part of the V12
Finance Group acquisition. These were recorded at fair value, and
are being amortised on a straight-line basis as follows:
Years
--------------------- -----
IT system 5
--------------------- -----
Distribution channel 10
--------------------- -----
Brand name 5
--------------------- -----
Company
Goodwill Computer software Total
GBPmillion GBPmillion GBPmillion
------------------------------------------- ----------- ----------------- -----------
Cost or valuation
------------------------------------------- ----------- ----------------- -----------
At 1 January 2018 0.3 12.3 12.6
------------------------------------------- ----------- ----------------- -----------
Additions - 1.3 1.3
------------------------------------------- ----------- ----------------- -----------
Disposals - (0.7) (0.7)
------------------------------------------- ----------- ----------------- -----------
At 31 December 2018 0.3 12.9 13.2
------------------------------------------- ----------- ----------------- -----------
Additions - 1.0 1.0
------------------------------------------- ----------- ----------------- -----------
Transfers to property, plant and equipment - (0.2) (0.2)
------------------------------------------- ----------- ----------------- -----------
Disposals - (1.3) (1.3)
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 0.3 12.4 12.7
------------------------------------------- ----------- ----------------- -----------
Accumulated amortisation
------------------------------------------- ----------- ----------------- -----------
At 1 January 2018 - (4.1) (4.1)
------------------------------------------- ----------- ----------------- -----------
Amortisation charge - (1.6) (1.6)
------------------------------------------- ----------- ----------------- -----------
Disposals - 0.6 0.6
------------------------------------------- ----------- ----------------- -----------
At 31 December 2018 - (5.1) (5.1)
------------------------------------------- ----------- ----------------- -----------
Amortisation charge - (1.6) (1.6)
------------------------------------------- ----------- ----------------- -----------
Transfers to property, plant and equipment - 0.1 0.1
------------------------------------------- ----------- ----------------- -----------
Disposals - 1.3 1.3
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 - (5.3) (5.3)
------------------------------------------- ----------- ----------------- -----------
Net book amount
------------------------------------------- ----------- ----------------- -----------
At 31 December 2018 0.3 7.8 8.1
------------------------------------------- ----------- ----------------- -----------
At 31 December 2019 0.3 7.1 7.4
------------------------------------------- ----------- ----------------- -----------
Goodwill above relates to the music business cash generating
unit, which is part of the Retail Finance operating segment. The
recoverable amount is determined on the same basis as for the
Group.
20. Investments
Company
GBPmillion
----------------------------------------------------------------- ----------
Cost and net book value
----------------------------------------------------------------- ----------
At 1 January 2018 3.7
----------------------------------------------------------------- ----------
Equity contributions to subsidiaries in respect of share options 0.2
----------------------------------------------------------------- ----------
At 31 December 2018 3.9
----------------------------------------------------------------- ----------
Equity contributions to subsidiaries in respect of share options 0.2
----------------------------------------------------------------- ----------
At 31 December 2019 4.1
----------------------------------------------------------------- ----------
Shares in subsidiary undertakings of Secure Trust Bank PLC at 31
December 2019 are stated at cost less any provision for impairment.
All subsidiary undertakings are unlisted and none are banking
institutions. All are 100% owned by the Company. The subsidiary
undertakings were all incorporated in the UK and wholly owned via
ordinary shares. All subsidiary undertakings are included in the
consolidated financial statements and have an
accounting reference date of 31 December.
Details are as follows:
Principal activity
--------------------------------------------------- -----------------------------------------
Owned directly
--------------------------------------------------- -----------------------------------------
Debt Managers (Services) Limited Debt collection company
--------------------------------------------------- -----------------------------------------
Secure Homes Services Limited Property rental
--------------------------------------------------- -----------------------------------------
STB Leasing Limited Leasing
--------------------------------------------------- -----------------------------------------
V12 Finance Group Limited Holding company
--------------------------------------------------- -----------------------------------------
Owned indirectly via intermediate holding companies
--------------------------------------------------- -----------------------------------------
V12 Personal Finance Limited Dormant
--------------------------------------------------- -----------------------------------------
V12 Retail Finance Limited Sourcing and servicing of unsecured loans
--------------------------------------------------- -----------------------------------------
The registered office of the Company, and all subsidiary
undertakings, is One Arleston Way, Shirley, Solihull, West Midlands
B90 4LH.
Secure Homes Services Limited, STB Leasing Limited and V12
Personal Finance Limited are exempt from the requirements of the
Companies Act 2006 relating to the audit of individual accounts by
virtue of s479A, and the Company has given guarantees accordingly
under s479C in respect of the year ended 31 December 2019.
21. Deferred taxation
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------- ----------- ----------- ----------- -----------
Other short-term timing differences 7.5 7.9 8.1 7.8
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets 7.5 7.9 8.1 7.8
------------------------------------- ----------- ----------- ----------- -----------
Deferred tax assets:
------------------------------------- ----------- ----------- ----------- -----------
Prior period closing 7.9 0.6 7.8 0.6
------------------------------------- ----------- ----------- ----------- -----------
Tax on IFRS 9 transition adjustment - 6.3 - 6.4
------------------------------------- ----------- ----------- ----------- -----------
Tax on IFRS 16 transition adjustment 0.2 - 0.2 -
------------------------------------- ----------- ----------- ----------- -----------
At 1 January 8.1 6.9 8.0 7.0
------------------------------------- ----------- ----------- ----------- -----------
Income statement (0.7) 1.2 (0.2) 1.1
------------------------------------- ----------- ----------- ----------- -----------
Other comprehensive income 0.1 (0.2) 0.3 (0.3)
------------------------------------- ----------- ----------- ----------- -----------
At 31 December 7.5 7.9 8.1 7.8
------------------------------------- ----------- ----------- ----------- -----------
The Government substantively enacted a reduction in the main
rate of UK corporation tax from 19% to 17% (effective 1 April
2020). However, on 17 March 2020, the Government legislated to
retain the current rate of 19%. The Group is also subject to an 8%
surcharge on the profits of banking companies in excess of GBP25
million that is reflected in the 2019 tax charge and
reconciliation. Deferred tax has been calculated based on the
enacted rate of 17.5% (being an average of the rate of 19% to March
2020 and 17% thereafter) to the extent that the related temporary
differences are expected to reverse in future periods, and is
recognised on the basis that future taxable profits are in excess
of the profits arising from the reversal of existing taxable
temporary differences. The potential effect of the rate remaining
at 19% would be to increase deferred tax assets by GBP0.7 million.
A deferred tax asset was recognised on the IFRS 9 transition
adjustment on 1 January 2018 and the current year credit includes a
reassessment of the rates at which it is projected to reverse over
the period to 31 December 2027.
22. Other assets
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
Other receivables 5.2 16.2 4.5 16.1
-------------------------------------- ----------- ----------- ----------- -----------
Amounts due from related companies - - 88.5 44.5
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development prepayment 6.4 - 6.4 -
-------------------------------------- ----------- ----------- ----------- -----------
Other prepayments and accrued income 5.7 6.2 4.4 5.0
-------------------------------------- ----------- ----------- ----------- -----------
17.3 22.4 103.8 65.6
-------------------------------------- ----------- ----------- ----------- -----------
Cloud software development costs of GBP6.4 million that do not
meet the intangible asset recognition criteria are included within
other prepayments and accrued income. The costs principally relate
to the Group's Motor Transformation Programme, and once the
software comes into use will be expensed to the income statement
over the useful economic life of the software.
23. Due to banks
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------- ----------- ----------- ----------- -----------
Amounts due to other credit institutions 308.0 263.0 308.0 263.0
----------------------------------------- ----------- ----------- ----------- -----------
Accrued interest 0.5 0.5 0.5 0.5
----------------------------------------- ----------- ----------- ----------- -----------
308.5 263.5 308.5 263.5
----------------------------------------- ----------- ----------- ----------- -----------
24. Deposits from customers
Group and Company
2019 2018
GBPmillion GBPmillion
---------------------------- ----------- -----------
Current/demand accounts 22.6 14.5
---------------------------- ----------- -----------
Term deposits 1,959.3 1,833.2
---------------------------- ----------- -----------
Individual savings accounts 38.4 -
---------------------------- ----------- -----------
2,020.3 1,847.7
---------------------------- ----------- -----------
25. Lease liabilities
Group
2019
GBPmillion
--------------------------------------------------- -----------
On transition at 1 January 2019 5.5
---------------------------------------------------- -----------
Payments (1.1)
---------------------------------------------------- -----------
Interest expense 0.1
---------------------------------------------------- -----------
4.5
--------------------------------------------------- -----------
Lease liabilities - Gross
--------------------------------------------------- -----------
- No later than one year 1.0
---------------------------------------------------- -----------
- Later than one year and no later than five years 3.9
---------------------------------------------------- -----------
4.9
--------------------------------------------------- -----------
Less: Future finance expense (0.4)
---------------------------------------------------- -----------
4.5
--------------------------------------------------- -----------
Lease liabilities - Net
--------------------------------------------------- -----------
- No later than one year 0.9
---------------------------------------------------- -----------
- Later than one year and no later than five years 3.6
---------------------------------------------------- -----------
4.5
--------------------------------------------------- -----------
Company
2019
GBPmillion
--------------------------------------------------- -----------
On transition at 1 January 2019 4.0
---------------------------------------------------- -----------
Payments (0.8)
---------------------------------------------------- -----------
Interest expense 0.1
---------------------------------------------------- -----------
3.3
--------------------------------------------------- -----------
Lease liabilities - Gross
--------------------------------------------------- -----------
- No later than one year 0.7
---------------------------------------------------- -----------
- Later than one year and no later than five years 2.9
---------------------------------------------------- -----------
3.6
--------------------------------------------------- -----------
Less: Future finance expense (0.3)
---------------------------------------------------- -----------
Lease liabilities - Net 3.3
---------------------------------------------------- -----------
Lease liabilities - Gross
--------------------------------------------------- -----------
- No later than one year 0.7
---------------------------------------------------- -----------
- Later than one year and no later than five years 2.6
---------------------------------------------------- -----------
3.3
--------------------------------------------------- -----------
26. Other liabilities
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------- ----------- ----------- ----------- -----------
Other payables 27.2 25.8 25.5 22.8
--------------------------------- ----------- ----------- ----------- -----------
Amounts due to related companies - - 5.5 14.1
--------------------------------- ----------- ----------- ----------- -----------
Accruals and deferred income 13.7 14.3 11.0 12.2
--------------------------------- ----------- ----------- ----------- -----------
40.9 40.1 42.0 49.1
--------------------------------- ----------- ----------- ----------- -----------
27. Provisions for liabilities and charges
Group and Company
Customer
redress ECL allowance on loan commitments Fraud Total
GBPmillion GBPmillion GBPmillion GBPmillion
--------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 1 January 2018 1.2 0.3 0.2 1.7
--------------------------------------- ----------- --------------------------------- ----------- -----------
(Credited)/charged to income statement (0.4) 0.1 (0.1) (0.4)
--------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 31 December 2018 0.8 0.4 0.1 1.3
--------------------------------------- ----------- --------------------------------- ----------- -----------
Credited to income statement (0.6) - - (0.6)
--------------------------------------- ----------- --------------------------------- ----------- -----------
Balance at 31 December 2019 0.2 0.4 0.1 0.7
--------------------------------------- ----------- --------------------------------- ----------- -----------
Customer redress provision
The Group provides for its best estimate of redress payable in
respect of outstanding claims relating to historical sales of
accident, sickness and unemployment insurance, by considering the
likely future uphold rate for claims, in the context of confirmed
issues and historical experience. The accuracy of these estimates
would be affected, were there to be a significant change in the
incidence of claims upheld by the Financial Ombudsman Service.
The Financial Conduct Authority announced a deadline for making
these customer redress claims, which gave consumers until 29 August
2019 to make a claim, so no further claims were accepted after this
date.
Fraud
The fraud provision relates to cases where the Bank has
reasonable evidence of suspected fraud, but further investigation
is required before the cases can be dealt with appropriately.
ECL allowance on loan commitments
In accordance with the requirements of IFRS 9 the Group holds an
ECL allowance against loans it has committed to lend but have not
yet been drawn. For the Real Estate Finance and Commercial Finance
portfolios, where a loan facility is agreed that includes both
drawn and undrawn elements and the Group cannot identify the ECL on
the loan commitment separately, a combined loss allowance for both
drawn and undrawn components of the loan is presented as a
deduction from the gross carrying amount of the drawn component,
with any excess of the loss allowance over the gross drawn amount
presented as a provision. At 31 December 2019 no provision was held
for losses in excess of drawn amounts.
The Directors expect all provisions to be fully utilised within the next 12 months.
28. Subordinated liabilities
2019 2018
GBPmillion GBPmillion
------------------------ ----------- -----------
Notes at par value 50.0 50.0
------------------------ ----------- -----------
Unamortised issue costs (0.6) (0.8)
------------------------ ----------- -----------
Accrued interest 1.2 1.2
------------------------ ----------- -----------
50.6 50.4
------------------------ ----------- -----------
Subordinated liabilities comprises two tranches of 6.75% Fixed
Rate Reset Callable Subordinated Notes due 2028 ('the Notes')
issued in 2018. The Notes mature in 2028 but the issuer may at its
discretion redeem the Notes in 2023. The Notes are listed on the
Global Exchange Market of the Irish Stock Exchange plc trading as
Euronext Dublin.
The Notes are treated as Tier 2 regulatory capital which is used
to support the continuing growth of the business taking into
account increases in regulatory capital buffers. The issue of the
Notes is part of an ongoing programme to diversify and expand the
capital base of the Group.
29. Contingent liabilities and commitments
29.1 Contingent liabilities
As a financial services business, the Group must comply with
numerous laws and regulations, which significantly affect the way
it does business. Whilst the Group believes there are no material
unidentified areas of failure to comply with these laws and
regulations, there can be no guarantee that all issues have been
identified.
29.2 Capital commitments
At 31 December 2019, the Group had no capital commitments (2018:
GBPnil).
The Company had no capital commitments (2018: GBPnil).
29.3 Credit commitments
Commitments to extend credit to customers were as follows:
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------- ----------- ----------- ----------- -----------
Business Finance
-------------------- ----------- ----------- ----------- -----------
Real Estate Finance 120.9 173.4 120.9 173.4
-------------------- ----------- ----------- ----------- -----------
Commercial Finance 48.7 45.6 48.7 45.6
-------------------- ----------- ----------- ----------- -----------
Consumer Finance
-------------------- ----------- ----------- ----------- -----------
Retail Finance 33.2 28.3 33.2 28.3
-------------------- ----------- ----------- ----------- -----------
Motor Finance 0.5 0.5 0.5 0.5
-------------------- ----------- ----------- ----------- -----------
Consumer Mortgages - 15.3 - 15.3
-------------------- ----------- ----------- ----------- -----------
203.3 263.1 203.3 263.1
-------------------- ----------- ----------- ----------- -----------
30. Share capital
Number GBPmillion
--------------------------------------- ---------- ----------
At 1 January 2018 and 31 December 2018 18,475,229 7.4
--------------------------------------- ---------- ----------
Issued during 2019 2,271 -
--------------------------------------- ---------- ----------
At 31 December 2019 18,477,500 7.4
--------------------------------------- ---------- ----------
Share capital comprises ordinary shares with a par value of 40
pence each.
31. Share-based payments
At 31 December 2019, the Group had five share-based payment
schemes in operation:
-- Share option Scheme
-- 2017 long term incentive plan
-- 2017 sharesave plan
-- 2017 deferred bonus plan
-- 'Phantom' share option scheme
A summary of the movements in share options during the year is
set out below:
Weighted Weighted
average average
exercise exercise
Forfeited Vested price of price
lapsed and options of options
Outstanding and Outstanding exercisable outstanding outstanding
at 1 Granted cancelled Exercised at 31 at 31 at 31 at 31
January during during during December December December December
2019 the year the year the year 2019 2019 Vesting 2018 2019
Number Number Number Number Number Number dates GBP GBP
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Equity
settled
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Share
option
scheme 177,084 - (35,417) - 141,667 141,667 2016 7.20 7.20
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017 long
term
incentive
plan 161,597 134,046 (32,549) - 263,094 - 2020-2024 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
sharesave
plan 145,009 65,789 (46,284) (872) 163,642 - 2020-2022 13.39 12.28
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
2017
deferred
bonus
plan 14,690 28,775 (12,404) (1,399) 29,662 3,497 2019-2022 0.40 0.40
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
498,380 228,610 (126,654) (2,271) 598,065 145,164 6.60 5.26
---------- ----------- -------- --------- --------- ----------- ----------- --------- ----------- -----------
Cash
settled
---------- ----------- -------- --------- --------- ----------- ----------- ---------------------- -----------
'Phantom'
share
option
scheme 312,917 - (31,250) - 281,667 281,667 2019 25.00
---------- ----------- -------- --------- --------- ----------- ----------- ---------------------- -----------
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- -----------
Expense incurred in relation to share-based payments 1.2 0.8 1.0 0.6
----------------------------------------------------- ----------- ----------- ----------- -----------
31.1. Share option scheme
The share option scheme was established on 17 October 2011.
On 2 November 2011, 934,998 share options were granted at an
exercise price of GBP7.20 per share, entitling three Directors and
certain senior employees to purchase shares in the Company.
Approximately half of the share options vested and were exercised
on 2 November 2014, with the remainder vesting and becoming
exercisable on 2 November 2016. The bulk of the remainder were
exercised on 7 November 2016, and 35,417 were cancelled during 2019
leaving 141,667 share options unexercised. Vested options are
exercisable for a period of 10 years from the date of grant.
The intrinsic value of unexercised options is GBP1.2 million (2018: GBP0.8 million).
31.2. Long term incentive plan
The long term incentive plan was established on 3 May 2017.
Awards under this plan are subject to three performance
conditions, which are based on:
-- annual compound growth in earnings per share ('EPS') over the performance period
-- rank of the total shareholder return ('TSR') over the
performance period against the TSR of the comparator group of peer
group companies
-- maintaining appropriate risk practices over the performance
period reflecting the longer-term strategic risk management of the
Group
The awards will vest on the date on which the Board determines
that these conditions have been met.
The awards have a performance term of three years. Those awards
granted to the Executive Directors are subject to a holding period
of two years following the vesting date. Those awards not subject
to a holding period will be released to the participants on the
vesting date. Vested options are exercisable for a period of 10
years from the date of grant.
The following awards have been granted under the plan, entitling
two Executive Directors and certain other key senior employees to
purchase shares in the Company:
Subject to a holding period Subject to no holding period Total
Number Number Number
-------------------------------- --------------------------- ---------------------------- --------
At 1 January 2018 33,467 34,525 67,992
-------------------------------- --------------------------- ---------------------------- --------
Granted 30,429 64,075 94,504
-------------------------------- --------------------------- ---------------------------- --------
Forfeited, lapsed and cancelled - (899) (899)
-------------------------------- --------------------------- ---------------------------- --------
At 31 December 2018 63,896 97,701 161,597
-------------------------------- --------------------------- ---------------------------- --------
Granted 54,312 79,734 134,046
-------------------------------- --------------------------- ---------------------------- --------
Forfeited, lapsed and cancelled (32,549) - (32,549)
-------------------------------- --------------------------- ---------------------------- --------
At 31 December 2019 85,659 177,435 263,094
-------------------------------- --------------------------- ---------------------------- --------
The original grant date valuation was determined using a
Black-Scholes model for the EPS and risk management tranches, and a
Monte Carlo model for the TSR tranche. Measurement inputs and
assumptions used for the grant date valuation were as follows:
Granted 2019 Granted 2019 Granted 2018 Granted 2018
Subject to a holding Subject to no holding Subject to a holding Subject to no holding
period period period period
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Share price at grant
date GBP15.20 GBP15.20 GBP20.85 GBP20.85
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Exercise price GBP0.40 GBP0.40 GBP0.40 GBP0.40
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Expected dividend
yield 6.18% 6.18% 4.05% 4.05%
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Expected stock price
volatility 25.9% 29.1% 25.2% 26.9%
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Risk free interest
rate 0.86% 0.72% 1.15% 0.89%
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Average expected life
(years) 5.00 3.00 5.00 3.00
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Discount for lack of
marketability during
holding period 10.0% N/A 10.0% N/A
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
Original grant date
valuation GBP9.02 GBP10.48 GBP14.26 GBP15.47
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
31.3. Sharesave plan
The sharesave plan was established on 3 May 2017.
This plan allows all employees with more than 12 months' service
to save for three years, subject to a maximum monthly amount of
GBP500, with the option to buy shares in Secure Trust Bank PLC when
the plan matures. Participants cannot change the amount that they
have agreed to save each month but they can suspend payments for up
to six months. Participants can withdraw their savings at any time
but, if they do this before the completion date, they lose the
option to buy shares at the Option Price, and if participants cease
to hold plan-related employment before the third anniversary of the
grant date, then the options are also lost. The options ordinarily
vest approximately three years after grant date, and are
exercisable for a period of six months following vesting.
The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used were
as follows:
Awarded during 2019 Awarded during 2018
-------------------------------- ------------------- -------------------
Share price at grant date GBP13.00 GBP17.53
-------------------------------- ------------------- -------------------
Exercise price GBP10.64 GBP14.03
-------------------------------- ------------------- -------------------
Expected stock price volatility 28.34% 28.14%
-------------------------------- ------------------- -------------------
Expected dividend yield 6.77% 4.57%
-------------------------------- ------------------- -------------------
Risk free interest rate 0.46% 0.89%
-------------------------------- ------------------- -------------------
Average expected life (years) 3.00 3.36
-------------------------------- ------------------- -------------------
Original grant date valuation GBP2.10 GBP3.67
-------------------------------- ------------------- -------------------
31.4. Deferred bonus plan
The deferred bonus plan was established on 3 May 2017.
Since 2017, 50% of the bonus earned by two Executive Directors,
amounting to GBP450,000 (2018: GBP280,000), is deferred into shares
under the deferred bonus plan. The awards vest in three equal
tranches after one, two and three years following deferral. One of
the Executive Directors resigned during the year, leaving only one
Executive Director remaining in the plan. Accordingly, the
following awards remain outstanding under the plan, entitling one
Executive Director to purchase shares in the Company:
Awards granted Awards granted Awards granted
Vesting after Vesting after Vesting after
1 year 2 years 3 years Awards granted
Number Number Number Total
----------------------- -------------- -------------- -------------- --------------
At 1 January 2018 - - - -
----------------------- -------------- -------------- -------------- --------------
Granted 4,896 4,896 4,898 14,690
----------------------- -------------- -------------- -------------- --------------
At 31 December 2018 4,896 4,896 4,898 14,690
----------------------- -------------- -------------- -------------- --------------
Granted 9,591 9,591 9,593 28,775
----------------------- -------------- -------------- -------------- --------------
Exercised (1,399) - - (1,399)
----------------------- -------------- -------------- -------------- --------------
Cancelled (3,202) (4,601) (4,601) (12,404)
----------------------- -------------- -------------- -------------- --------------
At 1 December 2019 9,886 9,886 9,890 29,662
----------------------- -------------- -------------- -------------- --------------
Vested and exercisable 3,497 - - 3,497
----------------------- -------------- -------------- -------------- --------------
The original grant date valuation was determined using a
Black-Scholes model. Measurement inputs and assumptions used were
as follows:
Granted 2019 Granted 2018
Granted 2019 Granted 2019 Awards vesting Granted 2018 Granted 2018 Awards vesting
Awards vesting Awards vesting after three Awards vesting Awards vesting after three
after one year after two years years after one year after two years years
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Share price at
grant date GBP11.90 GBP11.90 GBP11.90 GBP20.85 GBP20.85 GBP20.85
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Exercise price GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40 GBP0.40
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Expected
dividend yield 7.06% 7.06% 7.06% 3.96% 3.96% 3.96%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Expected stock
price
volatility 27.34% 24.79% 28.82% 25.25% 30.90% 27.68%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Risk free
interest rate 0.74% 0.74% 0.76% 0.69% 0.77% 0.82%
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Average expected
life (years) 1.00 2.00 3.00 1.00 2.00 3.00
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
Original grant
date valuation GBP10.69 GBP9.94 GBP9.59 GBP19.64 GBP18.87 GBP18.12
---------------- --------------- --------------- --------------- --------------- --------------- ---------------
31.5. Cash settled share-based payments
On 16 March 2015, a four-year 'phantom' share option scheme was
established in order to provide effective long-term incentive to
senior management of the Group. Under the scheme, no actual shares
would be issued by the Company, but those granted awards under the
scheme would be entitled to a cash payment. The amount of the award
is calculated by reference to the increase in the value of an
ordinary share in the Company over an initial value set at GBP25
per ordinary share, being the price at which the shares resulting
from the exercise of the first tranche of share options under the
share option scheme were sold in November 2014.
As at 31 December 2019, 281,667 (2018: 312,917) share options
remained outstanding. The options vested during 2019 and are
exercisable for a period of 10 years after grant date.
As at 31 December 2019, the estimated fair value has been
prepared using the Black-Scholes model. Measurement inputs and
assumptions used were as follows:
2019 2018
-------------------------------- -------- --------
Share price at reporting date GBP16.00 GBP11.80
-------------------------------- -------- --------
Expected stock price volatility 30.34% 24.76%
-------------------------------- -------- --------
Expected dividend yield 5.5% 7.12%
-------------------------------- -------- --------
Risk free interest rate 0.60% 0.76%
-------------------------------- -------- --------
Average expected life (years) 2.60 3.71
-------------------------------- -------- --------
Fair value GBP0.53 GBP0.05
-------------------------------- -------- --------
This resulted in the following being recognised in the financial
statements:
2019 2018
GBPmillion GBPmillion
---------- ----------- -----------
Liability 0.2 0.2
---------- ----------- -----------
The fair value at December 2018 was not used to calculate the
liability, as management concluded that it was appropriate to hold
the accrual at the same level as 2017 because the options can be
exercised at any point during the seven years after vesting, and
given high levels of share price volatility at that date.
For each award granted during the year, expected volatility was
determined by calculating the historical volatility of the Group's
share price over the period equivalent to the expected term of the
options being granted. The expected life used in the model has been
adjusted, based on management's best estimate, for the effects of
non-transferability, exercise restrictions, and behavioural
considerations.
32. Cash flow statement
32.1 Cash and cash equivalents
For the purposes of the statement of cash flows, cash and cash
equivalents comprise the following balances with less than three
months' maturity from the date of acquisition.
Group Group Company Company
2019 2018 2019 2018
GBPmillion GBPmillion GBPmillion GBPmillion
-------------------------------------- ----------- ----------- ----------- -----------
Cash and balances at central banks 105.8 169.7 105.8 169.7
-------------------------------------- ----------- ----------- ----------- -----------
Loans and advances to banks (Note 11) 48.4 44.8 45.2 41.9
-------------------------------------- ----------- ----------- ----------- -----------
154.2 214.5 151.0 211.6
-------------------------------------- ----------- ----------- ----------- -----------
32.2 Changes in liabilities arising from financing
activities
All changes in liabilities arising from financing activities
arise from changes in cash flows, apart from GBP0.1 million of
lease liabilities interest expense, as shown in Note 25, and GBP0.2
million amortisation of issue costs on subordinated liabilities, as
shown in Note 28.
33. Financial risk management strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group risk appetite
statement which sets out the Board's attitude to risk and internal
controls. Key risks identified by the Directors are formally
reviewed and assessed at least once a year by the Board, in
addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
A more detailed description of the risk governance structure is
contained in the Strategic Report beginning on page 2.
The principal financial risks inherent in the Group's business
are credit risk (Note 34), market risk (Note 35), liquidity risk
(Note 36), and capital risk (Note 37).
34. Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. A formal Credit Risk Policy has been agreed by the Board
whilst credit risk is monitored on a monthly basis by the Credit
Risk Committees which review performance of key portfolios
including new business volumes, collections performance,
provisioning levels and provisioning methodology. A credit risk
department within the Group monitors adherence to the Credit Risk
Policy, implements risk tools to manage credit risk and evaluates
business opportunities and the risks and opportunities they present
to the Group whilst ensuring the performance of the Group's
existing portfolios is in line with expectations.
The Group structures the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to
individual borrowers or groups of borrowers. Such risks are
monitored on a revolving basis and subject to an annual or more
frequent review. The limits on the level of credit risk are
approved periodically by the Board of Directors and actual
exposures against limits monitored daily.
Impairment provisions are provided for expected credit losses at
the statement of financial position date. Significant changes in
the economy could result in losses that are different from those
provided for at the statement of financial position date.
Management therefore carefully manages the Group's exposures to
credit risk as it considers this to be the most significant risk to
the business.
Exposure to Consumer Finance and Consumer Mortgages credit risk
is managed through regular analysis of the ability of borrowers and
potential borrowers to meet interest and capital repayment
obligations and by changing lending limits where appropriate.
Exposure to credit risk for these portfolios is also managed in
part by obtaining collateral, principally motor vehicles on Motor
Finance loans, residential property on Consumer Mortgages and a
credit support balance provided by RentSmart. The assets undergo a
scoring process to mitigate risk and are monitored by the
Board.
For Real Estate Finance and Commercial Finance, lending
decisions are made on an individual transaction basis, using expert
judgement and assessment against criteria set out in the lending
policies. Asset Finance lending is outsourced to Haydock, who
operate in line with the Group's credit policies and risk appetite,
and is currently closed to new business. The loans are secured
against the assets lent against (real estate, trade receivables and
commercial plant and equipment, respectively). Disclosures relating
to collateral and arrears on loans and advances to customers are
disclosed in Notes 12 and 14 respectively.
The Board monitors the ratings of the counterparties in relation
to the Group's loans and advances to banks. Disclosures of these at
the year-end are contained in Note 34.1. There is no direct
exposure to the Eurozone and peripheral Eurozone countries.
Group
With the exception of loans and advances to customers, the
carrying amount of financial assets represents the Group's maximum
exposure to credit risk. The Group's maximum exposure to credit
risk for loans and advances to customers by portfolio and IFRS 9
stage without taking account of any collateral held or other credit
enhancements attached was as follows:
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- --------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit-impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
31 December
2019
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Real Estate
Finance 910.2 33.7 2.8 36.5 16.1 - 16.1 962.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Asset
Finance 23.8 3.6 0.3 3.9 1.8 - 1.8 29.5
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Commercial
Finance 245.0 7.0 - 7.0 0.6 - 0.6 252.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Retail
Finance 624.1 80.3 4.5 84.8 5.5 - 5.5 714.4
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Motor
Finance 240.5 96.9 2.7 99.6 17.2 - 17.2 357.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Debt
Management - - - - 10.3 70.0 80.3 80.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Mortgages 105.6 - 0.3 0.3 0.3 - 0.3 106.2
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Other 7.6 - - - - - - 7.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total drawn
exposure 2,156.8 221.5 10.6 232.1 51.8 70.0 121.8 2,510.7
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Loan
commitments 203.3 - - - - - - 203.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total gross
exposure 2,360.1 221.5 10.6 232.1 51.8 70.0 121.8 2,714.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Impairment
allowance (21.6) (19.8) (4.3) (24.1) (17.0) 2.1 (14.9) (60.6)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total net
exposure 2,338.1 201.7 6.3 208.0 34.8 72.1 106.9 2,653.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- --------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit-impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
31 December
2018
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Real Estate
Finance 723.3 47.1 - 47.1 - - - 770.4
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Asset
Finance 55.6 6.5 0.5 7.0 3.2 - 3.2 65.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Commercial
Finance 186.1 8.8 - 8.8 0.6 - 0.6 195.5
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Retail
Finance 537.1 74.1 3.9 78.0 4.9 - 4.9 620.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Motor
Finance 200.2 92.7 2.4 95.1 20.5 - 20.5 315.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Debt
Management - - - - 9.3 23.0 32.3 32.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Mortgages 84.9 - - - - - - 84.9
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Other 11.3 - - - - - - 11.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total drawn
exposure 1,798.5 229.2 6.8 236.0 38.5 23.0 61.5 2,096.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Loan
commitments 263.1 - - - - - - 263.1
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total gross
exposure 2,061.6 229.2 6.8 236.0 38.5 23.0 61.5 2,359.1
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Impairment
allowance (20.3) (19.9) (4.0) (23.9) (22.9) - (22.9) (67.1)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total net
exposure 2,040.9 209.3 2.8 212.1 15.6 23.0 38.6 2,291.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
A reconciliation of opening to closing impairment allowance for
losses on loans and advances to customers is presented in Note
14.
Company
The Group's maximum exposure to credit risk for loans and
advances to customers by portfolio and IFRS 9 stage without taking
account of any collateral held or other credit enhancements
attached was as follows:
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- --------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit-impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
31 December
2019
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Real Estate
Finance 910.2 33.7 2.8 36.5 16.1 - 16.1 962.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Asset
Finance 23.8 3.6 0.3 3.9 1.8 - 1.8 29.5
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Commercial
Finance 244.0 7.0 - 7.0 0.6 - 0.6 251.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Retail
Finance 624.1 80.3 4.5 84.8 5.5 - 5.5 714.4
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Motor
Finance 240.5 96.9 2.7 99.6 17.2 - 17.2 357.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Mortgages 105.6 - 0.3 0.3 0.3 - 0.3 106.2
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Other 0.5 - - - - - 0.5
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total drawn
exposure 2,148.7 221.5 10.6 232.1 41.5 - 41.5 2,422.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Loan
commitments 203.3 - - - - - - 203.3
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total gross
exposure 2,352.0 221.5 10.6 232.1 41.5 - 41.5 2,625.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Impairment
allowance (22.8) (22.1) (4.8) (26.9) (19.0) - (19.0) (68.7)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total net
exposure 2,328.8 199.4 5.8 205.2 22.5 - 22.5 2,556.5
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Stage 1 Stage 2 Stage 3 Total
------------ ---------- ---------------------------------- --------------------------------------------- ----------
<= 30 days > 30 days Excl. purchased Purchased
past due past due Total credit-impaired credit-impaired Total
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
31 December
2018
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Business
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Real Estate
Finance 723.3 47.1 - 47.1 - - - 770.4
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Asset
Finance 55.6 6.5 0.5 7.0 3.2 - 3.2 65.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Commercial
Finance 182.0 8.8 - 8.8 0.6 - 0.6 191.4
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Finance
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Retail
Finance 537.1 74.1 3.9 78.0 4.9 - 4.9 620.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Motor
Finance 200.2 92.7 2.4 95.1 20.5 - 20.5 315.8
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Consumer
Mortgages 84.9 - - - - - - 84.9
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Other 0.6 - - - - - - 0.6
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total drawn
exposure 1,783.7 229.2 6.8 236.0 29.2 - 29.2 2,048.9
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Off balance
sheet
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Loan
commitments 263.1 - - - - - - 263.1
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total gross
exposure 2,046.8 229.2 6.8 236.0 29.2 - 29.2 2,312.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Less:
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Impairment
allowance (20.7) (20.2) (4.1) (24.3) (23.6) - (23.6) (68.6)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Provision
for loan
commitments (0.4) - - - - - - (0.4)
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
Total net
exposure 2,025.7 209.0 2.7 211.7 5.6 - 5.6 2,243.0
------------ ---------- ---------- ---------- ---------- --------------- --------------- ----------- ----------
34.1. Concentration risk
Management assesses the potential concentration risk from
geographic, product and individual loan concentration. Due to the
nature of the Group's lending operations the Directors consider the
lending operations of the Group as a whole to be well diversified.
Details of the Group's loans and advances to customers and loan
commitments by product is provided in Note 3.
Geographical concentration
The Group's Real Estate Finance and Consumer Mortgages are
secured against UK property only. The geographical concentration of
these business loans and advances to customers, by location of the
security is as follows:
Group and Company
Real Estate Finance Consumer Mortgages
GBPmillion GBPmillion
------------------------------------------ ------------------- ------------------
31 December 2019
------------------------------------------ ------------------- ------------------
Central England 127.1 19.9
------------------------------------------ ------------------- ------------------
Greater London 601.8 13.5
------------------------------------------ ------------------- ------------------
Northern England 48.5 21.2
------------------------------------------ ------------------- ------------------
South East England (excl. Greater London) 160.8 35.3
------------------------------------------ ------------------- ------------------
South West England 12.8 11.0
------------------------------------------ ------------------- ------------------
Scotland, Wales and Northern Ireland 11.8 5.3
------------------------------------------ ------------------- ------------------
Gross loans and receivables 962.8 106.2
------------------------------------------ ------------------- ------------------
Allowance for impairment (0.6) (0.3)
------------------------------------------ ------------------- ------------------
Total 962.2 105.9
------------------------------------------ ------------------- ------------------
Real Estate Finance Consumer Mortgages
GBPmillion GBPmillion
------------------------------------------ ------------------- ------------------
31 December 2018
------------------------------------------ ------------------- ------------------
Central England 35.1 16.2
------------------------------------------ ------------------- ------------------
Greater London 451.5 12.2
------------------------------------------ ------------------- ------------------
Northern England 37.6 16.6
------------------------------------------ ------------------- ------------------
South East England (excl. Greater London) 209.0 26.3
------------------------------------------ ------------------- ------------------
South West England 9.6 9.3
------------------------------------------ ------------------- ------------------
Scotland, Wales and Northern Ireland 27.6 4.3
------------------------------------------ ------------------- ------------------
Gross loans and receivables 770.4 84.9
------------------------------------------ ------------------- ------------------
Allowance for impairment (0.1) (0.2)
------------------------------------------ ------------------- ------------------
Total 770.3 84.7
------------------------------------------ ------------------- ------------------
34.2. Forbearance
At year-end, all bar an insignificant number of customers within
the Group's Consumer Mortgage business were up to date with their
monthly payments. Should customers face financial difficulties, the
Group may, depending on individual circumstances, offer customers
one of a number of forbearance options. The types of forbearance
the Group was prepared to offer in 2019 included the following:
-- Temporary interest only concessions are offered to customers
in financial difficulty on a temporary basis with formal periodic
review. The concession allows the customer to reduce monthly
payments to cover interest only, and if made, the arrears status
will not increase
-- Arrangement payment plans are agreed to enable customers to
reduce their arrears balances by an agreed amount per month which
is paid in addition to their standard monthly repayment
-- Payment concessions can be agreed on a temporary basis
whereby the customer may pay less than the contractual monthly
payment, in line with their individual affordability. If a customer
is within this type of concession, their arrears position will
increase
-- In exceptional circumstances, capitalisations of arrears may
occur or an interest rate adjustment may be applied. These are used
under strict controls, explicitly where the customer circumstances
offer no other option
All forbearance arrangements are formally discussed and agreed
with the customer. By offering customers in financial difficulty
the option of forbearance the Group potentially exposes itself to
an increased level of risk through prolonging the period of
non-contractual payment and/or potentially placing the customer
into a detrimental position at the end of the forbearance
period.
All forbearance arrangements are reviewed and monitored
regularly to assess the ongoing potential risk, suitability and
sustainability to the Group.
Where forbearance measures are not possible or are considered
not to be in the customer's best interests, or where such measures
have been tried and the customer has not adhered to the forbearance
terms that have been agreed, the Group will consider realising its
security and taking possession of the property in order to sell it
and clear the outstanding debt.
No forbearance arrangements are currently in place in respect of
Consumer Mortgages.
Other than Consumer Mortgages, throughout 2019 the Group did not
routinely reschedule contractual arrangements where customers
default on their repayments. In cases where it offered the customer
the option to reduce or defer payments for a short period, the
loans retained the normal contractual payment due dates and were
treated the same as any other defaulting cases for impairment
purposes. Arrears tracking would continue on the account with any
impairment charge being based on the original contractual due dates
for all products.
35. Market risk
Market risks arise from open positions in interest rate and
currency products, all of which are exposed to general and specific
market movements. There are no significant exposures to foreign
currencies and therefore there is no significant currency risk. The
Group does not operate a trading book.
Interest rate risk
Group and Company
Interest rate risk is the risk of potential loss through
unhedged or mismatched asset and liability positions, which are
sensitive to changes in interest rates. When interest rates change,
the present value and timing of future cash flows change. This in
turn changes the underlying value of the Group's assets,
liabilities and off-balance sheet instruments and hence its
economic value. Changes in interest rates also affect the Group's
earnings by altering interest sensitive income and expenses,
affecting its net interest income.
The Group seeks to 'match' interest rate risk on either side of
the statement of financial position. However, this is not a perfect
match and interest rate risk is present on the mismatch between
fixed rate loans and savings products and variable rate assets and
liabilities.
The Group monitors the interest rate mismatch on at least a
monthly basis using market value sensitivity and earnings at risk.
At 31 December 2019 these were as follows:
2019 2018
GBPmillion GBPmillion
-------------------------------------- ----------- -----------
Market value sensitivity
-------------------------------------- ----------- -----------
+200bps parallel shift in yield curve 2.6 0.2
-------------------------------------- ----------- -----------
-200bps parallel shift in yield curve (1.0) -
-------------------------------------- ----------- -----------
Earnings at risk sensitivity
-------------------------------------- ----------- -----------
+100bps parallel shift in yield curve 0.6 1.0
-------------------------------------- ----------- -----------
The Directors consider that 200bps in the case of Market value
sensitivity and 100bps in the case of Earnings at risk are a
reasonable approximation of possible changes.
The Group maintained such exposures within the risk appetite set
by the Board throughout the year.
Interest rate risks inherent in new products or through changes
to the terms and conditions of existing products were assessed over
the course of the year.
This potential exposure is managed by the Group Treasury
function and overseen by ALCO. The policy is not to take
significant unmatched positions.
36. Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in meeting obligations associated with its financial
liabilities that are settled by delivering cash or another
financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and longer-term
funding to address any structural liquidity requirements.
The Group has a formal governance structure in place to manage
and mitigate liquidity risk on a day-to-day basis. The Board sets
and approves the Group's liquidity risk management strategy. The
ALCO, comprising senior executives of the Company, monitors
liquidity risk. Key liquidity risk management information is
reported by the Treasury function and monitored by the Chief
Executive Officer and Chief Financial Officer on a daily basis. The
ALCO meets monthly to review liquidity risk against set thresholds
and risk indicators including early warning indicators, liquidity
risk tolerance levels and ILAAP metrics.
The Group raised new fixed rate deposits during the year as set
out below:
2019 2018
GBPmillion GBPmillion
---------------------------- ----------- -----------
Fixed rate bonds 192.4 448.4
---------------------------- ----------- -----------
Notice accounts 329.0 247.6
---------------------------- ----------- -----------
Individual Savings Accounts 38.2 -
---------------------------- ----------- -----------
Total 559.6 696.0
---------------------------- ----------- -----------
The terms of the deposits ranged from 1 to 7 years, and were
issued to broadly match the term lending by the Group.
The PRA requires a firm to maintain at all times liquidity
resources which are adequate, both as to amount and quality, to
ensure that there is no significant risk that its liabilities
cannot be met as they fall due. There is also a requirement that a
firm ensures its liquidity resources contain an adequate buffer of
high quality, unencumbered assets (i.e. Government Securities in
the liquidity asset buffer), and it maintains a conservative
funding profile. The liquidity assets buffer is a pool of highly
liquid assets that can be called upon to create sufficient
liquidity to meet liabilities on demand, particularly in a period
of liquidity stress. The liquidity resources outside the buffer
must either be marketable assets with a demonstrable secondary
market that the firm can access, or a credit facility that can be
activated in times of stress.
The Group has a Board approved ILAAP. The ILAAP rules require
the Group to identify, measure, manage and monitor liquidity and
funding risks across different time horizons and stress scenarios,
consistent with the Group's risk appetite as established by the
Board. The ILAAP seeks to document the Group's approach to
liquidity and funding, and demonstrate that it complies with the
Overall Liquidity Adequacy Rule. The PRA's approach to liquidity
supervision is based on the principle that a firm must have
adequate levels of liquidity resources and a conservative funding
profile, and that it comprehensively manages and controls liquidity
and funding risks. The liquidity buffer required by the ILAAP has
been put in place and maintained since that time. Liquidity
resources outside of the buffer are made up of deposits placed at
the Bank of England. The ILAAP is updated annually.
The primary measure used by management to assess the adequacy of
liquidity is the Overall Liquidity Adequacy Rule, which is the
Board's own view of the Group's liquidity needs as set out in the
Board approved ILAAP. The Group maintained liquidity in excess of
the Overall Liquidity Adequacy Rule throughout the year ended 31
December 2019.
The LCR regime has applied to the Group from 1 October 2016,
requiring management of net 30-day cash outflows as a proportion of
High Quality Liquid Assets. The Group has set a more conservative
internal limit. The actual LCR has significantly exceeded both
limits throughout the year.
The Group is exposed to daily calls on its available cash
resources from maturing deposits and loan draw-downs. The Group
maintains significant cash resources to meet all of these needs as
they fall due.
The matching and controlled mismatching of the maturities and
interest rates of assets and liabilities is fundamental to the
management of the Group. It is unusual for banks to be completely
matched, as transacted business is often of uncertain term and of
different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below analyse the contractual undiscounted cash flows
for the financial liabilities into relevant maturity groupings:
More than More than
Gross nominal Not more 3 months but 1 year but less More than
Carrying amount outflow than 3 months less than 1 year than 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
At 31 December
2019
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Due to banks 308.5 312.1 0.5 46.7 264.9 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Deposits from
customers 2,020.3 2,086.4 292.3 1,055.0 706.8 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Subordinated
liabilities 50.6 61.8 0.9 2.5 58.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Other financial
liabilities 27.2 27.2 27.2 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,406.6 2,487.5 320.9 1,104.2 1,030.1 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Derivative
financial
instruments 0.6 0.7 0.1 0.2 0.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
0.6 0.7 0.1 0.2 0.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,407.2 2,488.2 321.0 1,104.4 1,030.5 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
More than More than
Gross nominal Not more 3 months but 1 year but less More than
Carrying amount outflow than 3 months less than 1 year than 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
At 31 December
2018
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Due to banks 263.5 263.5 263.5 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Deposits from
customers 1,847.7 1,916.3 644.3 404.7 855.8 11.5
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Subordinated
liabilities 50.4 66.9 0.8 2.5 63.6 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Other financial
liabilities 26.3 26.3 26.3 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,187.9 2,273.0 934.9 407.2 919.4 11.5
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Company
More than More than
Gross nominal Not more 3 months but 1 year but less More than
Carrying amount outflow than 3 months less than 1 year than 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
At 31 December
2019
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Due to banks 308.5 312.1 0.5 46.7 264.9 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Deposits from
customers 2,020.3 2,086.4 292.3 1,055.0 706.8 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Subordinated
liabilities 50.6 61.8 0.9 2.5 58.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Other financial
liabilities 31.0 31.0 31.0 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,410.4 2,491.3 324.7 1,104.2 1,030.1 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Derivative
financial
instruments 0.6 0.7 0.1 0.2 0.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
0.6 0.7 0.1 0.2 0.4 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,411.0 2,492.0 324.8 1,104.4 1,030.5 32.3
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
More than More than
Gross nominal Not more 3 months but 1 year but less More than
Carrying amount outflow than 3 months less than 1 year than 5 years 5 years
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
At 31 December
2018
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Non-derivative
financial
liabilities
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Due to banks 263.5 263.5 263.5 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Deposits from
customers 1,847.7 1,916.3 644.3 404.7 855.8 11.5
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Subordinated
liabilities 50.4 66.9 0.8 2.5 63.6 -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
Other financial
liabilities 37.4 37.4 37.4 - - -
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
2,199.0 2,284.1 946.0 407.2 919.4 11.5
----------------- --------------- ----------------- -------------- ---------------- ---------------- -----------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing financial
liabilities as they mature are important factors in assessing the
liquidity of the Company and Group and its exposure to changes in
interest rates and exchange rates.
Other financial liabilities, as shown above, do not include
non-interest accruals as these are not classed as financial
liabilities.
37. Capital risk
The Group's capital management policy is focused on optimising
shareholder value, in a safe and sustainable manner. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
In accordance with CRD IV and the required parameters set out in
the Capital Requirements Regulation, the Group's ICAAP is embedded
in the risk management framework of the Group and is subject to
ongoing updates and revisions when necessary. However, as a
minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies,
and systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business
planning and capital management.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a 'Pillar 1 plus'
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequate to cover
management's view of anticipated risks. Where it is considered that
the Pillar 1 calculations do not reflect the risk, an additional
capital add-on in Pillar 2 should be applied, in line with the
Total Capital Requirement issued by the PRA.
Pillar 3 complements the minimum capital requirements (Pillar 1)
and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which would allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Pillar 3 disclosures for the Group for the
year ended 31 December 2019 are published as a separate document on
the Group's website.
The following table, which is unaudited and therefore not in
scope of the independent auditor's report, shows the regulatory
capital resources for the Group. The Group has adopted the IFRS 9
transitional rules. For 2019 this allowed 85% (2018: 95%) of the
initial IFRS 9 transition adjustment, net of attributable deferred
tax, to be added back to eligible Tier 1 capital. Tier 2 capital
comprises solely subordinated debt issued during the year net of
unamortised issue costs and excluding accrued interest, capped at
25% of the capital requirement.
2019 2018
GBPmillion GBPmillion
(unaudited) (unaudited)
---------------------------------------------------------------------- ------------ ------------
Tier 1
---------------------------------------------------------------------- ------------ ------------
Share capital 7.4 7.4
---------------------------------------------------------------------- ------------ ------------
Share premium 81.2 81.2
---------------------------------------------------------------------- ------------ ------------
Retained earnings 164.4 147.4
---------------------------------------------------------------------- ------------ ------------
Revaluation reserve 1.1 1.1
---------------------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustment 22.8 24.5
---------------------------------------------------------------------- ------------ ------------
Goodwill (1.0) (1.0)
---------------------------------------------------------------------- ------------ ------------
Intangible assets net of attributable deferred tax (7.9) (8.8)
---------------------------------------------------------------------- ------------ ------------
CET1 capital before foreseen dividend 268.0 251.8
---------------------------------------------------------------------- ------------ ------------
Proposed dividend - (11.8)
---------------------------------------------------------------------- ------------ ------------
CET1 capital 268.0 240.0
---------------------------------------------------------------------- ------------ ------------
Tier 2
---------------------------------------------------------------------- ------------ ------------
Subordinated liabilities 50.6 50.4
---------------------------------------------------------------------- ------------ ------------
Less ineligible portion (0.6) (4.7)
---------------------------------------------------------------------- ------------ ------------
Total Tier 2 capital 50.0 45.7
---------------------------------------------------------------------- ------------ ------------
Own Funds 318.0 285.7
---------------------------------------------------------------------- ------------ ------------
Reconciliation to total equity:
---------------------------------------------------------------------- ------------ ------------
IFRS 9 transition adjustment (22.8) (24.5)
---------------------------------------------------------------------- ------------ ------------
Eligible subordinated liabilities (50.0) (45.7)
---------------------------------------------------------------------- ------------ ------------
Goodwill and other intangible assets net of attributable deferred tax 8.9 9.8
---------------------------------------------------------------------- ------------ ------------
Proposed dividend - 11.8
---------------------------------------------------------------------- ------------ ------------
Total equity 254.1 237.1
---------------------------------------------------------------------- ------------ ------------
The Group ICAAP includes a summary of the capital required to
mitigate the identified risks in its regulated entities and the
amount of capital that the Group has available. The PRA sets a
Total Capital Requirement ('TCR') for each UK bank calibrated by
reference to its Capital Resources Requirement, which is broadly
equivalent to 8% of risk weighted assets and thus representing the
capital required under Pillar 1 of the Basel III framework. The
ICAAP is a key input into the PRA's TCR setting process, which
addresses the requirements of Pillar 2 of the Basel II framework.
The PRA's approach is to monitor the available capital resources in
relation to the TCR. The Group maintains an extra internal buffer
and capital ratios are reviewed on a monthly basis to ensure that
external and internal requirements are adhered to. The PRA reviewed
the Group's ICAAP in 2018 and issued its updated TCR in March
2019.
The Group is also subject to further capital requirements
imposed by the PRA on all financial services firms. During the
periods, the Group complied with these requirements.
The Group raised Tier 2 capital in 2018. Further details of the
capital issuance are given in Note 28.
38. Maturity analysis of consolidated assets and liabilities
Group
Due within
one year Due after more than one year No contractual maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Contractual maturity analysis at 31
December 2019
------------------------------------- ----------- ---------------------------- ----------------------- -----------
ASSETS
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Cash and balances at central banks 105.8 - - 105.8
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to banks 48.4 - - 48.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to customers 1,080.6 1,341.3 28.2 2,450.1
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Debt securities 25.0 - - 25.0
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Fair value adjustment for portfolio
hedged risk - - (0.9) (0.9)
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Derivative financial instruments - 0.8 0.1 0.9
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other assets - - 53.5 53.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total assets 1,259.8 1,342.1 80.9 2,682.8
------------------------------------- ----------- ---------------------------- ----------------------- -----------
LIABILITIES
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due to banks 45.5 263.0 - 308.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Deposits from customers 1,355.6 664.7 - 2,020.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Fair value adjustment for portfolio
hedged risk - - (0.7) (0.7)
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Derivative financial instruments 0.1 0.5 - 0.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Current tax liabilities 3.3 - - 3.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Lease liabilities 0.8 3.7 - 4.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other liabilities - - 41.6 41.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Subordinated liabilities 1.2 50.0 (0.6) 50.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total liabilities 1,406.5 981.9 40.3 2,428.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due within
one year Due after more than one year No contractual maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Contractual maturity analysis at 31
December 2018
------------------------------------- ----------- ---------------------------- ----------------------- -----------
ASSETS
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Cash and balances at central banks 169.7 - - 169.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to banks 44.8 - - 44.8
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to customers 1,035.1 960.2 33.6 2,028.9
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Debt securities 149.7 - - 149.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other assets - - 51.2 51.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total assets 1,399.3 960.2 84.8 2,444.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
LIABILITIES
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due to banks 263.5 - - 263.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Deposits from customers 1,016.6 831.1 - 1,847.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Current tax liabilities 4.2 - - 4.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other liabilities - - 41.4 41.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Subordinated liabilities 1.2 50.0 (0.8) 50.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total liabilities 1,285.5 881.1 40.6 2,207.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
The Directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above.
Company
Due within
one year Due after more than one year No contractual maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Contractual maturity analysis at 31
December 2019
------------------------------------- ----------- ---------------------------- ----------------------- -----------
ASSETS
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Cash and balances at central banks 105.8 - - 105.8
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to banks 45.2 - - 45.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to customers 994.5 1,338.7 20.4 2,353.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Debt securities 25.0 - - 25.0
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Fair value adjustment for portfolio
hedged risk - - (0.9) (0.9)
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Derivative financial instruments 0.1 0.8 - 0.9
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other assets - - 137.2 137.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total assets 1,170.6 1,339.5 156.7 2,666.8
------------------------------------- ----------- ---------------------------- ----------------------- -----------
LIABILITIES
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due to banks 45.5 263.0 - 308.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Deposits from customers 1,355.6 664.7 - 2,020.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Fair value adjustment for portfolio
hedged risk - - (0.7) (0.7)
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Derivative financial instruments 0.1 0.5 - 0.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Current tax liabilities 2.2 - - 2.2
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Lease liabilities 0.7 2.6 - 3.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other liabilities - - 42.7 42.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Subordinated liabilities 1.2 50.0 (0.6) 50.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total liabilities 1,405.3 980.8 41.4 2,427.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due within
one year Due after more than one year No contractual maturity Total
GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Contractual maturity analysis at 31
December 2018
------------------------------------- ----------- ---------------------------- ----------------------- -----------
ASSETS
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Cash and balances at central banks 169.7 - - 169.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to banks 41.9 - - 41.9
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Loans and advances to customers 1,026.5 953.8 - 1,980.3
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Debt securities 149.7 - - 149.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other assets - - 91.4 91.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total assets 1,387.8 953.8 91.4 2,433.0
------------------------------------- ----------- ---------------------------- ----------------------- -----------
LIABILITIES
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Due to banks 263.5 - - 263.5
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Deposits from customers 1,016.6 831.1 - 1,847.7
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Current tax liabilities 3.6 - - 3.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Other liabilities - - 50.4 50.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Subordinated liabilities 1.2 50.0 (0.8) 50.4
------------------------------------- ----------- ---------------------------- ----------------------- -----------
Total liabilities 1,284.9 881.1 49.6 2,215.6
------------------------------------- ----------- ---------------------------- ----------------------- -----------
The Directors have reviewed behavioural maturity of the loan
book and have concluded that it would not significantly affect the
analysis above
39. Classification of financial assets and liabilities
Group
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2019
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 105.8 105.8 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 48.4 48.4 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 2,450.1 2,416.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities 25.0 25.0 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.9) (0.9) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.9 0.9 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 5.2 5.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,634.5 2,600.6
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 308.5 308.5 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 2,020.3 2,016.9 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.7) (0.7) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.6 0.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 27.2 27.2 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.6 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,406.5 2,403.1
------------------------------------------------ --------------------- ----------- --------------------------
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
----------------------------------- --------------------- ----------- --------------------------
At 31 December 2018
----------------------------------- --------------------- ----------- --------------------------
Cash and balances at central banks 169.7 169.7 Level 1
----------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 44.8 44.8 Level 2
----------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 2,028.9 2,032.5 Level 3
----------------------------------- --------------------- ----------- --------------------------
Debt securities 149.7 149.7 Level 1
----------------------------------- --------------------- ----------- --------------------------
Other financial assets 16.2 16.2 Level 3
----------------------------------- --------------------- ----------- --------------------------
2,409.3 2,412.9
----------------------------------- --------------------- ----------- --------------------------
Due to banks 263.5 263.5 Level 2
----------------------------------- --------------------- ----------- --------------------------
Deposits from customers 1,847.7 1,859.7 Level 3
----------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 26.3 26.3 Level 3
----------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.4 50.4 Level 2
----------------------------------- --------------------- ----------- --------------------------
2,187.9 2,199.9
----------------------------------- --------------------- ----------- --------------------------
All financial assets and liabilities at 31 December 2019 and 31
December 2018 were carried at amortised cost, except for derivative
financial instruments which are value at fair value through profit
and loss. Therefore for these assets and liabilities, the fair
value hierarchy noted above relates to the disclosure in this note
only.
Company
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
------------------------------------------------ --------------------- ----------- --------------------------
At 31 December 2019
------------------------------------------------ --------------------- ----------- --------------------------
Cash and balances at central banks 105.8 105.8 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 45.2 45.2 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 2,353.6 2,319.7 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Debt securities 25.0 25.0 Level 1
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.9) (0.9) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.9 0.9 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial assets 93.0 93.0 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
2,622.6 2,588.7
------------------------------------------------ --------------------- ----------- --------------------------
Due to banks 308.5 308.5 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Deposits from customers 2,020.3 2,016.9 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Fair value adjustment for portfolio hedged risk (0.7) (0.7) Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Derivative financial instruments 0.6 0.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 31.0 31.0 Level 3
-------------------------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.6 50.6 Level 2
-------------------------------------------------- --------------------- ----------- --------------------------
2,410.3 2,406.9
------------------------------------------------ --------------------- ----------- --------------------------
Total carrying amount Fair value
GBPmillion GBPmillion Fair value hierarchy level
----------------------------------- --------------------- ----------- --------------------------
At 31 December 2018
----------------------------------- --------------------- ----------- --------------------------
Cash and balances at central banks 169.7 169.7 Level 1
----------------------------------- --------------------- ----------- --------------------------
Loans and advances to banks 41.9 41.9 Level 2
----------------------------------- --------------------- ----------- --------------------------
Loans and advances to customers 1,980.3 1,983.9 Level 3
----------------------------------- --------------------- ----------- --------------------------
Debt securities 149.7 149.7 Level 1
----------------------------------- --------------------- ----------- --------------------------
Other financial assets 60.6 60.6 Level 3
----------------------------------- --------------------- ----------- --------------------------
2,402.2 2,405.8
----------------------------------- --------------------- ----------- --------------------------
Due to banks 263.5 263.5 Level 2
----------------------------------- --------------------- ----------- --------------------------
Deposits from customers 1,847.7 1,859.7 Level 3
----------------------------------- --------------------- ----------- --------------------------
Other financial liabilities 37.4 37.4 Level 3
----------------------------------- --------------------- ----------- --------------------------
Subordinated liabilities 50.4 50.4 Level 2
----------------------------------- --------------------- ----------- --------------------------
2,199.0 2,211.0
----------------------------------- --------------------- ----------- --------------------------
All financial assets and liabilities at 31 December 2019 and 31
December 2018 were carried at amortised cost except for derivative
financial instrument which are value at fair value through profit
and loss. Therefore for these assets, the fair value hierarchy
noted above relates to the disclosure in this note only.
Fair value classification
The tables above include the fair values and fair value
hierarchies of the Group and Company's financial assets and
liabilities. The Group measures fair value using the following fair
value hierarchy that reflects the significance of the inputs used
in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly
(i.e. as prices) or indirectly (i.e. derived from prices)
-- Level 3: Inputs for the asset or liability that are not based
on observable market data (unobservable inputs)
Cash and balances at central banks
The fair value of cash and balances at central banks was
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date.
At the end of each year, the fair value of cash and balances at
central banks was calculated to be equivalent to their carrying
value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date, and the same
assumptions regarding the risk of default were applied as those
used to derive the carrying value.
Debt securities
The fair value of debt securities is based on the quoted
mid-market share price.
At the end of December 2019 the fair value of debt securities
was calculated to be equivalent to their carrying value.
Derivative financial instruments
The fair value of derivative financial instruments was
calculated based on the present value of the expected future cash
flows of the instruments. The rate used to discount the cash flows
was the market rate of interest at the balance sheet date.
Due to banks
The fair value of amounts due to banks was calculated based upon
the present value of the expected future principal and interest
cash flows. The rate used to discount the cash flows was the market
rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks
was calculated to be equivalent to their carrying value due to the
short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based
upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access
deposits is equal to book value as they are repayable on
demand.
Dividends and other financial liabilities
The fair value of dividends and other financial liabilities was
calculated based upon the present value of the expected future
principal cash flows.
At the end of each year, the fair value of dividends and other
financial liabilities was calculated to be equivalent to their
carrying value due to their short maturity. The other financial
liabilities include all other liabilities other than non-interest
accruals.
Subordinated liabilities
The fair value of subordinated liabilities was calculated based
upon the present value of the expected future principal cash
flows.
40. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits as set out below. The
tables on the following page relate to Key Management Personnel,
members of their close family and related entities as described
above.
2019 2018
GBPmillion GBPmillion
------------------------------------------ ----------- -----------
Loans
------------------------------------------ ----------- -----------
Loans outstanding at 1 January 4.2 3.7
------------------------------------------ ----------- -----------
Loans advanced 1.3 0.4
------------------------------------------ ----------- -----------
Loan repayments (1.3) -
------------------------------------------ ----------- -----------
Interest applied 0.2 0.1
------------------------------------------ ----------- -----------
Loans outstanding at 31 December 4.4 4.2
------------------------------------------ ----------- -----------
Deposits
------------------------------------------ ----------- -----------
Deposits outstanding at 1 January 0.4 0.4
------------------------------------------ ----------- -----------
Change in related parties during the year (0.2) -
------------------------------------------ ----------- -----------
Deposits outstanding at 31 December 0.2 0.4
------------------------------------------ ----------- -----------
The loans outstanding above comprise the following:
-- A GBP0.4million advance (2018: GBP0.4 million) as part of a
GBP2.5 million facility agreed with a company in which a member of
the Key Management Personnel of the Company holds 50% of the voting
shares, which is secured by property and personal guarantees
-- A GBP4.0 million advance (2018: GBP3.8 million) as part of a
revised GBP4.4 million facility agreed with a member of the Key
Management Personnel of the Company, which is secured by property
and certain other undertakings
Both of these transactions were agreed by the Group's Real
Estate Finance business and arose during the normal course of
business. Both loans were subject to the usual Board governance and
Credit Committee approval procedures and are on substantially the
same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other
companies in the Secure Trust Bank Group:
2019 2018
GBPmillion GBPmillion
---------------------------------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - income from sale of debt portfolio (0.2) (0.2)
---------------------------------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - interest charged (1.1) -
---------------------------------------------------------------------- ----------- -----------
Debt Managers (Services) Limited - debt collection services 0.6 1.0
---------------------------------------------------------------------- ----------- -----------
Secure Homes Services Limited - building rental paid 0.4 0.4
---------------------------------------------------------------------- ----------- -----------
STB Leasing Limited - interest charged (0.2) -
---------------------------------------------------------------------- ----------- -----------
V12 Finance Group Limited - dividend received (15.1) -
---------------------------------------------------------------------- ----------- -----------
V12 Retail Finance Limited - fees and commission
---------------------------------------------------------------------- ----------- -----------
Loan management services 16.2 14.9
---------------------------------------------------------------------- ----------- -----------
Sales commission 7.3 6.5
---------------------------------------------------------------------- ----------- -----------
7.9 22.6
---------------------------------------------------------------------- ----------- -----------
The loans and advances with, and amounts receivable and payable
to, related companies are noted below:
Company Company
2019 2018
GBPmillion GBPmillion
------------------------------------------------ ----------- -----------
Amounts receivable from subsidiary undertakings 88.5 44.5
------------------------------------------------ ----------- -----------
Amounts due to subsidiary undertakings (5.5) (14.1)
------------------------------------------------ ----------- -----------
83.0 30.4
------------------------------------------------ ----------- -----------
All amounts above are repayable on demand and interest is
charged at a variable rate.
Directors' remuneration
The Directors' emoluments (including pension contributions and
benefits in kind) for the year are disclosed in the Directors'
Remuneration Report beginning on page 82.
At the year-end the ordinary shares held by the Directors are
disclosed in the Directors' report beginning on page 106. Details
of the Directors' holdings of share options, as well as details of
those share options exercised during the year, are also disclosed
in the Directors' report.
41. Immediate parent company and ultimate controlling party
The Company has had no immediate parent company or ultimate
controlling party.
42. Post balance sheet event - COVID-19
The outbreak of COVID-19 and its impact on the global and UK
economies is considered to be a non-adjusting event as, at the
balance sheet date, the scale of the outbreak remained limited and
therefore there was not sufficient information available to have
caused changes to the assumptions applied to the financial position
as at 31 December 2019. The full impact of the outbreak is
currently uncertain and therefore the financial impact on the
Group, which will depend upon the extent of the economic downturn
and duration of the current lockdown, cannot be reliably
estimated.
The most significant financial impacts of the COVID-19 crisis on
the Group are expected to be in respect of significantly reduced
demand for the Group's Consumer Finance products while the UK
Government restricts movements, particularly for Motor Finance
while the UK used car market remains effectively closed, and on the
level of impairment provisioning required. Contraction of the
lending portfolio started to become evident after 31 March 2020,
with demand for Motor Finance lending dropping to almost zero,
Retail Finance volumes falling to approximately 50% of expectations
and Business Finance new business falling significantly from this
point. The impact on impairments is not yet clear though charges
are expected to increase, and the sensitivity analysis in Note 2.2
indicates the potential magnitude of this increase in the event of
material changes to loan book performance or economic factors. As
at 31 March 2020, 0.5% of Retail Finance customers and 2.1% of
Motor Finance customers had been granted payment holidays, these
being the portfolios where the most material impacts on impairment
are expected.
In assessing its viability, the Group has undertaken specific
stress testing which considers the potential impact of the outbreak
on profitability, capital and liquidity levels. These tests
considered two core scenarios, whereby the economy shows a
significant fall in GDP and increase in unemployment prior to
recovery. The more severe scenario assumed unemployment to peak at
over 10%. The scenarios were subject to a range of sensitivities,
including even higher unemployment rates and a more prolonged
period of poor economic conditions prior to recovery. The Group
considers that the results of the stress tests demonstrate that the
Group continues to be viable and a going concern in both
scenarios.
The ability to operate effectively is also impacted and steps
have been taken in order to mitigate the operational impact on the
business. The senior leadership team is closely monitoring the
guidance provided by the UK Government and making changes to
operational practices in order to continue to provide services and
support for customers, whilst also maintaining the health and
safety of employees.
Five year summary (unaudited)
2019 2018 2017 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit for the year
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Interest and similar income 191.4 169.2 149.3 141.1 139.7
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Interest expense and similar charges (46.0) (35.5) (26.7) (26.3) (21.6)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net interest income 145.4 133.7 122.6 114.8 118.1
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Net fee and commission income 20.1 17.9 14.9 14.5 14.4
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Operating income 165.5 151.6 137.5 129.3 132.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Impairment losses on loans and advances (32.6) (32.4) (36.9) (30.3) (24.3)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Arbuthnot Banking Group recharges - - - - (0.8)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Operating expenses (94.2) (84.5) (71.6) (71.5) (70.9)
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit on sale of equity instruments
available-for-sale - - 0.3 - -
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Profit before income tax 38.7 34.7 29.3 27.5 36.5
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
2019 2018 2017 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Earnings per share for profit attributable to the
equity holders of the Group during the year
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
(expressed in pence per share) - basic 168.3 153.2 128.8 754.1 157.8
----------------------------------------------------- ----------- ----------- ----------- ----------- -----------
2019 2018 2017 2016 2015
GBPmillion GBPmillion GBPmillion GBPmillion GBPmillion
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Financial position
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Cash and balances at central banks 105.8 169.7 226.1 112.0 131.8
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Loans and advances to banks 48.4 44.8 34.3 18.2 11.5
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Loans and advances to customers 2,450.1 2,028.9 1,598.3 1,321.0 1,074.9
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Debt securities 25.0 149.7 5.0 20.0 3.8
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.9) - - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 0.9 - - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Other assets 53.5 51.2 27.9 38.8 25.4
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total assets 2,682.8 2,444.3 1,891.6 1,510.0 1,247.4
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Due to banks 308.5 263.5 113.0 70.0 35.0
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Deposits from customers 2,020.3 1,847.7 1,483.2 1,151.8 1,033.1
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Fair value adjustment for portfolio hedged risk (0.7) - - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Derivative financial instruments 0.6 - - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Subordinated liabilities 50.6 50.4 - - -
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Other liabilities 49.4 45.6 46.3 52.2 38.1
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total shareholders' equity 254.1 237.1 249.1 236.0 141.2
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity 2,682.8 2,444.3 1,891.6 1,510.0 1,247.4
------------------------------------------------ ----------- ----------- ----------- ----------- -----------
Appendix to the preliminary announcement (unaudited)
Key performance indicators
(i) Margin ratios
Net interest margin is calculated as interest income and similar
income less interest expense and similar charges for the financial
period as a percentage of the average loan book, net revenue margin
is calculated as operating income for the financial period as a
percentage of the average loan book and gross revenue margin is
calculated as interest income and similar income plus fee and
commission income for the financial period as a percentage of the
average loan book. The calculation of the average loan book is the
average of the monthly
balance of loans and advances to customers, net of provisions, over 13 months:
2019 2018
GBPmillion GBPmillion
------------------------------------- ----------- -----------
Net interest margin
------------------------------------- ----------- -----------
Interest income and similar income 191.4 169.2
------------------------------------- ----------- -----------
Interest expense and similar charges (46.0) (35.5)
------------------------------------- ----------- -----------
Net interest income 145.4 133.7
------------------------------------- ----------- -----------
Net revenue margin
------------------------------------- ----------- -----------
Net interest income 145.4 133.7
------------------------------------- ----------- -----------
Net fee and commission income 20.1 17.9
------------------------------------- ----------- -----------
Operating income 165.5 151.6
------------------------------------- ----------- -----------
Gross revenue margin
------------------------------------- ----------- -----------
Interest income and similar income 191.4 169.2
------------------------------------- ----------- -----------
Fee and commission income 20.9 19.4
------------------------------------- ----------- -----------
Gross revenue 212.3 188.6
------------------------------------- ----------- -----------
Opening loan book 2,028.9 1,566.5
------------------------------------- ----------- -----------
Closing loan book 2,450.1 2,028.9
------------------------------------- ----------- -----------
Average loan book 2,252.4 1,818.2
------------------------------------- ----------- -----------
Net interest margin 6.5% 7.4%
------------------------------------- ----------- -----------
Net revenue margin 7.3% 8.3%
------------------------------------- ----------- -----------
Gross revenue margin 9.4% 10.4%
------------------------------------- ----------- -----------
The margin ratios all measure the yield of the loan book.
A reconciliation of the opening loan book at 1 January 2018 to
the balance sheet is as follows:
1 January
2018
GBPmillion
----------------------------- -----------
Loan book 1,598.3
------------------------------ -----------
IFRS 9 transition adjustment (31.8)
------------------------------ -----------
1,566.5
----------------------------- -----------
(ii) Cost ratios
Cost of risk is calculated as impairment losses on loans and
advances to customers for the financial period as a percentage of
the average loan book, cost of funds is calculated at interest
expense for the financial period as a percentage of average loan
book and cost to income ratio is calculated as operating expenses
for the financial period as a percentage of operating income for
the financial period:
2019 2018
GBPmillion GBPmillion
--------------------------------------------------------- ----------- -----------
Net impairment losses on loans and advances to customers 32.6 32.4
--------------------------------------------------------- ----------- -----------
Average loan book 2,252.4 1,818.2
--------------------------------------------------------- ----------- -----------
Cost of risk 1.4% 1.8%
--------------------------------------------------------- ----------- -----------
Interest expense 46.0 35.5
--------------------------------------------------------- ----------- -----------
Average loan book 2,252.4 1,818.2
--------------------------------------------------------- ----------- -----------
Cost of funds 2.0% 2.0%
--------------------------------------------------------- ----------- -----------
Operating expenses 94.2 84.5
--------------------------------------------------------- ----------- -----------
Operating income 165.5 151.6
--------------------------------------------------------- ----------- -----------
Cost to income ratio 56.9% 55.7%
--------------------------------------------------------- ----------- -----------
The cost of risk measures how effective the Group has been in
managing its impairment losses. The cost of funds measures the cost
of money being lent to customers. The cost to income ratio measures
how efficiently the Group is utilising its cost base in producing
income.
(iii) Return ratios
Annualised adjusted return on average assets is calculated as
the adjusted profit after tax for the previous 12 months as a
percentage of average assets, annualised adjusted return on average
equity is calculated as the adjusted profit after tax for the
previous 12 months as a percentage of average equity and annualised
adjusted return on required equity is calculated as the adjusted
profit after tax for the previous 12 months as a percentage of
average required equity.
Adjusted profit after tax is profit after tax, adjusted for
items that are non-controllable items or other items that fall
outside of the Group's core business activities. A reconciliation
of adjusted profit after tax to statutory profit after tax is
provided on page 20.
Average assets is calculated as the average of the monthly
assets balances, average equity is calculated as the average of the
monthly equity balances and average required equity is calculated
as the average of the monthly balances of total required equity.
Total required equity is calculated as the equity required to
achieve a CET1 ratio of 12%:
2019 2018
GBPmillion GBPmillion
---------------------------------------------------------------------------------- ----------- -----------
Adjusted profit after tax 33.0 29.9
---------------------------------------------------------------------------------- ----------- -----------
Opening assets (after IFRS 16/IFRS 9 transition adjustments - see following page) 2,448.6 1,866.1
---------------------------------------------------------------------------------- ----------- -----------
Closing assets 2,682.8 2,444.3
---------------------------------------------------------------------------------- ----------- -----------
Average assets 2,554.9 2,182.4
---------------------------------------------------------------------------------- ----------- -----------
Opening equity (after IFRS 16/IFRS 9 transition adjustments - see following page) 237.0 223.3
---------------------------------------------------------------------------------- ----------- -----------
Closing equity 254.1 237.1
---------------------------------------------------------------------------------- ----------- -----------
Average equity 243.6 228.9
---------------------------------------------------------------------------------- ----------- -----------
Opening required equity 217.8 173.3
---------------------------------------------------------------------------------- ----------- -----------
Closing required equity 251.8 220.9
---------------------------------------------------------------------------------- ----------- -----------
Average required equity 234.5 201.7
---------------------------------------------------------------------------------- ----------- -----------
Annualised adjusted return on average assets 1.3% 1.4%
---------------------------------------------------------------------------------- ----------- -----------
Annualised adjusted return on average equity 13.5% 13.1%
---------------------------------------------------------------------------------- ----------- -----------
Annualised adjusted return on required equity 14.1% 14.8%
---------------------------------------------------------------------------------- ----------- -----------
A reconciliation of assets to the balance sheet is as
follows:
2018
2019 (opening
(opening balance) balance)
GBPmillion GBPmillion
------------------------------ ------------------- -----------
Balance sheet assets 2,444.3 1,891.6
------------------------------ ------------------- -----------
IFRS 9 transition adjustment - (25.5)
------------------------------ ------------------- -----------
IFRS 16 transition adjustment 4.3 -
------------------------------ ------------------- -----------
2,448.6 1,866.1
------------------------------ ------------------- -----------
A reconciliation of equity to the balance sheet is as
follows:
2018
2019 (opening
(opening balance) balance)
GBPmillion GBPmillion
------------------------------ ------------------- -----------
Equity 237.1 249.1
------------------------------ ------------------- -----------
IFRS 9 transition adjustment - (25.8)
------------------------------ ------------------- -----------
IFRS 16 transition adjustment (0.1) -
------------------------------ ------------------- -----------
237.0 223.3
------------------------------ ------------------- -----------
Return on average assets demonstrates how profitable the Group's
assets are in generating revenue. Return on average equity is a
measure of the Group's ability to generate profit from the equity
available to it. Return on required equity relates profitability to
the capital that the Group is required to hold.
(iv) Funding ratios
The loan to deposit ratio is calculated as the loan book at the
year-end, divided by deposits from customers at the year-end, and
the total funding ratio is calculated as the total funding at the
year-end, being the sum of deposits from customers, borrowings
under liquidity support operations and the Term Funding Scheme, and
equity, divided by the loan book at the year-end:
2019 2018
GBPmillion GBPmillion
-------------------------------------------------------------------------- ----------- -----------
Loan book 2,450.1 2,028.9
-------------------------------------------------------------------------- ----------- -----------
Deposits from customers 2,020.3 1,847.7
-------------------------------------------------------------------------- ----------- -----------
Borrowings under liquidity support operations and the Term Funding Scheme 308.5 263.5
-------------------------------------------------------------------------- ----------- -----------
Tier 2 capital (including accrued interest) 50.6 50.4
-------------------------------------------------------------------------- ----------- -----------
Equity 254.1 237.1
-------------------------------------------------------------------------- ----------- -----------
Total funding 2,633.5 2,398.7
-------------------------------------------------------------------------- ----------- -----------
Loan to deposit ratio 121.3% 109.8%
-------------------------------------------------------------------------- ----------- -----------
Total funding ratio 107.5% 118.2%
-------------------------------------------------------------------------- ----------- -----------
The funding ratios measure the Group's liquidity.
(v) Adjusted earnings per share
Adjusted earnings per ordinary share are calculated by dividing
the adjusted profit attributable to equity holders of the parent by
the weighted average number of ordinary shares as follows:
2019 2018
-------------------------------------------------------------------------- ---------- ----------
Adjusted profit attributable to equity holders of the parent (GBPmillion) 33.0 29.9
-------------------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares (number) 18,476,280 18,475,229
-------------------------------------------------------------------------- ---------- ----------
Adjusted earnings per share (pence) 178.6 161.8
-------------------------------------------------------------------------- ---------- ----------
(vi) Adjusted profit and effective adjusted tax rate
Adjusted profit before tax was GBP41.1 million (2018: GBP36.7
million). Adjusted profit after tax was GBP33.0
million (2018: GBP29.9 million).
The Group uses adjusted profit for planning and reporting
purposes, as it improves the comparability of information between
reporting periods. The adjustments to profit relate to
non-controllable items or other items that fall outside of the
Group's core business activities.
Fair value amortisation relates to the acquisition of V12
Finance Group. The acquisition accounting required identifiable
assets and liabilities to be adjusted to their fair value, and
these adjustments are subject to amortisation.
Transformation costs comprise principally costs of the Motor
Transformation Programme and treasury development (31 December
2018: comprised principally costs of closing the unsecured personal
lending product, the cost of potential corporate acquisition work
and treasury development).
Bonus payments of GBP0.1 million (2018: GBP1.3 million) relate
to a long term incentive plan that was set up for a small number of
employees on the creation of the Commercial Finance business. The
scheme is based on profits earned by that business up to the end of
2019, and is payable in 2020.
The revaluation deficit of GBP1.1 million (2018: GBPnil) relates
to stamp duty and irrecoverable VAT incurred on the acquisition of
a freehold property during the year.
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
FR EAASKEEKEEAA
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