TIDMTS1L TIDMTSCO TIDM71XN
RNS Number : 4215O
Tesco Personal Finance PLC
02 October 2019
Tesco Personal Finance plc
Publication of Interim Financial Report for the six months ended
31 August 2019
In accordance with Listing Rule 9.6.1, a copy of the above
document for Tesco Personal Finance plc has been submitted to the
UKLA document viewing facility and will shortly be available for
inspection at: http://www.morningstar.co.uk/uk/NSM
The document is also available on the Company's website at:
www.corporate.tescobank.com
This announcement also contains additional information for the
purposes of compliance with the Disclosure and Transparency Rules,
including principal risks and uncertainties, details of related
party transactions and a responsibility statement.
Reference to pages and numbers refer to page numbers and notes
to the half year accounts in the Interim Financial Report.
2 October 2019
Enquiries:
Investors Chris Griffith (Tesco Plc) 01707 912 900
Media Simon Rew (Tesco Plc) 01707 918 701
Adam Shaw (Charlotte Street
Partners) 07824 096 155
Andrew Wilson (Charlotte Street
Partners) 07810 636 995
TESCO PERSONAL FINANCE PLC
INTERIM FINANCIAL REPORT
FOR THE SIX MONTHSED 31 AUGUST 2019
COMPANY NUMBER SC173199
TESCO PERSONAL FINANCE PLC
CONTENTS
Interim Management
Report.......................................................................................................................................................
1
Interim Condensed Consolidated Income
Statement..................................................................................................................
8
Interim Condensed Consolidated Statement of Comprehensive
Income....................................................................................
9
Interim Condensed Consolidated Statement of Financial
Position............................................................................................
10
Interim Condensed Consolidated Statement of Changes in
Equity............................................................................................
11
Interim Condensed Consolidated Statement of Cash
Flows.......................................................................................................
12
Notes to the Interim Condensed Consolidated Financial
Statements........................................................................................
13
Responsibility
Statement............................................................................................................................................................
47
Independent Review Report to Tesco Personal Finance
Plc.......................................................................................................
48
Abbreviations.............................................................................................................................................................................
49
Glossary of
Terms.......................................................................................................................................................................
50
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT
This Interim Financial Report comprises the Interim Management
Report and the Interim Condensed Consolidated Financial Statements
and accompanying notes. In the Interim Financial Report, unless
specified otherwise, the 'Company' means Tesco Personal Finance Plc
and the 'Group' means the Company and its subsidiaries and joint
venture included in the Interim Condensed Consolidated Financial
Statements. The Group operates using the trading name of Tesco
Bank.
Tesco Personal Finance Plc is a wholly owned subsidiary of Tesco
Personal Finance Group PLC (TPFG), the share capital of which is
wholly owned by Tesco PLC. A reconciliation of the results
contained within these Interim Condensed Consolidated Financial
Statements to the Tesco Bank results presented in the Tesco PLC
Interim Results 2019/20 can be found on the Tesco PLC internet
page:
https://www.tescoplc.com/media/755131/brokerpack_2019.pdf.
Cautionary Statement Regarding Forward-Looking Information
Where this document contains forward-looking statements, these
are made by the Directors in good faith based on the information
available to them at the time of their approval of this report.
These statements should be treated with caution due to the inherent
risks and uncertainties underpinning any such forward-looking
information. The Group cautions users of these Interim Condensed
Consolidated Financial Statements that a number of factors,
including matters referred to in this document, could cause actual
results to differ materially from those contained in any
forward-looking statement. Such factors include, but are not
limited to, those discussed under 'Principal risks and
uncertainties' on pages 6 and 7 of this Interim Management
Report.
Business Model
The Group provides financial services and products to personal
customers in the United Kingdom (UK). The Company is incorporated
and registered in Scotland. The Company owns 49.9% of Tesco
Underwriting Limited (TU), an authorised insurance company. TU is
accounted for as a joint venture of the Group.
Strategic Review
Following a strategic review of its activities, the Group
announced in May 2019 that it had ceased new Mortgage lending and
was actively exploring options to sell its existing Mortgage
business, including the complete transfer of related balances and
ongoing administration of relevant accounts. The Group, which has
offered Mortgages since 2012, has served over 23,000 customers,
with total net lending balances of GBP3,689.1m at 31 August
2019.
In recent years, challenging market conditions have limited
profitable growth opportunities. The Group's focus is on how it can
best serve Tesco customers and align its resources effectively to
their needs while ensuring that its offering remains sustainable in
the long-term. To that end, the Group made the strategic decision
to focus on serving a broader range of customers in more specific
areas, resulting in the move away from the Group's Mortgage
offering. In exploring a sale of its Mortgage business, the Group's
priority was to complete a commercially acceptable transaction with
a purchaser who will continue to serve the Group's customers
well.
In accordance with the requirements of International Financial
Reporting Standard (IFRS) 5 'Non-current assets held for sale and
discontinued operations', the Group has classified its Mortgage
business as a discontinued operation at 31 August 2019.
Amounts recognised in the Condensed Consolidated Income
Statement in respect of the Mortgage business are presented as a
single line item after profit after tax from continuing operations.
The prior period has been restated to present this on a consistent
basis with the current period. Assets and liabilities of the
disposal group representing the Mortgage business are presented
separately in the current period Interim Condensed Consolidated
Statement of Financial Position, with no requirement to restate
prior periods.
Following the Group's decision to sell its Mortgage business,
with effect from 1 September 2019 the Group's business model under
IFRS 9 'Financial Instruments' in respect of its Mortgage business
changed from being solely to collect contractual cash flows from
the Mortgage business to being to collect cash flows arising from
the sale of the Mortgage business. As a result, the Group has
accounted for its Mortgage business at fair value through profit or
loss (FVPL) from that date. The Mortgage business was previously
accounted for at amortised cost. The Group recognised a fair value
measurement gain after tax of GBP16.7m at 1 September 2019
following this change in business model.
1
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Strategic Review (Continued)
The Group completed the sale of the majority of its Mortgage
business to Halifax, which is part of Lloyds Banking Group, on 27
September 2019 for cash consideration of GBP3,694.6m. After
settling transaction and other costs associated directly with the
sale amounting to GBP3.8m, the Group's after-tax gain on sale was
GBP21.4m. Immediately following derecognition of the majority of
the Group's Mortgage business, the Group entered into a series of
receive-fixed interest rates swaps to economically neutralise the
effect of its existing pay-fixed interest rate swaps used to hedge
the interest rate risk inherent in the Mortgage business. The
inception value of these swaps was an after-tax gain of
GBP5.0m.
As is customary in such a transaction, the Group will continue
to recognise a small element of the Mortgage business, representing
new advances to existing Mortgage customers, until migration of all
Mortgage accounts to the purchaser, currently expected to take
place in February 2020, is completed. The final gain on sale will
be confirmed once migration is completed.
Further information on the Group's discontinued operations is
set out at notes 2, 4, 10 and 22.
Impact of Adoption of New Accounting Standards
The Group adopted IFRS 16 'Leases' with effect from 1 March
2019. This was adopted fully retrospectively and prior periods have
been restated.
The adoption of IFRS 16 resulted in the recognition of
right-of-use assets with a net book value of GBP16.7m at 1 March
2018. The net impact on lease liabilities, after the release of a
previously held operating lease accrual, was to increase lease
liabilities by GBP22.8m. The overall impact on equity, net of a
deferred tax asset of GBP1.6m, was a decrease of GBP4.5m at 1 March
2018.
Further details of the transitional impact of the adoption of
IFRS 16 are set out at note 2.
Headlines
Income Statement
-- Profit before tax from continuing operations is 71.2% lower
at GBP16.8m (August 2018: GBP58.4m)(1,2) .
-- Underlying profit before tax from continuing operations,
which excludes items which are not reflective of ongoing trading
performance, is 8.0% lower at GBP98.5m (August 2018:
GBP107.1m)(1,2) . A reconciliation of statutory to underlying
profit for the current and prior periods is set out at note 4.
-- Profit after tax from discontinued operations has decreased
by 1.7% to GBP17.4m (August 2018: GBP17.7m).
-- Profit before tax from continuing operations
The key drivers of the decrease in profit before tax from
continuing operations are:
o a 4.1% increase in net interest income to GBP240.1m (August
2018: GBP230.7m)(1,2) , reflecting higher interest earnings on the
back of lending growth. Net interest margin has remained broadly
similar at 4.2% (August 2018: 4.3%)(1,2) ;
o a 0.1% increase in fee and commission income to GBP169.8m
(August 2018: GBP169.7m)(2) . This includes a credit to insurance
income of GBP10.7m relating to commission recognised by the Group
in line with IFRS 15 'Revenue from contracts with customers' in
respect of future renewals of certain insurance policies managed
and underwritten by a third party. This is the point in time at
which the Group has satisfied all of its performance obligations in
relation to the policies sold and it is considered highly probable
that a significant reversal in the amount of revenue recognised
will not occur in future periods. This has been offset by continued
pressure on insurance retention rates due to a highly competitive
environment, leading to a reduction in insurance commission income,
and a reduction in ATM income as a result of the downward trend in
ATM transactions being seen across the market as customers move
towards contactless and other card payments;
o a loss on financial instruments at FVPL of GBP3.2m (August
2018: loss of GBP0.7m)(2) ;
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
2
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Income Statement (continued)
o a gain on disposal of investment securities of GBP0.1m (August
2018: gain of GBP8.4m);
o a 7.7% increase in operating expenses to GBP283.8m (August
2018: GBP263.6m)(1,2) . This includes an additional payment
protection insurance (PPI) charge of GBP45.0m (August 2018:
GBP7.0m) recognised during the period, further detail on the
drivers of which is set out in note 14, and a restructuring charge
of GBP8.2m relating to the Group's strategic review (August 2018:
credit of GBP1.6m relating to the early exit from the Group's
offices in central Edinburgh). The prior period also includes a
charge of GBP16.4m in respect of a regulatory provision relating to
the November 2016 fraud incident. There was no such charge in the
current period. Cost control remains a key focus of the Group and
is reflected in the GBP11.2m decrease in underlying costs to
GBP230.6m (August 2018: GBP241.8m) set out at note 4.
o a 25.7% increase in impairment charges to GBP113.4m (August
2018: GBP90.2m). This is mainly driven by an increase in the
Group's expected credit loss (ECL) allowance as a result of the
change in the regulatory landscape within the Credit Cards market
(Persistent Debt remediation programme which started in September
2018) as well as the implementation of a number of credit
initiatives in recent years. The bad debt:asset ratio (BDAR) in
respect of continuing operations increased to 2.6% (August 2018:
2.2%)(2) ; and
o a 75.6% increase in the Group's share of profit from its joint
venture, TU to GBP7.2m (August 2018: GBP4.1m). This includes a
credit of GBP3.7m (August 2018: GBPnil), representing the Group's
share of credits recognised by TU during the period relating to the
impact on TU's insurance reserves of a change to the Ogden tables,
which are used to calculate future losses in personal injury and
fatal accident cases.
-- Income tax charge on profit from continuing operations
Income tax on the Group's profit from continuing operations for
the period is a charge of GBP15.5m (August 2018: GBP19.8m)(1,2) .
The Group's current year effective tax rate is higher than the
statutory rate principally due to the non-deductibility of the
additional PPI charge recognised during the period.
-- Profit after tax from discontinued operations
The decrease in profit after tax from discontinued operations
predominantly reflects an increase in net interest income to
GBP41.3m (August 2018: GBP35.4m), offset by an increase in losses
on financial instruments held at FVPL to GBP6.6m (August 2018:
GBP2.8m) and an accelerated amortisation charge of GBP3.1m (August
2018: GBPnil) recognised during the period.
Following the classification during the period of the Group's
Mortgage business as a discontinued operation, the Group has
reassessed the useful life of certain of its intangible fixed
assets, reducing the expected life to a maximum of one year. As
this represents a change in accounting estimate, no prior period
adjustment is required.
In arriving at the profit after tax from discontinued operations
for the current and prior period, it has not been possible under
IFRS 5 to allocate any of the Group's cost of funding the Mortgage
business to discontinued operations as the related liabilities were
not entered into specifically to fund the Group's Mortgage
business. After including the Group's notional cost of funding of
GBP29.0m (August 2018: GBP26.2m) in respect of the Mortgage
business, the loss after tax from discontinued operations was
GBP3.8m (August 2018: GBP1.4m).
Balance Sheet
-- Loans and advances to customers have decreased by 30.1% to
GBP8.7bn (February 2019: GBP12.4bn). This reflects classification
during the period of the Group's GBP3.7bn (February 2019: GBP3.8bn)
Mortgage business as a disposal group. Reflecting the impact of
this classification on the prior period, loans and advances to
customers have remained broadly flat at GBP8.7bn (February 2019:
GBP8.7bn). Credit Card balances have reduced by 1.2%, while
Personal Loans have grown by 3.0%.
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
3
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Balance Sheet (continued)
-- Customer deposits, which continue to be the Group's main
source of funding, have decreased by 5.4% to GBP9.9bn (February
2019: GBP10.5bn) as the Group began to reduce its Savings balances
in response to the planned sale of its Mortgage business. Deposits
from banks at 31 August 2019 totalled GBP1,998.1m (February 2019:
GBP1,663.2m). At the period end, the Group had entered into
repurchase transactions of GBP659.1m (February 2019: GBP324.2m) and
accessed GBP1,339.0m of funds from the Bank of England's (BoE) Term
Funding Scheme (TFS) (February 2019: GBP1,339.0m). The lower cost
of funding provided by the TFS is reflected in competitive offers
for the Group's borrowing customers.
-- The balance sheet remains well positioned to support future
lending growth from both a liquidity and capital standpoint. At 31
August 2019, the total capital ratio was 18.4% (February 2019:
18.3%)(1) and net stable funding ratio (NSFR) was 121.4% (February
2019: 123.1%)(1) . The decrease in the NSFR over the period
reflects decreased available funding of GBP0.6bn as the Group began
to reduce its Savings balances in response to the planned sale of
its Mortgage business.
Strategic Priorities
The vision of Tesco Bank is to 'help Tesco shoppers manage their
money a little better every day'. In order to further the Group's
pursuit of this vision, the Group continues to seek opportunities
to make it easier for Tesco customers to bank and insure with the
Group through targeted investment in technology and data, making
life simpler for both customers and colleagues and driving
efficiency gains that can be reinvested in the customer offer. The
Group's strategy is to bring the best of Tesco to financial
services, offering customers great value across the range of
products and earning customer trust through the Group's
actions.
The Group now has 323 Travel Money bureaux across the UK, as
well as offering online services including click and collect and
delivery.
The Bank's mobile banking App has been upgraded to allow
customers to buy Travel Money via the App, underlining the Bank's
commitment to make it easy for customers to manage their money.
The Group's commitment to offering attractive products and good
service for customers has been rewarded with recognition as 'Best
Card Provider (Standard Rate)' and 'Best Card Provider (Balance
Transfer Rate)' at the 2019 Moneyfacts Awards.
During the period, colleagues raised over GBP54,000 for the
Group's charity partners and volunteered over 1,000 hours to their
local communities. In May 2019, the Group marked its second 'Tesco
Bank Turns Pink' event, showing the Group's commitment and support
to Cancer Research UK's Race for Life.
Regulatory Developments
The Group continues to monitor and prepare for a number of
regulatory changes taking effect over the next few years.
The Second Payment Services Directive (PSD2), the first phase of
which took effect from 13 January 2018, together with Open Banking,
allows customers to choose to share data from their banking
products with third party providers (TPPs) and bring together all
of their financial relationships and data in one place, potentially
leading to a fundamental change in how customers manage both their
money and data over the longer term. The aim of these changes is to
promote competition and enhance customer choice. They provide
potential opportunities for the Group to attract new customers, as
well as potentially increasing competition from traditional banking
businesses and new providers of financial services, including
technology companies. The Group continues to monitor and review the
opportunities and risks associated with the introduction of PSD2,
including the need to ensure that there is appropriate control and
ownership of sensitive and confidential customer data as the use of
TPPs becomes more widespread.
The second phase of PSD2 was launched during the period. Open
Banking, which is supported by a secure technology standard, is a
change for the whole UK banking sector and is designed to give
customers more control over their financial data and money.
Customers will also be able to more easily compare accounts from
different providers, understand features, service quality and
pricing, and be able to select which offers best value. Using Open
Banking, the Group's customers can choose to connect their Personal
Current Accounts, Credit Cards, Instant Access Savings Accounts or
Internet Saver accounts to TPPs. TPPs will provide a range of
different Apps and websites offering new ways for customers to
manage money and make payments.
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
4
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Regulatory Developments (continued)
Amendments to the Capital Requirements Regulation (CRR) and
Capital Requirements Directive (CRD) were published in the Official
Journal of the European Union (EU) on 7 June 2019. The majority of
the CRR amendments will apply from 28 June 2021 and the CRD
amendments from 28 December 2020. The impact of these amendments
continues to be assessed. Uncertainty remains around the
implementation and impact of further regulatory developments
arising from the finalisation of Basel III, which will be subject
to EU and UK implementation.
In addition, the Group will be subject to the minimum
requirements for own funds and eligible liabilities (MREL) on an
interim basis from 1 January 2020, with full implementation
applicable from 1 January 2022. The requirements are factored into
the Group's funding and capital plans. TPFG undertook an initial
GBP250.0m issuance of MREL-compliant debt in July 2019 in support
of these requirements and subsequently invested the proceeds in the
Company via an intercompany subordinated loan.
Business Review
During the period, Personal Loan balances grew by 3.0% while
Credit Card balances reduced by 1.2%. Mortgage balances fell by
2.1% in the period to GBP3,689.1m (February 2019: GBP3,767.4m)
following the Group's decision to cease new Mortgage lending.
Customer deposits of GBP9,914.5m (February 2019: GBP10,478.6m)
continue to be the Group's primary source of funding. The Group's
customer deposits reduced by 5.4% in the period as the Group began
to reduce its Savings balances in response to the planned sale of
its Mortgage business.
During the period, the Group maintained its funding from the
BoE's TFS at GBP1,339.0m (February 2019: GBP1,339.0m).
Money Services products have performed well overall as the Group
continues to enhance the product range and expand the customer
base. A reduction in ATM transaction volumes, due to the declining
use of cash as customers move towards contactless and other card
payments, was partially offset by growth in other products,
including Travel Money.
A significant and ongoing investment has been made in Motor
Insurance pricing in the period, across both new business and
renewal policies, in response to price deflation, supporting the
Group's commitment to offering value to Tesco customers. This has
driven improved Motor Insurance retention rates year-on-year,
although the total number of in-force policies has fallen, driven
by the impact of overall market price deflation on Motor Insurance
premiums.
5
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Key Performance Indicators
The Directors consider the following to be Key Performance
Indicators (KPIs) for the Consolidated Income Statement and are
quoted in respect of the Group's continuing operations. The
methodology applied in calculating the Group's KPI's is set out in
the Glossary of Terms:
31 August 31 August
2019 2018
Restated(1,2)
Underlying net interest margin(1,2) 4.5% 4.8%
Net interest margin(1,2) 4.2% 4.3%
Underlying cost:income ratio(1,2) 52.5% 55.6%
Cost:income ratio(1,2) 69.8% 64.6%
Bad debt:asset ratio(2) 2.6% 2.2%
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
Capital and Liquidity Ratios
The Directors consider the following to be Key Performance
Indicators for capital and liquidity reporting:
31 August 28 February 31 August
2019 2019 2018
Restated(1) Restated(1)
Common equity tier 1 ratio(1) 16.2% 16.2% 16.0%
Total capital ratio(1) 18.4% 18.3% 18.1%
Net stable funding ratio(1) 121.4% 123.1% 117.4%
Underlying loan to deposit ratio 123.2% n/a n/a
Loan to deposit ratio 87.6% 118.6% 120.6%
The Group's total capital ratio remains above internal targets
and regulatory requirements at 18.4% (February 2019: 18.3%)(1) and
leaves the Group well placed to support future growth.
On 1 March 2018, IFRS 9 came into force and a transitional
period was introduced, allowing the Company (being the regulated
entity) to phase in the IFRS 9 impact on capital over a period of 5
years.
Under the transitional provisions, the impact as at 31 August
2019 on common equity tier 1 is GBP12.7m (February 2019: GBP7.8m).
Common equity tier 1 is expected to reduce from inception to end
point by approximately 164 basis points (unaudited). The Group's
common equity tier 1 capital is disclosed in note 18.
The NSFR, a measure of the Group's liquidity position, is within
appetite at 121.4% as at 31 August 2019 (February 2019: 123.1%)(1)
. The Group maintains a liquid asset portfolio of high quality
securities of GBP1.8bn (February 2019: GBP2.1bn).
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
Principal risks and uncertainties
The Board of Directors has overall responsibility for
determining the Group's strategy and related Risk Appetite. The
Board's Risk Appetite comprises a suite of Risk Appetite
statements, underpinned by corresponding measures with agreed
triggers and limits. The Risk Appetite framework defines the type
and amount of risk that the Group is prepared to accept to achieve
its objectives and forms a key link between the day-to-day risk
management of the business, its strategic objectives, long-term
plan, capital plan and stress testing. The Risk Appetite is
formally reviewed by the Board on at least an annual basis.
The Board is also responsible for overall corporate governance,
which includes overseeing an effective system of risk management
and that the level of capital and liquidity held is adequate and
consistent with the risk profile of the business.
6
TESCO PERSONAL FINANCE PLC
INTERIM MANAGEMENT REPORT (continued)
Principal risks and uncertainties (continued)
To support this, a Risk Management Framework (RMF) has been
embedded across the Group, creating an integrated approach to
managing risk. The RMF brings together governance, Risk Appetite,
the three lines of defence, the Policy Framework and risk
management tools to support the business in managing risk as part
of day-to-day activity, and is underpinned by governance, controls,
processes, systems and policies within the first line business
areas and those of the second line Risk Management Function.
The Chief Risk Officer (CRO) performs a strategic risk
management role and is responsible for managing and enhancing the
RMF. The CRO is independent from any commercial function, reports
directly to the Chief Executive Officer and can only be removed
from his position with the approval of the Board.
The principal risks and uncertainties faced by the Group remain
unchanged from those set out in the Group's Annual Report and
Financial Statements for the year ended 28 February 2019 (pages 8
to 12).
Credit risk The risk that a borrower will default on a debt
or obligation by failing to make contractually obligated
payments, or that the Group will incur losses due
to any other counterparty failing to meet their
financial obligations.
Operational risk The risk of potential error, loss, harm or failure
caused by ineffective or inadequately defined processes,
system failure, improper conduct, human error, fraud
or from external events.
Liquidity and Liquidity risk is the risk that the Group is not
Funding risk able to meet its obligations as they fall due. This
includes the risk that a given security cannot be
traded quickly enough in the market to prevent a
loss if a credit rating falls.
Funding risk is the risk that the Group does not
have sufficiently stable and diverse sources of
funding.
Market risk The risk that the value of earnings or capital is
altered through the movement of market rates. This
includes interest rates, foreign exchange rates,
credit spreads and equities.
Insurance risk The risks accepted through the provision of insurance
products in return for a premium. These risks may
or may not occur as expected and the amount and
timing of these risks are uncertain and determined
by events outside of the Group's control.
Regulatory risk The risk of reputational damage, liability or material
loss from failure to comply with the requirements
of the financial services regulators or related
codes of best practice applicable to the business
areas within which the Group operates.
Capital risk The risk that the Group holds regulatory capital
which is of insufficient quality and quantity to
enable it to absorb losses.
Brexit On 29 March 2017 the UK triggered Article 50, formally
beginning the process to leave the EU. The process
of exiting the EU continues to contribute to political
and economic uncertainty in the UK and Europe. The
Group will continue to monitor the wider economic
environment, particularly to assess the impact on
credit risk to the Group. The largest impact on
the Group relates to the economic impact on the
Group's ECL provision, sensitivities in respect
of which are set out at note 16.
LIBOR rate replacement On 27 July 2017 the Financial Conduct Authority
announced that the London Interbank Offered Rate
(LIBOR) would be phased out and replaced with an
alternative reference rate by the end of 2021.
7
TESCO PERSONAL FINANCE PLC
INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
FOR THE SIX MONTHSED 31 AUGUST 2019
6 months 6 months
ended 31 ended 31
August August
2019 2018
Note GBPm GBPm
Restated(1,2)
Continuing operations
---------- --------------
Interest and similar income 5 346.0 318.8
Interest expense and similar charges 5 (105.9) (88.1)
---------- --------------
Net interest income 240.1 230.7
Fees and commissions income 6 185.2 186.5
Fees and commissions expense 6 (15.4) (16.8)
---------- --------------
Net fees and commissions income 169.8 169.7
Net loss on financial instruments at fair value
through profit or loss (FVPL) (3.2) (0.7)
Net gain on investment securities 0.1 8.4
---------- --------------
Net other income (3.1) 7.7
Total income 406.8 408.1
---------- --------------
Administrative expenses (201.2) (197.5)
Depreciation and amortisation (37.6) (42.7)
Provision for customer redress 14 (45.0) (7.0)
Regulatory charge -- (16.4)
---------- --------------
Operating expenses (283.8) (263.6)
Impairment loss on financial assets 7 (113.4) (90.2)
---------- --------------
Operating profit 9.6 54.3
Share of profit of joint venture 7.2 4.1
---------- --------------
Profit before tax 16.8 58.4
Analysed as:
--------------------------------------------------- ----- ---------- --------------
Underlying profit before tax 4 98.5 107.1
Non-underlying items 4 (81.7) (48.7)
--------------------------------------------------- ----- ---------- --------------
16.8 58.4
Income tax charge 8 (15.5) (19.8)
Profit for the period from continuing operations 1.3 38.6
Discontinued operations
Profit for the period after tax from discontinued
operations 10 17.4 17.7
Profit for the period attributable to owners
of the parent 18.7 56.3
---------- --------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
8
TESCO PERSONAL FINANCE PLC
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE SIX MONTHSED 31 AUGUST 2019
6 month 6 months
ended 31 ended 31
August August
2019 2018
GBPm GBPm
Restated(1)
Profit for the period 18.7 56.3
Items that may be reclassified subsequently
to the income statement
Debt securities at fair value through other
comprehensive income (FVOCI)
Fair value movements 0.4 0.5
Net gains transferred to the income statement
on disposal (0.1) (8.4)
Expected credit loss (ECL) allowance transferred
to the income statement -- 0.4
Taxation (0.1) 2.0
---------- ------------
0.2 (5.5)
---------- ------------
Cash flow hedges
Fair value movements 1.1 0.3
Taxation (0.1) (0.1)
---------- ------------
1.0 0.2
---------- ------------
Currency basis reserve
Foreign currency movements (0.2) --
---------- ------------
(0.2) --
---------- ------------
Share of other comprehensive income/(expense)
of joint venture 5.6 (0.1)
---------- ------------
5.6 (0.1)
---------- ------------
Items that will not be reclassified subsequently
to the income statement
Equity securities at FVOCI
Fair value movements 0.8 0.5
Taxation (0.2) (0.1)
---------- ------------
0.6 0.4
---------- ------------
Other comprehensive income/(expense) for the period,
net of tax 7.2 (5.0)
---------- ------------
Total comprehensive income for the period 25.9 51.3
---------- ------------
Total comprehensive income attributable to owners
of the parent arising from:
Continuing operations 8.5 33.6
Discontinued operations 17.4 17.7
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
9
TESCO PERSONAL FINANCE PLC
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(UNAUDITED)
AS AT 31 AUGUST 2019
31 August 28 February 31 August
2019 2019 2018
Note GBPm GBPm GBPm
Restated(1) Restated(1,2)
Assets
Cash and balances with central banks 723.2 1,072.1 1,232.9
Loans and advances to banks 459.1 324.2 249.2
Loans and advances to customers 11 8,688.7 12,425.7 12,152.2
Derivative financial instruments 40.0 31.3 38.0
Investment securities 1,060.0 1,071.5 715.4
Prepayments and accrued income 64.2 49.4 62.0
Other assets 274.7 236.6 225.4
Investment in joint venture 12 83.5 86.4 83.7
Deferred income tax asset 60.6 59.3 57.4
Intangible assets 205.0 224.2 244.6
Property, plant and equipment 72.6 76.8 79.6
Assets of the disposal group 10 3,690.1 - -
------------------------------------------------------ ----- ---------- ------------ --------------
Total assets 15,421.7 15,657.5 15,140.4
------------------------------------------------------ ----- ---------- ------------ --------------
Liabilities
Deposits from banks 1,998.1 1,663.2 1,813.2
Deposits from customers 9,914.5 10,478.6 10,073.2
Debt securities in issue 13 861.1 1,185.5 922.6
Derivative financial instruments 63.0 60.2 48.6
Provisions for liabilities and charges 14 81.6 55.0 77.9
Accruals and deferred income 88.8 95.3 84.2
Current income tax liability 22.6 31.1 30.9
Other liabilities 206.6 185.7 201.6
Subordinated liabilities and notes 15 486.2 235.0 235.0
Liabilities of the disposal group 10 4.2 - -
------------------------------------------------------ ----- ---------- ------------ --------------
Total liabilities 13,726.7 13,989.6 13,487.2
------------------------------------------------------ ----- ---------- ------------ --------------
Equity and reserves attributable to owners of parent
Share capital 122.0 122.0 122.0
Share premium account 1,097.9 1,097.9 1,097.9
Retained earnings 439.3 420.6 394.0
Other reserves 35.8 27.4 39.3
------------------------------------------------------ ----- ---------- ------------ --------------
Total equity 1,695.0 1,667.9 1,653.2
------------------------------------------------------ ----- ---------- ------------ --------------
Total liabilities and equity 15,421.7 15,657.5 15,140.4
------------------------------------------------------ ----- ---------- ------------ --------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following a change in
presentation of the amount of the ECL allowance recognised under
IFRS 9 which exceeds the gross carrying amount of the financial
asset as set out at note 11. Refer to note 2 for further
details.
10
TESCO PERSONAL FINANCE PLC
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
FOR THE SIX MONTHSED 31 AUGUST 2019
Cash Share
flow Currency based
Share Share Retained FV/AFS hedge basis payment Total
capital premium earnings reserve reserve reserve reserve equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
Balance at 1 March
2019 122.0 1,097.9 420.6 4.6 (1.0) (0.3) 24.1 1,667.9
Comprehensive income
Profit for the period -- -- 18.7 -- -- -- -- 18.7
Net fair value movement
on investment
securities
held at FVOCI -- -- -- 0.8 -- -- -- 0.8
Net movement on cash
flow hedges -- -- -- -- 1.0 (0.2) -- 0.8
Share of other
comprehensive
income of joint
venture -- -- -- 5.6 -- -- -- 5.6
--------- --------- ------------ --------- --------- --------- --------- ------------
Total comprehensive
income -- -- 18.7 6.4 1.0 (0.2) -- 25.9
--------- --------- ------------ --------- --------- --------- --------- ------------
Transactions with
owners
Dividends to ordinary
shareholders -- -- -- -- -- -- -- --
Share based payments -- -- -- -- -- -- 1.2 1.2
Total transactions
with owners -- -- -- -- -- -- 1.2 1.2
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 31 August
2019 122.0 1,097.9 439.3 11.0 -- (0.5) 25.3 1,695.0
--------- --------- ------------ --------- --------- --------- --------- ------------
Balance at 1 March
2018 122.0 1,097.9 503.7 13.0 (0.3) -- 31.5 1,767.8
Impact of initial application
of IFRS9 -- -- (166.0) (0.5) -- -- -- (166.5)
Balance at 1 March
2018 after adopting
IFRS 9 122.0 1,097.9 337.7 12.5 (0.3) -- 31.5 1,601.3
Comprehensive income
Profit for the period -- -- 56.3 -- -- -- -- 56.3
Net fair value movement
on
investment securities
held at FVOCI -- -- -- (5.1) -- -- -- (5.1)
Net movement on cash
flow hedges -- -- -- -- 0.2 -- -- 0.2
Share of other comprehensive
expense of joint venture -- -- -- (0.1) -- -- -- (0.1)
------ -------- -------- ------ ------ --- ----- --------
Total comprehensive
income -- -- 56.3 (5.2) 0.2 -- -- 51.3
------ -------- -------- ------ ------ --- ----- --------
Transactions with owners
Share based payments -- -- -- -- -- -- 0.6 0.6
Total transactions
with owners -- -- -- -- -- -- 0.6 0.6
------ -------- -------- ------ ------ --- ----- --------
Balance at 31 August
2018 122.0 1,097.9 394.0 7.3 (0.1) -- 32.1 1,653.2
------ -------- -------- ------ ------ --- ----- --------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
11
TESCO PERSONAL FINANCE PLC
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHSED 31 AUGUST 2019
6 months 6 months
ended 31 ended 31
August 2019 August 2018
Restated(1)
Note GBPm GBPm
Operating Activities
Profit before tax from continuing operations 16.8 58.4(2)
Profit before tax from discontinued operations 10 23.9 24.3
------------- -------------
Total profit before tax 40.7 82.7
Adjusted for:
Non-cash items included in operating profit before taxation and other
adjustments 179.0 130.1
Changes in operating assets and liabilities (447.1) (70.5)
Income taxes paid (31.9) (35.1)
Cash flows (used in)/generated from operating activities (259.3) 107.2
------------- -------------
Investing Activities
Purchase of intangible assets and property, plant and equipment (19.0) (14.8)
Purchase of investment securities classified as FVOCI (81.0) (318.4)
Sale of investment securities classified as FVOCI 95.4 553.7
Dividends received from joint venture -- 10.3
Redemption of subordinated debt issued by joint venture 7.8 5.2
Repayment of joint venture share capital 15.6 -
Cash flows generated from investing activities 18.8 236.0
------------- -------------
Financing Activities
Proceeds from issue of subordinated liabilities 250.0 -
Principal repayments on debt securities in issue 13 (350.0) (425.0)
Interest paid on debt securities in issue (10.5) (12.8)
Interest received on assets held to hedge debt securities in issue 4.1 1.8
Interest paid on subordinated liabilities and notes (2.5) (2.4)
Principal repayments on lease liabilities (0.9) (0.8)
Interest paid on lease liabilities (1.0) (1.1)
Cash flows used in financing activities (110.8) (440.3)
------------- -------------
Net decrease in cash and cash equivalents (351.3) (97.1)
Cash and cash equivalents(3) at beginning of period 1,043.4 1,303.5
Cash and cash equivalents(3) at end of period 692.1 1,206.4
------------- -------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
(3) Cash and cash equivalents comprise cash and balances with
central banks, excluding mandatory reserve deposits of GBP31.1m
(August 2018: GBP26.5m).
12
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Interim Condensed Consolidated Financial Statements for the
six months ended 31 August 2019 were approved by the Board of
Directors on 30 September 2019.
1. Basis of Preparation
The Interim Condensed Consolidated Financial Statements have
been prepared in accordance with the Disclosure and Transparency
Rules of the Financial Conduct Authority (FCA) and with
International Accounting Standard (IAS) 34 'Interim Financial
Reporting' as endorsed by the European Union (EU).
Unless otherwise stated, the accounting policies applied, and
the judgements, estimates and assumptions made in applying those
policies, are consistent with those described in the Consolidated
Financial Statements of the Group for the year ended 28 February
2019. The Interim Condensed Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial
Statements of the Group for the year ended 28 February 2019, which
have been prepared in accordance with International Financial
Reporting Standards (IFRS) and interpretations issued by the
International Financial Reporting Interpretations Committee (IFRIC)
of the International Accounting Standards Board (IASB) as endorsed
by the EU.
These Interim Condensed Consolidated Financial Statements have
been reviewed, not audited, and do not constitute Statutory
Financial Statements as defined in section 434 of the Companies Act
2006. The Consolidated Financial Statements for the year ended 28
February 2019 were approved by the Board of Directors on 8 April
2019 and have been filed with the Registrar of Companies. The
report of the auditors on those Financial Statements was
unqualified, did not contain an emphasis of matter paragraph and
did not contain any statement under section 498 of the Companies
Act 2006.
Going concern
The Directors have completed an assessment of the Group's going
concern status, taking into account both current and projected
performance, including projections for the Group's capital and
funding position and having regard to the Group's risk profile. As
a result of this assessment, the Directors consider the Group to be
in a satisfactory financial position and have a reasonable
expectation that the Group has adequate resources to continue in
business for the foreseeable future. Accordingly, the Directors
continue to adopt the going concern basis in preparing the Interim
Condensed Consolidated Financial Statements.
Adoption of new and amended IFRS
There are a number of new accounting standards and amendments to
standards which will impact the Group in future reporting periods.
Further details of these are included in the Consolidated Financial
Statements of the Group for the year ended 28 February 2019.
During the period to 31 August 2019, the Group has adopted the
following new accounting standards which became effective with
relevant EU endorsement for annual periods beginning on or after 1
January 2019:
IFRS 16 'Leases'
IFRS 16 is a replacement for International Accounting Standards
(IAS) 17 'Leases'. IFRS 16 removes the distinction between finance
and operating leases and instead provides a single lessee
accounting model. The Group, as a lessee, has recognised lease
liabilities and corresponding right-of-use assets for all
applicable leases.
The recognition pattern for the Group's leases in the Interim
Condensed Consolidated Income Statement has changed from the
previous pattern for operating leases, with interest on the
liabilities and depreciation expense on the right-of-use assets now
recognised separately.
In the Interim Condensed Consolidated Statement of Cash Flows,
lease payments are categorised within financing activities rather
than operating activities.
13
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
1. Basis of Preparation (continued)
IFRS 16 does not significantly change the accounting for leases
by lessors.
The Group adopted IFRS 16 on 1 March 2019. As a result, the
Group has recognised right-of-use assets in its Interim Condensed
Consolidated Statement of Financial Position at the adoption date
in respect of property assets previously accounted for as operating
leases. A corresponding lease liability has also been recognised,
representing the future payments to be made under these leases,
discounted at the Group's incremental borrowing rate at lease
inception. The Group does not have any short-term leases or leases
of low value assets for which it may elect not to apply the above
requirements under IFRS 16.
The Group has applied the requirements of IFRS 16 fully
retrospectively, including the restatement of prior period
comparatives.
Further details of the impact of adoption of IFRS 16 are
included in note 2.
New accounting policies
Non-current assets held for sale (or disposal groups) and
discontinued operations
Under IFRS 5, the Group classifies non-current assets (or
disposal groups) as assets held for sale when their carrying amount
is to be recovered principally through a sale transaction and a
sale is considered highly probable, with the asset available for
immediate sale in its present condition.
Non-current assets (or disposal groups) classified as held for
sale are measured under IFRS 5 at the lower of their carrying
amount and fair value less costs to sell, with the exception of
deferred tax balances and financial assets falling within the scope
of IFRS 9. These balances are initially measured in line with their
respective accounting policies and subsequently remeasured as part
of the overall disposal group, in accordance with the requirements
of IFRS 5.
Balances in respect of disposal groups held for sale are
presented separately in the Interim Condensed Consolidated
Statement of Financial Position for the current period, with no
requirement to restate prior periods.
The net results of discontinued operations are presented
separately in the Interim Condensed Consolidated Income Statement
where an entity or component of an entity of the Group has been
disposed of or is classified as held for sale and:
(a) Represents a separate major line of business or geographical
area of operations; or
(b) Is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of
operations.
A component of an entity of the Group comprises operations and
cash flows that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the Group's
operations and cash flows. If an entity or a component of an entity
of the Group is classified as a discontinued operation, prior
periods in the Interim Condensed Consolidated Income Statement are
restated to present these on a consistent basis with the current
period presentation of discontinued operations.
Leases
The Group has entered into leases for office buildings.
Leases are recognised as a right-of-use asset and corresponding
lease liability at the date on which the leased asset becomes
available for use by the Group.
Right-of-use assets are included within property, plant and
equipment in the Interim Condensed Consolidated Statement of
Financial Position.
Right-of-use assets are measured at cost, which comprises:
-- the amount of the initial lease liability;
-- any lease payments made at or before the lease commencement date;
-- any initial direct costs; and
-- restoration costs.
Right-of-use assets are depreciated over the lease term on a
straight-line basis.
14
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
1. Basis of Preparation (continued)
Lease liabilities are initially calculated as the net present
value of expected lease payments, less any lease incentives
receivable. The lease payments are discounted using the interest
rate implicit in the lease, if that rate can be determined, or if
not, at the Group's incremental borrowing rate.
Following initial recognition, lease payments are allocated
between the outstanding lease liability and interest expense. The
interest expense is charged to the Interim Condensed Consolidated
Income Statement over the lease period through interest expense and
similar charges so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each
period.
2. Restatement of Prior Periods
Leases
The Group has recognised right-of-use assets in its Interim
Condensed Consolidated Statement of Financial Position at the
adoption date in respect of property assets previously accounted
for as operating leases. A corresponding lease liability has also
been recognised, representing the future payments to be made under
these leases, discounted at the Group's incremental borrowing rate
at lease inception. The lease liability replaces a previous
operating lease accrual held under IAS 17. A related deferred tax
asset was also recognised at the adoption date.
In accordance with the transitional provisions of IFRS 16, the
new rules have been applied fully retrospectively and comparatives
for prior periods have been restated.
Discontinued operations
Following the Group's announcement during the period of its
decision to sell its Mortgage business, the Group has classified
transactions in the Interim Condensed Consolidated Income Statement
relating to its Mortgage business as discontinued operations. Refer
to note 10 for further details.
The prior period Interim Condensed Consolidated Income Statement
has been restated in line with the current period presentation of
the Mortgage business.
In arriving at the profit after tax from discontinued operations
for the current and prior periods, it has not been possible under
IFRS 5 to allocate any of the Group's cost of funding the Mortgage
business to discontinued operations as the related liabilities were
not entered into specifically to fund the Group's Mortgage
business. Refer to notes 4 and 10 for further details.
Assets and liabilities of the disposal group representing the
Mortgage business are presented separately in the current period
Interim Condensed Consolidated Statement of Financial Position,
with no requirement to restate prior periods.
Change in presentation of ECL provision
During the second half of the financial year to 28 February
2019, the Group reclassified the amount of ECL allowance recognised
under IFRS 9 which exceeds the gross carrying amount of the
financial asset from loans and advances to customers to provisions
for liabilities and charges. This presentation was reflected in the
Group's year end Financial Statements at 28 February 2019. Balances
at 31 August 2018 within the Interim Condensed Consolidated
Statement of Financial Position have been restated to present these
consistently with the approach taken at 28 February 2019.
15
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
2. Restatement of Prior Periods (continued)
Impact of restatements
The impact of these changes on the relevant Financial Statement
lines is as follows:
As previously IFRS 16 adjustments Discontinued Provision Restated
reported operations for ECL
GBPm GBPm GBPm GBPm GBPm
At 1 March 2018(1)
Statement of Financial
Position
Property, plant and equipment 68.0 16.7 -- -- 84.7
Deferred income tax asset 57.0 1.6 -- -- 58.6
Accruals and deferred
income (109.0) 12.8 -- -- (96.2)
Other liabilities (147.7) (35.6) -- -- (183.3)
Retained earnings (342.2) 4.5 -- -- (337.7)
At 31 August 2018
Statement of Financial
Position
Loans and advances to
customers 12,144.4 -- -- 7.8 12,152.2
Property, plant and equipment 63.7 15.9 -- -- 79.6
Deferred income tax asset 55.8 1.6 -- -- 57.4
Provisions for liabilities
and charges (70.1) -- -- (7.8) (77.9)
Accruals and deferred
income (96.9) 12.7 -- -- (84.2)
Other liabilities (166.6) (35.0) -- -- (201.6)
Retained earnings (398.8) 4.8 -- -- (394.0)
Income Statement
Interest and similar
income 354.2 -- (35.4) -- 318.8
Interest expense and
similar charges (86.8) (1.3) -- -- (88.1)
Fees and commissions
income 187.6 -- (1.1) -- 186.5
Net loss on financial
instruments at FVPL (3.5) -- 2.8 (0.7)
Administrative expenses (207.2) 1.8 7.9 -- (197.5)
Depreciation and amortisation (43.4) (0.8) 1.5 -- (42.7)
Impairment loss on financial
assets 90.2 -- -- -- 90.2
Income tax charge (26.4) -- 6.6 -- (19.8)
Statement of Cash Flows
Non-cash items included
in operating profit before
taxation and other adjustments 128.0 2.1 -- -- 130.1
Changes in operating
assets and liabilities (70.6) 0.1 -- -- (70.5)
Principal repayments
on lease liabilities -- (0.8) -- -- (0.8)
Interest paid on lease
liabilities -- (1.1) -- -- (1.1)
(1) These balances as previously reported include the impact of
transition to IFRS 9 and IFRS 15 on 1 March 2018.
16
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
2. Restatement of Prior Periods (continued)
Impact of restatements (continued)
As previously IFRS 16 adjustments Discontinued Provision Restated
reported operations for ECL
GBPm GBPm GBPm GBPm GBPm
At 28 February 2019
Statement of Financial
Position
Property, plant and equipment 61.6 15.2 -- -- 76.8
Deferred income tax asset 57.6 1.7 -- -- 59.3
Accruals and deferred
income (108.0) 12.7 -- -- (95.3)
Other liabilities (151.2) (34.5) -- -- (185.7)
Retained earnings (425.5) 4.9 -- -- (420.6)
3. Segmental Reporting
Following the measurement approach of IFRS 8 'Operating
segments', the Group's operating segments are reported in
accordance with the internal reporting provided to the Board of
Directors, which is responsible for allocating resources to the
operating segments and assessing their performance.
As the result of restructuring undertaken during the period, in
line with the definition of a reportable segment under IFRS 8, the
Group's reportable segments at 31 August 2019 have increased from
one to two, being Banking and Insurance. This reflects changes made
to the reporting of business results to the Board of Directors, as
chief operating decision maker. Prior period disclosures in this
note have been restated accordingly.
The Group's two operating segments are as follows:
-- Banking - incorporating Credit Cards, Personal Loans,
Savings, Personal Current Accounts, ATMs and Money Services;
and
-- Insurance - incorporating Motor, Home and Pet Insurance
There are no transactions between the operating segments. There
are no significant seasonal fluctuations that affect the Group's
results.
Segmental assets and liabilities comprise operating assets and
liabilities, being the majority of the Interim Condensed
Consolidated Statement of Financial Position, but exclude
unallocated reconciling items such as taxation.
Segmental results of continuing operations and a reconciliation
of segmental results of continuing operations to the total results
of continuing operations are presented below.
Central Total management
Banking Insurance costs reporting Total consolidated
Continuing operations GBPm GBPm GBPm GBPm GBPm
6 months ended August 2019
Total income 347.0 59.8 -- 406.8 406.8
Profit before tax from continuing
operations(1) 35.3 55.0 (73.5) 16.8 16.8
6 months ended 31 August 2018(2,3)
Total income 348.2 59.9 -- 408.1 408.1
Profit before tax from continuing
operations(1) 85.9 54.0 (81.5) 58.4 58.4
(1) The Banking and Insurance segments include only directly
attributable administrative costs such as marketing and operational
costs. Central overhead costs, which reflect the overhead of
operating both the Insurance and Banking businesses, are not
allocated against an operating segment for internal reporting
purposes.
(2) The prior period has been restated following the
classification during the period of the Group's Mortgage business
as a discontinued operation. Refer to notes 2 and 10 for further
details.
(3) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
17
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
3. Segmental Reporting (continued)
Central Total management
Banking Insurance costs reporting Total consolidated
31 August 2019 GBPm GBPm GBPm GBPm GBPm
Total assets(1,2) 15,283.3 138.4 -- 15,421.7 15,421.7
Total liabilities 13,704.9 21.8 -- 13,726.7 13,726.7
28 February 2019(3)
Total assets(1) 15,488.0 169.5 -- 15,657.5 15,657.5
Total liabilities 13,969.0 20.6 -- 13,989.6 13,989.6
31 August 2018(3,4)
Total assets(1) 14,976.7 163.7 -- 15,140.4 15,140.4
Total liabilities 13,465.7 21.5 -- 13,487.2 13,487.2
(1) The investment of GBP83.5m (February 2019: GBP86.4m, August
2018: GBP83.7m) in Tesco Underwriting Limited (TU), a joint venture
company accounted for using the equity method, is shown within the
total assets of the insurance segment.
(2) Assets and liabilities of the disposal group in respect of
the Group's Mortgage business are included within the banking
segment.
(3) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(4) The prior period has been restated following a change in
presentation of the amount of the ECL allowance recognised under
IFRS 9 which exceeds the gross carrying amount of the financial
asset as set out at note 11. Refer to note 1 for further
details.
18
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
4. Underlying Profit
The Group's financial performance is presented in the Interim
Condensed Consolidated Income Statement on page 8. A summary of the
Group's financial performance in respect of its continuing
operations on an underlying basis, excluding items which are not
reflective of ongoing trading performance, is presented below.
Ogden
Statutory Restructuring Customer Regulatory rate Financial Underlying
basis activity(1) redress(2) provision(3) changes(4) instruments(5) basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------- -------------- ----------- ------------- ----------- --------------- --------------
6 months
ended 31
August 2019
Net
interest
income 240.1 29.0 -- -- -- -- 269.1
Other
income 166.7 -- -- -- -- 3.2 169.9
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Total
income 406.8 29.0 -- -- -- 3.2 439.0
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Total
operating
expenses (283.8) 8.2 45.0 -- -- -- (230.6)
Impairment (113.4) -- -- -- -- -- (113.4)
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Operating
profit 9.6 37.2 45.0 -- -- 3.2 95.0
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Share of
profit of
joint
venture 7.2 -- -- -- (3.7) -- 3.5
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Profit
before tax 16.8 37.2 45.0 -- (3.7) 3.2 98.5
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Ogden
Statutory Restructuring Customer Regulatory rate Financial Underlying
basis activity(1) redress(2) provision(3) changes(4) instruments(5) basis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Restated(6,7) Restated(6,7)
-------------- -------------- ----------- ------------- ----------- --------------- --------------
6 months
ended 31
August 2018
Net
interest
income 230.7 26.2 -- -- -- -- 256.9
Other
income 177.4 -- -- -- -- 0.7 178.1
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Total
income 408.1 26.2 -- -- -- 0.7 435.0
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Total
operating
expenses (263.6) (1.6) 7.0 16.4 -- -- (241.8)
Impairment (90.2) -- -- -- -- -- (90.2)
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Operating
profit 54.3 24.6 7.0 16.4 -- 0.7 103.0
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Share of
profit of
joint
venture 4.1 -- -- -- -- -- 4.1
-------------- -------------- ----------- ------------- ----------- --------------- --------------
Profit
before tax 58.4 24.6 7.0 16.4 -- 0.7 107.1
-------------- -------------- ----------- ------------- ----------- --------------- --------------
(1) Comprising:
* interest expense of GBP29.0m (August 2018: GBP26.2m)7
in respect of the Group's cost of funding its
Mortgage business, presented within net interest
income on page 8. As this cost cannot be directly
attributed to liabilities of the Group entered into
specifically to fund the Group's Mortgage business,
as required by IFRS 5, it has not been possible to
present this cost within profit after tax from
discontinued operations for the current or prior
period. These costs are in respect of business
restructuring and not considered part of the Group's
underlying results, reflecting actions taken by
Management to reduce the Group's deposits from
customers in response to the Group's reduced funding
requirement post-sale of its Mortgage business; and
* a restructuring charge of GBP8.2m in respect of costs
related to the Group's strategic review (August 2018:
credit of GBP1.6m reflecting a reduction in
dilapidations and onerous lease provisions),
presented within administrative expenses on page 8.
The current period charge and prior period credit are
in respect of business restructuring and not
considered part of the Group's underlying results.
(2) Comprising:
* payment protection insurance (PPI) provision charge
of GBP45.0m (August 2018: GBP7.0m) presented within
operating expenses on page 8. These costs relate to
historic sales of PPI and are not reflective of the
Group's underlying trading performance.
(3) Comprising:
* in the prior period, a charge of GBP16.4m in respect
of the November 2016 fraud incident, presented within
operating expenses on page 8. This charge relates to
the financial penalty imposed by the Financial
Conduct Authority in relation to this incident and is
not reflective of the Group's underlying trading
performance. There was no such charge in the current
period.
(4) Comprising:
* a credit of GBP3.7m (August 2018: GBPnil)
representing the Group's share of credits recognised
by TU relating to the impact on TU's insurance
reserves of a change in the Ogden tables, presented
within share of profit of joint venture on page 8.
The Ogden tables were last changed in March 2017,
when the discount rate was changed from 2.5% to
-0.75%, resulting in the Group recognising a charge
of GBP22.8m for the year ended 28 February 2017 in
respect of this rate change, which was excluded from
underlying profit at that date. The credit recognised
in the current period reflects the change to the
current discount rate of -0.25%. This rate change was
implemented following Government consultation and is
not reflective of the ongoing underlying performance
of TU.
(5) Comprising:
* Losses on financial instruments at FVPL of GBP3.2m
(August 2018: losses of GBP0.7m)(7) presented within
total income on page 8. Fair value movements on
financial instruments reflect hedge ineffectiveness
arising from hedge accounting and fair value
movements on derivatives in economic hedges that do
not meet the criteria for hedge accounting. Where
these derivatives are held to maturity, fair value
movements represent timing differences that will
reverse over the life of the derivatives. Therefore,
excluding these movements from underlying profit more
accurately represents the underlying performance of
the Group. Where derivatives are terminated prior to
maturity, this may give rise to fair value movements
that do not reverse.
(6) The prior period has been restated following the retrospective
adoption of IFRS 16 in the current period. Refer to note 2 for further
details.
(7) The prior period has been restated following the classification
of the Mortgage business as a discontinued operation. Refer to notes
2 and 10 for further details.
19
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
5. Net Interest Income
6 months 6 months
ended ended
31 August 31 August
2019 2018
GBPm GBPm
Continuing operations Restated(1,2)
Interest and similar income
On financial assets measured at amortised cost
Loans and advances to customers 332.5 309.8
Cash and balances with central banks 3.8 3.9
Investment securities 0.5 0.7
----------- --------------
336.8 314.4
----------- --------------
On financial assets measured at fair value
Investment securities 9.2 2.6
Derivative financial instruments - FVPL -- 1.8
----------- --------------
9.2 4.4
----------- --------------
Total interest and similar income 346.0 318.8
----------- --------------
Interest expense and similar charges
On financial liabilities measured at amortised
cost
Deposits from customers (75.1) (67.0)
Deposits from banks (8.0) (4.7)
Debt securities in issue (11.6) (12.8)
Lease liabilities (1.3) (1.3)
Subordinated liabilities and notes (2.6) (2.3)
----------- --------------
Total interest expense and similar charges (98.6) (88.1)
----------- --------------
On financial liabilities measured at fair value
Derivative financial liabilities - FVPL (7.3) -
----------- --------------
(7.3) -
----------- --------------
Total interest and similar expense (105.9) (88.1)
----------- --------------
Net interest income 240.1 230.7
----------- --------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
(2) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2, 4 and 10 for further details.
20
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
6. Net Fees and Commissions Income
6 months 6 months
ended 31 ended 31
August 2019 August 2018
GBPm GBPm
Restated(1)
Continuing operations
Fees and commissions income
Banking revenue from contracts with customers 122.0 125.7
Insurance revenue from contracts with customers 46.5 45.6
Other revenue from contracts with customers 16.7 15.2
------------- -------------
Total fees and commissions income 185.2 186.5
------------- -------------
Fees and commissions expense
Banking expense (15.4) (16.8)
------------- -------------
Total fees and commissions expense (15.4) (16.8)
------------- -------------
Net fees and commissions income 169.8 169.7
------------- -------------
With the exception of other revenue from contracts with
customers, all of the above fees and commissions relate to
financial assets and financial liabilities measured at amortised
cost. These figures exclude amounts incorporated in determining the
effective interest rate (EIR) on such financial assets and
financial liabilities.
(1) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
7. Impairment Loss on Financial Assets
6 months 6 months
ended ended
31 August 31 August
2019 2018
Restated(1)
GBPm GBPm
Continuing operations
Impairment loss on loans and advances to customers(2) 113.8 89.8
Impairment loss on investment securities at
FVOCI (0.4) 0.4
----------- ------------
Total impairment loss on financial assets 113.4 90.2
----------- ------------
(1) The prior period has been restated following the
classification of the Mortgage business as a discontinued
operation. Refer to notes 2 and 10 for further details.
(2) Included within the impairment loss on loans and advances to
customers is an amount of GBP0.8m (August 2018: GBP4.4m) received
through the sale of debt to third parties.
8. Income Tax
The tax charge in the Interim Condensed Consolidated Income
Statement is based on Management's best estimate of the full year
effective tax rate based on expected full year profits to 29
February 2020.
Income tax on the Group's profit from continuing operations for
the period is a charge of GBP15.5m (August 2018: GBP19.8m) and on
the Group's discontinued operations is a charge of GBP6.5m (August
2018: GBP6.6m). The Group's current effective tax rate is higher
than the statutory rate principally due to the non-deductibility of
the additional PPI charge recognised in the period.
The March 2016 Budget Statement included an announcement that
the standard rate of corporation tax in the United Kingdom (UK)
would be reduced to 17% from 1 April 2020. This rate reduction was
enacted during the year ended 28 February 2017 and is therefore
incorporated in these Interim Condensed Consolidated Financial
Statements. The rate change is expected to reduce the Group's
effective tax rate in the medium term.
21
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
9. Capital Expenditure and Commitments
In the six months ended 31 August 2019 there were additions to
property, plant and equipment and intangible assets of GBP18.7m
(August 2018: GBP12.7m). Commitments for capital expenditure
contracted for but not provided at 31 August 2019 were GBPnil
(February 2019: GBPnil) on property, plant and equipment and
GBP4.0m (February 2019: GBP0.8m) on intangible assets. In the 6
months ended 31 August 2019 there were disposals of intangible
assets amounting to GBP3.7m (August 2018: GBP0.1m). At 31 August
2019, TU has a commitment of GBPnil (February 2019: GBP1.2m) to
subscribe to the Tritax Property Income Fund Unit Trust as part of
its investment portfolio.
The Group's Management are confident that future net revenues
and funding will be sufficient to cover these commitments.
10. Assets/Liabilities of the Disposal Group and Discontinued Operations
Assets/Liabilities of the disposal group
31 August
2019
GBPm
Assets and liabilities of the disposal group
Secured Mortgage lending - gross 3,660.1
Fair value hedge adjustment 32.2
Less: Allowance for impairment (3.2)
Secured Mortgage lending - net 3,689.1
Other assets 1.0
Assets of the disposal group 3,690.1
----------
Other liabilities (4.2)
Liabilities of the disposal group (4.2)
----------
During the period to 31 August 2019, secured Mortgage lending
balances have been reclassified from loans and advances to
customers set out at note 11 to assets of the disposal group
following the Group's decision to sell its Mortgage business. Cash
in transit balances in relation to Mortgages have also been
reclassified from other assets and other liabilities to assets and
liabilities of the disposal group respectively as these balances
relate to amounts which will be applied to Mortgage accounts and
therefore form part of the Mortgage business being sold. The Group
agreed the sale of its Mortgage business on 3 September 2019 and
completed the sale of the majority of its Mortgage business on 27
September 2019. Further information in respect of this disposal is
set out at note 22.
At 31 August 2019, the Group had contractual lending commitments
of GBP53.9m in respect of the assets of the disposal group.
22
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
10. Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - income statement
The table below shows the results of discontinued operations in
relation to the Group's Mortgage business which are included in the
Interim Condensed Consolidated Income Statement and Interim
Condensed Consolidated Statement of Cash Flows for the period to 31
August 2019.
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
---------- ---------- --------
6 months ended 31 August 2019
Net interest income 41.3 (29.0) 12.3
Net fees and commissions income 1.0 -- 1.0
Other income (6.6) -- (6.6)
---------- ---------- --------
Total income 35.7 (29.0) 6.7
Total operating expenses (11.8) -- (11.8)
Impairment loss on financial assets -- -- --
---------- ---------- --------
Profit/(loss) before tax 23.9 (29.0) (5.1)
Income tax (charge)/credit (6.5) 7.8 1.3
Profit after tax for the period attributable
to owners of the parent arising from discontinued
operations 17.4 (21.2) (3.8)
---------- ---------- --------
Statutory Funding Managed
basis costs(1) basis
GBPm GBPm GBPm
---------- ---------- --------
6 months ended 31 August 2018
Net interest income 35.4 (26.2) 9.2
Net fees and commissions income 1.1 -- 1.1
Other income (2.8) -- (2.8)
---------- ---------- --------
Total income 33.7 (26.2) 7.5
Total operating expenses (9.4) -- (9.4)
Impairment loss on financial assets -- -- --
---------- ---------- --------
Profit/(loss) before tax 24.3 (26.2) (1.9)
Income tax (charge)/credit (6.6) 7.1 0.5
Profit after tax for the period attributable
to owners of the parent arising from discontinued
operations 17.7 (19.1) (1.4)
---------- ---------- --------
(1) Comprising:
* interest expense of GBP29.0m (August 2018: GBP26.2m)
in respect of the discontinued operations' cost of
funding, presented within net interest income on page
8. As this cost cannot be directly attributed to
liabilities of the Group entered into specifically to
fund the Group's Mortgage business, as required by
IFRS 5, it has not been possible to present this cost
within statutory profit for the period after tax from
discontinued operations for the current or prior
period. These costs are in respect of business
restructuring and are considered part of the Mortgage
business' results on a managed basis. These costs are
expected to reduce, reflecting actions taken by
Management to reduce the Group's deposits from
customers in response to the Group's reduced funding
requirement post-sale of the Mortgage business.
23
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
10. Assets/Liabilities of the Disposal Group and Discontinued Operations (continued)
Discontinued operations - statement of cash flows
6 months 6 months
ended 31 ended 31
August 2019 August 2018
Statement of Cash Flows GBPm GBPm
Net cash flows from operating activities 111.0 (482.9)
Net cash flows from investing activities -- --
Net cash flows from financing activities -- --
Net cash flows from discontinued operations 111.0 (482.9)
------------- -------------
11. Loans and Advances to Customers
31 August 28 February 31 August
2019 2019 2018
GBPm GBPm GBPm
Restated(1)
Secured Mortgage lending - 3,767.4 3,515.9
Unsecured lending 9,190.8 9,146.2 9,112.7
---------- ------------ ------------
Total secured and unsecured lending 9,190.8 12,913.6 12,628.6
---------- ------------ ------------
Fair value hedge adjustment 9.3 (2.7) (11.5)
---------- ------------ ------------
Gross loans and advances to customers 9,200.1 12,910.9 12,617.1
---------- ------------ ------------
Less: allowance for impairment (Refer to note 16) (511.4) (485.2) (464.9)
Net loans and advances to customers 8,688.7 12,425.7 12,152.2
---------- ------------ ------------
(1) The prior period has been restated following a change in the
presentation of the amount of the ECL allowance recognised under
IFRS 9 which exceeds the gross carrying amount of the financial
asset. Refer to note 1 for further details.
Contractual lending commitments and ECL provision
At 31 August 2019, the Group had contractual lending commitments
of GBP11,820.5m (February 2019: GBP12,226.2m). An additional ECL
provision of GBP8.6m was also recognised at 31 August 2019
(February 2019: GBP8.5m). This represents the excess of total ECLs
for both drawn and undrawn balances over the gross carrying
balances as above. Refer to note 14 for further details.
Secured Mortgage lending
During the period to 31 August 2019, the secured Mortgage
lending balances and related fair value hedge adjustments have been
reclassified from loans and advances to customers to assets of the
disposal group. Refer to note 10 for further details.
Fair value hedge adjustments
Fair value hedge adjustments amounting to GBP9.3m are in respect
of fixed rate Loans. The balances at 28 February 2019 and 31 August
2018 also included fixed rate Mortgages. These adjustments are
largely offset by derivatives, which are used to manage interest
rate risk and are designated as fair value hedges within loans and
advances to customers.
24
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
12. Investment in Joint Venture
During the period ended 31 August 2019 the Group's joint
venture, TU, completed a share capital reduction of GBP15.6m.
Following the share capital reduction, TU distributed capital of
GBP31.3m. The Group has recognised its share of this distribution,
being GBP15.6m, through a reduction in the carrying value of its
investment in TU. The Group's investment in subordinated debt
issued by TU has decreased by GBP7.8m, reflecting the Group's share
of loan capital repaid in the period.
13. Debt Securities in Issue
Interest rate Par value Term Maturity 31 August 28 February 31 August
GBPm (years) date 2019 2019 2018
GBPm GBPm GBPm
RPI bond(1) 1.0% 73.2 8 2019 73.2 72.3 71.0
Fixed rate retail
bond(2) 5.0% 200.0 8.5 2020 202.9 202.9 203.4
Floating rate AAA
bond (A2)(3) 1M LIBOR + 0.65% 350.0 7 2021 -- 349.9 349.8
Floating rate AAA
bond (A1)(4) 1M LIBOR + 0.53% 300.0 5 2022 299.0 298.7 298.4
Floating rate AAA 1M USD LIBOR
bond (A1)(5) + 0.84% 272.2 7 2020 286.0 261.7 --
861.1 1,185.5 922.6
--------- ----------- ---------
All Floating Rate Bonds were issued by Delamare Cards MTN Issuer
plc and are listed on the Irish Stock Exchange. All retail bonds
are listed on the London Stock Exchange.
(1) This bond was issued on 16 December 2011.
(2) This bond was issued on 21 May 2012.
(3) This Bond was issued on 6 June 2014. This bond was redeemed
on its scheduled redemption date in May 2019.
(4) This Bond was issued on 7 November 2017. The scheduled
redemption date of this Bond is October 2020.
(5) This bond was issued on 27 November 2018. The scheduled
redemption date of this bond is November 2020.
25
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
14. Provisions for Liabilities and Charges
Customer Restructuring Expected Other
redress provision provision credit loss provisions
provision Total
GBPm GBPm GBPm GBPm GBPm
6 months to 31 August
2019
At beginning of period 34.7 -- 8.5 11.8 55.0
Provided during the
period 45.0 5.2 -- 1.2 51.4
Utilised during the
period (18.5) (4.3) -- (1.3) (24.1)
Transfer from loans
and advances ECL
allowance -- -- 0.1 -- 0.1
Released during the
period -- -- -- (0.8) (0.8)
------------------- -------------- ------------- ------------ -------
At end of period 61.2 0.9 8.6 10.9 81.6
------------------- -------------- ------------- ------------ -------
Customer redress provision - Payment protection insurance
Of the total customer redress provision balance at 31 August
2019, GBP60.7m (February 2019: GBP34.2m) has been provided for
customer redress in respect of potential customer claims arising
from historic sales of PPI.
In March 2017, the FCA issued a Policy Statement (PS17/3,
'Payment protection insurance complaints: feedback on CP16/20 and
final rules and guidance') which confirmed a deadline for PPI
claims of August 2019, supported by an FCA led communications
campaign.
The policy statement also set out rules and guidance on the
handling of PPI claims in light of the Supreme Court's decision in
Plevin v Paragon Personal Finance Limited (Plevin), confirming that
both up-front commission arrangements and profit share arrangements
should also be considered in the calculation of total commission
for Plevin claims.
The claims deadline passed on 29 August 2019. In response to the
high level of claims received by the Group during the period in
advance of the PPI complaint deadline, the Group increased its PPI
provision by GBP45.0m during the half-year ended 31 August 2019 to
reflect an updated assessment of the claim rate and average
redress.
Although a significant degree of uncertainty remains with regard
to the ultimate cost of settling PPI claims, the provision balance
represents Management's best estimate at the reporting date of that
cost and is based on historical uphold rates, average redress and
the associated administrative expenses. The PPI provision and the
impact of regulatory changes will continue to be monitored as
Management complete their assessment of the significant level of
claims received in advance of the claims deadline and levels of
redress. Management expect to utilise the provision over the
remainder of the year ended 29 February 2020.
26
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
14. Provisions for Liabilities and Charges (continued)
Customer redress provision - Payment protection insurance
(continued)
The table below details for each key assumption, actual data to
31 August 2019 and a sensitivity assessment demonstrating the
impact on the provision of a variation in the key assumptions. The
key sensitivity in relation to PPI claims received is the
conversion rate into an upheld complaint.
Sensitivity
------------ -----------------------------------
Cumulative Outstanding Change in Consequential
Assumption actual claims assumption change in provision
GBPm
+/- 2,000
successful
Valid claims 155,723 35,308 claims +/- 3.3
Average redress per valid
claim GBP1,726 GBP1,665 +/- GBP100 +/- 3.5
Customer redress provision - Consumer credit act (CCA)
The Group holds a provision of GBP0.5m (February 2019: GBP0.5m)
in respect of customer redress relating to instances where certain
requirements of the CCA for post-contract documentation were not
fully complied with.
In arriving at the provision required, the Group has considered
the legal and regulatory position with respect to these matters and
has sought legal advice which it took into account when making its
judgement. The provision represents Management's best estimate at
the reporting date of the cost of concluding the redress programme
for Loan and Credit Card customers, and in making the estimate
Management have exercised judgement as to both the timescale for
completing the redress campaign and the final scope of any amounts
payable. Management expect to utilise the provision over the
remainder of the year ended 29 February 2020.
Restructuring provision
The restructuring provision is in respect of costs related to
the Group's strategic review. Management expect to utilise the
provision over the remainder of the year ended 29 February
2020.
Expected Credit Loss provision
The ECL provision represents the amount of ECL allowance
recognised under IFRS 9 which exceeds the gross carrying amount of
the financial asset as set out at note 11.
Other provisions
Other provisions predominantly reflect:
-- a dilapidations provision related to the anticipated costs of
restoring leased assets to their original condition. Management
expect that the provision will be utilised at the end of the lease
terms, the longest of which is due to end in 2029;
-- a warranty provision in respect of debt sales. This
represents post-determination date customer receipts payable to
debt purchasers and provision for any accounts which may need to be
bought back under the terms of the debt sale agreements; and
-- a provision in respect of the potential cost of refunding fees to customers.
27
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
15. Subordinated Liabilities and Notes
31 August 28 February 31 August
2019 2019 2018
GBPm GBPm GBPm
Fixed rate subordinated loans maturing 251.2 - -
2025
Floating rate subordinated loans
maturing 2030 190.0 190.0 190.0
Undated floating rate notes 45.0 45.0 45.0
Total subordinated liabilities and
notes 486.2 235.0 235.0
---------- ------------ ----------
Subordinated liabilities and notes comprise loan capital issued
to Tesco Personal Finance Group PLC (TPFG). This includes GBP190.0m
(February 2019: GBP190.0m) of subordinated loans maturing in 2030,
GBP45.0m (February 2019: GBP45.0m) of undated notes with no fixed
maturity date and GBP250.0m notional (February 2019: GBPnil) of
subordinated loans maturing in 2025.
TPFG undertook an initial issuance of MREL-compliant debt(1) in
July 2019 and subsequently invested the proceeds in the Company via
an intercompany subordinated loan.
Interest payable on the fixed rate intercompany subordinated
loan is 3.5%. Interest payable on the floating rate subordinated
liabilities and notes is based on three month LIBOR plus a spread
ranging from 60 to 220 basis points (February 2019: three month
LIBOR plus a spread ranging from 60 to 220 basis points).
(1) The Group will be subject to the minimum requirements for
own funds and eligible liabilities (MREL) on an interim basis from
1 January 2020, with full implementation applicable from 1 January
2022. The requirements are factored into the Group's funding and
capital plans.
28
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management
Full details of the Group's risk management are included in the
Group's Consolidated Financial Statements for the year ended 28
February 2019. Updates on key areas of credit risk management and
ECL measurement are included below.
-- Credit risk: ECL measurement
Incorporation of forward-looking information
The ECL calculation and the measurement of significant
deterioration in credit risk both incorporate forward-looking
information using a range of macro-economic scenarios. The key
economic variables are based on historical patterns observed over a
range of economic cycles.
The Group has engaged a third party supplier to provide relevant
economic data for this purpose which, prior to incorporation into
the ECL calculation, is subject to internal review and challenge
with reference to other publicly available market data and
benchmarks. From this data, a base case scenario has been
developed, together with two additional scenarios, each of which
have been assigned a relative probability. The base case represents
an estimate of the most-likely outcome whilst the other scenarios
represent more optimistic (upside) and more pessimistic (downside)
outcomes. The downside scenario represents, at the reporting date,
the Group's view of the economy if the UK exits the EU without both
a withdrawal agreement and framework for a future relationship with
the EU. The scenarios have been assigned weightings of 40%, 25% and
35% respectively which is considered to be appropriate for the
calculation of unbiased ECLs.
The economic scenarios used at 31 August 2019 include the
following ranges of key indicators:
2019 2020 2021-23
Bank of England (BoE) base
rate(1) Base 0.55% 0.46% 0.56%
Upside 0.43% 0.20% 0.19%
Downside 0.95% 2.13% 2.29%
Unemployment rate(1) Base 3.83% 3.88% 3.77%
Upside 3.79% 3.83% 3.71%
Downside 4.39% 5.17% 6.24%
House price index(2) Base 2.93% 3.36% 4.02%
Upside 4.26% 4.66% 5.77%
Downside -2.08% -4.14% 2.51%
Gross domestic product(2) Base 1.31% 1.67% 1.82%
Upside 1.69% 2.04% 2.23%
Downside 0.85% 0.24% 1.53%
(1) Simple average
(2) Annual growth rates
29
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
Sensitivity analysis
The most significant assumptions affecting the ECL calculation
are as follows:
-- Probability of default (PD);
-- Loss given default (LGD);
-- Macro-economic scenarios;
-- PD threshold (staging); and
-- Expected lifetime of revolving credit facilities
For further details on each of these assumptions refer to the
Consolidated Financial Statements for the Group for the year ended
28 February 2019.
Set out below are changes in the ECL allowance that would arise
from reasonably possible changes in these assumptions from those
used in the Group's calculations at 31 August 2019:
Impact on the loss
allowance
GBPm
Increase of
PD 2.5% 9.6
Decrease of
2.5% (9.4)
Increase of
LGD 2.5% 12.4
Decrease of
2.5% (12.6)
Macro-economic scenarios (100% weighted) Upside scenario (42.8)
Base scenario (33.1)
Downside scenario 79.4
Increase of
Staging 20% (13.3)
Decrease of
20% 19.9
Increase of
Expected lifetime 1 year 2.5
Decrease of
1 year (2.5)
30
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
-- Credit risk: credit risk exposure
Maximum exposure to credit risk
The table below represents the Group's maximum exposure to
credit risk, by IFRS 9 stages at the reporting date, in respect of
financial assets held.
For financial assets, the balances are based on gross carrying
amounts as reported in the Consolidated Statement of Financial
Position. For loan commitments, the amounts in the table represent
the amounts for which the Group is contractually committed.
As at 31 August 2019 Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to customers 7,977.3 906.2 307.3 9,190.8
Investment securities at FVOCI 1,039.0 -- -- 1,039.0
Investment securities at amortised
cost 21.1 -- -- 21.1
Assets of the disposal group(1) 3,534.9 124.1 1.1 3,660.1
Loan commitments - Loans and
advances to customers(2) 11,713.9 105.4 1.2 11,820.5
Loan commitments - Assets of
the disposal group(1) 53.9 -- -- 53.9
Total gross exposure 24,340.1 1,135.7 309.6 25,785.4
----------- -------- -------- -----------
Loss allowance
Loans and advances to customers(2) 100.0 215.5 195.9 511.4
Investment securities at FVOCI(3) (0.2) -- -- (0.2)
Investment securities at amortised
cost 0.1 -- -- 0.1
Assets of the disposal group(1) 1.5 1.6 0.1 3.2
Total loss allowance 101.4 217.1 196.0 514.5
----------- -------- -------- -----------
As at 28 February 2019 Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to customers 11,463.6 1,179.1 270.9 12,913.6
Investment securities at FVOCI 1,042.7 -- -- 1,042.7
Investment securities at amortised
cost 28.9 -- -- 28.9
Loan commitments(2) 12,115.1 109.6 1.5 12,226.2
Total gross exposure 24,650.3 1,288.7 272.4 26,211.4
----------- -------- -------- -----------
Loss allowance
Loans and advances to customers 84.6 228.7 171.9 485.2
Investment securities at FVOCI(3) 0.2 -- -- 0.2
Investment securities at amortised
cost 0.1 -- -- 0.1
Total loss allowance 84.9 228.7 171.9 485.5
----------- -------- -------- -----------
(1) During the period to 31 August 2019, secured Mortgage
lending balances have been reclassified from loans and advances to
customers to assets of the disposal group. These continue to be
measured at amortised cost per the requirements of IFRS 9.
(2) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers and assets of the disposal group as above to the extent
that it is below the gross carrying amount of loans and advances to
customers or assets of the disposal group. Where the loss allowance
exceeds the gross carrying amount, any excess is included within
provisions as set out at note 14.
(3) The loss allowance for investment securities at FVOCI is not
recognised in the carrying amount of investment securities as the
carrying amount is their fair value.
31
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
As at 31 August 2018 Stage 1 Stage 2 Stage 3 Total
GBPm GBPm GBPm GBPm
Gross Exposure
Loans and advances to customers 11,318.3 1,068.0 242.3 12,628.6
Investment securities at FVOCI 686.7 -- -- 686.7
Investment securities at amortised
cost 28.9 -- -- 28.9
Loan commitments(1) 12,186.9 154.2 1.5 12,342.6
Total gross exposure 24,220.8 1,222.2 243.8 25,686.8
--------- -------- -------- ---------
Loss allowance
Loans and advances to customers 88.1 215.8 161.0 464.9
Investment securities at FVOCI(2) (0.1) -- -- (0.1)
Investment securities at amortised
cost 0.2 -- -- 0.2
Total loss allowance 88.2 215.8 161.0 465.0
--------- -------- -------- ---------
(1) The loss allowance in respect of loan commitments is
included within the total loss allowance for loans and advances to
customers as above to the extent that it is below the gross
carrying amount of loans and advances to customers. Where the loss
allowance exceeds the gross carrying amount, any excess is included
within provisions as set out at note 14.
(2) The loss allowance for investment securities at FVOCI is not
recognised in the carrying amount of investment securities as the
carrying amount is their fair value.
32
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
-- Credit risk: Loss allowance
Loss allowance reconciliation
The following table provides a reconciliation of the movements
in the loss allowance in the period:
6 months to 31 August 2019 Stage Stage Stage Total
1 2 3
GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2019 84.6 228.7 171.9 485.2
Transfers(1,3)
Transfers from stage 1 to stage 2 (9.9) 9.9 -- --
Transfers from stage 2 to stage 1 58.3 (58.3) -- --
Transfers to stage 3 (1.6) (37.6) 39.2 --
Transfers from stage 3 1.2 2.2 (3.4) --
Income statement charge
Net remeasurement(2) following transfer
of stage(3) (34.7) 20.8 49.5 35.6
New financial assets originated(4) 15.9 6.4 1.1 23.4
Changes in risk parameters and other movements(3,5) (12.7) 47.0 18.7 53.0
Other movements
Write-offs and asset disposals(6) -- (1.7) (81.0) (82.7)
Transfer from provisions for liabilities
and charges(7) 0.4 (0.3) -- 0.1
At 31 August 2019 101.5 217.1 196.0 514.6
------- ------- ------- -------
Comprising:
Loans and advances to customers 100.0 215.5 195.9 511.4
Assets of the disposal group(8) 1.5 1.6 0.1 3.2
Total loss allowance at 31 August 2019 101.5 217.1 196.0 514.6
------- ------- ------- -------
Investment securities at FVOCI
At 1 March 2019 0.2 -- -- 0.2
Income statement charge
New financial assets purchased(4) -- -- -- --
Financial assets derecognised during the -- -- -- --
period
Changes in risk parameters and other movements(5) (0.4) -- -- (0.4)
At 31 August 2019 (0.2) -- -- (0.2)
------- ------- ------- -------
Investment securities at amortised cost
At 1 March 2019 and 31 August 2019 0.1 -- -- 0.1
------- ------- ------- -------
Reconciliation to income statement
Net expected credit loss (release)/charge (31.9) 74.2 69.3 111.6
Recoveries and write-offs -- -- 1.8 1.8
Total income statement (release)/charge (31.9) 74.2 71.1 113.4
------- ------- ------- -------
Comprising:
- In respect of continuing operations (30.7) 73.0 71.1 113.4
- In respect of discontinuing operations (1.2) 1.2 -- --
------- ------- ------- -------
Total income statement (release)/charge (31.9) 74.2 71.1 113.4
------- ------- ------- -------
(1) Transfers - The opening loss allowance on financial assets
in respect of continuing operations which transferred stage during
the period.
(2) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(3) Includes a release in stages 1 and 2 of GBP6.6m due to a
change in macro-economic assumptions.
(4) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the period, representing their stage at 31 August 2019.
(5) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and exposure at default changes during the period.
(6) Write-offs and asset disposals - The release of the loss
allowance following the write off and/or disposal of a financial
asset during the period.
(7) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(8) During the period to 31 August 2019, the Group classified
its Mortgage business as a disposal group. Refer to notes 2 and 10
for further details.
33
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
6 months to 31 August 2018 Stage Stage Stage Total
1 2 3
GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2018(8,9) 94.9 210.9 151.1 456.9
Transfers(1,3)
Transfers from stage 1 to stage 2 (10.7) 10.7 -- --
Transfers from stage 2 to stage 1 36.9 (36.9) -- --
Transfers to stage 3 (1.2) (29.5) 30.7 --
Transfers from stage 3 0.9 1.4 (2.3) --
Income statement charge
Net remeasurement(2) following transfer
of stage (3) (19.8) 19.0 41.3 40.5
New financial assets originated(4) 19.4 7.5 1.0 27.9
Changes in risk parameters and other movements(3,5) (32.7) 35.0 22.0 24.3
Other movements
Write-offs and asset disposals(6) (2.2) (1.2) (82.8) (86.2)
Transfer from provisions for liabilities
and charges(7) 2.6 (1.1) -- 1.5
At 31 August 2018 88.1 215.8 161.0 464.9
------- ------- ------- -------
Investment securities at FVOCI
At 1 March 2018 (0.5) -- -- (0.5)
Income statement charge
New financial assets purchased(4) 0.1 -- -- 0.1
Financial assets derecognised during the
period 0.3 -- -- 0.3
Changes in risk parameters and other movements(5) -- -- -- --
At 31 August 2018 (0.1) -- -- (0.1)
------- ------- ------- -------
Investment securities at amortised cost
At 1 March 2018 and 31 August 2018 0.2 -- -- 0.2
------- ------- ------- -------
Reconciliation to income statement
Net expected credit loss (release)/charge (32.7) 61.5 64.3 93.1
Recoveries and write-offs -- -- (2.9) (2.9)
Total income statement (release)/charge (32.7) 61.5 61.4 90.2
------- ------- ------- -------
Comprising:
- In respect of continuing operations (32.4) 61.2 61.4 90.2
- In respect of discontinuing operations (0.3) 0.3 -- --
------- ------- ------- -------
Total income statement (release)/charge (32.7) 61.5 61.4 90.2
------- ------- ------- -------
(1) Transfers - The opening loss allowance on financial assets
in respect of continuing operations which transferred stage during
the period.
(2) Net remeasurement - The increase/(decrease) in the opening
loss allowance as a result of a stage transfer.
(3) Includes a release in stages 1 and 2 of GBP11.3m due to a
change in macro-economic assumptions.
(4) New financial assets originated or purchased - The loss
allowance on new financial assets originated or purchased during
the period, representing their stage at 31 August 2019.
(5) Changes in risk parameters and other movements - The change
in loss allowance due to changes in macro-economic scenarios, PD,
LGD and exposure at default changes during the period.
(6) Write-offs and asset disposals - The release of the loss
allowance following the write off and/or disposal of a financial
asset during the period.
(7) Transfer from provisions for liabilities and charges - The
movement in loss allowance which exceeds the gross carrying amount
of the financial asset.
(8) This balance includes the impact of transition to IFRS 9 on
1 March 2018.
(9) The prior period has been restated following a change in
presentation of the amount of the ECL allowance recognised under
IFRS 9 which exceeds the gross carrying amount of the financial
asset as set out at note 11. Refer to note 2 for further
details.
34
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
The following table provides a reconciliation of movements in
the gross carrying amounts of financial instruments to help explain
their significance to the changes in the loss allowance during the
period as set out in the above table:
Stage Stage Stage Total
1 2 3
6 months to 31 August 2019 GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2019 11,463.6 1,179.1 270.9 12,913.6
Transfers(1)
Transfers from stage 1 to stage 2 (434.0) 434.0 -- --
Transfers from stage 2 to stage 1 435.3 (435.3) -- --
Transfers to stage 3 (48.4) (101.2) 149.6 --
Transfers from stage 3 3.2 5.4 (8.6) --
Other movements
New financial assets originated(2) 1,597.1 31.0 1.7 1,629.8
Net decrease in lending(3) (1,507.2) (81.5) (2.7) (1,591.4)
Write-offs and asset disposals(4) (0.3) (1.8) (106.9) (109.0)
Changes in interest accrual and other
movements 2.9 0.6 4.4 7.9
Gross balances at 31 August 2019 11,512.2 1,030.3 308.4 12,850.9
---------- -------- -------- ----------
Comprising:
Loans and advances to customers 7,977.3 906.2 307.3 9,190.8
Assets of the disposal group 3,534.9 124.1 1.1 3,660.1
Gross balances at 31 August 2019 11,512.2 1,030.3 308.4 12,850.9
---------- -------- -------- ----------
Investment securities at FVOCI
At 1 March 2019 1,042.7 -- -- 1,042.7
New financial assets purchased 81.0 -- -- 81.0
Financial assets derecognised during
the period (95.3) -- -- (95.3)
Other movements 10.6 -- -- 10.6
At 31 August 2019 1,039.0 -- -- 1,039.0
---------- -------- -------- ----------
Investment securities at amortised
cost
At 1 March 2019 28.9 -- -- 28.9
Financial assets derecognised during
the period (7.8) -- -- (7.8)
At 31 August 2019 21.1 -- -- 21.1
---------- -------- -------- ----------
(1) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at period end.
(2) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the period, representing their stage as at 31 August 2019.
(3) Net decrease in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(4) Write-offs and asset disposals -The write-off of the gross
carrying amount when a financial asset is deemed uncollectible
and/or has been disposed of.
(5) During the period to 31 August 2019, the Group classified
its Mortgage business as a disposal group. Refer to notes 2 and 10
for further details.
35
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
16. Credit risk management (continued)
Stage Stage Stage Total
1 2 3
6 months to 31 August 2018 GBPm GBPm GBPm GBPm
Loans and advances to customers
At 1 March 2018 10,619.1 932.2 230.4 11,781.7
Transfers(1)
Transfers from stage 1 to stage 2 (515.3) 515.3 -- --
Transfers from stage 2 to stage 1 338.4 (338.4) -- --
Transfers to stage 3 (43.9) (83.0) 126.9 --
Transfers from stage 3 2.9 4.1 (7.0) --
Other movements
New financial assets originated(2) 2,214.2 45.2 1.5 2,260.9
Net decrease in lending(3) (1,265.7) (5.5) (21.7) (1,292.9)
Write-offs and asset disposals(4) (33.5) (2.8) (89.6) (125.9)
Changes in interest accrual and other
movements 2.1 0.9 1.8 4.8
At 31 August 2018 11,318.3 1,068.0 242.3 12,628.6
---------- -------- ------- ----------
Investment securities at FVOCI
At 1 March 2018 925.4 -- -- 925.4
New financial assets purchased 318.4 -- -- 318.4
Financial assets derecognised during
the period (545.3) -- -- (545.3)
Other movements (11.8) -- -- (11.8)
At 31 August 2018 686.7 -- -- 686.7
---------- -------- ------- ----------
Investment securities at amortised
cost
At 1 March 2018 34.1 -- -- 34.1
Financial assets derecognised during
the period (5.2) -- -- (5.2)
At 31 August 2018 28.9 -- -- 28.9
---------- -------- ------- ----------
(1) Transfers - The opening gross carrying amount of financial
assets held which transferred stage as at period end.
(2) New financial assets originated or purchased - The gross
carrying amount of financial assets originated or purchased during
the period, representing their stage as at 31 August 2019.
(3) Net decrease) in lending - The changes in gross carrying
amount of financial assets after taking account of additional
borrowing and/or payments received from customers.
(4) Write-offs and asset disposals -The write-off of the gross
carrying amount when a financial asset is deemed uncollectible
and/or has been disposed of.
36
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
17. Fair Values
Except as detailed in the following table, the Directors
consider that the carrying value amounts of financial assets and
financial liabilities recorded in the Interim Condensed
Consolidated Statement of Financial Position are approximately
equal to their fair values(1) .
31 August 2019 28 February 2019 31 August 2018
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
GBPm GBPm GBPm GBPm GBPm GBPm
Restated(2)
Financial assets:
Loans and advances to
customers 8,688.7 8,856.3 12,425.7 12,607.3 12,152.2 12,301.4
Investment securities
- amortised cost 21.0 26.0 28.8 28.2 28.7 32.4
Assets of the disposal
group(3) 3,689.1 3,712.1 -- -- -- --
--------- --------- --------- --------- ------------ ---------
12,398.8 12,594.4 12,454.5 12,635.5 12,180.9 12,333.8
--------- --------- --------- --------- ------------ ---------
Financial liabilities:
Deposits from customers 9,914.5 9,917.6 10,478.6 10,440.5 10,073.2 10,052.6
Debt securities in issue 861.1 863.5 1,185.5 1,189.5 922.6 929.9
Subordinated liabilities 486.2 471.3 235.0 182.2 235.0 191.3
--------- --------- --------- --------- ------------ ---------
11,261.8 11,252.4 11,899.1 11,812.2 11,230.8 11,173.8
--------- --------- --------- --------- ------------ ---------
The only financial assets and financial liabilities which are
carried at fair value in the Interim Condensed Consolidated
Statement of Financial Position at period end are cash balances
relating to the Group's travel money offering, FVOCI investment
securities and derivative financial instruments. The valuation
techniques and inputs used to derive fair values at the period end
are described below.
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. Where an active market
is considered to exist, fair values are based on quoted prices. For
instruments which do not have active markets, fair value is
calculated using present value models, which take individual cash
flows together with assumptions based on market conditions and
credit spreads, and are consistent with accepted economic
methodologies for pricing financial instruments.
In each case the fair value is calculated by discounting future
cash flows using benchmark, observable market interest rates.
(1) Fair value disclosures are not required for lease
liabilities.
(2) The prior period has been restated following a change in the
presentation of the ECL allowance provision. Refer note 1 for
further details.
(3) During the period to 31 August 2019, secured Mortgage
lending balances have been reclassified from loans and advances to
customers to assets of the disposal group. These continue to be
measured at amortised cost in line with the requirements of IFRS
9.
37
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
17. Fair Values (continued)
The table below categorises all financial instruments held at
fair value (recurring measurement) and the fair value of financial
instruments held at amortised cost according to the method used to
establish the fair value disclosed.
Level 1 Level 2 Level 3 Total
As at 31 August 2019 GBPm GBPm GBPm GBPm
Financial assets carried at fair value
Cash and balances with central banks(1) -- 42.0 -- 42.0
Investment securities - FVOCI 1,035.6 -- 3.4 1,039.0
Derivative financial instruments:
- Interest rate swaps -- 24.8 -- 24.8
- Forward foreign currency contracts -- 0.3 -- 0.3
- Cross currency swaps - 14.9 - 14.9
Financial assets carried at amortised cost
Loans and advances to customers -- -- 8,856.3 8,856.3
Investment securities - amortised cost -- 26.0 -- 26.0
Assets of the disposal group - - 3,712.1 3,712.1
-------- -------- --------- ---------
Total 1,035.6 108.0 12,571.8 13,715.4
-------- -------- --------- ---------
Financial liabilities carried at fair value
Derivative financial instruments:
- Interest rate swaps -- 63.0 -- 63.0
Financial liabilities carried at amortised cost
Deposits from customers -- -- 9,917.6 9,917.6
Debt securities in issue 863.5 -- -- 863.5
Subordinated liabilities -- 471.3 -- 471.3
-------- -------- --------- ---------
Total 863.5 534.3 9,917.6 11,315.4
-------- -------- --------- ---------
Level 1 Level 2 Level 3 Total
GBPm GBPm GBPm GBPm
As at 28 February 2019
Financial assets carried at fair value
Cash and balances with central banks(1) -- 30.5 -- 30.5
Investment Securities - FVOCI 1,040.2 -- 2.5 1,042.7
Derivative financial instruments:
- Interest rate swaps -- 31.3 -- 31.3
Financial assets carried at amortised cost
Loans and advances to customers -- -- 12,607.3 12,607.3
Investment securities - loans and receivables -- 28.2 -- 28.2
-------- -------- --------- ---------
Total 1,040.2 90.0 12,609.8 13,740.0
-------- -------- --------- ---------
Financial liabilities carried at fair value
Derivative financial instruments:
- Interest rate swaps -- 50.9 -- 50.9
- Forward foreign currency contracts -- 0.2 -- 0.2
- Cross currency interest rate swaps -- 9.1 -- 9.1
Financial liabilities carried at amortised cost
Deposits from customers -- -- 10,440.5 10,440.5
Debt securities in issue 1,189.5 -- -- 1,189.5
Subordinated liabilities -- 182.2 -- 182.2
-------- -------- --------- ---------
Total 1,189.5 242.4 10,440.5 11,872.4
-------- -------- --------- ---------
(1) Cash balances relating to the Group's travel money offering
are carried at fair value under IFRS 9.
38
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
17. Fair Values (continued)
Level 1 Level 2 Level 3 Total
As at 31 August 2018 GBPm GBPm GBPm GBPm
Financial assets carried at fair value
Cash and balances with central banks(1) -- 47.7 -- 47.7
Investment Securities - FVOCI 684.1 -- 2.6 686.7
Derivative financial instruments:
- Interest rate swaps -- 37.9 -- 37.9
- Forward foreign currency contracts -- 0.1 -- 0.1
Financial assets carried at amortised cost
Loans and advances to customers -- -- 12,301.4 12,301.4
Investment securities - amortised cost -- 32.4 -- 32.4
-------- -------- --------- ---------
Total 684.1 118.1 12,304.0 13,106.2
-------- -------- --------- ---------
Financial liabilities carried at fair value
Derivative financial instruments:
- Interest rate swaps -- 48.6 -- 48.6
Financial liabilities carried at amortised cost
Deposits from customers -- -- 10,052.6 10,052.6
Debt securities in issue 929.9 -- -- 929.9
Subordinated liabilities and notes -- 191.3 -- 191.3
-------- -------- --------- ---------
Total 929.9 239.9 10,052.6 11,222.4
-------- -------- --------- ---------
There are three levels to the hierarchy as follows:
Level 1
Quoted prices (unadjusted) 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 (for
example, as prices) or indirectly (for example, derived from
prices).
Fair values of cash balances relating to the Group's Travel
Money offering are considered to equate to their carrying value as
they are short-term in nature.
Derivative financial instruments which are categorised as Level
2 are those which either:
-- Have future cash flows which are on known dates and for which
the cash flow amounts are known or calculable by reference to
observable interest and foreign currency exchange rates; or
-- Have future cash flows which are not pre-defined, but for
which the fair value of the instrument has very low sensitivity to
changes in estimate of future cash flows.
In each case the fair value is calculated by discounting future
cash flows using benchmark, observable market interest rates.
FVOCI investment securities which are categorised as Level 2 are
those where no active market exists or where there are quoted
prices available for similar instruments in active markets.
Fair values of investment securities classified as amortised
cost/loans and receivables are based on quoted prices, where
available, or by using discounted cash flows applying market
rates.
The estimated fair value of subordinated liabilities is
calculated using a discounted cash flow model based on a current
yield curve appropriate for the remaining term to maturity.
(1) Cash balances relating to the Group's Travel Money offering
are carried at fair value under IFRS 9.
39
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
17. Fair Values (continued)
Level 3
Inputs for the asset or liability are not based on observable
market data (unobservable inputs).
Loans and advances to customers and assets of the disposal group
are net of charges for impairment. The estimated fair value of
loans and advances to customers and assets of the disposal group
represents the discounted amount of estimated future cash flows
expected to be received. Expected cash flows are discounted at
current market rates to determine fair value.
The estimated fair value of deposits from customers represents
the discounted amount of estimated future cash flows expected to be
paid. Expected cash flows are discounted at current market rates to
determine fair value.
The estimated fair value of financial assets classified as
FVOCI, being the Group's interest in VISA Inc. preferred stock, is
reflected in the table on page 38. The preferred stock may be
convertible into Class A Common Stock of VISA Inc. at certain
future dates, the earliest point being June 2020. Conversion is
contingent upon future events, principally related to the outcome
of interchange litigation against VISA Europe Limited. As such, the
valuation reflects both an illiquidity discount and the risk of a
reduction in the conversion rate to VISA Inc. common Stock. The
reduction in the conversion rate is the most significant
unobservable input to the valuation.
Transfers
There were no transfers between Level 1 and Level 2 during the
period (February 2019: no transfers).
There were no transfers between Level 2 and Level 3 during the
period (February 2019: no transfers).
40
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
18. Capital Resources
On 1 March 2018, IFRS 9 came into force and a transitional
period was introduced, allowing the Company (being the regulated
entity) to phase in the IFRS 9 impact on capital over a period of 5
years.
Under the transitional provisions, the impact as at 31 August
2019 on common equity tier 1 is GBP12.7m (February 2019: GBP7.8m).
Common equity tier 1 is expected to reduce from inception to end
point by approximately 164 basis points (unaudited).
The following tables analyse the regulatory capital resources of
the Company applicable as at the period end on a 'transitional' and
'end point' position for the current period as related to the IFRS
9 transitional period:
Transitional End Point Transitional Transitional
6 months 6 months 6 months 6 months
to 31 August to 31 August to 28 February to 31 August
2019 2019 2019 2018
GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
Movement in common equity tier
1 capital:
At the beginning of the period 1,598.2 1,433.8 1,497.8 1,497.8
Impact of initial application
of IFRS 9 -- -- (166.3) (166.0)
Profit attributable to shareholders 11.3 11.3 135.1 52.0
Gains and losses on liabilities
arising from own credit -- -- (0.1) 0.3
Other reserves 2.0 2.0 (14.6) (4.9)
Ordinary dividends (23.0) (23.0) (60.0) (23.3)
IFRS 9 transitional add back (12.7) -- 164.4 158.2
Movement in intangible assets 19.2 19.2 46.9 26.5
Movement in material holdings -- -- -- --
Deferred tax liabilities related
to intangible assets -- -- (5.0) (2.7)
At the end of the period 1,595.0 1,443.3 1,598.2 1,537.9
-------------- -------------- ---------------- --------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
41
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
18. Capital Resources (continued)
Transitional End Point Transitional Transitional
31 August 31 August 28 February 31 August
2019 2019 2019 2018
GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
Common equity tier 1
Shareholders' equity (accounting
capital) 1,672.7 1,672.7 1,658.7 1,645.6
Regulatory adjustments
Unrealised gains on cash flow
hedge reserve -- -- 0.5 0.1
Adjustment to own credit/Additional
value adjustments (1.4) (1.4) (1.2) (0.7)
Foreseeable dividends (23.0) (23.0) -- (23.3)
Intangible assets (205.0) (205.0) (224.2) (244.6)
Deferred tax liabilities related
to intangible assets -- -- -- 2.6
IFRS 9 transitional add back 151.7 -- 164.4 158.2
Common equity tier 1 capital 1,595.0 1,443.3 1,598.2 1,537.9
------------- ---------- ------------- -------------
Tier 2 capital (instruments and
provisions)
Undated subordinated notes 45.0 45.0 45.0 45.0
Dated subordinated notes net
of regulatory amortisation 190.0 190.0 190.0 190.0
Credit risk adjustment -- -- -- --
------------- ---------- ------------- -------------
Tier 2 capital (instruments and
provisions) before regulatory
adjustments 235.0 235.0 235.0 235.0
------------- ---------- ------------- -------------
Regulatory adjustments
Material holdings in financial
sector entities (21.0) (21.0) (28.8) (28.7)
------------- ---------- ------------- -------------
Total regulatory adjustments
to tier 2 capital (instruments
and provisions) (21.0) (21.0) (28.8) (28.7)
------------- ---------- ------------- -------------
Total tier 2 capital
(instruments and provisions) 214.0 214.0 206.2 206.3
------------- ---------- ------------- -------------
Total capital 1,809.0 1,657.3 1,804.4 1,744.2
------------- ---------- ------------- -------------
Total risk-weighted assets (unaudited) 9,820.8 9,777.6 9,856.8 9,637.1
Common equity tier 1 ratio (unaudited) 16.2% 14.8% 16.2% 16.0%
Tier 1 ratio (unaudited) 16.2% 14.8% 16.2% 16.0%
Total capital ratio (unaudited) 18.4% 16.9% 18.3% 18.1%
Total capital requirements (TCR) refers to the amount and
quality of capital the Bank must maintain to comply with the
Capital Requirements Regulation (CRR) Pillar 1 and the 2A capital
requirements. The TCR for the Company as at 31 August 2019 is
11.74% plus GBP52.0m as a static add-on for pension obligation
risk.
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
42
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
18. Capital Resources (continued)
The table below reconciles shareholders' equity of the Group to
shareholders' equity of the Company:
31 August 28 February 31 August
2019 2019 2018
GBPm GBPm GBPm
Restated(1) Restated(1)
Tesco Personal Finance Plc (Group)
shareholders' equity 1,695.0 1,667.9 1,653.2
Share of joint venture's retained earnings (14.8) (7.7) (3.9)
Subsidiaries' retained earnings 0.6 1.0 (0.1)
Share of joint venture's AFS reserve (8.1) (2.5) (3.6)
---------- ------------ ------------
Tesco Personal Finance Plc (Company)
shareholders' equity 1,672.7 1,658.7 1,645.6
---------- ------------ ------------
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
It is the Group's policy to maintain a strong capital base, to
expand it as appropriate and to utilise it efficiently throughout
its activities to optimise the return to shareholders while
maintaining a prudent relationship between the capital base and the
underlying risks of the business. In carrying out this policy, the
Group has regard to the supervisory requirements of the Prudential
Regulatory Authority (PRA).
The Group is required to submit Internal Capital Adequacy
Assessment Process (ICAAP) reports to the PRA which set out future
business plans, the impact on capital availability, capital
requirements and the risk to capital adequacy under stress
scenarios.
The Group also maintains a Recovery Plan that provides the
framework and a series of recovery options which could be deployed
in a severe stress event impacting capital or liquidity positions.
The Recovery Plan is reviewed and approved by the Board on at least
an annual basis.
The Group has met all relevant capital requirements throughout
the period.
Leverage ratio (unaudited)
The Basel III reforms include the introduction of a capital
leverage measure, defined as the ratio of tier 1 capital to total
exposure. This is intended to reinforce the risk-based capital
requirements with a simple, non-risk based 'backstop' measure.
43
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
18. Capital Resources (continued)
The Group has published the leverage ratio on a CRD IV basis
using the existing exposure approach:
Exposures for leverage ratio
(unaudited) Transitional End Point Transitional Transitional
31 August 31 August 28 February 31 August
2019 2019 2019 2018
GBPm GBPm GBPm GBPm
Restated(1) Restated(1)
Total balance sheet exposures 15,421.7 15,421.7 15,657.5 15,140.4
Adjustments for entities which
are consolidated for accounting
purposes but outside scope
of regulatory consolidation (23.0) (23.0) (10.2) (7.5)
Removal of accounting value
of derivatives and Securities
Financing Transactions (SFTs) (499.1) (499.1) (355.5) (287.2)
Exposure value for derivatives
and SFTs 90.3 90.3 45.5 41.0
Off balance sheet: unconditionally
cancellable (10%) 1,182.1 1,182.1 1,208.6 1,204.6
Off balance sheet: other (20%) 10.7 10.7 28.3 59.3
Regulatory adjustment - intangible
assets (205.0) (205.0) (224.2) (244.6)
Regulatory adjustment - other,
including IFRS 9 91.0 (60.7) 124.5 129.0
Total 16,068.7 15,917.0 16,474.5 16,035.0
------------- ---------- ------------- -------------
Common equity tier 1 1,595.0 1,443.3 1,598.2 1,537.9
Leverage ratio 9.9% 9.1% 9.7% 9.6%
(1) The prior period has been restated following the
retrospective adoption of IFRS 16 in the current period. Refer to
note 2 for further details.
Capital Management
The Group operates an integrated risk management process to
identify, quantify and manage risk in the Group. The quantification
of risk includes the use of both stress and scenario testing. Where
capital is considered to be an appropriate mitigant for a given
risk, this is identified and reflected in the Group's internal
capital assessment. The capital resources of the Group are
regularly monitored against the higher of this internal assessment
and regulatory requirements. Capital adequacy and performance
against the Group's capital plan is monitored daily, with monthly
reporting provided to the Board, Asset and Liability Committee and
Capital Management Forum.
Pillar 2 capital methodologies
The PRA updated its Pillar 2 capital methodologies in July 2016
following the publication of prudential requirements for
implementation of ring-fencing and issued a policy statement in
October 2017 refining the Pillar 2A framework.
These proposals are aimed at promoting the safety and soundness
of PRA-regulated firms, to facilitate a more effective banking
sector and to make the PRA's Pillar 2A capital assessment more
proportionate by addressing some of the concerns over the
differences between standardised approach (SA) and internal
ratings-based risk weights. This will continue to be managed as
part of the Bank's ICAAP in line with the PRA policy statement
issued in October 2017. The PRA general safety and soundness
objectives in relation to continuity of core services in the UK and
ring-fencing of Bank activities where core deposits are in excess
of GBP25bn came into effect from 1 January 2019. The Group has not
exceeded this threshold and has not therefore automatically been
required to ring-fence the Group's core activities by the 2019
implementation date.
44
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
18. Capital Resources (continued)
Credit Risk
In December 2017 the Basel Committee on Banking Supervision
(BCBS) finalised Basel III reforms for credit risk, including
revisions to the calculation of risk-weighted assets and
enhancements to the risk-sensitivity of the standardised approaches
to credit risk, constraining the use of internal model approaches
by placing limits on certain inputs and replacing the existing
Basel II output floors with a risk-sensitive floor based on the
Committee's Basel III standardised approaches. The final Basel III
reforms will be implemented in January 2022.
Operational risk
In December 2017, the BCBS finalised Basel III reforms for
operational risk by replacing all existing approaches in the Basel
II framework with a single risk-sensitive SA to be used by all
banks. The new SA increases the sensitivity by combining a refined
measure of gross income with the bank's internal historical losses.
The final Basel III reforms will be implemented in January
2022.
Leverage
At present the Group has no minimum UK leverage requirement as
it is currently exempt from the UK Leverage Framework Regime (LFR),
which only applies to institutions with retail deposits over GBP50
billion. In December 2017, the BCBS finalised Basel III reforms for
the leverage ratio. The final Basel III reforms will be implemented
in January 2022. In June 2019, the EU published updates to the CRR
which will result in a minimum leverage requirement of 3% from June
2021.
The Group is subject to reporting and disclosure requirements
under the CRR and is not currently subject to temporary
modifications of the UK LFR.
The European Commission's minimum requirements for own funds and
eligible liabilities (MREL)
MREL requires banks to maintain at all times a sufficient
aggregate amount of own funds and eligible liabilities (that may be
bailed-in if required). MREL will, on full implementation, be set
on a firm-specific basis and calculated as the sum of two
components: a loss absorption amount, being the amount needed to
absorb losses up to and in resolution; and a recapitalisation
amount which reflects the capital that a firm is likely to need
post resolution.
MREL is expected to be set annually over the transitional period
until 1 January 2022. Prior to 31 December 2019, MREL will be equal
to an institution's minimum regulatory capital requirements. From 1
January 2020 until 31 December 2021 an interim requirement will be
set, with full compliance applicable on 1 January 2022. The
issuance by TPFG of GBP250.0m of senior debt in July 2019 provided
further funding to the Group and reflects the Group's progression
towards meeting the BoE's MREL by 1 January 2022.
45
TESCO PERSONAL FINANCE PLC
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (continued)
19. Related Party Transactions
The Group's related party transactions during the interim period
were entered into in the normal course of business. Transactions
for this period are not significant to an understanding of the
Group's financial position or performance and are similar in nature
to those for the year ended 28 February 2019.
20. Contingent Liabilities
Contingent liabilities are possible obligations arising from
past events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events that
are not recognised because either it is not probable that an
outflow of economic benefits will be required or the amount of the
obligation cannot be reliably estimated.
Contingent liabilities are not recognised but information about
them is disclosed unless the possibility of any outflow of economic
benefits is remote. There are a number of contingent liabilities
that arise in the normal course of business which, if realised, are
not expected to result in a material liability to the Group.
21. Ultimate Parent Undertaking
The Group's ultimate parent undertaking and controlling party is
Tesco PLC which is incorporated in England.
22. Events After the Reporting Period
Following the Group's decision to sell its Mortgage business,
with effect from 1 September 2019 the Group's business model under
IFRS 9 in respect of its Mortgage business changed from being
solely to collect contractual cash flows from the Mortgage business
to being to collect cash flows arising from the sale of the
Mortgage business. As a result, the Group has accounted for its
Mortgage business at FVPL from that date. The Mortgage business was
previously accounted for at amortised cost. The Group recognised a
fair value measurement gain after tax of GBP16.7m at 1 September
2019 following this change in business model.
The Group completed the sale of the majority of its Mortgage
business to Halifax, which is part of Lloyds Banking Group, on 27
September 2019 for cash consideration of GBP3,694.6m. The majority
of the Mortgage business was derecognised at this point. After
settling transaction and other costs associated directly with the
sale amounting to GBP3.8m, the Group's after-tax gain on sale was
GBP21.4m. Immediately following derecognition of the majority of
the Group's Mortgage business, the Group entered into a series of
receive-fixed interest rates swaps to economically neutralise the
effect of its existing pay-fixed interest rate swaps used to hedge
the interest rate risk inherent in the Mortgage business. The
inception value of these swaps was an after-tax gain of
GBP5.0m.
As is customary in such a transaction, the Group will continue
to recognise a small element of the Mortgage business, representing
new advances to existing Mortgage customers, until migration of all
Mortgage accounts to the purchaser is completed. Migration is
currently expected to take place in February 2020. The final gain
on sale will be confirmed once migration is completed.
46
TESCO PERSONAL FINANCE PLC
RESPONSIBILITY STATEMENT
The Directors listed below confirm that to the best of their
knowledge:
-- these Interim Condensed Consolidated Financial Statements
have been prepared in accordance with IAS 34, 'Interim Financial
Reporting', as endorsed by the European Union; and
-- the Interim Condensed Consolidated Financial Statements and
Interim Management Report contained herein include a fair review of
the information required by DTR 4.2.7R, namely an indication of
important events that have occurred during the first six months and
their impact on the Interim Condensed Consolidated Financial
Statements, and a description of the principal risks and
uncertainties for the remaining six months of the financial
year.
The Directors are responsible for the maintenance and integrity
of the Company's website. Legislation in the United Kingdom
governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
The Directors of Tesco Personal Finance Plc as at the date of
this announcement are as set out below.
By order of the Board,
Declan Hourican
Director
30 September 2019
Directors: Graham Pimlott Non-Executive Chairman
John Castagno* Independent Non-Executive Director
Robert Endersby Independent Non-Executive Director
Jacqueline Ferguson Independent Non-Executive Director
Richard Henderson Chief Risk Officer
Declan Hourican Chief Financial Officer
Simon Machell Independent Non-Executive Director
Gerard Mallon Chief Executive
James McConville Independent Non-Executive Director
Amanda Rendle Independent Non-Executive Director
Alan Stewart Non-Executive Director
James Willens Senior Independent Non-Executive Director
Company Secretary: Michael Mustard
* Resigned on 30 September 2019.
47
TESCO PERSONAL FINANCE PLC
INDEPENT REVIEW REPORT TO TESCO PERSONAL FINANCE PLC
We have been engaged by Tesco Personal Finance Plc ("the
Company") to review the Interim Condensed Consolidated Financial
Statements in the Interim Financial Report for the six months 31
August 2019 which comprises the Interim Condensed Consolidated
Income Statement, the Interim Condensed Consolidated Statement of
Comprehensive Income, the Interim Condensed Consolidated Statement
of Financial Position, the Interim Condensed Consolidated Statement
of Changes in Equity, the Interim Condensed Consolidated Statement
of Cash Flows and related notes 1 to 22. We have read the other
information contained in the Interim Financial Report and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the Interim
Condensed Consolidated Financial Statements.
This report is made solely to the Company in accordance with
International Standard on Review Engagements (UK and Ireland) 2410
"Review of Interim Financial Information Performed by the
Independent Auditor of the Entity" issued by the Auditing Practices
Board. Our work has been undertaken so that we might state to the
Company those matters we are required to state to it in an
independent review report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company, for our review work, for this
report, or for the conclusions we have formed.
Directors' responsibilities
The Interim Financial Report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the Interim Financial Report in accordance with the
Disclosure and Transparency Rules of the United Kingdom's Financial
Conduct Authority.
As disclosed in note 1, the Annual Financial Statements of the
Company are prepared in accordance with IFRS as adopted by the
European Union. The Interim Condensed Consolidated Financial
Statements included in this Interim Financial Report have been
prepared in accordance with International Accounting Standard 34
'Interim Financial Reporting' as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the Interim Condensed Consolidated Financial Statements in the
Interim Financial Report based on our review.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the Interim Condensed Consolidated
Financial Statements in the Interim Financial Report for the six
months ended 31 August 2019 are not prepared, in all material
respects, in accordance with International Accounting Standard 34
as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct
Authority
Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
30 September 2019
48
TESCO PERSONAL FINANCE PLC
ABBREVIATONS
AFS Available-for-sale
BCBS Basel Committee on Banking Supervision
BDAR Bad debt:asset ratio
BoE Bank of England
CCA Consumer Credit Act
CRD Capital Requirements Directive
CRO Chief Risk Officer
CRR Capital Requirements Regulation
EAD Exposure at default
ECL Expected credit losses
EIR Effective interest rate
EU European Union
FCA Financial Conduct Authority
FVOCI Fair value through other comprehensive income
FVPL Fair value through profit or loss
IAS International Accounting Standard
IAS 17 IAS 17 'Leases'
IAS 34 IAS 34 'Interim Financial Reporting'
IASB International Accounting Standards Board
ICAAP Internal capital adequacy assessment process
IFRIC International Financial Reporting Interpretations Committee
IFRS International Financial Reporting Standard
IFRS 5 IFRS 5 'Non-current assets held for sale and discontinued operations
IFRS 9 IFRS 9 'Financial Instruments'
IFRS 15 IFRS 15 'Revenue from Contracts with Customers'
IFRS 16 IFRS 16 'Leases'
KPI Key performance indicator
LGD Loss given default
LIBOR London Inter Bank Offered Rate
LFR Leverage Framework Regime
MREL Minimum requirements for own funds and eligible liabilities
NSFR Net stable funding ratio
OCI Other comprehensive income
PD Probability of default
Plevin Plevin v Paragon Personal Finance Limited
PPI Payment protection insurance
PRA Prudential Regulation Authority
PSD2 Second Payment Services Directive
RMF Risk management framework
RPI Retail Price Index
SA Standardised approach
SFTs Securities financing transactions
TCR Total capital requirement
TFS Term Funding Scheme
TPFG Tesco Personal Finance Group PLC
TPP Third party provider
TU Tesco Underwriting Limited
UK United Kingdom
49
TESCO PERSONAL FINANCE PLC
GLOSSARY OF
TERMS
A
Amortised cost The amount at which the financial asset or financial
liability is measured at initial recognition minus principal
repayments, plus or minus the cumulative amortisation
using the EIR method of any difference between the initial
amount and the maturity amount and minus any reduction
(directly through the use of an allowance account) for
impairment or uncollectability.
B
Basel II The capital adequacy framework issued by the BCBS (June
2006) in the form of the 'International Convergence
of Capital Measurement and Capital Standards'.
Basel III The capital reforms and introduction of a global liquidity
standard proposed by the BCBS.
Bad debt:asset The bad debt:asset ratio is calculated by dividing the
ratio impairment loss by the average balance of loans and
advances to customers, excluding any interest-bearing
assets held within a disposal group.
Brexit The process by which the UK will leave the EU.
C
Capital requirements A legislative package relating to capital adequacy,
directive issued by the European Commission and adopted by EU
member states.
Capital requirements The Capital Requirements Regulation (EU) No. 575/2013
regulation is an EU law that aims to decrease the likelihood that
banks become insolvent, reflecting Basel III rules on
capital measurement and capital standards.
Capital resources Eligible capital held in order to satisfy capital requirements.
Capital risk The risk that the Group holds regulatory capital which
is of insufficient quality and quantity to enable it
to absorb losses.
Common equity The highest form of regulatory capital under CRD IV,
tier 1 capital comprising common shares issued, related share premium,
retained earnings and other reserves less regulatory
adjustments.
Common equity The common equity tier 1 ratio is calculated by dividing
tier 1 ratio total tier 1 capital at the end of the reporting period
by total risk weighted assets and is calculated in line
with the CRR.
Company Tesco Personal Finance Plc.
Cost:income The cost:income ratio is calculated by dividing operating
ratio expenses by total income.
CRD IV Legislation published in June 2013 (in force from 1
January 2014) by the European Commission, comprising
the CRD and CRR and together forming the CRD IV package.
CRD IV implements the Basel III proposals in addition
to new proposals on sanctions for non-compliance with
regulatory rules, corporate governance and remuneration.
The rules have been implemented in the UK via PRA policy
statement PS7/13, with some elements subject to transitional
phase-in.
Credit risk Credit risk is the risk that a borrower will default
on a debt or obligation by failing to make contractually
obligated payments, or that the Group will incur losses
due to any other counterparty failing to meet their
financial obligations.
D
Derivatives Financial instruments whose value is based on the performance
of one or more underlying assets.
Discontinued The operations and cash flows of a major component of
operations a business, the carrying amount in respect of which is
to be recovered principally through a sale transaction,
when the sale is considered highly probable at the reporting
date.
Disposal group Under IFRS 5, a group of assets or liabilities, the carrying
amount in respect of which is to be recovered principally
through a sale transaction, when the sale is considered
highly probable at the reporting date, with the asset
available for immediate sale in its present condition.
E
Exposure A claim, contingent claim or position which carries a
risk of financial loss.
50
TESCO PERSONAL FINANCE PLC
GLOSSARY OF TERMS (continued)
E (continued)
Exposure at The amount expected to be outstanding after any credit
default or exposure risk mitigation, if and when the counterparty defaults.
value EAD reflects both drawn down balances as well as an allowance
for undrawn commitments and contingent exposures.
F
Fair Value 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.
Financial Conduct The statutory body responsible for conduct of business
Authority regulation and supervision of UK authorised firms from
1 April 2013. The FCA also has responsibility for the
prudential regulation of firms that do not fall within
the PRA's scope.
Financial instrument A contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument
of another entity.
Foreign exchange The risk that the value of transactions in currencies
risk other than Sterling is altered by the movement of exchange
rates.
Funding risk The risk that the Group does not have sufficiently stable
and diverse sources of funding.
G
General Data The General Data Protection Regulation 2016/679 is a
Protection Regulation regulation in EU law on data protection and privacy for
all individuals within the EU and the EEA. It also addresses
the export of personal data outside the EU and EEA areas.
Group The Company and its subsidiaries and joint venture.
I
Impairment charge Provisions held on the balance sheet as a result of the
and impairment raising of an impairment charge against profit for the
provisions incurred loss inherent in the lending book. Impairment
provisions may be individual or collective.
Impairment losses The reduction in value that arises following an impairment
review of an asset which has determined that the asset's
value is lower than its carrying value. For impaired
financial assets measured at amortised cost, impairment
losses are the difference between the carrying value
and the present value of estimated future cash flows,
discounted at the asset's original effective interest
rate.
Insurance risk The risks accepted through the provision of insurance
products in return for a premium. These risks may or
may not occur as expected and the amount and timing of
these risks are uncertain and determined by events outside
of the Group's control.
Interest rate The risk arising from the different repricing characteristics
risk of the Group's non-trading assets and liabilities.
Internal capital The Group's own assessment, based on Basel II requirements,
adequacy assessment of the level of capital needed in respect of its regulatory
process capital requirements (for credit, market and operational
risks) and for other risks including stress events.
L
Leverage ratio Tier 1 capital divided by total exposure.
Liquidity risk The risk that the Group is not able to meet its obligations
as they fall due. This includes the risk that a given
security cannot be traded quickly enough in the market
to prevent a loss if a credit rating falls.
Loan to deposit The loan to deposit ratio is calculated by dividing
ratio loans and advances to customers by deposits from customers.
M
Market risk The risk that the value of earnings or capital is altered
through the movement of market rates. This includes
interest rates, foreign exchange rates, credit spreads
and equities.
Minimum requirements A requirement for minimum loss-absorbing capacity institutions
for own funds must hold.
and eligible
liabilities
51
TESCO PERSONAL FINANCE PLC
GLOSSARY OF TERMS (continued)
N
Net interest Net interest margin is calculated by dividing net interest
margin income by average interest bearing assets, excluding
any interest bearing assets held within a disposal group.
Net stable funding The net stable funding ratio is calculated under the
ratio CRD IV methodology.
O
Ogden tables Tables which are used to calculate the cost of any claim
that involves compensation for loss of future benefits.
The tables provide an estimate of the return to be expected
from the investment of a lump sum damages award.
Open Banking A Government initiative to improve competition in the
UK by opening up information that banks hold about their
services and customers.
Operational The risk of potential error, loss, harm or failure caused
risk by ineffective or inadequately defined processes, system
failure, improper conduct, human error, fraud or from
external events.
P
Past due Accounts are past due when a counterparty has failed
to make a payment in line with their contractual obligations.
PD threshold The maximum lifetime PD for each financial asset that
was expected at the reporting date at initial recognition
before a significant increase in credit risk is deemed
to have occurred.
Pension risk The risk to the Group caused by contractual or other
liabilities to or with respect to a pension scheme.
Pillar 1 The first Pillar of the Basel II framework sets out
the minimum regulatory capital requirements for credit,
market and operational risks.
Pillar 2 The second Pillar of the Basel II framework, known as
the Supervisory Review Process, sets out the review
process for a bank's capital adequacy; the process under
which supervisors evaluate how well banks are assessing
their risks and the actions taken as a result of these
assessments.
Pillar 2A Pillar 2A addresses risks to an individual firm which
either are not captured, or not fully captured, under
the Pillar 1 capital requirements applicable to all
banks.
Probability Represents the likelihood a customer will default over
of default the relevant period, being either 12 months or the expected
lifetime.
Prudential Regulatory The statutory body responsible for the prudential regulation
Authority and supervision of banks, building societies, credit
unions, insurers and major investment firms in the UK.
Second Payment PSD2 is an EU Directive which regulates payment services
Services Directive and payment service providers throughout the European
Union and European Economic Area. PSD2 updates and replaces
the Payment Services Directive 2008.
R
Recovery plan The framework and recovery options which could be deployed
in a severe stress event impacting capital or liquidity
positions.
Regulatory capital The capital that a bank holds, determined in accordance
with rules established by the PRA.
Regulatory risk The risk of reputational damage, liability or material
loss from failure to comply with the requirements of
the financial services regulators or related codes of
best practice applicable to the business area within
which the Group operates.
Risk Appetite The level and types of risk that the Group is willing
to assume to achieve its strategic objectives.
Risk-weighted Calculated by assigning a degree of risk expressed as
assets a percentage (risk-weight) to an exposure value in accordance
with the applicable standardised and IRB approach rules.
S
Securitisation A securitisation is defined as a transaction where the
payments are dependent upon the performance of a single
exposure or pool of exposures, where the subordination
of tranches determines the distribution of losses during
the life of the transaction.
Securities Financing The act of lending, or borrowing, a stock, derivative,
Transactions or other security to or from an investor or firm.
52
TESCO PERSONAL FINANCE PLC
GLOSSARY OF TERMS (continued)
S (continued)
Stress testing The term used to describe techniques where plausible
events are considered as vulnerabilities to ascertain
how this will impact the capital resources which are
required to be held by the Group.
Securitisation A corporation, trust, or other non-bank entity, established
structured entity for the purpose of carrying on securitisation activities.
Structured entities are designed to isolate their obligations
from those of the originator and the holder of the beneficial
interests in the securitisation.
Standardised In relation to credit risk, the method for calculating
Approach credit risk capital requirements using risk-weightings
that are prescribed by the regulator. SA's following
prescribed methodologies also exist for calculating
market and operational risk capital requirements.
Subordinated Liabilities which, in the event of insolvency or liquidation
liabilities of the issuer, are subordinated to the claims of depositors
and other creditors of the issuer.
T
Tesco Pay+ Tesco Pay+ is the Group's mobile payment service, which
offers Tesco's shoppers the ability to pay and collect
Clubcard points with one simple and convenient scan
of their phone.
Tier 1 capital A component of regulatory capital, comprising common
equity tier 1 capital and other tier 1 capital. Other
tier 1 capital includes qualifying capital instruments
such as non-cumulative perpetual preference shares and
other tier 1 capital securities.
Tier 2 capital A component of regulatory capital, comprising qualifying
subordinated loan capital and related non-controlling
interests.
Total capital The total capital ratio is calculated by dividing total
ratio regulatory capital by total risk-weighted assets.
Total capital The minimum regulatory capital that must be held in
requirements accordance with Pillar 1 requirements for credit, market
and operational risk.
U
UK Leverage The UK LFR currently applies to firms with retail deposits
Framework Regime equal to or greater than GBP50 billion on an individual
or consolidated basis.
Underlying cost:income The underlying cost:income ratio is calculated by dividing
ratio underlying operating expenses by total underlying income.
Underlying loan The underlying loan to deposit ratio is calculated by
to deposit ratio dividing loans and advances to customers, excluding
secured lending classified as assets of the disposal
group, by deposits from customers, adjusted to reflect
those deposits estimated to be funding the Mortgage
business at the balance sheet date.
Underlying net The underlying net interest margin is calculated by
interest margin dividing underlying net interest income by average interest
bearing assets, excluding any interest-bearing assets
held within a disposal group.
53
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IR LLFIDIILLIIA
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