TIDMPAG
RNS Number : 7705Z
Paragon Banking Group PLC
22 May 2019
PROFIT GROWTH DRIVEN BY INCREASED LING AND IMPROVED MARGINS
Paragon Banking Group PLC ('Paragon' or the 'Group'), the
specialist lender and banking group, today announces its half year
results for the six months ended 31 March 2019.
Nigel Terrington, Chief Executive of Paragon, said:
"We have delivered a strong first half, with increased profits
benefiting from good growth in lending and improved margins. This
reflects our strategic transformation to become a more broadly
based banking group focussed on supporting British SMEs and
consumers in specialist lending markets.
In buy-to-let, we have continued to grow lending adapting to the
changing market dynamics. Professional landlords are becoming the
backbone of the UK private rented sector, where we are well placed
to address their complex needs.
The successful integration of the Titlestone development finance
business, together with strong growth in the wider Commercial
Lending division means that we now offer a stronger and broader
proposition to our SME customers. This, together with the changing
mix of buy-to-let business, has helped to create a structural
improvement in the Group's net interest margin which will continue
during the rest of the year and beyond.
The half year performance provides further evidence of the
success of Paragon's five-year transformation into a specialist
banking group. Our diversification will enable us to continue to
grow our customer base and deliver improving returns to
shareholders."
Strong operational and financial performance
-- Growth in lending volumes of 30.2% to GBP1,289.2 million (2018 H1: GBP990.3 million)
-- Diversification driving structural growth in Net Interest
Margin ('NIM') to 224bp (2018 H1: 216 bp)
-- Underlying profits up 8.7% to GBP79.8 million (2018 H1: GBP73.4 million)
-- Specialist small and medium size customer focus, including
professional buy-to-let and finance for small property
developers
-- Retail deposit balances up 11.0% to GBP5.9 billion
-- Improved technology enhancing customer delivery
-- Through-the-cycle management and operating experience
evidenced in buy-to-let mortgage arrears of 0.12%
-- Strong capital base supporting growth, with basic CET1 of 13.7% (2018 H1: 15.5%)
-- Increased interim dividend up 27.3% to 7.0 pence per share (2018 H1: 5.5 pence)
OVERVIEW AND OUTLOOK
1. Overview
Our strategy to build a specialist bank has delivered another
strong set of results for the period to March 2019. We have
achieved good growth in operating profits and underlying earnings,
supported by strong lending volumes, a growing loan book and
improving NIM. The concentration on specialist markets enables us
to utilise our competitive strengths supported by the deployment of
our through-the-cycle experience and a robust approach to credit
risk, and mitigates the competitive pressures in the wider, more
commoditised banking sector.
2. Financial Performance
Underlying profits for the half year were 8.7% higher than the
same period in 2018 at GBP79.8 million with strong performances
from both the Mortgage and Commercial Lending divisions, each of
which delivered loan and margin growth. Structural benefits from
the portfolio mix, with new buy-to-let and commercial lending
margins wider than those achieved on the legacy buy-to-let
portfolio, underpinned an 8 basis-point improvement in NIM to 224
basis points. This was achieved despite maintaining cautious
liquidity levels in the face of Brexit-related market uncertainties
and disposing of a high-yielding Idem Capital loan portfolio just
before the period began.
In addition to strong new business flows, we have seen lower
levels of buy-to-let redemption activity in the period, most
notably on the new book, where annualised redemption rates fell to
11.3% from the 18.2% reported at the last half year, contributing
to a 10.4% year-on-year increase in the loan book, which had
reached GBP12.5 billion at the period end.
Operating costs were 15.3% higher than in the first half of
2018, reflecting full-period expenses for the Iceberg and
Titlestone businesses acquired in December 2017 and July 2018
respectively. The Group continues to increase its technology
investments and has also incurred significant project costs during
the period, most notably in respect of professional costs to
support its pending IRB application.
As expected, the cost of risk rose slightly, to 8 basis points,
reflecting the introduction of the IFRS 9 accounting approach.
Provision charges within the Mortgage segment fell
period-on-period, whereas the charge in the Commercial Lending
segment rose, reflecting its relative growth rate and higher
through-the-cycle provisioning expectation.
Statutory earnings per share were 5.1% lower year-on-year at
22.5 pence per share, despite the improved underlying performance.
An anomalous movement in swap rates during March, fuelled by
Brexit-related uncertainties, resulted in a fair value charge of
GBP7.8 million for the period. This reduced statutory reported
profit, but will revert to zero over the lives of the underlying
instruments.
Removing the impact of this fair value movement, underlying
earnings per share rose 11.1% to 25.0 pence per share, and the
underlying Return on Tangible Equity ('RoTE') increased to 14.4%
from the 13.3% reported in the first half of 2018.
3. New Business Activity
New business growth was strong in both the Mortgage and
Commercial Lending segments.
Within the Mortgage division, our focus continues to be to
support the needs of professional landlords. Complex lending
comprised 91.5% of the period-end pipeline and completions rose
44.0% from their first half 2018 level. Total new lending in the
Mortgage segment was 15.7% higher in the first half of 2019
compared to the first half of 2018.
As a consequence of this strong new business flow and slower
redemption rates, the net loan book in the Mortgage segment rose
6.6% from March 2018 to March 2019.
Following the acquisitions in 2018, the Commercial Lending
segment has seen the greatest rate of change, with new loans and
advances up 69.1% at GBP455.3 million and the net loan book 88.8%
higher at GBP1.28 billion. Total new advances were GBP186.0 million
higher, with development finance up GBP125.6 million, asset finance
up GBP47.2 million, structured lending up GBP17.6 million and motor
finance down GBP4.4 million, where volume growth has been
strategically sacrificed for margin enhancement. Our existing
development finance business has now been fully integrated with the
Titlestone business, now rebranded as Paragon Development
Finance.
Our deposit-taking franchise has continued to develop, with
balances rising 37.2% year-on-year to GBP5.9 billion. Our
traditional online distribution has been augmented during the half
year via a relationship with Hargreaves Lansdown, and further
platform partnerships are under development. The average cost of
our deposit book has increased by 6 basis points over the year to
1.81% at the end of March 2019, despite the increase in base rates
since March 2018.
4. Capital Management
Capital ratios remain strong, with a CET1 ratio of 13.7%.
Capital resources exceed our regulatory requirements and are in
line with our risk appetites. The UK leverage ratio remains strong,
at 6.5%.
We indicated a formulaic approach to determining the level of
interim dividend with our 2018 results. The move from a dividend
cover ratio of 2.75 to 2.5 times during 2018 has led to a
particularly strong interim dividend in 2019 (the interim dividend
being half of the prior year final) increasing 27.3% to 7.0 pence
per share.
5. Diversification, Growth and Capital Optimisation
The diversification of the Group's loan books and funding
sources has been a core part of our strategy in recent years.
Operating as a specialist bank, we aim to differentiate our
offerings through a greater understanding of our markets, our
customers, the products we offer and the associated risks of
running such strategies, allowing us to optimise the balance
between growth, returns and risk.
During 2018 we demonstrated our ability to recycle capital
towards growth opportunities. Capital discipline, while maintaining
prudent capital ratios, will remain a feature of our strategy going
forward.
In the half year to March 2019 we initiated a thorough review of
the risk weights we use to assess capital requirements, which
confirmed our approach. We have made significant progress in the
development of our second generation buy-to-let IRB models. Once
these have been through their final governance reviews we will be
ready to submit the first module in our IRB application
process.
6. Outlook
Our strategy is to provide outstanding products and service to
British consumers and SMEs. We deliver these through a deep
understanding of the sectors in which we trade and the customers we
serve, ensuring that the products we offer and the services which
we provide are appropriate and delivered with a high standard of
excellence whilst maintaining our strong credit standards. This
specialisation and our through-the-cycle experience enable us to
understand our target markets better than our competitors,
providing a significant competitive advantage.
Our diversification strategy will support future business
growth, delivering further value for our customers, employees and
shareholders over the coming years. Economic uncertainties persist
in the UK, but our disciplined approach to risk management leaves
us well placed to withstand any potential stresses. We remain
confident in our future prospects.
Financial highlights:
Profit before tax 2019 2018 Increase
H1 H1
Underlying
(GBPm) 79.8 73.4 8.7%
------------------------------------------------------------------------------------- ---------------- ---------------- --------------------
* Underlying income growth more than absorbs impact of
2018 Idem Capital portfolio sale
* Net interest margin improved, despite loan sale and
conservative liquidity position maintained in light
of Brexit-related economic uncertainties
* Costs reflect systems enhancements, development of
IRB framework and overheads of businesses acquired in
2018
* Impairment costs remain at low levels, now reported
under IFRS 9
* Difference between underlying and statutory relates
to fair values of hedging items, impacted by
disruption in interest rates around period end, but Statutory
which will revert to zero over time (GBPm) 72.0 77.2 (6.7%)
----------------------- ---------------- ---------------- --------------------
Dividend per share 2019 2018 Increase
H1 H1
* In line with previous guidance of 50% of prior year
final dividend
* Strong growth year-on-year
Statutory
* 2.5 times cover ratio still targeted for full year (p) 7.0 5.5 27.3%
---------------------- ---------------- ---------------- --------------------
Basic earnings per share 2019 2018 Increase
H1 H1
Underlying
(p) 25.0 22.5 11.1%
---------------------------------------------------------------------------- ---------------- ---------------- --------------------
Statutory
* Underlying EPS excludes fair value movements (p) 22.5 23.7 (5.1%)
----------------------- ---------------- ---------------- --------------------
CET1 Ratio 2019 2018 Increase
H1 H1
Basic 13.7% 15.5% (180bp)
------------------------------------------------------------------------- ----------------- ----------------- --------------------
* Fully loaded figure includes impact of IFRS 9 Fully
transition loaded 13.4% 15.5% (210bp)
------------------- ----------------- ----------------- --------------------
RoTE 2019 2018 Increase
H1 H1
* Progress reflects earnings growth and capital
optimisation Underlying 14.4% 13.3% 110bp
----------------------- ----------------- ----------------- --------------------
For further information, please contact:
Paragon Banking Group PLC Headland
Nigel Terrington, Chief Executive Del Jones and Mike Smith
Richard Woodman, Chief Financial
Officer
Tel: 020 7786 8455 Tel: 020 3805 4860 / 020 3435
7482
The Group will be holding a results presentation for analysts on
22 May 2019 at 9:30 am at UBS, 5 Broadgate, London EC2M 2QS. The
presentation material will be available on its website at
www.paragonbankinggroup.co.uk/investors from 11:00 am on the same
day.
CAUTIONARY STATEMENT
Sections of this half-yearly report, including but not limited
to the Interim Management Report, may contain forward-looking
statements with respect to certain of the plans and current goals
and expectations relating to the future financial condition,
business performance and results of the Group. These have been made
by the directors in good faith using information available up to
the date on which they approved this report and the Group
undertakes no obligation to update these forward-looking
statements. By their nature, all forward-looking statements involve
risk and uncertainty because they relate to future events and
circumstances that are beyond the control of the Group and depend
upon circumstances that may or may not occur in the future. There
are a number of factors that could cause actual future financial
conditions, business performance, results or developments to differ
materially from the plans, goals and expectations expressed or
implied by these forward-looking statements and forecasts. Nothing
in this document should be construed as a profit forecast.
INTERIM MANAGEMENT REPORT
1. STRATEGY REVIEW
During the six months ended 31 March 2019 the Group has
maintained its specialist lending strategy, growing its loan books
and improving margins whilst integrating new operations acquired or
developed in the previous year.
Lending
Strong lending growth was achieved across the Group's
businesses, with total lending of GBP1,289.2 million, an increase
of 30.2% on the first half of 2018 (2018 H1: GBP990.3 million).
Overall these lending levels generated a 10.4% increase in the loan
book to GBP12,525.6 million at 31 March 2019, from GBP11,346.7
million a year earlier.
Volumes within the Mortgage segment increased by 15.7% to
GBP833.9 million (31 March 2018: GBP721.0 million), with a 17.4%
increase in buy-to-let lending and a reduction in other business
lines as the Group increasingly focusses on the professional
buy-to-let market. Overall the mortgage segment loan book increased
by 6.6% year-on-year to GBP10,783.9 million (31 March 2018:
GBP10,119.5 million), including the impact of IFRS 9 transition,
with the post-2010 buy-to-let portfolio growing by 25.5% to
GBP4,998.5 million.
Within the buy-to-let business the strategic focus remains on
the professional landlord subset who are becoming the core
investors in the UK private rented sector. The proportion of
completions where the customers were 'complex' (operating through
corporate structures and / or running large portfolios) increased
from 71.8% to 88.0% of the total with a corresponding fall in
simple completions. This effect is also seen in the pipeline at 31
March 2019, with 91.1% of the GBP711.1 million total representing
complex cases (31 March 2018: GBP787.6 million with 86.3%
complex).
Commercial Lending advances increased by 69.1%, to GBP455.3
million, compared to the first half of 2018 (2018 H1: GBP269.3
million). Within this, the Group's development finance operation,
incorporating the Titlestone business acquired in July 2018,
advanced GBP160.7 million (2018 H1: GBP35.1 million). Structured
lending, launched in the second half of 2018 made GBP17.6 million
of new loans, while the asset finance businesses advanced GBP211.0
million, 28.8% up on the GBP163.8 million for the first half of
2018, at improved margins. Motor finance lending reduced from
GBP70.4 million to GBP66.0 million following a strategic focus on
margin improvement. Overall, the Commercial Lending portfolio
increased by 88.8% year-on-year to GBP1,283.9 million (31 March
2018: GBP680.1 million), including the impact of the Titlestone
acquisition.
The increase in lending balances was funded principally through
an increase in the Group's retail deposit balances to GBP5,878.0
million, 37.2% higher than the GBP4,285.8 million balance at 31
March 2018. This included the initial deposits accepted through the
Hargreaves Lansdown platform, representing the first
diversification in the savings operation's route to market. Average
pricing in the portfolio at 31 March 2019 was 1.81%, slightly
higher than the 1.76% reported at 30 September 2018, still
representing a highly cost-effective and stable funding source.
Results
Underlying profits (before the effect of fair value movements on
hedging items) increased by 8.7% to GBP79.8 million, from GBP73.4
million in the first half of 2018. Net interest income was 13.8%
higher than for the same period in 2018 at GBP138.1 million driven
upwards by both a higher net interest margin ('NIM') and
year-on-year increases in loan balances.
The Group's new mortgage lending delivers higher margins than
its legacy, pre-2010 portfolio. Therefore the run-off of the legacy
assets and their replacement with new loans enhances margins
overall. Together with wider margins earned through the businesses
within the Commercial Lending segment, the Group's new lending
activities create a structurally improving margin. NIM in the
period was 2.24%, compared to 2.16% in the first half of 2018,
despite absorbing the income lost following the sale of a portion
of the Idem Capital portfolio in September 2018.
The Group has continued to hold strong levels of liquidity, both
actual and contingent, during the period in response to the
economic uncertainties inherent in the UK's Brexit process. This
has had a negative impact on sentiment across the Group's markets
during the period and appears set to continue throughout the
remainder of the financial year and beyond.
The Mortgage segment saw underlying profit increasing by 17.0%
to GBP84.6 million (2018 H1: GBP72.3 million). NIM increased to
1.69% (2018 H1: 1.55%) reflecting the improving mix in the
portfolio between the post-2010 lending and lower yielding legacy
assets. The redemption rate on the portfolio fell from 10.5% to
8.7% per annum, reflecting retention of customers reaching the end
of fixed rate periods and lower absolute levels of maturing
accounts, given the movement in the market towards longer-term
products in recent years.
In Commercial Lending, underlying profits increased from GBP6.2
million in the first half of 2018 to GBP19.5 million for the
period. This includes the impact of the Titlestone acquisition,
with the acquired loan portfolio contributing approximately 83
basis points of the 106 basis point improvement in the segment's
NIM in the period.
Underlying profits of the Idem Capital division fell to GBP22.8
million (2018 H1: GBP37.5 million), reflecting the run-off of the
book, the asset sale at the end of the 2018 financial year and the
particularly high level of lump sum settlements in 2018 which
contributed to that period's earnings. NIM in the division reduced
to 10.8% from 14.3% in the first half of 2018, a result of these
mix changes.
The Group's cost:income ratio in the period was 42.8%, compared
to 42.2% in the first half of 2018. The cost base increased by
GBP8.4 million year-on-year, including a full six months of costs
from 2018 acquisitions, the increased outsourced costs of the
larger savings book and significant project-related costs
(including expenses associated with the Group's IRB application).
The Group continued to make significant investments in developing
systems to provide improved service offerings to its customers and
enhance operations resilience, which contributed to the increase in
costs in the period.
The Group's loan impairment costs are now reported under IFRS 9.
The overall effect of the transition to the new standard was to
increase the opening provisions on the Group's loan assets by
GBP27.2 million and reduce equity by GBP22.2 million, net of tax,
although these changes do not impact on the Group's results for the
period. IFRS 9 accelerates provision for losses, increasing profit
and loss charges on growing books, such as many of the Group's
portfolios. Despite this, the bad debt charge only increased to
GBP4.9 million in the period, compared to GBP1.8 million in the
first half of 2018 and less than GBP5.6 million recorded for the
second half of that year. The bad debt charge was lower in the
Mortgage division, but rose in Commercial Lending, reflecting its
relative growth rate.
Buy-to-let credit performance remained strong with arrears at 31
March 2019 at 0.12%, significantly less than market averages (31
March 2018: 0.09%). Commercial Lending bad debt rates increased
slightly, although still represent a very small number of cases.
Overall, our behavioural scoring models, which act as a lead
indicator of financial stress in the loan books, were stronger in
all significant portfolios across the period.
During March 2019 the UK capital markets were affected by
Brexit-led macro-economic uncertainties impacting on fair value
exercises carried out for accounting purposes at the period end.
This created a charge of GBP7.8 million in respect of the
revaluation of derivatives held for hedging (2018 H1: gain of
GBP3.8 million) in the income statement and an increase in the
pension scheme liability in the balance sheet of GBP12.4 million
since 30 September 2018, with a consequential reduction of capital.
Indications in April 2019 showed interest rates stabilising,
suggesting that these movements will reverse, to some extent in the
second half of the financial year.
This fair value adjustment led to statutory profit before tax
decreasing to GBP72.0 million from GBP77.2 million in the first
half of 2018, with profit after tax reducing from GBP62.0 million
to GBP58.1 million after provision for tax at a rate of 19.3% (2018
H1: 19.7%).
This result translates to basic earnings per share ('EPS') on an
underlying basis (excluding fair value movements) of 25.0 pence per
share, a year-on-year increase of 11.1% (2018 H1: 22.5 pence per
share) (appendix B). On the statutory basis basic EPS reduced by
5.1% to 22.5 pence per share as a result of the fair value losses
(2018 H1: 23.7 pence per share). Underlying return on tangible
equity ('RoTE') at 14.4% (2018 H1: 13.3%) continued to make
progress towards the Group's long-term target of over 15% (appendix
B).
The Group maintains a strong capital position, even after the
reductions in equity from IFRS 9 and the revaluation of the pension
liability. On an IFRS 9 transitional basis the Group's CET1 capital
ratio was 13.7% and its total capital ratio 16.0% (31 March 2018:
15.5% and 18.2%). The largest part of the year-on-year reduction
resulted from the Titlestone acquisition in July 2018, where the
purchased goodwill has been deducted from regulatory capital,
causing the CET1 and total capital ratios to reduce to 13.8% and
16.2% respectively by 30 September 2018. The fully loaded CET1 and
total capital ratios at 31 March 2019, excluding the IFRS 9
transitional capital relief were 13.4% and 15.7% respectively. The
UK leverage ratio remained strong at 6.5% on the transitional
basis, 6.4% fully loaded (31 March 2018: 6.8%).
In accordance with the previously announced policy, an interim
dividend of 7.0 pence per share, 50% of the 2018 final dividend
will be paid. This represents an increase of 27.3% from the 2018
interim dividend of 5.5 pence per share.
The business has continued to successfully pursue the strategy
set out to investors, focussing on its specialist markets and
maintaining a strong capital and funding base. It is well placed to
deliver further progress and provide sustainable returns to
shareholders. Its operating model and wide experience mean that the
Group is positioned to respond quickly to the challenges, and to
take advantage of the opportunities that will arise, given changes
in the broader operating environment.
A more detailed discussion of the Group's performance is given
below covering:
2. Lending review 3. Funding review 4. Financial 5. Operational
review review
Lending, performance Retail deposits, Results for the Governance, people,
and markets wholesale funding period, assets risk and regulation
and capital management and liabilities
------------------------ ----------------- ---------------------
2. LING REVIEW
The Group's operations are organised into three divisions, based
on product types and origination and servicing capabilities. Its
investments in loans and the amounts invested in the period for
each of those divisions are summarised below:
Advances and investments Investments in loans
in the period at the period end
Six months ended Six months ended Year
ended
31 March 31 March 30 September 31 March 31 March 30 September
2019 2018 2018 2019 2018 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm GBPm GBPm GBPm
Mortgages 833.9 721.0 1,623.2 10,783.9 10,119.5 10,473.5
Commercial Lending 455.3 269.3 710.0 1,283.9 680.1 1,133.2
Idem Capital - - 83.4 457.8 547.1 521.1
----------------- ----------------- ------------- --------- --------- -------------
1,289.2 990.3 2,416.6 12,525.6 11,346.7 12,127.8
================= ================= ============= ========= ========= =============
Loan balances and related measures are calculated in accordance
with IFRS 9 at 31 March 2019 and in accordance with IAS 39 at 30
September 2018 and 31 March 2018. Therefore they may not be
directly comparable (see note 3).
The first half of the year has seen the overall loan balance
increase by 3.3%, with advances 30.2% ahead of the same period in
2018. This performance was driven by strong growth in the
Commercial Lending segment, particularly in newer business areas
and steady, targeted growth in buy-to-let mortgage lending combined
with lower rates of redemption.
2.1 MORTGAGES
The Group's Mortgage division offers buy-to-let first charge and
owner-occupied first and second charge mortgages on residential
property in the UK. In all its offerings, the Group targets niche
markets where its focus on detailed case-by-case underwriting and
its robust and informed approach to property risk differentiate it
from mass market and other specialist lenders. Its core products
are buy-to-let residential property mortgages, targeted at
professional landlords, a market where it is one of the leading
participants.
Over the six-month period the UK housing market has remained
subdued in the face of economic concerns arising from Brexit and
the wider economy. Research from the Royal Institution of Chartered
Surveyors ('RICS') during the period suggested that over 70% of
estate agents considered Brexit uncertainty as the biggest
challenge affecting the housing market, impacting on both buyers
and sellers. Against this background the environment for mortgage
lending remained relatively benign, with low interest rates helping
affordability and low levels of arrears and forced sales.
New mortgage approvals in the period, reported by the Bank of
England, at GBP123.0 billion increased by 3.5% from the GBP118.8
billion recorded in the same period in the preceding year, with the
split of remortgage and house purchase accounts remaining broadly
similar. This key indicator remains far below its 2007 peak, when
approvals in the six months to March were GBP178.5 billion. House
prices were also subdued, with the Nationwide Building Society
reporting an average decline of 0.8% in the six-month period,
although this included significant regional variations. The most
recent RICS survey suggested this slight downward trend is likely
to continue in the near term before a longer-term recovery
begins.
Within this larger market buy-to-let lending remained strong
with new advances of GBP18.9 billion in the six months reported by
UK Finance ('UKF'), compared to GBP18.4 billion in the same period
in the previous year. Much of this activity represents refinancing
by landlords, with 73.0% of new advances by value representing
remortgages (2018 H1: 70.7%). The trend in favour of longer-term
fixed interest rates has also continued, with the proportion of new
loans with interest rates fixed for five years or more reaching
57.3% (2018 H1: 46.2%, 2017 H1: 25.6%). This trend has been seen in
the Group's own lending and is expected to reduce remortgage
activity especially in the short-term as product maturity terms
increase.
Professional landlords form the largest part of the Group's
target market. Recent years have seen lenders' strategies for
buy-to-let polarising, with many large lenders not offering
buy-to-let loans. This has left the Group amongst a small number of
specialist lenders addressing the professional buy-to-let mortgage
market.
The lettings market remains robust with RICS reporting both
demand and rental levels increasing due to restricted supply,
partially as a result of amateur landlords seeking to exit the
market in response to fiscal and regulatory changes over recent
years. However, the English Housing Survey for 2018, published in
January 2019 still shows the private rented sector representing
around 19-20% of households, as it has for the past five years.
These factors have led to an expectation of increasing rents, with
RICS members predicting a 2% increase over the next twelve months
accelerating to 3% per annum up to 2024, which should benefit the
Group's customers and the affordability of their loans. However,
reduced supply and increased rents may present difficulties for
tenants and those seeking rented accommodation.
Lending activity
The Group's activity in the six months has been centred on its
professional buy-to-let lending proposition, with other products
carefully targeted to ensure that yields and risk profiles were
appropriate. The new lending activity in the division during the
six months is set out below:
Six months ended 31 March Six months ended 31 March Year
2019 2018 ended 30 September 2018
GBPm GBPm GBPm
First charge buy-to-let 787.5 670.5 1,495.5
First charge owner-occupied 8.6 22.6 56.5
Second charge 37.8 27.9 71.2
-------------------------- -------------------------- -------------------------
833.9 721.0 1,623.2
========================== ========================== =========================
Total mortgage lending increased by 15.7% in the six months
compared to the same period in the previous year.
Buy-to-let
The majority of the increase arose in the division's core
buy-to-let business, where activity increased by 17.4%, compared to
the same period in 2018. The new business pipeline, the loans
passing through the underwriting process, was GBP711.1 million at
the period end (30 September 2018: GBP778.9 million, 31 March 2018:
GBP787.6 million).
In the professional buy-to-let market the Group's strategy of
focussing on complex customers (corporate customers and those with
larger portfolios) has delivered positive results. These are the
customers best suited to the Group's service model and this
targeting, coupled with a disciplined approach to underwriting and
valuation, has enabled margins and retention rates to be increased
while providing the customers with a high standard of support for
their business needs.
Six months to Six months to Year to
31 March 2019 31 March 2018 30 September
2018
GBPm % GBPm % GBPm %
Buy-to-let advances
Corporate customers 405.9 51.5% 248.0 37.0% 656.7 43.9%
Other complex customers 287.2 36.5% 233.4 34.8% 528.8 35.4%
-------- -------- -------- -------- ---------- --------
Total corporate
and complex 693.1 88.0% 481.4 71.8% 1,185.5 79.3%
Non-complex customers 94.4 12.0% 189.1 28.2% 310.0 20.7%
-------- -------- -------- -------- ---------- --------
787.5 100.0% 670.5 100.0% 1,495.5 100.0%
======== ======== ======== ======== ========== ========
These advances show the continuing move towards the
concentration of buy-to-let activity among more professional
investors, many operating through corporate structures. This trend
is set to continue in the second half of the year, with 91.5% of
pipeline cases being either corporate or complex (31 March 2018:
86.3%).
The Group sources the majority of its new buy-to-let lending
through specialist intermediaries and significant investment has
been made to ensure the service offered to them is excellent. It
was therefore gratifying that in feedback from intermediaries in
the period, 93% were satisfied with the ease of obtaining a
response from the Group, delivering a net promoter score (the
excess of positive over negative feedback per 100 respondents) at
offer stage of +55.
Other lending
The division's other lending has been carefully managed to
ensure that only lending with appropriate risks and returns is
undertaken.
Lending in the Group's second charge mortgage operation at
GBP37.8 million was in line with plan, 35.5% up on the comparable
period in 2018. While the second charge market comprises some
GBP1.12 billion per annum, according to data for the year ended 31
March 2019 released by the Finance and Leasing Association ('FLA'),
a large part of this lending is to lower credit quality customers,
who do not match the Group's credit risk appetite, limiting
potential lending in this field.
In residential mortgage lending, margins have been generally
compressed and the Group has maintained discipline on acceptable
yields, meaning that the amount of new business has fallen. The
opportunities for the Group in this area principally relate to
highly specialised propositions, where the Group's operational
approach can be beneficial, including lending to the existing
professional landlord customer base.
Performance
The outstanding loan balances in the segment are set out below,
analysed by business line.
31 March 31 March 30 September 2018
2019 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm
Post 2010 assets
First charge buy-to-let 4,998.5 3,982.0 4,481.8
First charge owner-occupied 67.0 26.6 59.4
Second charge 159.1 113.8 141.3
--------- --------- ------------------
5,224.6 4,122.4 4,682.5
Legacy assets
First charge buy-to-let 5,549.5 5,984.7 5,779.8
First charge owner-occupied 9.8 12.4 11.2
--------- --------- ------------------
10,783.9 10,119.5 10,473.5
========= ========= ==================
At 31 March 2019 the balance on the Group's mortgage portfolio
was 6.6% higher than a year earlier, even after allowing for the
GBP23.2 million reduction in balances on the introduction of IFRS
9. The buy-to-let portfolio had increased year-on-year by 5.8% to
GBP10,548.0 million, including an IFRS 9 reduction of GBP23.1
million (31 March 2018: GBP9,966.7 million). Within the buy-to-let
portfolio, the value of the post-2010 assets had grown by 25.5%,
representing 47.3% of the total (31 March 2018: 40.0%).
The annualised redemption rate on post-2010 buy-to-let mortgage
assets was 11.3% in the six months to 31 March 2019 (2018 H1:
18.2%). The annualised redemption rate on pre-2010 legacy assets,
at 6.6%, rose slightly from the 5.7% experienced in the six months
ended 31 March 2018.
The reduction in post-2010 redemption rates reflects both
operational initiatives, which have led to a greater proportion of
the Group's customers opting to re-fix their loans during the
period, and a lower absolute level of maturing products, resulting
from the increased proportion of five-year fixed rate business
written in recent years.
Arrears on the buy-to-let book have remained stable in the six
months at 0.12% (30 September 2018: 0.11%, 31 March 2018: 0.09%),
with arrears on post-2010 lending standing at 0.01% (30 September
2018: 0.01%, 31 March 2018: 0.01%). These arrears remain very low
compared to performance in the national buy-to-let market, with UKF
reporting arrears of 0.41% across the sector at 31 March 2019 (31
March 2018: 0.41%, 30 September 2018: 0.41%). This exemplary
performance reflects the Group's experience through-the-cycle in
focussing underwriting on the credit quality and financial
capability of its customers, underpinned by a detailed and thorough
assessment of the value and suitability of the property as
security.
Second charge mortgage arrears increased to 0.41% as the
portfolio becomes more seasoned (31 March 2018: zero), with
performance remaining strong despite the book's increased maturity.
The Group's lending in this field is targeted towards stronger
credit propositions and therefore the differential between this
performance and the FLA averages for all second charge mortgage
loans is expected.
The Group's receiver of rent process for buy-to-let assets helps
to reduce the level of loss incurred by both it and, in turn, its
landlord customers by giving direct access to the rental flows from
the underlying properties. At the period end 751 properties were
managed by a receiver on the customer's behalf, a year-on-year
reduction of 5.2% (31 March 2018: 792 properties) as cases on the
old book resolve and relatively low numbers of post-2010 cases
enter receivership.
Outlook
The Group has established a significant market position in
professional buy-to-let which offers good prospects for future
development and profitability.
While the economic outlook remains uncertain, the Group is
confident that its robust approach to valuation and the loan to
value coverage in its buy-to-let book, at 67.8% (31 March 2018:
66.6%) provide it with significant security in the event of a
downturn. The levels of interest cover and stressed affordability
in the portfolio, coupled with continuing strong rental demand
suggest that its customers should also prove resilient.
Looking forward, the Group intends to develop its offerings to
its core professional landlord customers and the intermediaries
supporting them to provide both an enhanced service and additional
products tailored to their needs. Despite the political
uncertainties, professional landlords are carrying on with their
businesses and continuing to develop and expand their portfolios.
With the private rented sector representing a fifth of households,
professional landlords are vital to the UK's housing provision and
the Group sees significant business opportunities in providing them
with the financial support that they require.
2.2 COMMERCIAL LING
The Group's Commercial Lending division brings together various
streams of mostly asset backed lending to, or through, commercial
organisations and has seen material levels of Group investment
since 2015, for both acquisition activity and organic business
development. The principal customer focus of the division is on
lending to SME and mid-sized corporate customers, which is an
important differentiator from the rest of the Group's business. It
includes equipment leasing operations and also the Group's
development finance, structured lending and professions finance
operations.
The corporate asset finance market in the UK is substantial,
covering some GBP79.4 billion of outstanding balances at 31 March
2019 (30 September 2018: GBP75.1 billion) and GBP16.1 billion of
advances in the six months then ended (year ended 30 September
2018: GBP32.1 billion). However, much of this volume is commodity
lending by bulk lenders. It is the Group's strategy to target
niches (either product types or customer groups) within this market
where its particular skill sets can be best applied, and its
capital effectively deployed to optimise the relationship between
growth, risk and return.
Other offerings in the segment target markets where there has
historically been a shortage of credit, such as the Group's
development finance business which primarily supports smaller
housebuilders and the structured lending business which funds small
non-bank lending operations.
In each of these markets the Group's competitors are other
smaller banks and similar sized lenders. They are markets in which
the largest lenders have little presence, creating a credit
availability issue for customers and significant opportunities for
the Group.
The division relies heavily on specialist teams to address the
separate business lines, either sourced externally or internally
developed. This was highlighted when the asset finance business was
named as 'SME Specialist of the Year' at the 2018 Leasing World
Awards and 'Best Specialist Finance Solutions Provider' in the SME
News Magazine's 2019 UK Legal Awards.
The Consumer Lending businesses are building on this success,
increasingly developing technological solutions to assist in
customer procuration processes, enabling potential borrowers or the
brokers they use to access appropriate finance.
The common themes of these diverse business lines are a reliance
on understanding and engaging with the customer and the valuation
of any security, together with expertise in collections and
security realisation. In common with the rest of the Group, the
division's focus is on the maintenance of strong credit standards
and it does not pursue business volumes at the expense of
margins.
Lending activity
During the period the focus across all of the division's
business lines has been on growing the scope of the operations to
address a wider range of funding propositions for SME customers,
while maintaining credit discipline and improving yields.
Within the leasing operations a wider range of assets has been
considered, including both hard and soft assets, providing funding
to a broader range of small business operations, while the Group's
development finance and structured lending have also increased
their scope.
Economic factors have led to some nervousness in the Group's
market, with macro-economic indicators generally flat, but this has
not yet led to any significant downward impact on volumes. The
construction sector, which is a significant target market for the
asset finance operation, has held up well so far, supported, to
some extent, by the impact of large infrastructure projects.
Commercial Lending exposure has increased overall by 13.3% in
the six-month period to GBP1,283.9 million (30 September 2018:
GBP1,133.2 million). This has been driven by particularly strong
performances in development finance (up GBP73.2 million), asset
finance (up GBP47.4 million) and structured lending (up GBP17.4
million).
The new lending activity in the segment during the period is set
out below.
Six months Six months Year
ended ended ended
31 March 31 March 30 September 2018
2019 2018
GBPm GBPm GBPm
Asset finance 150.6 121.4 259.2
Motor finance 66.0 70.4 177.9
Development finance 160.7 35.1 136.8
Structured lending 17.6 - 40.6
Professions finance 60.4 42.4 95.5
----------- ----------- -------------------
455.3 269.3 710.0
=========== =========== ===================
The Commercial Lending segment has seen a 69.1% growth in new
advances compared to the corresponding period in 2018. A
significant part of this increase comes from the acquisition of
Titlestone, which now forms part of the development finance
business, in July 2018, and the Iceberg professions finance
business in December 2017, which only contributed to three months
of the comparator period.
Development finance
The Group's development finance business was significantly
expanded by the acquisition of Titlestone in July 2018. The nine
months since then have been positive for the business, with
Titlestone integrated with the Group's organically developed
operation and the focus of the new combined business refined.
The Group's target customer is a small to medium sized developer
of UK residential property. The typical types of projects funded
have an average size of approximately GBP4.5 million and are
generally focussed on the more liquid parts of the residential
market, avoiding developments with high unit values. While the
business has been concentrated in the South-East of England so far,
with 67% of balances at 31 March 2019 located in London and the
South East, the Group's strategic objective is to lend more widely
across the UK and this shift continued in the period. Central
London property hot-spots have been largely avoided.
Activity in the Group's target market has held up well in the
half year, with numbers of enquiries consistent with previous
periods. However, some developers have taken longer to get projects
under way and there has been additional caution amongst larger
scale developers, evidenced in lengthening periods between facility
agreement and the first drawdown.
Prospects for the second half of the year remain encouraging,
with undrawn amounts on live facilities at 31 March 2019 of
GBP276.9 million and a post-offer pipeline of GBP149.8 million, a
large proportion of which would be expected to flow in to second
half completions. Market fundamentals remain strong, albeit
tempered by short-term economic anxieties, and the Group's
extensive property experience can be used to leverage future
growth.
Asset finance
The asset finance operation has retained its position in its
core 'hard asset' market during the period. It has maintained its
focus on margins and sought to support its business levels through
strong customer relationships and service standards.
Volumes have benefitted from an enhanced core proposition and
operational efficiencies arising from increasing centralisation of
operations at the Group's asset finance hub in Southampton. New
asset finance loan volumes have grown by 24.1% compared to the
comparative period in 2018, reaching GBP150.6 million (2018 H1:
GBP121.4 million). As part of the centralisation process
significant investments have been made in technology, while the
sales teams have also been strengthened across the various
specialist areas of the business.
Investment in operating lease assets has also continued with
GBP11.9 million of assets acquired in the period (2018 H1: GBP19.3
million).
Structured lending
The Group's structured lending business, which made its first
loans in the second half of 2018 has made significant progress in
the six months. The team, which has built a solid reputation in the
market, has expanded in the period, allowing more prospects to be
addressed. The structured lending business generally has a longer
pipeline than other operations, with detailed negotiations required
before a new loan can be agreed. There are now five transactions in
place, with more prospects at various stages of development. The
deals currently in progress are expected to provide further lending
in the second half of the year, while the business as a whole has
good prospects for further expansion.
Other lending
The Group continues to carefully target its motor finance
offerings on those specialist propositions which are not addressed
by mass-market lenders. This limits its ability to grow market
share and the level of advances in the first half of 2019 has been
below that achieved in 2018, in part due to a continued level of
new business pricing discipline. The short-term professions finance
business, which includes the Iceberg operation acquired in December
2018, grew broadly in line with expectations during the period.
Performance
The outstanding loan balances in the division are set out below,
analysed by business line.
31 March 31 March 30 September
2019 2018 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm
Asset finance 451.4 364.8 403.4
Motor finance 262.4 195.4 256.6
Development finance 426.0 57.0 352.8
Structured lending 56.1 - 38.7
Invoice factoring 20.9 15.3 21.8
Professions finance 48.4 36.7 42.6
Unsecured business lending 14.5 7.3 13.1
Other loans 4.2 3.6 4.2
--------- --------- -------------
1,283.9 680.1 1,133.2
========= ========= =============
Margins in the segment have remained strong, reflecting both the
acquisition of Titlestone in 2018 and an underlying increase on a
like-for-like basis.
Credit quality in the development finance books has been good,
and the overall performance of the projects has been in line with
expectations. These accounts are monitored on a case-by-case basis
by the Credit Risk function. At 31 March 2019 no accounts had been
identified by the monitoring process as being likely to result in a
loss, other than three Titlestone accounts identified on
acquisition and allowed for in the purchase price, where
refinements in fair values at the acquisition date have been
reflected in the goodwill valuation.
The average loan to gross development value for the portfolio at
the period end, a measure of security cover, was 63.9% (31 March
2018: 60.1%). This increase reflects the initially cautious launch
of the Paragon proposition and the higher risk appetite of the
Titlestone business.
Arrears in Commercial Lending remain low with arrears in the
asset finance business at 1.66% and motor finance at 1.27% (31
March 2018: 0.97% and 0.78% respectively), comparable to those in
the wider sector, with the FLA reporting average arrears for asset
finance at 1.10% and car finance at 2.70% at 31 March 2019 (31
March 2018: 0.80% and 2.50% respectively).
Performance in the structured lending operation has been in line
with expectations with satisfactory pricing and no serious concerns
with the operation of the deals.
Outlook
The Commercial Lending segment has seen the greatest level of
investment by the Group in the recent past, most notably through
its acquisition activity in the asset and development finance
markets. The first half of the 2019 financial year has demonstrated
the Group's ability to support the needs of underserved customers
in these important parts of the UK economy. Whilst further bolt-on
acquisitions to enhance existing operations remain a possibility,
the Group's focus is now to invest in technological, distribution
and servicing enhancements for its commercial activities, having
integrated and embedded the acquired elements into its core risk,
operational and systems processes.
2.3 IDEM CAPITAL
The Idem Capital segment contains the Group's acquired
portfolios, together with its pre-2010 legacy consumer accounts.
Its strategic focus is on the acquisition of more specialist loan
portfolios where it can enhance value through its collections
process and access to funding, and which will augment the organic
origination activities of the Group. It uses its analytical skills
base, which it sees as a core differentiator, to identify and
evaluate portfolios brought to market against these criteria.
As part of the banking group it is able to deploy expertise in a
wide variety of asset classes and access the systems development
resource and support functions of the wider business, enabling more
complex portfolios to be addressed. It also has significant
experience in working in partnership, either as an investor or
administrator, giving it access to transactions which may be
unattractive on a standalone basis.
Overall Idem Capital's success rests on understanding assets,
strong analytics, advanced servicing capabilities and the efficient
use of funding.
New Business
The UK loan portfolio purchase market remains active despite the
current levels of economic uncertainty, and the Group has
participated in all the significant tender processes in the period,
to some extent. However, conditions in the market have become more
difficult with levels of demand and prices remaining high, with
several very large investors active in the market.
In the face of these conditions the Group has maintained its
disciplined approach. It continues to target only those deals where
its wider capabilities in administration and funding can provide a
real benefit to the project and where the projected return is
attractive in comparison to the other opportunities for the
deployment of its capital.
During the period no new deals were completed (2018 H1: none)
although, as noted above, the division undertook a limited number
of reviews of opportunities that were ultimately not progressed.
Aside from these, the main focus of the business was on monitoring
the performance of the extant portfolio and the integration of the
motor finance portfolio purchased towards the end of the previous
financial year.
Performance
The value of the loan balances in the segment are set out below,
analysed by business line.
31 March 31 March 30 September
2019 2018 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm
Second charge mortgage loans 245.8 357.5 274.6
Unsecured consumer loans 158.4 189.6 173.7
Motor finance 53.6 - 72.8
--------- --------- -------------
457.8 547.1 521.1
========= ========= =============
The reduction in balances from March 2018 is a result of the
scale of realisations from the brought forward portfolio. These
were both organically from customer repayments and through a
portfolio sale, of GBP54.7 million of assets, completed in the
second half of the 2018 financial year. 120 month Estimated
Remaining Collections on acquired consumer assets reduced from
GBP615.2 million at 31 March 2018 to GBP446.5 million at the period
end (note 7).
Overall collections from customers have held up well in the
period, despite the generally negative economic forecasts for the
UK. However, this position will be monitored carefully going
forward as the portfolios contain a number of customers who might
be more at risk in a downturn. Cash flow from the portfolio remains
robust, however, following very high lump sum settlement receipts
in 2018 which contributed to income recognition, the current year
has seen a more normal level of settlements. Instalment payments
remain strong, reflecting the improving behavioural scores seen
across the business.
Arrears on the segment's secured lending business remain in line
with recent performance at 15.5% (30 September 2018: 15.8%, 31
March 2018: 19.9%). While this is higher than the average for the
sector it reflects the seasoning of the balances, which are mostly
more than ten years old. Average arrears for secured lending of
9.1% at 31 March 2019 were reported by the FLA (30 September 2018:
9.4%).
The division's consumer lending portfolio has performed well
during the period, with strong cash generation. The Group monitors
actual cash receipts from acquired portfolios against those
forecast in the evaluation which informed the purchase price. Up to
31 March 2019 such collections were 109.8% of those forecast to
that point (30 September 2018: 109.7%, 31 March 2018: 109.4%).
The motor finance book acquired at the end of the previous
financial year has been bedded in successfully, with collections
currently ahead of plan. The success of this acquisition reflects
the Group's strategy of targeting more specialist portfolios.
Operational improvements have continued to be made in systems,
processes and employment patterns which are expected to generate
operational efficiencies in future periods.
Outlook
The loan purchase market continues to offer significant
opportunities for Idem Capital to invest in portfolios, either by
itself or with partners, where its ability to leverage the skill
base of the wider group can generate good returns. These deals are
likely to be larger, more idiosyncratic and less frequently
available than the average, which leads to an irregular flow of new
accounts to the division.
However, it is the Group's firm belief that the maintenance of
strict discipline in this area is the best route to delivering an
appropriate return on its investments and that the division is well
placed to continue the effective management of its asset base and
to address appropriate business opportunities as they arise.
3. FUNDING REVIEW
The Group's strategic funding objective is to maintain a
diversified and sustainable funding base. It manages a variety of
funding options to ensure that pricing and availability issues in
any particular funding market can be mitigated, while maintaining
the flexibility to fund new business opportunities when
required.
During the period this strategy has seen the Group focus on
retail deposits, with the capital markets relatively inactive and
pricing relatively unattractive for much of the period.
In the uncertain economic climate which has continued through
the past six months, the Group continued its policy of increasing
contingent liquidity and of holding larger cash balances than might
otherwise be the case, with GBP759.7 million of cash available for
liquidity and other purposes at 31 March 2019 (30 September 2018:
GBP962.9 million, 31 March 2018: GBP690.7 million). The contingent
liquidity policy will be kept under review in the light of the
emerging economic and political environment.
The Group has also explored new routes to the savings market in
the period in order to broaden its distribution and create the
capacity for more flexibility in its funding.
The Group's funding at 31 March 2019 is summarised as
follows:
31 March 31 March 30 September 2018
2019 2018
GBPm GBPm GBPm
Retail deposit balances 5,878.0 4,285.8 5,296.6
Securitised and warehouse funding 6,064.8 6,471.2 6,490.3
Central bank facilities 984.4 974.4 1,024.4
Tier 2 and retail bonds 445.7 445.1 445.4
--------- --------- ------------------
Total on balance sheet funding 13,372.9 12,176.5 13,256.7
Off balance sheet central bank facilities 108.5 108.9 108.7
--------- --------- ------------------
13,481.4 12,285.4 13,365.4
========= ========= ==================
The Group's present medium-term strategic funding objective is
principally focussed on raising retail deposits, while optimising
the use of central bank facilities. Securitisation is used
tactically if market conditions are favourable, or where it is
appropriate for particular transactions and the Group's present
expectation is that one securitisation per year is likely, if
conditions are right.
3.1 RETAIL FUNDING
The Group's retail savings proposition provides customers with a
range of deposit options, offering competitive rates and value for
money, combined with the protection provided by the Financial
Services Compensation Scheme ('FSCS'). Such deposits represent a
reliable, cost-effective and scalable source of finance for the
Group. Over recent years there have been a number of new entrants
to this sector of the banking market and competition for
internet-sourced deposits has increased. However, the Group's
competitive pricing, attractive products and good customer service
have meant that it has been able to achieve its required funding
levels at an appropriate price.
The volume of retail deposits has continued to grow during the
period, with balances at 31 March 2019, at GBP5,878.0 million,
11.0% higher than at the previous year end (30 September 2018:
GBP5,296.6 million, 31 March 2018: GBP4,285.8 million).
The Group's share of the overall UK savings market remains
small, with household savings balances reported by the Bank of
England increasing by 1.6% in the six months ended 31 March 2019 to
GBP1,194.5 billion (30 September 2018: GBP1,175.6 billion),
although these deposits remain overwhelmingly with clearing banks
and building societies. While this market position enhances the
Group's flexibility, it does mean that rates may be influenced by
the funding needs of other, larger, participants in the market,
which are beyond the Group's control.
The Group's savings balances at the period end are analysed
below.
Average interest Average initial Proportion of
rate balance deposits
31.03.19 30.09.18 31.03.19 30.09.18 31.03.19 30.09.18
% % GBP000 GBP000 % %
Fixed rate deposits 1.99% 1.94% 18 19 69.6% 68.8%
Variable rate deposits 1.41% 1.36% 16 16 30.4% 31.2%
--------- --------- --------- --------- --------- ---------
All balances 1.81% 1.76% 18 18 100.0% 100.0%
========= ========= ========= ========= ========= =========
The average initial term of fixed rate deposits at 31 March 2019
was 27 months (30 September 2018: 27 months).
At 31 March 2019 the proportion of easy access deposits, which
are repayable on demand, at 23.6% was broadly similar to its level
at the beginning of the period (30 September 2018: 25.5%), and
represented GBP1,384.7 million of the balance. This percentage can
be expected to rise going forward as the Group generates richer
behavioural data to support its liquidity requirement assumptions
for easy access business.
The core route to market for the deposit proposition is through
its online presence, with traffic driven by strong repeat business
flows, a presence on price comparison websites and recommendations
from industry savings experts. This has been enhanced in the period
by the launch of alternative deposit sources, such as investment
platforms outside the main business flow.
The first of these alternative sources came on line in the
period, with the Group's launch on the Hargreaves Lansdown Active
Savings platform in November 2018. Further such projects are under
development and are expected to be launched in the second half of
the year.
The Group's products, process and approach continue to be well
regarded, both in the industry and by customers. During the period
Paragon Bank won the 'Best Monthly Interest Provider' award in the
2019 Moneynet awards, repeating its 2018 success, was named 'Online
Savings Provider of the Year' in the Moneyfacts Consumer Awards
2019 and was named as the 'Best Savings Provider for Existing
Customers' in the 2019 Savings Champion awards.
In customer feedback 89% of those opening a savings account with
the Group in the period, who provided data, stated that they would
'probably' or 'definitely' take a second product (2018 H1: 91%,
2018 full year: 90%). The net promoter score in the same survey was
+63, up from +62 in the first half of the preceding financial year
(2018 full year: +61).
When customers with maturing savings balances in the year were
surveyed 92% stated that they would 'probably' or 'definitely'
consider taking out a replacement product with the Group (2018 H1:
90%) with a net promoter score at maturity of +58, up from +44 for
the first half of the 2018 financial year (2018 full year: +50).
This performance is particularly valuable to the Group, given the
benefits of customer and deposit retention.
The Group's outsourced deposit administration platform continues
to meet its needs and provides a cost-effective, stable and
scalable solution in the medium to long term. Overall, the savings
proposition provides the Group with a stable funding platform, with
a focus on term funding to manage interest rate risk and the
ability to limit product availability to short periods of time,
giving the funding channel flexibility and manageability.
The Group expects its deposit base to increase with the
business, developing greater diversity and exploring new channels
to market and products. The FSCS guarantee is likely to reduce the
potential for an economic downturn to impact liquidity and the
Group's profiling of its target customers suggests they may be more
resilient than average in such circumstances.
3.2 WHOLESALE FUNDING
The Group's wholesale funding comprises securitisation funding,
warehouse debt and retail and corporate bonds. It has been one of
the principal issuers of residential mortgage backed securities
('RMBS') in the UK over many years. Its Long-Term Issuer Default
Rating was affirmed at BBB by Fitch in the period, albeit with a
negative outlook which was applied to all the major UK banks as a
result of the uncertainty in the Brexit process. Fitch have stated
that, all other things being equal, this would be removed in the
event of a resolution.
The capital markets have been largely quiet in the six months
with rates less appealing than in previous periods. This is
attributable to two factors, the general economic environment in
the UK and the impending withdrawal of the LIBOR reference rate,
which has formed the basis for interest charging on the majority of
asset backed securities since the inception of that market.
LIBOR is due to be withdrawn in 2021, within the lifetime of a
newly issued four-year security, and UK regulators have mandated
the Bank of England Sterling Overnight Index Average ('SONIA') to
replace it. However, up until April 2019 no significant
SONIA-linked bonds have been issued, with much of the market
waiting for a standard approach to emerge.
During the period three mature transactions have been
refinanced. These included two pre-2010 deals, First Flexible No. 5
PLC and Paragon Secured Funding (No. 1) PLC, which between them had
GBP83.4 million of principal outstanding at the previous year end
and some of the highest funding costs amongst the legacy funding
arrangements. The third transaction, Paragon Mortgages (No. 21)
PLC, had reached its expected maturity date and was paid down in
accordance with market expectations.
While rates have been unattractive for new RMBS issuance
throughout the period, with most deals pricing at 100 basis points
above LIBOR or more, the Group has been working with its legal and
professional advisers to ensure that it is in a position to issue
new SONIA linked RMBS when it believes market conditions are
right.
At the same time the Group continues to carefully monitor
emerging regulatory and market developments so that it suffers no
disruption in connection with legacy LIBOR-linked borrowings when
the reference rate is withdrawn.
A further funding option is provided by wholesale warehouse
funding, which provides standby capability, particularly in the
event of market disruption elsewhere, where funds need to be
deployed rapidly or as an alternative to retail deposit funding for
liquidity purposes. During the period a new GBP200.0 million
facility was agreed with Bank of America Merrill Lynch. This has an
interest rate of LIBOR plus 0.95%, providing a source of
cost-effective standby funding and an effective means of funding
assets ahead of their inclusion in public securitisation
structures.
3.3 CENTRAL BANK FACILITIES
The Group has continued to make use of facilities offered by the
Bank of England to support its lending to households and
businesses. Its drawings under the Term Funding Scheme ('TFS')
remain in place and provide GBP944.4 million of the Group's funding
(30 September 2018: GBP944.4 million, 31 March 2018: GBP944.4
million), with all drawings remaining in place until at least 2021.
The Group also utilised the Indexed Long-Term Repo scheme ('ILTR')
for six-month borrowings, with GBP40.0 million outstanding at the
period end (30 September 2018: GBP80.0 million, 31 March 2018:
GBP30.0 million).
The Group's liquidity drawdown under the Funding for Lending
Scheme ('FLS'), which provides liquidity of GBP108.5 million (30
September 2018: GBP108.7 million, 31 March 2018: GBP108.9 million)
remained in place throughout the period. The terms of this facility
are such that neither the drawing nor the liquidity provided appear
on the Group's balance sheet.
The Group has also pre-positioned further mortgage loans and
certain other assets with the Bank of England to act as collateral
for further drawings on central bank funding lines, if and when
required, providing access to liquidity of up to GBP1,149.6
million.
The Group will continue to access these facilities in future, as
part of its overall funding framework.
3.4 SUMMARY
The Group's diversified sources of funding, supporting its
retail deposit franchise, give it a strong position, reducing its
exposure to issues affecting any particular funding source and
allowing it the flexibility to raise funds in accordance with its
own market assessments, rather than being forced into sub-optimal
transactions for short term reasons. This base delivers a robust
and adaptable position going forward, supporting the Group's
overall strategic objectives.
Further information on the Group's borrowings is given in note
23.
4. CAPITAL REVIEW
The Group's capital policy aims to provide appropriate returns
to shareholders, while ensuring the strength of its balance sheet
is preserved and sufficient capital is available to meet its
strategic objectives going forward. The maintenance of strong
regulatory capital and liquidity positions to safeguard its
depositors is also a principal strategic objective.
For regulatory purposes the Group's capital comprises
shareholders equity and tier 2 bonds and may be supplemented, if
appropriate, by the issue of further qualifying liabilities.
4.1 DIVID AND DISTRIBUTION POLICY
The Company's previously announced dividend policy of paying out
40% of consolidated earnings to shareholders, remains in place,
achieving a dividend cover ratio of 2.5 times, in ordinary
circumstances.
The interim dividend has been determined, in accordance with
policy, as 50% of the previous year's final dividend and has
therefore been set at 7.0 pence per share, an increase of 27.3%
from the 5.5 pence per share declared in 2018. This will be paid on
26 July 2019 to shareholders on the register on 5 July 2019.
The directors have considered the distributable reserves of the
Company and concluded that such a dividend is appropriate.
The Group's operational capital and funding requirements are
also influenced by the need to retain sufficient liquidity in the
business to meet its cash requirements in the short and long term,
as well as to provide a buffer under stress. There is also a
regulatory requirement to hold liquidity in Paragon Bank. The Board
regularly reviews its liquidity risk appetite and closely monitors
a number of key internal and external measures. The most
significant of these, which are calculated for the Paragon Bank
regulatory group on a basis which is standardised across the
banking industry, are set out below.
Indicator 31 March 31 March 30 September 2018 Regulatory minimum
2019 2018
LCR - Liquidity coverage ratio 134% 170% 144% 100%
NSFR - Net stable funding requirement 112% 112% 113% 100% *
========= ========= ================== ===================
* not yet a binding requirement
This shows the available liquidity at the period end to be well
in excess of regulatory minimums.
4.2 REGULATORY CAPITAL
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision, the regulator issues individual capital guidance
setting an amount of regulatory capital, defined under the
international Basel III rules, implemented through the Capital
Requirements Regulation and Directive ('CRD IV'), which the Group
is required to hold relative to its risk weighted assets in order
to safeguard depositors in the event of severe losses being
incurred by the Group.
The Group maintains extremely strong capital and leverage
ratios, with a total capital ratio of 16.0% at 31 March 2019 and a
UK leverage ratio of 6.5%. The CET1 ratio, 13.7% at 31 March 2019,
reduced during the period, reflecting the growth in the balance
sheet, goodwill on acquisitions and dividends paid to
shareholders.
The Group's principal capital measures are set out below. It has
been granted transitional relief on the adoption of IFRS 9, with
the impact on capital being phased in over a five-year period, with
only 5% of the effect being recognised in the first year. However,
firms are also required to disclose capital measures as if the
relief has not been given (referred to as the 'fully loaded'
basis).
31.03.19 31.03.18 01.10.18 30.09.18
GBPm GBPm GBPm GBPm
CET1 Capital Basic 918.7 886.1 889.6 890.8
Fully loaded 897.5 886.1 868.4 890.8
Total Regulatory capital
('TRC') Basic 1,068.7 1,039.9 1,039.6 1,045.7
Fully loaded 1,047.5 1,039.9 1,018.4 1,045.7
The Group's CET1 Capital comprises its equity shareholders'
funds, adjusted as required by the CRD IV rules. TRC, in addition,
includes tier 2 capital representing the Tier 2 Bonds. Additional
tier 2 capital arising from credit loss allowances is no longer
included in regulatory capital following the introduction of IFRS
9.
The Group's capital requirements include the Pillar 1 + 2a
amount which is specific to the Group and is set by the regulator.
This may include both variable and fixed components. At 31 March
2019 this requirement was GBP747.4 million on the transitional
basis and GBP746.4 million on the fully loaded basis (31 March
2018: GBP659.7 million - both bases), with the increased
requirement principally driven by the growth in the Group's asset
base.
The Group's capital must also cover the CRD IV buffers, the
Counter-Cyclical ('CCyB') and Capital Conservation ('CCoB')
buffers. These apply to all firms and are based on a percentage of
risk weighted assets. These buffers were both increased in the
period, with the CCoB increasing from 1.875%, to 2.500%, its
long-term rate, from 1 January 2019 and the CCyB increasing from
0.5% to 1.0%, from November 2018. These increases in standard CRD
IV buffers have added over GBP75.0 million to the Group's capital
requirement. Further buffers may be set by the PRA on a firm by
firm basis, but may not be disclosed.
The Group continues to maintain a healthy capital surplus,
although this has been eroded by the 1.125 percentage point
increase in the CRD IV buffers in the period, the introduction of
IFRS 9 and the increase in the deficit on the Group's pension
plan.
Capital ratios are set out below.
31.03.19 31.03.18 01.10.18 30.09.18
CET1 Ratio Basic 13.7% 15.5% 13.8% 13.8%
Fully loaded 13.4% 15.5% 13.5% 13.8%
Total Capital Ratio Basic 16.0% 18.2% 16.2% 16.2%
Fully loaded 15.7% 18.2% 15.8% 16.2%
UK Leverage Ratio Basic 6.5% 6.8% 6.4% 6.4%
Fully loaded 6.4% 6.8% 6.3% 6.4%
Capital ratios remain largely in line with previous performance,
with IFRS 9 transition not having a major impact. The Group's
current CET1 appetite is consistent with its previously stated
target of 13.0%.
During the period the Group has undertaken a thorough review of
the risk weightings applied to its assets for capital purposes,
partly in response to market concerns across the sector. This
exercise confirmed the weightings being applied under the
Standardised Approach and the appropriateness of the Group's risk
weighted assets values and hence its capital measures.
The Group's project to develop an Internal Ratings Approach
('IRB') to credit risk for capital adequacy purposes continues. A
considerable amount of work has been completed during the period,
using both internal and external resources, and submission of the
first applications, in respect of the Group's buy-to-let mortgage
assets is expected in the second half of the current financial
year.
4.3 CAPITAL OUTLOOK
While the Group's strong businesses and its flexible funding
provide the foundations to grow its capital base to sustain future
strategic growth, the Board keeps the appropriate level and form of
capital required for the Group under review.
This ensures that, in the light of the Group's strategic
objectives and, more specifically where there are changes in the
business or in regulatory expectations, the capital position will
always be prudent and sustainable, for the benefit of all
stakeholders.
5. FINANCIAL REVIEW
Over the half year period the Group's results were impacted by
market interest rate movements, These generated significant fair
value volatility in the profit and loss account and increased the
deficit on the Group's pension scheme, although both measures
showed strong signs of recovery after the period end. However, the
underlying position continued the positive trends seen in previous
periods, driven by Group's long-term strategy.
The six months ended 31 March 2019 saw the Group's underlying
profit (appendix B) increase by 8.7% to GBP79.8 million (2018 H1:
GBP73.4 million) while on the statutory basis profit before tax
decreased by 6.7% to GBP72.0 million (2018 H1: GBP77.2 million) as
a result of the fair value losses on hedging instruments.
Earnings per share decreased by 5.1% to 22.5p (2018 H1: 23.7p)
on the statutory basis, and increased by 11.1% to 25.0p excluding
the effect of the fair value gains (2018 H1: 22.5p) (appendix
B).
5.1 RESULTS FOR THE PERIOD
CONSOLIDATED RESULTS
For the six months ended 31 March 2019
2019 H1 2018 H1
IFRS 9 IAS 39
GBPm GBPm
Interest receivable 249.2 213.3
Interest payable and similar
charges (111.1) (92.0)
-------- --------
Net interest income 138.1 121.3
Other operating income 9.9 8.8
-------- --------
Total operating income 148.0 130.1
Operating expenses (63.3) (54.9)
Provisions for losses (4.9) (1.8)
-------- --------
79.8 73.4
Fair value net (losses) /
gains (7.8) 3.8
-------- --------
Operating profit being profit
on ordinary activities before
taxation 72.0 77.2
Tax charge on profit on ordinary
activities (13.9) (15.2)
-------- --------
Profit on ordinary activities
after taxation 58.1 62.0
======== ========
2019 H1 2018 H1
Basic earnings per share 22.5p 23.7p
Diluted earnings per share 22.0p 23.0p
Dividend - rate per share
for the period 7.0p 5.5p
======== ========
Income
Total operating income increased by 13.8% to GBP148.0 million
(2018 H1: GBP130.1 million). Within this, net interest income in
the period increased by 13.8% to GBP138.1 million from GBP121.3
million for the six months ended 31 March 2018. The increase
principally reflects the growth in the size of the average loan
book, which rose by 9.6% to GBP12,313.1 million (2018 H1:
GBP11,235.4 million) (appendix C).
Annualised net interest margin ('NIM') was improved in the six
months to 31 March 2019 to 2.24% from the 2.16% achieved in the
corresponding period last year (appendix C). This increase reflects
the changes in product mix in the Group's balance sheet, with new
buy-to-let margins exceeding those achieved on the legacy book and
the growing Commercial Lending division operating on still wider
margins. The net impact of the Titlestone development finance
acquisition and the Idem Capital portfolio disposal in the second
half of 2018 was also positive for net interest.
Other operating income was GBP9.9 million for the six months,
compared with GBP8.8 million in the corresponding period in 2018.
The increase arises principally from increased operating lease
income, following investment in leasing assets over recent
years.
Costs
Operating expenses for the period increased by 15.3% to GBP63.3
million from GBP54.9 million for the six months ended 31 March
2018. These costs include a full six months of costs relating to
both the Titlestone business, acquired in the second half of the
last financial year and the Iceberg business, acquired in December
2017. The Group's average number of employees also increased to
1,364 for the period, an increase of 1.1% over the comparable
period in 2018 (2018 H1: 1,349). The increase in the Group's
savings balance in the period (37.2% between 31 March 2018 and 31
March 2019) also impacts operating costs, with the outsourced
servicing fee set by reference to the balance outstanding.
The achievement of the Group's strategy is dependent on its IT
infrastructure and during the period it invested heavily in
developments to improve efficiency and to provide an enhanced
experience to its customers, particularly in the SME market. These
initiatives were ongoing at the period end and will be rolled out
in the future. Further systems effort was deployed to enhance
cyber-security and operational resilience. The period's costs also
include expenditure of over GBP1.0 million on the development of
the Group's IRB approach, both in internal resources and external
advice, which should generate material future benefits to the
Group's capital position. Overall the Group estimates that these
project costs comprise over GBP2.0 million of the cost base for the
period.
This investment for the future increased the Group's cost:income
ratio in the period to 42.8% (appendix A) from the 42.2% recorded
in the first half of 2018, although without the additional project
costs and the impact of the acquisitions, this would have reduced.
The control of operating costs remains a principal strategic
priority of the Group and it applies a rigorous budgeting and
monitoring process. Over the medium term, the Group targets
improvements in the cost:income ratio, from scale and efficiency
gains, but increases in regulatory burdens, IT investments and the
impact of new operations means that progress to a lower ratio is
unlikely to be linear.
Impairment provisions
With effect from the current financial year, the Group is
required to use the new financial instruments accounting standard,
IFRS 9, to calculate its impairment provisions in place of IAS 39.
This changes the basis of provision from incurred loss to expected
loss, which means that although a broadly similar bad debt charge
will be posted over the life of a credit impaired account, it will
be recognised earlier. The consequence of this is that a growing
portfolio, such as most of the Group's loan books, will attract a
higher provision charge than it would have done under the previous
methodology.
On transition to IFRS 9 an additional GBP27.2 million of
impairment was identified and recognised in opening reserves. The
total reduction in equity was GBP22.2 million after recognising a
deferred tax asset. Comparative results for 2018 are not restated,
so the impairment charges in the 2019 and 2018 periods are not
strictly comparable.
The charge of GBP4.9 million for loan impairment in the first
half year has increased from that for the previous year principally
due to the introduction of IFRS 9 (2018 H1: GBP1.8 million).
However, this was less than the GBP5.6 million recorded in the
second half of 2018 under IAS 39. The cost of risk (the impairment
charge as an annualised percentage of average loans to customers)
increased to 0.08% from 0.03% during the six months ended 31 March
2018 (appendix C), but the level remains low, reflecting the strong
credit performance delivered by the Group's underwriting approach
in its various operating businesses.
During the period the largest part of the provision charge was
attributable to the Commercial Lending segment, with a charge of
GBP3.7 million for the half year, compared to the GBP0.3 million
charge in the first half of 2018 under IAS 39. This was expected
under the new standard as this division includes the Group's
fastest growing portfolios, where the expected loss basis
accelerates provision. In contrast, the Group's mortgage books,
where the outstanding balance changed less, had a half year charge
of GBP0.7 million, compared to the GBP1.9 million IAS 39 charge in
the first half of 2018.
Operationally, the Group has continued to see favourable trends
in arrears performance over the period, both in terms of new cases
reducing and customers correcting past arrears. Careful management
of all of the Group's loan books continues to be a strategic
priority, for both retention and credit purposes. The credit
performance of the books continues to be pleasing, with that of the
buy-to-let book remaining exemplary, compared to market averages,
and credit metrics on the Group's newer portfolios also strong and
in line with expectations.
Fair value movements
Yield curve movements during the period resulted in hedging
instrument fair value net losses of GBP7.8 million (2018 H1: GBP3.8
million net gain), which do not affect cash flow. The size of the
movement in the period is mostly a result of market turbulence at
the valuation date, with the 31 March 2019 yield curve showing
large fluctuations from longer-term levels, and the March month
generating almost two thirds of the charge for the entire period.
Commentators have ascribed some of this to heightened political
uncertainties in the UK over Brexit at that time. A significant
part of this loss was reversed in early April as the yield curve
returned to its more normal shape.
The fair value movements of hedged assets or liabilities are
expected to trend to zero over time. As such this item represents a
timing difference which is consistently excluded from the Group's
definition of its underlying profit. The Group remains
appropriately economically hedged.
Tax
Tax has been charged at an effective rate of 19.3%, compared
with 19.7% for the corresponding period last year. Materially all
of the Group's operations fall within the scope of UK taxation and
the standard rate of corporation tax applying to the Group in both
periods was 19.0%.
Profits after taxation of GBP58.1 million (2018 H1: GBP62.0
million) have been transferred to equity, which totalled GBP1,087.0
million at the period end (31 March 2018: GBP1,020.6 million). This
represents a tangible net asset value of GBP3.54 per share (31
March 2018: GBP3.47) and a net asset value on the statutory basis
of GBP4.21 per share (31 March 2018: GBP3.94) (appendix D).
The information on related party transactions required by DTR
4.2.8(1) of the Disclosure and Transparency Rules is given in note
33.
5.2 SEGMENTAL RESULTS
The Group continues to manage its business through three
divisions, which are the principal segments for which performance
is monitored:
-- Mortgages, including the Group's buy-to-let and
owner-occupied first and second charge mortgage lending and related
activities
-- Commercial Lending, including the Group's equipment leasing
activities, development finance, structured lending and other
offerings targeted towards SME customers and together with its
motor finance business
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
The Group's central administration and funding costs,
principally the costs of service areas, establishment costs, and
bond interest have not been allocated.
The underlying operating profits of these divisions are detailed
fully in note 9 and are summarised below.
Six months Six months
to to
31 March 31 March
2019 2018
GBPm GBPm
Segmental profit
Mortgages 84.6 72.3
Commercial Lending 19.5 6.2
Idem Capital 22.8 37.5
----------- -----------
126.9 116.0
Unallocated central costs (47.1) (42.6)
----------- -----------
79.8 73.4
=========== ===========
Mortgages
The Mortgage division continues to maintain a strong market
position in its core professional buy-to-let loan market.
Strategically targeted operational initiatives have improved
retention and enhanced NIM, while provisions remain low. As a
result, the segmental profit increased by 17.0% to GBP84.6 million,
from the corresponding period in the previous year (2018 H1:
GBP72.3 million) on a mortgage book which itself had increased by
6.6% between 31 March 2018 and 31 March 2019. The increasing volume
of new buy-to-let lending and the run-off of the legacy portfolio,
together with reductions in the redemption rate in the post-2010
book contributed to a 14 basis point improvement in segmental NIM
in the period.
Commercial Lending
The Commercial Lending segment achieved a segmental profit of
GBP19.5 million in the period (2018 H1: GBP6.2 million). This is
attributable to the contribution of new business lines, together
with growth and enhanced focus in the ongoing sectors. NIM in the
division rose by 106 basis points compared with the six months
ended 31 March 2018, 23 basis points of which represented
like-for-like growth with the remaining 83 basis points relating to
assets acquired with the Titlestone business.
Together with organic growth, the acquired Titlestone business
generated a substantial increase in loan assets, with the segment's
loans to customers at 31 March 2019, at GBP1,283.9 million
increasing 88.8% from the position twelve months earlier (31 March
2018: GBP680.1 million).
Idem Capital
The Idem Capital division's portfolios continued to perform well
in the six months ended 31 March 2019. No new deals were completed
and hence the outstanding loan balance reduced through run-off in
the period, falling by 16.3% in the last twelve months (31 March
2018: GBP547.1 million). NIM reduced in the segment, a result of
the strategic focus on acquiring performing books, which may have
lower yields; the impact of the portfolio sale of higher yielding
assets in September 2018; natural portfolio amortisation; and a
more normal level of lump sum settlements than the strong levels
that enhanced earnings in the prior year. This impacted on segment
profit, which fell by 39.2% to GBP22.8 million (2018 H1: GBP37.5
million).
5.3 ASSETS AND LIABILITIES
The Group's assets and liabilities at the period end are
summarised in the balance sheet below.
SUMMARY BALANCE SHEET
31 March 2019
31 March 31 March 1 October 30 September 2018
2019 2018 2018
IFRS 9 IAS 39 IFRS 9 IAS 39
GBPm GBPm GBPm GBPm
Free cash 204.2 141.2 238.0 238.0
Other cash 867.8 921.4 1,072.6 1,072.6
Loans to customers 12,525.6 11,346.7 12,100.6 12,127.8
Derivative financial assets 751.3 763.4 855.7 855.7
Other assets 133.7 53.7 51.7 51.7
Intangible assets 171.4 120.3 169.3 169.3
--------- --------- ---------- ------------------
Total assets 14,654.0 13,346.7 14,487.9 14,515.1
========= ========= ========== ==================
Retail deposits 5,878.0 4,285.8 5,296.6 5,296.6
Borrowings 7,495.6 7,891.7 7,961.2 7,961.2
Derivative liabilities 30.9 6.2 4.7 4.7
Sundry liabilities 130.6 112.6 132.0 137.2
Pension deficit 31.9 29.8 19.5 19.5
Equity 1,087.0 1,020.6 1,073.9 1,095.9
--------- --------- ---------- ------------------
Total equity and liabilities 14,654.0 13,346.7 14,487.9 14,515.1
========= ========= ========== ==================
The change in the balance sheet in the period has been driven by
the increase in the Group's loan books reported in the lending
review section, with the portfolio increasing on a like-for-like
basis by 3.5% since the year end to GBP12,525.6 million (1 October
2018 (IFRS 9): GBP12,100.6 million). This increase, together with
the Group's liquidity policy, determines its funding requirements
and hence the level of its liabilities.
Loan assets
The Group's loan assets include:
-- Buy-to-let and owner-occupied first mortgage assets in the Mortgage segment
-- Second charge mortgages, with new originations in the
Mortgage segment and purchased and similar legacy assets in Idem
Capital
-- Other unsecured consumer lending in Idem Capital
-- Asset finance and motor finance loans in the Commercial
Lending segment, with similar purchased accounts in the Idem
Capital segment
-- Development finance loans in the Commercial Lending segment
-- Structured lending loans in the Commercial Lending segment
-- Professions finance, invoice finance and other funding
solutions for SME businesses in the Commercial Lending segment
The allocation of these loan assets between segments is set out
below.
31 March 31 March 1 October 30 September
2019 2018 2018 2018
IFRS 9 IAS 39 IFRS 9 IAS 39
GBPm GBPm GBPm GBPm
Mortgages 10,783.9 10,119.5 10,449.5 10,473.5
Commercial Lending 1,283.9 680.1 1,131.3 1,133.2
Idem Capital 457.8 547.1 519.8 521.1
--------- --------- ---------- -------------
12,525.6 11,346.7 12,100.6 12,127.8
========= ========= ========== =============
An analysis of the Group's financial assets by type is shown in
note 18. Movements in the Group's loan asset balances are discussed
in the Lending Review (Section 2) above.
Derivatives
Movements in derivative financial assets and liabilities arise
principally as a result of the effect of changes in exchange rates
on instruments forming cash flow hedges for the Group's floating
rate notes. These movements do not impact the Group's results while
the exchange movements have a broadly equal and opposite impact on
borrowings.
The impact of the yield curve changes already mentioned has also
driven significant changes in the valuation of derivatives held for
hedging fixed rate loan assets or deposit liabilities, with the net
carrying value switching from a GBP21.3 million asset at 30
September 2018 to a GBP20.0 million liability at the period end.
For those derivatives forming part of a hedge for accounting
purposes this movement is offset by the movement in the fair value
adjustments against loans to customer and retail deposits.
Funding
Movements in the Group's funding, including retail deposit
balances and wholesale borrowings, are discussed in the funding
review section. The Group has pursued a conservative liquidity
policy in the period, resulting in strong levels of liquid assets
being held throughout the period.
Pension obligations
The IAS 19 valuation of the Group's pension scheme deficit
increased significantly in the period, with the impact of the
Group's contributions under the recovery plan being offset by a
reduction in the bond yields which drive the discounting used in
this valuation. These yields fell by 50 basis points in the period
to record low levels, a result of the same market disruption which
affected swap fair values. This caused the GBP12.4 million increase
in the deficit to GBP31.9 million (30 September 2018: GBP19.5
million, 31 March 2018: GBP29.8 million).
While the valuation under IAS 19 is that which is required to be
disclosed in the accounts, pension trustees generally use the
technical provisions basis as provided in the Pensions Act 2004 to
measure scheme liabilities. On this basis, the valuation at 31
March 2019 was GBP26.7 million, an increase of GBP11.5 million in
the period (30 September 2018: GBP15.2 million, 31 March 2018:
GBP19.6 million), representing a 79.3% funding level (30 September
2018: 87.0%).
Discount rates increased after the period end, with the
valuation on the technical basis having reduced to GBP20.7 million
by 30 April 2019. An approximately proportionate impact on the IAS
19 valuation would be expected.
Other assets and liabilities
Sundry assets have increased significantly as a result of the
Group's deferred tax balance becoming an asset (a result of IFRS 9
transition adjustments and the movement in the pension plan
liability), together with the inclusion of GBP26.0 million of
collateral which was required to be posted in respect of credit
swap balances (30 September 2018: GBP3.8 million).
Within sundry liabilities, the transfer of deferred tax to
assets has been offset by the increase in interest accruals on
deposits.
6. OPERATIONS REVIEW
Over the period the Group has continued to generate operational
efficiencies. The Group's development finance operations have been
integrated with the acquired Titlestone business, in terms of
location, systems and management structure while the
rationalisation of the asset finance business on to fewer sites has
also progressed.
Strategically the Group continues to operate a centralised
operational structure, with a consolidated governance and risk
management framework covering all of its operations and ensuring
effective oversight.
6.1 MANAGEMENT AND PEOPLE
The Group relies on the strength of its governance and
management processes and the quality of its people to achieve its
strategic objectives. With over 1,350 employees, split between the
head office in Solihull and satellite offices, the Group recognises
the importance of its strengths in this area and its participation
in a number of external initiatives to enhance them.
Governance and management
During the period the Company continued to comply with the
principles of the UK Corporate Governance Code (the 'Code'). On 31
December 2018 Alan Fletcher and Patrick Newberry stepped down from
the Board. Alan served as a director from 2009, including a lengthy
term as Chairman of the Remuneration Committee, ceasing to be
independent for corporate governance purposes in February 2018. Pat
served first as an independent director of Paragon Bank PLC from
its earliest months of operation in 2014, serving as chairman of
its audit committee, and joined the Board of Paragon Banking Group
in 2017. They leave with the thanks of the Group and their fellow
directors for their support and dedication in the development of
both the Group and Paragon Bank PLC, and the best wishes of their
colleagues for the future.
Peter Hartill, a non-executive director since 2011, and Chairman
of the Audit Committee and Senior Independent Director, will be
retiring at the 2020 Annual General Meeting having served on the
Board for nine years. The Group has commenced the process of
identifying a new non-executive director and a further announcement
will be made when appropriate.
John Heron, Director of Mortgages, has also signalled his
intention to retire and will be leaving in early 2020. John joined
the Group in 1986 and, as well as being the Group's longest-serving
employee, he has been instrumental in establishing and building our
buy-to-let mortgage offering. A recruitment process has
commenced.
During the period the Group has continued its review of the
requirements of the new edition of the Code, which will come into
force for the Group from 1 October 2019. At the same time the Group
has considered the forthcoming changes in UK rules for the
disclosure of Chief Executive remuneration and the director's
consideration of wider stakeholder interests ('section 172') and
new requirements for corporate governance and other new disclosures
in subsidiary entities.
No significant implementation issues have been identified and
the Group expects to be able to meet the new requirements as of the
implementation dates.
The Board has also considered the governance and committee
structures in preparation for the Group's IRB application, as well
as providing oversight to that development more generally.
Equality and diversity
Diversity has continued to be a focus for the Board and the
Group as a whole, and in September 2018 the second progress report
on the Group's internal targets under the Women in Finance Charter
was published on its website. The targets include female
representation in senior management roles reaching 35% by January
2022, increasing from 26% at the time the targets were set. The
Group was pleased to report this target had been achieved by 31
December 2018 and remained at 35% at 31 March 2019.
The Group reported its full Gender Pay Gap information at the
end of March 2019, having included the headline numbers in its
Annual Report for the year ended 30 September 2018. These results,
based on the April 2018 pay date, can be found on the 'Corporate
Responsibility' section of the Group's website.
The Group's published data covered all its operations, going
beyond the requirements of the legislation to provide a more
complete view of its position. The median gender pay gap for the
whole Group at 5 April 2018, reported in March 2019, at 30.7% was
not dissimilar to those for other smaller financial entities (5
April 2017: 30.4%). Analysis of the data confirmed the Group's view
that its gap arose primarily from the low numbers of women in
higher paying positions, rather than unequal pay for similar jobs,
emphasising the importance of the Women in Finance initiative to
generate improvements over the medium term.
The Group welcomes the interest in this issue generated by the
public reporting of gender pay but would favour a review of the
detail of the legislation in the light of experience to date to
ensure all disclosures required are comparable and
understandable.
During the period the Group joined the Women Ahead 30% Club
cross-company mentoring scheme, providing ten trained mentors to
support female mentees from other companies, whilst nominating ten
female mentees to receive external mentoring support at the same
time. This is an annual programme and feedback from mentors and
mentees has been very positive.
The Group provides annual diversity awareness training for
managers and additional communication events are planned in the
coming months. The Group carries out an annual voluntary and
anonymous diversity survey of its employees with the 2018 survey
producing a response rate of 72%, significantly above industry
average. The 2019 survey will be conducted during the second half
of 2019 and results will be reported at the year end. Actions to
promote equal opportunities within recruitment, learning and career
development continue to be an important element of the Group's
people strategy.
The Nomination Committee, as the Board Committee responsible for
diversity issues across the Group, oversees policies and
performance on diversity. While the Group is confident that there
is no systematic gender bias in its recruitment or remuneration
practices, it is conscious of the underrepresentation of women at
senior levels in the financial services sector and it anticipates
that one of the effects of its Women in Finance initiative will be
to erode the gender pay gap over time by increasing female
representation at senior levels.
Whilst the Group is pleased with progress to date in improving
diversity, relative to other similar organisations, it recognises
that there is still much work to do. It is confident, however, that
the measures put in place will help provide individuals with the
opportunities they deserve and the Group with the workforce it
needs to achieve its strategic goals. A full list of the Group's
diversity targets can be found on the 'Corporate Responsibility'
section of the Group's website.
People and development
The Group has managed an efficient operation over the past six
months, increasing average employee numbers by 1.1% compared to the
first half of 2018. It maintains its accreditation from the UK
Living Wage Foundation and minimum pay continues to meet the levels
set by the Foundation.
The Group prides itself on the high retention rate of its
workforce. Its annual employee attrition rate of 16.1% (2018 H1:
8.7%) is below the national average. 26.4% of its people have been
with the Group for more than ten years, with 11.2% having achieved
over 20 years' service. We believe this is due to the provision of
quality development opportunities and ensuring the Group remains a
place where people want to work. This in turn has meant that
through-the-cycle knowledge and experience have been retained in
all the Group's specialist areas, which form the foundation of its
strategic focus on specialist lending.
The Group has continued to draw down on Apprenticeship Levy
funds to support its development objectives and the internal
Management Academy was certified with the Chartered Management
Institute ('CMI') to facilitate this. There are typically over 100
people completing professional qualifications at any one time
across the Group. The Group currently has 43 apprentices registered
under the levy scheme, utilising 28% of its levy pot in the past 12
months. Whilst a higher take up would be desirable, the requirement
for apprentices to spend 20% of their time out of the business
makes identifying suitable roles challenging.
Regulatory and other training programmes have also taken place
internally to ensure employees remain competent to deliver good
customer outcomes. The Group has continued to work with local
secondary schools, colleges and universities, with industrial
placements becoming a feature for some of the Group's specialist
areas. The Group has introduced a volunteering day linked to local
and regional charitable activities which is available to all
employees, with the first initiative piloted between January and
March 2019 by nine employees. Feedback has been very positive and
there are plans to extend the volunteering scheme across local
communities in the second half of this year.
Management development has been a core focus to support the
Group's wider succession planning strategy, as well as developing
more female employees to increase the pool of available internal
candidates. During the period work has continued to embed the
internal mentoring programme, accredited by the CMI, which helps to
support succession planning strategy and develop future leaders.
The Group held a senior leadership conference in January 2019 and
two senior leadership development centres have been held during the
period.
The health and wellbeing of the Group's employees is an
important element of its people strategy. An internal team of
emotional wellbeing volunteers, identified and trained with the
support of the charity Mind during 2018, is now embedded and
provides support to individuals experiencing issues within their
personal life or at work, which may impact on their emotional,
psychological or social wellbeing.
6.2 RISK
The effective management of risk is crucial to the achievement
of the Group's strategic objectives. It operates a risk governance
framework, designed around a formal three lines of defence model
(business areas, Risk and Compliance function and Internal Audit)
supervised at Board level.
In the last six months, the Group has continued to enhance its
ability to manage all categories of risk. In particular it has
focussed on:
-- The development of advanced models to enhance credit risk
management and support the Group's IRB application process
-- The enhancement of operational risk capabilities, including
the assessment of critical business services and tolerances
-- The continuing evolution and embedding of its risk appetite framework
-- Ongoing embedding of its operational risk management system
in business areas for use on a day-to-day basis
-- The maintenance and further development of effective cyber-security controls
-- The integration of the businesses acquired in the previous
year to ensure they are fully captured by the risk management
framework
-- Continuing the embedding of robust data protection processes
and controls to ensure compliance with the Data Protection Act
2018
The principal challenges in the risk environment faced by the
Group during the six-month period and going forward include:
-- The impact of continuing uncertainty as to the timing and
terms on which the UK will leave the EU and their impact on the
Group's businesses and the regulatory regimes it operates under
-- The impact of fiscal and regulatory changes introduced in
preceding periods on the scope and nature of the demand for
buy-to-let mortgages in the UK
-- Heightened cyber-security risks as a result of the increasing sophistication and frequency of cyber-attacks affecting the financial services sector
The Group is carefully monitoring and responding to these risks
as they develop and considers itself well placed to mitigate their
impact.
A summary of the principal risks and uncertainties faced by the
Group is given on pages 47 and 48.
6.3 REGULATION
Paragon Bank, which encompasses the majority of the Group's
activities for regulatory purposes, is authorised by the PRA and
regulated by the PRA and the FCA. The Group is subject to
consolidated supervision by the PRA and a number of its other
subsidiaries are authorised and regulated by the FCA. As a result,
current and projected regulatory changes, particularly revisions to
the Basel supervisory regime, continue to pose a significant risk
for the Group, both as a result of their impact and of the pace of
change.
The governance and control structures within the Group continue
to be developed to ensure that the impacts of all new regulatory
requirements on the business are clearly understood and that
appropriate preparations are made before these requirements are
implemented. Regular reports on key regulatory developments are
received at both executive and board risk committees, assessing the
potential implications for the Group, along with necessary
actions.
Whilst the Group is impacted by a broad range of prudential and
conduct regulations, given the nature of its operations, the
following recent and current developments are of particular
note:
-- A discussion paper was published by the Bank of England, PRA
and FCA in July 2018 focussing on the need for greater operational
resilience in the UK financial system and the individual firms and
market infrastructures within it. The Group is actively working to
ensure it has the necessary arrangements in place to meet the best
practice expectations of the paper
-- Extensions to the Senior Managers and Certification Regime
('SMCR') to cover a wider section of persons employed in financial
services come into force in December 2019. This will increase the
number of the Group's employees within the SMCR and the oversight
activities required to ensure compliance with the extended rules.
These systems have been developed in the period and training
modules for all impacted people have taken place across the
Group
-- The policy statement issued by the FCA in March 2017
regarding Payment Protection Insurance ('PPI'), setting a deadline
of 29 August 2019 for any new PPI complaints and new rules and
guidance on the handling of such matters. Impacts from this process
have, so far, been minimal and this is expected to remain the
case
-- The development of proposals, led by the Bank of England and
the FCA, to establish SONIA as the primary sterling interest rate
benchmark by the end of 2021, in place of LIBOR, continues to be
monitored to assess any potential impact on the Group and its
customers. This is discussed further in the funding section
-- The FCA proposals to make changes to the responsible lending
rules and guidance in respect of mortgage customers, issued in
March 2019. The Group is in the process of assessing their impact
and determining what action may be required
-- The results of the FCA multi-firm review on motor finance,
published in March 2019. The Group has competed a detailed gap
analysis against this and is currently considering any policy and
procedural changes which may be required
The Group, along with the rest of the UK corporate sector, does
not yet have clear visibility on potential regulatory changes that
may be introduced following the UK's decision to leave the EU.
However, given its current business model and activities, it does
not have any EU passporting issues that need to be considered.
Certain regulations applying in the financial services sector
only affect entities over a certain size. The Group considers
whether and when such regulations might apply to it in the light of
the growth implicit in its business plans and puts appropriate
arrangements in place to ensure that it would be able to comply at
that point.
Overall, the Group considers that it is well placed to address
all the regulatory changes to which it is presently exposed.
7. CONCLUSION
The Group has continued to make strong progress in its strategy
to provide focussed specialist lending products to UK small
businesses and consumers, while offering competitive lending rates
to savers.
The Group remains well placed in those specialist markets where
it has targeted its activity. It has maintained its leading
position in the professional buy-to-let mortgage market, helping to
support the UK's vital private rented sector. It has also continued
to focus its product range on underserved areas of consumer and SME
lending, providing these consumers with better access to
finance.
During the period the integration of the acquired Titlestone
development finance business has been successfully completed giving
the Group a significant presence in that market, supporting smaller
house builders. Investing in the development of delivery processes
has also continued across all business lines to enhance the
experience of both customers and business partners.
These developments leave the Group well placed to continue to
support its customer base in the face of economic uncertainty in
the UK and to deliver sustainable returns to its shareholders.
PRINCIPAL RISK AND UNCERTAINTIES
There are a number of potential risks and uncertainties which
could have a material impact on the Group's performance over the
remaining six months of the financial year and could cause actual
results to differ materially from expected and historical results.
In the opinion of the directors these have not changed materially
from those described in section A2.2 of the last annual report and
accounts of the Group for the year ended 30 September 2018. These
are summarised below.
Category Risk Description
Business Economic The Group could be materially affected
by a severe downturn in the UK economy
given its income is wholly derived from
activities within the UK. This is more
difficult to forecast given current uncertainties
on the date and terms on which the UK
will leave the EU and the potential for
economic turbulence and negative short-term
consequences.
This could reduce demand for the Group's
loan products, increase the number of
customers that default on their loans
and cause security asset values to fall.
-------------- ---------------------------------------------------
Concentration The Group's business plans could be particularly
affected by any downturn in the performance
of the UK private rented sector and/or
further regulatory intervention to control
buy-to-let lending.
-------------- ---------------------------------------------------
Transition Failure to manage major internal reorganisations
or integrate acquired businesses safely
and effectively could adversely affect
the Group's business plans and damage
its reputation.
-------------- ---------------------------------------------------
Credit Customer Inaccurate targeting and underwriting
of credit decisions could result in customers
becoming less able to service debt, exposing
the Group to unexpected material losses.
-------------- ---------------------------------------------------
Counterparty Failure of an institution holding the
Group's cash deposits or providing hedging
facilities for risk mitigation could expose
the Group to loss or liquidity issues.
-------------- ---------------------------------------------------
Conduct Fair outcomes If the Group fails to deliver fair outcomes
for its customers this could impact both
on its reputation and on its financial
performance through loss of business or
regulatory sanction.
-------------- ---------------------------------------------------
Operational Systems and The risk that the Group's systems may
IT Security be unable to support its operational requirements
or that the Group fails to adequately
protect itself and its customers against
cyber-crime.
-------------- ---------------------------------------------------
People Failure to attract or retain appropriately
skilled key employees at all levels could
impact upon the Group's ability to deliver
its business plans and strategic objectives.
-------------- ---------------------------------------------------
Regulation The risk that the Group's strategic plans
could be materially impacted by any significant,
regulatory or legal changes and that it
might suffer loss or reputational damage
if it fails to identify and respond to
such changes effectively.
-------------- ---------------------------------------------------
Liquidity Funding If access to funding became restricted,
and Capital either through market movements or regulatory
intervention, this might result in the
scaling back or cessation of some business
lines.
-------------- ---------------------------------------------------
Capital Changes in capital requirements for lending
secured on residential property currently
in progress could have adverse financial
implications for the Group.
-------------- ---------------------------------------------------
Market Interest Reduction in margins between market lending
rates and borrowing rates or mismatches in the
Group balance sheet could impact profits.
-------------- ---------------------------------------------------
Pension Pensions The obligation to support the Group's
Obligation defined benefit pension plan might deplete
resources.
-------------- ---------------------------------------------------
The Group has considered and responded to all these risks,
mitigating the exposure as far as is practicable to ensure that its
risk profile remains within the Board's stated risk appetite.
DIRECTORS' RESPONSIBILITES
The directors confirm that, to the best of their knowledge:
-- the condensed financial statements have been prepared in
accordance with International Accounting Standard 34 - 'Interim
Financial Reporting', issued by the IASB and as adopted and
endorsed by the European Union;
-- the Interim Management Report includes a fair review of the
information required by Section 4.2.7R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being an indication of important events that have occurred during
the first six months of the current financial year and their impact
on the condensed financial statements and a description of the
principal risks and uncertainties for the remaining six months of
the financial year); and
-- the Interim Management Report includes a fair review of the
information required by Section 4.2.8R of the Disclosure Guidance
and Transparency Rules, issued by the UK Listing Authority (that
being disclosure of related party transactions that have taken
place in the first six months of the current financial year and
that have materially affected the financial position or the
performance of the enterprise during that period; and any changes
in the related party transactions described in the last annual
report which could do so).
Approved by the Board of Directors and signed on behalf of the
Board.
PANDORA SHARP
Company Secretary
22 May 2019
Board of Directors
F J Clutterbuck J A Heron B A Ridpath
N S Terrington P J N Hartill F F Williamson
R J Woodman H R Tudor G H Yorston
CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the six months ended 31 March 2019 (Unaudited)
Note Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm
Interest receivable 10 249.2 213.3 451.9
Interest payable and similar
charges 11 (111.1) (92.0) (197.3)
----------- ----------- -------------
Net interest income 138.1 121.3 254.6
----------- ----------- -------------
Other leasing income 9.0 7.4 16.3
Related costs (7.0) (6.0) (12.5)
----------- ----------- -------------
Net leasing income 2.0 1.4 3.8
Gain on disposal of financial
assets - - 28.0
Other income 12 7.9 7.4 15.5
----------- ----------- -------------
Other operating income 9.9 8.8 47.3
----------- ----------- -------------
Total operating income 148.0 130.1 301.9
Operating expenses (63.3) (54.9) (114.2)
Provisions for losses (4.9) (1.8) (7.4)
----------- ----------- -------------
Operating profit before
fair value items 79.8 73.4 180.3
Fair value net (losses)
/ gains 13 (7.8) 3.8 1.2
----------- ----------- -------------
Operating profit being
profit on ordinary activities
before taxation 72.0 77.2 181.5
Tax charge on profit on
ordinary activities 14 (13.9) (15.2) (35.7)
----------- ----------- -------------
Profit on ordinary activities
after taxation 58.1 62.0 145.8
=========== =========== =============
Note Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
Basic earnings per share 15 22.5p 23.7p 55.9p
Diluted earnings per share 15 22.0p 23.0p 54.2p
Dividend - rate per share
for the period 29 7.0p 5.5p 19.4p
=========== =========== =============
The results for the periods shown above relate entirely to
continuing operations.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 31 March 2019 (Unaudited)
Note Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
IFRS 9 IAS 39 IAS 39
GBPm GBPm GBPm
Profit for the period 58.1 62.0 145.8
----------- ----------- -------------
Other comprehensive income
/ (expenditure)
Items that will not be reclassified
subsequently to profit or
loss
Actuarial (loss) / gain on
pension plan 25 (12.9) (0.6) 8.9
Tax thereon 1.8 0.1 (1.7)
----------- ----------- -------------
(11.1) (0.5) 7.2
----------- ----------- -------------
Items that may be reclassified
subsequently to profit or
loss
Cash flow hedge (losses)
/ gains taken to equity (0.9) 0.6 1.0
Tax thereon 0.2 (0.1) (0.2)
----------- ----------- -------------
(0.7) 0.5 0.8
----------- ----------- -------------
Other comprehensive income
/ (expenditure) for the period
net of tax (11.8) - 8.0
----------- ----------- -------------
Total comprehensive income
for the period 46.3 62.0 153.8
=========== =========== =============
CONSOLIDATED BALANCE SHEET
31 March 2019 (Unaudited)
31 March 31 March 1 October 30 September 30 September
2019 2018 2018 2018 2017
IFRS 9 IAS 39 IFRS 9 IAS 39 IAS 39
Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash - central banks 16 704.0 628.5 895.9 895.9 615.0
Cash - retail banks 16 368.0 434.1 414.7 414.7 881.9
Short-term investments 17 - 10.0 - - -
Loans to customers 18 12,544.4 11,325.1 12,076.5 12,103.7 11,115.4
Derivative financial
assets 20 751.3 763.4 855.7 855.7 906.6
Sundry assets 45.9 13.1 19.0 19.0 12.7
Deferred tax assets 5.4 - - - -
Property, plant and
equipment 63.6 52.2 56.8 56.8 46.2
Intangible assets 21 171.4 120.3 169.3 169.3 104.4
--------- --------- ---------- ------------- -------------
Total assets 14,654.0 13,346.7 14,487.9 14,515.1 13,682.2
========= ========= ========== ============= =============
Liabilities
Short-term bank borrowings 0.6 1.0 1.1 1.1 0.6
Retail deposits 22 5,878.7 4,278.8 5,292.4 5,292.4 3,611.9
Derivative financial
liabilities 20 30.9 6.2 4.7 4.7 7.1
Asset backed loan
notes 23 5,143.0 5,457.7 5,554.7 5,554.7 6,475.8
Secured bank borrowings 23 921.9 1,013.5 935.6 935.6 1,306.0
Retail bond issuance 23 296.3 295.9 296.1 296.1 295.7
Corporate bond issuance 23 149.4 149.2 149.3 149.3 149.1
Central bank facilities 23 984.4 974.4 1,024.4 1,024.4 700.0
Sundry liabilities 24 112.4 99.1 114.4 114.4 74.6
Current tax liabilities 17.5 15.5 21.4 21.4 17.4
Deferred tax liabilities - 5.0 0.8 5.6 4.8
Retirement benefit
obligations 25 31.9 29.8 19.5 19.5 29.8
--------- --------- ---------- ------------- -------------
Total liabilities 13,567.0 12,326.1 13,414.4 13,419.2 12,672.8
========= ========= ========== ============= =============
Called-up share capital 26 281.8 281.5 281.6 281.6 281.5
Reserves 27 908.1 837.1 895.9 918.3 811.0
Own shares 28 (102.9) (98.0) (104.0) (104.0) (83.1)
--------- --------- ---------- ------------- -------------
Total equity 1,087.0 1,020.6 1,073.5 1,095.9 1,009.4
========= ========= ========== ============= =============
Total liabilities
and equity 14,654.0 13,346.7 14,487.9 14,515.1 13,682.2
========= ========= ========== ============= =============
The condensed financial statements for the half year were
approved by the Board of Directors on 22 May 2019.
CONSOLIDATED CASH FLOW STATEMENT
For the six months ended 31 March 2019 (Unaudited)
Note Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Net cash flow generated
by operating activities 30 177.3 515.9 1,074.4
Net cash (utilised) by investing
activities 31 (1.3) (17.2) (282.8)
Net cash (utilised) by financing
activities 32 (414.1) (933.4) (978.4)
----------- ----------- -------------
Net (decrease) in cash and
cash equivalents (238.1) (434.7) (186.8)
Opening cash and cash equivalents 1,309.5 1,496.3 1,496.3
----------- ----------- -------------
Closing cash and cash equivalents 1,071.4 1,061.6 1,309.5
=========== =========== =============
Represented by balances
within
Cash 16 1,072.0 1,062.6 1,310.6
Short-term bank borrowings (0.6) (1.0) (1.1)
----------- ----------- -------------
1,071.4 1,061.6 1,309.5
=========== =========== =============
CONSOLIDATED STATEMENT OF MOVEMENTS IN EQUITY
For the six months ended 31 March 2019 (Unaudited)
Six months ended 31 March 2019 (IFRS 9)
Share Share Capital Merger Cash flow Profit and Own shares Total
capital premium redemption reserve hedging loss equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
period - - - - - 58.1 - 58.1
Other
comprehensive
income - - - - (0.7) (11.1) - (11.8)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Total
comprehensive
income - - - - (0.7) 47.0 - 46.3
Transactions
with owners
Dividends paid
(note 29) - - - - - (35.9) - (35.9)
Shares - - - - - - - -
cancelled
Own shares - - - - - - - -
purchased
Shares issued - - - - - - - -
to ESOP
Exercise of
share awards 0.2 0.3 - - - (1.2) 1.1 0.4
Charge for
share based
remuneration - - - - - 2.8 - 2.8
Tax on share
based
remuneration - - - - - (0.1) - (0.1)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Net movement
in equity in
the period 0.2 0.3 - - (0.7) 12.6 1.1 13.5
Opening equity
As previously
reported 281.6 65.8 28.7 (70.2) 3.3 890.7 (104.0) 1,095.9
Change of
accounting
policy (note
3) - - - - - (22.4) - (22.4)
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
As adjusted 281.6 65.8 28.7 (70.2) 3.3 868.3 (104.0) 1,073.5
----------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
Closing equity 281.8 66.1 28.7 (70.2) 2.6 880.9 (102.9) 1,087.0
=========== =========== =========== =========== ========== =========== =========== ===========
Six months ended 31 March 2018 (IAS 39)
Share Share Capital Merger Cash flow Profit and Own Total
capital premium redemption reserve hedging loss shares equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
period - - - - - 62.0 - 62.0
Other
comprehensive
income - - - - 0.5 (0.5) - -
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Total
comprehensive
income - - - - 0.5 61.5 - 62.0
Transactions
with owners
Dividends paid
(note 29) - - - - - (28.9) - (28.9)
Shares - - - - - - - -
cancelled
Own shares
purchased - - - - - - (25.2) (25.2)
Shares issued - - - - - - - -
to ESOP
Exercise of
share awards - 0.1 - - - (10.3) 10.3 0.1
Charge for
share based
remuneration - - - - - 2.4 - 2.4
Tax on share
based
remuneration - - - - - 0.8 - 0.8
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Net movement
in equity in
the period - 0.1 - - 0.5 25.5 (14.9) 11.2
Opening equity 281.5 65.5 28.7 (70.2) 2.5 784.5 (83.1) 1,009.4
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Closing equity 281.5 65.6 28.7 (70.2) 3.0 810.0 (98.0) 1,020.6
========= ============= ============ ============ ============ ============ ========= ========
Year ended 30 September 2018 (IAS 39)
Share Share Capital Merger Cash flow Profit and Own Total
capital premium redemption reserve hedging loss shares equity
reserve reserve account
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Transactions
arising from
Profit for the
year - - - - - 145.8 - 145.8
Other
comprehensive
income - - - - 0.8 7.2 - 8.0
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Total
comprehensive
income - - - - 0.8 153.0 - 153.8
Transactions
with owners
Dividends paid
(note 29) - - - - - (43.1) - (43.1)
Shares - - - - - - - -
cancelled
Own shares
purchased - - - - - - (31.4) (31.4)
Shares issued - - - - - - - -
to ESOP
Exercise of
share awards 0.1 0.3 - - (10.9) 10.5 -
Charge for
share based
remuneration - - - - - 6.1 - 6.1
Tax on share
based
remuneration - - - - - 1.1 - 1.1
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Net movement
in equity in
the year 0.1 0.3 - - 0.8 106.2 (20.9) 86.5
Opening equity 281.5 65.5 28.7 (70.2) 2.5 784.5 (83.1) 1,009.4
--------- ------------- ------------ ------------ ------------ ------------ --------- --------
Closing equity 281.6 65.8 28.7 (70.2) 3.3 890.7 (104.0) 1,095.9
========= ============= ============ ============ ============ ============ ========= ========
SELECTED NOTES TO THE ACCOUNTS
For the six months ended 31 March 2019 (Unaudited)
1. GENERAL INFORMATION
The condensed financial statements are prepared for Paragon
Banking Group PLC and its subsidiary companies ('the Group') on a
consolidated basis.
The condensed financial statements for the six months ended 31
March 2019 and for the six months ended 31 March 2018 and the
balance sheet information as at 1 October 2018 have not been
audited, as defined in section 434 of the Companies Act 2006.
The figures shown above for the years ended 30 September 2018
and 30 September 2017 are not statutory accounts. A copy of the
statutory accounts for each year has been delivered to the
Registrar of Companies. The auditors reported on those statutory
accounts and their reports were unqualified, did not draw attention
to any matters by way of emphasis and did not contain an adverse
statement under sections 498 (2) or 498 (3) of the Companies Act
2006.
A copy of the half-yearly financial report will be posted to
those shareholders who have requested to receive one and additional
copies can be obtained from the Company Secretary, Paragon Banking
Group PLC, 51 Homer Road, Solihull, West Midlands, B91 3QJ.
This half-yearly financial report is also available on the
Group's website at www.paragonbankinggroup.co.uk. In future years
the half-yearly financial report will be available online only, to
help to reduce the environmental impact of shareholder
communication.
2. ACCOUNTING POLICIES
The condensed financial statements are presented in accordance
with the requirements of International Accounting Standard 34 -
'Interim Financial Reporting'.
The Group prepares its annual financial statements in accordance
with International Financial Reporting Standards as endorsed by the
European Union. The condensed financial statements have been
prepared on the basis of the accounting policies set out in the
Annual Report and Accounts of the Group for the year ended 30
September 2018 except for the adoption of IFRS 9 - 'Financial
Instruments' ('IFRS 9') and IFRS 15 - 'Revenue from Contracts with
Customers' ('IFRS 15'), described in note 3. This basis is expected
to be used in the preparation of the financial statements of the
Group for the year ending 30 September 2019.
The critical accounting estimates and judgements affecting the
condensed financial information are the same as those described in
note 6 to the accounts of the Group for the year ended 30 September
2018 other than those related to IFRS 9, as described in note
3.
Comparability of information
As described in note 3 below, the balance sheet information at
30 September 2017, 30 September 2018 and 31 March 2018 and the
profit and loss information for the periods ended on these dates is
not required to be restated on the adoption of IFRS 9. The
information presented is derived in accordance with IAS 39
'Financial Instruments: Recognition and Measurement' ('IAS 39'),
and therefore may not be directly comparable with the balance sheet
at 31 March 2019 and the profit and loss account for the six months
then ended which are prepared under IFRS 9.
New and revised reporting standards
No new or revised reporting standards significantly affecting
the Group's accounting have been issued since the approval of the
Group's financial statements for the year ended 30 September
2018.
3. CHANGES IN ACCOUNTING STANDARDS
The Group is required to adopt IFRS 9 and IFRS 15 in preparing
its financial statements for the year ending 30 September 2019. It
has therefore applied these standards in the preparation of this
half year report.
IFRS 9 - Overview
IFRS 9 'Financial Instruments' replaces IAS 39 'Financial
Instruments: Recognition and Measurement' ('IAS 39') and addresses
the recognition, classification and measurement of financial assets
and liabilities. The Group published a report on its transition to
IFRS 9 on 22 March 2019 which gives more details on the new
requirements and how the Group has chosen to adopt them. This
document is available from the investor section of the Group's
website at www.paragonbankinggroup.co.uk.
IFRS 9 - Classification
IFRS 9 changes the classification requirements for financial
assets and liabilities. In accordance with the new rules
-- Cash balances and loans to customers (other than finance
leases), which were classified as 'loans and receivables' under IAS
39 are classified as 'held at amortised cost' under IFRS 9 and
continue to be measured on the amortised cost basis
-- Retail deposits and external borrowings, which were
classified as 'other financial liabilities' under IAS 39 are
classified as 'financial liabilities measured at amortised cost'
and continue to be measured on the amortised cost basis
-- Derivative financial assets and liabilities, which were
carried at fair value under IAS 39 are classified as 'financial
assets or liabilities at fair value through profit and loss' under
IFRS 9 and continue to be measured on the same basis
The amortised cost and fair value measurement methodologies
remain broadly the same in IFRS 9 as they were in IAS 39 and no
measurement changes in the Group's accounts have arisen as a result
of these classification changes.
The Group's material financial asset and financial liability
balances measured in accordance with IFRS 9 and the preceding
standard, IAS 39, at the transition date (1 October 2018) are set
out below:
Post-transition Pre-transition
GBPm GBPm
Financial Assets
Cash - central banks 895.9 895.9
Cash - retail banks 414.7 414.7
Loans to customers 12,100.6 12,127.8
Derivative financial assets 855.7 855.7
---------------- ---------------
14,266.9 14,294.1
================ ===============
Financial Liabilities
Retail deposits 5,296.6 5,296.6
Derivative financial liabilities 4.7 4.7
Asset backed loan notes 5,554.7 5,554.7
Secured bank borrowings 935.6 935.6
Retail bond issuance 296.1 296.1
Corporate bond issuance 149.3 149.3
Central bank facilities 1,024.4 1,024.4
---------------- ---------------
13,261.4 13,261.4
================ ===============
IFRS 9 - Impairment
IFRS 9 changes the basis of impairment provision for all
financial assets from an incurred loss to an expected loss basis.
Therefore, the provisioning is dependent on an assessment of the
probability of future default and the loss which might be incurred
at that time. This introduces significant additional areas of
estimation to the accounting.
IFRS 9 requires loan assets to be divided into three 'stages',
with accounts which were credit impaired on initial recognition
representing a fourth class.
The three classes comprise: those where there has been no
Significant Increase in Credit Risk ('SICR') since advance or
acquisition (Stage 1); those where there has been a SICR (Stage 2);
and loans which are credit impaired (Stage 3). It is an important
feature of the standard that SICR is not defined solely by the
performance of the account, but also by other information available
about the customer both internally and externally, such as credit
bureau information.
-- On initial recognition, and for assets where there has not
been an SICR, provisions will be made in respect of losses
resulting from the level of credit default events expected in the
twelve months following the balance sheet date. These accounts
would be largely unprovided for under IAS 39, although some cases
with adverse qualitative indicators might have been addressed by a
collective emergence provision. Such provisions under IAS 39 were
designed to cover assets where a loss event had occurred before the
reporting date, but this event had not yet affected performance
-- Where a loan has experienced an SICR, whether or not the loan
is considered to be credit impaired, provisions will be made based
on the ECLs over the full life of the loan. This is likely to lead
to an increase in provision in general, though the IAS 39 emergence
provision would have also addressed some of this risk
-- For credit impaired assets, provisions will be made on the
basis of lifetime expected credit losses, taking account of
forward-looking economic assumptions and a range of possible
outcomes. Under IAS 39, provisions were based on the asset's
carrying value and the present value of the estimated future cash
flows. Despite IAS 39 not explicitly taking account of alternative
economic scenarios, where loans had attracted a provision under IAS
39, the IFRS 9 provision on transition was, in most cases, broadly
similar to the closing IAS 39 position
Credit impaired assets are identified either through
quantitative measures or by operational status. In determining
indicators of credit impairment regard is also taken of definitions
used for regulatory capital purposes. Assets may also be assigned
to Stage 3 if they are identified as credit impaired as a result of
management review processes
-- For assets which were purchased or originated as credit
impaired ('POCI') accounts (i.e. considered as credit impaired at
the point of first recognition), such as certain of the Group's
acquired assets in Idem Capital, the required treatment is largely
similar under IAS 39 and IFRS 9. This classification also includes
credit impaired assets recognised in corporate acquisitions under
IFRS 3. Purchased performing accounts are not classified as POCI,
but are first recognised in Stage 1
Full details of the approach to these calculations is given in
the transition report.
Under IAS 39 the Group treated all accounts as live where they
remained open on its administration system. IFRS 9 requires a firm
to consider the prospect of future recovery in its write off
approach and the Group has adopted a revised accounting policy for
write offs following transition.
Accounts are now written off for accounting purposes when
standard enforcement processes have been completed, subject to any
amount retained in respect of expected salvage receipts. This
change has no effect on the net carrying value, only on the amounts
reported as gross loan balances and accumulated impairment
provisions, but provides a more informative value for the coverage
ratio.
All accounts which would have been written off for accounting
purposes prior to the transition date under the new policy have
been written off at transition. All of these cases were fully
provided and therefore this has had no impact on reserves.
As disclosed in the transition report, the introduction of IFRS
9 resulted in an increase in impairment provision of GBP27.2m at
the transition date, 1 October 2018. The impacts by business
segment are set out below:
IAS 39 IFRS 9 Change Change
GBPm GBPm GBPm %
Loans to customers
Mortgages 10,473.5 10,449.5 (24.0) (0.2)%
Commercial Lending 1,133.2 1,131.3 (1.9) (0.2)%
Idem Capital 521.1 519.8 (1.3) (0.2)%
--------- --------- ------- -------
Total 12,127.8 12,100.6 (27.2) (0.2)%
========= ========= ======= =======
The increase in impairment on transition will be allowed as a
deduction for the purposes of UK Corporation Tax under the Change
in Accounting Practices Regulations. This is spread over the ten
years following transition for loan assets and is allowable in the
2019 tax computations for finance leases. A deferred tax asset of
GBP5.0m has been recognised on transition.
The movement in impairment provisions between the balance
disclosed under IAS 39 and the opening balance under IFRS 9 is set
out below.
GBPm
Loans to customers
At 30 September 2018 under
IAS 39 107.4
IFRS 9 transition adjustments 27.2
Change in write-off definition (80.4)
-------
At 1 October 2018 under
IFRS 9 54.2
=======
The reduction due to write off definitions is principally
attributable to part redeemed loan balances which remained live on
the administration systems of the Group and were therefore treated
as live for accounting purposes. Under IFRS 9 these balances may be
defined as written off, and the Group's IFRS 9 write off policy
considers them to be so, as this provides users with a more useful
measure of provision cover.
IFRS 9 - Significant judgements
In addition to the significant judgements disclosed in the Group
accounts for the year ended 30 September 2018, the following
judgements relating to IFRS 9 are significant in compiling the half
year information.
Definition Used in modelling probabilities of default. The
of default Group's definition of default is aligned to its
internal operational procedures. IFRS 9 provides
a rebuttable presumption of default when an account
is 90 days overdue and this was used as the starting
point for this exercise. Other factors include
account management activities such as appointment
of a receiver or enforcement procedures.
A combination of qualitative and quantitative
measures was considered in developing the definition
of default.
Identification SICR is based primarily on changes in the calculated
of SICR PD, but also includes consideration of other qualitative
indicators and the adoption of the backstop assumption
in the Standard that all cases which are more
than 30 days overdue have an SICR, for account
types where days overdue is an appropriate measure.
----------------------------------------------------------
Use of forward-looking The economic inputs to the model, where the central
information forecast represents the scenario used in the Group's
planning process and the alternative scenarios
are based on versions of this as well as the Bank
of England's stress scenario.
More detail is provided on the Group's use of
forward-looking information in note 19.
----------------------------------------------------------
IFRS 9 - Hedge accounting
The hedge accounting requirements of IFRS 9 do not specifically
address portfolio fair value hedges of interest rate risk ('macro
hedges') which IAS 39 deals with directly. A separate financial
reporting standard is to be developed in this area. IFRS 9 allows
the option to continue to apply the existing hedge accounting
requirements of IAS 39 until this is implemented.
As the Group's hedging arrangements are either macro hedges,
which are not specifically addressed by the new standard, or
bespoke cash flow hedges, which would not be affected by the change
of standard, the Group has decided to defer application of these
rules until the full new hedge accounting regime is in place.
It thus continues to apply the hedge accounting requirements of
IAS 39 and all hedging arrangements in place at 30 September 2018
continue to be recognised on 1 October 2018 after IFRS
transition.
IFRS 9 - Comparative information
IFRS 9 does not require the restatement of comparative
information and therefore all balance sheets and results for
periods on or before 30 September 2018 are presented in accordance
with IAS 39.
In order to aid users of the accounts additional comparative
balance sheet amounts at 1 October 2018, immediately following
transition, have been provided where relevant.
IFRS 15 - Impact
IFRS 15 governs the accounting for those of the Group's income
streams which are not within the scope of either IFRS 9 or IAS 17 -
'Leases'. These comprise principally third-party servicing income,
maintenance income on vehicle leasing, third party commission
income and account fee income. The accounting for most of these
flows is unchanged as the amounts are charged on an event-by-event
basis.
There is a small balance sheet impact from the accounting for
maintenance agreements, decreasing reserves at 30 September 2018 by
GBP0.2m. In view of the low level of impact comparative amounts
have not been restated for this change.
Summary
The overall impacts of the changes above on equity at 30
September 2018 are set out below.
GBPm GBPm
At 30 September 2018 1,095.9
IFRS 9
Impairment (27.2)
Deferred tax thereon 5.0
-------
(22.2)
IFRS 15
Maintenance income (0.2)
-------
Total adjustments (22.4)
--------
Equity at 1 October 2018 1,073.5
========
All these amendments impacted retained earnings. None of these
changes have any impact on the Group's cash flow reporting.
4. Going concern basis
The business activities of the Group, its current operations and
those factors likely to affect its future results and development,
together with a description of its financial position and funding
position, are described in the Interim Management Report on pages 6
to 46. The principal risks and uncertainties affecting the Group in
the forthcoming six months are described on pages 47 and 48.
Note 7 to the accounts for the year ended 30 September 2018
includes an analysis of the Group's working capital position and
policies, while notes 8 to 11 include a detailed description of its
funding structures, its use of financial instruments, its financial
risk management objectives and policies and its exposure to credit,
interest rate and liquidity risk. Note 6 to those accounts
discusses critical accounting estimates affecting the results and
financial position disclosed therein. The position and policies
described in these notes remain materially unchanged to the date of
this half-yearly report, subject to the changes in funding
described in note 23.
The Group has a formalised process of budgeting, reporting and
review. The Group's planning procedures forecast its profitability,
capital position, funding requirement and cash flows. Detailed
plans are produced for two year periods with longer term forecasts
covering a five year period which include detailed income
forecasts. These plans provide information to the directors which
is used to ensure the adequacy of resources available for the Group
to meet its business objectives, both on a short-term and strategic
basis.
The Group's retail deposits of GBP5,878.0m (note 22) are
repayable within five years, with 71.0% of this balance
(GBP4,175.3m) payable within twelve months of the balance sheet
date. The liquidity exposure represented by these deposits is
closely monitored, a process supervised by the Asset and Liability
Committee. The Group is required to hold liquid assets in Paragon
Bank to mitigate this liquidity risk. At 31 March 2019 Paragon Bank
held GBP555.9m of the balance sheet assets for liquidity purposes,
all of which comprised central bank deposits (note 16). A further
GBP108.5m of liquidity was provided by the Bank of England Funding
for Lending Scheme, bringing the total to GBP664.4m.
Paragon Bank manages its liquidity in line with the Board's risk
appetite and the requirements of the PRA, which are formally
documented in the Board's approved Individual Liquidity Adequacy
Assessment Process ('ILAAP'). The Bank maintains a liquidity
framework that includes a short to medium term cash flow
requirement analysis, a longer-term funding plan and access to the
Bank of England's liquidity insurance facilities, where
pre-positioned assets give access to an additional GBP1,149.6m of
further drawings.
The Group's securitisation funding structures ensure that a
substantial proportion of its originated loan portfolio is match
funded. Repayment of the securitisation borrowings is restricted to
funds generated by the underlying assets and there is limited
recourse to the Group's general funds. Recent and current loan
originations utilising the Group's available warehouse facilities
are refinanced through securitisation or retail deposits from time
to time.
The earliest maturity of any of the Group's working capital debt
is in December 2020, when the oldest of the Group's retail bond
issues matures.
The Group's cash analysis continues to show strong free cash
balances, even after allowing for significant discretionary cash
outflows, and its securitisation investments produce substantial
cash inflows.
The Group has demonstrated its ability to raise retail and
corporate bond debt when required through its Euro Medium Term Note
Programme and other programmes, while it most recently accessed the
UK long-term securitisation debt market in April 2018. The Group's
access to debt is also enhanced by its corporate BBB rating
affirmed by Fitch Ratings in March 2019 and its status as an issuer
is evidenced by the BBB- rating of its GBP150.0 million Tier-2
bond.
At 31 March 2019 the Group had free cash balances of GBP204.2m
immediately available for use (note 16).
As described in note 6 the Group's capital base is subject to
consolidated supervision by the PRA. Its capital at 31 March 2019
was in excess of regulatory requirements and group forecasts show
this continuing to be the case.
Accounting standards require the directors to assess the Group's
ability to continue to adopt the going concern basis of accounting.
In performing this assessment, the directors consider all available
information about the future, the possible outcomes of events and
changes in conditions and the realistically possible responses to
such events and conditions that would be available to them, having
regard to those aspects of the 'Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting'
published by the Financial Reporting Council in September 2014
applicable to half-yearly reporting.
In order to assess the appropriateness of the going concern
basis the directors considered the Group's financial position, the
cash flow requirements laid out in its forecasts, its access to
funding, the assumptions underlying the forecasts and potential
risks affecting them.
After performing this assessment, the directors concluded that
it was appropriate for them to continue to adopt the going concern
basis in preparing the half-yearly report.
5. Fair values of financial assets and financial liabilities
IFRS 7 - 'Financial Instruments: Disclosures' requires that
where assets are measured at fair value these measurements should
be classified using a fair value hierarchy reflecting the inputs
used, and defines three levels.
-- Level 1 measurements are unadjusted market prices
-- Level 2 measurements are derived from observable data, such as market prices or rates
-- Level 3 measurements rely on significant inputs which are not derived from observable data
As quoted prices are not available for level 2 and 3
measurements, the valuation is derived from cash flow models based,
where possible, on independently sourced parameters. The accuracy
of the calculation would therefore be affected by unexpected market
movements or other variances in the operation of the models or the
assumptions used.
The Group had no financial assets or liabilities in the period
ended 31 March 2019 or the year ended 30 September 2018 carried at
fair value and valued using level 3 measurements, other than
contingent consideration amounts (note 24).
The Group has not reclassified any of its measurements during
the period.
The methods by which fair value is established for each class of
financial assets and liabilities are set out below.
a) Assets and liabilities carried at fair value
Derivative financial assets and liabilities
Derivative financial instruments are stated at their fair values
in the accounts. The Group uses a number of techniques to determine
the fair values of its derivative assets and liabilities, for which
observable prices in active markets are not available. These are
principally present value calculations based on estimated future
cash flows arising from the instruments, discounted using a risk
adjusted interest rate. The principal inputs to these valuation
models are LIBOR benchmark interest rates for the currencies in
which the instruments are denominated, being sterling, euros and
dollars. The cross-currency basis swaps have a notional principal
related to the outstanding currency borrowings and therefore the
estimated rate of repayment of these notes also affects the
valuation of the swaps. In order to determine the fair values,
management applies valuation adjustments to observed data where
that data would not fully reflect the attributes of the instrument
being valued, such as particular contractual features or the
identity of the counterparty. Management reviews the models used on
an ongoing basis to ensure that the valuations produced are
reasonable and reflect all relevant factors. These valuations are
based on market information and they are therefore classified as
level 2 measurements. Details of these assets are given in note
20.
Contingent consideration
The value of the contingent considerations shown in note 26 are
required to be stated at fair value in the accounts. These amounts
are valued based on the expected outcomes of the performance tests
set out in respective sale and purchase agreements, discounted as
appropriate. The most significant inputs to these valuations are
the Group's forecasts on future activity relating to the businesses
or individuals concerned, which are drawn from the overall Group
forecasting model. As such, these are classified as unobservable
inputs and the valuations classified as level 3 measurements.
Short-term investments
The short-term investments described in note 17 are freely
traded securities for which a market price quotation is available
and are classified as level 1 measurements.
b) Assets and liabilities carried at amortised cost
Cash, bank loans and securitisation borrowings
The fair values of cash and cash equivalents, bank loans and
overdrafts and asset backed loan notes, which are carried at
amortised cost are considered to be not materially different from
their book values. In arriving at that conclusion market inputs
have been considered but because all the assets mature within three
months of the year end and the interest rates charged on financial
liabilities reset to market rates on a quarterly basis, little
difference arises.
While the Group's asset backed loan notes are listed, the quoted
prices for an individual note may not be indicative of the fair
value of the issue as a whole, due to the specialised nature of the
market in such instruments and the limited number of investors
participating in it.
As these valuation exercises are not wholly market based they
are considered to be level 2 measurements.
Corporate debt
The Group's retail and corporate bonds are listed on the London
Stock Exchange and there is presently a reasonably liquid market in
the instruments. It is therefore appropriate to consider that the
market price of these borrowings constitutes a fair value. As this
valuation is based on a market price, it is considered to be a
level 1 measurement.
Retail deposits
To assess the likely fair value of the Group's retail deposit
liabilities, the directors have considered the estimated cash flows
expected to arise based on a mixture of market based inputs, such
as rates and pricing and non-market based inputs such as withdrawal
rates. Given the mixture of observable and non-observable inputs,
these are considered to be level 3 measurements.
Loan assets
To assess the likely fair value of the Group's loan assets in
the absence of a liquid market, the directors have considered the
estimated cash flows expected to arise from the Group's investments
in its loans to customers based on a mixture of market based
inputs, such as rates and pricing and non-market based inputs such
as redemption rates. Given the mixture of observable and
non-observable inputs these are considered to be level 3
measurements.
Sundry assets and liabilities
Fair values of financial assets and liabilities disclosed as
sundry assets and sundry liabilities are not considered to be
materially different to their carrying values.
The fair values for financial assets and liabilities held at
amortised cost, other than those where carrying values are so low
that any difference would be immaterial, determined in accordance
with the methodologies set out above is summarised below.
31 March 2019 31 March 2019 31 March 2018 31 March 2018 30 September 30 September
2018 2018
Carrying amount Fair Carrying amount Fair Carrying Fair
value value amount value
GBPm GBPm GBPm GBPm GBPm GBPm
Financial
assets
Loans to
customers 12,525.6 12,666.8 11,346.7 11,424.2 12,127.8 12,222.9
Cash 1,072.0 1,072.0 1,062.6 1,062.6 1,310.6 1,310.6
---------------- -------------- ---------------- -------------- --------------- ---------------
13,597.6 13,738.8 12,409.3 12,486.8 13,438.4 13,533.5
================ ============== ================ ============== =============== ===============
Financial
liabilities
Asset backed
loan notes 5,143.0 5,143.0 5,457.7 5,457.7 5,554.7 5,554.7
Corporate and
retail bonds 445.7 468.8 445.1 483.4 445.4 478.3
Retail deposits 5,878.0 5,900.4 4,285.8 4,281.5 5,296.6 5,301.7
Secured bank
borrowings 921.9 921.9 1,013.5 1,013.5 935.6 935.6
---------------- -------------- ---------------- -------------- --------------- ---------------
12,388.6 12,434.1 11,202.1 11,236.1 12,232.3 12,270.3
================ ============== ================ ============== =============== ===============
6. Capital management
The Group's objectives in managing capital are:
-- To ensure that the Group has sufficient capital to meet its
operational requirements and strategic objectives
-- To safeguard the Group's ability to continue as a going
concern, so that it can continue to provide returns to shareholders
and benefits for other stakeholders
-- To provide an adequate return to shareholders by pricing
products and services commensurately with the level of risk
-- To ensure that sufficient regulatory capital is available to
meet any externally imposed requirements
The Group sets the amount of capital in proportion to risk,
availability and cost. The Group manages the capital structure and
makes adjustments to it in the light of changes in economic
conditions and the risk characteristics of the underlying assets,
having particular regard to the relative costs and availability of
debt and equity finance at any given time. In order to maintain or
adjust the capital structure the Group may adjust the amount of
dividends paid to shareholders, return capital to shareholders,
issue new shares, issue or redeem other capital instruments, such
as retail or corporate bonds, or sell assets to reduce debt.
The Group is subject to regulatory capital rules imposed by the
PRA on a consolidated basis as a group containing an authorised
bank. This is discussed further below.
(a) Dividend policy
The Company is committed to a long term sustainable dividend
policy. Ordinarily, dividends will increase in line with earnings,
subject to the requirements of the business and the availability of
cash resources. The Board reviews the policy at least twice a year
in advance of announcing its results, taking into account the
Group's strategy, capital requirements, principal risks and the
objective of enhancing shareholder value. In determining the level
of dividend for any year, the Board expects to follow the dividend
policy, but will also take into account the level of available
retained earnings in the Company, its cash resources and the cash
and capital requirements inherent in its business plans.
The Board reviewed its dividend policy following the Group's
reorganisation in September 2017, concluding that the changes made
would make the Group's use of working capital more efficient and
that there was, therefore, less need to retain earnings to support
future growth. It therefore determined that the targeted dividend
cover ratio would be 2.5 times with effect from the year ended 30
September 2018. Subsequent reviews, most recently in May 2019 have
confirmed this policy. The Company considers it has access to
sufficient cash resources to pay dividends at this level and that
its distributable reserves are abundant for this purpose.
To provide greater transparency, the Company has also indicated
that its interim dividend per share will normally be 50% of the
previous final dividend, in the absence of any indicators which
might make such a level of payment inappropriate, and the interim
dividend for the current year has been set in accordance with this
policy (note 29).
(b) Return on tangible equity ('RoTE')
RoTE is defined by the Group by comparing the profit after tax
for the period, adjusted for amortisation charged on intangible
assets, to the average of the opening and closing equity positions,
excluding intangible assets and goodwill.
The Group's consolidated annualised RoTE for the six months
ended 31 March 2019 is derived as follows:
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Profit for the period 58.1 62.0 145.8 117.2
Amortisation of intangible
assets 1.3 0.9 2.1 1.6
--------- --------- ------------- -------------
Adjusted profit 59.4 62.9 147.9 118.8
--------- --------- ------------- -------------
Divided by
Opening equity 1,073.5 1,009.4 1,009.4 969.5
Opening intangible assets (169.3) (104.4) (104.4) (105.4)
--------- --------- ------------- -------------
Opening tangible equity 904.2 905.0 905.0 864.1
--------- --------- ------------- -------------
Closing equity 1,087.0 1,020.6 1,095.9 1,009.4
Closing intangible assets (171.4) (120.3) (169.3) (104.4)
--------- --------- ------------- -------------
Closing tangible equity 915.6 900.3 926.6 905.0
--------- --------- ------------- -------------
Average tangible equity 909.9 902.6 915.8 884.5
--------- --------- ------------- -------------
Return on tangible equity 13.1% 13.9% 16.1% 13.4%
========= ========= ============= =============
(c) Regulatory capital
The Group is subject to supervision by the PRA on a consolidated
basis, as a group containing an authorised bank. As part of this
supervision the regulator will issue individual capital guidance
setting an amount of regulatory capital, which the Group is
required to hold relative to its risk weighted assets in order to
safeguard depositors from loss in the event of severe losses being
incurred by the Group. This is defined by the international Basel
III rules, set by the Basel Committee on Banking Supervision
('BCBS') and currently implemented in UK law by EU Regulation
575/2013, referred to as the Capital Requirements Regulation
('CRR').
The Group's regulatory capital is monitored by the Board of
Directors, its Risk and Compliance Committee and the Asset and
Liability Committee, who ensure that appropriate action is taken to
ensure compliance with the regulator's requirements. The future
regulatory capital requirement is also considered as part of the
Group's forecasting and strategic planning process.
The tables below demonstrate that at 31 March 2019 the Group's
total regulatory capital of GBP1,068.7m (31 March 2018:
GBP1,039.9m, 30 September 2018: GBP1,045.7m) was comfortably in
excess of the amounts required by the regulator, including
GBP747.4m in respect of Pillar 1 and Pillar 2a capital (31 March
2018: GBP659.7m, 30 September 2018: GBP727.7m), which is comprised
of fixed and variable elements (none of these amounts are covered
by the independent review report).
The CRR also requires firms to hold additional capital buffers,
including a Capital Conservation Buffer ('CCoB') of 2.50% of risk
weighted assets (at 31 March 2019) and a Counter Cyclical Buffer
('CCyB'), currently 1.0% of risk weighted assets. These have
increased from a CCoB of 1.875% and CCyB of 0.5% at 30 September
2018. Firm specific buffers may also be required.
The Group's regulatory capital differs from its equity as
certain adjustments are required by the CRR or the regulator. A
reconciliation of the Group's equity to its regulatory capital
determined in accordance with CRD IV at 31 March 2019 is set out
below.
Note 31 March 31 March 1 October 30 September 30 September
2019 2018 2018 2018 2017
GBPm GBPm GBPm GBPm GBPm
Total equity -- 1,087.0 1,020.6 1,073.5 1,095.9 1,009.4
Deductions
Proposed dividend 29 (18.1) (14.2) (35.8) (35.8) (28.9)
IFRS 9 transitional
relief * 21.2 - 21.2 - -
Intangible assets 21 (171.4) (120.3) (169.3) (169.3) (104.4)
---------- ---------- ---------- ------------- -------------
Common Equity Tier
1 ('CET1') capital 918.7 886.1 889.6 890.8 876.1
Other tier 1 capital - - - - -
---------- ---------- ---------- ------------- -------------
Total tier 1 capital 918.7 886.1 889.6 890.8 876.1
---------- ---------- ---------- ------------- -------------
Corporate bond 150.0 150.0 150.0 150.0 150.0
Less: amortisation
adjustment - - - - -
---------- ---------- ---------- ------------- -------------
150.0 150.0 150.0 150.0 150.0
Collectively assessed
credit impairment
allowances ++ - 3.8 - 4.9 4.4
---------- ---------- ---------- ------------- -------------
Total tier 2 capital 150.0 153.8 150.0 154.9 154.4
---------- ---------- ---------- ------------- -------------
Total regulatory
capital ('TRC') 1,068.7 1,039.9 1,039.6 1,045.7 1,030.5
========== ========== ========== ============= =============
-- Including results for the six months ended 31 March 2019
which have been verified by the Group's external auditor for
regulatory purposes.
* Firms are permitted to phase in the impact of IFRS 9 transition over a five year period.
Where tier 2 capital instruments have less than five years to
maturity the amount eligible as regulatory capital reduces by 20%
per annum on a straight line basis. No such adjustment is required
in respect of the Group's Tier 2 Corporate Bond which matures in
2026.
++ Under IFRS 9 there are no collectively assessed credit
impairment allowances which are eligible as tier 2 capital.
The total risk exposure calculated under the CRD IV framework,
against which this capital is held, and the proportion of this
exposure it represents, are calculated as shown below.
31 March 31 March 1 October 30 September
2019 2018 2018 2018
GBPm GBPm GBPm GBPm
Credit risk
Balance sheet assets 6,053.9 5,066.1 5,756.3 5,767.3
Off balance sheet 59.5 79.4 87.8 87.8
IFRS 9 transitional
relief 10.5 - 10.5 -
--------- --------- ---------- -------------
Total credit risk 6,123.9 5,145.5 5,854.6 5,855.1
Operational risk 485.1 464.9 485.1 485.1
Market risk - - - -
Other 91.1 103.9 105.1 105.1
--------- --------- ---------- -------------
Total risk exposure
('TRE') 6,700.1 5,714.3 6,444.8 6,445.3
========= ========= ========== =============
Solvency ratios % % % %
CET1 13.7 15.5 13.8 13.8
TRC 16.0 18.2 16.2 16.2
========= ========= ========== =============
This table is not covered by the Independent Review Report
On a fully loaded basis (excluding the effect of IFRS 9
transitional relief) the Group's capital ratios would be:
31 March 31 March 1 October 30 September
2019 2018 2018 2018
GBPm GBPm GBPm GBPm
CET1 Capital 918.7 886.1 889.6 890.8
Add back: IFRS 9 relief (21.2) - (21.2) -
--------- --------- ---------- -------------
Fully loaded CET1
Capital 897.5 886.1 868.4 890.8
--------- --------- ---------- -------------
TRC 1,068.7 1,039.9 1,039.6 1,045.7
Add back: IFRS 9 relief (21.2) - (21.2) -
--------- --------- ---------- -------------
Fully loaded TRC 1,047.5 1,039.9 1,018.4 1,045.7
--------- --------- ---------- -------------
Total risk exposure 6,700.1 5,714.3 6,444.8 6,445.3
Add back: IFRS 9 relief (10.5) - (10.5) -
--------- --------- ---------- -------------
Fully loaded TRE 6,689.6 5,714.3 6,434.3 6,445.3
--------- --------- ---------- -------------
Fully loaded Solvency % % % %
ratios
CET1 13.4 15.5 13.5 13.8
Total regulatory capital 15.7 18.2 15.8 16.2
========= ========= ========== =============
This table is not covered by the Independent Review Report
The total regulatory capital at 31 March 2019 on the fully
loaded basis of GBP1,047.5m was in excess of the Pillar 1 & 2a
requirement of GBP746.4m on the same basis (amounts not covered by
the Independent Review Report).
The CRD IV risk weightings for credit risk exposures are
calculated using the Standardised Approach. Operational risk is
calculated using the Basic Indicator Approach.
Risk weighted assets under the Standardised Approach are
calculated on the basis of carrying values. Therefore the
introduction of IFRS 9 reduces the total risk exposure as a
consequence of the increased provision levels.
The following table below shows the calculation of the UK
leverage ratio, based on the consolidated balance sheet assets
adjusted as shown below:
Note 31 March 31 March 1 October 30 September
2019 2018 2018 2018
GBPm GBPm GBPm GBPm
Total balance sheet assets 14,654.0 13,346.7 14,487.9 14,515.1
Add: Credit fair value
adjustments on loans
to customers 18 - 21.6 24.1 24.1
Debit fair value adjustments
on retail deposits 22 - 7.0 4.2 4.2
----------- ----------- ----------- -------------
Adjusted balance sheet
assets 14,654.0 13,375.3 14,516.2 14,543.4
Less: Derivative assets 20 (751.3) (763.4) (855.7) (855.7)
Central bank deposits 16 (704.0) (628.5) (895.9) (895.9)
CRDs (9.1) (2.4) (6.2) (6.2)
Accrued interest on
sovereign exposures (0.2) - (0.4) (0.4)
----------- ----------- ----------- -------------
On-balance sheet items 13,189.4 11,981.0 12,758.0 12,785.2
Less: Intangible assets 21 (171.4) (120.3) (169.3) (169.3)
----------- ----------- ----------- -------------
Total on balance sheet
exposures 13,018.0 11,860.7 12,588.7 12,615.9
----------- ----------- ----------- -------------
Derivative assets 20 751.3 763.4 855.7 855.7
Potential future exposure
on derivatives 151.2 170.7 172.1 172.1
----------- ----------- ----------- -------------
Total derivative exposures 902.5 934.1 1,027.8 1,027.8
----------- ----------- ----------- -------------
Post offer pipeline at
gross notional amount 810.4 492.7 817.7 817.7
Adjustment to convert
to credit equivalent
amounts (674.9) (246.3) (569.2) (569.2)
----------- ----------- ----------- -------------
Off balance sheet items 135.5 246.4 248.5 248.5
----------- ----------- ----------- -------------
Tier 1 capital 918.7 886.1 889.6 890.8
Total leverage exposure
before IFRS 9 relief 14,056.0 13,041.2 13,865.0 13,892.2
IFRS 9 relief 25.8 - 25.8 -
----------- ----------- ----------- -------------
Total leverage exposure 14,081.8 13,041.2 13,890.8 13,892.2
----------- ----------- ----------- -------------
UK leverage ratio 6.5% 6.8% 6.4% 6.4%
=========== =========== =========== =============
This table is not covered by the Independent Review Report
The fully loaded leverage ratio is calculated as follows
31 March 31 March 1 October 30 September
2019 2018 2018 2018
GBPm GBPm GBPm GBPm
Fully loaded Tier 1 capital 897.5 886.1 868.4 890.8
Total leverage exposure before
IFRS 9 relief 14,056.0 13,041.2 13,865.0 13,892.2
--------- --------- ---------- -------------
Fully loaded UK leverage exposure 6.4% 6.8% 6.3% 6.4%
--------- --------- ---------- -------------
This table is not covered by the Independent Review Report
The regulatory capital disclosures in these condensed financial
statements relate only to the consolidated position for the Group.
Individual entities within the Group are also subject to
supervision on a standalone basis. All such entities complied with
the requirements to which they were subject during the period.
This leverage ratio is prescribed by the PRA and differs from
the Basel / CRR ratio due to the exclusion of central bank deposits
from exposures.
7. CREDIT RISK
The Group's business objectives rely on maintaining a
high-quality customer base and place strong emphasis on good credit
management, both at the time of acquiring or underwriting a new
loan, where strict lending criteria are applied, and throughout the
loan's life.
The Group's credit risk is primarily attributable to its loans
to customers. There are no significant concentrations of credit
risk to individual counterparties due to the large number of
customers included in the portfolios.
The Group's loan assets at 31 March 2019, 31 March 2018 and 1
October 2018 are analysed as follows:
31 March 2019 31 March 2018 1 October 2018
IFRS 9 IAS 39 IFRS 9
GBPm % GBPm % GBPm %
Buy-to-let mortgages 10,548.0 84.2% 9,966.7 87.9% 10,227.4 84.5%
Owner occupied mortgages 76.8 0.6% 39.0 0.3% 80.9 0.7%
----------- --------- ----------- --------- ----------- ---------
Total first mortgages 10,624.8 84.8% 10,005.7 88.2% 10,308.3 85.2%
Second charge mortgage loans 404.8 3.2% 471.3 4.2% 414.4 3.4%
----------- --------- ----------- --------- ----------- ---------
Loans secured on residential property 11,029.6 88.0% 10,477.0 92.4% 10,722.7 88.6%
Development finance 426.0 3.4% 57.0 0.5% 352.9 2.9%
----------- --------- ----------- --------- ----------- ---------
Loans secured on property 11,455.6 91.4% 10,534.0 92.9% 11,075.6 91.5%
Asset finance loans 433.6 3.5% 361.8 3.2% 389.9 3.3%
Motor finance loans 316.0 2.5% 195.4 1.7% 329.2 2.7%
Aircraft mortgages 17.8 0.1% 3.0 - 12.4 0.1%
Structured lending 56.1 0.4% - - 38.7 0.3%
Invoice finance 20.9 0.2% 15.3 0.1% 21.7 0.2%
----------- --------- ----------- --------- ----------- ---------
Total secured loans 12,300.0 98.1% 11,109.5 97.9% 11,867.5 98.1%
Professions finance 48.4 0.4% 36.7 0.3% 42.1 0.4%
Other unsecured commercial loans 18.7 0.2% 10.9 0.1% 17.2 0.1%
Unsecured consumer loans 158.5 1.3% 189.6 1.7% 173.8 1.4%
----------- --------- ----------- --------- ----------- ---------
Total loans to customers 12,525.6 100.0% 11,346.7 100.0% 12,100.6 100.0%
=========== ========= =========== ========= =========== =========
Other consumer loans include unsecured loans either advanced by
Group companies or acquired from their originators at a
discount.
Professions finance loans are generally short-term unsecured
loans made to lawyers and accountants for working capital
purposes.
Loans secured on residential property
An analysis of the indexed Loan-To-Value ('LTV') ratio for those
loan accounts secured on residential property by value at 31 March
2019 is set out below. For acquired accounts the effect of any
discount on purchase is allowed for.
31 March 2019 31 March 2018 30 September
2018
First Secured First Secured First Secured
Mortgages Loans Mortgages Loans Mortgages Loans
% % % % % %
LTV ratio
Less than 70% 53.8 64.1 60.0 58.4 60.6 66.1
70% to 80% 34.3 18.5 27.9 18.1 29.7 17.4
80% to 90% 9.6 10.3 9.2 11.4 7.1 9.3
90% to 100% 0.5 3.5 0.9 6.4 0.8 3.5
Over 100% 1.8 3.6 2.0 5.7 1.8 3.7
----------- -------- ----------- -------- ----------- --------
100.0 100.0 100.0 100.0 100.0 100.0
=========== ======== =========== ======== =========== ========
Average LTV
ratio 67.7 66.6 66.5 68.8 66.0 65.9
=========== ======== =========== ======== =========== ========
Buy-to-let 67.8 66.6 66.1
Owner-occupied 53.4 44.6 51.3
=========== =========== ===========
The regionally indexed LTVs shown above are affected by changes
in house prices, with the Nationwide house price index, for the UK
as a whole, registering a decrease of 0.8% during the six months
ended 31 March 2019 and annual increases of 0.7% in the year ended
31 March 2019 and 2.0% in the year ended 30 September 2018.
The increase in the LTV ratio for owner occupied accounts
relates to the greater numbers of new lending accounts, which have
higher LTV levels than old legacy cases.
The geographical distribution of the Group's first mortgage
assets by gross carrying value is set out below.
31 March 31 March 30 September
2019 2018 2018
East Anglia 3.1% 3.1% 3.0%
East Midlands 5.3% 5.2% 5.2%
Greater London 18.7% 18.3% 18.6%
North 3.4% 3.5% 3.5%
North West 10.2% 10.3% 10.2%
South East 31.4% 30.9% 31.3%
South West 9.1% 9.4% 9.2%
West Midlands 5.0% 4.6% 4.8%
Yorkshire and Humberside 9.1% 9.7% 9.4%
--------- --------- -------------
Total England 95.3% 95.0% 95.2%
Northern Ireland 0.1% 0.1% 0.1%
Scotland 1.3% 1.5% 1.4%
Wales 3.3% 3.4% 3.3%
--------- --------- -------------
100.0% 100.0% 100.0%
========= ========= =============
Unsecured consumer loans
Almost all the Group's unsecured consumer loan assets are part
of purchased debt portfolios where the consideration paid will have
been based on the credit quality and performance of the loans at
the point of the transaction. Collections on purchased accounts
have been comfortably in excess of those implicit in the purchase
prices.
Development finance
Development finance loans do not require customers to make
payments during the life of the loan, therefore arrears and past
due measures cannot be used to monitor credit risk. Instead, cases
are monitored on an individual basis by management and Credit Risk.
The average Loan To Gross Development Value ('LTGDV') ratio for the
portfolio at the period end, a measure of security cover, is
analysed below.
31 March 2019 31 March 2018 30 September 2018
By value By number By value By number By value By number
LTGDV % % % % % %
50% or less 2.0 2.2 10.5 9.8 3.4 4.4
50% to 60% 14.2 18.0 24.0 32.8 18.9 22.8
60% to 65% 46.1 48.3 64.2 55.7 63.3 59.6
65% to 70% 27.2 23.0 1.3 1.7 7.1 9.6
70% to 75% 5.0 6.8 - - 0.7 0.7
Over 75% 5.5 1.7 - - 6.6 2.9
--------- ---------- --------- ---------- --------- ----------
100.0 100.0 100.0 100.0 100.0 100.0
========= ========== ========= ========== ========= ==========
The average LTGDV cover at the period end was 63.9% (31 March
2018 60.1%, 30 September 2018 63.2%).
LTGDV is calculated by comparing the current expected end of
term exposure with the latest estimate of the value of the
completed development based on surveyors' reports.
At 31 March 2019 the development finance portfolio comprised 178
accounts (31 March 2018: 61, 30 September 2018: 136) with a total
carrying value of GBP426.0m (31 March 2018 GBP57.0m, 30 September
2018: GBP352.8m). Of these accounts only three were considered at
risk of loss (31 March 2018 none, 30 September 2018: four). These
accounts had been acquired in the Titlestone purchase where an
allowance for losses was made in the IFRS 3 fair value
calculation.
Structured lending
The Group's structured lending division provides revolving loan
facilities to support non-bank lending businesses. Loans are made
to a Special Purpose Vehicle ('SPV') company controlled by the
customer and effectively secured on the loans made by the SPV.
Exposure is limited to a percentage of the underlying assets,
providing a buffer against credit loss.
Summary details of the structured lending portfolio are set out
below
31 March 31 March 30 September 30 September
2019 2018 2018 2017
Number of transactions 5 - 3 -
Total facilities (GBPm) 60.2 - 52.5 -
Carrying value (GBPm) 56.1 - 38.7 -
========= ========= ============= =============
The maximum advance under these facilities was 70% to 75% of the
underlying assets and the Group's Credit Risk function monitors
compliance with agreed covenants relating to both the customer and
the asset pool.
At 31 March 2019 there were no significant concerns regarding
the credit performance of these facilities and no provisions for
impairment had been made.
Arrears measures
The number of accounts in arrears by asset class, based on the
most commonly quoted definition of arrears for the type of asset,
at 31 March 2019, 31 March 2018 and 30 September 2018, compared to
the industry averages at those dates published by UK Finance
('UKF') and the Finance and Leasing Association ('FLA'), was:
31 March 31 March 30 September
2019 2018 2018
% % %
First mortgages
Accounts more than three months in
arrears
Buy-to-let accounts including receiver
of rent cases 0.12 0.09 0.11
Buy-to-let accounts excluding receiver
of rent cases 0.04 0.02 0.03
Owner-occupied accounts 2.99 2.60 3.15
UKF data for mortgage accounts more
than three months in arrears
Buy-to-let accounts including receiver
of rent cases 0.41 0.41 0.41
Buy-to-let accounts excluding receiver
of rent cases 0.37 0.38 0.37
Owner-occupied accounts 0.87 0.91 0.88
All mortgages 0.78 0.82 0.79
--------- --------- -------------
Second charge mortgage loans
Accounts more than 2 months in arrears
All accounts 14.04 18.17 13.64
Post-2010 originations 0.41 0.00 0.21
Legacy cases 19.34 16.94 17.97
Purchased assets 15.52 21.06 14.81
FLA data for second mortgages 9.10 10.60 9.40
--------- --------- -------------
Motor finance loans
Accounts more than 2 months in arrears
All accounts 6.05 0.78 3.91
Originated cases 1.27 0.78 0.93
Purchased assets 12.01 - 6.84
FLA data for consumer hire purchase 2.70 2.50 2.50
--------- --------- -------------
Asset finance loans
Accounts more than 2 months in arrears 1.66 0.97 0.78
FLA data for business lease / hire
purchase loans 1.10 0.80 0.70
========= ========= =============
No published industry data for asset classes comparable to the
Group's other books has been identified. Where revised data at 31
March 2018 or 30 September 2018 has been published by the FLA or
UKF, the comparative industry figures above have been amended.
Arrears information is not given for development finance or
factoring activities as the structure of the products means that
such a measure is not relevant. Other consumer loans consist
primarily of purchased credit impaired assets.
The Group calculates its headline arrears measure for buy-to-let
mortgages, shown above, based on the numbers of accounts three
months or more in arrears, including purchased assets, but
excluding those cases in possession and receiver of rent cases
designated for sale. This is consistent with the methodology used
by UKF in compiling its statistics for the buy-to-let mortgage
market as a whole.
The number of accounts in arrears will naturally be higher for
legacy books, such as the Group's legacy second charge mortgages
and residential first mortgages than for comparable active ones, as
performing accounts pay off their balances, leaving arrears
accounts representing a greater proportion of the total.
The figures shown above for secured loans include purchased
portfolios which generally include a high proportion of cases in
arrears at the time of purchase and where this level of performance
is allowed for in the discount to current balance represented by
the purchase price. However, this will lead to higher than average
reported arrears.
IFRS 9 Analysis
IFRS 9 calculations and related disclosures require loan assets
to be divided into three stages, with accounts which were credit
impaired on initial recognition representing a fourth class.
The three classes comprise: those where there has been no SICR
since advance or acquisition (Stage 1); those where there has been
a SICR (Stage 2); and loans which are impaired (Stage 3). It is an
important feature of the standard that SICR is not defined solely
by the performance of the account, but also by other information
available about the customer, such as credit bureau
information.
-- On initial recognition, and for assets where there has not
been an SICR, provisions will be made in respect of losses
resulting from the level of credit default events expected in the
twelve months following the balance sheet date
-- Where a loan has experienced an SICR, whether or not the loan
is considered to be credit impaired, provisions will be made based
on the ECLs over the full life of the loan.
-- For credit impaired assets, provisions will be made on the
basis of lifetime expected credit losses, taking account of
forward-looking economic assumptions and a range of possible
outcomes
Credit impaired assets are identified either through
quantitative measures or by operational status. Designations of
accounts for regulatory capital purposes are also taken into
account. Assets may also be assigned to Stage 3 if they are
identified as credit impaired as a result of management review
processes
For assets which were 'Purchased or Originated as Credit
Impaired' ('POCI') accounts (i.e. considered as credit impaired at
the point of first recognition), such as certain of the Group's
acquired assets in Idem Capital, the carrying valuation is based on
expected cash flows discounted by the EIR determined at the point
of acquisition.
An analysis of the Group's loan portfolios between these stages
is set out below.
Stage 1 Stage 2 * Stage 3 * POCI Total
GBPm GBPm GBPm GBPm GBPm
31 March 2019
Gross loan book
Mortgages 10,280.8 384.2 138.8 11.7 10,815.5
Commercial Lending 1,231.1 38.4 8.4 14.6 1,292.5
Idem Capital 234.3 18.1 38.4 178.3 469.1
--------- ---------- ---------- ------ ---------
Total 11,746.2 440.7 185.6 204.6 12,577.1
--------- ---------- ---------- ------ ---------
Impairment provision
Mortgages (0.4) (2.2) (29.0) - (31.6)
Commercial Lending (4.8) (0.8) (3.0) - (8.6)
Idem Capital (0.3) (0.5) (10.5) - (11.3)
--------- ---------- ---------- ------ ---------
Total (5.5) (3.5) (42.5) - (51.5)
--------- ---------- ---------- ------ ---------
Net loan book
Mortgages 10,280.4 382.0 109.8 11.7 10,783.9
Commercial Lending 1,226.3 37.6 5.4 14.6 1,283.9
Idem Capital 234.0 17.6 27.9 178.3 457.8
--------- ---------- ---------- ------ ---------
Total 11,740.7 437.2 143.1 204.6 12,525.6
Coverage ratio
Mortgages - 0.57% 20.89% - 0.29%
Commercial Lending 0.39% 2.08% 35.71% - 0.67%
Idem Capital 0.13% 2.76% 27.34% - 2.41%
--------- ---------- ---------- ------ ---------
Total 0.05% 0.79% 22.90% - 0.41%
========= ========== ========== ====== =========
Stage 1 Stage 2 * Stage 3 * POCI Total
GBPm GBPm GBPm GBPm GBPm
1 October 2018
Gross loan book
Mortgages 9,961.6 369.9 142.4 11.7 10,485.6
Commercial Lending 1,106.4 8.2 5.8 17.5 1,137.9
Idem Capital 278.9 19.7 40.0 192.7 531.3
--------- ---------- ---------- ------ ---------
Total 11,346.9 397.8 188.2 221.9 12,154.8
--------- ---------- ---------- ------ ---------
Impairment provision
Mortgages (0.3) (1.7) (34.1) - (36.1)
Commercial Lending (4.2) (0.4) (2.0) - (6.6)
Idem Capital (0.4) (0.5) (10.6) - (11.5)
--------- ---------- ---------- ------ ---------
Total (4.9) (2.6) (46.7) - (54.2)
--------- ---------- ---------- ------ ---------
Net loan book
Mortgages 9,961.3 368.2 108.3 11.7 10,449.5
Commercial Lending 1,102.2 7.8 3.8 17.5 1,131.3
Idem Capital 278.5 19.2 29.4 192.7 519.8
--------- ---------- ---------- ------ ---------
Total 11,342.0 395.2 141.5 221.9 12,100.6
========= ========== ========== ====== =========
Coverage ratio
Mortgages - 0.46% 23.95% - 0.34%
Commercial Lending 0.38% 4.88% 34.48% - 0.58%
Idem Capital 0.14% 2.54% 26.50% - 2.16%
--------- ---------- ---------- ------ ---------
Total 0.04% 0.65% 24.81% - 0.45%
========= ========== ========== ====== =========
* Stage 2 and 3 balances are analysed in more detail below.
During the period the Group revised certain of its default
definitions for regulatory purposes. Where appropriate, IFRS 9
definitions have been amended to harmonise with the new definition
and hence the staging at 1 October 2018 set out above differs from
that presented in the Group's transition report.
In terms of the Group's credit management processes, Stage 1
cases will fall within the appropriate customer servicing functions
and Stage 2 cases will be subject to account management
arrangements. Stage 3 cases will include both those subject to
recovery or similar processes and those which, though being managed
on a long-term basis, are included with defaulted accounts for
regulatory purposes. However, these broad categorisations may vary
between different product types.
POCI balances included in the Commercial Lending segment arise
principally from acquired businesses, where those assets were
identified as credit impaired at the point of acquisition when the
acquired portfolios as a whole were evaluated.
Idem Capital loans include acquired consumer and motor finance
loans together with legacy (originated pre-2010) second charge
mortgage and unsecured consumer loans. Legacy assets and acquired
loans which were performing on acquisition are included in the
staging analysis above. Acquired portfolios which were largely
non-performing at acquisition and which were purchased at a deep
discount to face value are shown as POCI assets above. Although no
provision is shown above for such assets, the effect of the
discount on purchase is included in the gross value ensuring that
the carrying value is substantially less than the current balances
due from customers and the level of cover is considerable.
Analysis of Stage 2 loans
The table below analyses the accounts in stage 2 between those
not more than one month in arrears where a significant increase in
credit risk ('SICR') has nonetheless been identified from other
information and accounts more than one month in arrears, which are
automatically deemed to have an SICR.
< 1 month > 1 <= 3 Total
arrears months arrears
GBPm GBPm GBPm
31 March 2019
Gross loan book
Mortgages 328.6 55.6 384.2
Commercial Lending 33.3 5.1 38.4
Idem Capital 8.7 9.4 18.1
---------- ---------------- ------
Total 370.6 70.1 440.7
---------- ---------------- ------
Impairment provision
Mortgages (1.0) (1.2) (2.2)
Commercial Lending (0.2) (0.6) (0.8)
Idem Capital (0.2) (0.3) (0.5)
---------- ---------------- ------
Total (1.4) (2.1) (3.5)
---------- ---------------- ------
Net loan book
Mortgages 327.6 54.4 382.0
Commercial Lending 33.1 4.5 37.6
Idem Capital 8.5 9.1 17.6
---------- ---------------- ------
Total 369.2 68.0 437.2
========== ================ ======
Coverage ratio
Mortgages 0.30% 2.16% 0.57%
Commercial Lending 0.60% 11.76% 2.08%
Idem Capital 2.30% 3.19% 2.76%
---------- ---------------- ------
Total 0.38% 3.00% 0.79%
========== ================ ======
< 1 month > 1 <= 3 Total
arrears months arrears
GBPm GBPm GBPm
1 October 2018
Gross loan book
Mortgages 306.3 63.6 369.9
Commercial Lending 4.0 4.2 8.2
Idem Capital 8.8 10.9 19.7
---------- ---------------- ------
Total 319.1 78.7 397.8
---------- ---------------- ------
Impairment provision
Mortgages (0.8) (0.9) (1.7)
Commercial Lending (0.1) (0.3) (0.4)
Idem Capital (0.2) (0.3) (0.5)
---------- ---------------- ------
Total (1.1) (1.5) (2.6)
---------- ---------------- ------
Net loan book
Mortgages 305.5 62.7 368.2
Commercial Lending 3.9 3.9 7.8
Idem Capital 8.6 10.6 19.2
---------- ---------------- ------
Total 318.0 77.2 395.2
========== ================ ======
Coverage ratio
Mortgages 0.26% 1.42% 0.46%
Commercial Lending 2.50% 7.14% 4.88%
Idem Capital 2.27% 2.75% 2.54%
---------- ---------------- ------
Total 0.34% 1.91% 0.65%
========== ================ ======
The Group uses arrears multiples as a proxy for days past due,
as this measure is commonly used in its arrears reporting. A loan
will generally be one month in arrears from the point it is one day
past due until it is thirty days past due.
Analysis of Stage 3 loans
The table below analyses the accounts in Stage 3 between
accounts in the process of enforcement or where full recovery is
considered unlikely ('Realisations' in the table), loans being
managed on a long term basis where full recovery is possible but
which are considered in default for regulatory purposes and
buy-to-let mortgages where a receiver of rent ('RoR') has been
appointed by the Group to manage the property on the customer's
behalf. RoR accounts in Stage 3 may be fully up-to-date with full
recovery possible, and such accounts would not have been provided
for under IAS 39. These accounts are included in Stage 3 as they
are classified as defaulted for regulatory purposes.
> 3 month RoR managed Realisations Total
arrears
GBPm GBPm GBPm GBPm
31 March 2019
Gross loan book
Mortgages 6.4 115.1 17.3 138.8
Commercial Lending 0.6 - 7.8 8.4
Idem Capital 28.2 - 10.2 38.4
---------- ------------ ------------- -------
Total 35.2 115.1 35.3 185.6
---------- ------------ ------------- -------
Impairment provision
Mortgages (0.5) (22.3) (6.2) (29.0)
Commercial Lending - - (3.0) (3.0)
Idem Capital (1.8) - (8.7) (10.5)
---------- ------------ ------------- -------
Total (2.3) (22.3) (17.9) (42.5)
---------- ------------ ------------- -------
Net loan book
Mortgages 5.9 92.8 11.1 109.8
Commercial Lending 0.6 - 4.8 5.4
Idem Capital 26.4 - 1.5 27.9
---------- ------------ ------------- -------
Total 32.9 92.8 17.4 143.1
========== ============ ============= =======
Coverage ratio
Mortgages 7.81% 19.37% 35.84% 20.89%
Commercial Lending - - 38.46% 35.71%
Idem Capital 6.38% - 85.29% 27.34%
---------- ------------ ------------- -------
Total 6.53% 19.37% 50.71% 22.90%
========== ============ ============= =======
> 3 month RoR managed Realisations Total
arrears
GBPm GBPm GBPm GBPm
1 October 2018
Gross loan book
Mortgages 5.0 116.3 21.1 142.4
Commercial Lending 1.1 - 4.7 5.8
Idem Capital 29.0 - 11.0 40.0
---------- ------------ ------------- -------
Total 35.1 116.3 36.8 188.2
---------- ------------ ------------- -------
Impairment provision
Mortgages - (26.8) (7.3) (34.1)
Commercial Lending (0.4) - (1.6) (2.0)
Idem Capital (1.7) - (8.9) (10.6)
---------- ------------ ------------- -------
Total (2.1) (26.8) (17.8) (46.7)
---------- ------------ ------------- -------
Net loan book
Mortgages 5.0 89.5 13.8 108.3
Commercial Lending 0.7 - 3.1 3.8
Idem Capital 27.3 - 2.1 29.4
---------- ------------ ------------- -------
Total 33.0 89.5 19.0 141.5
========== ============ ============= =======
Coverage ratio
Mortgages - 23.04% 35.55% 23.95%
Commercial Lending 36.36% - 34.04% 34.48%
Idem Capital 5.86% - 80.91% 26.50%
---------- ------------ ------------- -------
Total 5.98% 23.04% 48.37% 24.81%
========== ============ ============= =======
The RoR managed accounts are being managed to ensure the optimal
resolution for landlords, tenants and lenders and this long-term,
stable situation underpinned their treatment as not impaired under
IAS 39, but the existence of the RoR arrangement causes the
accounts to be treated as defaulted for regulatory purposes.
The following table analyses the number and gross carrying value
of RoR managed accounts shown above by the date of the receivers'
appointment, illustrating this position.
31 March 2019 1 October
2018
No GBPm No GBPm
Appointment date
Gross loan book
2010 and earlier 452 80.9 464 83.0
2011 to 2013 102 20.4 107 21.8
2014 to 2016 36 5.2 40 5.9
2016 and later 70 8.6 44 5.6
------ -------- ---- ------
Total 660 115.1 655 116.3
====== ======== ==== ======
Receiver of rent accounts in the process of realisation at the
period end are included under that heading.
Idem Capital balances with over three months arrears comprise
principally second charge mortgage accounts originated over ten
years ago. These accounts are generally making regular payments and
have significant levels of equity in the underlying property which
reduces the required provision to the value shown above. It is
expected that a high proportion of these accounts will eventually
redeem naturally, either on the sale of the property or by the
satisfaction of the amount due through instalment payments.
Estimated remaining collections
In the debt purchase industry, Estimated Remaining Collections
('ERC') is commonly used as a measure of the value of a portfolio.
This is defined as the sum of the undiscounted cash flows expected
to be received over a specified future period. In the Group's view,
this measure may be suitable for heavily discounted, unsecured,
distressed portfolios (which will be treated as POCI under IFRS 9),
but is less applicable for some types of portfolio in which the
Group has invested, where cash flows are higher on acquisition,
loans may be secured on property and customers may not be in
default. In such cases, the IFRS 9 amortised cost balance, at which
these assets are carried in the Group balance sheet, provides a
better indication of value.
However, to aid comparability, the 84 and 120 month ERC values
for the Group's purchased consumer assets are set out below. These
are derived from the same models and assumptions used in the
effective interest rate calculations. ERCs are set out both for all
purchased consumer portfolios and for those classified as POCI
under IFRS 9.
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
All purchased consumer
assets
Carrying value 331.2 452.3 364.2 503.5
84 month ERC 395.5 543.5 434.9 608.9
120 month ERC 446.5 615.2 489.6 688.8
========= ========= ============= =============
POCI assets only
Carrying value 190.0 272.3 204.4 302.9
84 month ERC 248.1 316.2 269.9 317.2
120 month ERC 283.9 411.4 306.2 359.9
========= ========= ============= =============
Amounts shown include loans disclosed as consumer loans and
first mortgages (note 18).
Further information relating to comparative information prepared
under IAS 39 is included in note 34(a) and (b).
8. ACQUISITIONS
On 3 July 2018 the Group acquired the entire share capital of
Titlestone Property Finance Limited together with a portfolio of
loans held by companies related to it (together 'Titlestone'). IFRS
disclosures in respect of this acquisition were presented on a
provisional basis in note 15 to the Group Accounts for the year
ended 30 September 2018.
Following the end of the year the circumstances, performance and
security value of certain of the Titlestone loans were reviewed in
more detail, providing further information on the value of those
assets at the acquisition date. As a result of this exercise the
initial values of those loans were reduced by GBP2.8m with a
corresponding change in the related deferred tax balances of
GBP0.4m. Consequently the goodwill balance was increased by GBP2.4m
(note 21).
9. SEGMENTAL RESULTS
The Group analyses its operations, both for internal management
information and external financial reporting, on the basis of the
markets from which its assets are generated. The segments used are
described below:
-- Mortgages, including the Group's buy-to-let, and
owner-occupied first and second charge lending and related
activities
-- Commercial Lending, including the Group's equipment leasing
activities, development finance, structured lending and other
offerings targeted towards SME customers and together with its
motor finance business
-- Idem Capital, including loan assets acquired from third
parties and legacy assets which share certain credit
characteristics with them
Dedicated financing and administration costs of each of these
businesses are allocated to the segment. Shared central costs are
not allocated between segments, and neither is income from central
cash balances nor the carrying costs of unallocated savings
balances.
Loans to customers and operating lease assets are allocated to
segments as are dedicated securitisation funding arrangements and
their related cross-currency basis swaps and cash balances.
Other assets are not allocated between segments.
All of the Group's operations are conducted in the UK, all
revenues arise from external customers and there are no
inter-segment revenues. No customer contributes more than 10% of
the revenue of the Group.
Financial information about these business segments, prepared on
the same basis as used in the consolidated accounts of the Group,
is shown below.
Six months ended 31 March 2019
Mortgages Commercial Idem Unallocated Total
Lending Capital items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 170.9 44.7 30.2 3.4 249.2
Interest payable (81.2) (14.3) (3.8) (11.8) (111.1)
---------- ----------- --------- ------------ --------
Net interest income 89.7 30.4 26.4 (8.4) 138.1
Other operating
income 3.3 5.7 0.9 - 9.9
---------- ----------- --------- ------------ --------
Total operating
income 93.0 36.1 27.3 (8.4) 148.0
Direct costs (7.7) (12.9) (4.0) (38.7) (63.3)
Provisions for
losses (0.7) (3.7) (0.5) - (4.9)
---------- ----------- --------- ------------ --------
84.6 19.5 22.8 (47.1) 79.8
========== =========== ========= ============ ========
Six months ended 31 March 2018
Mortgages Commercial Idem Unallocated Total
Lending Capital items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 145.1 19.6 46.8 1.8 213.3
Interest payable (67.3) (7.3) (5.2) (12.2) (92.0)
---------- ----------- --------- ------------ -------
Net interest income 77.8 12.3 41.6 (10.4) 121.3
Other operating
income 3.8 4.7 0.3 - 8.8
---------- ----------- --------- ------------ -------
Total operating
income 81.6 17.0 41.9 (10.4) 130.1
Direct costs (7.4) (10.5) (4.8) (32.2) (54.9)
Provisions for
losses (1.9) (0.3) 0.4 - (1.8)
---------- ----------- --------- ------------ -------
72.3 6.2 37.5 (42.6) 73.4
========== =========== ========= ============ =======
Year ended 30 September 2018
Mortgages Commercial Idem Unallocated Total
Lending Capital items
GBPm GBPm GBPm GBPm GBPm
Interest receivable 299.1 50.1 97.9 4.8 451.9
Interest payable (141.5) (17.9) (10.1) (27.8) (197.3)
---------- ----------- --------- ------------ --------
Net interest income 157.6 32.2 87.8 (23.0) 254.6
Other operating
income 7.6 10.9 0.7 28.1 47.3
---------- ----------- --------- ------------ --------
Total operating
income 165.2 43.1 88.5 5.1 301.9
Direct costs (14.9) (21.2) (10.4) (67.7) (114.2)
Provisions for
losses (5.5) (2.0) 0.1 - (7.4)
---------- ----------- --------- ------------ --------
144.8 19.9 78.2 (62.6) 180.3
========== =========== ========= ============ ========
The segmental profits disclosed above reconcile to the
consolidated results as shown below:
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Results shown above 79.8 73.4 180.3
Fair value items (7.8) 3.8 1.2
--------- --------- -------------
Operating profit 72.0 77.2 181.5
========= ========= =============
The assets of the segments listed above are:
31 March 31 March 1 October 30 September 2018 30 September 2017
2019 2018 2018
GBPm GBPm GBPm GBPm GBPm
Mortgages 11,833.9 11,193.1 11,598.2 11,622.2 11,393.2
Commercial Lending 1,326.6 710.0 1,166.7 1,168.6 582.2
Idem Capital 457.8 581.1 539.6 540.9 642.4
--------- --------- ---------- ------------------ ------------------
Total segment assets 13,618.3 12,484.2 13,304.5 13,331.7 12,617.8
Unallocated assets 1,035.7 862.5 1,183.4 1,183.4 1,064.4
--------- --------- ---------- ------------------ ------------------
Total assets 14,654.0 13,346.7 14,487.9 14,515.1 13,682.2
========= ========= ========== ================== ==================
An analysis of the Group's loan assets by type and segment are
shown in note 18.
10. INTEREST RECEIVABLE
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Interest receivable in respect
of
Loans and receivables 221.3 198.0 408.9
Finance leases 22.0 11.6 34.4
Factoring income 1.4 1.2 2.2
--------- --------- -------------
Interest on loans to customers 244.7 210.8 445.5
Other interest receivable 4.5 2.5 6.4
--------- --------- -------------
Total interest on financial
assets 249.2 213.3 451.9
========= ========= =============
The above interest arises from:
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Financial assets held at
amortised cost 227.2 201.7 417.5
Finance leases 22.0 11.6 34.4
--------- --------- -------------
249.2 213.3 451.9
========= ========= =============
11. INTEREST PAYABLE AND SIMILAR CHARGES
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
On retail deposits 53.9 37.8 83.1
On asset backed loan notes 34.6 27.2 60.3
On bank loans and overdrafts 2.4 8.8 16.5
On corporate bonds 5.5 5.5 10.9
On retail bonds 9.3 9.3 18.6
On central bank facilities 4.1 2.1 5.2
--------- --------- -------------
Total interest on financial
liabilities 109.8 90.7 194.6
On pension scheme deficit
(note 25) 0.3 0.4 0.8
Discounting on contingent
consideration 0.2 0.2 0.5
Other finance costs 0.8 0.7 1.4
--------- --------- -------------
111.1 92.0 197.3
========= ========= =============
All interest on financial liabilities relates to financial
liabilities carried at amortised cost.
12. other incOme
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Loan account fee income 3.9 4.3 9.0
Broker commissions 0.9 1.1 2.1
Third party servicing 2.7 1.5 3.4
Other income 0.4 0.5 1.0
--------- --------- -------------
7.9 7.4 15.5
========= ========= =============
13. FAIR VALUE NET (losses) / gains
The fair value net (loss) / gain represents the accounting
volatility on derivative instruments which are matching risk
exposure on an economic basis generated by the hedge accounting
requirements of IAS 39, which is still applied by the Group, as
permitted by IFRS 9. Some accounting volatility arises on these
items due to accounting ineffectiveness on designated hedges, or
because hedge accounting has not been adopted or is not achievable
on certain items. The losses are primarily due to timing
differences in income recognition between the derivative
instruments and the economically hedged assets and liabilities.
Such differences will reverse over time and have no impact on the
cash flows of the Group.
Foreign exchange gains of GBP88.2m on asset backed loan notes
denominated in US Dollars and Euros (31 March 2018: gains of
GBP158.8m; 30 September 2018: gains of GBP67.6m) have been offset
against movements on the cross-currency basis swaps used to hedge
these liabilities as part of the cash flow hedge accounting
treatment applied.
14. TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES
Income tax for the six months ended 31 March 2019 is charged at
an effective rate of 19.3% (six months ended 31 March 2018: 19.7%,
year ended 30 September 2018: 19.7%), representing the best
estimate of the annual effective rate of income tax expected for
the full year, applied to the pre-tax income of the period.
The standard rate of corporation tax in the UK applicable to the
Group in the period was 19.0% (2018 H1: 19.0%).
15. EARNINGS PER SHARE
Earnings per ordinary share is calculated as follows:
31 March 31 March 30 September
2019 2018 2018
Profit for the period (GBPm) 58.1 62.0 145.8
--------- --------- -------------
Basic weighted average number of
ordinary shares ranking for dividend
during the period (m) 258.1 262.1 260.8
Dilutive effect of the weighted
average number of share options
and incentive plans in issue during
the period (m) 6.5 7.5 8.4
--------- --------- -------------
Diluted weighted average number
of ordinary shares ranking for
dividend during the period (m) 264.6 269.6 269.2
========= ========= =============
Earnings per ordinary share - basic 22.5p 23.7p 55.9p
- diluted 22.0p 23.0p 54.2p
========= ========= =============
16. CASH and cash equivalents
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Balances with central
banks 704.0 628.5 895.9 615.0
Balances with other
banks 368.0 434.1 414.7 881.9
--------- --------- ------------- -------------
1,072.0 1,062.6 1,310.6 1,496.9
========= ========= ============= =============
Only 'Free Cash' is unrestrictedly available for the Group's
general purposes. Cash received in respect of loan assets funded
through warehouse facilities and securitisations is not immediately
available, due to the terms of those arrangements. This cash is
shown as 'securitisation cash' below.
Balances with central banks includes deposits which form part of
the liquidity buffer of Paragon Bank PLC and are therefore not
available for the Group's general purposes. Free cash may also be
deposited at the Bank of England.
Cash held by the Trustees of the Paragon Employee Share
Ownership Plans may only be used to invest in the shares of the
Company, pursuant to the aims of those plans. This is shown as
'ESOP cash' below.
The total 'Cash and Cash Equivalents' balance may be analysed as
shown below.
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Free cash 204.2 141.2 238.0 305.5
Securitisation cash 309.6 369.5 338.8 574.0
Liquidity buffer 555.5 549.5 724.9 615.0
ESOP cash 2.7 2.4 8.9 2.4
--------- --------- ------------- -------------
1,072.0 1,062.6 1,310.6 1,496.9
========= ========= ============= =============
17. SHORT-TERM INVESTMENTS
This amount represents treasury bills and other liquid
securities held from time to time as part of the liquidity
requirement of Paragon Bank PLC. They were designated as 'Available
for Sale', under IAS 39 - 'Financial Instruments: Recognition and
Measurement' and are consequently shown at market value.
18. Loans to Customers
31 March 31 March 1 October 30 September 30 September
2019 2018 2018 2018 2017
GBPm GBPm GBPm GBPm GBPm
Loans to customers 12,525.6 11,346.7 12,100.6 12,127.8 11,124.1
Fair value adjustments
from portfolio
hedging 18.8 (21.6) (24.1) (24.1) (8.7)
--------- --------- ---------- ------------- -------------
12,544.4 11,325.1 12,076.5 12,103.7 11,115.4
========= ========= ========== ============= =============
The Group's loan assets at 31 March 2019, analysed between the
segments described in note 9 are as follows:
Mortgages Commercial Idem Total
Lending Capital
GBPm GBPm GBPm GBPm
At 31 March 2019 (IFRS
9)
First mortgages 10,624.8 - - 10,624.8
Consumer loans 159.1 - 404.2 563.3
Motor finance - 262.4 53.6 316.0
Asset finance - 451.4 - 451.4
Development finance - 426.0 - 426.0
Other commercial loans - 144.1 - 144.1
---------- ----------- --------- ---------
Loans to customers 10,783.9 1,283.9 457.8 12,525.6
========== =========== ========= =========
At 31 March 2018 (IAS
39)
First mortgages 10,005.7 - - 10,005.7
Consumer loans 113.8 - 547.1 660.9
Motor finance - 195.4 - 195.4
Asset finance - 364.8 - 364.8
Development finance - 57.0 - 57.0
Other commercial loans - 62.9 - 62.9
---------- ----------- --------- ---------
Loans to customers 10,119.5 680.1 547.1 11,346.7
========== =========== ========= =========
At 1 October 2018 (IFRS
9)
First mortgages 10,308.3 - - 10,308.3
Consumer loans 141.2 - 447.0 588.2
Motor finance - 256.4 72.8 329.2
Asset finance - 402.3 - 402.3
Development finance - 352.9 - 352.9
Other commercial loans - 119.7 - 119.7
---------- ----------- --------- ---------
Loans to customers 10,449.5 1,131.3 519.8 12,100.6
========== =========== ========= =========
At 30 September 2018
(IAS 39)
First mortgages 10,332.2 - - 10,332.2
Consumer loans 141.3 - 448.3 589.6
Motor finance - 256.6 72.8 329.4
Asset finance - 403.4 - 403.4
Development finance - 352.8 - 352.8
Other commercial loans - 120.4 - 120.4
---------- ----------- --------- ---------
Loans to customers 10,473.5 1,133.2 521.1 12,127.8
========== =========== ========= =========
At 30 September 2017
(IAS 39)
First mortgages 9,855.5 - - 9,855.5
Consumer loans 98.4 - 611.4 709.8
Motor finance - 163.0 - 163.0
Asset finance - 323.5 - 323.5
Development finance - 42.3 - 42.3
Other commercial loans - 30.0 - 30.0
---------- ----------- --------- ---------
Loans to customers 9,953.9 558.8 611.4 11,124.1
========== =========== ========= =========
19. Impairment provisions on loans to customers
The movements in the impairment provision calculated under IFRS
9 are set out below
Mortgages Commercial Idem Total
Lending Capital
GBPm GBPm GBPm GBPm
At transition - 1 October
2018 36.1 6.6 11.5 54.2
Provided in period 1.1 3.7 0.8 5.6
Amounts written off (5.6) (1.7) (1.0) (8.3)
---------- ----------- --------- ------
At 31 March 2019 31.6 8.6 11.3 51.5
========== =========== ========= ======
Accounts are considered to be written off for accounting
purposes when standard enforcement processes have been completed,
subject to any amount retained in respect of expected salvage
receipts. This change has no effect on the net carrying value, only
on the amounts reported as gross loan balances and accumulated
impairment provisions, but provides a more informative value for
the coverage ratio.
Impairment provision under IFRS 9 is calculated on a
forward-looking expected loss basis, based on expected economic
conditions in multiple internally coherent scenarios. The Group
uses four distinct economic scenarios chosen to represent the range
of possible outcomes and allow for the impact of economic asymmetry
in the calculations.
The central scenario is the economic forecast used within the
Group for planning purposes and represents its expectation of the
most likely outcome. The upside and downside scenarios are less
likely variants developed from this base case. The final scenario
represents a protracted slump and is derived from the Bank of
England's annual stress testing scenarios.
The economic variables comprising each scenario, and their
projected average rates of increase (or decrease) for the first
five years of the forecast period are set out below.
31 March 2019
Central Upside Downside Severe
scenario scenario scenario downside
scenario
Weighting applied 40% 30% 25% 5%
Economic driver
Gross Domestic Product ('GDP')
(increase) 1.7% 2.2% 1.0% (0.1)%
House Price Index ('HPI')
(increase) 3.1% 5.3% (0.5)% (5.9)%
Bank Base Rate ('BBR') 0.9% 1.8% 0.5% 0.0%
Consumer Price Inflation
('CPI') 2.0% 1.7% 2.5% 3.1%
Unemployment (rate) 4.0% 3.5% 5.6% 8.0%
Secured lending (annual change) 3.2% 3.7% 2.4% 1.3%
Consumer credit (annual change) 8.5% 10.6% 5.1% 0.1%
1 October 2018
Central Upside Downside Severe
scenario scenario scenario downside
scenario
Weighting applied 40% 30% 25% 5%
Economic driver
Gross Domestic Product ('GDP')
(increase) 1.6% 2.0% 0.9% (0.1)%
House Price Index ('HPI')
(increase) 3.0% 5.1% (0.3)% (5.2)%
Bank Base Rate ('BBR') 1.2% 1.7% 0.7% 0.0%
Consumer Price Inflation
('CPI') 2.1% 1.8% 2.6% 3.3%
Unemployment (rate) 3.9% 3.6% 5.7% 8.3%
Secured lending (annual change) 3.2% 3.6% 2.5% 1.5%
Consumer credit (annual change) 8.6% 10.5% 5.3% 0.6%
Further information relating to comparative disclosures under
IAS 39 which are no longer relevant under IFRS 9 are included in
note 34(c).
20. DERIVATIVE FINANCIAL ASSETS AND LIABILITES
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Derivative financial
assets 751.3 763.4 855.7 906.6
Derivative financial
liabilities (30.9) (6.2) (4.7) (7.1)
--------- --------- ------------- -------------
720.4 757.2 851.0 899.5
========= ========= ============= =============
Of which:
Foreign exchange basis
swaps 740.4 738.1 829.7 896.3
Other derivatives (20.0) 19.1 21.3 3.2
--------- --------- ------------- -------------
720.4 757.2 851.0 899.5
========= ========= ============= =============
The accounting treatment of these derivative assets and
liabilities remain the same under IFRS 9. All hedging relationships
and strategies at 30 September 2018 have continued in the
period.
The Group's securitisation borrowings are denominated in
sterling, euros and US dollars. All currency borrowings are swapped
at inception so that they have the effect of sterling borrowings.
These swaps provide an effective hedge against exchange rate
movements, but the requirement to carry them at fair value leads,
when exchange rates have moved significantly since the issue of the
notes, to large balances for the swaps being carried in the balance
sheet. This is currently the case with both euro and US dollar
swaps, although the debit balance is compensated for by
retranslating the borrowings at the current exchange rate.
21. INTANGIBLE ASSETS
Intangible assets at net book value comprise:
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Goodwill 164.6 114.6 162.2 98.1
Computer software 2.1 1.6 2.1 2.0
Other intangibles 4.7 4.1 5.0 4.3
--------- --------- ------------- -------------
Total assets 171.4 120.3 169.3 104.4
========= ========= ============= =============
The movements in goodwill shown above include the adjustments to
acquisition accounting described in note 8.
22. Retail deposits
The Group's retail deposits, held by Paragon Bank PLC, were
received from customers in the United Kingdom and are denominated
in sterling. The deposits comprise principally term deposits and
120 day notice accounts. The method of interest calculation on
these deposits is analysed as follows:
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Fixed rate 4,092.5 3,210.6 3,643.1 2,675.9
Variable rates 1,785.5 1,075.2 1,653.5 939.5
--------- --------- ------------- -------------
5,878.0 4,285.8 5,296.6 3,615.4
========= ========= ============= =============
The weighted average interest rate on retail deposits, analysed
by charging method, was:
31 March 31 March 30 September 30 September
2019 2018 2018 2017
% % % %
Fixed rate 1.99 1.90 1.94 1.89
Variable rates 1.41 1.30 1.36 1.61
========= ========= ============= =============
The contractual maturity of these deposits is analysed
below.
31 March 31 March 30 September 30 September
2019 2018 2018 2017
GBPm GBPm GBPm GBPm
Amounts repayable
In less than three
months 570.6 293.8 256.8 211.4
In more than three
months but not more
than one year 2,220.0 1,470.5 2,024.7 1,399.6
In more than one year,
but not more than
two years 994.2 1,081.8 1,010.6 770.0
In more than two years,
but not more than
five years 708.5 698.1 655.3 629.7
---------- ---------- ------------- -------------
Total term deposits 4,493.3 3,544.2 3,947.4 3,010.7
Repayable on demand 1,384.7 741.6 1,349.2 604.7
---------- ---------- ------------- -------------
5,878.0 4,285.8 5,296.6 3,615.4
Fair value adjustments
for portfolio hedging 0.7 (7.0) (4.2) (3.5)
---------- ---------- ------------- -------------
5,878.7 4,278.8 5,292.4 3,611.9
========== ========== ============= =============
23. BORROWINGS
On 27 March 2019, Fitch Ratings confirmed the Group's Long-Term
Issuer Default Rating and its senior unsecured debt rating at BBB.
Consequentially the rating of the Group's GBP150.0m Tier 2 Bond was
also maintained at BBB-.
All borrowings described in the Group Accounts for the year
ended 30 September 2018 remained in place throughout the period,
except as noted below.
During the period the Group continued to access the Indexed
Long-Term Repo ('ILTR') scheme provided by the Bank of England.
Of the Group's borrowings at 30 September 2018, the mortgage
backed floating rate notes issued by First Flexible No. 5 PLC and
Paragon Mortgages (No. 21) PLC were both repaid in December 2018.
The asset backed floating rate notes issued by Paragon Secured
Funding (No. 1) PLC, the Group's last outstanding non-mortgage
securitisation, were repaid in November 2018. In each case this
followed the purchase of the entity's loan assets by other group
companies.
On 14 November 2018, a new GBP200.0m warehouse funding facility
was agreed between Paragon Seventh Funding Limited and Bank of
America Merrill Lynch. The facility is secured over all of the
assets of Paragon Seventh Funding Limited, with a 12 month
commitment period. Interest is payable at 0.95% over three month
LIBOR.
Repayments made in respect of the Group's borrowings are shown
in note 32.
24. Sundry Liabilities
Sundry liabilities include GBP38.8m of amounts falling due after
more than one year (31 March 2018: GBP43.5m; 30 September 2018:
GBP40.8m). Deferred consideration of GBP21.3m, falling due after
more than one year, is included in the sundry liabilities balance
(31 March 2018: GBP26.1m; 30 September 2018: GBP25.7m).
25. RETIREMENT BENEFIT OBLIGATIONS
The defined benefit obligation at 31 March 2019 has been
calculated on a year-to-date basis. Since the last IAS 19 actuarial
valuation at 30 September 2018 there have been movements in
financial conditions, requiring an adjustment to the actuarial
assumptions underlying the calculation of the defined benefit
obligation at 31 March 2019. In particular, over the period since
the 30 September 2018 actuarial valuation, the discount rate has
decreased by 50 basis points per annum, whereas expectations of
long term inflation have remained stable.
The net effect of these changes, together with the Group's
contribution and the performance of the plan assets, has resulted
in the value of the defined benefit obligation at 31 March 2019
increasing substantially from that at 30 September 2018. The impact
of allowing for the change in actuarial assumptions has been
recognised as an actuarial loss in other comprehensive income.
The movements in the deficit on the defined benefit plan during
the six month period ended 31 March 2019 are summarised below.
Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Opening pension deficit 19.5 29.8 29.8
Employer contributions (2.2) (2.2) (4.5)
Amounts posted to profit and
loss
Service cost 0.9 0.9 1.8
Past service cost 0.2 - -
Net funding cost (note 11) 0.3 0.4 0.8
Administrative expenses 0.3 0.3 0.5
Amounts posted to other comprehensive
income
Return on plan assets not included
in interest 0.2 0.7 (1.1)
Experience (gain) on liabilities - - -
Actuarial loss / (gain) from
changes in financial assumptions 14.1 (0.1) (6.0)
Actuarial (gain) from changes
in demographic assumptions (1.4) - (1.8)
----------- ----------- -------------
Closing pension deficit 31.9 29.8 19.5
=========== =========== =============
Past service cost relates to the cost of GMP equalisation,
discussed in note 56 to the group accounts.
Pursuant to the recovery plan agreed with the Trustee of the
pension plan, the Group has effectively granted a first charge over
its freehold head office building as security for its agreed
contributions. No account of this charge is taken in the
calculation of the above deficit.
26. Called-up share capital
Movements in the issued share capital in the period were:
Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
Number Number Number
Ordinary shares of GBP1
each
Opening share capital 281,596,936 281,489,701 281,489,701
Shares issued 168,094 7,583 107,235
Shares cancelled - - -
------------ ------------ -------------
Closing share capital 281,765,030 281,497,284 281,596,936
============ ============ =============
During the period the Company issued 168,094 shares (six months
ended 31 March 2018: 7,583; year ended 30 September 2018: 107,235)
to satisfy options granted under sharesave schemes for a
consideration of GBP475,660 (six months ended 31 March 2018:
GBP22,548; year ended 30 September 2018: GBP360,031).
27. RESERVES
31 March 31 March 1 October 30 September 30 September
2019 2018 2018 2018 2017
IFRS 9 IAS 39 IFRS IAS 39 IAS 39
9
GBPm GBPm GBPm GBPm GBPm
Share premium account 66.1 65.6 65.8 65.8 65.5
Capital redemption reserve 28.7 28.7 28.7 28.7 28.7
Merger reserve (70.2) (70.2) (70.2) (70.2) (70.2)
Cash flow hedging
reserve 2.6 3.0 3.3 3.3 2.5
Profit and loss
account 880.9 810.0 868.3 890.7 784.5
--------- --------- ---------- ------------- -------------
908.1 837.1 895.9 918.3 811.0
========= ========= ========== ============= =============
28. OWN SHARES
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Treasury shares
At 1 October 2018 91.8 66.6 66.6
Shares purchased - 25.2 25.2
Shares cancelled - - -
----------- ----------- -------------
At 31 March 2019 91.8 91.8 91.8
----------- ----------- -------------
ESOP shares
At 1 October 2018 12.2 16.5 16.5
Shares purchased - - 6.2
Options exercised (1.1) (10.3) (10.5)
----------- ----------- -------------
At 31 March 2019 11.1 6.2 12.2
----------- ----------- -------------
Total at 31 March 2019 102.9 98.0 104.0
=========== =========== =============
Total at 1 October 2018 104.0 83.1 83.1
=========== =========== =============
Number of shares held
Treasury 20,800,284 20,800,284 20,800,284
ESOP 2,517,608 1,608,146 2,874,825
----------- ----------- -------------
Total at 31 March 2019 23,317,892 22,408,430 23,675,109
=========== =========== =============
29. EQUITY DIVID
Amounts recognised as distributions to equity shareholders in
the period:
Six months Six months Year to
to 31 March to 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Final dividend for the year
ended 30 September 2018 of 13.9p 35.9 - -
per share
Final dividend for the year
ended 30 September 2017 of 11.0p
per share - 28.9 28.9
Interim dividend for the year
ended 30 September 2018 of 5.5p
per share - - 14.2
------------- ------------- --------------
35.9 28.9 43.1
============= ============= ==============
An interim dividend of 7.0p per share is proposed (2018: 5.5p
per share), payable on 26 July 2019 with a record date of 5 July
2019. The amount expected to be absorbed by this dividend, based on
the number of shares in issue at the balance sheet date is GBP18.1m
(31 March 2018: GBP14.2m). The interim dividend will be recognised
in the accounts when it is paid.
30. NET CASH FLOW FROM OPERATING ACTIVITIES
Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Profit before tax 72.0 77.2 181.5
Non-cash items included in
profit, and other adjustments
Depreciation of property,
plant and equipment 0.8 0.9 1.9
Profit on disposal of property,
plant and equipment - (0.1) (0.2)
Amortisation of intangible
assets 1.3 0.9 2.1
Foreign exchange movements
on borrowings (88.2) (158.8) (67.6)
Other non-cash movements on
borrowings 0.8 2.9 6.0
Impairment losses on loans
to customers 4.9 1.8 7.4
Charge for share based remuneration 2.8 2.4 6.1
Net (increase) / decrease in
operating assets
Operating lease assets (7.3) (6.6) (12.0)
Loans to customers (432.7) (222.4) (781.7)
Derivative financial instruments 104.4 143.2 50.9
Fair value of portfolio hedges (42.9) 12.9 15.4
Other receivables (26.9) (0.4) (6.1)
Net increase / (decrease) in
operating liabilities
Retail deposits 581.4 670.4 1,681.2
Derivative financial instruments 26.2 (0.9) (2.4)
Fair value of portfolio hedges 4.9 (3.5) (0.7)
Other liabilities (2.6) 12.1 24.6
----------- ----------- -------------
Cash generated by operations 198.9 532.0 1,106.4
Income taxes (paid) (21.6) (16.1) (32.0)
----------- ----------- -------------
Net cash flow generated by
operating activities 177.3 515.9 1,074.4
=========== =========== =============
31. NET CASH FLOW USED IN INVESTING ACTIVITIES
Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Proceeds from sales of property,
plant and equipment - 0.3 0.5
Purchases of property, plant
and equipment (0.3) (0.5) (0.8)
Purchases of intangible assets (1.0) (0.2) (1.5)
(Increase) / decrease in short-term
investments - (10.0) -
Acquisition of businesses - (6.8) (281.0)
----------- ----------- -------------
Net cash (utilised) by investing
activities (1.3) (17.2) (282.8)
=========== =========== =============
32. NET CASH FLOW FROM FINANCING ACTIVITIES
Six months Six months Year to
to to
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Shares issued (note 26) 0.4 0.1 0.4
Dividends paid (note 29) (35.9) (28.9) (43.1)
Issue of asset backed floating
rate notes - - 432.5
Repayment of asset backed floating
rate notes (324.8) (860.9) (1,289.7)
Movement on central bank facilities (40.0) 274.4 324.4
Movement on other bank facilities (13.8) (292.9) (371.1)
Purchase of shares (note 28) - (25.2) (31.8)
----------- ----------- -------------
Net cash (utilised) by financing
activities (414.1) (933.4) (978.4)
=========== =========== =============
33. RELATED PARTY TRANSACTIONS
In the six months ended 31 March 2019, the Group has continued
the related party relationships described in note 66 on page 226 of
the Annual Report and Accounts of the Group for the financial year
ended 30 September 2018. Related party transactions in the period
comprise the compensation of the Group's key management personnel,
transactions with the Group Pension Plan, the acceptance of retail
deposits from certain non-executive directors and fees paid to a
non-executive director who retired during the year in respect of
his appointment as a director of the Corporate Trustee of the Group
Pension Plan.
There have been no changes in these relationships which could
have a material effect on the financial position or performance of
the Group in the period.
Except for the transactions referred to above, there have been
no related party transactions in the six months ended 31 March
2019.
34. Disclosures under ias 39
Certain disclosures made in respect of IAS 39 based amounts are
not directly comparable to IFRS 9 disclosures, but still form part
of the comparative financial information. To avoid confusion, these
are presented below.
a) Analysis of Loans to Customers (Note 7)
The IAS 39 carrying amount of loans to customers is analysed
between product types as shown below. The corresponding balances
under IFRS 9 at 1 October 2018 are shown in note 7.
30 September 2018
IAS 39
GBPm %
Buy-to-let mortgages 10,261.6 84.6%
Owner-occupied mortgages 70.6 0.6%
------------ ---------
Total first mortgages 10,332.2 85.2%
Second charge mortgage loans 415.9 3.4%
------------ ---------
Loans secured on residential property 10,748.1 88.6%
Development finance 352.8 2.9%
------------ ---------
Loans secured on property 11,100.9 91.5%
Asset finance loans 391.0 3.3%
Motor finance loans 329.4 2.7%
Aircraft mortgages 12.4 0.1%
Structured lending 38.7 0.3%
Invoice finance 21.8 0.2%
------------ ---------
Total secured loans 11,894.2 98.1%
Professions finance 42.6 0.4%
Other unsecured commercial loans 17.3 0.1%
Unsecured consumer loans 173.7 1.4%
------------ ---------
Total loans to customers 12,127.8 100.0%
============ =========
b) Ageing of IAS 39 exposures
The payment status of the carrying balances of the Group's live
loan assets, before provision for impairment, at 31 March 2018 and
at 30 September 2018 split between those accounts considered as
performing and those included in the population for impairment
testing, is shown below. This disclosure is not required under IFRS
9, however comparative amounts are still required to be presented.
Balances for immaterial asset classes are not shown. Asset finance
loans below include other related loan balances. Fully provided
non-live accounts, shown in note 19, are excluded from the tables
below.
Days past due is not a relevant measure for the development
finance or invoice discounting businesses, due to their particular
contractual arrangements.
First mortgages
31 March 30 September 2018
2018
GBPm GBPm
Performing accounts (less than 3 months arrears) 9,986.6 10,312.8
Impairment population 32.6 33.0
--------- ------------------
10,019.2 10,345.8
========= ==================
Consumer and asset finance
Second charge mortgage Motor finance loans Asset finance loans Total
loans
GBPm GBPm GBPm GBPm
31 March 2018
Performing accounts
(less than 2 months arrears) 403.1 195.1 410.1 1,008.3
Impairment population 68.7 1.5 6.4 76.6
----------------------- -------------------- -------------------- ----------
471.8 196.6 416.5 1,084.9
======================= ==================== ==================== ==========
30 September 2018
Performing accounts
(less than 2 months arrears) 370.1 324.0 402.4 1,096.5
Impairment population 48.3 6.8 3.1 58.2
----------------------- -------------------- -------------------- ----------
418.4 330.8 405.5 1,154.7
======================= ==================== ==================== ==========
Arrears in the tables above are based on the contractual payment
status of the customers concerned. Where assets have been
purchased, customers may already have been in arrears at the time
of acquisition and an appropriate adjustment made to the
consideration paid.
c) Movement in impairment provision
The following amounts in respect of impairment provisions under
IAS 39, net of allowances for recoveries of written off assets,
have been deducted from the appropriate assets in the balance
sheet. This disclosure has been superseded under IFRS 9, but
disclosures for comparator periods are still required.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
At 30 September 2017 89.1 18.3 3.2 110.6
Provided in the period 2.0 (0.4) 0.3 1.9
Amounts written off (3.1) (4.9) (0.3) (8.3)
----------- ----------------- -------- -------
At 31 March 2018 88.0 13.0 3.2 104.2
=========== ================= ======== =======
At 30 September 2017 89.1 18.3 3.2 110.6
Provided in the year 5.6 0.6 2.9 9.1
Amounts written off (3.7) (7.6) (1.0) (12.3)
----------- ----------------- -------- -------
At 30 September 2018 91.0 11.3 5.1 107.4
=========== ================= ======== =======
Of the above balances, the following provisions were held in
respect of realised losses not charged off, which remained on the
balance sheet and are provided for in full.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
At 31 March 2018 76.2 - 0.5 76.7
At 30 September 2018 78.2 - 0.9 79.1
=========== ================= ======== ======
The amounts charged to the profit and loss account, net of
recoveries of previously provided amounts, are set out below.
First Other Finance Total
mortgages loans leases
and receivables
GBPm GBPm GBPm GBPm
Six months ended 31 March
2018
Amounts provided in the period 2.0 (0.4) 0.3 1.9
Recovery of amounts previously
provided (0.1) - - (0.1)
----------- ----------------- -------- ------
Net impairment for the period 1.9 (0.4) 0.3 1.8
=========== ================= ======== ======
Year ended 30 September 2018
Amounts provided in the year 5.6 0.6 2.9 9.1
Recovery of amounts previously
provided (0.1) (0.5) (1.1) (1.7)
----------- ----------------- -------- ------
Net impairment for the year 5.5 0.1 1.8 7.4
=========== ================= ======== ======
INDEPENT REVIEW REPORT
TO PARAGON BANKING GROUP PLC
Conclusion
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 31 March 2019 which comprises the consolidated
income statement, consolidated statement of comprehensive income,
consolidated balance sheet, consolidated cash flow statement,
consolidated statement of movements in equity and related
explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
March 2019 is not prepared, in all material respects, in accordance
with IAS 34 Interim Financial Reporting as adopted by the EU and
the Disclosure Guidance and Transparency Rules ('the DTR') of the
UK's Financial Conduct Authority ('the UK FCA').
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
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.
The impact of uncertainties due to the UK exiting the European
Union on our review
Uncertainties related to the effects of Brexit are relevant to
understanding our review of the condensed financial statements.
Brexit is one of the most significant economic events for the UK,
and at the date of this report its effects are subject to
unprecedented levels of uncertainty of outcomes, with the full
range of possible effects unknown. An interim review cannot be
expected to predict the unknowable factors or all possible future
implications for a company and this is particularly the case in
relation to Brexit.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU. The directors are
responsible for preparing the condensed set of financial statements
included in the half-yearly financial report in accordance with IAS
34 as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the Company in accordance with the
terms of our engagement to assist the Company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the Company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the Company for our
review work, for this report, or for the conclusions we have
reached.
Simon Clark
for and on behalf of KPMG LLP
Chartered Accountants
1 Snow Hill Queensway
Birmingham
B4 6GH
22 May 2019
ADDITIONAL FINANCIAL INFORMATION
For the six months ended 31 March 2019
Additional financial information supporting the amounts shown in
the interim management report but not forming part of the condensed
financial statements.
A. COST:INCOME RATIO
Cost:income ratio is derived as follows:
31 March 31 March 30 September
2019 2018 2018
Operating expenses (GBPm) 63.3 54.9 114.2
Total operating income (GBPm) 148.0 130.1 301.9
--------- --------- -------------
Cost , Income 42.8% 42.2% 37.8%
========= ========= =============
B. UNDERLYING PROFIT
The Group reports underlying profit excluding fair value
accounting adjustments arising from its hedging arrangements. This
measure has been chosen as it is one widely used by investors and
analysts following the Group's shares, and because management feel
it better represents the underlying economic performance of the
Group's business.
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Profit on ordinary activities
before tax 72.0 77.2 181.5
Less: Gain on disposal of financial
assets - - (28.0)
Add back: Acquisition costs
and other one-off items - - 4.2
Add back: Fair value adjustments 7.8 (3.8) (1.2)
--------- --------- -------------
Underlying profit 79.8 73.4 156.5
========= ========= =============
Underlying basic earnings per share, calculated on the basis of
underlying profit charged at the overall effective tax rate, is
derived as follows.
31 March 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Underlying profit 79.8 73.4 156.5
Tax at effective rate (note
14) (15.4) (14.5) (30.8)
--------- --------- -------------
Underlying earnings 64.4 58.9 125.7
========= ========= =============
Basic weighted average number
of shares (note 15) 258.1 262.1 260.8
--------- --------- -------------
Underlying earnings per share 25.0p 22.5p 48.2p
========= ========= =============
Underlying return on tangible equity is derived using underlying
earnings calculated on the same basis.
Six months Six months Year to
to 31 March to 31 March 30 September
2019 2018 2018
GBPm GBPm GBPm
Underlying earnings 64.4 58.9 125.7
Amortisation of intangible
assets 1.3 0.9 2.1
------------- ------------- --------------
Adjusted underlying earnings 65.7 59.8 127.8
------------- ------------- --------------
Average tangible equity (note
6(b)) 909.9 902.6 915.8
------------- ------------- --------------
Underlying RoTE 14.4% 13.3% 14.0%
============= ============= ==============
C. INCOME STATEMENT RATIOS
Net interest margin ('NIM') and cost of risk (impairment charge
as a percentage of average loan balance) for the Group and its
segments are calculated as follows:
Six months to 31 March 2019 (IFRS 9)
Mortgages Commercial Idem Total
Lending Capital
GBPm GBPm GBPm GBPm
Opening loans to customers
(note 18) 10,449.5 1,131.3 519.8 12,100.6
Closing loans to customers
(note 18) 10,783.9 1,283.9 457.8 12,525.6
---------- ----------- --------- ---------
Average loans to customers 10,616.7 1,207.6 488.8 12,313.1
---------- ----------- --------- ---------
Net interest 89.7 30.4 26.4 138.1
Annualised NIM 1.69% 5.03% 10.80% 2.24%
========== =========== ========= =========
Impairment provision 0.7 3.7 0.5 4.9
Cost of risk (annualised) 0.01% 0.61% 0.20% 0.08%
========== =========== ========= =========
Six months to 31 March 2018 (IAS 39)
Mortgages Commercial Idem Total
Lending Capital
GBPm GBPm GBPm GBPm
Opening loans to customers
(note 18) 9,953.9 558.8 611.4 11,124.1
Closing loans to customers
(note 18) 10,119.5 680.1 547.1 11,346.7
---------- ----------- --------- ---------
Average loans to customers 10,036.7 619.4 579.3 11,235.4
---------- ----------- --------- ---------
Net interest 77.8 12.3 41.6 121.3
Annualised NIM 1.55% 3.97% 14.36% 2.16%
========== =========== ========= =========
Impairment provision 1.9 0.3 0.4 1.8
Cost of risk (annualised) 0.04% 0.10% 0.14% 0.03%
========== =========== ========= =========
Year to 30 September 2018 (IAS 39)
Mortgages Commercial Idem Total
Lending Capital
GBPm GBPm GBPm GBPm
Opening loans to customers
(note 18) 9,953.9 558.8 611.4 11,124.1
Closing loans to customers
(note 18) 10,473.5 1,133.2 521.1 12,127.8
---------- ----------- --------- ---------
Average loans to customers 10,213.7 846.0 566.3 11,626.0
---------- ----------- --------- ---------
Net interest 157.6 32.2 87.8 254.6
Annualised NIM 1.54% 3.81% 15.50% 2.19%
========== =========== ========= =========
Impairment provision 5.5 2.0 (0.1) 7.4
Cost of risk (annualised) 0.05% 0.24% (0.02)% 0.06%
========== =========== ========= =========
D. Net asset value
Note 31 March 31 March 30 September
2019 2018 2018
Total equity (GBPm) 1,087.0 1,020.6 1,095.9
---------- ---------- -------------
Outstanding issued shares (m) 26 281.8 281.5 281.6
Treasury shares (m) 28 (20.8) (20.8) (20.8)
Shares held by ESOP schemes (m) 28 (2.5) (1.6) (2.9)
---------- ---------- -------------
258.5 259.1 257.9
---------- ---------- -------------
Net asset value per GBP1 ordinary share GBP4.21 GBP3.94 GBP4.25
========== ========== =============
Tangible equity (GBPm) 6 915.6 900.3 926.6
---------- ---------- -------------
Tangible net asset value per GBP1 ordinary share
GBP3.54 GBP3.47 GBP3.59
========== ========== =============
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IR KFLFLKEFEBBK
(END) Dow Jones Newswires
May 22, 2019 02:01 ET (06:01 GMT)
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