TIDMDFCH
RNS Number : 6661W
Distribution Finance Cap. Hldgs PLC
19 April 2023
19 April 2023
This announcement contains inside information as stipulated
under the UK version of the market abuse regulation (EU no.
596/2014) as it forms part of UK law by virtue of the European
Union (withdrawal) act 2018 (as amended from time to time).
Distribution Finance Capital Holdings plc
("DF Capital" or the "Company" together with its subsidiaries
the "Group")
Audited Results for the year ended 31 December 2022
Scaling the bank delivers maiden full year profit significantly
beating original expectations.
Distribution Finance Capital Holdings plc, the specialist bank
providing working capital solutions to dealers and manufacturers
across the UK, today announces its audited results for the year
ended 31 December 2022.
Highlights
2022 2021 Change
----------------------------------------------- -------------------- -------------------- ---------------------
Performance
Loan Book (GBPm) 439 249 +76%
New loans advanced to customers
(GBPm) 1,001 690 +45%
----------------------------------------------- -------------------- -------------------- ---------------------
No of dealer customers 998 805 +24%
----------------------------------------------- -------------------- -------------------- ---------------------
Financial
Gross Revenue 26.8 13.6 +97%
----------------------------------------------- -------------------- -------------------- ---------------------
Net Interest Income 20.4 11.3 +81%
----------------------------------------------- -------------------- -------------------- ---------------------
Cost of Risk (bps) 74 32 42bps
----------------------------------------------- -------------------- -------------------- ---------------------
Profit/(Loss) before tax
(GBPm) 1.3 (3.7) 5.0
----------------------------------------------- -------------------- -------------------- ---------------------
Net Assets (GBPm) 96.2 86.1 +12%
=============================================== ==================== ==================== =====================
-- Maiden full year profit before tax of GBP1.3m, improving
significantly on prior year loss of GBP3.7m and surpassing
management expectations.
-- Record level of loan origination, totalling over GBP1bn
(2021: GBP690m), supporting a closing loan book of GBP439m (2021:
GBP249m).
-- Net interest margin (NIM) of 6.5% maintained in excess of 6%
target (2021: 6.5%), against a backdrop of rising funding
costs.
-- Stock turn has slowed to c.120 days, however, continued to
run faster than the historical average of 150 days.
-- Continued low number of arrears cases demonstrates underlying
quality and financial strength of dealer obligors, with cost of
risk at 0.74%, well below the through-the-cycle target of 1%.
-- Increased deposits during the year by GBP183m, with over
12.6k savings accounts and GBP480m of deposits at 31 December
2022.
-- Initial GBP175m ENABLE Guarantee agreed by British Business
Bank, which may be increased to GBP350m and would support up to
GBP150m of additional loan book growth on the existing capital
base.
-- Accredited by Best Companies as a 2-star company and an "Outstanding Place to Work".
Q1 Trading and Outlook
-- Loan origination up c.23% on prior year at c. GBP270m (Q1
2022: GBP220m) delivering a c.15% increased loan book to c.GBP505m
with 1,079 dealers (Q1 2022: 858) now being provided with over
GBP900m of facilities (Q1 2022: GBP682m).
-- Stock turn slowed moderately to c.130 days improving loan
book returns, with increased loan repayments also positively
impacting arrears and credit loss provisions.
-- Continuing strong NIM performance in excess of target
expected through 2023, influenced by recent movements in the UK
base rates. The Group expects to revert to its 6% NIM target with
base rate reductions over the medium-term.
-- Achieved unaudited profit for the quarter.
-- Pursued adjacent lending opportunities in receivables
financing (invoice discounting) and wholesale funding, representing
attractive future potential to deepen relationships with
manufacturer and dealer partners.
-- The Group is exploring non-dilutive Tier 2 capital to further
support its product diversification and medium-term growth
strategy.
-- Board expects financial performance for the full year to be
materially ahead of management expectations, targeting a year end
loan book for 2023 in the range of GBP550m-600m, with a continuing
trend of rising loan origination and strong net interest
margin.
Carl D'Ammassa, Chief Executive, commented : "Achieving our
first full year of profitability has been a priority for us since
being authorised as a bank. Our capital and retained earnings will
now support our ambitious growth plans and the strategic
development of the firm.
"We continue to see strong momentum in our core markets and have
started to explore adjacent lending opportunities that will
underpin our efforts to scale the bank further. 2022 has been a
great year for the Group on so many fronts. It's brilliant to hear
our colleagues say that DF Capital is an outstanding place to work
too."
The Group's full Annual Report and Financial Statements have
today been published and are available on its investor website at
www.dfcapital-investors.com .
Annual General Meeting
The Company will hold its Annual General Meeting on 24 May 2023
at the Company's registered office in Manchester. The Notice of AGM
and Form of Proxy will be posted to shareholders in due course and
a copy will be available at www.dfcapital-investors.com .
The person responsible for arranging the release of this
announcement on behalf of the Company is Karen D'Souza (Company
Secretary).
For further information contact:
Distribution Finance Capital Holdings
plc
Carl D'Ammassa - Chief Executive Officer +44 (0) 161 413 3391
Kam Bansil - Head of Investor Relations +44 (0) 7779 229508
http://www.dfcapital-investors.com
Investec Bank plc (Nomad and Broker) +44 (0) 207 597 5970
David Anderson
Bruce Garrow
Harry Hargreaves
Maria Gomez de Olea
Liberum Capital Limited (Joint Broker) +44 (0) 203 100 2000
Chris Clarke
Lauren Kettle
Antonia Brown
Chair's Statement
Dear Shareholder
The momentum the firm demonstrated in 2021 continued at pace
through 2022. The global pandemic and war in Ukraine are continuing
to have an impact on the economy and supply chains worldwide. DF
Capital has navigated these uncertainties well and against this
backdrop it is pleasing to report the Group's maiden full year
profit.
Given the time taken to obtain our bank licence, one of our key
priorities has been to reach profitability. The Group was
bank-ready for some time, so following our authorisation as a bank
we were quickly able to enjoy the full benefits, with access to
retail deposits to support our lending operation. That being said,
to have reached full year profitability within two years of
becoming a bank truly demonstrates the strength of our proposition,
and is a credit to the entire DF Capital team. Hitting this
milestone is one that many new banks aspire to achieve.
An outstanding place to work
In the Board's opinion, modern sustainable businesses are built
on the solid foundation of a positive and inclusive culture across
the firm, where all employees work in a collaborative environment,
where risk management is taken seriously and where customers' needs
are front of everyone's minds. The Board is delighted that DF
Capital has been recognised as an "Outstanding place to work" by
Best Companies, following a survey of our employees. Being
accredited with two stars builds on last year's result and it will
be no surprise that the firm has ranked highly in sector and
regional league tables also.
Board composition
As a Board, ensuring that we have the right skills and
experience to support the Group's ambitions is front of our minds.
I am delighted to welcome Sheryl Lawrence and Nicole Coll to the
Board, with Sheryl becoming Senior Independent Director and Chair
of the Risk Committee, and Nicole becoming our Chair of the Audit
Committee.
I would like to thank Carole Machell, who stood down from the
Board at last year's Annual General Meeting, for her support not
only during my transition to the position of Chair, but also during
her four year tenure as a member of the Board. I am grateful to
Carole for picking up additional responsibilities whilst we planned
Sheryl and Nicole's appointments.
I am confident we have both the breadth and depth of experience
across the Group to support the firm's ambitions to further scale
our franchise, always underpinned by an appropriate and
proportionate corporate governance framework.
A well-capitalised bank
DF Capital is a well-capitalised bank and now with the
additional support from the British Business Bank's ENABLE
Guarantee scheme we have the capacity to grow the Group's lending
further. We remain committed to supporting manufacturers and
dealers with our products and services. During 2023 we intend to
build on the foundation we have laid by pushing into adjacent
markets and exploring other opportunities to use our banking
franchise to lend in markets where we feel we can make strong risk
adjusted returns.
2022 has been another strong year for the firm and I am
delighted with the continued progress the Group is making to
deliver sustainable returns for its shareholders over the medium
term.
Mark Stephens
Independent Non-Executive Chair
Chief Executive Officer's Report
Dear Shareholder
I am delighted to announce our first full year of profitability.
Since receiving our bank licence in September 2020, we have strived
to achieve run-rate profitability in a sustainable, responsible way
as soon as we possibly could. We have diligently stuck to our
business plan and had a cautious eye on good credit risk management
throughout. We can confidently now move forward in the knowledge
that our capital and retained profits will support increased
lending, rather than absorbing trading losses.
2022: significant progress amid continued macroeconomic
uncertainty
It's clear that during our relatively short life as a bank, we
have craved for what we would describe as more normal times,
calibrated against the world as it was pre-pandemic. Obtaining a
banking licence during a global pandemic was not an easy task, but
the economic uncertainty that has unfolded since, whether that's
the tail effects of the pandemic, inflation, the war in Ukraine or
disruption to global supply chains and logistics, has really put
the team and our business model through its paces. I am delighted
with the Group's response, having performed exceptionally well,
demonstrating our agility and speed of action in order to best
navigate what can only be described as an uncertain world.
We have continued to focus on our strategic pillars:
1. delivering growth;
2. putting our customers' needs first; and
3. acting sustainably.
2022 has been an exceptional year for DF Capital. As well as
achieving maiden profitability, we have delivered record levels of
new loan origination, exceeding GBP1bn for the first time; an
increase of 45% on the prior year (2021: GBP690m). The Group's loan
book grew significantly by 76% to GBP439m at 31 December 2022
(2021: GBP249m), clearly demonstrating the strength of our
relationships with dealers and manufacturers.
Throughout the year, we have maintained a highly diversified mix
of assets across our core sectors, achieving double-digit
percentage growth in all sectors. Our commercial lending
(non-leisure assets) comprised 38% of the loan book at the year-end
(December 2021: 37%).
Whilst growth in lending enables our ambitions to deliver
mid-to-high teens returns, ensuring we continue to achieve at least
a 6% net interest margin (NIM) is a critical component of our
returns journey. Despite rising retail deposit rates and given the
fees we charge our lending customers are directly linked to Bank of
England Base Rate, we have effectively balanced pricing and growth
through the year, achieving a consistent 6.5% net interest margin
(2021: 6.5%).
Supporting a record number of dealers and manufacturers
Our strategy in how we will scale the bank remains unchanged. In
our core lending product, we are focused on supporting more
manufacturers and dealers, providing them with increasing aggregate
credit lines and offering the exceptional levels of service that
makes it easy for our borrowers to do business with us. During the
period, we have increased our manufacturer and distributor partners
to 90 (2021: 78) and now provide facilities to almost 1,000 dealers
(2021: 805). Aggregate credit lines hit GBP817m, up 36% on the
prior year (2021: GBP601m) which underpins the growth we have seen
in our loan book.
It is fair to say that across the majority of sectors, dealers
have experienced continued strong demand for their products.
End-user demand in leisure assets (such as motorhomes, caravans,
motorcycles) has remained particularly elevated. As we progressed
through the year we saw a modest slowing of sales that has seen our
average stock turn extend to c.120 days from c.105 days during
2021, still below our normalised historical average of
approximately 150 days. Availability of product, particularly in
the transportation sector, has remained challenging through much of
2022, given continuing issues in China and COVID-19 outbreaks. As
we closed the year, with supply chain logistics normalising there
were significant volumes of light commercial vehicles en-route to
the UK, which we expect to flow through to dealers during 2023.
We entered the specialist car market during the year. Whilst
this remains a relatively small part of our lending activity today,
we have learnt a lot through our early activities that will allow
us to develop our proposition and achieve growth in this sector
during 2023.
Whilst we are undoubtedly pleased with the loan originations and
where our loan book closed the year, we continue to operate in an
environment that is fraught with uncertainties and far from normal.
Working closely with our manufacturer partners and having deep
relationships with our dealer customers allows us to respond
quickly to their needs and navigate these unpredictable times.
Maintaining high levels of service
Putting our customers' needs first and providing them with
exceptional levels of service is critical to our proposition. Our
lending activities are highly digitised coupled with human-touch
relationship management. We are relentless in our focus on
automation and continuous improvement, to allow accessing finance
from us easier for our borrowers. Having explored the benefits of
Robotic Process Automation and Optical Character Recognition, these
are efficiency and digitalisation techniques that we have adopted
and are now very much embedded in the firm. We have invested in
resources to help accelerate implementation of continuous
improvement projects, which in turn we expect to support our
cost-to-income ratio ambitions.
Understanding what delights our customers is important to us. We
measure customer satisfaction across a number of touchpoints and
this important feedback helps define areas for service improvement.
We measure customer satisfaction using Net Promotor Score, and
whilst we are delighted to have received another strong result of
+41 in our most recent survey (2021:+42), we are not complacent. We
recognise that evolving our products and services, whilst making
sure we continue to meet customer expectations in a world where
technology is continually advancing is critical.
Successful retail deposit capability
Now over two years since we launched our maiden savings
products, we are recognised more widely as a quality provider of
retail deposits. We offer well-priced savings products across an
array of tenors, through a digitised savings platform, backed up by
our award-winning in-house customer service team. Given the digital
nature of our retail deposit capability, our platform is
significantly scalable from where we are today. We believe we offer
a uniquely DF Capital experience and that is reflected in our
customer satisfaction scores at 4.7 stars (2021: 4.6) as measured
by feefo.
Having placed significant focus on existing customer retention,
we have built a loyal depositor base. Offering existing customers
attractive priced loyalty products as they reach maturity of their
fixed rate bonds has seen retention rates of over 70%.
We closed the year with GBP480m of deposits (2021: GBP297m). We
continue to leverage best buy tables to alert new customers to our
rates. The retail deposit market has remained buoyant, and we have
found it easy to raise the liquidity to support our lending
activities. We have continued to build a well-diversified range of
product maturity profiles in both the notice and fixed rate
markets.
Growth in core lending
Scaling the bank by growing our lending remains our priority.
The routes to growth in the core lending products are many:
increasing facility utilisation and active dealers; bringing
onboard new dealers; targeting new manufacturers and entering new
sectors.
Having a significant pipeline of potential dealers supports much
of our ambition for growth, that being said, we are operating in an
environment where careful selection of dealers, who meet our credit
criteria is important. We continue to validate and refine pipeline
and new sector opportunities. Our lending capabilities are
transferrable; we see potential to consider new asset classes, have
ambitions to support greener products where our inventory and
distribution finance solutions could provide secured lending
against serialised assets.
Building new product capabilities
We believe entering adjacent markets is a critical component in
the delivery of our medium term returns ambitions. We continue to
explore both organic and inorganic strategic opportunities.
Throughout the year, we have proactively considered business
acquisitions that could accelerate our product development
ambitions, particularly for "lending beyond the forecourt", such as
hire purchase and leasing. The uncertain economic environment and
increasing interest rates to combat inflation has made us more
cautious in our endeavours. We know what a good acquisition or
partnership should look like, the return potential required and
accordingly have set a high bar.
Our efforts in this regard have helped frame an organic or
self-build growth plan. We are clear on what we would need to
invest, in both people and technology, to ensure we could safely
and securely lend to end-users, ultimately supporting our dealers
and manufacturers to sell more products. There remains strong
demand from our existing customers to build a deeper multi-product
relationship with us. Accordingly, the development of a retail
lending product (such as hire purchase or leasing), aligned to the
sectors we support today, feels inevitable, at some point in the
near future, when the economic environment best allows us to
successfully make the necessary investment. We continue to explore
opportunities to partner with other funders to bring our product
development ambitions to life.
As a small bank, we find it beneficial to test new lending
opportunities in a controlled and small-scale way. These
opportunities generally support our own strategic ambitions,
allowing us to leverage our banking licence to lend in areas where
we achieve our risk adjusted returns objectives, whilst building
valuable insight through a "test and learn" approach. We consider
types of wholesale funding (ie. lending to non-bank lenders) as an
attractive opportunity that could underpin any future strategic
partnership in existing or new product types. As a firm we have
many opportunities, often presented to us, to build on our banking
franchise, leverage our ability to raise deposits and put capital
to work, whilst always achieving our target risk adjusted
returns.
Our culture, being an outstanding place to work
At the heart of what we do at DF Capital is our culture. We are
a bank that strives to do the right thing for its customers,
employees, the environment and its communities. We believe this
preoccupation about acting sustainably starts with our employees
and will ultimately define the quality of shareholder returns.
In October 2022, we participated again in the "Best Companies to
Work for" survey. Throughout the year, we have built on the
feedback we received from the December 2021 survey. Over 95% of our
employees provided their feedback this time around (2021: 98%) on
what we do well and where we can make further improvements in how
we do things and what we do. It has, therefore, been a personal
highlight to see the progress we have made in improving employee
satisfaction, being accredited as an Outstanding place to work. Our
employees believe the firm operates with sound values and a
positive culture that allows them to flourish and be at their
best.
The Group now features in the UK's top 5 financial services
firms to work for (2021: 13th); top 15 North West companies to work
for (2021: 48th); and 14th in the UK's top 75 mid-sized companies
to work for (2021: 52nd).
Outlook
We have seen continued momentum in lending during the first
quarter, a critical period for dealers to re-stock. New loan
origination exceeded GBP270m, with the Group's loan book reaching
GBP505m as at 31 March 2023, up 15% since the start of the
year.
Whilst loan origination levels have continued to be very strong,
end-user demand for product has also remained higher than expected,
particularly in the motorhome and caravan sectors. A deeper
contraction in discretionary spend across a number of sectors had
been expected, which in turn would lead to a slowing of stock turn
through the period. Whilst stock turn has now reached c.130 days,
up from 120 days for FY 2022 (FY2021: 105 days), it remains
significantly below seasonal expectations and our historical
average of 150 days, leaving scope for further improvement in this
area. Across the transportation sector, a catch-up of product
delivery at the end of 2022, caused by COVID-19 outbreaks in China,
has seen a mismatch of dealer demand for electric vehicles which
are now physically in the UK against diesel vehicles that remain in
transit. This has slowed loan origination in this sector
specifically, which represents approximately 20% of our loan book,
but is expected to be rebalanced through the balance of the
year.
During the quarter, we have extended our product offering for a
key client relationship, providing receivables financing or better
known as invoice discounting to support their sales activity. We
have also taken the first step to "lend to a lender" or wholesale
funding, which could form the basis of an expected future
partnership with an asset-based lender who provides hire purchase
to businesses. Whilst both lending opportunities remain small in
the context of our entire loan book at c2%, they present attractive
future potential for the Group as we look to build even deeper
relationships with our manufacturer and dealer partners through
adjacent lending opportunities, alongside any organic approach to
product development and/or business acquisition.
Notwithstanding the uncertain economic backdrop, we feel
confident about the year ahead. With the expectation of achieving a
loan book in the range of GBP550m-GBP600m by the close of 2023 and,
in the near-term, net interest margin above our target of 6%,
coupled with better-than-expected loss performance and lower
arrears in light of the faster loan repayment, the Board believes
that full year performance for the financial year ending 31
December 2023 will be materially ahead of management expectations,
building on our outperformance in 2022 and a profitable (unaudited)
first quarter of 2023.
DF Capital operates in very large diversified markets where we
continue to see demand and have opportunities to lend in adjacent
markets and, can develop new products and explore tactical
transactions that play to our strategic ambitions. Collectively
these initiatives underpin our ability to scale the bank. With the
support of the British Business Bank's ENABLE Guarantee, our
existing Tier 1 capital base and our activities to consider
non-dilutive Tier 2 capital, we have the firepower to support our
growth ambitions in 2023.
Carl D'Ammassa
Chief Executive Officer
Chief Financial Officer's Report
Dear Shareholder
We are delighted to report a full year pre-tax profit of GBP1.3m
(2021: Loss GBP3.7m).
Significantly increased gross revenues underpinned by strong
yield
Gross revenues, which are predominantly comprised of interest
and facility fees, increased by 97% to GBP26.8m (2021: GBP13.6m)
and reflects the increase in the average loan book during the
year.
Gross yield in the year increased to 8.2% (2021: 7.9%),
reflecting the impact of increasing Bank of England base rate and
pricing on newly originated loans, benefitting from these base rate
movements.
The average cost of retail deposits during the year increased to
1.90% (2021:1.16%). This increase reflects the significant increase
on new product retail deposit rates during the year driven by the
Bank of England base rate increasing from 0.25% as we entered 2022
to 3.5% by the close of the year. Our deposit book is an array of
fixed rate tenors and therefore the increasing deposit rates will
take time to fully flow through to the deposit book as a whole, as
maturing deposits are replaced.
Net Interest Margin (NIM), which is gross yield less interest
expense, was stable at 6.5% (2021: 6.5%) reflecting our ability to
pass on base rate rises to our dealers as our underlying deposit
interest rates increased. This was ahead of our NIM target of
6%.
Strong arrears and impairments performance
We have continued to intensively manage our loan portfolio and
arrears position. Despite the macro-economic uncertainty, we have
continued to see a low number of arrears cases during the year.
However, the total value of arrears increased to 1.6% of the loan
book at 31 December 2022 (31 December 2021: 0.4%). This arrears
balance includes GBP4.7m of arrears in respect of one obligor who
is in the process of completing a major refinancing of their
balance sheet, after which we expect to be fully repaid. The
arrears excluding this single obligor would have been 0.6%. We are
pleased with the underlying quality and financial strength of our
dealer obligors, many of which came out of the pandemic achieving
record levels of sales and profitability.
As a percentage of average gross receivables, the Group's cost
of risk for the year increased to 0.74% (2021: 0.32%). In 2021, our
cost of risk benefitted from a reduction in the level of COVID-19
overlay in our IFRS9 model given the improving economic conditions
and outlook for the UK economy at that time. During 2022 the Group
has released the remaining COVID-19 provisions and replaced this
with a cost-of-living and associated economic uncertainties model
overlay.
Summarised Statement 2022 2021
of Comprehensive Income GBP'000 GBP'000
Gross revenues 26,842 13,641
----------------------- -----------------------
Interest expense (6,411) (2,338)
----------------------- -----------------------
Net income 20,431 11,303
----------------------- -----------------------
Operating expenses (16,831) (14,507)
----------------------- -----------------------
Impairment charges (2,296) (556)
----------------------- -----------------------
Provisions for commitments
and other liabilities 0 25
----------------------- -----------------------
Profit/ (loss) before
taxation 1,304 (3,735)
----------------------- -----------------------
Taxation 8,457 59
----------------------- -----------------------
Profit/ (loss) after
taxation 9,761 (3,676)
----------------------- -----------------------
Other comprehensive (loss)/income (79) (162)
----------------------- -----------------------
Total comprehensive profit/
(loss) 9,682 (3,838)
----------------------- -----------------------
Arrears (GBP'000)
31-Dec-22 31-Dec-21 31-Dec-20 31-Dec-19
Arrears - principal repayment, fees and interest
1-30
days
past
due 136 105 27 643
------------------------ ------------------------ ------------------------ ------------------------
31-60
days
past
due 1,084 834 22 225
------------------------ ------------------------ ------------------------ ------------------------
61-90
days
past
due 25 0 39 87
------------------------ ------------------------ ------------------------ ------------------------
91 days
+
past
due 5,885 164 132 762
------------------------ ------------------------ ------------------------ ------------------------
7,130 1,103 220 1,717
------------------------ ------------------------ ------------------------ ------------------------
% Loan
book 1.6% 0.4% 0.2% 0.8%
------------------------ ------------------------ ------------------------ ------------------------
Associated principal balance
1-30
days
past
due 2,016 951 96 5,505
------------------------ ------------------------ ------------------------ ------------------------
31-60
days
past
due 1,512 834 7 482
------------------------ ------------------------ ------------------------ ------------------------
61-90
days
past
due 214 0 14 226
------------------------ ------------------------ ------------------------ ------------------------
91 days
+
past
due 16,317 184 259 857
------------------------ ------------------------ ------------------------ ------------------------
20,058 1,970 376 7,070
------------------------ ------------------------ ------------------------ ------------------------
% Loan
book 4.6% 0.8% 0.3% 3.4%
------------------------ ------------------------ ------------------------ ------------------------
The combined stage 1 and 2 impairment allowance at 31 December
2022 as a percentage of gross receivables was 0.46% (2021: 0.52%)
which reflects the improved weighted average risk rating of the
portfolio, the relatively low number of arrears cases and the
estimated impact of the prevailing economic uncertainties on our
customer base. These estimates remain higher than we have seen
during 2022 but we believe align with broader external economic
indicators. The total impairment allowance (comprising stages 1, 2
and 3) at 31 December 2022 as a percentage of gross receivables was
0.84% (2021: 0.69%).
Strong security position
In our core lending product, we provide working capital to UK
based dealers secured against their inventory or stock. Loans are
advanced, in the main, against the wholesale value of an asset. The
value of dealer loans outstanding compared to wholesale value
('loan to value' or 'LTV') at 31 December 2022 was 91% (31 December
2021: 91%). We do not advance funds measured against retail prices,
which typically represent a mark-up of approximately 20% on the
wholesale invoice price. Accordingly, for our security position to
be at risk, and for the Group to incur losses on recovery of an
asset in the event of default there would need to be an average
reduction of c25% in retail prices across the sectors and asset
classes we support.
We often hold additional security, which can mitigate credit
losses further, in the form of personal and/or cross company
guarantees as well as having manufacturer repurchase or
redistribution agreements in place across c65% of our core loan
book (2021: c60%).
Unlocking operational leverage
We have continued to unlock the business' operational leverage
given our highly digitised client facing processes, with ongoing
investment in areas to support growth and scaling of the business,
such as API-connections with dealers, robotic process automation
(RPA) and character-recognition technologies. We believe we are
building further scalability into our operational capabilities and
much of the cost we need to support our near-term loan book targets
is already embedded.
Headcount increased to 117 at December 2022 (December 2021: 93)
reflecting the actions taken to strengthen and widen the reach of
our commercial team in addition to bolstering our risk resources.
We have carefully managed the inflationary pressures impacting our
operating cost base, however, we are mindful of the cost of living
pressures faced by a number of our employees. We, therefore,
implemented two separate salary increases in April and October 2022
across the majority of our employees. Operating expenses increased
by 16% to GBP16.8m (2021: GBP14.5m). This increase in operating
expenses is considerably lower than the relative increase in net
income, meaning our cost to income ratio has reduced significantly
to 82% (2021: 128%). We expect to see further reductions in this
ratio as we scale the business, underpinning the delivery of our
return ambitions.
Recognition of deferred tax asset
The Directors expect profitable growth going forward and
therefore believe it is probable the Group will be able to utilise
the remaining tax losses in DF Capital Bank Limited. On this basis
a deferred tax asset of GBP8.5m has been recognised. This gives a
profit after tax for 2022 of GBP9.8m (2021: Loss GBP3.7m).
Well capitalised balance sheet supports lending ambitions
With equity at the year-end of GBP96.2m (December 2021:
GBP86.1m), this gives us sufficient regulatory capital to support a
loan book in excess of GBP0.5bn.
In January 2023 we agreed an initial GBP175m ENABLE Guarantee
with the British Business Bank, which may also be increased in the
future to GBP350m. This Guarantee commitment provides the Group
with incremental capacity to scale its loan book without the need
for additional Tier 1 equity capital by up to GBP75m on the basis
of the initial GBP175m facility and up to GBP150m if the facility
is increased to GBP350m. The Group continues to explore options to
raise non-dilutive Tier 2 capital to further support its product
diversification and medium-term growth strategy.
Our CET1 ratio at 31 December 2022 was c.22% (31 December 2021
c38%); well above our regulatory capital minimum limits.
Gavin Morris
Chief Financial Officer
Report of the Directors
The Directors present their Annual Report on the affairs of the
Group, together with the consolidated financial statements, company
financial statements and auditor's report, for the year ended 31
December 2022.
Details of significant subsequent events are contained in note
39 to these consolidated financial statements. An indication of
likely future developments in the business of the Group are
included in the Strategic Report section.
Information about the use of financial instruments by the Group
is detailed within note 36 to the consolidated financial
statements.
Principal activity
The principal activity of the Group is as a specialist personal
savings and commercial lending bank group. The Group provides niche
working capital funding solutions to dealers and manufacturers
across the UK, enabled by competitively priced personal savings
products.
Results and dividends
The total comprehensive profit for the year, after taxation,
amounted to GBP9,682,000 (2021: loss GBP3,838,000).
The Directors do not recommend the payment of a dividend (2021:
GBPnil).
Directors'
The Directors who held office during the year and up to the date
of the Directors' report were as follows:
Mark Stephens
Sheryl Lawrence (appointed 16 May 2022)
Nicole Coll (appointed 16 May 2022)
Thomas Grathwohl
Haakon Stenrød
Carl D'Ammassa
Gavin Morris
Carole Machell (resigned 15 June 2022)
Directors' shareholdings
As at 31 December 2022, the Directors held the following
ordinary shares in the Company:
Voting
No. of ordinary rights
Director Position shares (%)
========================= ============================= ================================= =========================
Mark Independent
Stephens Board Chair 62,500 0.03%
Independent
Thomas Non-Executive
Grathwohl Director 533,312 0.30%
Chief
Carl Executive
D'Ammassa Officer 509,591 0.28%
Chief
Gavin Financial
Morris Officer 384,026 0.21%
Significant shareholders
As at 31 December 2022, the following parties held greater than
3% of issued share capital in the Company in accordance with the
requirements of Rule 5 of the Disclosure Guidance and Transparency
Rules:
Voting
rights
No. of ordinary shares (%)
=========================== ======================================================================= =====================
Watrium AS 26,646,093 14.86%
Liontrust
Asset
Management 23,700,305 13.21%
Davidson
Kempner
Capital
Management 17,599,990 9.81%
Lombard
Odier Asset
Management 13,583,408 7.57%
BlackRock
Investment
Management 12,650,000 7.05%
Janus
Henderson
Investors 8,479,379 4.73%
UBS
Securities 7,616,334 4.25%
River &
Mercantile
Asset
Management 7,096,000 3.96%
M&G
Investments 5,500,000 3.07%
Allianz
Global
Investors 5,400,000 3.01%
CRUX Asset
Management 5,391,454 3.01%
Political and charitable donations
The Group made charitable donations of GBP3,569 (2021: GBP6,933)
and no political donations during the year ended 31 December 2022
(2021: GBPnil).
Annual General Meeting
The Company anticipates holding its Annual General Meeting in
May 2023. The Notice of AGM and Form of Proxy will be posted to
shareholders in due course and a copy will be available at
www.dfcapital-investors.com. The AGM will be held at the Company's
registered office in Manchester.
Directors' insurance and indemnities
The Group has maintained Directors and Officers liability
insurance for the benefit of the Group, the Directors, and its
officers. The Directors consider the level of cover appropriate for
the business and will remain in place for the foreseeable
future.
Statement of Going Concern
The Directors have completed a formal assessment of the Group's
financial resources. In making this assessment the Directors have
considered the Group's current available capital and liquidity
resources, the business financial projections and the outcome of
stress testing. Based on this review, the Directors believe that
the Group is well placed to manage its business risks successfully
within the expected economic outlook. See note 1.7 for further
details.
Accordingly, the Directors have a reasonable expectation that
the Group has adequate resources to continue in operational
existence for a period of at least 12 months from the date of
approval of the financial statements. Accordingly, they continue to
adopt the going concern basis in preparing the Annual Report and
Financial Statements.
Corporate Governance
The Corporate Governance Report on pages 59 to 93 contains
information about the Group's corporate governance
arrangements.
Subsequent events
Details relating to significant events occurring between 31
December 2022 and the date of approval of the financial statements
are detailed further within Note 39 of the consolidated financial
statements.
Disclosure of information to the auditor
Each of the persons who is a Director at the date of approval of
this annual report confirms that:
-- so far as the Director is aware, there is no relevant audit
information of which the Company's auditors are unaware; and
-- the Director has taken all the steps that they ought to have
taken as a Director in order to make themself aware of any relevant
audit information and to establish that the Company's auditors are
aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies Act
2006.
Reappointment of auditor
Deloitte LLP have expressed their willingness to continue in
office as auditors and a resolution to reappoint them will be
proposed at the forthcoming Annual General Meeting.
Approved by the Board on 18 April 2023 and signed on its behalf
by:
...............................................
Carl D'Ammassa
Director
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under that
law the Directors have elected to prepare the financial statements
in accordance with United Kingdom adopted International Accounting
Standards. The financial statements also comply with International
Financial Reporting Standards (IFRSs) as issued by the
International Accounting Standards Board (IASB). The directors have
chosen to prepare the parent Company financial statements on the
same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss of the Group for the year.
In preparing these consolidated financial statements and Company
financial statements, the Directors are required to:
-- properly select and apply accounting policies;
-- present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- provide additional disclosures when compliance with the
specific requirements of the financial reporting framework are
insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entity's financial
position and financial performance; and
-- make an assessment of the company's ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group's
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that the
financial statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group and to
prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the
annual financial report
Each of the persons who is a Director at the date of approval of
this report confirms, to the best of their knowledge, that:
-- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company and the undertakings included in the consolidation
taken as a whole;
-- the Strategic Report/Directors' Report includes a fair review
of the development and performance of the business and the position
of the Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face; and
-- the annual report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company's position and
performance, business model and strategy.
Financial Statements
Consolidated Statement of Comprehensive Income
2022 2021
Note GBP'000 GBP'000
============================================== =================== ======================== =======================
Interest and similar income 4 25,407 13,259
Interest and similar expenses 6 (6,411) (2,338)
Net interest income 18,996 10,921
---------------------------------------------- ------------------- ------------------------ -----------------------
Fee income 7 1,348 466
Net losses on disposal of
financial assets
at fair value through other
comprehensive
income 20 (17) (3)
Net gains from derivatives and other financial
instruments
at fair value through profit or loss 99 -
Other operating
income/(expense) 5 (81)
Total operating income 20,431 11,303
---------------------------------------------- ------------------- ------------------------ -----------------------
Staff costs 8 (10,848) (9,121)
Other operating expenses 10 (5,983) (5,386)
Net impairment loss on
financial assets 13 (2,296) (556)
Provisions 12 - 25
Total operating profit/(loss) 1,304 (3,735)
---------------------------------------------- ------------------- ------------------------ -----------------------
Profit/(loss) before taxation 1,304 (3,735)
---------------------------------------------- ------------------- ------------------------ -----------------------
Taxation 15 8,457 59
Profit/(loss) after taxation 9,761 (3,676)
---------------------------------------------- ------------------- ------------------------ -----------------------
Other comprehensive loss:
Items that may subsequently be transferred to the income
statement:
FVOCI debt securities:
Amounts transferred to the
income statement 20 17 3
Fair value movements on debt
securities 20 (96) (165)
Total other comprehensive loss for the year,
net of tax (79) (162)
------------------------------------------------------------------- ------------------------ -----------------------
Total comprehensive
income/(loss) for
the year 9,682 (3,838)
---------------------------------------------- ------------------- ------------------------ -----------------------
Earnings per share: pence pence
Basic EPS 37 5 (2)
Diluted EPS 37 5 (2)
The notes on pages 114 to 180 are an integral part of these
financial statements.
The financial results for all periods are derived entirely from
continuing operations.
Consolidated Statement of Financial Position
As at As at
31 December 31 December
2022 2021
Note GBP'000 GBP'000
========================================= =================== ========================== ==========================
Assets:
Cash and balances at
central banks 107,353 -
Loans and advances to
banks(1) 26 3,848 29,597
Debt securities 20 22,964 108,867
Derivatives held for risk
management 21 57 -
Loans and advances to
customers 19 435,883 247,205
Trade and other
receivables(1) 23 1,524 1,074
Current taxation asset(1) 24 55 59
Deferred taxation asset 25 8,457 -
Property, plant and
equipment 16 1,045 99
Right-of-use assets 17 433 641
Intangible assets 18 877 1,066
Total assets 582,496 388,608
----------------------------------------- ------------------- -------------------------- --------------------------
Liabilities:
Customer deposits 33 479,736 296,856
Derivatives held for risk
management 21 42 -
Fair value adjustments on
hedged liabilities 22 (84) -
Financial liabilities 34 445 554
Trade and other payables 35 6,041 5,067
Provisions 12 77 73
Total liabilities 486,257 302,550
----------------------------------------- ------------------- -------------------------- --------------------------
Equity:
Issued share capital 29 1,793 1,793
Share premium 29 39,273 39,273
Merger relief 29 94,911 94,911
Merger reserve 31 (20,609) (20,609)
Own shares 30 (364) (364)
Retained loss (18,765) (28,946)
Total equity 96,239 86,058
----------------------------------------- ------------------- -------------------------- --------------------------
Total equity and
liabilities 582,496 388,608
----------------------------------------- ------------------- -------------------------- --------------------------
(1) In these consolidated financial statements, the Group
reclassified a number of low value balances within the statement of
financial position for the year ended 31 December 2021. See note
1.4 for details of this reclassification.
The notes on pages 114 to 180 are an integral part of these
consolidated financial statements.
These financial statements were approved by the Board of
Directors and authorised for issue on 18 April 2023. They were
signed on its behalf by:
.................................
Carl D'Ammassa
Director
18 April 2023
Registered number: 11911574
Consolidated Statement of Changes in Equity
Issued
share Share Merger Merger Own Retained
capital premium relief reserve shares loss Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================= ====================== ====================== ====================== ======================== ====================== ======================== =======================
Balance at 1
January
2021 1,066 - 94,911 (20,609) (364) (24,115) 50,889
----------------------------- ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ------------------------ -----------------------
Loss after
taxation - - - - - (3,676) (3,676)
Other
comprehensive
loss - - - - - (162) (162)
Share based
payments - - - - - 362 362
Issue of new
shares 727 39,273 - - - (1,355) 38,645
Balance at 31
December
2021 1,793 39,273 94,911 (20,609) (364) (28,946) 86,058
----------------------------- ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ------------------------ -----------------------
Profit after
taxation - - - - - 9,761 9,761
Other
comprehensive
loss - - - - - (79) (79)
Share based
payments - - - - - 499 499
Balance at 31
December
2022 1,793 39,273 94,911 (20,609) (364) (18,765) 96,239
----------------------------- ---------------------- ---------------------- ---------------------- ------------------------ ---------------------- ------------------------ -----------------------
The notes on pages 114 to 180 are an integral part of these
consolidated financial statements.
Refer to note 29 to 31 for further details on equity movements
during the periods.
Consolidated Cash Flow Statement
2022 2021
Note GBP'000 GBP'000
=================================== ==================== ======================================== ======================================
Cash flows from
operating
activities:
Profit/(loss) before
taxation 1,304 (3,735)
Adjustments for
non-cash items
and other
adjustments
included
in the income
statement 27 4,664 1,446
Increase in
operating assets 27 (193,189) (136,244)
Increase in
operating
liabilities 27 183,809 151,711
Taxation received 24 4 -
Net cash (used
in)/generated
from operating
activities (3,408) 13,178
----------------------------------- -------------------- ---------------------------------------- --------------------------------------
Cash flows from
investing
activities:
Purchase of debt
securities 20 - (350,980)
Proceeds from sale
and maturity
of debt securities 20 85,070 307,958
Interest received on
debt securities 20 746 549
Purchase of
property, plant and
equipment 16,17 (1,041) (253)
Purchase of
intangible assets 18 (193) (586)
Net cash generated
from/(used
in) investing
activities 84,582 (43,312)
----------------------------------- -------------------- ---------------------------------------- --------------------------------------
Cash flows from
financing
activities:
Issue of new shares 29 - 38,645
Repayment of lease
liabilities 32 (141) (147)
Net cash (used
in)/generated
from financing
activities (141) 38,498
----------------------------------- -------------------- ---------------------------------------- --------------------------------------
Net increase in cash
and cash
equivalents 81,033 8,364
Cash and cash
equivalents at
start of the year 29,597 21,233
Cash and cash
equivalents at
end of the year 27 110,630 29,597
----------------------------------- -------------------- ---------------------------------------- --------------------------------------
Notes to the Financial Statements
1. Basis of preparation
1.1 General information
The consolidated financial statements of Distribution Finance
Capital Holdings plc (the "Company" or "DFCH plc") include the
assets, liabilities, and results of its wholly owned subsidiary, DF
Capital Bank Limited (the "Bank"), together form the "Group".
DFCH plc is registered and incorporated in England and Wales
whose company registration number is 11911574. The registered
office is St James' Building, 61-95 Oxford Street, Manchester,
England, M1 6EJ. The Company's ordinary shares are listed on the
Alternative Investment Market ("AIM") of the London Stock
Exchange.
The principal activity of the Company is that of an investment
holding company. The principal activity of the Group is as a
specialist personal savings and commercial lending banking group.
The Group provides niche working capital funding solutions to
dealers and manufacturers across the UK, enabled by competitively
priced personal savings products.
These financial statements are presented in pounds sterling,
which is the currency of the primary economic environment in which
the Group operates, and are rounded to the nearest thousand pounds,
unless stated otherwise.
1.2 Basis of preparation
The Group consolidated financial statements and the Company
financial statements have been prepared and approved by the
Directors in accordance with International Financial Reporting
Standards ("IFRSs") as adopted by the United Kingdom (UK) and
interpretations issued by the IFRS Interpretations Committee (IFRS
IC).
The consolidated and Company financial statements are prepared
on a going concern basis and under the historical cost convention
except for the treatment of certain financial instruments,
including the revaluation of debt securities held at fair value
through other comprehensive income (FVTOCI), and derivative
contracts and other financial assets or liabilities held at fair
value through profit or loss (FVTPL).
By including the Company financial statements, here together
with the Group consolidated financial statements, the Company is
taking advantage of the exemption in Section 408 of the Companies
Act 2006 not to present its individual income statement and related
notes that form a part of these approved financial statements.
1.3 Basis of consolidation
The Group accounts include the results of the Company and its
subsidiary undertakings. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group and are
deconsolidated from the date that control ceases. Accounting
policies of the Company and its subsidiaries are consistent. The
Group 'controls' an entity if it is exposed to, or has rights to,
variable returns from its involvement with the entity and has the
ability to affect those returns through its power over the
entity.
Upon consolidation, all intra-group transactions, balances,
income, and expenses are eliminated within the consolidated
financial statements within this Annual Report and Financial
Statements. The consolidated financial statements contained in this
Annual Report consolidate the statements of total comprehensive
income, statements of financial position, cash flow statements,
statements of changes in equity and related notes for Distribution
Finance Capital Holdings plc and DF Capital Bank Limited, which
together form the "Group", which have been prepared in accordance
with applicable IFRS accounting standards. Accounting policies have
been applied consistently throughout the Group and its
subsidiary.
1.4 Reclassification
Taxation
During the year ended 31 December 2022, the Group recognised a
deferred tax asset given as it is now reasonably probable that
future taxable profits will be available to be utilised against
prior taxable losses. In these consolidated financial statements,
the Group has enhanced the taxation disclosure to present
separately the deferred taxation asset and current taxation asset
on the statement of financial position due to materiality. In the
year ended 31 December 2021, a current taxation asset of GBP59,000
was previously recognised within 'trade and other receivables',
which has been reclassified to form part of the 'current taxation
asset'.
Cash and cash equivalents
During the year ended 31 December 2022, the Group began holding
cash and cash equivalents with central banks, in addition to its
existing cash and cash equivalent balances held with other banking
institutions. These cash balances held with other banks were
previously presented as cash and cash equivalents within the
statement of financial position.
For the year ended 31 December 2021, the Group has reclassified
GBP29,597,000 from 'cash and cash equivalents' to 'loans and
advances to banks'. The cash and cash equivalents amount held
within loans and advances to banks is still reflected in the cash
flow statement and other supporting notes.
1.5 Adoption of new and revised standards and
interpretations
International financial reporting standards issued and adopted
for the first time in the year ended 31 December 2022
There were a number of minor amendments to financial reporting
standards that are effective for the current year. There has been
no material impact on the financial statements of the Group from
the adoption of these financial reporting standard amendments and
interpretations. The Group will comply with these from the stated
effective date:
New Accounting Description Effective Impact on the
Standard of change Date Group
Classification The 01 July 2022 The Group
of liabilities amendments - 30 June presents
as current clarify the 2023. its assets
or non-current requirements and
(IAS 1) for liabilities
classifying in
liabilities order of
as current or liquidity
non-current. in its
More statement
specifically: of financial
position.
The This
amendments amendment
specify that will only
the affect
conditions the
which exist disclosures
at the end of and the Group
the reporting does not
period are expect
those which this
will amendment
be used to to have a
determine if significant
a impact on the
right to annual
defer financial
settlement statements.
of a
liability
exists.
Management
expectations
about
events after
the balance
sheet
date, for
example on
whether
a covenant
will be
breached,
or whether
early
settlement
will take
place, are
not relevant.
The
amendments
clarify the
situations
that are
considered
settlement of
a liability.
---------------------------- --------------------------- ----------------------------
Improvements The IASB 01 July 2022 The
to IFRS issued the - 30 June amendments
(Annual Annual 2023. are not
improvements improvements expected
2016 - 2018) to IFRS to have a
standards significant
2016-2018 impact on the
Cycle. These annual
annual financial
improvements statements.
include
amendments
to the
following
standards.
IFRS 9 - The
amendment
clarifies
that fees
that an
entity
includes
when
assessing
whether the
terms of a
new or
modified
financial
liability are
substantially
different
from the
terms of
the original
financial
liability.
These fees
include only
those
paid or
received
between the
borrower and
the lender,
including
fees paid or
received by
either
the borrower
or lender on
the other's
behalf.
---------------------------- --------------------------- ----------------------------
International financial reporting standards issued but not yet
effective which are applicable to the Group.
Certain amendments to accounting standards and interpretations
that were not effective on 31 December 2022 have not been early
adopted by the Group. The adoption of these amendments are not
expected to have a material impact on the financial statements of
the Group in future periods.
1.6 Principal accounting policies
The principal accounting policies adopted in the preparation of
this financial information are set out below. These policies have
been applied consistently to all the financial periods
presented.
1.7 Going concern
The financial statements are prepared on a going concern basis
as the Directors are satisfied that the Group has adequate
resources to continue operating for a period of at least 12 months
from the date of approval of the financial statements. In making
this assessment the Directors have considered:
-- The Group's financial projections;
-- The Group's current available capital and liquidity resources
and surplus over regulatory and risk appetite requirements;
-- The stress testing and capital and liquidity planning
performed as a part of the ICAAP and ILAAP indicate adequate
capital and liquidity buffers and the ability to effectively manage
stresses and resources. A number of severe and plausible scenarios
were considered as part of the stress testing process including a
combination of severe idiosyncratic and macroeconomic scenarios
which included the potential impact of the cost of living crisis on
our dealers;
-- Recent failures in the banking sector (e.g. Silicon Valley
Bank) and any implications for the Group. This included
consideration of our deposit base which is made up entirely of
retail customers of which 98% are fully covered by the Financial
Services Compensation Scheme ('FSCS'). The liquid assets of the
Group being predominantly either cash held at the Bank of England
or in UK government gilts and treasury bills. The Group's asset and
liability maturity profile;
-- In respect of climate change, the Board recognises the
long-term risks and these are considered as part of the annual
ICAAP.
Based on this review, the Directors believe that the Group is
well placed to manage its business risks successfully within the
expected economic outlook. Accordingly, the Directors have adopted
the going concern basis in preparing the financial statements.
Information on the Group's business strategy, performance and
outlook are detailed in the Chairman's Statement, Chief Executive
Officer's review and Chief Financial Officer's review. The Risk
Overview sections further detail the key risks faced by the Group
and mitigants and provides an overview of the Group's Risk
Management Framework.
1.8 Critical accounting estimates and judgements
In accordance with IFRS, the Directors of the Group are required
to make judgements, estimates and assumptions in certain subjective
areas whilst preparing these financial statements. The application
of these accounting policies may impact the reported amounts of
assets, liabilities, income and expenses and actual results may
differ from these estimates.
Any estimates and underlying assumptions used within the
statutory financial statements are reviewed on an ongoing basis,
with revisions recognised in the period in which they are adjusted,
and any future periods affected.
Further details can be found in note 3 on the critical
accounting estimates and judgements used within these financial
statements.
1.9 Foreign currency translation
The financial statements are expressed in Pound Sterling, which
is the functional and presentational currency of the Group.
Transactions in foreign currencies are translated to the Group's
functional currency at the foreign exchange rate ruling at the date
of the transaction. Monetary assets and liabilities denominated in
foreign currencies at the reporting date are retranslated to the
functional currency at the foreign exchange rate ruling at that
date. Non-monetary assets and liabilities that are measured in
terms of historical cost in a foreign currency are translated using
the exchange rate at the date of the transaction. Foreign exchange
differences arising on translation are recognised in the statement
of income.
2. Summary of significant accounting policies
2.1 Revenue recognition
Net interest income
Interest income and expense for all financial instruments except
for those classified as held for trading or measured or designated
as at fair value through profit and loss ("FVTPL") are recognised
in "Net interest income" as "Interest income" and "Interest
expenses" in the income statement using the effective interest
method.
The effective interest rate ("EIR") is the rate that exactly
discounts estimated future cash flows of the financial instrument
through the expected life of the financial instrument or, where
appropriate, a shorter period, to the net carrying amount of the
financial asset or financial liability. The future cash flows are
estimated taking into account all the contractual terms of the
instrument.
The calculation of the EIR includes all fees and points paid or
received between parties to the contract that are incremental and
directly attributable to the specific lending arrangement,
transaction costs, and all other premiums or discounts.
In calculating the EIR, management have taken into consideration
the behavioural characteristics of the underlying loans in the
lending portfolio which includes evaluating the expected duration
of loans and any additional behavioural fees.
The EIR is adjusted where there is a movement in the reference
interest rate (SONIA, or base rate) affecting portfolios with a
variable interest rate which will impact future cash flows.
The interest income/expense is calculated by applying the EIR to
the gross carrying amount of non-credit impaired financial assets
(that is, to the amortised cost of the financial asset before
adjusting for any expected credit loss allowance), or to the
amortised cost of financial liabilities.
For credit-impaired financial assets, as defined in the
financial instruments accounting policy, the interest income is
calculated by applying the EIR to the amortised cost of the
credit-impaired financial assets (that is, to the gross carrying
amount less the allowance for expected credit losses ("ECLs").
Interest income on debt securities is included in interest and
similar income. Interest on derivatives is included in interest and
similar income or interest and similar expenses charges following
the underlying instrument it is hedging.
Fee income
All fee income relates to fees charged directly to customers
based on their credit facility. These fees do not meet the criteria
for inclusion within interest income. The Group satisfies its
performance obligations as the services are rendered. These fees
are billed in arrears of the period they relate to.
Fee income is recognised in accordance with IFRS 15 which sets
out the principles to follow for revenue recognition which takes
into consideration the nature, amount, timing and uncertainty of
revenue and cash flows resulting from a contract with a customer.
The accounting standard presents a five-step approach to income
recognition to enable the Group to recognise the correct amount of
income in the corresponding period(s):
-- the contract has been approved by the parties to the contract;
-- each party's rights in relation to the goods or services to
be transferred can be identified;
-- the payment terms for the goods or services to be transferred can be identified;
-- the contract has commercial substance; and
-- it is probable that the consideration to which the entity is
entitled to in exchange for the goods or services will be
collected.
All other income is currently recognised under IFRS 9 under the
effective interest rate methodology, however, when new fees are
implemented, they will be assessed as to whether they fall under
IFRS 9 (EIR) or IFRS 15. IFRS 9 and IFRS 15 have been applied
consistently to all the financial periods presented.
Net gains / (losses) from derivatives and other financial
instruments at fair value through profit or loss
Net gains/(losses) from derivatives and other financial
instruments at fair value through profit or loss relate to
non-trading derivatives held for risk management purposes. It
includes all realised and unrealised fair value movements, interest
and foreign exchange differences.
Other income from financial instruments
Debt securities are measured at fair value through other
comprehensive income. The securities are measured at their closing
bid prices at the reporting date with any unrealised gain or loss
recognised through other comprehensive income. Once the assets have
been disposed, the corresponding realised gain or loss is
transferred from other comprehensive income into the income
statement.
Other operating income/(expense)
Other operating income/(expense) predominantly consists of UK
government grant monies (including repayments of previously awarded
monies) and other minor income received by the Group.
2.2 Property, plant and equipment
All property, plant and equipment is stated at historical cost
(or deemed historical cost) less accumulated depreciation, and less
any identified impairment. Cost includes the original purchase
price of the asset and the costs attributable to bringing the asset
to its working condition for its intended use.
Depreciation is provided on all property, plant and equipment at
rates calculated to write each asset down to its estimated residual
value on a straight-line basis at the following annual rates:
Fixtures & fittings 3 years
Computer equipment 3 years
Telephony & communications 3 years
Leasehold improvements 3 years
Motor vehicles 3 years
Right-of-use assets are depreciated over the shorter period of
the lease term and the useful life of the underlying asset. All
current lease agreements have a maximum lease term of 5 years. If a
lease transfers ownership of the underlying asset or the cost of
the right-of-use asset reflects that the Group expects to exercise
a purchase option, the related right-of-use asset is depreciated
over the useful life of the underlying asset.
Useful economic lives and estimated residual values are reviewed
annually and adjusted as appropriate.
The gain or loss arising on the disposal of an asset is
determined as the difference between the sales proceeds less any
costs of disposal and the carrying amount of the asset, which is
recognised in the Income Statement.
2.3 Intangible assets
Computer software
Computer software which has been purchased by the Group from
third party vendors is measured at initial cost less accumulated
amortisation and less any accumulated impairments.
Computer software is estimated to have a useful life of 3 years
with no residual value after the period. These assets are amortised
on a straight-line basis with the useful economic lives and
estimated residual values being reviewed annually and adjusted as
appropriate.
Internally generated intangible assets
Internally generated intangible assets are only recognised by
the Group when the recognition criteria have been met in accordance
with IAS 38: Intangible Assets as follows:
-- expenditure can be reliably measured;
-- the product or process is technically and commercially feasible;
-- future economic benefits are likely to be received;
-- intention and ability to complete the development; and
-- view to either use or sell the asset in the future.
The Group will only recognise an internally generated asset
should it meet all the above criteria. In the event of a
development not meeting the criteria it will be recognised within
the consolidated income statement in the period incurred.
Capitalised costs include all directly attributable costs to the
development of the asset. Internally generated assets are measured
at capitalised cost less accumulated amortisation less accumulated
impairment losses.
The internally generated asset is amortised at the point the
asset is available for use or sale. The asset is amortised on a
straight-line basis over the useful economic life with the
remaining useful economic life and residual value being assessed
annually. The estimated useful economic life of internally
generated assets is 3-5 years with no expected residual
balance.
Any subsequent expenditure on the internally generated asset is
only capitalised if the cost increases the future economic benefits
of the related asset. Otherwise, all additional expenditure should
be recognised through the income statement in the period it
occurs.
2.4 Financial instruments
Initial recognition
Financial assets and financial liabilities are recognised in the
statement of financial position when the Group becomes a party to
the contractual provisions of the instrument.
Financial assets and financial liabilities are initially
measured at fair value. Transaction costs that are directly
attributable to the acquisition or issue of the financial assets
and financial liabilities (other than financial assets and
financial liabilities at FVTPL) are respectively added to or
deducted from the fair value of the financial assets or financial
liabilities, as appropriate, on initial recognition. Transaction
costs that are not directly attributable to the acquisition of
financial assets and financial liabilities at FVTPL are recognised
immediately in the consolidated income statement.
Classification
The Group classifies financial instruments based on the business
model and the contractual cash flow characteristics of the
financial instruments. Under IFRS 9, the Group classifies financial
assets into one of three measurement categories:
-- Amortised cost - assets in a business model whose objective
is to hold financial assets to collect contractual cash flows,
where the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest (SPPI) on the principal amount outstanding. The Group
classifies non-derivative financial liabilities as measured at
amortised cost.
-- Fair value through other comprehensive income (FVOCI) -
assets held in a business model whose objective is to collect
contractual cash flows and sell financial assets where the
contractual terms of the financial assets give rise on specified
dates to cash flows that are SPPI on the principal amount
outstanding. The Group measures debt securities under this
category.
-- Fair value through profit or loss (FVTPL) - assets not
measured at amortised cost or FVOCI. The Group measures derivatives
under this category.
The Group has no non-derivative financial assets or liabilities
classified as held for trading.
The Group reassesses its business models each reporting
period.
The Group classifies certain financial instruments as equity
where they meet the following conditions:
-- the financial instrument includes no contractual obligation
to deliver cash or another financial asset on potentially
unfavourable conditions;
-- the financial instrument is a non-derivative that includes no
contractual obligation for the issuer to deliver a variable number
of its own equity instruments; or
-- the financial instrument is a derivative that will be settled
only by the issuer exchanging a fixed amount of cash or another
financial asset for a fixed number of its own equity
instruments.
Financial assets - measurement
I. Financial assets measured at amortised cost
These are initially measured at fair value plus transaction
costs that are directly attributable to the financial asset.
Subsequently, these are measured at amortised cost using the EIR
method. The amortised cost is the amount advanced less principal
repayments, plus or minus the cumulative amortisation using the EIR
method of any difference between the amount advanced and the
maturity amount, less impairment provisions for expected losses.
The losses arising from impairment are recognised in the income
statement and disclosed with any other similar losses within the
line item "Net impairment loss on financial assets".
Financial assets measured at amortised cost mainly comprise
loans and advances to customers, loans and advances to banks, and
other receivables.
II. Fair value through other comprehensive income (FVTOCI)
These are initially measured at fair value plus transaction
costs that are directly attributable to the financial asset.
Subsequently, they are measured at fair value based on current,
quoted bid prices in active markets for identical assets that the
Group can access at the reporting date. Where there is no active
market, or the debt securities are unlisted, the fair values are
based on valuation techniques including discounted cash flow
analysis, with reference to relevant market rates and other
commonly used valuation techniques. Interest income is recognised
in the income statement using the EIR method. Impairment provisions
for expected losses are recognised in the income statement which
does not reduce the carrying amount of the investment security but
is transferred from the FVOCI reserve in equity. Other fair value
movements are recognised in other comprehensive income and
presented in the FVOCI reserve in equity. On disposal, the gain or
loss accumulated in equity is reclassified to the income
statement.
FVTOCI financial assets includes debt securities in the form of
UK Treasury Bills and UK Gilts. These assets are not classified as:
loans and receivables; held-to-maturity investments; or financial
assets at fair value through profit or loss.
Regular purchases and sales of debt securities are recognised on
the trade date at which the Group commits to purchase or sell the
asset.
III. Financial assets at fair value through profit or loss (FVTPL)
These are measured both initially and subsequently at fair value
with movements in fair value recorded in the income statement. Any
costs that are directly attributable to their acquisition are
recognised in profit or loss when incurred. The Group only measures
derivative financial assets under this classification.
Financial assets - Impairment
The Group recognises loss allowances for expected credit losses
("ECLs") on the following financial instruments that are not
measured at FVTPL:
-- Financial assets measured at amortised cost;
-- Debt securities measured at fair value through other comprehensive income; and
-- Loan commitments
IFRS 9 permits entities to apply a 'simplified approach' for
trade receivables, contract assets and lease receivables. The
simplified approach permits entities to recognise lifetime expected
losses on all these assets without the need to identify significant
increases in credit risk. The Group has adopted this simplified
approach for assessing trade and other receivables balances. The
Group confirms these trade and other receivable balances do not
contain a significant financing component.
With the exception of purchased or originated credit impaired
("POCI") financial assets (which are considered separately below),
ECLs are measured through loss allowances calculated on the
following bases.
ECLs are a probability-weighted estimate of the present value of
credit losses. The Group measures ECL on an individual basis, or on
a collective basis for portfolios of loans that share similar
economic risk characteristics. The loss allowance is measured as
the difference between the contractual cash flows and the present
value of the asset's expected cash flows using the asset's original
EIR, regardless of whether it is measured on an individual basis or
a collective basis.
A financial asset that gives rise to credit risk, is referred to
(and analysed in the notes to this financial information) as being
in "Stage 1" provided that since initial recognition (or since the
previous reporting date) there has not been a significant increase
in credit risk, nor has it has become credit impaired.
For a Stage 1 asset, the loss allowance is the "12-month ECL",
that is, the ECL that results from those default events on the
financial instrument that are possible within 12 months from the
reporting date.
A financial asset that gives rise to credit risk is referred to
(and analysed in the notes to this financial information) as being
in "Stage 2" if since initial recognition there has been a
significant increase in credit risk (SICR) but it is not credit
impaired.
For a Stage 2 asset, the loss allowance is the "lifetime ECL",
that is, the ECL that results from all possible default events over
the life of the financial instrument.
A financial asset that gives rise to credit risk is referred to
(and analysed in the notes to this financial information) as being
in "Stage 3" if since initial recognition it has become credit
impaired.
For a Stage 3 asset, the loss allowance is the difference
between the asset's projected exposure at default (EAD) and the
present value of estimated future cash flows discounted at an
applicable EIR. Further, the recognition of interest income is
constrained relative to the amounts that are recognised on Stage 1
and Stage 2 assets, as described in the revenue recognition policy
set out above.
If circumstances change sufficiently at subsequent reporting
dates, an asset is referred to by its newly appropriate Stage and
is re-analysed in the notes to the financial information.
Where an asset is expected to mature in 12 months or less, the
"12-month ECL" and the "lifetime ECL" have the same effective
meaning and accordingly for such assets the calculated loss
allowance will be the same whether such an asset is at Stage 1 or
Stage 2. In order to determine the loss allowance for assets with a
maturity of 12 months or more, and disclose significant increases
in credit risk, the Group nonetheless determines which of its
financial assets are in Stages 1 and 2 at each reporting date.
Significant increase in credit risk - policies and procedures
for identifying Stage 2 assets
Whenever any contractual payment is past due, the Group compares
the risk of a default occurring on the financial instrument as at
the reporting date with the risk of a default occurring on the
financial instrument as at the date of initial recognition in order
to determine whether credit risk has increased significantly.
See note 36 for further details about how the Group assesses
increases in significant credit risk.
Definition of a default
Critical to the determination of significant increases in credit
risk (and to the determination of ECLs) is the definition of
default. Default is a component of the probability of default (PD),
changes in which lead to the identification of a significant
increase in credit risk, and PD is then a factor in the measurement
of ECLs.
The Group's definition of default for this purpose is:
-- A counterparty defaults on a payment due under a loan
agreement and that payment is more than 90 days overdue;
-- The collateral that secures, all or in part, the loan
agreement has been sold or is otherwise not available for sale and
the proceeds have not been paid to the Group; or
-- A counterparty commits an event of default under the terms
and conditions of the loan agreement which leads the lending
company to believe that the borrower's ability to meet its credit
obligations to the Group is in doubt.
The definition of default is similarly critical in the
determination of whether an asset is credit-impaired (as explained
below).
Credit-impaired financial assets - policies and procedures for
identifying Stage 3 assets
A financial asset is credit-impaired when one or more events
that have a detrimental impact on the estimated future cash flows
of the financial asset have occurred. IFRS 9 states that evidence
of credit-impairment includes observable data about the following
events:
-- A counterparty is 90 days past due for one or more of its loan receivables;
-- Significant financial difficulty of the borrower or issuer;
-- A breach of contract such as a default (as defined above) or past due event, or
-- The Group, for economic or contractual reasons relating to
the borrower's financial difficulty, having granted to the borrower
a concession that the Group would not otherwise consider.
The Group assesses whether debt instruments that are financial
assets measured at amortised cost or at FVTOCI are credit-impaired
at each reporting date. When assessing whether there is evidence of
credit-impairment, the Group takes into account both qualitative
and quantitative indicators relating to both the borrower and to
the asset. The information assessed depends on the borrower and the
type of the asset. It may not be possible to identify a single
discrete event - instead, the combined effect of several events may
have caused financial assets to become credit-impaired.
See note 31 for further details about how the Group identifies
credit impaired assets.
Purchased or originated credit-impaired ("POCI") financial
assets
POCI financial assets are treated differently because they are
in Stage 3 from the point of original recognition. It is not in the
nature of the Group's business to purchase financial assets
originated by other lenders, nor has the Group to date originated
any loans or advances to borrowers that it would define as credit
impaired.
Movements back to stages 1 and 2
Exposures will move out of stage 3 to stage 2 when they no
longer meet the criteria for inclusion and have completed a minimum
3-month probation period as set according to the type of lending
and default event circumstances. Movement into stage 1 will only
occur when the SICR criteria are no longer met.
Presentation of allowance for ECL in the statement of financial
position
Loss allowances for ECL are presented in the statement of
financial position as follows:
-- For financial assets measured at amortised cost: as a
deduction from the gross carrying amount of the assets; and
-- For loan commitments: as a provision.
Revisions to estimated cash flows
Where cash flows are significantly different from the original
expectations used to determine EIR, but where this difference does
not arise from a modification of the terms of the financial
instrument, the Group revises its estimates of receipts and adjusts
the gross carrying amount of the financial asset to reflect actual
and revised estimated contractual cash flows. The Group
recalculates the gross carrying amount of the financial asset as
the present value of the estimated future contractual cash flows
discounted at the financial instrument's original EIR.
The adjustment is recognised in the consolidated income
statement as income or expense.
Modification of financial assets
A modification of a financial asset occurs when the contractual
terms governing a financial asset are renegotiated without the
original contract being replaced and derecognised. A modification
is accounted for in the same way as a revision to estimated cash
flows, and in addition;
-- Any fees charged are added to the asset and amortised over
the new expected life of the asset, and
-- The asset is individually assessed to determine whether there
has been a significant increase in credit risk.
Derecognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire, or when
it transfers the financial asset and substantially all the risks
and rewards of ownership of the asset to another entity. If the
Group neither transfers nor retains substantially all the risks and
rewards of ownership and continues to control the transferred
asset, the Group recognises its retained interest in the asset and
an associated liability for amounts it may have to pay. If the
Group retains substantially all the risks and rewards of ownership
of a transferred financial asset, the Group continues to recognise
the financial asset and also recognises a collateralised borrowing
for the proceeds received.
On derecognition of a financial asset in its entirety, the
difference between the asset's carrying amount and the sum of the
consideration received and receivable and the cumulative gain or
loss that had been recognised in other comprehensive income and
accumulated in equity is recognised in the income statement.
On derecognition of a financial asset other than in its entirety
(e.g. when the Group retains an option to repurchase part of a
transferred asset), the Group allocates the previous carrying
amount of the financial asset between the part it continues to
recognise under continuing involvement, and the part it no longer
recognises on the basis of the relative fair values of those parts
on the date of the transfer. The difference between the carrying
amount allocated to the part that is no longer recognised and the
sum of the consideration received for the part no longer recognised
and any cumulative gain or loss allocated to it that had been
recognised in other comprehensive income is recognised in the
consolidated statement of comprehensive income. A cumulative gain
or loss that had been recognised in other comprehensive income is
allocated between the part that continues to be recognised and the
part that is no longer recognised on the basis of the relative fair
values of those parts.
Write-offs
Loans and advances are written off when the Group has no
reasonable expectation of recovering the financial asset; either in
its entirety or a portion of it. This is the case when the Group
determines that the borrower does not have assets or sources of
income that could generate sufficient cash flows to repay the
amounts subject to the write-off. A write-off constitutes a
derecognition event. The Group may apply enforcement activities to
financial assets written off. Recoveries resulting from enforcement
activities will result in impairment gains.
Forward-looking macroeconomic scenarios
ECLs and SICR take into account forecasts of future economic
conditions in addition to current conditions. The Group has
developed a macroeconomic model which adjusts the ECLs calculated
by the credit models to provide probability weighted numbers based
on a number of forward-looking macroeconomic scenarios.
Due to the assumptions and estimates within these
forward-looking macroeconomic scenarios, refer to note 3 for
further details of the Group's approach.
Financial liabilities
A financial liability is a contractual obligation to deliver
cash or another financial asset or to exchange financial assets or
financial liabilities with another entity under conditions that are
potentially unfavourable to the Group or a contract that will or
may be settled in the Group's own equity instruments, or a
derivative contract over own equity that will or may be settled
other than by the exchange of a fixed amount of cash (or another
financial asset) for a fixed number of the Group's own equity
instruments. Gains or losses on financial liabilities are
recognised in the consolidated statement of comprehensive
income.
Financial liabilities and equity
Debt and equity instruments that are issued are classified as
either financial liabilities or as equity in accordance with the
substance of the contractual arrangement.
Equity instruments
The Group classifies capital instruments as financial
liabilities or equity instruments in accordance with the substance
of the contractual terms of the instruments. Where an instrument
contains no obligation on the Group to deliver cash or other
financial assets, or to exchange financial assets or financial
liabilities with another party under conditions that are
potentially unfavourable to the Group, or where the instrument will
or may be settled in the Group's own equity instruments but
includes no obligation to deliver a variable number of the Group's
own equity instruments, then it is treated as an equity instrument.
Accordingly, the Group's share capital are presented as components
of equity and any dividends, interest or other distributions on
capital instruments are also recognised in equity. Any related tax
is accounted for in accordance with IAS 12.
Financial liabilities - measurement
Financial liabilities are classified as either financial
liabilities measured at amortised cost or financial liabilities at
FVTPL.
I. Financial liabilities measured at amortised cost
Financial liabilities at amortised cost are recognised initially
at fair value net of transaction costs incurred. They are
subsequently measured at amortised cost. Any difference between the
fair value and the redemption value is recognised in the income
statement over the period of the borrowings using the EIR
method.
Interest bearing loans and borrowings are measured at amortised
cost using the effective interest rate method. Gains and losses are
recognised in the income statement when the liabilities are
derecognised as well as through the effective interest rate method
(EIR) amortisation process. Amortised cost is calculated by taking
into account any discount or premium on acquisition and fees or
costs that are an integral part of the EIR. The EIR amortisation is
included in "Interest and similar expenses" in the Income
Statement.
II. Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss may
include financial liabilities held for trading. Financial
liabilities are classified as held for trading if they are acquired
for the purpose of selling in the near term.
During the periods presented the Group has held no financial
liabilities for trading, nor designated any financial liabilities
upon initial rec ognition as at fair value through profit or
loss.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or they
expire.
Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other
than deferred tax assets, are reviewed at each reporting date to
determine whether there is any indication of impairment. If any
such indication exists, then the asset's recoverable amount is
estimated. The recoverable amount of an asset or cash-generating
unit is the greater of its value in use and its fair value less
costs to sell. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset. For the
purposes of impairment testing, assets that cannot be tested
individually are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets
('the cash-generating unit').
An impairment loss is recognised if the carrying amount of an
asset or its cash-generating unit ("CGU") exceeds its estimated
recoverable amount. Impairment losses are recognised in the income
statement. Impairment losses recognised in respect of CGUs are
allocated to reduce the carrying amounts of assets in the unit (or
group of units) on a pro rata basis.
An impairment loss is reversed if and only if the reasons for
the impairment have ceased to apply.
Impairment losses recognised in prior periods are assessed at
each reporting date for any indication that the loss has decreased
or no longer exists. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the
carrying amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had been
recognised.
2.5 Derivative financial instruments
The Group uses derivative financial instruments (interest rate
swaps) to manage its exposure to interest rate risk. In accordance
with the Group Treasury Policy, the Group does not hold or issue
derivative financial instruments for proprietary trading.
Derivative financial instruments are recognised at their fair
value with changes in their fair value taken to profit or loss.
Fair values are calculated by discounting cash flows at the
prevailing interest rates. All derivatives are classified as assets
when their fair value is positive and as liabilities when their
fair value is negative. If a derivative is cancelled, it is
derecognised from the Consolidated Statement of Financial Position.
A derivative is presented as a non-current asset or a non-current
liability if the remaining maturity of the instrument is more than
12 months and it is not due to be realised or settled within 12
months. Other derivatives are presented as current assets or
current liabilities.
2.6 Hedge accounting
Due to the simplistic nature of the Group's hedging activities,
the Group has adopted to apply IFRS 9 for portfolio assets and
liabilities being hedged by applying fair value hedge
accounting.
The Group designates certain derivatives held for risk
management as hedging instruments in qualifying hedging
relationships. On initial designation of the hedge, the Group
formally documents the relationship between the hedging instruments
and hedged items, including the risk management objective, the
strategy in undertaking the hedge and the method that will be used
to assess the effectiveness of the hedging relationship.
The Group makes an assessment, both at the inception of the
hedge relationship, as well as on an ongoing basis, as to whether
the hedging instruments are expected to be highly effective in
offsetting the movements in the fair value of the respective hedged
items during the period for which the hedge is designated.
Where there is an effective hedge relationship for fair value
hedges, the Group recognises the change in fair value of each
hedged item in profit or loss with the cumulative movement in their
value being shown separately in the Consolidated Statement of
Financial Position as fair value adjustments on hedged assets and
liabilities. The fair value changes of both the derivative and the
hedge substantially offset each other to reduce profit
volatility.
The Group discontinues hedge accounting when the derivative
ceases through expiry, when the derivative is cancelled or the
underlying hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge
accounting or is cancelled whilst still effective, the fair value
adjustment relating to the hedged assets or liabilities within the
hedge relationship prior to the derivative becoming ineffective or
being cancelled remains on the Consolidated Statement of Financial
Position and is amortised over the remaining life of the hedged
assets or liabilities. The rate of amortisation over the remaining
life is in line with expected income or cost generated from the
hedged assets or liabilities. Each reporting period, the
expectation is compared to actual with an accelerated run-off
applied where the two diverge by more than set parameters.
Fair value hedge accounting for portfolio hedges of interest
rate risk
The Group applies fair value hedge accounting for portfolio
hedges of interest rate risk. As part of its risk management
process, the Group identifies portfolios whose interest rate risk
it wishes to hedge. The portfolios comprise of only liabilities.
The Group analyses each portfolio into repricing time periods based
on expected repricing dates, by scheduling cash flows into the
periods in which they are expected to occur. Using this analysis,
the Group designates as the hedged item an amount of the
liabilities from each portfolio that it wishes to hedge.
The amount to hedge is determined based on a movement in the
present value of the Group's balance sheet under a 200-basis point
shift in the yield curve being used to value the instruments to
ensure the mismatches in expected repricing buckets are within the
limits set by the Board on the sensitivity analysis approach using
a hypothetical shift in interest rates.
The Group measures monthly the movements in fair value of the
portfolio relating to the interest rate risk that is being hedged.
Provided that the hedge has been highly effective, the Group
recognises the change in fair value of each hedged item in the
income statement with the cumulative movement in their value being
shown on the statement of financial position as a separate item,
'Fair value adjustment for portfolio hedged risk', either within
assets or liabilities as appropriate.
The Group measures the fair value of each hedging instrument
monthly. The value is included in derivatives held for risk
management in either assets or liabilities as appropriate, with the
change in value recorded in net gains from derivatives and other
financial instruments at fair value through profit or loss in the
income statement. Any hedge ineffectiveness is recognised in net
gains/(losses) from derivatives and other financial instruments at
fair value through profit or loss in the income statement as the
difference between the change in fair value of the hedged item and
the change in fair value of the hedging instrument.
2.7 Current and deferred income tax
Income tax on the result for the period comprises current and
deferred income tax. Income tax is recognised in the statement of
comprehensive income except to the extent that it relates to items
recognised directly in equity, in which case it is recognised in
equity.
Current tax is the expected tax payable or receivable on the
taxable income for the period, using tax rates enacted or
substantively enacted at the reporting date, and any adjustment to
tax payable in respect of previous periods.
Deferred tax is provided using the balance sheet liability
method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. The amount of deferred
tax provided is based on the expected manner of realisation or
settlement of the carrying amount of assets and liabilities, using
tax rates enacted or substantively enacted at the reporting date.
Deferred tax assets are recognised to the extent it is probable
that taxable profits will be available against which the deductible
temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered. Deferred tax assets and
liabilities are offset when there is a legally enforceable right to
set off current tax assets against current tax liabilities and when
they relate to income taxes levied by the same taxation authority
and the Group intends to settle its current tax assets and
liabilities on a net basis.
Deferred tax liabilities are recognised for all taxable
temporary differences.
The Company and its UK subsidiaries are in the same VAT
group.
2.8 Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash
equivalents comprise cash and non-mandatory deposits held with
central banks, mandatory deposits held with central banks in demand
accounts and amounts due from banks with an original maturity of
less than three months that are available to finance the Group's
day-to-day operations.
2.9 Employee benefits - pension costs
A defined contribution plan is a post-employment benefit plan
under which the Group pays fixed contributions into a separate
entity and will have a legal or constructive obligation to pay
further amounts. Contributions to defined contribution schemes are
charged to the statement of comprehensive income as they become
payable in accordance with the rules of the scheme. Differences
between contributions payable in the year and contributions
actually paid are shown as either accruals or prepayments in the
statement of financial position.
2.10 Share based payments
The Group has a number of long-term incentive share schemes for
all employees, including some Directors, whereby they have been
granted equity-settled share-based payments in the Group. The share
schemes all have vesting conditions with some schemes for senior
management being subject to specific performance conditions. All
share schemes are equity settled share-based payments.
The fair value of equity settled share-based payment awards are
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). Fair value is measured by use of the Black-Scholes
option pricing model. The variables used in the model are adjusted,
based on management's best estimate, for the effects of
non-transferability, exercise restrictions and behavioural
considerations.
The share-based payments are recognised as staff costs in the
income statement and expensed on a straight-line basis over the
vesting period, based on estimates of the number of shares which
may eventually vest. The amount recognised as an expense is
adjusted to reflect differences between expected and actual
outcomes, such that the amount ultimately recognised as an expense
is based on the number of awards that meet the related service and
specific performance conditions at the vesting date. The change in
estimations, if any, is recognised in the income statement at the
time of the change with a corresponding adjustment in equity
through the retained earnings account.
See note 9 for further details on the share schemes.
2.11 Leasing
The Group presently is only a lessee with lease agreements with
third-party suppliers. It does not hold any lessor contracts with
customers.
IFRS 16 distinguishes leases and service contracts on the basis
of whether an identified asset is controlled by a customer for
which these are deemed as right-of-use assets. The lessee is
required to recognise a right-of-use asset representing the Group
right of use and control over the leased asset. Furthermore, the
Group is required to recognise a lease liability representing its
obligation to make lease payments over the relevant term of the
lease. The Group will recognise both interest expense and
depreciation charges, which equate to the finance costs of the
leases.
Furthermore, the classification of cash flows will also be
affected because operating lease payments under IAS 17 are
presented as operating cash flows; whereas under the IFRS 16 model,
the lease payments will be split into a principal and an interest
portion which will be presented as financing and operating cash
flows respectively.
Lease liability
The lease liability is initially measured at the present value
of the lease payments that are not paid at that date. The Group
assesses on a lease-by-lease payments the contractual terms of the
lease and likelihood of the Group enacting on available extension
and break clauses within the lease in order to determine the
expected applicable term of the lease. Once determined, the Group
analyses the expected future payments of the lease over this
applicable term, which are discounted. The interest rate used to
discount the cashflows is the interest rate implicit to the lease
agreement. Where this is not available, the Group has applied their
incremental borrowing rate. The incremental borrowing rate is the
rate of interest that the Group would have to pay to borrow, over a
similar term and with a similar security, the funds necessary to
obtain an asset of a similar value to the right-of-use asset in a
similar economic environment.
Subsequently, the lease liability is adjusted for interest and
lease payments, as well as the impact of lease modifications,
amongst other variables. The interest expense of the lease
liability is calculated under the effective interest rate where the
interest expense equates to the lease payments over the remaining
term.
Right-of-use asset
The right-of-use asset is initially measured at cost and
subsequently measured at cost (subject to certain exceptions) less
accumulated depreciation and impairment losses, adjusted for any
remeasurement of the lease liability.
The cost at initial recognition is calculated as the initial
lease liability plus initial direct costs, expected restoration
costs and remaining prepayment balances at the commencement
date.
The right-of-use asset is subsequently measured at cost, less
accumulated depreciation, and any accumulated impairment losses.
Any remeasurement of the lease liability results in a corresponding
adjustment to the right-of-use asset.
The Company calculates depreciation of the right-of-use asset in
accordance with IAS 16 'Property, Plant and Equipment' and is
consistent with the depreciation methodology applied to other
similar assets. All leases are depreciated on a straight-line basis
over the shorter of the lease term and the useful life of the
right-of-use asset.
Restoration costs will be estimated at initial application and
added to the right-of-use asset and a corresponding provision
raised in accordance with IAS 37 'Provisions, contingent
liabilities, and contingent assets. Any subsequent change in the
measurement of the restoration provision, due to a revised
estimation of expected restoration costs, is accounted for as an
adjustment of the right-of-use asset.
Short-term leases and leases of low value assets
The Group leases some smaller asset classes, such as computer
hardware, which either has a value under GBP5,000 per annum or has
a lease period of 12 months or shorter. For such leases, the Group
has elected under IFRS 16 rules to treat these as operating leases
and hold off-balance sheet. These leases are charged to the income
statement on a straight-line basis over the lease term.
2.12 Provisions for commitments and other liabilities
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle that
obligation and a reliable estimate can be made of the amount of the
obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the
reporting date, taking into account the risks and uncertainties
surrounding the obligation. Where a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows (discounted at the
Company's weighted average cost of capital when the effect of the
time value of money is material).
When some or all of the economic benefits required to settle a
provision are expected to be recovered from a third party, a
receivable is recognised as an asset only if it is virtually
certain that reimbursement will be received, and the amount of the
receivable can be measured reliably.
2.13 Operating segments
IFRS 8 Operating segments requires particular classes of
entities (essentially those with publicly traded securities) to
disclose information about their operating segments, products and
services, the geographical areas in which they operate, and their
major customers. Information is based on the Group's internal
management reports, both in the identification of operating
segments and measurement of disclosed segment information.
The Group's products and the markets to which they are offered
are so similar in nature that they are reported as one class of
business. All customers are currently UK-based only. As a result,
the chief operating decision maker uses only one segment to control
resources and assess the performance of the entity, while deciding
the strategic direction of the Group.
However, in accordance with IFRS 8, the Group will continue to
monitor its activities to ensure any further reportable segments
are identified and the appropriate reporting and disclosures are
made.
2.14 Earnings per share
In accordance with IAS 33, the Group will present on the face of
the statement of comprehensive income basic and diluted EPS
for:
- Profit or loss from continuing operations attributable to the
ordinary equity holders of the Company; and
- Profit or loss attributable to the ordinary equity holders of
the Company for the period for each class of ordinary shares that
has a different right to share in profit for the period.
Basic EPS is calculated by dividing profit or loss attributable
to ordinary equity holders of the Company by the weighted average
number of ordinary shares outstanding during the period.
Diluted EPS is calculated by adjusting the earnings and number
of shares for the effects of dilutive options and other dilutive
potential ordinary shares.
2.15 Merger relief
Merger relief is relief granted under the Companies Act 2006
section 612 which removes the requirement for the Company to
recognise the premium on issued shares to acquire another company
within the share premium account. Merger relief is recognised where
all the following criteria are satisfied:
-- The Company secures at least a 90% equity holding of all
share classes in another company as part of the arrangement;
and
-- The Company provides either of the following as consideration
for the allotment of shares in the acquired company:
o Issue or transfer of equity shares in the Company in exchange
for equity shares in the acquired company; or
o The cancellation of any such shares in the acquired company
that the Company does not already hold.
2.16 Merger accounting
Business combination and merger accounting
IFRS 3 Business Combinations prescribes the accounting treatment
for business combinations, however, the change in control and
ownership of a company under common control is outside the scope of
IFRS 3 Business Combinations. In the absence of appropriate IFRS,
the Directors sought other applicable accounting standards, and
elected to apply FRS 102 in the form of Merger Accounting which
provides accounting guidance for transactions of this nature.
The principles of merger accounting are as follows:
-- Assets and liabilities of the acquired entity are stated at
predecessor carrying values. Fair value measurement is not
required;
-- No new goodwill arises in merger accounting; and
-- Any difference between the consideration given and the
aggregate book value of the assets and liabilities of the acquired
entity at the date of transaction is included in equity in retained
earnings or in a separate "Merger Reserve" account.
By way of using the merger accounting methodology for preparing
these consolidated financial statements, comparative information
will be prepared as if the Group had existed and been formed in
prior periods. The Directors agree this will enable informative
comparatives to users given the underlying activities and
management structure of the Group remain largely unchanged
following the formation of the Group.
Merger reserve
Where merger accounting has been applied this prescribes that
any difference between the consideration given and the aggregate
book value of the assets and liabilities of the acquired entity at
the date of transaction is included in equity in retained earnings
or in a separate reserve account. Therefore, on consolidation of
the Group financial statements, the difference between the
consideration paid and the book value of the acquired entity is
recognised as a Merger Reserve, in accordance with relevant
accounting standards relating to businesses under common
control.
2.17 Own Shares
Own equity instruments of the Group which are acquired by it or
by any of its subsidiaries (treasury shares) are deducted from
equity. Consideration paid or received on the purchase, sale,
issue, or cancellation of the Group's own equity instruments is
recognised directly in equity. No gain or loss is recognised in
profit or loss on the purchase, sale, issue, or cancellation of own
equity instruments.
3. Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial information in accordance with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and reported
amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the
basis of making the judgements about carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
i. Expected credit losses loan impairment
Significant increase in credit risk for classification in stage
2
Counterparties are classified into stage 2 where the risk
profile of the borrower profile has significantly increased from
inception of the exposure. This increase in credit risk is
signified by either increases in internal or external credit
ratings, the counterparty becoming over 30 days past due, or
forbearance measures being applied.
In the year ended 31 December 2021, due to the COVID-19
pandemic, the Group granted payment holidays to assist its
customers, whereby in these scenarios this would not be considered
a significant increase in credit risk. In 2022, the Group removed
all concessions to customers as the economic environment improved,
therefore, any extensions or forbearance measures are again
considered a trigger of stage 2 classification.
Definition of default
The Group aligns its definition of default to the regulatory
definition for default in all periods presented. The Group applies
the regulatory guideline of 90+ days in arrears and also uses
internal and external information, along with financial and
non-financial information, available to the Group to determine
whether a default event has either occurred or is perceived to have
occurred.
Should a default event occur the Group applies a probationary
("cooling off") period to Stage 3 counterparties before being
transferred back to either stage 1 or 2. The probationary period is
typically 3 months but is extended up to 12 months for more severe
scenarios. During the probationary period the counterparty must no
longer meet the criteria for Stage 3 inclusion for the entire
applicable period.
Estimates
The Group has made the following estimates in the application of
the accounting policies that have a significant risk of material
adjustment to the carrying amount of assets and liabilities within
the next financial year:
i. Expected credit losses loan impairment
Probability of default ("PD")
The Group predominantly uses external credit ratings and PD
models to estimate the probability of default of counterparties
over the following 12-month period or expected lifetime of the
exposure. These models are further supplemented by an internal
credit rating system to enhance the accuracy of the PD modelling.
Typical of PD modelling, these are derived from lagging indicators
which are primarily derived from historical data rather than
forward looking assumptions, resultantly, the Group uses external
and managerial judgements to estimate how probability of defaults
may change in the future.
In 2021, the Group applied a macro-economic overlay for the
increased uncertainty from the COVID-19 pandemic. The Group
released this overlay in the year ended 31 December 2022 to reflect
the improved economic environment following the successful vaccine
roll-out. In the second half of the year ended 31 December 2022,
the UK began experiencing inflationary pressures and market
instabilities, resultantly, the Group elected to apply a
macro-economic overlay to its PD modelling to reflect this
increased risk, although it has not begun materialising in observed
default rates yet.
A 100% deterioration in PDs (excluding stage 3 exposures, which
are already in default) would result in an additional impairment
charge of GBP1,130,000 at 31 December 2022 (2021: GBP881,000).
Loss given default ("LGD")
The Group uses an internal LGD model to estimate expected losses
on defaulted counterparties based on numerous characteristics of
the counterparty and type of lending. These models have been
developed by using observed historical loss events, identifying
specific drivers of losses, and are regularly tested for accuracy
and updated as necessary.
A 10% reduction in the expected discounted cashflows from the
collateral held by the Group would result in an additional
impairment charge of GBP2,389,000 (2021: GBP618,000).
Forward looking macroeconomic scenarios
The Group has adopted an approach which utilises four
macroeconomic scenarios within its impairment modelling whereby the
Group stresses PD and LGD input variables in accordance with
expected macro-economic and managerial outlooks. The scenario ECL
impairment allowance is weighted based on the expected probability
of the scenario transpiring over the next 12-month period from the
reporting date. These models are sensitive to managerial estimates
over the scenarios and their associated probability weighting.
The following forward-looking macroeconomic scenarios, together
with their probability weighting and key economic variables, were
used in calculating the ECLs used for determining impairment
provisions:
Probability ECL
Weighting ECL Impairment Coverage(1)
Scenario % GBP'000 %
======================== ========================== ====================================== ==========================
31
December
2022
Upside 15% 2,427 0.55%
Base 55% 2,823 0.64%
Downside 25% 5,343 1.20%
Severe
Downside 5% 9,362 2.11%
------------------------ -------------------------- --------------------------------------
Weighted 100% 3,720 0.84%
------------------------ -------------------------- -------------------------------------- --------------------------
31
December
2021
Upside 15% 898 0.36%
Base 60% 1,315 0.52%
Downside 20% 2,753 1.10%
Severe
Downside 5% 4,868 1.94%
------------------------ -------------------------- -------------------------------------- --------------------------
Weighted 100% 1,718 0.68%
------------------------ -------------------------- -------------------------------------- --------------------------
(1) ECL Coverage is calculated by dividing the ECL impairment by
the Exposure at Default (EAD). EAD is typically higher than the
gross loan receivable balance.
The following table details the additional impairment allowance
charge/(credit) should one of the macroeconomic scenarios be
assigned a 100% probability weighting:
2022 2021
Scenario GBP'000 GBP'000
=============================== =============================== =======================================
Upside (1,293) (820)
Base (897) (403)
Downside 1,623 1,035
Severe Downside 5,642 3,150
------------------------------- ------------------------------- ---------------------------------------
ii. Deferred taxation asset
The Group has recognised a deferred tax asset in respect of
future taxable profits for the first time this year. The Board has
recognised the full value of the potential deferred tax asset of
GBP8.5m at December 2022 within the Bank based on the most recently
approved financial forecasts through to December 2026 with the
deferred tax asset forecast to be fully utilised during 2026.
The forecast is inherently sensitive to the assumptions and
estimates which underpin it, including macroeconomic conditions
(such as interest rates, inflation and future tax rates), and is
dependent on the Group's ability to successfully execute its
strategy. As such, the expected utilisation of the deferred tax
asset may vary significantly.
The following sensitivities have been modelled to demonstrate
the impact of changes in assumptions on the recoverability of
deferred tax assets within the Bank:
-- A reduction in the base forecast loan book by 20% each
year.
-- A reduction in the net interest margin in the base forecast
by a factor of 10% each year.
-- An increase in forecast costs of risk by a factor of 50% each
year.
-- A 20% increase above forecast of staff costs and other
operating expenses each year.
In each of the individual sensitivities performed above, the
reduction in profitability means the timing of full recovery of the
deferred tax asset is delayed, but in all cases it is expected to
be fully utilised within 5 years and, therefore, the Board is
comfortable that these sensitivities do not impact the level of
deferred tax asset to be recognised at 31 December 2022.
The Group has an unrealised deferred tax asset of GBP0.7m (2021:
GBP7.3m). This unrecognised deferred tax asset as at December 2022
relates entirely to the prior taxable losses in Distribution
Finance Capital Holdings plc entity.
4. Interest and similar income
2022 2021
GBP'000 GBP'000
============================================== ================================== ==================================
On loans and advances to
customers 24,333 13,296
On loans and advances to banks 1,065 5
On debt securities - measured
at FVOCI 9 (42)
Total interest and similar
income 25,407 13,259
---------------------------------------------- ---------------------------------- ----------------------------------
5. Operating segments
It is the Director's view that the Group's products and the
markets to which they are offered are so similar in nature that
they are reported as one class of business. All customers are
currently UK-based only. As a result, it is considered that the
chief operating decision maker uses only one segment to control
resources and assess the performance of the entity, while deciding
the strategic direction of the Group. For this purpose, the chief
operating decision maker of the Group is the Board of
Directors.
6. Interest and similar expenses
The Group is solely funded by customer deposits and Group
reserves. See note 33 and 34 for further detail of the movements in
customer deposits and financial liabilities during the year.
2022 2021
GBP'000 GBP'000
=============================================== ================================ ===================================
On financial liabilities not at
fair
value through profit or loss:
Customer deposits 6,373 2,338
On financial liabilities at fair
value
through profit or loss:
Net interest expense on
financial instruments
hedging liabilities 38 -
Total interest and similar
expense 6,411 2,338
----------------------------------------------- -------------------------------- -----------------------------------
7. Fee income
2022 2021
GBP'000 GBP'000
===================================== ============================== ===============================
Facility-related fees 1,348 466
Total fee income 1,348 466
------------------------------------- ------------------------------ -------------------------------
8. Staff costs
Analysis of staff costs:
2022 2021
GBP'000 GBP'000
=============================================== ================================== =================================
Wages and salaries 8,651 7,372
Share based payments 499 362
Contractor costs 75 24
Social security costs 1,099 921
Pension costs arising on defined
contribution schemes 524 442
Total staff costs 10,848 9,121
----------------------------------------------- ---------------------------------- ---------------------------------
Contractor costs are recognised within personnel costs where the
work performed would otherwise have been performed by employees.
Contractor costs arising from the performance of other services is
included within other operating expenses.
Average number of persons employed by the Group (including
Directors):
2022 2021
No. No.
======================================= =================================== ==================================
Management 12 11
Finance 7 7
Credit & Risk 19 17
Sales & Marketing* 29 21
Operations* 23 23
Technology 13 11
Total average headcount 103 90
--------------------------------------- ----------------------------------- ----------------------------------
*The Group has reclassified the Client Management team from
Operations to Sales & Marketing due to changes in their
responsibilities and reporting structure at the Group. Client
Management became part of the Commercial function during the year
ended 31 December 2022, as such, prior year comparatives have been
amended to retrospectively apply this reclassification for
consistency. In the years ended 31 December 2022 and 31 December
2021, the Client Management team had average employees of 10 and 7
respectively.
Directors' emoluments:
Long
Employer term
Fees/basic pension Benefits incentive 2022 2021
salary Bonuses contributions in kind schemes total total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=============================== ========================= ====================== ============================ ======================= ======================== ====================== ======================
Executive
Directors:
Carl D'Ammassa 425 356 43 7 - 831 673
Gavin Morris 266 120 26 7 - 419 370
691 476 69 14 - 1,250 1,043
------------------------------- ------------------------- ---------------------- ---------------------------- ----------------------- ------------------------ ---------------------- ----------------------
Non-executive
Directors:
Mark Stephens 150 - - - - 150 150
Thomas Grathwohl 75 - - - - 75 100
Nicole Coll(1) 54 - - - - 54 -
Sheryl
Lawrence(1) 60 - - - - 60 -
Stephen
Greene(2) - - - - - - -
Haakon
Stenrød(2) - - - - - - -
Carole
Machell(3) 45 - - - - 45 100
John Baines(4) - - - - - - 133
384 - - - - 384 483
------------------------------- ------------------------- ---------------------- ---------------------------- ----------------------- ------------------------ ---------------------- ----------------------
Total Director
remuneration 1,075 476 69 14 - 1,634 1,526
------------------------------- ------------------------- ---------------------- ---------------------------- ----------------------- ------------------------ ---------------------- ----------------------
(1) Nicole Coll and Sheryl Lawrence were appointed as
Non-executive Directors on 16 May 2022.
(2) Stephen Greene and Haakon Stenrød hold their position as
Non-Executive Directors by virtue of major shareholders (Arrowgrass
Master Fund Ltd and Watrium AS, respectively) exercising their
rights to appoint Directors under their Relationship Agreements.
They are compensated by these respective shareholders. Stephen
Greene resigned on 17 December 2021.
(3) Carole Machell resigned on 15 June 2022.
(4) John Baines resigned on 19 May 2021.
The pension for the year ended 31 December 2022 to Carl
D'Ammassa and Gavin Morris of GBP43,000 (2021:GBP43,000) and
GBP26,000 (2021:GBP24,000) respectively is the sum of payments made
to these individuals in lieu of Group pension contributions.
Carl D'Ammassa and Gavin Morris have received share options as
part of long-term incentive schemes - further details of these
share option schemes can be found in note 9.
Carl D'Ammassa is the highest paid Director with total
remuneration of GBP831,000 (2021: GBP673,000) in the year ended 31
December 2022. Carl D'Ammassa has been awarded share options of
which none have vested as at 31 December 2022 (2021: nil). Refer to
note 9 for further details of these awards.
9. Share based payments
The Group has the following share options scheme for employees
which have been granted and remain outstanding at 31 December
2022:
Options Charge
No. of outstanding for year
options value ended 31
outstanding 31 December Performance December
31 December 2022 Grant Vesting Exercise conditions Settlement 2022
Plan 2022 GBP'000 dates dates price attached method GBP'000
=========================== =========================== ========================== ===================== ====================== ======================= ========================== ========================= =======================
General
Award 2020 222,500 68 Jun-20 Jun-23 Nil No Equity 16
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
General
Award 2021 160,248 48 Jun-21 Jun-24 Nil No Equity 27
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
General
Award 2022 385,511 23 May-22 May-25 Nil No Equity 23
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Jun-21
Manager Jun-22
CSOP Award 384,298 29 Aug-20 Jun-23 40.5p No Equity 8
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Aug-20
Manager Jun-21
PSP Award 853,334 346 Aug-20 Jun-22 Nil No Equity 19
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
CEO
Recruitment
Award 900,000 282 Jun-20 Jun-23 Nil Yes Equity 95
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Senior
Manager
Award 2020 885,000 198 Jun-20 Jun-23 Nil Yes Equity 142
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Senior
Manager Sep-22
Award 2021 144,370 55 Jun-21 Jun-24 Nil No Equity 36
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Senior
Manager May-22 May-25
Award 2022 1,765,000 111 Sep-22 Sep-25 Nil Yes Equity 111
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Leader &
High
Performer
Award 2022 201,022 12 May-22 May-25 Nil No Equity 12
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Sharesave Jan-22 Jan-22 46.3p
Scheme 1,068,212 10 Aug-22 Aug-25 30p No Equity 10
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
Total 6,969,495 1,182 499
--------------------------- --------------------------- -------------------------- --------------------- ---------------------- ----------------------- -------------------------- ------------------------- -----------------------
All awards are equity-settled, and the shares awarded for all
schemes are Distribution Finance Capital Holdings plc over ordinary
shares of GBP0.01 each of the current share capital of the Company
which are listed on the Alternative Investment Market (AIM). The
awards were granted to employees and Directors within the Group
with the majority of the employees being employed by DF Capital
Bank Limited.
During the year ended 31 December 2022, the movements in share
options granted, forfeited, and exercised were as follows:
Options Options
Options Options Options Options outstanding exercisable
outstanding granted forfeited exercised at end at end
at start during during during of the of the
of year the year the year the year year year
Plan No. No. No. No. No. No.
--------------------------- -------------------------- ------------------------- ------------------------- ------------------------ -------------------------- --------------------------
Year ended 31 December 2022
General
Award 2020 287,500 - (65,000) - 222,500 -
General
Award 2021 216,000 3,000 (58,752) - 160,248 -
General
Award 2022 - 450,000 (64,489) - 385,511 -
Manager CSOP
Award 385,298 - (1,000) - 384,298 -
Manager PSP
Award 853,334 - - - 853,334 853,334
CEO
Recruitment
Award 900,000 - - - 900,000 -
Senior
Manager
Award
2020 885,000 - - - 885,000 -
Senior
Manager
Award
2021 114,370 30,000 - - 144,370 39,370
Senior
Manager
Award
2022 - 1,765,000 - - 1,765,000 -
Leader &
High
Performer
Award 2022 - 220,000 (18,978) - 201,022 -
Sharesave
scheme - 1,693,596 (625,384) - 1,068,212 -
Total 3,641,502 4,161,596 (833,603) - 6,969,495 892,704
--------------------------- -------------------------- ------------------------- ------------------------- ------------------------ -------------------------- --------------------------
Year ended 31 December 2021
General
Award 2020 320,000 - (32,500) - 287,500 -
General
Award 2021 - 240,000 (24,000) - 216,000 -
Manager CSOP
Award 385,298 - - - 385,298 -
Manager PSP
Award 853,334 - - - 853,334 377,481
CEO
Recruitment
Award 900,000 - - - 900,000 -
Senior
Manager
Award
2020 985,000 - (100,000) 885,000 -
Senior
Manager
Award
2021 - 114,370 - 114,370 -
Total 3,443,632 354,370 (156,500) - 3,641,502 377,481
--------------------------- -------------------------- ------------------------- ------------------------- ------------------------ -------------------------- --------------------------
The fair value at grant date is calculated by taking into
consideration any restrictive vesting criteria, including any
market and/or non-market performance conditions. The below table
summarises the share schemes including the weighted average
remaining contractual years and the weighted average fair value at
grant date:
2022 2021
=============================================================================== ===============================================================================
Weighted Weighted Weighted Weighted
Options average average Options average average
outstanding remaining fair outstanding remaining fair
at end contractual value at end contractual value
of the life at grant of the life at grant
Plan year (years) date year (years) date
=========================== ========================== ========================== ======================= ========================== ========================== =======================
General
Award 2020 222,500 0.5 37.50 287,500 1.5 37.50
General
Award 2021 160,248 1.4 61.00 216,000 2.4 61.00
General
Award 2022 385,511 2.4 37.00 - - -
Manager CSOP
Award 384,298 0.4 8.00 385,298 1.4 8.00
Manager PSP
Award 853,334 - 40.50 853,334 0.2 40.50
CEO
Recruitment
Award 900,000 0.5 37.50 900,000 1.5 37.50
Senior
Manager
Award
2020 885,000 0.5 37.50 885,000 1.5 37.50
Senior
Manager
Award
2021 144,370 1.1 60.27 114,370 1.8 61.00
Senior
Manager
Award
2022 1,765,000 2.4 36.12 - - -
Leader &
High
Performer
Award 2022 201,022 2.4 37.00 - - -
Sharesave
Scheme 1,068,212 2.5 44.35 - - -
6,969,495 1.4 38.63 3,641,502 1.3 37.38
--------------------------- -------------------------- -------------------------- ----------------------- -------------------------- -------------------------- -----------------------
The terms of the individual schemes are as follows:
General Award
In the year ended 31 December 2022, nil cost options over
ordinary shares of GBP0.01 each of the current share capital of the
Company were granted to all employees (excluding Directors). These
options vest over a 3-year period and are not subject to specific
performance conditions.
Manager PSP and CSOP Award
As part of a Group reorganisation of its existing share capital
and employee loan agreements in the year ended 31 December 2020,
managers and former managers were awarded share options so that
they were not disadvantaged by this exercise. PSP scheme nil cost
options and Company Share Option Scheme shares ("CSOP") were issued
over ordinary shares of GBP0.01 each of the share capital of the
Company. The CSOP Options have an exercise price per share of 40.5p
equal to the market value of Ordinary Shares as at the time of
grant and the PSP Options are nil cost options. The PSP and CSOP
Options will become exercisable on the same timeline, and in the
same proportions, that the corresponding original Ordinary Shares
would have become freely transferable on the terms on which they
were held. The Options are not subject to the satisfaction of
performance conditions. The fair value of the CSOP was measured at
the grant date using the Black-Scholes model.
No further awards under this scheme were granted in the years
ended 31 December 2022 and 31 December 2021.
CEO Recruitment Award
On his appointment on 9 March 2020, Carl D'Ammassa was granted
900,000 nil cost options by way of a Recruitment Award. In the year
ended 31 December 2021, the Group's Remuneration Committee agreed
that the final performance conditions relating to 400,000 shares
have been satisfied in full and the entire share award shall vest
in June 2023, subject to service conditions being met.
Senior Manager Award
Nil cost options over ordinary shares of GBP0.01 each of the
current share capital of the Company were granted to certain senior
managers. All of these share awards have been granted in line with
our PSP rules and have performance conditions aligned to financial
performance, risk management and cultural objectives.
-- In the year ended 31 December 2022, Senior Managers were
granted additional awards based on either promotion, recruitment
incentives, or performance. Performance conditions are included for
1,090,000 options of the 1,765,000 awards granted, and all awards
vest over a period of 3 years subject to service conditions being
met.
Leader & High Performer Award
In the year ended 31 December 2022, the Group awarded nil cost
options over ordinary shares of GBP0.01 each of the current share
capital of the Company to non-senior managers of the Group. This
scheme does not include performance conditions and vest over a
period of 3 years subject to service conditions being met.
Sharesave Scheme
In the year ended 31 December 2022, the Group introduced a 'Save
As You Earn' scheme ('SAYE' or 'Sharesave Scheme') which is
available to all UK-based employees. This is a HMRC-approved share
scheme, whereby the scheme allows employees to purchase options by
saving a fixed amount of between GBP10 and GBP500 per month over a
period of three years at the end of which the options, subject to
leaver provisions, are usually exercisable. If not exercised, the
amount saved is returned to the employee. During the year ended 31
December 2022, the Group has offered this scheme twice with grant
dates of 1 January 2022 and 1 August 2022. The option price is
calculated using the closing bid-market price of a Distribution
Finance Capital Holdings plc ordinary share over the five dealing
days prior to the Invitation Date and applying a discount of
20%.
Director share awards:
The below table summarises share options which have been awarded
to Directors as part of long-term incentive schemes:
Options Options Options Options
Options granted Options exercised outstanding exercisable
outstanding during forfeited during at end at end
at start the during the of the of the
of year year the year year year year
Plan No. No. No. No. No. No.
--------------------------- -------------------------- ----------------------- ------------------------ ------------------------ -------------------------- --------------------------
Year ended
31 December
2022
Carl
D'Ammassa:
General
Award 2020 5,000 - - - 5,000 -
CEO
Recruitment
Award 900,000 - - - 900,000 -
Senior
Manager
Award
2022 - 400,000 - - 400,000 -
Sharesave
Scheme - 60,000 - - 60,000 -
905,000 460,000 - - 1,365,000 -
Gavin
Morris:
General
Award 2020 5,000 - - - 5,000 -
Manager CSOP
Award 74,074 - - - 74,074 -
Manager PSP
Award 19,733 - - - 19,733 19,733
Senior
Manager
Award
2020 200,000 - - - 200,000 -
Senior
Manager
Award
2022 - 200,000 - - 200,000 -
Sharesave
Scheme - 60,000 - - 60,000 -
298,807 260,000 - - 558,807 19,733
Total
Director
awards 1,203,807 720,000 - - 1,923,807 19,733
--------------------------- -------------------------- ----------------------- ------------------------ ------------------------ -------------------------- --------------------------
Year ended
31 December
2021
Carl
D'Ammassa:
General
Award 2020 5,000 - - - 5,000 -
CEO
Recruitment
Award 900,000 - - - 900,000 -
905,000 - - - 905,000 -
Gavin
Morris:
General
Award 2020 5,000 - - - 5,000 -
Manager CSOP
Award 74,074 - - - 74,074 -
Manager PSP
Award 19,733 - - - 19,733 -
Senior
Manager
Award
2020 200,000 - - - 200,000 -
298,807 - - - 298,807 -
Total
Director
awards 1,203,807 - - - 1,203,807 -
--------------------------- -------------------------- ----------------------- ------------------------ ------------------------ -------------------------- --------------------------
See above section within this note for further details of the
schemes, including the fair value (market price) at grant date.
Performance conditions are attached to the Senior Manager Award
2022 for both Carl D'Ammassa and Gavin Morris. All awards are
subject to service conditions being met over the vesting
period.
10. Other operating expenses
2022 2021
Note GBP'000 GBP'000
============================ ==================== ================================= ================================
Finance costs 11 21 19
Depreciation 16,17 318 259
Amortisation
of
intangible
assets 18 382 314
Loss on
disposal of
fixed
assets 16 - 3
Professional
services
expenses 1,831 1,858
IT-related
expenses 1,862 1,688
Other
operating
expenses 1,569 1,245
Total other
operating
expenses 5,983 5,386
---------------------------- -------------------- --------------------------------- --------------------------------
11. Finance costs
2022 2021
GBP'000 GBP'000
============================================= ====================== ======================
Interest on lease liabilities 21 19
Total finance costs 21 19
--------------------------------------------- ---------------------- ----------------------
12. Provisions
Analysis for movements in other provisions:
Onerous
Leasehold supplier
dilapidations contracts Total
GBP'000 GBP'000 GBP'000
--------------------------- -------------------------------------- ------------------------------ --------------------------------
Year ended
31 December
2022
At start of
year 73 - 73
Additions - - -
Utilisation
of provision - - -
Unused
amounts
reversed - - -
Unwinding of
discount 4 - 4
At end of
year 77 - 77
--------------------------- -------------------------------------- ------------------------------ --------------------------------
Year ended
31 December
2021
At start of
year 58 25 83
Additions 70 - 70
Utilisation
of
provision (29) (16) (45)
Unused
amounts
reversed (29) (9) (38)
Unwinding of
discount 3 - 3
At end of
year 73 - 73
--------------------------- -------------------------------------- ------------------------------ --------------------------------
13. Net impairment loss on financial assets
2022 2021
GBP'000 GBP'000
======================================================= ============================== =============================
Movement in impairment allowance in
the year 2,028 384
Write-offs 268 173
Write-back of amounts written-off - (1)
Total net impairment losses on financial
assets 2,296 556
------------------------------------------------------- ------------------------------ -----------------------------
See note 19 on further analysis of the movement in impairment
allowances on loans and advances to customers.
Analysis of write-offs:
2022 2021
Note GBP'000 GBP'000
=============================== =================== ============================== ================================
Realised losses
on loan
receivables 19 186 98
Realised losses
on trade
receivables 23 19 54
Recovery
transaction
costs 63 39
Bad debt VAT
relief - (18)
Total write-offs 268 173
------------------------------- ------------------- ------------------------------ --------------------------------
14. Profit/(Loss) before taxation
Profit/(Loss) before taxation is stated after charging:
2022 2021
GBP'000 GBP'000
========================================= ==================================== =====================================
Depreciation of property,
plant and
equipment 95 105
Depreciation of
right-of-use assets 223 154
Amortisation of intangible
assets 382 314
Loss on disposal of
property, plant
and equipment - 3
Loss on disposal of
intangible assets - -
Allowance for credit
impaired assets 2,028 384
Staff costs 10,848 9,121
Auditor's remuneration 290 253
13,866 10,334
----------------------------------------- ------------------------------------ -------------------------------------
Analysis of auditor's remuneration:
2022 2021
GBP'000 GBP'000
========================================== =================================== =====================================
Audit services:
Fees payable to the
Company's auditor
for the audit of the
Company's annual
accounts 58 50
Fees payable to the
Company's auditor
for the audit of its
subsidiaries 177 153
Fees paid to the Company's
auditors
relating to prior periods 1 -
Total audit services fees 236 203
------------------------------------------ ----------------------------------- -------------------------------------
Assurance services:
Interim review 54 50
Total assurance services
fees 54 50
------------------------------------------ ----------------------------------- -------------------------------------
Total auditor's
remuneration 290 253
------------------------------------------ ----------------------------------- -------------------------------------
15. Taxation
Analysis of tax charge recognised in the period:
2022 2021
GBP'000 GBP'000
====================================== ======================================== ====================================
Current taxation
charge/(credit):
UK corporation tax on
profit/(loss)
for the current period 586 -
Adjustments in respect
of prior years - -
SME R&D tax relief - (59)
Total taxation
charge/(credit) 586 (59)
Deferred taxation
(credit)/charge:
Current year (9,043) -
Adjustments in respect
of prior years - -
Total deferred taxation
(credit)/charge (9,043) -
Total taxation
(credit)/charge (8,457) (59)
-------------------------------------- ---------------------------------------- ------------------------------------
Reconciliation of profit/(loss) before taxation to total tax
credit recognised:
2022 2021
GBP'000 GBP'000
========================================================= ======================= =======================
Profit/(Loss) on ordinary activities
before taxation 1,304 (3,735)
Taxation on profit/(loss) on ordinary
activities at standard corporation tax
rate of 19% (2021:19%) 248 (710)
Effects of:
Disallowable expenses 118 50
Other short-term timing differences
for which no deferred tax asset has
been recognised 1 50
Current year losses for which no deferred
tax asset has been recognised 219 610
Recognition of deferred taxation asset (9,043) -
Total tax (credit)/charge (8,457) -
--------------------------------------------------------- ----------------------- -----------------------
Current tax on profits reflects UK corporation tax levied at a
rate of 19% for the year ended 31 December 2022 (31 December 2021:
19%) and the banking surcharge levied at a rate of 8% on the
profits of banking companies chargeable to corporation tax after an
allowance of GBP25 million per annum.
Expenses that are not deductible in determining taxable
profits/losses include impairment losses, amortisation of
intangible assets, depreciation of fixed assets, client and staff
entertainment costs, and professional fees which are capital in
nature.
On 17 October 2022, the Chancellor of the Exchequer confirmed
that the UK corporation tax rate will increase to 25% from 1 April
2023. On 17 November 2022 it was confirmed that the previously
enacted reduction in Banking Surcharge to 3%, with an allowance of
GBP100m, would proceed, also from 1 April 2023. These enacted tax
rates have been used to determine the deferred tax balances at 31
December 2022.
A deferred tax asset is only recognised to the extent the Group
finds it probable that the prior taxable losses can be utilised
against future taxable profits. As at 31 December 2022, the Group
has an estimated unrecognised deferred tax asset of GBP0.7m (31
December 2021: GBP7.3m) from prior taxable losses.
In the year ended 31 December 2022, the Group has recognised a
deferred tax asset in respect of future taxable profits. Further
detail on the deferred tax is provided in note 25.
16. Property, plant and equipment
Furniture,
Leasehold Fixtures Computer Telephony Motor
Improvements & Fittings Hardware & Communications Vehicles Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
========================= ======================================= ================================= =============================== ============================================ ============================ ========================
Cost:
As at 1
January
2021 26 137 247 6 - 416
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Additions 10 24 34 - - 68
Disposals
and write
offs (3) (9) (5) - - (17)
As at 31
December
2021 33 152 276 6 - 467
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Additions - - 87 - 954 1,041
Disposals
and write
offs (23) (128) (204) (6) - (361)
As at 31
December
2022 10 24 159 - 954 1,147
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Accumulated depreciation:
As at 1
January
2021 20 99 152 6 - 277
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Charge for
the year 6 34 65 - - 105
Disposals
and write
offs (2) (9) (3) - - (14)
As at 31
December
2021 24 124 214 6 - 368
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Charge for
the year 4 16 59 - 16 95
Disposals
and write
offs (23) (128) (204) (6) - (361)
As at 31
December
2022 5 12 69 - 16 102
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
Carrying
amount:
At 31
December
2021 9 28 62 - - 99
At 31
December
2022 5 12 90 - 938 1,045
------------------------- --------------------------------------- --------------------------------- ------------------------------- -------------------------------------------- ---------------------------- ------------------------
In the year ended 31 December 2022, the Group wrote off fully
depreciated assets of GBP361,000. During the year ended 31 December
2021, the Group wrote off GBP17,000 of assets with a disposal value
of GBP3,000.
17. Right-of-use assets
Buildings
GBP'000
========================================= =================================
Cost:
As at 1 January 2021 407
Additions 789
Disposals and write offs -
Lease modifications (58)
As at 31 December 2021 1,138
----------------------------------------- ---------------------------------
Additions 4
Disposals and write offs -
Lease modifications 11
As at 31 December 2022 1,153
----------------------------------------- ---------------------------------
Accumulated depreciation:
At 1 January 2021 343
Charge for the year 154
Disposals and write offs -
At 31 December 2021 497
----------------------------------------- ---------------------------------
Charge for the year 223
Disposals and write offs -
At 31 December 2022 720
----------------------------------------- ---------------------------------
Carrying amount:
At 31 December 2021 641
At 31 December 2022 433
----------------------------------------- ---------------------------------
During the year ended 31 December 2022, the Group is engaged in
leasing agreements for office premises, motor vehicles and IT
equipment. IT equipment leases are low in value and the Motor
Vehicles are leased for a term of less than 12 months, resultantly,
the Group have opted not to classify these leases as right-of-use
assets.
During the year ended 31 December 2022, a lease modification of
GBP11,000 was recognised due changes in rental payments due to
inflationary price increases and an extension of 1-month for the
Group's London Office, for which the lease agreement terminated on
31 January 2023.
The maturity analysis of lease liabilities is presented in note
32.
Amounts recognised in the income statement:
2022 2021
GBP'000 GBP'000
================================================= ================================ =================================
Depreciation expense on
right-of-use
assets 223 154
Interest expense on lease
liabilities 21 19
Expense relating to short-term
leases 44 -
Expense relating to leases of low
value
assets 6 6
Expenses relating to variable
lease
payments not included in
measurement
of lease liability 90 92
Total amounts recognised in the
income
statement 384 271
------------------------------------------------- -------------------------------- ---------------------------------
Some of the property leases in which the Group is the lessee
contain variable lease payment terms relating to service charges
and insurance costs which are included within the contractual terms
of the lease agreement. The breakdown of the lease payments for
these property leases are as follows:
2022 2021
GBP'000 GBP'000
==================================== =============================== ===============================
Buildings:
Fixed payments 141 147
Variable payments 98 73
Total lease payments 239 220
------------------------------------ ------------------------------- -------------------------------
1 8 . Intangible assets
Computer Software
GBP'000
==================================================== =========================================
Cost:
At 1 January 2021 1,189
---------------------------------------------------- -----------------------------------------
Additions from internal development 280
Additions from separate acquisitions 306
Disposals and write offs -
---------------------------------------------------- -----------------------------------------
At 31 December 2021 1,775
---------------------------------------------------- -----------------------------------------
Additions from internal development 193
Additions from separate acquisitions -
Disposals and write offs (27)
---------------------------------------------------- -----------------------------------------
At 31 December 2022 1,941
---------------------------------------------------- -----------------------------------------
Accumulated amortisation:
At 1 January 2021 395
---------------------------------------------------- -----------------------------------------
Charge for the year 314
Disposals and write offs -
---------------------------------------------------- -----------------------------------------
At 31 December 2021 709
---------------------------------------------------- -----------------------------------------
Charge for the year 382
Disposals and write offs (27)
---------------------------------------------------- -----------------------------------------
At 31 December 2022 1,064
---------------------------------------------------- -----------------------------------------
Carrying amount:
At 31 December 2021 1,066
---------------------------------------------------- -----------------------------------------
At 31 December 2022 877
---------------------------------------------------- -----------------------------------------
In the year ended 31 December 2022, the Group capitalised
GBP172,000 (2021: GBP152,000) of consultancy costs, GBPnil of
third-party purchased software (2021: GBP35,000) and GBP21,000
(2021: GBP93,000) of employee costs in relation to the development
of software platforms aimed at improving the commercial lending
processes, customer journey for commercial clients and development
of retail customer deposits platform. The amortisation period for
these software costs is within a range of 3-5 years following an
individual assessment of the asset's expected life. The Group
performed an impairment review at 31 December 2022 and concluded an
impairment of GBPnil (2021: GBPnil).
In the year ended 31 December 2022, the Group wrote off fully
depreciated intangible assets of GBP27,000 (2021: GBPNil).
19. Loans and advances to customers
2022 2021
GBP'000 GBP'000
========================================= ================================== =======================================
Gross carrying amount 441,284 249,454
Less: impairment allowance (3,720) (1,718)
Less: effective interest
rate adjustment (1,681) (531)
Total loans and advances
to customers 435,883 247,205
----------------------------------------- ---------------------------------- ---------------------------------------
Refer to note 36 for details on the expected maturity analysis
of the gross loans receivable balance.
Refer to note 13 and 36 for further details on the impairment
losses recognised in the periods.
Ageing analysis of gross loan receivables:
2022 2021
GBP'000 GBP'000
=================================== ====================================== =========================================
Not in default:
Not yet past due 422,845 247,974
Past due: 1 - 30
days 136 105
Past due: 31 - 60
days 1,074 834
Past due: 61 - 90
days 25 -
Past due: 90+ days - -
----------------------------------- -------------------------------------- -----------------------------------------
424,080 248,913
Defaulted:
Not yet past due and
past due 1
- 90 days 11,319 377
Past due 90+ days 5,885 164
----------------------------------- -------------------------------------- -----------------------------------------
17,204 541
Total gross loan
receivables 441,284 249,454
----------------------------------- -------------------------------------- -----------------------------------------
Analysis of gross loans and advances to customers:
Stage Stage
Stage 1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
=================================== ======================== ======================== ======================= =======================
As at 1 January 2022 239,327 9,585 542 249,454
----------------------------------- ------------------------ ------------------------ ----------------------- -----------------------
Transfer to Stage 1 6,920 (6,597) (323) -
Transfer to Stage 2 (29,077) 29,081 (4) -
Transfer to Stage 3 (1,731) (16,739) 18,470 -
Net
lending/(repayment) 195,333 (2,007) (1,310) 192,016
Write-offs (16) - (170) (186)
----------------------------------- ------------------------ ------------------------ ----------------------- -----------------------
Total movement in
gross loan
receivables 171,429 3,738 16,663 191,830
As at 31 December
2022 410,756 13,323 17,205 441,284
----------------------------------- ------------------------ ------------------------ ----------------------- -----------------------
Loss allowance
coverage at
31 December 2022 0.47% 0.63% 9.84% 0.84%
Stage Stage Stage
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
=================================== ======================== ======================== ====================== ======================
As at 1 January 2021 103,823 8,726 710 113,259
----------------------------------- ------------------------ ------------------------ ---------------------- ----------------------
Transfer to Stage 1 2,038 (2,038) - -
Transfer to Stage 2 (19,388) 19,388 - -
Transfer to Stage 3 (134) (569) 703 -
Net
lending/(repayment) 152,993 (15,922) (778) 136,293
Write-offs (5) - (93) (98)
----------------------------------- ------------------------ ------------------------ ---------------------- ----------------------
Total movement in
gross loan
receivables 135,504 859 (168) 136,195
As at 31 December
2021 239,327 9,585 542 249,454
----------------------------------- ------------------------ ------------------------ ---------------------- ----------------------
Loss allowance
coverage at 31
December 2021 0.48% 1.62% 77.68% 0.69%
Analysis of impairment losses on loans and advances to
customers:
Stage Stage Stage
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
=================================== ====================== ====================== ====================== ======================
As at 1 January 2022 1,142 155 421 1,718
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Transfer to Stage 1 76 (73) (3) -
Transfer to Stage 2 (146) 146 - -
Transfer to Stage 3 (13) (421) 434 -
Remeasurement of
impairment
allowance (24) 143 1,028 1,147
Net
lending/(repayment) 908 134 (17) 1,025
Write-offs - - (170) (170)
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Total movement in
loss allowance 801 (71) 1,272 2,002
As at 31 December
2022 1,943 84 1,693 3,720
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Stage Stage Stage
1 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
=================================== ====================== ====================== ====================== ======================
As at 1 January 2021 645 49 594 1,288
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Transfer to Stage 1 20 (20) - -
Transfer to Stage 2 (139) 139 - -
Transfer to Stage 3 - (1) 1 -
Remeasurement of
impairment
allowance (13) 93 77 157
Net
lending/(repayment) 629 (105) (175) 349
Write-offs - - (76) (76)
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
Total movement in
loss allowance 497 106 (173) 430
As at 31 December
2021 1,142 155 421 1,718
----------------------------------- ---------------------- ---------------------- ---------------------- ----------------------
20. Debt securities
2022 2021
GBP'000 GBP'000
================================================= ================================ =================================
FVOCI debt securities:
Treasury bills - 53,085
UK government gilts 22,964 55,782
Total FVOCI debt securities 22,964 108,867
------------------------------------------------- -------------------------------- ---------------------------------
Analysis of movements during the year:
At 1 January 108,867 66,601
------------------------------------------------- -------------------------------- ---------------------------------
Purchased debt securities - 350,980
Proceeds from sold or maturing
securities (85,070) (307,955)
Coupons received (746) (549)
Interest income 9 (42)
Realised gains/losses (17) (3)
Unrealised losses (96) (165)
Amounts transferred to the income
statement 17 -
At 31 December 22,964 108,867
------------------------------------------------- -------------------------------- ---------------------------------
Maturity profile of debt
securities:
Within 12 months 22,964 24,602
Over 12 months - 84,265
------------------------------------------------- -------------------------------- ---------------------------------
The securities are valued at fair value through other
comprehensive income ("FVTOCI") using closing bid prices at the
reporting date.
In accordance with IFRS 9, all debt securities were assessed for
impairment and treated as Stage 1 assets in both reporting
periods.
Refer to note 36 for details of the maturity profile of these
securities.
21. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Consolidated
statement of financial position:
Net amount
of financial Cash collateral
assets / (liabilities) paid / (received)
Gross amount presented in not offset
of recognised the Statement in the Statement
financial of Financial of Financial
assets / (liabilities) Position Position Net amount
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- ========================================= ============================================= ===================================== ==============================
31 December
2022
Derivative
assets:
Interest rate
risk
hedging 57 57 (28) 29
Derivative liabilities:
Interest rate
risk
hedging (42) (42) 98 56
In the year ended 31 December 2021, the Group entered into an
International Swaps and Derivatives Association (ISDA) agreement
with a broker to enable the Group to transact in derivative
instruments for managing interest rate risk. However, no swap
agreements were executed until 2022, resultantly, there is no
comparatives presented for the year ended 31 December 2021.
All derivative instruments which have been entered into are
transacted against SONIA.
Derivative assets and liabilities include a variation margin of
GBP70,000 with swap counterparties. Further, the Group holds
GBP500,000 of independent collateral with banks for the swap
facility, which is not included within the above table. See note 26
for the balance of cash collateral held with banks.
The table below profiles the maturity of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Less
Total than More
nominal 3 3 - 12 1 - 5 than 5
amount months months years years
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------- ======================= ====================== ====================== ====================== ======================
31 December
2022
Derivative
assets 70,000 - 30,000 40,000 -
Derivative
liabilities 20,000 5,000 - 15,000 -
90,000 5,000 30,000 55,000 -
--------------------------- ----------------------- ---------------------- ---------------------- ---------------------- ----------------------
The Group has 6 (2021: Nil) derivative contracts with an average
fixed rate of 4.21% (2021: n.a).
22. Hedge Accounting
2022 2021
GBP'000 GBP'000
----------------------------- ========================================= ===============================================
Hedged
liabilities:
Current hedge
relationships (77) -
Swap inception
adjustment (7) -
Fair value
adjustments
on hedged
liabilities (84) -
----------------------------- ----------------------------------------- -----------------------------------------------
As at the year ended 31 December 2022, the Group presently only
hedges liabilities in the form of its customer deposits. The Group
does not hedge its loans and advances to customers given these
assets are expected to reprice within a short time frame. Refer to
note 36 for further details on the Group's interest rate risk
management.
The swap inception adjustment relates to hedge accounting
adjustments arising when hedge accounting commences, primarily on
derivative instruments previously taken out against new retail
deposits.
At present, the Group expects its hedging relationships to be
highly effective as the Group hedges fixed term deposit accounts
for which the fair value movements between the hedged item and
hedging instrument are expected to be highly correlated. Further,
the Group does not anticipate having to rebalance the relationship
once entered into due to the contractual terms of the fixed term
deposits with depositors. In the year ended 31 December 2022, there
has been no cancelled or de-designated hedge relationships due to
failed hedge accounting relationships.
The tables below analyse the Group's portfolio hedge accounting
for fixed rate amounts owed to retail depositors:
2022 2021
================================================= =================================================
Hedged Hedging Hedged Hedging
item instrument item instrument
GBP'000 GBP'000 GBP'000 GBP'000
============================ ====================== ========================= ====================== =========================
Customer
deposits:
Carrying
amount of
hedged
item/nominal
value of
hedging
instrument 90,505 90,000 - -
Cumulative
fair value
adjustments (84) - - -
Fair value
adjustments
for the
period (84) - - -
---------------------------- ---------------------- ------------------------- ---------------------- -------------------------
In the Consolidated Statement of Financial Position, GBP57,000
(2021: GBPnil) of hedging instruments were recognised within
derivative assets; and GBP42,000 (2021: GBPnil) within derivative
liabilities.
23. Trade and other receivables
2022 2021
GBP'000 GBP'000
============================================= =================================== ==================================
Trade receivables 850 355
Impairment allowance (101) (75)
--------------------------------------------- ----------------------------------- ----------------------------------
749 280
Other debtors 273 278
Accrued Income 94 192
Prepayments 408 324
--------------------------------------------- ----------------------------------- ----------------------------------
775 794
Total trade and other
receivables 1,524 1,074
--------------------------------------------- ----------------------------------- ----------------------------------
All trade receivables are due within one year, refer to note 36
for the expected maturity profile.
The trade receivable balances are assessed for expected credit
losses (ECL) under the 'simplified approach', which requires the
Group to assess all balances for lifetime ECLs and is not required
to assess significant increases in credit risk.
Ageing analysis of trade receivables:
2022 2021
GBP'000 GBP'000
========================================== ===================================== ===================================
Not in default:
Not yet past due 563 276
Past due: 1 - 30 days 27 7
Past due: 31 - 60 days 2 1
Past due: 61 - 90 days - -
Past due: 90+ days - -
------------------------------------------ ------------------------------------- -----------------------------------
592 284
Defaulted:
Not yet past due and past
due 1 - 90
days 194 10
Past due 90+ days 64 61
------------------------------------------ ------------------------------------- -----------------------------------
258 71
Total gross trade
receivables 850 355
------------------------------------------ ------------------------------------- -----------------------------------
Analysis of movement of impairment losses on trade
receivables:
2022 2021
GBP'000 GBP'000
========================================== ===================================== ===================================
Balance at 1 January 75 121
------------------------------------------ ------------------------------------- -----------------------------------
Amounts written off (19) (26)
Amounts recovered - -
Change in loss allowance
due to new
trade and other
receivables originated
net of those derecognised
due to settlement 45 (20)
Balance at 31 December 101 75
------------------------------------------ ------------------------------------- -----------------------------------
24. Current taxation asset
2022 2021
GBP'000 GBP'000
======================================= ======================================= ====================================
At 1 January 59 -
(Charge)/credit to
profit and loss account (586) 59
Repayments 4 -
Adjustments in respect
of prior years - -
Utilisation of deferred
taxation asset 586 -
At 31 December 55 59
--------------------------------------- --------------------------------------- ------------------------------------
As detailed in note 1.4 of these consolidated financial
statements, the Group elected to reclassify a taxation asset of
GBP59,000 in the year ended 31 December 2021 from trade and other
receivables into current taxation asset within the statement of
financial position.
Refer to note 25 for further details of the deferred taxation
asset.
25. Deferred taxation asset
Deferred tax assets and liabilities are recognised on temporary
differences between the carrying amounts of assets and liabilities
in the balance sheet and the amounts attributed to such assets and
liabilities for tax purposes. Deferred tax liabilities are
generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent it is probable
that future taxable profits will be available against which
deductible temporary differences can be utilised. Deferred tax is
determined using tax rates and legislation in force at the balance
sheet date and is expected to apply when the deferred tax asset is
realised, or the deferred tax liability is settled.
Refer to note 3 of these consolidated financial statements for
critical accounting judgements in regards to the recognition of a
deferred taxation asset.
The table below shows the movement in net deferred tax
assets:
2022 2021
GBP'000 GBP'000
====================================== ======================================== ====================================
At 1 January - -
Credit/(charge) to
profit and loss
account 8,457 -
Adjustments in respect
of prior years - -
At 31 December 8,457 -
-------------------------------------- ---------------------------------------- ------------------------------------
See below for an analysis of the deferred taxation asset
balance:
2022 2021
GBP'000 GBP'000
======================================= ======================================= ====================================
Losses 8,730 -
Short term timing
differences 8 -
Fixed assets (281) -
Deferred taxation asset 8,457 -
--------------------------------------- --------------------------------------- ------------------------------------
The Group has recognised a deferred tax asset in relation to tax
losses carried forward of GBP35m, short term timing difference of
GBP30,000, and a deferred tax liability in relation to tangible
fixed assets of GBP1.1m.
The Group has an unrecognised deferred tax asset value of
GBP0.7m (2021:GBP7.3m) which is not expected to be utilised for the
foreseeable future.
On 17 October 2022, the Chancellor of the Exchequer confirmed
that the UK corporation tax rate will increase to 25% from 1 April
2023. On 17 November 2022 it was confirmed that the previously
enacted reduction in Banking Surcharge to 3%, with an allowance of
GBP100m, would proceed, also from 1 April 2023. These enacted tax
rates have been used to determine the deferred tax balances at 31
December 2022.
26. Loans and advances to banks
2022 2021
GBP'000 GBP'000
====================================================== ========================== =================================
Included in cash and cash equivalents:
balances with less than three months
to maturity at inception 3,277 29,597
Cash collateral on derivatives placed
with banks 571 -
Total loans and advances to banks 3,848 29,597
------------------------------------------------------ -------------------------- ---------------------------------
As detailed in note 1.4 of these consolidated financial
statements, the Group elected to reclassify cash and cash
equivalents of GBP29,597,000 in the year ended 31 December 2021
from cash and cash equivalents into loans and advances to banks
within the statement of financial position. This change is prompted
by the Group having cash and balances at central banks.
The cash and cash equivalents balances are included in the
consolidated cash flow statement as detailed further in note
27.
In the year ended 31 December 2022, the Group began transacting
in derivative instruments to manage interest rate risk for which
the cash collateral on derivatives placed with banks solely relates
to. The cash collateral on derivatives placed with banks is
recognised on a net basis. Refer to note 21 for further details on
derivative instruments.
27. Notes to the cash flow statement
See below for reconciliation of balances classified as cash and
cash equivalents, which are recognised within the consolidated cash
flow statement:
2022 2021
GBP'000 GBP'000
-------------------------------------------------- --------------------------------- ------------------------------
Cash and balances at central banks 107,353 -
Loans and advances to banks 3,277 29,597
Total cash and cash equivalents 110,630 29,597
-------------------------------------------------- --------------------------------- ------------------------------
Adjustments for non-cash items and other adjustments included in
the income statement:
2022 2021
Note GBP'000 GBP'000
============================ =================== ======================================== ======================================
Depreciation
of property,
plant
and
equipment 16 95 105
Depreciation
of
right-of-use
assets 17 223 154
Loss on
disposal of
property,
plant
and
equipment 16 - 3
Amortisation
of
intangible
assets 18 382 314
Loss on
disposal of
intangible
assets 18 - -
Share based
payments 9 499 362
Impairment
allowances
on
receivables 13 2,296 556
Movement in
other
provisions 12 4 (10)
Interest
income on
debt
securities 20 (9) 42
Finance costs 11 21 19
Unwind of
discount 12 4 3
Interest in
suspense 1,149 (102)
Total
non-cash
items and
other
adjustments 4,664 1,446
---------------------------- ------------------- ---------------------------------------- --------------------------------------
Net change in operating assets:
2022 2021
GBP'000 GBP'000
======================================================= ========================= ===============================
Increase in loans and advances to
customers (190,709) (136,202)
Derivative financial instruments (57) -
Increase in other assets (2,423) (42)
Increase in operating assets (193,189) (136,244)
-------------------------------------------------------- ------------------------- -------------------------------
Net change in operating liabilities:
2022 2021
GBP'000 GBP'000
================================================== ======================= ======================================
Increase in customer deposits 182,879 150,874
Derivative financial instruments 42 -
Fair value adjustments for portfolio
hedged risk (84) -
Increase in other liabilities 972 837
Repayment of financial liabilities - -
Increase in operating liabilities 183,809 151,711
--------------------------------------------------- ----------------------- --------------------------------------
Changes in liabilities arising from financing activities:
The table below details changes in the Group's liabilities
arising from financing activities, including both cash and non-cash
changes. Liabilities arising from financing activities are those
for which cash flows were, or future cash flows will be, classified
in the Group's consolidated cash flow statement as cash flows from
financing activities.
2022 2021
===================================================================== ==============================================================================
Lease liabilities Lease liabilities
(see note (see note
32) Total 32) Total
GBP'000 GBP'000 GBP'000 GBP'000
============================ ===================================== ============================== ===================================== =======================================
At 1 January 504 504 57 57
---------------------------- ------------------------------------- ------------------------------ ------------------------------------- ---------------------------------------
Financing
cash flows:
Interest
payments (141) (141) (147) (147)
Non-cash
movements:
Recognition
of lease
liabilities - - 604 604
Interest
expense on
lease
liabilities 21 21 19 19
Lease
modification 11 11 (29) (29)
At 31
December
2022 395 395 504 504
---------------------------- ------------------------------------- ------------------------------ ------------------------------------- ---------------------------------------
28. Investment in subsidiaries
Class Country
Principal Shareholding of of Registered
Subsidiary Activity % shareholding incorporation Address
========================= ======================== =========================== =========================== ============================ ==========================
St James'
Building,
61-95
DF Capital Oxford St,
Bank Financial Manchester,
Limited Services 100% Ordinary UK M1 6EJ
During the year ended 31 December 2022, there were no changes to
the ownership of subsidiaries of the Group (2021: none).
29. Equity
2022 2021 2022 2021
No. No. GBP'000 GBP'000
=========================== ============================ ============================ ====================== ======================
Authorised:
Ordinary
shares of
1p each 179,369,199 179,369,199 1,793 1,793
Allotted,
issued and
fully paid:
Ordinary
shares of
1p each 179,369,199 179,369,199 1,793 1,793
Analysis of the movements in equity:
No. of Issue Share Share Merger
Date shares Price Capital Premium Relief Total
# GBP GBP'000 GBP'000 GBP'000 GBP'000
========================= ========================= ========================== ==================== ====================== ====================== ====================== ======================
At 1 January 2021 106,641,926 1,066 - 94,911 95,977
==================================================== ========================== ==================== ====================== ====================== ====================== ======================
Issue of
new
shares 22-Feb-21 72,727,273 0.55 727 39,273 - 40,000
At 31 December 2021 179,369,199 1,793 39,273 94,911 135,977
---------------------------------------------------- -------------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
No
movements
in the
year
At 31 December 2022 179,369,199 1,793 39,273 94,911 135,977
---------------------------------------------------- -------------------------- -------------------- ---------------------- ---------------------- ---------------------- ----------------------
30. Own shares
At 31 December 2022 the Group's Employee Benefit Trust held
2,963,283 (2021: 2,963,283) ordinary shares in Distribution Finance
Capital Holdings plc to meet obligations under the Company's share
and share option plans. The shares are stated at cost and their
market value at 31 December 2022 was GBP992,700 (2021:
GBP1,452,009).
2022 2021
GBP'000 GBP'000
At 1
January (364) (364)
Employee
Benefit
Trust - -
At 31
December (364) (364)
31. Merger reserve
There were no movements relating to the merger reserve account
during years ended 31 December 2022 and 31 December 2021.
32. Lease liabilities
2022 2021
GBP'000 GBP'000
At 1 January 504 57
Initial recognition - 604
Interest expense 21 19
Interest payments (141) (147)
Lease modification 11 (29)
At 31 December 395 504
During the year ended 31 December 2022, a lease modification of
GBP11,000 was recognised due changes in rental payments due to
inflationary price increases and an extension of 1-month for the
Group's London Office, for which the lease agreement terminated on
31 January 2023.
The fair value of the Group's lease obligations as at 31
December 2021 is estimated to be GBP394,681 (2021: GBP503,816)
using a 5% discount rate. The 5% discount rate is equivalent to the
Group's incremental borrowing rate which would be incurred for the
financing of a similar asset under similar terms as the lease
arrangement.
The Group does not face a significant liquidity risk with regard
to its lease liabilities. Lease liabilities are monitored within
the Group's treasury function.
All lease obligations are denominated in currency units.
The maturity analysis of lease liabilities is as follows:
2022 2021
GBP'000 GBP'000
Analysed as:
Non-current 145 109
Current 250 395
395 504
Maturity analysis:
Year 1 162 131
Year 2 184 161
Year 3 79 184
Year 4 - 79
Year 5 - -
Onwards - -
425 555
Less: unearned interest (30) (51)
Total lease liabilities 395 504
33. Customer deposits
2022 2021
GBP'000 GBP'000
Retail deposits 479,736 296,856
Total customer deposits 479,736 296,856
Amounts repayable within one
year 364,674 249,930
Amounts repayable after one
year 115,062 46,926
479,736 296,856
Refer to note 36 for the maturity profile of the customer
deposit balances.
34. Financial liabilities
2022 2021
GBP'000 GBP'000
Lease liabilities 395 504
Preference Shares 50 50
Total financial liabilities 445 554
Lease liabilities:
See note 32 for further details on the lease liabilities of the
Group.
Preference shares:
In April 2019, a sole member decision was granted the allocation
of 50,000 non-voting paid up redeemable preference shares of
GBP1.00 each. The preference shares have no attached interest rate,
dividends or return on capital. These preference shares are deemed
as paid in full with the Director undertaking to pay the
consideration of the preference shares by 1 April 2024. The
preference shares have no contractual maturity date but will be
redeemed in the future out of the proceeds of any issue of new
ordinary shares by the Company or when it has available
distributable profits. Given these characteristics the preference
shares are recognised as a non-current liability with no equity
component.
The maturity profile of the financial liabilities are as
follows:
2022 2021
GBP'000 GBP'000
Current liabilities 145 109
Non-current liabilities 300 445
Total financial liabilities 445 554
Reconciliation of movement in financial liabilities:
Preference
shares Lease liabilities Total
GBP'000 GBP'000 GBP'000
Balance at 1
January 2021 50 57 107
Financing cash
flows:
Repayment of
lease
liabilities - (147) (147)
- (147) (147)
Non-cash
movements:
Additions - 604 604
Interest
expense - 19 19
Lease
modifications - (29) (29)
- 594 594
Balance at 31
December 2021 50 504 554
Financing cash
flows:
Repayment of
lease
liabilities - (141) (141)
- (141) (141)
Non-cash
movements:
Interest
expense - 21 21
Lease
modifications - 11 11
- 32 32
Balance at 31
December 2022 50 395 445
35. Trade and other payables
2022 2021
GBP'000 GBP'000
Current liabilities:
Trade payables 218 282
Social security and other taxes 360 275
Other creditors 2,993 2,422
Accruals 2,446 2,032
Total current liabilities 6,017 5,010
Non-current liabilities:
Social security and other taxes 24 57
Total non-current liabilities 24 57
Total trade and other payables 6,041 5,067
36. Financial instruments
The Directors have performed an assessment of the risks
affecting the Group through its use of financial instruments and
believe the principal risks to be: Treasury (covering capital
management, liquidity and interest rate risk); and Credit risk.
This note describes the Group's objectives, policies and
processes for managing the material risks and the methods used to
measure them. The significant accounting policies regarding
financial instruments are disclosed in note 2.
Capital management
The Group manages its capital to ensure that it will be able to
continue as a going concern while providing an adequate return to
shareholders.
The capital structure of the Group consists of financial
liabilities (see note 34) and equity (comprising issued capital,
merger relief, reserves, own shares and retained earnings - see
notes 29 to 31).
As a regulated banking Group, the Group is required by the
Prudential Regulation Authority (PRA) to hold sufficient regulatory
capital. The Group is required by the PRA to conduct an Internal
Capital Adequacy Assessment Process ("ICAAP") to assess the
appropriate amount of regulatory capital to be held by the Group as
a measure of its risk weighted assets ("RWAs"), in accordance with
the Group's risk management framework. The ICAAP identifies all key
risks to the Bank and how the Group manages these risks. The
document outlines the capital resources of the Group, its perceived
capital requirements, and capital adequacy over a 3-year period.
Within this process the Group conducts a stress testing process to
identify key risks, the potential capital requirements and whether
the Group has sufficient capital buffers to sustain such events.
The Group uses the Standardised Approach (SA) for calculating the
capital requirements for credit risk, and Counterparty Credit Risk
(SA-CCR) and the Basic Indicator Approach (BIA) for operational
risk. The ICAAP is approved by the Group Board at least
annually.
The regulatory capital resources of the Group were as
follows:
2022 2021
GBP'000 GBP'000
CET1 capital: instruments and
reserves
Called up share capital 1,793 1,793
Share premium accounts 39,273 39,273
Retained earnings account (28,447) (28,946)
Accumulated other comprehensive
income
& other reserves 83,620 73,939
CET1 capital before regulatory
adjustments 96,239 86,059
CET1 capital: regulatory adjustments
Intangible assets (877) (1,066)
Investment in own shares (2,303) (2,303)
Prudent valuation adjustment (23) -
Deferred tax asset (8,457) -
CET1 capital 84,579 82,690
T1 capital 84,579 82,690
Total regulatory capital 84,579 82,690
The return on assets of the Group (calculated as profit/(loss)
after taxation divided by average total assets) was 2.2% (2021:
-1%).
Information disclosure under Pillar 3 of the Capital
Requirements Directive is published on the Group's website at
www.dfcapital-investors.com
Principal financial instruments
The principal financial instruments to which the Group is party,
and from which financial instrument risk arises, are as
follows:
-- Cash and balances at central banks, which are considered risk free;
-- Loans and advances to banks, which can be a source of credit
risk but are primarily liquid assets available to further business
objectives or to settle liabilities as necessary;
-- Loans and advances to customers, primarily credit risk,
interest rate risk, and liquidity risk;
-- Debt securities, source of interest rate risk;
-- Derivative instruments, credit and liquidity risk;
-- Trade receivables, primarily credit risk and liquidity risk;
-- Trade and other payables, primarily credit risk and liquidity risk;
-- Customer deposits, primarily interest rate risk and liquidity risk;
Summary of financial assets and liabilities:
Below is a summary of the financial assets and liabilities held
on the Group's statement of financial position at the reporting
dates. These values are reflected at their carrying amounts at the
respective reporting date:
Fair value Fair value
through other through
Amortised comprehensive profit or
cost income loss Total
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets:
Cash and
balances at
central
banks 107,353 - - 107,353
Loans and
advances to
banks 3,848 - - 3,848
Debt
securities - 22,964 - 22,964
Derivative
assets - - 57 57
Loans and
advances to
customers 435,883 - - 435,883
Trade
receivables 749 - - 749
Other
receivables 273 - - 273
Total
financial
assets 548,106 22,964 57 571,127
31 December
2022
Financial
liabilities:
Customer
deposits 479,736 - - 479,736
Derivative
liabilities - - 42 42
Other
financial
liabilities 395 - - 395
Trade
payables 218 - - 218
Other
payables 3,377 - - 3,377
Preference
shares 50 - - 50
Total
financial
liabilities 483,776 - 42 483,818
Fair value
through other Fair value
comprehensive through profit
Amortised Cost income or loss Total
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets:
Loans and
advances
to banks 29,597 - - 29,597
Debt
securities - 108,867 - 108,867
Loans and
advances
to customers 247,205 - - 247,205
Trade
receivables 280 - - 280
Other
receivables 337 - - 337
Total
financial
assets 277,419 108,867 - 386,286
31 December
2021
Financial
liabilities:
Customer
deposits 296,856 - - 296,856
Other
financial
liabilities 504 - - 504
Trade
payables 282 - - 282
Other
payables 2,753 - - 2,753
Preference
shares 50 - - 50
Total
financial
liabilities 300,445 - - 300,445
Analysis of financial instruments by valuation model
The Group measures fair values using the following hierarchy of
methods:
-- Level 1 - Quoted market price in an active market for an identical instrument
-- Level 2 - Valuation techniques based on observable inputs.
This category includes instruments valued using quoted market
prices in active markets for similar instruments, quoted prices for
similar instruments that are considered less than active, or other
valuation techniques where all significant inputs are directly or
indirectly observable from market data
-- Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
Financial assets and liabilities that are not measured at fair
value:
Carrying Fair Level Level Level
amount value 1 2 3
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets not
measured at
fair value:
Cash and
balances at
central
banks 107,353 107,353 107,353 - -
Loans and
advances
to banks 3,848 3,848 3,848 - -
Loans and
advances
to
customers 435,883 435,883 - - 435,883
Trade
receivables 749 749 - - 749
Other
receivables 273 273 - - 273
548,106 548,106 111,201 - 436,905
31 December
2022
Financial
liabilities
not
measured at
fair value:
Customer
deposits 479,736 478,800 - - 478,800
Other
financial
liabilities 395 395 - - 395
Trade
payables 218 218 - - 218
Other
payables 3,377 3,377 - - 3,377
Preference
shares 50 50 - - 50
483,776 482,840 - - 482,840
Carrying Fair Level Level Level
amount value 1 2 3
31 December 2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial assets not
measured at fair
value:
Loans and advances to
banks 29,597 29,597 29,597 - -
Loans and advances to
customers 247,205 247,205 - - 247,205
Trade receivables 280 280 - - 280
Other receivables 337 337 - - 337
277,419 277,419 29,597 - 247,822
----------------------
31 December 2021
======================
Financial liabilities
not
measured at fair
value:
Preference shares 50 50 - - 50
Customer deposits 296,856 296,856 - - 296,856
Other financial
liabilities 504 504 - - 504
Trade payables 282 282 - - 282
Other payables 2,753 2,753 - - 2,753
300,445 300,445 - - 300,445
----------------------
Fair values for level 3 assets were calculated using a
discounted cash flow model and the Directors consider that the
carrying amounts of financial assets and liabilities recorded at
amortised cost are approximate to their fair values.
Cash and balances at central banks
This represents cash held at central banks where fair value is
considered to be equal to carrying value.
Loans and advances to banks
This mainly represents the Group's working capital current
accounts with other banks with an original maturity of less than
three months. Fair value is not considered to be materially
different to carrying value.
Loans and advances to customers
Due to the short-term nature of loans and advances to customers,
their carrying value is considered to be approximately equal to
their fair value. These items are short term in nature such that
the impact of the choice of discount rate would not make a material
difference to the calculations.
Trade and other receivables, other borrowings and other
liabilities
These represent short-term receivables and payables and as such
their carrying value is considered to be equal to their fair
value.
Financial assets and liabilities included in the statement of
financial position that are measured at fair value:
Carrying Principal Level Level Level
Amount Amount 1 2 3
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets
measured at
fair value:
Debt
securities 22,964 23,000 22,964 - -
Derivative
assets 57 70,000 - 57 -
23,021 93,000 22,964 57 -
Financial
liabilities
measured at
fair value:
Derivative
liabilities 42 20,000 - 42 -
42 20,000 - 42 -
Carrying Principal Level Level Level
Amount Amount 1 2 3
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets
measured at
fair value:
Debt
securities 108,867 108,085 108,867 - -
108,867 108,085 108,867 - -
Debt securities
The debt securities carried at fair value by the Company are
treasury bills and government gilts. Treasury bills and government
gilts are traded in active markets and fair values are based on
quoted market prices.
There were no transfers between levels during the periods, all
debt securities have been measured at level 1 from acquisition.
Derivatives
Derivative instruments fair values are provided by a third party
and are based on the market values of similar financial
instruments. The fair value of investment securities held at FVTPL
is measured using a discounted cash flow model.
Financial risk management
The Group's activities and the existence of the above financial
instruments expose it to a variety of financial risks.
The Board has overall responsibility for the determination of
the Group's risk management objectives and policies. The overall
objective of the Board is to set policies that seek to reduce
ongoing risk as far as possible without unduly affecting the
Group's competitiveness and flexibility.
The Group is exposed to the following financial risks:
-- Credit risk
-- Liquidity risk
-- Interest rate risk
Further details regarding these policies are set out below.
Credit risk
Credit risk is the risk that a customer or counterparty will
default on its contractual obligations resulting in financial loss
to the Group. One of the Group's main income generating activities
is lending to customers and therefore credit risk is a principal
risk. Credit risk mainly arises from loans and advances to
customers. The Group considers all elements of credit risk exposure
such as counterparty default risk, geographical risk and sector
risk for risk management purposes.
Credit risk management
The Group has a dedicated credit risk function, which is
responsible for individual credit assessment, portfolio management,
collections and recoveries. Furthermore, it manages the Group's
credit risk by:
-- Ensuring that the Group has appropriate credit risk
practices, including an effective system of internal control;
-- Identifying, assessing and measuring credit risks across the
Group from an individual instrument to a portfolio level;
-- Creating relevant policies to protect the Group against the
identified risks including the requirements to obtain collateral
from borrowers, to perform robust ongoing credit assessment of
borrowers and to continually monitor exposures against internal
risk limits;
-- Limiting concentrations of exposure by type of asset,
counterparty, industry, credit rating, geographic location;
-- Establishing a robust control framework regarding the
authorisation structure for the approval and renewal of credit
facilities;
-- Established practises to identify and manage risks within the portfolio;
-- Developing and maintaining the Group's risk grading to
categorise exposures according to the degree of risk default. Risk
grades are subject to regular reviews; and
-- Developing and maintaining the Group's processes for
measuring Expected Credit Loss (ECL) including monitoring of credit
risk, incorporation of forward-looking information and the method
used to measure ECL.
Significant increase in credit risk
The Group continuously monitors all assets subject to Expected
Credit Loss as to whether there has been a significant increase in
credit risk since initial recognition, either through a significant
increase in Probability of Default ("PD") or in Loss Given Default
("LGD").
The following is based on the procedures adopted by the Group
for the year ended 31 December 2022:
Granting of credit
The commercial team prepare a Credit Application which sets out
the rationale and the pricing for the proposed loan facility, and
confirms that it meets the Group's product, manufacturer programme
and pricing policies. The Application will include the proposed
counterparty's latest financial information and any other relevant
information but as a minimum:
-- Details of the limit requirement e.g. product, amount, tenor, repayment plan etc,
-- Facility purpose or reason for increase,
-- Counterparty details, background, management, financials and ratios (actuals and forecast),
-- Key risks and mitigants for the application,
-- Conditions, covenants & information (and monitoring
proposals) and security (including comments on valuation),
-- Pricing,
-- Confirmation that the proposed exposure falls within risk appetite,
-- Clear indication where the application falls outside of risk appetite.
Other information which can be considered includes (where
necessary and available):
-- Existing counterparty which has met all obligations in time
and in accordance with loan agreements,
-- Counterparty known to credit personnel who can confirm positive experience,
-- Additional security, either tangible or personal guarantees
where there is verifiable evidence of personal net worth,
-- A commercial rationale for approving the application,
although this mitigant will generally be in addition to at least
one of the other mitigants.
The credit risk function will analyse the financial information,
obtain reports from a credit reference agency, allocate a risk
rating, and make a decision on the application. The process may
require further dialogue with the Business Development Team to
ascertain additional information or clarification.
Each mandate holder is authorised to approve loans up to agreed
financial limits and provided that the risk rating of the
counterparty is within agreed parameters. If the financial limit
requested is higher than the credit authority of the first reviewer
of the loan facility request, the application is sent to the next
credit authority level with a recommendation.
Transactional Credit Committee considers all applications that
are outside the credit approval mandate of the Director - Credit
due to the financial limit requested. There is an agreed further
escalation to the Board Risk Committee for the largest transactions
which fall outside of the Transactional Credit Committee.
Identifying significant increases in credit risk
The short tenor of the current loan facilities reduces the
possible adverse effect of changes in economic conditions and/or
the credit risk profile of the counterparty.
The Group nonetheless measures a change in a counterparty's
credit risk mainly on payment performance and end of contract
repayment behaviour. The regular collateral audit process and
interim reviews may highlight other changes in a counterparty's
risk profile, such as the security asset no longer being under the
control of the borrower. The Group views a significant increase in
credit risk as:
-- A two-notch reduction in the Company's counterparty's risk
rating, as notified through the credit rating agency alert
system.
-- a presumption that an account which is more than 30 days past
due has suffered a significant increase in credit risk. IFRS 9
allows this presumption to be rebutted, but the Group believes that
more than 30 days past due to be an appropriate back stop measure
and therefore has not rebutted the presumption.
-- A counterparty defaults on a payment due under a loan agreement.
-- Late contractual payments which although cured, re-occur on a regular basis.
-- Counterparty confirmation that it has sold Group financed
assets but delays in processing payments.
-- Evidence of a reduction in a counterparty's working capital
facilities which has had an adverse effect on its liquidity.
-- Evidence of actual or attempted sales out of trust or of
double financing, of assets funded by the Group.
An increase in significant credit risk is identified when any of
the above events happen after the date of initial recognition.
Identifying loans and advances in default and credit
impaired
The Group's definition of default for this purpose is:
-- A counterparty defaults on a payment due under a loan
agreement and that payment is more than 90 days overdue;
-- A counterparty commits an event of default under the terms
and conditions of the loan agreement which leads the lending
company to believe that the borrower's ability to meet its credit
obligations to the lending company is in doubt; or
-- The Group is made aware of a severe deterioration of the
credit profile of the customer which is likely to impede the
customers' ability to satisfy future payment obligations.
In the normal course of economic cyclicality, the short tenor of
the loans extended by the Group means that significant economic
events are unlikely to influence counterparties' ability to meet
their obligations to the Group.
Exposure at default (EAD)
Exposure at default ("EAD") is the expected loan balance at the
point of default. Where a receivable is not classified as being in
default at the reporting date, the Group have included reasonable
assumptions to add unaccrued interest and fees up to the receivable
becoming 91 days past due, which is considered to be the point of
default.
Expected credit losses (ECL)
The ECL on an individual loan is based on the credit losses
expected to arise over the life of the loan, being defined as the
difference between all the contractual cash flows that are due to
the Group and the cash flows that it expects to receive. This
difference is then discounted at the original effective interest
rate on the loan to reflect the disposal period of such assets
underlying the original contract.
Regardless of the loan status stage, the aggregated ECL is the
value that the Group expects to lose on its current loan book
having assessed each loan individually.
To calculate the ECL on a loan, the Group considers:
1. Counterparty PD; and
2. LGD on the asset
whereby: ECL = EAD x PD x LGD
Forward looking information
In its ECL models, the Group applies sensitivity analysis of
forward-looking economic inputs. When formulating the economic
scenarios, the Group considers both macro-economic factors and
other specific drivers which may trigger a certain stress scenario.
The impact of movements in these macro-economic factors are
assessed on a 12-month basis from the reporting date (31
December).
Maximum exposure to credit risk:
2022 2021
GBP'000 GBP'000
Loans and advances to
banks 3,848 29,597
Derivative assets 57 -
Loans and advances to
customers 435,883 247,205
Trade and other
receivables 1,022 617
440,810 277,419
Collateral held as security:
2022 2021
GBP'000 GBP'000
Fully collateralised:
Loan-to-value* ratio:
Less than 50% 2,798 1,698
51% to 70% 36,764 13,106
71% to 80% 63,239 29,724
81% to 90% 69,499 29,302
91% to 100% 264,118 175,125
436,418 248,955
Partially
collateralised (loans
over 100%
loan-to-value) - -
Unsecured lending 4,866 499
* Calculated using wholesale collateral values. Wholesale
collateral values represent the invoice total (including applicable
VAT) from the invoice received from the supplier of the product.
The wholesale amount is less than the recommended retail price
(RRP) of the product.
The Group's lending activities are asset based so it expects
that the majority of its exposure is secured by the collateral
value of the asset that has been funded under the loan agreement.
The Group has title to the collateral which is funded under loan
agreements. The collateral includes boats, motorcycles,
recreational vehicles, caravans, light commercial vehicles,
industrial and agricultural equipment. The collateral has low
depreciation and is not subject to rapid technological changes or
redundancy. There has been no change in the Group's assessment of
collateral and its underlying value in the reporting period.
The assets are generally in the counterparty's possession, but
this is controlled and managed by the asset audit process. The
audit process checks on a periodic basis that the asset is in the
counterparty's possession and has not been sold out of trust or is
otherwise not in the counterparty's control. The frequency of the
audits is initially determined by the risk rating assessed at the
time that the borrowing facility is first approved and is assessed
on an ongoing basis.
Additional security may also be taken to further secure the
counterparty's obligations and further mitigate risk. Further to
this, in many cases, the Group is often granted, by the
counterparty, an option to sell-back the underlying collateral.
Based on the Group's current principal products, the
counterparty repays its obligation under a loan agreement with the
Group at or before the point that it sells the asset. If the asset
is not sold and the loan agreement reaches maturity, the
counterparty is required to pay the amount due under the loan
agreement plus any other amounts due. In the event that the
counterparty does not pay on the due date, the Group's customer
management process will maintain frequent contact with the
counterparty to establish the reason for the delay and agree a
timescale for payment. Senior Management will review actions on a
regular basis to ensure that the Group's position is not being
prejudiced by delays.
In the event the Group determines that payment will not be made
voluntarily, it will enforce the terms of its loan agreement and
recover the asset, initiating legal proceedings for delivery, if
necessary. If there is a shortfall between the net sales proceeds
from the sale of the asset and the counterparty's obligations under
the loan agreement, the shortfall is payable by the counterparty on
demand.
Concentration of credit risk
The Group maintains policies and procedures to manage
concentrations of credit at the counterparty level and industry
level to achieve a diversified loan portfolio.
Credit quality
The Risk Rating is an internal rating system of counterparty
credit risk whereby the Group will allocate a rating from 1 to 9, 1
being the highest level of credit quality and 9 being the lowest
level of credit quality. The Group uses Experian Delphi scores to
set Risk Ratings which in turn determine the probability of default
for each Counterparty. In the majority of cases, the Experian
Delphi score will be used without management override adjustments.
However, where the Delphi score differs from the Group's assessment
of credit risk and / or where a Delphi score cannot be derived such
as in the case of sole traders or unincorporated partnerships,
either a Delphi score uplift or a Delphi score equivalent is
utilised to calculate DFC's internal risk rating. The Risk Rating
for each counterparty is reviewed on an ongoing basis and recorded
as at the reporting date.
An analysis of the Group's credit risk exposure for loan and
advances to customers, internal rating and "stage" is provided in
the following tables. A description of the meanings of Stages 1, 2
and 3 was given in the accounting policies set out above. See below
table of gross loan receivables by Risk Rating and IFRS 9 stage
allocation:
Stage
Stage 1 2 Stage 3 2022 Total
31 December 2022 GBP'000 GBP'000 GBP'000 GBP'000
Credit rating:
Above average
(Risk rating
1-2) 267,000 6,629 - 273,629
Average (Risk
rating 3-5) 110,818 5,433 14,757 131,008
Below average
(Risk rating
6+) 32,938 1,261 2,448 36,647
Gross carrying
amount 410,756 13,323 17,205 441,284
Loss allowance (1,943) (84) (1,693) (3,720)
Carrying amount 408,813 13,239 15,512 437,564
Stage 2021
Stage 1 2 Stage 3 Total
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000
======================
Credit
rating:
Above average
(Risk
rating 1-2) 142,119 - - 142,119
Average (Risk
rating
3-5) 77,286 8,758 - 86,044
Below average
(Risk
rating 6+) 19,922 827 542 21,291
Gross
carrying
amount 239,327 9,585 542 249,454
----------------------
Loss
allowance (1,142) (155) (421) (1,718)
Carrying
amount 238,185 9,430 121 247,736
----------------------
See note 19 for analysis of the movements in gross loan
receivables and impairment allowances in terms of IFRS 9
staging.
Analysis of credit quality of trade receivables:
2022 2021
GBP'000 GBP'000
=============================================
Status at balance sheet date:
Not past due, nor impaired 563 276
Past due but not impaired 29 8
Impaired 258 71
Total gross carrying amount 850 355
Loss allowance (101) (75)
Carrying amount 749 280
See note 23 for analysis of the movements in gross trade
receivables and impairment allowances in terms of IFRS 9
staging.
Amounts written off
The contractual amount outstanding on financial assets that were
written off during the reporting period and are still subject to
enforcement activity is GBPnil at 31 December 2022 (31 December
2021: GBP49,000).
Liquidity risk
Liquidity risk is the risk that the Group does not have
sufficient financial resources to meet its obligations as they fall
due or will have to do so at an excessive cost. This risk arises
from mismatches in the timing of cash flows which is inherent in
all finance operations and can be affected by a range of
Group-specific and market-wide events.
Liquidity risk management
The Group has in place a policy and control framework for
managing liquidity risk. The Group's Asset and Liability Management
Committee (ALCO) is responsible for managing the liquidity risk via
a combination of policy formation, review and governance, analysis,
stress testing, limit setting and monitoring. The ALCO meets on a
monthly basis to review the liquidity position and risks.
The Bank has a comprehensive suite of liquidity management
processes in place, which allow the Bank to monitor liquidity risk
on a daily basis. Daily liquidity reporting is supplemented by
Early Warning Indicators and a Liquidity Contingency Plan.
Liquidity stress testing
Stress Testing is a key risk management tool for the Bank and is
used to inform the setting of risk appetite limits and required
buffers.
A range of liquidity stress scenarios has been conducted (as
detailed in the Internal Liquidity Adequacy Assessment Process
"ILAAP" document), which demonstrates that the Group's liquidity
profile is sufficient to withstand a severe stress.
Maturity analysis for financial assets:
The following maturity analysis is based on expected gross cash
flows:
Gross Less 3 months
Carrying nominal than 1 1 - to 1 1 - >5
amount inflow month 3 months year 5 years years
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Cash and
balances at
central
banks 107,353 107,353 107,353 - - - -
Loans and
advances
to banks 3,848 3,848 3,277 75 (58) 554 -
Debt
securities 22,964 23,233 13,008 113 10,112 - -
Derivative
assets 57 20 - - 39 (19) -
Loans and
advances
to
customers 435,883 439,282 58,593 138,833 219,829 22,027 -
Trade
receivables 749 850 850 - - - -
Other
receivables 273 273 1 - 8 154 110
571,127 574,859 183,082 139,021 229,930 22,716 110
Gross Less
Carrying nominal than 1 1 - 3 3 months 1 -
amount inflow month months to 1 year 5 years >5 years
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Loans and
advances
to banks 29,597 29,597 29,597 - - - -
Loans and
advances
to
customers 247,205 249,240 24,953 56,140 128,226 39,921 -
Debt
securities 108,867 108,085 24,600 38,000 22,485 23,000 -
Trade
receivables 280 355 355 - - - -
Other
receivables 337 337 9 59 9 260 -
386,286 387,614 79,514 94,199 150,720 63,181 -
Maturity analysis for financial liabilities:
The following maturity analysis is based on contractual gross
cash flows:
Gross Less 1 - 3 months
Carrying nominal than 3 to 1 1 - >5
amount outflow 1 month months year 5 years years
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=======================
Customer
deposits 479,736 491,911 47,861 43,564 278,483 122,003 -
Derivative
liabilities 42 68 51 - - 17 -
Other
financial
liabilities 395 425 - 23 139 263 -
Trade
payables 218 218 218 - - - -
Other
payables 3,377 3,249 3,212 - (33) 70 -
Preference
shares 50 50 - - - 50 -
483,818 495,921 51,342 43,587 278,589 122,403 -
-----------------------
Loan
commitments - 10,663 10,663 - - - -
3
Gross Less 1 - months
Carrying nominal than 3 to 1 1 - >5
amount outflow 1 month months year 5 years years
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Customer
deposits 296,856 299,371 4,684 29,798 217,159 47,730 -
Other
financial
liabilities 504 555 4 31 96 424 -
Trade
payables 282 282 282 - - - -
Other
payables 2,753 2,864 2,666 - 35 163 -
Preference
shares 50 50 - - - 50 -
300,445 303,122 7,636 29,829 217,290 48,367 -
Loan
commitments - 3,892 3,892 - - - -
Market risk
Market risk is the risk that movements in market factors, such
as foreign exchange rates, interest rates, credit spreads, equity
prices and commodity prices will reduce the Group's income or the
value of its assets.
The principal market risk to which the Group is exposed is
interest rate risk.
Interest rate risk management
The Group is exposed to the risk of loss from fluctuations in
the future cash flows or fair values of financial instruments
because of the change in market interest rates.
The Group's borrowings are either fixed rate, or administered,
(being products where the rate is set at the DFC's discretion). The
Group has no exposure to LIBOR. These borrowings fund loans and
advances to customers at fixed rate.
The limited average duration of the loan and deposit book
provide a natural mitigant against interest rate risk.
Additionally, during 2022 interest rate swap lines were incepted
which allow the Bank to use interest rate swaps as a further
mitigation tool for interest rate risk.
The Bank evaluates changes in the economic value of equity
calculated under the following six supervisory shock scenarios
referred to in Rule 9.7 of the ICAA Part of the PRA Rulebook as
issued by the Prudential Regulation Authority (PRA).
The impact of changes in interest rates has been assessed in
terms of economic value of equity (EVE) and profit or loss.
Economic value of equity (EVE) is a cash flow calculation that
takes the present value of all asset cash flows and subtracts the
present value of all liability cash flows. This is a long-term
economic measure used to assess the degree of interest rate risk
exposure.
The estimate that a 200bps upward and downward movement in
interest rates would have impacted the economic value of equity
(EVE) is as follows:
2022 2021
GBP'000 GBP'000
Change in interest rate (basis points):
Sensitivity of EVE
+200bps 658 15
Sensitivity of EVE
-200bps (681) 6
The estimate of the effect on the next 12 months net interest
income using a 200bps upward and 200bps downward movement in
interest rates is as follows:
2022 2021
GBP'000 GBP'000
Change in interest rate (basis points):
Sensitivity of profit
+200bps 1,868 2,998
Sensitivity of profit
-200bps (2,522) 147
In preparing the sensitivity analyses above, the Group makes
certain assumptions consistent with the expected and contractual
re-pricing behaviour as well as behavioural repayment profiles
under the two interest rate scenarios.
37. Earnings per share
Analysis of number of shares in the periods:
2022 2021
No. No.
Number of shares:
At period end 179,369,199 179,369,199
Basic:
Weighted average number of
shares
in issue
in the year 179,369,199 168,808,800
Diluted:
Effect of weighted average
number
of options outstanding
for the
year - -
Diluted weighted average
number
of shares
and options for the year 179,369,199 168,808,800
-------------------------------------
Earnings attributable to equity holders:
2022 2021
GBP'000 GBP'000
Earnings attributable to
ordinary shareholders:
Profit/(loss) after tax
attributable
to the shareholders 9,761 (3,676)
Earnings per share calculation:
2022 2021
pence pence
Earnings per share:
Basic 5 (2)
Diluted 5 (2)
38. Related party disclosures
In the year ended 31 December 2022, Directors were awarded share
based payments, refer to note 9 for further details.
Directors' emoluments are disclosed in note 8 of these
consolidated financial statements.
39. Subsequent events
In January 2023, the Bank agreed an initial GBP175m ENABLE
Guarantee with the British Business Bank, which may also be
increased in the future to GBP350m. As a regulated bank, this
scheme enables the Bank to benefit from a zero risk-weighted HM
Government guarantee on a fixed percentage of credit losses in
excess of an agreed first loss threshold on the loan portfolio
originated under the Guarantee. This zero-risk weighting of assets
above this threshold provides the Group with incremental capacity
to scale its loan book without the need for additional Tier 1
equity capital. The Bank commenced using the Guarantee effective
from 31 March 2023.
The Company Statement of Financial Position
As at As at
31 December 31 December
2022 2021
Note GBP'000 GBP'000
Assets:
Loans and
advances to
banks(1) 5 146 530
Trade and
other
receivables 7 155 119
Investment in
subsidiaries 8 134,213 134,213
Total assets 134,514 134,862
Liabilities:
Amounts
payable to
Group
Undertakings 9 5,522 5,110
Trade and
other
payables 10 700 545
Financial
liabilities 11 50 50
Total
liabilities 6,272 5,705
Equity:
Issued share
capital 12 1,793 1,793
Share premium 12 39,273 39,273
Merger relief 12 94,911 94,911
Retained loss (7,371) (6,456)
Own shares (364) (364)
Total equity 128,242 129,157
Total equity
and
liabilities 134,514 134,862
(1) During the year ended 31 December 2022, the Company
reclassified 'cash and cash equivalents' to 'loans and advances to
banks' in the statement of financial position to be consistent with
the consolidated financial statements. See note 1.4 of the
consolidated financial statements for details of this
reclassification.
The notes on pages 184 to 189 are an integral part of these
financial statements.
Distribution Finance Capital Holdings plc recorded loss after
taxation for the year ended 31 December 2022 of GBP1,414,000 (2021:
loss of GBP868,000). These financial results are derived entirely
from continuing operations.
These financial statements were approved by the Board of
Directors and authorised for issue on 18 April 2023. They were
signed on its behalf by:
.................................
Carl D'Ammassa
Director
18 April 2023
Registered number: 11911574
The Company Cash Flow Statement
2022 2021
Note GBP'000 GBP'000
=================== ===============================
Cash flows
from
operating
activities:
Loss before
taxation 4 (1,414) (868)
Adjustments
for non-cash
items
and other
adjustments
included
in the
income
statement 6 (1,029) (1,366)
Decrease in
operating
assets (34) 35
Increase in
operating
liabilities 155 282
Taxation paid - -
-------------------
Net cash used
in operating
activities (2,322) (1,917)
-------------------
Cash flows
from
financing
activities:
Issue of new
shares 12 - 38,645
Acquisition
of shares in
DF Capital
Bank Limited 8 - (38,600)
Proceeds from
intercompany
loan 1,938 2,199
-------------------
Net cash from
financing
activities 1,938 2,244
-------------------
Net increase
in cash and
cash
equivalents (384) 327
Cash and cash
equivalents
at start
of the year 530 203
-------------------
Cash and cash
equivalents
at end
of the year 6 146 530
-------------------
The Company Statement of Changes in Equity
Issued
share Share Merger Retained Own
capital premium relief loss shares Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance
at 1
January
2021 1,066 - 94,911 (4,595) (364) 91,018
Loss
after
taxation - - - (868) - (868)
Employee
Benefit
Trust - - - - - -
Share
based
payments - - - 362 - 362
Issue of
new
shares 727 39,273 - (1,355) - 38,645
Balance
at 31
December
2021 1,793 39,273 94,911 (6,456) (364) 129,157
Loss
after
taxation - - - (1,414) - (1,414)
Share
based
payments - - - 499 - 499
Issue of
new
shares - - - - - -
Balance
at 31
December
2022 1,793 39,273 94,911 (7,371) (364) 128,242
Notes to the Company Financial Statements
Basis of preparation
1.1 Accounting basis
These standalone financial statements for Distribution Finance
Capital Holdings plc (the "Company") have been prepared and
approved by the Directors in accordance with International
Financial Reporting Standards ("IFRSs") as adopted by the United
Kingdom (UK) and interpretations issued by the IFRS Interpretations
Committee (IFRS IC).
1.2 Going concern
As detailed in note 1 to the consolidated financial statements,
the Directors have performed an assessment of the appropriateness
of the going concern basis. The Directors consider that it is
appropriate to continue to adopt the going concern basis in
preparing the financial statements.
1.3 Income statement
Under Section 408 of the Companies Act 2006 the Company is
exempt from the requirement to present its own income
statement.
2. Summary of significant accounting policies
These financial statements have been prepared using the
significant accounting policies as set out in note 2 to the
consolidated financial statements. Any further accounting policies
provided below are solely applicable to the Company financial
statements.
2.1 Investment in subsidiaries
In accordance with IAS 27 Separate Financial Statements the
Company has elected to account for an investment in subsidiary at
cost. The Company performs an impairment assessment on the
investment in subsidiary at each reporting date to assess whether
the cost basis reflects an accurate value of the investment at the
reporting date.
3. Critical accounting judgements and key sources of estimation
uncertainty
In the financial statements for the year ended 31 December 2022,
the Company has not made any critical accounting judgements and key
sources of estimation which are considered to be material in value
or significance to the performance of the Company.
4. Net loss attributable to equity shareholders of the
Company
2022 2021
GBP'000 GBP'000
Net loss attributable to equity shareholder
of the Company (1,414) (868)
5. Loans and advances to banks
2022 2021
GBP'000 GBP'000
Included in cash and cash equivalents:
balances with
less than three months to maturity
at inception 146 530
Total loans and advances to banks 146 530
As detailed in note 1.4 of the consolidated financial
statements, the Group reclassified cash and cash equivalents of
GBP530,000 in the year ended 31 December 2021 from 'cash and cash
equivalents' into 'loans and advances to banks' within the
statement of financial position. This change has been reflected in
the Company financial statements to remain consistent with the
consolidated financial statements.
6. Notes to the cash flow statement
See below for reconciliation of balances classified as cash and
cash equivalents, which are recognised within the cash flow
statement:
2022 2021
GBP'000 GBP'000
Loans and advances to banks 146 530
Total cash and cash equivalents 146 530
Adjustments for non-cash items and other adjustments included in
the income statement:
2022 2021
GBP'000 GBP'000
Management fee recharge (1,205) (1,502)
Movement in other provisions - -
Share based payments 176 136
Total non-cash items and other adjustments (1,029) (1,366)
Changes in liabilities arising from financing activities:
The Company had no changes in the Company's liabilities arising
from financing activities, including both cash and non-cash
changes, for the years ended 31 December 2022 and 31 December
2021.
7. Trade and other receivables
2022 2021
GBP'000 GBP'000
Other debtors 50 50
Indirect taxes 4 2
Prepayments 101 67
Total trade and other receivables 155 119
8. Investment in subsidiaries
Country
Principal Shareholding Class of of Registered
Subsidiary Activity % shareholding incorporation Address
St James'
Building,
61-95
Oxford St,
DF Capital Manchester,
Bank Financial M1
Limited Services 100% Ordinary UK 6EJ
In the years ended 31 December 2022, there was no changes to
investment in subsidiaries.
In February 2021, the Company undertook a placing of new
ordinary shares rais ing GBP40.0 million of additional capital
before expenses and approximately GBP38.6 million after expenses.
Following the placing, DF Capital Bank Limited, a wholly owned
subsidiary of the Group, issued 38,600,000 ordinary shares of
GBP1.00 nominal value each to Distribution Finance Capital Holdings
plc at a price of GBP1.00 per share giving an aggregate
sub-scription price of GBP38 .6 million
For the year ended 31 December 2022, the Company conducted an
impairment assessment of the investment in subsidiaries and
concluded that there is no impairment required (2021:GBPnil).
9. Amounts payable to Group undertakings
2022 2021
GBP'000 GBP'000
Amounts payable to DF Capital
Bank
Limited 5,522 5,110
Total amounts payable to Group
undertakings 5,522 5,110
10. Trade and other payables
2022 2021
GBP'000 GBP'000
Trade payables - 21
Accruals 654 488
Social security taxes 46 36
Total trade and other
payables 700 545
11. Financial liabilities
2022 2021
GBP'000 GBP'000
Preference shares 50 50
Total financial liabilities 50 50
Reconciliation of movements in financial liabilities:
Preference Shares
GBP'000
Balance at 1 January 2021 50
No transactions in the year -
Balance at 31 December 2021 50
No transactions in the year -
Balance at 31 December 2022 50
12. Share capital
2022 2021 2022 2021
No. No. GBP'000 GBP'000
========================== ========================== ================================ ================================
Authorised:
Ordinary
shares of
1p each 179,369,199 179,369,199 1,793 1,793
Allotted,
issued and
fully
paid:
Ordinary
shares of
1p
each 179,369,199 179,369,199 1,793 1,793
No. of Issue Share Share Merger
Date shares Price Capital Premium Relief Total
# GBP GBP'000 GBP'000 GBP'000 GBP'000
Balance at 1 January
2021 106,641,926 1,066 - 94,911 95,977
Issue of new
shares 22-Feb-21 72,727,273 0.55 727 39,273 - 40,000
Balance at 31 December
2021 179,369,199 1,793 39,273 94,911 135,977
No
transactions
in the year - - - - - -
Balance at 31 December
2022 179,369,199 1,793 39,273 94,911 135,977
13. Financial instruments
The Group monitors and manages risk management at a group-level
and, therefore, the Risk Management Framework stipulated in note 36
of the consolidated financial statements encompasses the Company
risk management environment.
The Company and Directors believe the principal risks of the
Company to be credit risk and liquidity risk. The Directors have
evaluated the following risks to either not be relevant to the
Company or of immaterial significance: market risk, interest rate
risk and exchange rate risk.
See note 36 of the consolidated financial statements for further
details on how the Company defines and manages credit risk and
liquidity risk.
Financial assets and financial liabilities included in the
statement of financial position that are not measured at fair
value:
Carrying Fair Level Level Level
amount value 1 2 3
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets not
measured at
fair value:
Loans and
advances to
banks 146 146 146 - -
Other
receivables 54 54 - - 54
200 200 146 - 54
31 December
2022
Financial
liabilities
not
measured at
fair value:
Amounts
payable to
Group
Undertakings 5,522 5,522 - - 5,522
Trade
payables - - - - -
Other
payables 46 46 - - 46
Preference
shares 50 50 - - 50
5,618 5,618 - - 5,618
Carrying Fair Level Level Level
amount value 1 2 3
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Financial
assets not
measured at
fair value:
Loans and
advances to
banks 530 530 530 - -
Other
receivables 52 52 - - 52
582 582 530 - 52
31 December
2021
Financial
liabilities
not
measured at
fair value:
Amounts
payable to
Group
Undertakings 5,110 5,110 - - 5,110
Trade
payables 21 21 - - 21
Other
payables 36 36 - - 36
Preference
shares 50 50 - - 50
5,217 5,217 - - 5,217
Maximum exposure to credit risk:
2022 2021
GBP'000 GBP'000
Loans and advances to banks 146 530
Trade and other receivables 54 52
200 582
Maturity analysis for financial assets
The following maturity analysis is based on expected gross cash
flows:
3
Gross Less 1 - months
Carrying nominal than 1 3 to 1 1 - >5
amount inflow months months year 5 years years
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Loans and
advances to
banks 146 146 146 - - - -
Other
receivables 54 54 4 - - 50 -
200 200 150 - - 50 -
Less 3
Gross than 1 - months
Carrying nominal 1 3 to 1 1 - >5
amount inflow months months year 5 years years
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Loans and
advances
to banks 530 530 530 - - - -
Other
receivables 52 52 2 - - 50 -
582 582 532 - - 50 -
Maturity analysis for financial liabilities
The following maturity analysis is based on contractual gross
cash flows:
3
Gross Less 1 - months
Carrying nominal than 1 3 to 1 1 - >5
amount outflow months months year 5 years years
31 December
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Amounts
payable to
Group
Undertakings 5,522 5,522 - - 5,522 - -
Other
payables 46 80 1 - 51 28 -
Preference
shares 50 50 - - - 50 -
5,618 5,652 1 - 5,573 78 -
Less 3
Gross than 1 - months
Carrying nominal 1 3 to 1 1 - >5
amount outflow months months year 5 years years
31 December
2021 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Amounts
payable to
Group
Undertakings 5,110 5,110 - - 5,110 - -
Trade
payables 21 21 21 - - - -
Other
payables 36 82 - - 1 81 -
Preference
shares 50 50 - - - 50 -
5,217 5,263 21 - 5,111 131 -
14. Subsequent events
There have been no subsequent events between 31 December 2022
and the date of this report which would have a material impact on
the financial position of the Company.
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END
FR SFMESAEDSESL
(END) Dow Jones Newswires
April 19, 2023 02:00 ET (06:00 GMT)
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