TIDMWBS
RNS Number : 5940G
West Bromwich Building Society
30 May 2017
West Bromwich Building Society
Preliminary results announcement for the year ended 31 March
2017
Forward Looking Statements
Statements in this document are forward looking with respect to
plans, goals and expectations relating to the future financial
position, business performance and results of the West Brom.
Although the West Brom believes that the expectations reflected in
these forward looking statements are reasonable, we can give no
assurance that these expectations will prove to be an accurate
reflection of actual results. By their nature, all forward looking
statements involve risk and uncertainty because they relate to
future events and circumstances that are beyond the control of the
West Brom including, amongst other things, UK domestic and global
economic business conditions, market related risks such as
fluctuation in interest rates and exchange rates,
inflation/deflation, the impact of competition, changes in customer
preferences, risks concerning borrower credit quality, delays in
implementing proposals, the timing, impact and other uncertainties
of future acquisitions or other combinations within relevant
industries, the policies and actions of regulatory authorities, the
impact of tax or other legislation and other regulations in the
jurisdictions in which the West Brom operates. As a result, the
West Brom's actual future financial condition, business performance
and results may differ materially from the plans, goals and
expectations expressed or implied in these forward looking
statements. Due to such risks and uncertainties the West Brom
cautions readers not to place undue reliance on such forward
looking statements. We undertake no obligation to update any
forward looking statements whether as a result of new information,
future events or otherwise.
West Bromwich Building Society
Preliminary results announcement
for the year ended 31 March 2017
The West Brom today announces its results for the financial year
ended 31 March 2017.
Key highlights include:
- Gross residential mortgage lending of GBP712m (2015/16: GBP673m)
- Growth of 15% in the prime owner occupied mortgage book
- Savings balances maintained at GBP4.4bn (2015/16: GBP4.4bn)
- Total assets stable at GBP5.8bn (2015/16: GBP5.8bn)
- Underlying profit before tax up 60% to GBP7.7m (2015/16: GBP4.8m)
- Statutory loss before tax of GBP19.8m (2015/16: profit of
GBP13.5m), including costs of GBP27.5m relating to a one-off
reimbursement of interest charged on certain buy to let
mortgages.
- Robust capital position, with a Common Equity Tier 1 capital ratio of 13.8% (2015/16: 14.6%)
Jonathan Westhoff, Chief Executive, commented:
Whilst the reported loss for the year is disappointing, we can
draw considerable confidence from our strong underlying performance
and year on year growth in residential mortgage lending. The main
reason behind the loss has been clearly stated in the half yearly
results, reflecting the one-off costs of reimbursing certain buy to
let borrowers who had previously been charged additional interest
on their loans.
Our purpose as a building society is to support the financial
wellbeing of our members and we achieve this through providing
funds to enable home ownership and a good return on the savings we
are entrusted with. The Society's performance during the year shows
we are delivering on both counts.
Our broad range of mortgage products provides choice for new
purchasers and existing homeowners seeking a better deal and
represents excellent value through incentives such as no fees and
cashback. Nearly a quarter of our new lending during the year was
to first time buyers, which is essential for a healthy housing
market.
We continue to offer a secure home for savers' deposits and
whilst the market is undoubtedly tough because of a prolonged
period of low interest rates, our accounts remain competitively
placed. Our internet bonus account released during the year, for
example, featured regularly in the Best Buy tables.
We are also helping our members plan for later life and a series
of pension-themed open days held in branches proved very popular
thanks to the availability of independent financial advice through
our partner Wren Sterling.
It has been a year of significant economic and political change
and there is no denying that a number of challenges still lie
ahead. Household budgets are being squeezed by rising inflation and
a sense of uncertainty prevails around the forthcoming election and
negotiations to leave the EU.
Yet as a Society we feel well equipped to face these challenges
and, above all, have confidence in our ability to continue
fulfilling the needs of our members.
30 May 2017
ENQUIRIES:
The West Brom 0121 796 7785
Ashraf Piranie
Group Finance & Operations Director
Chief Executive's Review
Performance
I am proud to report a year of strong underlying performance and
unwavering focus on our simple mutual philosophy - to provide
members with a secure home for, and a good return on, their savings
and the ability to realise their home ownership ambitions.
New prime residential mortgage lending totalled GBP712m
(2015/16: GBP673m) and, overall, prime owner occupied loans grew by
a further 15%, as new and existing customers were supported
throughout the year with a competitive mortgage offering. Whilst
our focus has been on growing the prime residential book, alongside
this we have continued to reduce our exposure to commercial
lending.
After adjustment for the one-off items explained below,
underlying profitability improved markedly, up 60% from GBP4.8m to
GBP7.7m.
The statutory loss before tax of GBP19.8m (2015/16: profit of
GBP13.5m) included the one-off costs of refunding additional
interest charged since December 2013 on certain loans to landlord
investors with multi-property portfolios. This followed the
well-publicised overturning in June 2016, by the Court of Appeal,
of an earlier decision of the High Court in respect of the Group's
ability to vary the interest rate applicable to these loans. It is
regrettable that our attempts to introduce fairness, for the
benefit of our membership as a whole, were ultimately blocked. We
have, nonetheless, duly met our obligations to cease charging the
additional interest and to reimburse affected borrowers for what
had previously been levied. The underlying profitability of
GBP7.7m, referred to above, excludes the one-off costs of GBP27.5m.
Of this amount, GBP8.7m related to additional interest charged on
the affected loans during 2015/16 and has been adjusted for in the
comparative figure.
The retail franchise remained strong, with retail deposits of
GBP4.4bn (2015/16: GBP4.4bn) providing a healthy 104% (2015/16:
106%) cover for residential mortgage balances.
As capital is pivotal to the protection of members' interests it
is pleasing that, despite reporting a loss and making significant
investment in future growth, the Group's Common Equity Tier 1
(CET1) capital ratio remained robust at 13.8% (2015/16: 14.6%). At
6.8% (2015/16: 7.6%), our leverage ratio was one of the best in the
bank and building society sector. In January 2017, a third party
alleged that the profit participating deferred shares (PPDS) of the
Society do not comply with one aspect of the Capital Requirements
Regulation criteria for eligibility as CET1. The Society's Board
believes that the PPDS are eligible as CET1 and that the PPDS meet
the CET1 criteria in all respects. The Board has sought external
legal advice on this matter which has confirmed the Board's
position. We have also sought clarification on the matter from the
European Banking Authority (EBA) and now await a response. Should
the EBA not agree our position, it is possible that we would have
to reduce the degree to which the PPDS would count towards our CET1
by 50% today and thereafter by 10% per annum on each 1 January.
Under this scenario, the immediate impact on our CET1 ratio would
be a reduction from 13.8% at 31 March 2017 to 10.6%. The PPDS not
included as CET1 would instead be included as Tier 2 capital so
there would be no change to the total capital, or solvency, ratio
of 16.0% as at that date and there would be no breach of any
regulatory capital requirements.
Asset quality
Residential mortgage arrears have fallen for the fourth
consecutive year, evidencing the high credit quality of both new
lending and the now well-seasoned back book. Since the Society's
re-entry into the prime residential market, only one new customer
has moved into a serious arrears position. At the year end, none
remained in serious arrears.
The de-risking of the balance sheet has continued with a 14%
decrease in our exposure to non-core commercial balances from
GBP680m in 2015/16 to GBP588m. Some GBP73m of this exposure is in
securitisation vehicles which have the effect of transferring the
risk of loss out of the Society. Of the remaining GBP515m of
exposure, GBP302m are non-performing loans being managed for
recovery and GBP38m (7%) has been set aside as provisions in
respect of these non-securitised commercial loans.
The Group's liquidity portfolio is efficiently managed and, at
31 March 2016 and 2017, all investment securities were rated single
A or above or held with a Global Systemically Important
Counterparty. The Society's Liquidity Coverage Ratio - a measure of
whether there are sufficient high quality liquid assets to cover
expected cash outflows under a 30-day liquidity stress scenario -
was 127% (2015/16: 111%), comfortably in excess of the regulatory
minimum.
Our members' needs
As a traditional, regional building society we remain committed
to the principles of mutuality and all our decision-making is
centred around the delivery of long-term value to our circa 446,000
members.
The West Brom looks after the interests of its members by
offering prime residential mortgages for homeowners, competitive
retail savings and a range of ancillary products and services
designed to meet individual financial needs. During the last
financial year, we invested substantially in our mortgage
application and customer management systems to make it easier for
our members to do business with us and to provide operational
efficiencies.
Throughout 2016/17 we offered borrowers a competitive range of
fixed and discounted variable mortgages, including features such as
fees assisted legal services, free valuations and cashbacks. These
incentives were well received, in particular, by those borrowers
looking to own their first home, with 23% of new mortgages advanced
in the year attributable to first time buyers (2015/16: 21%).
Savers faced further downward pressure on returns following the
Monetary Policy Committee's decision to lower Bank Rate to 0.25% in
August 2016 and of course the impact of the decision of the Court
of Appeal I referred to earlier. Savings rates were also adversely
impacted by the Bank of England's Term Funding Scheme, introduced
to stimulate the mortgage markets by providing banks and building
societies with low cost funding, which had the impact of lowering
rates across the market. Despite this, the average interest margin
paid to savers continues to remain above the average paid across
the entire cash savings market.
Against this backdrop, the Society's net interest margin, which
is broadly the difference between what is charged on mortgage
lending and what is paid to savers, is not maximised but managed at
a level which balances the current needs of savers and borrowers
with the requirement to deliver business growth and member value
over a longer horizon. Throughout the year, we maintained a
consistent presence in the Best Buy tables, offering flexibility
and choice through a range of savings products available via
branch, post and online channels.
Our members' views
As a building society the West Brom operates first and foremost
in the interests of its members.
Our expanding Customer Panel enables members to ultimately shape
the way we do things. It provides a platform for us to engage with
members and hear their views. During the year, we sought and
responded to the Panel's feedback on topics such as our latest
savings application form, communication preferences and what
constitutes a great branch experience.
Members' ViewPoint events, hosted in the Head Office and in
locations across the branch network, offer an opportunity for
customers to make suggestions and convey their opinions about the
Society to the Chief Executive and senior managers in a relaxed
setting. This year, we discussed the future for interest rates,
rewarding loyalty, mortgage fees and housing market growth with
members who attended.
Real-time surveys within our Customer Services, Direct Mortgage
and branch teams invite members to give immediate feedback on our
service, an important tool for monitoring performance against
members' expectations. During 2016/17, we were delighted to win
'Improvement Strategy of the Year' in the Midlands and Yorkshire
Contact Centre Awards for improvements to our Customer Services
department.
Outlook
Interest rates are predicted to remain low for the coming year,
maybe longer. Together with the availability of low cost funding
through the Bank of England's Term Funding Scheme, this will
stimulate lending but may also serve to intensify competition in
the mortgage markets.
The Government's recent housing white paper, 'Fixing our Broken
Housing Market', states an intention to increase the supply of new
housing stock and provide affordable options for people wishing to
buy or rent their own homes. We will keep abreast of these
developments and consider any opportunities and concerns they
present for home finance providers.
We will continue to invest in systems to improve the customer
experience, as well as moving forwards with the Internal Ratings
Based (IRB) approach to credit risk capital requirements - a
regulatory project which we expect, due to the low risk nature of
our core mortgage books, will ultimately improve our already robust
capital position.
As the UK negotiates its departure from the EU, there is
considerable uncertainty over its future relationships within and
beyond Europe. Against this backdrop, we are starting to see a
slowdown in house price inflation and real household income growth.
While our prime residential mortgages are of a high credit quality
and able to withstand a deterioration in market conditions, the
commercial loan book is much more sensitive to adverse movements
and further loss provisions may be necessary.
Despite the uncertainty that may result from the events of 2016,
the Society has achieved lending growth and maintained a solid
capital base. Furthermore, the upward trend in underlying
profitability is testimony to the strength of the Society's
business model. We are therefore well equipped to face the
challenges which may lie ahead and remain confident in our ability
to continue doing what we do best - fulfilling the needs of our
membership.
Jonathan Westhoff
Chief Executive
30 May 2017
Income Statement
for the year ended 31 March 2017 Group Group
2017 2016
GBPm GBPm
Interest receivable and similar income 108.9 126.7
Interest expense and similar charges (53.6) (66.7)
-------------------------------------------------- ------- ---------------
Net interest receivable 55.3 60.0
Fees and commissions receivable 2.7 3.7
Other operating income 4.1 3.9
-------------------------------------------------- ------- ---------------
Total operating income 62.1 67.6
Fair value losses on financial instruments (0.2) (1.0)
Net realised profits 0.5 0.6
-------------------------------------------------- ------- ---------------
Total income 62.4 67.2
Administrative expenses (44.4) (42.0)
Depreciation and amortisation (5.7) (5.1)
-------------------------------------------------- ------- ---------------
Operating profit before revaluation gains,
impairment and provisions 12.3 20.1
Gains on investment properties 5.4 5.5
Impairment on loans and advances (7.6) (8.1)
Provisions for liabilities (29.9) (4.0)
-------------------------------------------------- ------- ---------------
(Loss)/Profit before tax (19.8) 13.5
Taxation (6.0) (4.1)
--------------------------------------------------
(Loss)/Profit for the financial year (25.8) 9.4
================================================== ======= ===============
Statement of Comprehensive Income
for the year ended 31 March 2017 Group Group
2017 2016
GBPm GBPm
(Loss)/Profit for the financial year (25.8) 9.4
-------------------------------------------------- ------- ---------------
Other comprehensive income
Items that may subsequently be reclassified
to profit or loss
Available for sale investments
Valuation gains/(losses) taken to equity 0.5 (2.2)
Amounts transferred to Income Statement (0.5) (0.6)
Cash flow hedge losses taken to equity (0.5) (0.2)
Taxation 0.1 0.2
Items that will not subsequently be reclassified
to profit or loss
Gains on revaluation of land and buildings 0.6 -
Actuarial losses on defined benefit obligations (10.4) (0.9)
Amortisation of original discount on subscribed
capital 0.1 -
Taxation 1.7 0.1
-------------------------------------------------- ------- ---------------
Other comprehensive income for the financial
year, net of tax (8.4) (3.6)
-------------------------------------------------- -------
Total comprehensive income for the financial
year (34.2) 5.8
================================================== ======= ===============
Statement of Financial Position
at 31 March 2017 Group Group
2017 2016
GBPm GBPm
Assets
Cash and balances with the Bank of England 294.8 215.4
Loans and advances to credit institutions 174.0 204.0
Investment securities 385.0 410.1
Derivative financial instruments 6.3 8.9
Loans and advances to customers 4,776.5 4,739.0
Deferred tax assets 16.4 20.4
Trade and other receivables 3.5 2.7
Intangible assets 13.3 8.2
Investment properties 128.9 123.7
Property, plant and equipment 32.1 33.9
Retirement benefit assets - 0.8
Total assets 5,830.8 5,767.1
============================================= ====================== =================
Liabilities
Shares 4,427.3 4,385.1
Amounts due to credit institutions 450.3 259.0
Amounts due to other customers 132.7 157.0
Derivative financial instruments 69.0 77.1
Debt securities in issue 263.2 368.6
Deferred tax liabilities 5.0 4.7
Trade and other payables 10.2 15.2
Provisions for liabilities 3.1 2.7
Retirement benefit obligations 6.5 -
--------------------------------------------- -----------------
Total liabilities 5,367.3 5,269.4
Equity
Profit participating deferred shares 173.0 179.5
Subscribed capital 75.0 74.9
General reserves 211.0 239.3
Revaluation reserve 3.5 3.4
Available for sale reserve 1.7 0.9
Cash flow hedging reserve (0.7) (0.3)
--------------------------------------------- ---------------------- -----------------
Total equity attributable to members 463.5 497.7
Total liabilities and equity 5,830.8 5,767.1
============================================= ====================== =================
Statement of Changes
in Members' Interest
for the year ended
31 March 2017
Profit Available Cash
participating for flow
deferred Subscribed General Revaluation sale hedging
shares capital reserves reserve reserve reserve Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2016 179.5 74.9 239.3 3.4 0.9 (0.3) 497.7
Loss for the financial
year (6.5) - (19.3) - - - (25.8)
Other comprehensive
income for the period
Amortisation of original
discount on subscribed
capital - 0.1 - - - - 0.1
Available for sale
investments: reallocation
of tax* - - (0.8) - 0.8 - -
Actuarial losses on
defined benefit obligations - - (8.5) - - - (8.5)
Gains on revaluation
of land and buildings - - - 0.4 - - 0.4
Realisation of previous
revaluation gains - - 0.3 (0.3) - - -
Cash flow hedge losses - - - - - (0.4) (0.4)
Total other comprehensive
income - 0.1 (9.0) 0.1 0.8 (0.4) (8.4)
------------------------------ --------------- ----------- ---------- ------------ ---------- --------- -------
Total comprehensive
income for the year (6.5) 0.1 (28.3) 0.1 0.8 (0.4) (34.2)
------------------------------
At 31 March 2017 173.0 75.0 211.0 3.5 1.7 (0.7) 463.5
============================== =============== =========== ========== ============ ========== ========= =======
Profit Available Cash
participating for flow
deferred Subscribed General Revaluation sale hedging
shares capital reserves reserve reserve reserve Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April 2015 177.1 74.9 233.1 3.4 3.5 (0.1) 491.9
Profit for the financial
year 2.4 - 7.0 - - - 9.4
Other comprehensive
income for the period
Available for sale
investments: current
year movement net of
tax - - - - (2.6) - (2.6)
Actuarial losses on
defined benefit obligations - - (0.8) - - - (0.8)
Cash flow hedge losses - - - - - (0.2) (0.2)
Total other comprehensive
income - - (0.8) - (2.6) (0.2) (3.6)
------------------------------ --------------- ----------- ---------- ------------ ---------- --------- -------
Total comprehensive
income for the year 2.4 - 6.2 - (2.6) (0.2) 5.8
------------------------------ --------------- ----------- ---------- ------------ ---------- --------- -------
At 31 March 2016 179.5 74.9 239.3 3.4 0.9 (0.3) 497.7
============================== =============== =========== ========== ============ ========== ========= =======
* Tax in relation to available for sale investments has
been reallocated to reflect the underlying transactions.
Statement of Cash Flows
for the year ended 31 March 2017 Group Group
2017 2016
GBPm GBPm
Net cash inflow from operating activities
(below) 138.7 220.3
------------------------------------------------- -------- --------
Cash flows from investing activities
Purchase of investment securities (230.4) (386.7)
Proceeds from disposal of investment securities 213.1 298.0
Proceeds from disposal of investment properties 0.2 0.4
Purchase of property, plant and equipment
and intangible assets (9.6) (8.8)
Proceeds from disposal of property, plant
and equipment 0.5 -
Net cash flows from investing activities (26.2) (97.1)
------------------------------------------------- -------- --------
Cash flows from financing activities
Repayment of mortgage backed loan notes (106.0) (98.5)
Net cash flows from financing activities (106.0) (98.5)
------------------------------------------------- -------- --------
Net increase in cash 6.5 24.7
Cash and cash equivalents at beginning
of year 468.8 444.1
Cash and cash equivalents at end of year 475.3 468.8
================================================= ======== ========
For the purposes of the statement of cash flows, cash
and cash equivalents comprise the following balances
with less than 90 days maturity:
Group Group
2017 2016
GBPm GBPm
Analysis of cash and cash equivalents
Cash in hand (including Bank of England
Reserve account) 287.6 208.7
Loans and advances to credit institutions 174.0 204.0
Investment securities 13.7 56.1
475.3 468.8
================================================= ======== ========
The Group is required to maintain certain mandatory balances
with the Bank of England which, at 31 March 2017, amounted
to GBP7.2m (2015/16: GBP6.7m). The movement in these
balances is included within cash flows from operating
activities.
Group Group
2017 2016
GBPm GBPm
Cash flows from operating activities
(Loss)/Profit on ordinary activities before
tax from continuing activities (19.8) 13.5
Movement in prepayments and accrued income (0.8) (0.2)
Movement in accruals and deferred income (2.6) (0.4)
Impairment on loans and advances 7.6 8.1
Depreciation and amortisation 5.7 5.1
Revaluations of investment properties (5.4) (5.5)
Movement in provisions for liabilities 0.4 0.5
Movement in derivative financial instruments (5.5) 6.4
Movement in fair value adjustments (0.7) (2.3)
Movement in subscribed capital 0.1 -
Change in retirement benefit obligations (3.1) (9.2)
------------------------------------------------- -------- --------
Cash flows from operating activities before
changes in operating assets and liabilities (24.1) 16.0
Movement in loans and advances to customers (47.7) (72.4)
Movement in loans and advances to credit
institutions (0.5) 0.6
Movement in shares 45.7 407.1
Movement in deposits and other borrowings 167.0 (129.7)
Movement in trade and other receivables - 2.4
Movement in trade and other payables (1.7) (3.7)
Net cash inflow from operating activities 138.7 220.3
================================================= ======== ========
Ratios
for the year ended 31 March 2017 Group Statutory
2017 limit
% %
Lending limit 11.5 25.0
Funding limit 11.7 50.0
------------------------------------------- -------------------- ---------------
Group Group
2017 2016
% %
As a percentage of shares and borrowings:
Gross capital 9.25 10.37
Free capital 6.21 7.29
Liquid assets 17.04 17.28
As a percentage of mean total assets:
(Loss)/Profit for the financial year (0.44) 0.17
Management expenses 0.86 0.83
------------------------------------------- -------------------- ---------------
Group Group
2017 2016
% %
Common Equity Tier 1 capital ratio 13.8 14.6
------------------------------------------- -------------------- ---------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
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