TIDMWBS
RNS Number : 7134J
West Bromwich Building Society
06 December 2018
WEST BROMWICH BUILDING SOCIETY
Announcement of half-year results for the six months
to 30 September 2018
The West Brom today announces its half-year results for the six
months to 30 September 2018.
Key highlights:
- GBP466m advanced for new mortgage lending (30 September 2017:
GBP478m), maintaining traction in a highly competitive market.
- Increased support and more product choice for first time
buyers; we enabled more than 2,000 people to purchase their first
home during the half-year.
- Net Promoter Score up from 65 to 71 and customer satisfaction up from 94% to 95%.
- Appointment of new Member and Employee Councils reflects our
ongoing commitment to engaging with key stakeholders and responding
to their needs.
- Profit before tax of GBP6.0m for the six months to 30
September 2018, a year on year increase of 43% (30 September 2017:
GBP4.2m).
- An uplift in the net interest margin to 1.02% (30 September 2017: 0.98%).
- Strengthened capital position as a result of a successful
Liability Management Exercise and increase in retained profit.
- The Society's Common Equity Tier 1 (CET 1) capital ratio now
stands at 15.2% (30 September 2017: 14.8%).
Jonathan Westhoff, Chief Executive, commented:
The Society has delivered a strong half-year performance,
despite an increasingly competitive market, with a 43% increase in
profits and continued all-round support for our members. Improved
profitability allows us to grow the business sustainably and invest
in the type of products and services we can offer.
In recognition of our role in supporting those who aspire to own
their own home, advances to first time buyers accounted for over a
third (38%) of our total new lending during the last six months. We
have also broadened our product range so that we can support
borrowers who have more specialist needs, making a controlled entry
into the self-build, assisted mortgage and limited company buy to
let markets.
For savers, our average interest rate payable was 42% higher
than the market average. Our members also welcomed a subsequent
boost when we upped the majority of our savings rates in response
to the latest increase in Bank Rate.
We ensure our savings products cater for a variety of needs,
including a recently enhanced children's account and our Help to
Buy ISA for those who are building up a deposit for their first
home. In addition, we provide services for retirement and later
life planning and devoted a month to raising awareness about
pensions through a series of in-branch clinics hosted by
independent financial advisers.
The heightened levels of political and economic uncertainty
surrounding Brexit and intensified mortgage market pricing
competition could present considerable challenges for the financial
sector in the months and, potentially, years to come. In the face
of these challenges, the Society will continue to be there for its
members with its responsible approach to lending and supporting its
savers.
Alongside established distribution channels such as our branch
network, the Society is committed to investing in its core
technology platforms to allow greater digital capability and
operational resilience, which is something members quite rightly
expect from a modern building society. Work in this area is well
underway and will continue to be a significant focus for us in the
years ahead.
ENQUIRIES
The West Brom 0121 796 7785
Jonathan Westhoff - Chief Executive
Ashraf Piranie - Group Finance & Operations Director
West Bromwich Building Society
Condensed consolidated
half-yearly financial information
30 September 2018
Chief Executive's BUSINESS Review
Half-year results reflecting our mutual purpose
As a mutual organisation the West Brom exists for, and operates
in, the interests of our membership; supporting our members'
financial wellbeing by providing a safe and good return on their
savings and enabling people to have somewhere they call home.
We continue to be focused on the delivery of our core strategic
objectives; sustainable levels of residential lending funded
primarily by retail savings, cost efficient services delivered to
the standards members rightly expect and continuing the managed
exit of non-core legacy positions.
Against our mutual purpose, I am proud to announce that our
simple strategy has yet again delivered a strong half-year
performance with an improved level of profit and a further
strengthening of our Common Equity Tier 1 (CET 1) capital position,
allowing us to complete a further GBP466m of residential lending.
The level of profit achieved enables us to grow our core business
sustainably whilst also allowing us to invest in products and
services.
Profitability improved, a modernised capital base and better
returns for savers
At GBP6.0m, the half-year statutory profit represents a year on
year increase of 43%. This increase has been achieved due to an
uplift in net interest margin to 1.02% (30 September 2017: 0.98%),
a 3.5% reduction in management expenses and a 41% lower charge for
impairment. These factors more than offset a GBP1.2m reduction in
gains on investment properties to GBP1.8m, which reflects a cooling
of house price valuation rises generally.
Managing the interests of members
As a mutual it is not our role to maximise the interest rate gap
between savers and borrowers but to manage this at a level that
covers the costs we incur in delivering our services to members and
allowing room for investment in the future, whilst maintaining our
strong capital position.
This is why, when the Bank of England decided in August to
increase the Bank Rate by 0.25%, we took the opportunity to
increase savings rates, where possible, to ensure our products
continue to offer good value, particularly when compared with what
is available through competitor branch networks. We have once again
offered value to our savers, increasing the average we pay above
the market average from 0.14% for the six months to 30 September
2017 to 0.27%1.
[(1) Average market rates sourced from Bank of England Bankstats
table A6.1]
At the West Brom we believe firmly that the value we offer
extends beyond the competitive interest rates we pay our savers or
charge our borrowers. We also pride ourselves on our service
offering; the face-to-face service offered in our 37 heartland
branches, our dedicated customer services support team and our
WeBSave offering that allows members to manage their savings
online.
Along with savings and mortgages we help support our members'
broader financial wellbeing through a range of investment and
protection products. Fees, commissions and other operating income
increased to GBP3.6m compared with GBP3.1m in the first half of
2017/18. This comprised income earned on insurance and protection
products, investment advice and rent receivable on our portfolio of
investment properties.
Keeping control of costs
We strive to provide member services in the most cost efficient
way possible and continue to invest in the technology to do so. In
the first half of the year a number of areas where efficiency could
be improved were identified and, as such, resulted in sustainable
cost savings of 3.5%, supporting our ability to offer value to
savers and borrowers and invest in the Society's future. Management
expenses were GBP24.9m (30 September 2017: GBP25.8m) with the Group
management expenses ratio reduced from 0.89% to 0.88%, compared
with the same period in 2017. A resolute focus on how we can
deliver our services to members in the most efficient way possible
will continue throughout the second half of the year.
A modernised capital base
The impact of the Liability Management Exercise which completed
in April 2018 is detailed in the Group Statement of Changes in
Members' Interests and Equity and in note 5 to the condensed
consolidated half-yearly financial information. The transaction was
a significant landmark for the Society, modernising its capital
base and increasing members' general reserves by GBP52m. When
combined with the unaudited profit for the half year and a further
reduction in higher risk weighted legacy lending, this has resulted
in our CET 1 capital ratio increasing to 15.2% (31 March 2018:
14.8%); a robust base from which we can grow and invest. The stable
leverage ratio of 6.8% (31 March 2018: 6.9%) compares favourably
with others in the sector and is significantly above the current
regulatory minimum of 3%.
The following table illustrates the Group's capital position and
ratios at 30 September 2018 and 31 March 2018, presented as
currently calculated under CRD IV transitional rules, which apply
to the Society until 5 April 2021, and also with the full impact of
CRD IV implementation.
Capital resources
Transitional Transitional
CRD IV Full implementation CRD IV Full implementation
rules of CRD IV rules of CRD IV
30-Sep-18 30-Sep-18 31-Mar-18 31-Mar-18
GBPm GBPm GBPm GBPm
Equity attributable to members
(excluding Additional Tier
1) 375.2 375.2 395.0 395.0
Other adjustments(1) 5.4 5.4 (20.8) (20.8)
-------------------------------------- --------------- -------------------- ------------- --------------------
Common Equity Tier 1 (CET 1)
capital 380.6 380.6 374.2 374.2
Additional Tier 1 capital 8.9 - 30.0 -
-------------------------------------- --------------- -------------------- ------------- --------------------
Total Tier 1 capital 389.5 380.6 404.2 374.2
Tier 2 capital(2) 21.7 21.7 16.3 16.3
Total regulatory capital resources 411.2 402.3 420.5 390.5
-------------------------------------- --------------- -------------------- ------------- --------------------
Risk weighted assets (RWA) 2,508.7 2,508.7 2,523.1 2,523.1
Leverage ratio exposure 5,706.7 5,706.7 5,885.2 5,885.2
-------------------------------------- --------------- -------------------- ------------- --------------------
Capital ratios
% % % %
Common Equity Tier 1 ratio
(as a percentage of RWA) 15.2 15.2 14.8 14.8
Tier 1 ratio (as a percentage
of RWA) 15.5 15.2 16.0 14.8
Total capital ratio (as a percentage
of RWA) 16.4 16.0 16.7 15.5
Leverage ratio 6.8 6.7 6.9 6.4
-------------------------------------- --------------- -------------------- ------------- --------------------
1 Other adjustments mainly comprise deductions for intangible
assets and deferred tax. For September 2018, the other adjustments
line also includes IFRS 9 transitional relief.
2 Tier 2 capital excludes accrued interest.
On 1 April 2018 a new accounting standard came into effect; IFRS
9 'Financial Instruments', which has changed the way impairment is
calculated and has resulted in an increase in the level of
provisioning. Transitional rules apply for the implementation of
this new standard which enable banks and building societies to
phase in the capital impact of IFRS 9 adoption over a period of
five years. During this period, percentages of the additional
impairment provision requirements, recognised in general reserves
on IFRS 9 adoption, are added back to CET 1 capital. Had these
transitional arrangements not been in place, the CET 1 ratio at 30
September 2018 would have been 14.3% and the leverage ratio would
have been 6.2%.
Commitment to our core purpose
Our lending
Throughout the first half of the year the Society has continued
to cement its position as a well-recognised residential mortgage
lender with gross lending totalling GBP466m (30 September 2017:
GBP478m) and owner occupied net lending of GBP173m (30 September
2017: GBP243m).
Over the last few years we have continued to see increasing
challenges for first time buyers, owing to a lack of supply,
constraints on their ability to borrow and increased house prices
relative to incomes. As a result, the expectations of people in how
they occupy the place they call home have also begun to shift, with
an increased proportion of younger generations renting as well as
seeking support to buy. With this in mind, and aligned to our
purpose of promoting home ownership, we have continued to develop
our product proposition to support first time buyers. We have
introduced Help to Buy remortgage products, an assisted mortgage
range for those looking to buy with the support of a sponsor and
self-build products. We have also introduced products for portfolio
buy to let landlords who continue to support the private rented
sector. I am pleased to report that the Society has supported over
2,000 first time buyers to own their own home in the six months to
30 September 2018, with first time buyer advances making up 38% of
total lending in the period (30 September 2017: 28%).
Our funding
Aligned to mutual principles, mortgage lending remains primarily
funded by retail savings balances, with 87% of our residential
lending balances provided by members' savings (31 March 2018: 93%).
Of these savings balances 69% are held in branch based accounts, a
higher proportion than at the year end (31 March 2018: 66%).
In addition to our members' savings, wholesale markets provide
an important source of supplementary funding primarily as the
majority is longer-term in nature, with 68% placed with the Society
for periods exceeding two years. In the first half of the year the
Society's wholesale funding ratio increased modestly from 22.8% to
24.1%. Wholesale funding includes mortgage backed securitisations,
which provides term funding.
Holding high quality liquid assets is important in ensuring the
Society is comfortably able to meet its financial obligations as
they fall due under both normal and plausible stressed scenarios.
The key regulatory measure of liquidity is the Liquidity Coverage
Ratio (LCR) which, at 144% was at a strong level (31 March 2018:
194%), considerably above the current minimum regulatory
requirement. The liquidity figure at 31 March 2018 year end was
higher than normal, as the Society had raised GBP350m of 5 year
term funding through a residential mortgage backed securitisation,
in January 2018.
Asset quality improved
Since 2009 a key strategic objective for the Society has been to
improve the risk profile of the balance sheet by taking
opportunities to remove legacy positions, primarily commercial
assets, where economically viable. In the first half of the year
non-core commercial lending balances reduced by 5%; at 30 September
2018 total remaining gross balance sheet exposures stood at GBP464m
(31 March 2018: GBP488m), of which GBP41m is securitised (31 March
2018: GBP53m) with no residual risk exposure for the Group.
Following adoption of IFRS 9 on 1 April 2018, provisions are now
recognised on an expected loss basis, as explained in note 4 to the
condensed consolidated half-yearly financial information. This has
increased the level of provision coverage from 8.6% at 31 March
2018 on an IAS 39 basis to 16.7% at 30 September 2018 on an IFRS 9
basis. The strategy of reducing non-core exposures and lending only
into traditional residential lending segments has resulted in a
material change to the Society's balance sheet. Prime owner
occupied residential loan balances have more than doubled, from
GBP1.38bn to GBP2.84bn, since the Society re-entered the mortgage
market in 2012/13, over which same time period non-core commercial
balances reduced by nearly 60% from GBP1.10bn to GBP0.46bn.
With significant growth in our prime owner occupied lending over
the past five years or so, it is also encouraging to see that the
number of residential customers experiencing difficulty with their
payments remains significantly below the market average. At half
year core residential 3 months or longer arrears stood at 0.29%,
compared with the market average of 0.78%(2) which is a testament
to the responsible approach we have taken to ensure our borrowers
can afford their mortgage payments.
[(2) UK Finance table AP1]
Under the new IFRS 9 accounting standard, impairment must be
measured on an expected loss basis, rather than the incurred loss
approach prescribed by its predecessor, IAS 39. Since our year-end
disclosures, we have continued to improve the methodologies that
underpin our provisioning approach, particularly around the market
sensitivities inherent within our commercial book. To this end, as
detailed in note 4, IFRS 9 implementation has resulted in a
reduction in general reserves of GBP27.9m almost entirely due to
additional commercial provisioning requirements under this new
standard.
Member value delivered
The Society delivers member value through the competitive
products we offer, the service we provide through our branches,
customer services team, online and our community relationships.
Products
For savers, in what continues to be a historically low interest
rate environment, our average rates were some 42% higher than the
market average, demonstrating our determination to support our
savers through this period of unprecedented low interest rates.
Along with this competitive rate of interest we seek to ensure our
products cater for a breadth of member needs from children's
accounts supporting the next generation to save, our Help to Buy
ISA supporting a new generation of home owners to our range of easy
access and fixed rate bonds supporting our members to save either
an emergency buffer or for longer-term goals.
For our borrowers we continue to offer a wide range of products
that satisfy both the simple needs of those looking to buy and
remortgage but also those with more complex requirements, those
looking to build, operate as a landlord through a limited company,
or remortgage but retain their Help to Buy Equity Loan. Across all
of our mortgage products we seek to offer competitive rates to
borrowers (within the Society's risk appetite), with a range of
initial fee options and incentives such as free valuations.
Service
Our products offer competitive rates, but we know that our
product offering must be enhanced by our service offering. To this
end, we strive to offer the very best service to all Society
members both current and future. For the period to 30 September
2018, the Society's Net Promoter Score was an impressive +71 (31
March 2018: +65) and customer satisfaction was also up from 94% to
95%. This really is important to a society seeking to achieve the
highest service standards possible in the most efficient way. These
service standards were independently recognised in this year's
Financial Adviser Service Awards in the category for mortgage
lenders and packagers, where the Society received the coveted five
star rating for its quality of service.
Engagement
In my statement at full year I announced two exciting new
initiatives, the Member and Employee Councils that seek to
galvanise how actively our key stakeholders are engaged in our
decision making. To this end, I am pleased to update that,
following a significant number of applications, both councils are
now appointed and will start in the second half to contribute to
the decisions of both the Executive Committee and the Board. While
you'll be hearing much more information about the roles of the
Councils as we move forward, I wanted to take this opportunity to
thank all the members and employees who applied, a testament to
what an engaged, motivated and passionate member base the West Brom
has.
Community
As both a regional member-owned organisation and a local
employer we recognise the importance of giving back to the local
community. This year the Society has partnered with Black Country
Women's Aid as our charity of the year to support the much needed
work they do in supporting the victims of domestic abuse, violence
and exploitation. A significant number of both fundraising and
volunteering events have already taken place in the first six
months of the year with much more to follow.
Principal risks and uncertainties
The Society continues to recognise that effective risk
management is essential to achieving the Society's objectives in an
operating environment where the nature of the threats which prevail
is continually evolving.
A description of the principal risks and uncertainties is
provided in this report to the extent that they differ from those
at 31 March 2018 as reported on pages 24 and 25 of the 2017/18
Annual Report and Accounts.
Principal risks
During the period, the Society added Model Risk to its principal
risk categories, recognising the importance of models in critical
decision making processes. Model Risk is defined as the risk of
adverse consequences resulting from decisions based on models that
are inaccurate, sub-optimal, incorrectly implemented, or misused.
The Society has established its Model Risk Management Framework to
describe its approach to assessing, measuring, monitoring, managing
and controlling Model Risk. The Model Risk Committee, a
sub-committee of the Executive Risk Committee, assists the Society
in its management of Model Risk as part of a comprehensive risk
governance structure.
Business conditions and the economic environment
Brexit related uncertainty has grown and the impact of this on
the economy is closely monitored. Whilst the regulatory authorities
have commented that the UK Banking system could support the real
economy should the UK leave the EU without a transitional deal in
place, the potential range of outcomes for Brexit has widened. The
Society's UK focus should allow it to be protected from the
potential adverse implications of a problematic Brexit, but it
could be impacted by wider economic changes, affecting house
prices, Bank Rate and employment. Business plans continue to model
the impact of a range of scenarios and stress tests to provide
comfort that the Society can tolerate the consequences. In
particular, financial projections are reviewed regularly to
identify mitigation actions.
Margin compression
The 2017/18 Annual Report and Accounts included details of the
factors leading to margin compression as a consequence of reducing
mortgage pricing for traditional borrowers and increasing saving
rates following the first Bank Rate increase in 10 years. This
position has further exacerbated following the subsequent Bank Rate
increase seen in August as the benefits passed to our savers by the
Society have not been matched by an equivalent increase in
borrowers' rates. Whilst the margin for the first half of the year
did show a small improvement, the current pressures may impact the
Society's growth opportunities within the traditional mortgage
market, as the Society will only lend at rates which enable us to
achieve our risk-adjusted return on capital thresholds, which is a
key measure in quantifying the best interests of our membership as
a whole.
Technology investment and operational resilience
The Society is committed to a programme of strategic investment
in its core technology platforms that support both mortgage
origination and savings to allow greater digital capability. The
programme is underway and will retain significant management
involvement for the remainder of 2018/19 and through to 2021.
This investment will continue to ensure the Society's focus on
operational availability and resiliency. As described in the
2017/18 Annual Report and Accounts, the Society recognises the need
to maintain and develop its defences and responses in this area in
order to protect the Society and maintain the trust of customers
and the confidence of regulators. During 2017/18, the Society
invested significantly in cyber security infrastructure and
training and has continued to do so in 2018/19, in line with the
Cyber Resilience Strategy and Information Risk Management
Framework. This will require the Society to remain vigilant to the
latest cyber attack trends and protection defences.
Strengthening risk management capabilities
Our existing capability to assess, manage and control risks
continues to be illustrated by the strong progress we have made to
de-risk the balance sheet along with the impressive performance of
new residential lending. As indicated earlier in the Business
Review, opportunities within the traditional mortgage markets may
be constrained in future periods. Notwithstanding market pressures,
we are continuing to build on our risk management capabilities
through an active project to progress the Society towards the
Internal Ratings Based approach to credit risk. The project is
progressing well and we are continuing to work towards a 2019
application date.
A Society positioned well for the future
Outlook
These results illustrate the continued success of our strategy;
increased levels of profitability, a reduction in balance sheet
risk and a modernised capital base to withstand better potential
market risks, including those associated with Brexit. As we look to
the future we recognise the importance of maintaining the momentum
of our strategy and continuing to improve the level of returns we
are able to offer members.
In order to do this we recognise the equal importance of
investment in the Society's future, particularly the core systems
required to deliver the digital services members expect of a modern
building society and a concentrated focus on how we control our
costs. Both investment and cost control will be essential to ensure
the Society is well positioned moving forward.
Jonathan Westhoff
Chief Executive
Forward-looking statements
Certain statements in this half-yearly report are
forward-looking. 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. 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.
Condensed consolidated half-yearly Income Statement
for the six months ended 30 September 2018
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17* 31-Mar-18*
unaudited unaudited audited
Notes GBPm GBPm GBPm
Interest receivable and similar income 54.3 48.7 97.3
Interest expense and similar charges (25.3) (20.3) (41.8)
Net interest receivable 29.0 28.4 55.5
Fees and commissions receivable 1.6 1.2 2.7
Other operating income 2.0 1.9 3.8
Fair value gains on financial instruments 0.2 2.3 2.5
Total income 32.8 33.8 64.5
Administrative expenses (21.6) (22.1) (43.5)
Depreciation and amortisation 11 (3.3) (3.7) (7.2)
Operating profit before revaluation
gains, impairment and provisions 7.9 8.0 13.8
Gains on investment properties 12 1.8 3.0 3.8
Impairment on loans and advances 7 (3.7) (6.3) (7.9)
Provisions for liabilities and charges 8 - (0.5) (0.9)
Profit before tax 6.0 4.2 8.8
Taxation (1.1) (0.8) (0.9)
Profit for the period 4.9 3.4 7.9
------------------------------------------- ------ ---------- ----------- -----------
*As explained in note 4 to the condensed consolidated
half-yearly financial information, the Group has adopted IFRS 9
'Financial Instruments' with effect from 1 April 2018 and
comparatives have not been restated. The condensed consolidated
Income Statement is therefore presented on an IFRS 9 basis for the
six months ended 30 September 2018 and an IAS 39 basis for the six
months ended 30 September 2017 and year ended 31 March 2018.
Condensed consolidated half-yearly Statement of Comprehensive
Income
for the six months ended 30 September 2018
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17* 31-Mar-18*
unaudited unaudited audited
GBPm GBPm GBPm
Profit for the period 4.9 3.4 7.9
--------------------------------------------------------------------- ---------- --------------- ---------------
Other comprehensive income
Items that may subsequently be reclassified to profit or loss
Available for sale investments
Valuation losses taken to equity - (0.2) (1.1)
Fair value through other comprehensive income investments
Valuation losses taken to equity (0.9) - -
Cash flow hedge gains taken to equity - 2.5 0.8
Taxation 0.2 (0.4) 0.1
Items that will not subsequently be reclassified to profit or loss
Actuarial losses on defined benefit obligations - - (1.6)
Taxation - - 0.4
--------------------------------------------------------------------- ---------- --------------- ---------------
Other comprehensive income for the period, net of tax (0.7) 1.9 (1.4)
--------------------------------------------------------------------- ---------- --------------- ---------------
Total comprehensive income for the period 4.2 5.3 6.5
--------------------------------------------------------------------- ---------- --------------- ---------------
As a percentage of mean total assets % % %
Profit for the period 0.09 0.06 0.14
Management expenses (annualised) 0.88 0.89 0.87
--------------------------------------------------------------------- ---------- --------------- ---------------
*As explained in note 4 to the condensed consolidated
half-yearly financial information, the Group has adopted IFRS 9
'Financial Instruments' with effect from 1 April 2018 and
comparatives have not been restated. The condensed consolidated
Statement of Comprehensive Income is therefore presented on an IFRS
9 basis for the six months ended 30 September 2018 and an IAS 39
basis for the six months ended 30 September 2017 and year ended 31
March 2018.
Condensed consolidated half-yearly Statement of Financial
Position
at 30 September 2018
30-Sep-18 30-Sep-17* 31-Mar-18*
unaudited unaudited audited
Notes GBPm GBPm GBPm
Assets
Cash and balances with the Bank
of England 130.1 212.4 324.7
Loans and advances to credit
institutions 106.0 143.8 120.6
Investment securities 259.4 316.0 311.9
Derivative financial instruments 17.9 11.2 19.5
Loans and advances to customers 9 4,843.6 4,866.3 4,805.4
Deferred tax assets 19.7 15.0 15.3
Trade and other receivables 3.6 3.3 6.4
Intangible assets 11 15.1 13.7 15.3
Investment properties 12 134.0 131.6 132.2
Property, plant and equipment 11 29.6 31.1 30.2
------------------------------------ ------ ---------- ----------- -----------
Total assets 5,559.0 5,744.4 5,781.5
------------------------------------ ------ ---------- ----------- -----------
Liabilities
Shares 10 3,869.2 4,160.0 4,051.4
Amounts due to credit institutions 760.1 683.9 571.3
Amounts due to other customers 96.7 189.2 133.1
Derivative financial instruments 33.0 53.0 38.7
Debt securities in issue 13 369.7 169.3 493.3
Current tax liabilities 4.0 - -
Deferred tax liabilities 4.2 4.9 4.5
Trade and other payables 9.7 7.7 12.0
Provisions for liabilities and
charges 8 1.5 2.5 2.1
Retirement benefit obligations 4.0 5.1 5.1
Subordinated liabilities 18 22.8 - -
Total liabilities 5,174.9 5,275.6 5,311.5
------------------------------------ ------ ---------- ----------- -----------
Equity
Profit participating deferred
shares 14 - 173.8 175.0
Core capital deferred shares 15 127.0 - -
Subscribed capital 17 8.9 75.0 75.0
General reserves 244.7 213.7 215.8
Revaluation reserve 3.4 3.4 3.4
Available for sale reserve - 1.5 0.8
Fair value reserve 0.1 - -
Cash flow hedging reserve - 1.4 -
------------------------------------ ------ ---------- ----------- -----------
Total members' interests and
equity 384.1 468.8 470.0
==================================== ====== ========== =========== ===========
Total members' interests, equity
and liabilities 5,559.0 5,744.4 5,781.5
------------------------------------ ------ ---------- ----------- -----------
*As explained in note 4 to the condensed consolidated
half-yearly financial information, the Group has adopted IFRS 9
'Financial Instruments' with effect from 1 April 2018 and
comparatives have not been restated. The condensed consolidated
Statement of Financial Position is therefore presented on an IFRS 9
basis at 30 September 2018 and an IAS 39 basis at 30 September 2017
and 31 March 2018.
Condensed consolidated Statement of Changes in Members'
Interests and Equity
for the six months ended 30 September 2018
6 months ended
30 September
2018
(unaudited)
Profit Core
participating capital Available Fair
deferred deferred Subscribed General Revaluation for sale value
shares shares capital reserves reserve reserve reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2018 175.0 - 75.0 215.8 3.4 0.8 - 470.0
Changes on
initial
application
of IFRS 9
(note 4) - - - (27.9) - (0.8) 0.8 (27.9)
--------------- -------------- --------- ----------- --------- ------------ ---------- -------- -------
Restated
balance at 1
April 2018 175.0 - 75.0 187.9 3.4 - 0.8 442.1
Profit for the
period - - - 4.9 - - - 4.9
Other
comprehensive
income for the
period (net of
tax)
Fair value
through other
comprehensive
income
investments - - - - - - (0.7) (0.7)
Total other
comprehensive
income - - - - - - (0.7) (0.7)
--------------- -------------- --------- ----------- --------- ------------ ---------- -------- -------
Total
comprehensive
income for
the period - - - 4.9 - - (0.7) 4.2
--------------- -------------- --------- ----------- --------- ------------ ---------- -------- -------
Capital
restructuring
(note 5) (175.0) 127.0 (66.1) 51.9 - - - (62.2)
--------------- -------------- --------- ----------- --------- ------------ ---------- -------- -------
At 30
September
2018 - 127.0 8.9 244.7 3.4 - 0.1 384.1
--------------- -------------- --------- ----------- --------- ------------ ---------- -------- -------
6 months ended
30 September
2017
(unaudited)*
Profit
participating Subscribed General Revaluation Available for Cash flow
deferred shares capital reserves reserve sale reserve hedging reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2017 173.0 75.0 211.0 3.5 1.7 (0.7) 463.5
Profit for the
period 0.8 - 2.6 - - - 3.4
Other
comprehensive
income for the
period (net of
tax) - - - - - - -
Realisation of
previous
revaluation
gains - - 0.1 (0.1) - - -
Available for
sale
investments - - - - (0.2) - (0.2)
Cash flow
hedge gains - - - - - 2.1 2.1
Total other
comprehensive
income - - 0.1 (0.1) (0.2) 2.1 1.9
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
Total
comprehensive
income for
the period 0.8 - 2.7 (0.1) (0.2) 2.1 5.3
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
At 30
September
2017 173.8 75.0 213.7 3.4 1.5 1.4 468.8
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
Year ended 31
March 2018
(audited)*
Profit
participating Subscribed General Revaluation Available for Cash flow
deferred shares capital reserves reserve sale reserve hedging reserve Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 April
2017 173.0 75.0 211.0 3.5 1.7 (0.7) 463.5
Profit for the
period 2.0 - 5.9 - - - 7.9
Other
comprehensive
income for the
period (net of
tax)
Available for
sale
investments - - - - (0.9) - (0.9)
Actuarial
losses on
defined
benefit
obligations - - (1.2) - - - (1.2)
Realisation of
previous
revaluation
gains - - 0.1 (0.1) - - -
Cash flow
hedge gains - - - - - 0.7 0.7
Total other
comprehensive
income - - (1.1) (0.1) (0.9) 0.7 (1.4)
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
Total
comprehensive
income for
the period 2.0 - 4.8 (0.1) (0.9) 0.7 6.5
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
At 31 March
2018 175.0 75.0 215.8 3.4 0.8 - 470.0
--------------- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- ------------------
*As explained in note 4 to the condensed consolidated
half-yearly financial information, the Group has adopted IFRS 9
'Financial Instruments' with effect from 1 April 2018 and
comparatives have not been restated. The condensed consolidated
Statement of Changes in Members' Interests and Equity is therefore
presented on an IFRS 9 basis for the six months ended 30 September
2018 and an IAS 39 basis for the six months ended 30 September 2017
and the year ended 31 March 2018.
Condensed consolidated half-yearly Statement of Cash Flows
for the six months ended 30 September 2018
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Net cash outflow from operating activities
(below) (103.2) (91.9) (323.4)
--------------------------------------------- -------------------- ------------------ ------------------
Cash flows from investing activities
Purchase of investment securities (62.5) (37.8) (155.6)
Proceeds from disposal of investment
securities 65.3 124.8 267.7
Proceeds from disposal of investment
properties - 0.3 0.5
Purchase of property, plant and equipment
and intangible assets (2.5) (2.9) (7.1)
--------------------------------------------- -------------------- ------------------ ------------------
Net cash flows from investing activities 0.3 84.4 105.5
--------------------------------------------- -------------------- ------------------ ------------------
Cash flows from financing activities
Issue of debt securities 1.0 - 348.5
Repayment of debt securities (124.0) (86.9) (113.4)
Capital restructuring (note 5) (36.2) - -
-------------------------------------------- -------------------- ------------------ ------------------
Net cash flows from financing activities (159.2) (86.9) 235.1
--------------------------------------------- -------------------- ------------------ ------------------
Net (decrease)/increase in cash and
cash equivalents (262.1) (94.4) 17.2
Cash and cash equivalents at beginning
of period 492.5 475.3 475.3
--------------------------------------------- -------------------- ------------------ ------------------
Cash and cash equivalents at end of
period 230.4 380.9 492.5
--------------------------------------------- -------------------- ------------------ ------------------
For the purposes of the cash flow statement, cash and cash
equivalents comprise the following balances with less than 90 days
maturity:
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Cash and cash equivalents
Cash in hand (including Bank of
England Reserve account) 119.4 205.4 318.1
Loans and advances to credit institutions 106.0 143.8 120.6
Investment securities 5.0 31.7 53.8
-------------------------------------------- --------------- --------------- ---------------
230.4 380.9 492.5
------------------------------------------- --------------- --------------- ---------------
The Group is required to maintain certain mandatory balances
with the Bank of England which, at 30 September 2018, amounted to
GBP10.7m (30 September 2017: GBP7.0m and 31 March 2018: GBP6.6m).
The movement in these balances is included within cash flows from
operating activities.
Condensed consolidated half-yearly Statement of Cash Flows
(continued)
for the six months ended 30 September 2018
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17* 31-Mar-18*
unaudited unaudited audited
GBPm GBPm GBPm
Cash flows from operating activities
Profit before tax 6.0 4.2 8.8
Adjustments for non-cash items
included in profit before tax
Impairment on loans and advances 3.7 6.3 7.9
Depreciation and amortisation 3.3 3.7 7.2
Revaluation of investment properties (1.8) (3.0) (3.8)
Provisions for liabilities and
charges (0.6) (0.6) (1.0)
Interest on subordinated liabilities 1.2 - -
Fair value losses on equity
release portfolio 0.9 - -
Other non-cash movements 1.3 8.0 24.1
--------------------------------------- -------------------- ------------------ --------------------
14.0 18.6 43.2
Changes in operating assets and
liabilities
Loans and advances to customers (79.0) (111.2) (69.5)
Loans and advances to credit
institutions (4.1) 0.2 0.6
Derivative financial instruments (4.1) (20.9) (43.5)
Shares (182.1) (264.8) (373.2)
Deposits and other borrowings 153.0 290.1 123.1
Trade and other receivables 2.5 0.2 (2.9)
Trade and other payables (2.3) (2.7) 1.7
Retirement benefit obligations (1.1) (1.4) (3.0)
Tax received - - 0.1
--------------------------------------- -------------------- ------------------ --------------------
Net cash outflow from operating
activities (103.2) (91.9) (323.4)
--------------------------------------- -------------------- ------------------ --------------------
*Comparatives have been recategorised, where applicable, to
align to the current period presentation of cash flows from
operating activities.
Notes to condensed consolidated half-yearly financial
information
for the six months ended 30 September 2018
1 General information
These half-yearly financial results do not constitute statutory
accounts as defined in section 81A of the Building Societies Act
1986. A copy of the statutory accounts for the year to 31 March
2018 has been delivered to the Financial Conduct Authority and the
relevant information in this report has been extracted from these
statutory accounts. These accounts have been reported on by the
Group's auditor and the report of the auditor was (i) unqualified,
and (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their
report.
The consolidated half-yearly financial information for the six
months to 30 September 2018 and 30 September 2017 is unaudited and
has not been reviewed by the Group's auditor.
2 Basis of preparation
This condensed consolidated half-yearly financial report for the
six months ended 30 September 2018 has been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, 'Interim Financial Reporting' as adopted
by the European Union. The half-yearly condensed consolidated
financial report should be read in conjunction with the Annual
Report and Accounts for the year ended 31 March 2018, which have
been prepared in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union.
3 Going concern and business viability statement
Details of the Group's objectives, policies and processes for
managing its exposure to risk are contained in the Risk Management
Report of the 2017/18 Annual Report and Accounts. The Directors
also include statements in the Directors' Report in respect of
going concern and longer-term business viability on page 30 of the
2017/18 Annual Report and Accounts.
The Directors have reviewed the latest plans and forecasts for
the Group giving consideration to liquidity and capital adequacy.
They are satisfied that the Group has adequate resources to meet
both the normal demands of the business and the requirements which
might arise in stressed circumstances for the foreseeable future
and that the longer-term business viability statement in the
2017/18 Annual Report and Accounts remains appropriate. Accordingly
they continue to adopt the going concern basis in preparing these
half-yearly financial results.
4 Accounting policies
The accounting policies adopted by the Group in the preparation
of its 2018 Interim Financial Report are consistent with those
disclosed in the Annual Report and Accounts for the year ended 31
March 2018 with the exception of the adoption of IFRS 15 'Revenue
from Contracts with Customers' and IFRS 9 'Financial Instruments',
the impacts of which are set out below.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 'Revenue from Contracts with Customers' has been adopted
by the Group with effect from 1 April 2018. The standard specifies
how and when an entity should recognise revenue providing a simple,
principles based five-step model applicable to all contracts with
customers. The majority of the Group's revenue is in the form of
net interest income from financial instruments which falls outside
the scope of IFRS 15. The Group has assessed, and continues to
monitor, all revenue generating activities in the scope of IFRS 15
and has concluded that no changes in revenue recognition practices
arise as a result of adopting the new standard.
IFRS 9 'Financial Instruments'
a) Introduction
IFRS 9 'Financial Instruments' has been adopted by the Group
with effect from 1 April 2018. The standard replaces IAS 39
'Financial Instruments: Recognition and Measurement'. IFRS 9
introduces new rules for classification and measurement, impairment
and hedge accounting for financial instruments and also establishes
new disclosure requirements under IFRS 7 'Financial Instruments:
Disclosures'.
The first audited financial statements prepared on an IFRS 9
basis will be published in the Annual Report and Accounts for the
year ended 31 March 2019. As permitted by the new standard,
comparative figures will not be restated.
The Group has made the accounting policy choice, allowed under
IFRS 9, to continue applying IAS 39 for all hedge relationships
until such time as the new macro hedging rules (carved out as a
separate IASB project) are finalised.
b) Changes to accounting policies
Where the Group's accounting policies have changed as a result
of IFRS 9 implementation, the details are set out below.
(i) Classification and measurement
Financial assets
Under IFRS 9, financial assets are classified as amortised cost
or fair value (through other comprehensive income or through profit
or loss), based on the business model under which they are held and
the characteristics of their contractual cash flows.
Amortised cost
Financial assets are measured at amortised cost if they are held
for the purpose of collecting contractual cash flows and have
contractual terms which give rise on specified dates to cash flows
which are solely payments of principal and interest (SPPI) on the
outstanding amount.
This category includes cash and balances with the Bank of
England, loans and advances to credit institutions and the majority
of the Group's loans and advances to customers. All of the Group's
mortgage portfolios were originated or purchased for the purposes
of collecting contractual cash flows. With the exception of the
closed equity release portfolio, the contractual terms of the
Group's mortgage books indicate that the cash flows to be collected
comprise capital and interest on the outstanding balance.
Assets measured at amortised cost are initially recognised at
fair value, being the cash consideration to originate or purchase
the asset including any directly attributable transaction costs,
and measured subsequently using the effective interest method.
Fair value through other comprehensive income (FVOCI)
Financial assets are classified as FVOCI where the Group's
associated business model objective is achieved by both collecting
contractual cash flows and selling the assets. The contractual
terms of FVOCI assets give rise on specified dates to cash flows
which are solely payments of principal and interest on the
outstanding balance.
This category comprises the Group's portfolio of investment
securities held for liquidity management purposes. Consistent with
the criteria for FVOCI, the Group collects contractual cash flows
which, without exception, meet the IFRS 9 SPPI definition and
periodically sells a proportion of the portfolio to evidence the
liquidity of the investment assets.
FVOCI assets are initially recognised at fair value, which is
the cash consideration including any directly attributable
transaction costs, and measured subsequently at fair value. Gains
and losses from changes in fair value are recorded in other
comprehensive income, except for impairment losses which are
recognised in the Income Statement. Gains or losses arising on
sale, including any cumulative gains and losses previously
recognised in other comprehensive income, are recognised in the
Income Statement. Interest is calculated using the effective
interest method.
The fair values of FVOCI assets are based on quoted prices or,
if these are not available, valuation techniques developed by the
Group. These include, but are not limited to, the use of discounted
cash flow models, option pricing models and recent arm's length
transactions.
Fair value through profit or loss (FVTPL)
Financial assets which do not meet the classification criteria
to be held at amortised cost or FVOCI are measured at FVTPL.
This category includes derivative assets and the Society's
closed equity release portfolio (presented within loans and
advances to customers). An assessment of the contractual terms of
the equity release loans concluded that the SPPI criteria, which
must be satisfied to carry an asset at amortised cost or FVOCI,
were not met. The book is therefore measured at FVTPL.
The fair values of derivatives are based on level 2 valuation
techniques, as described in the Annual Report and Accounts for the
year ended 31 March 2018. Changes in the fair value of derivative
assets are presented within fair value gains/(losses) on financial
instruments in the Income Statement offset, where the derivatives
are hedging instruments in a qualifying IAS 39 fair value hedge
relationship, by the fair value movements on the corresponding
hedged items. The Group's hedge accounting policies have not
changed in the period, remaining as described in the Group Annual
Report and Accounts for the year ended 31 March 2018. Interest
arising on derivative financial instruments is recognised within
net interest on an accruals basis.
Due to the bespoke nature of equity release books, relevant
market pricing data is not available. The fair value of the equity
release portfolio is therefore determined using an internal
discounted cash flow model which estimates the amount and timing of
future cash flows arising on redemption and discounts them back at
assumed market rates to calculate the fair value of the mortgages.
Model inputs are informed by a combination of the Society's
historic experience (e.g. redemption rates) and economic forecast
data (e.g. house price inflation indices). Under IFRS 13 'Fair
Value Measurement' and Amendments to IFRS 7 'Financial Instruments:
Disclosures' the fair value measurement of equity release mortgages
is categorised as level 3.
An entity may, at initial recognition or on adoption of IFRS 9,
make an irrevocable designation to measure a financial asset at
FVTPL, if doing so eliminates or significantly reduces a
measurement or recognition inconsistency that would arise if the
asset were to be held at amortised cost or FVOCI. The Group has not
designated any financial assets as FVTPL on transition to IFRS 9 or
subsequently.
Financial liabilities
In accordance with IFRS 9, all of the Group's financial
liabilities are classified and subsequently measured at amortised
cost except for financial liabilities at fair value through profit
or loss.
Amortised cost
This category includes shares, amounts due to credit
institutions, amounts due to other customers, debt securities in
issue and subordinated liabilities.
Liabilities subsequently measured at amortised cost are
recognised initially at fair value, being the issue proceeds, net
of premia, discounts and directly attributable transaction costs
incurred. They are subsequently measured at amortised cost using
the effective interest method.
Fair value through profit or loss (FVTPL)
This category includes derivative liabilities for which changes
in fair value are presented within fair value gains/(losses) on
financial instruments in the Income Statement offset, where the
derivatives are hedging instruments in a qualifying IAS 39 fair
value hedge relationship, by the fair value movements on the
corresponding hedged items. The Group's hedge accounting policies
have not changed in the period, remaining as described in the Group
Annual Report and Accounts for the year ended 31 March 2018.
Interest arising on derivative financial instruments is recognised
within net interest on an accruals basis.
The fair values of derivative liabilities are categorised as
level 2, in accordance with the three tier valuation hierarchy
defined by IFRS 13 'Fair Value Measurement' and Amendments to IFRS
7 'Financial Instruments: Disclosures' and described in the Group
Annual Report and Accounts for the year ended 31 March 2018.
An entity may, at initial recognition or on adoption of IFRS 9,
make an irrevocable designation to measure a financial liability
(that would otherwise be held at amortised cost) at FVTPL if doing
so eliminates or significantly reduces a measurement or recognition
inconsistency. The Group has not designated any financial
liabilities as FVTPL on transition to IFRS 9 or subsequently.
(ii) Impairment of financial assets
Expected credit losses (ECLs) are recognised for all financial
assets carried at amortised cost or FVOCI under IFRS 9, and also
for undrawn loan commitments where a mortgage offer has been made
but the loan is yet to be advanced and recognised in the Statement
of Financial Position.
Staging
At each reporting date, financial assets subject to the
impairment requirements of IFRS 9 are categorised into one of three
stages:
Stage 1
On initial recognition, financial assets which are not credit
impaired are categorised as stage 1 and provision is made for 12
month ECLs, being the losses from default events expected to occur
within the next 12 months. Assets remain in stage 1 until such time
as they meet the criteria for another stage or are
derecognised.
Stage 2 (significant increase in credit risk)
Financial assets which are not in default, but have experienced
a significant increase in credit risk since initial recognition,
are categorised as stage 2. The loss allowance recognised is
equivalent to lifetime ECL, being the loss arising from default
events expected to occur over the lifetime of the financial
asset.
Determining whether a significant increase in credit risk has
occurred is a critical aspect of the IFRS 9 methodology and one
which involves judgement, based on a combination of quantitative
and qualitative measures. As described in the ECL calculation
sections which follow, the criteria applied vary across portfolios
depending on the nature of the portfolio and availability of
relevant credit risk information but all include the IFRS 9
'backstop' of 30 days past due as a stage 2 trigger.
Stage 3 (default)
Defaulted or credit impaired financial assets are categorised as
stage 3, requiring recognition of lifetime ECLs.
Transfers to lower stages (curing)
Financial assets in stages 2 or 3 can transfer back to stages 1
or 2, respectively, once the criteria for significant increase in
credit risk or default cease to be met for a period of time defined
within the ECL methodology for that portfolio, sometimes known as
the 'cure' period. In practice, this means that a stage 2 or 3 loan
which ceases to breach the threshold(s)/criteria for that stage
will remain in the higher stage for a pre-determined number of
months. The use of cure periods gives assurance that accounts have
rehabilitated before re-entering lower stages and reduces the level
of volatility that might otherwise arise from accounts regularly
migrating between stages.
Forward-looking ECL approach
ECL is measured as the present value of the difference between
the cash flows contractually due on a financial asset or undrawn
commitment and the cash flows expected to be received. In the
Statement of Financial Position, the loss allowance is presented as
a reduction in the carrying value of the financial asset. In the
case of an undrawn loan commitment, the impairment provision is
instead presented within provisions for other liabilities and
charges.
For each of the Group's financial asset portfolios in the scope
of IFRS 9 impairment, the estimate of ECL is unbiased and
probability-weighted, taking into account a range of possible
outcomes. The calculations involve a number of assumptions over a
period no longer than the maximum contractual period that the Group
is exposed to credit risk.
In accordance with IFRS 9, forecasts of future economic
conditions are integral to the ECL calculations for each portfolio.
The Group currently models three forward-looking macroeconomic
scenarios: a central forecast with economic assumptions aligned to
the Society's Medium Term Plan (and therefore assigned the highest
probability), an upside scenario and a downside forecast.
ECL calculation - core residential mortgages
For the core residential mortgage books, the impairment models
employ industry-accepted statistical techniques to address the
complex requirements of IFRS 9, with model assumptions and
parameters initially determined by regression analysis of
historical default data. The assumptions are validated using 'out
of time' samples, across a range of economic scenarios, enabling
the predictive capabilities of the models to be confirmed.
The model incorporates quantitative factors for identifying a
significant increase in credit risk by comparing reporting date
lifetime probability of default (PD) with residual origination
lifetime PD. For the purposes of this quantitative staging
assessment, mortgages are segmented by lending type (owner occupied
or buy to let) and internal credit risk rating grade. Residual
origination PD curves and (relative and absolute) threshold levels
were established via an iterative process involving statistical
analysis of the Group's default data. In addition, a range of
internally monitored potential impairment indicators have been
selected as qualitative criteria for classifying an individual loan
as stage 2. Examples of qualitative indicators include cancelled
direct debit instructions and evidence of impaired credit history
obtained from external agencies.
Residential loans are considered to be in default or
credit-impaired if they are in arrears by three or more months or
in bankruptcy, litigation, possession or LPA receivership.
Within the core residential models ECL is calculated by
multiplying forward-looking probability of default (PD), exposure
at default (EAD) and loss given default (LGD). The models output
monthly ECLs, which are aggregated over the first 12 months to
obtain 12 month ECL and over the life of the loan to calculate
lifetime ECL.
Macroeconomic variable inputs to the model are reviewed
quarterly and include house price index (HPI), interest rates,
unemployment, household income and GDP. The variables were selected
based on statistical tests and other analysis which evidenced their
correlation with credit risk.
The core residential impairment model aligns the Group's capital
and accounting approaches to the estimation of credit losses as
closely as possible.
ECL calculation - undrawn commitments
The loss allowance for undrawn commitments is inferred from the
core residential mortgage impairment model outputs for existing
loans with similar risk characteristics.
All undrawn commitments are currently allocated to stage 1 such
that a 12 month ECL calculation is appropriate.
The Group's IFRS 9 provision requirements for undrawn
commitments at 1 April 2018 and 30 September 2018 were
negligible.
ECL calculation - second charge residential mortgages
For the closed second charge loan book, a significant increase
in credit risk is assessed using external credit agency PD
indicators. Absolute thresholds have been set based on analysis of
monthly PD scores from origination (or earliest available date) to
point of default.
Second charge mortgages are considered to be in default if they
are in arrears by three or more months or in bankruptcy, litigation
or possession.
Impairment provisions for the closed second charge mortgage book
are determined using a simple discounted cash flow model which
segregates accounts by payment status. Estimated future cash flows,
which consider the forced sale property valuation and level of
first charge debt remaining, are discounted to their present value
using the effective interest rate of the loan and compared with the
account balance at the reporting date. This estimated loss on
possession is multiplied by the probability of possession occurring
to calculate the ECL requirement.
The key macroeconomic variable affecting the level of second
charge impairment losses is HPI, as forecast within the Group's
central, upside and downside scenarios.
ECL calculation - commercial mortgages
The key indicator of a significant increase in credit risk for a
commercial loan is a downward migration in internal credit rating,
determined via an established internal credit risk assessment
process. The internal grade is determined at an individual account
level, combining expert judgement with prescriptive measures
including, but not limited to, loan to value and income/debt
service coverage ratios.
Commercial loans are categorised as default if they are in
arrears by greater than or equal to three months or past scheduled
maturity with no formal extension having been agreed with the
borrower. Loans not meeting these criteria may be classified as
stage 3 based on expert management judgment of the perceived risk
of non-payment.
The ECL requirements for commercial mortgages are assessed on an
individual loan basis, using cash flow scenario modelling. This
involves estimating the timing and amount of future cash flows, in
the event of default, for one or more probability-weighted
account-specific scenarios based on the Group's central forecast of
economic conditions. Applying the Group's upside and downside
macroeconomic scenarios has the effect of stressing the key model
assumptions to create a range of alternative outcomes.
Estimated future cash flows, comprising rental receipts and
final sales proceeds (each net of costs), are discounted at the
effective interest rate of the loan and compared with its carrying
value to determine the ECL under each combination of
account-specific and macroeconomic scenarios. The relevant
probability weightings are then applied to calculate the overall
provision requirement at the reporting date.
ECL calculation - liquid assets
For liquid assets, comprising cash and balances with the Bank of
England, loans and advances to credit institutions and investment
securities, a significant increase in credit risk is determined by
counterparty type and adverse movements in counterparty credit
rating beyond specified thresholds. None of the Group's liquid
assets are categorised as stage 2 at the reporting date.
Liquid assets are in default if categorised as such by external
credit rating agencies or if 90 days past due. The Group has never
experienced an impairment loss or default on its Treasury
investment portfolio.
The ECL calculation for liquid assets multiplies the carrying
value of the asset by a PD applicable to its credit rating at the
reporting date. The PD is obtained from publically available
external credit rating agency data tables. The probability-weighted
upside and downside macroeconomic scenarios translate to shifts in
counterparty credit ratings thereby changing the PDs applied in the
calculation.
The Group's liquid asset provision requirements at 1 April 2018
and 30 September 2018 were negligible.
(iii) Modification of contractual cash flows
The Group may, in certain circumstances, renegotiate or
otherwise modify the contractual cash flows of loans and advances
to customers. If qualitative and quantitative assessments conclude
that the new cash flows are substantially different to the original
cash flows, the original loan is derecognised and a new financial
asset recognised in the Statement of Financial Position. If the
modified cash flows are not substantially different, a modification
gain or loss is recognised in profit or loss, calculated by
adjusting the loan's gross carrying amount to the present value of
the modified contractual cash flows discounted at the asset's
original effective interest rate.
Where contractual terms are modified due to financial
difficulties of the borrower (forbearance), the modification gain
or loss is included within impairment on loans and advances;
otherwise it is presented within interest receivable.
For residential mortgages, a change of product at the end of a
fixed rate deal period is not considered to be a modification to
the contract but instead a repricing to market interest rates which
was envisaged at the start of the customer relationship.
c) Impact of IFRS 9 adoption on equity and regulatory
capital
Equity
The table below summarises the impact on Group equity as a
result of IFRS 9 adoption.
Increase/(Decrease)
in general reserves
1-Apr-18
unaudited
Notes GBPm
Impairment losses on residential mortgage
loans (1.6)
Impairment losses on non-securitised commercial
mortgage loans (i) (31.4)
Reclassification of financial instruments
designated at FVTPL under IAS 39 (0.1)
Reclassification of equity release portfolio (ii) (0.5)
Deferred tax 5.7
---------------------------------------------------------- -----------------------------------------
Total (iii) (27.9)
------------------------------------------------- ------- -----------------------------------------
Notes
(i) As the first loss exposure to commercial structured entities
has been exceeded, increases in provision requirements for
securitised commercial loans, arising on IFRS 9 adoption, are borne
by the external loan note holders; hence the reserves movement in
the table relates solely to the non-securitised balances.
(ii) On IFRS 9 adoption, the equity release portfolio was
reclassified from an amortised cost to FVTPL basis of measurement.
The decrease to general reserves shown in the table is the net
movement between releasing the IAS 39 impairment provisions
previously held on the equity release mortgages and recognising the
IFRS 9 cumulative fair value losses to the date of IFRS 9
transition.
(iii) As permitted by IFRS 9, comparatives have not been
restated and the impact of adopting IFRS 9 has been recognised as
an adjustment to general reserves on 1 April 2018. The initial
estimate of this reduction to reserves, as reported in the Group
Annual Report and Accounts for the year ended 31 March 2018, was
circa GBP15m mainly due to an increase in commercial provision
requirements as a result of moving from an incurred to expected
loss basis of calculation. The cash flow projections used in the
commercial provision assessment cover an extended period of time
and, after further consideration of the potential future outcomes,
taking account of all available data on the economic and market
position and outlook as at 31 March 2018 and, in particular, the
outlook for the retail sector, the calculated provision requirement
is higher than initially estimated.
Regulatory capital
Transitional relief applies to IFRS 9 adjustments at 95% for the
first year post implementation. Net of this relief the impact on
Common Equity Tier 1 capital is a reduction of GBP2.1m; which is
equivalent to a 0.04% reduction to the Common Equity Tier 1
ratio.
d) Changes to classification and measurement of financial
instruments
The table below shows the changes to the measurement categories
and carrying amounts of the Group's financial assets and
liabilities on initial adoption of IFRS 9.
Carrying Carrying
amount amount
IAS 39 IFRS 9
31-Mar-18 1-Apr-18
Measurement category Measurement category audited unaudited
Notes IAS 39 IFRS 9 GBPm GBPm
Financial assets
Cash and balances with the Bank of
England (i) Loans and receivables Amortised cost 324.7 324.7
Loans and advances to credit
institutions (i) Loans and receivables Amortised cost 120.6 120.6
Investment securities (ii) Available for sale FVOCI 311.9 311.9
Derivative financial instruments FVTPL FVTPL 19.5 19.5
Loans and advances to customers
Loans fully secured on residential
property (excluding equity
release portfolio) (i) Loans and receivables Amortised cost 4,361.1 4,359.5
Equity release portfolio (iii) Loans and receivables FVTPL 18.9 18.4
Loans fully secured on land
designated as FVTPL under IAS 39 (iv) FVTPL Amortised cost 8.4 8.4
Other loans fully secured on land Loans and receivables Amortised cost 417.0 384.8
--------------------------------------------- ----------------------- --------------------- ---------- ----------
5,582.1 5,547.8
------------------------------------------------------------------------------------------- ---------- ----------
Financial liabilities
Shares Amortised cost Amortised cost 4,051.4 4,051.4
Amounts due to credit institutions Amortised cost Amortised cost 571.3 571.3
Amounts due to other customers Amortised cost Amortised cost 133.1 133.1
Derivative financial instruments FVTPL FVTPL 38.7 38.7
Debt securities in issue designated
as FVTPL under IAS 39 (iv) FVTPL Amortised cost 12.5 12.6
Other debt securities in issue Amortised cost Amortised cost 480.8 480.0
--------------------------------------------- ----------------------- --------------------- ---------- ----------
5,287.8 5,287.1
------------------------------------------------------------------------------------------- ---------- ----------
Notes
(i) The 'loans and receivables' category does not exist under
IFRS 9. With the exception of the closed equity release mortgage
portfolio, the financial assets previously classified as loans and
receivables meet the criteria to be measured at amortised cost
under IFRS 9.
(ii) The 'available for sale' category does not exist under IFRS
9. The financial assets previously classified as available for
sale, being a portfolio of investment securities held for liquidity
management purposes, meet the criteria to be measured at FVOCI
under IFRS 9.
(iii) The contractual terms of the closed equity release
portfolio are not considered to give rise on specified dates to
cash flows which are solely payments of principal and interest. The
loans are therefore categorised at FVTPL under IFRS 9.
(iv) Under IAS 39, the Group designated certain debt securities
in issue and an underlying portfolio of securitised loans and
advances as FVTPL to eliminate accounting inconsistencies that
would otherwise have arisen from measuring financial instruments
(including derivatives) on different bases. This designation was
irrevocable under IAS 39. As the circumstances giving rise to the
measurement inconsistencies no longer exist, the Group has not
elected to designate any financial assets or liabilities as FVTPL
on IFRS 9 adoption.
e) Reconciliation of financial instrument balances from an IAS
39 to IFRS 9 basis
The table below reconciles the carrying values of financial
assets and liabilities, as reported under IAS 39, to those
applicable on initial adoption of IFRS 9.
Carrying Carrying
amount amount
IAS 39 IFRS 9
31-Mar-18 Reclassification Remeasurement 1-Apr-18
audited unaudited unaudited unaudited
GBPm GBPm GBPm GBPm
Financial assets
Amortised cost
Cash and balances with the Bank
of England 324.7 - - 324.7
Loans and advances to credit institutions 120.6 - - 120.6
Loans and advances to customers
Loans fully secured on residential
property (excluding equity release
portfolio) 4,361.1 - (1.6) 4,359.5
Equity release portfolio 18.9 (18.9) - -
Loans fully secured on land 417.0 8.4 (32.2) 393.2
------------------------------------------- ---------- ----------------- -------------- ----------
Total amortised cost 5,242.3 (10.5) (33.8) 5,198.0
------------------------------------------- ---------- ----------------- -------------- ----------
Available for sale
Investment securities 311.9 (311.9) - -
Total available for sale 311.9 (311.9) - -
------------------------------------------- ---------- ----------------- -------------- ----------
FVOCI
Investment securities - 311.9 - 311.9
Total FVOCI - 311.9 - 311.9
------------------------------------------- ---------- ----------------- -------------- ----------
FVTPL
Derivative financial instruments 19.5 - - 19.5
Loans and advances to customers
Equity release portfolio - 18.9 (0.5) 18.4
Loans fully secured on land 8.4 (8.4) - -
Total FVTPL 27.9 10.5 (0.5) 37.9
------------------------------------------- ---------- ----------------- -------------- ----------
Total financial assets 5,582.1 - (34.3) 5,547.8
------------------------------------------- ---------- ----------------- -------------- ----------
Financial liabilities
Amortised cost
Shares 4,051.4 - - 4,051.4
Amounts due to credit institutions 571.3 - - 571.3
Amounts due to other customers 133.1 - - 133.1
Debt securities in issue 480.8 12.5 (0.7) 492.6
Total amortised cost 5,236.6 12.5 (0.7) 5,248.4
------------------------------------------- ---------- ----------------- -------------- ----------
FVTPL
Derivative financial instruments 38.7 - - 38.7
Debt securities in issue 12.5 (12.5) - -
Total FVTPL 51.2 (12.5) - 38.7
------------------------------------------- ---------- ----------------- -------------- ----------
Total financial liabilities 5,287.8 - (0.7) 5,287.1
------------------------------------------- ---------- ----------------- -------------- ----------
f) Reconciliation of impairment provisions from an IAS 39 to
IFRS 9 basis
The table below analyses the movements in impairment loss
allowances arising on transition from the IAS 39 incurred loss
methodology applied in 2017/18 to the expected credit loss approach
prescribed by IFRS 9 and effective from 1 April 2018.
Loans fully
secured Loans fully
on residential secured
property on land Total
Notes GBPm GBPm GBPm
Impairment provision (unaudited)
At 31 March 2018 (IAS 39 basis) 13.2 42.1 55.3
Reclassification (i) (7.0) - (7.0)
IAS 39 collective provisions (ii) (2.5) (11.4) (13.9)
12 month ECL on assets not individually
impaired under IAS 39 (iii) 0.6 0.1 0.7
Lifetime ECL on assets not individually
impaired under IAS 39 (iv) 3.1 21.2 24.3
Changes to calculation methodology for
assets individually impaired under IAS
39 (v) (1.0) 22.4 21.4
Post model adjustments (vi) 1.4 - 1.4
----------------------------------------- ------- ---------------- ------------ -------
At 1 April 2018 (IFRS 9 basis) 7.8 74.4 82.2
-------------------------------------------------- ---------------- ------------ -------
Notes
(i) The Group's closed portfolio of equity release mortgages has
been reclassified as FVTPL under IFRS 9. FVTPL assets are not
subject to the impairment requirements of IFRS 9 and the equity
release loss allowance previously recognised under IAS 39 is no
longer required.
(ii) Assets not individually impaired under IAS 39 were grouped
on the basis of similar credit risk characteristics and included in
a collective impairment assessment. A collective provision was made
where there was objective evidence that credit losses had been
incurred but not observed at the reporting date. The expected loss
methodology prescribed by IFRS 9 means that a provision requirement
is calculated for all loans and advances to customers held at
amortised cost.
(iii) Under IFRS 9, a provision is made for 12 month ECL on up
to date loans allocated to stage 1. These loans were previously
included in a collective impairment assessment under IAS 39.
(iv) Under IFRS 9, loans which have experienced a significant
increase in credit risk since initial recognition or are in default
are allocated to stages 2 or 3, thereby requiring a provision for
lifetime ECL. This is a key driver for the increase in loss
allowances on IFRS 9 adoption. The Group's closed commercial book
is particularly sensitive to uncertainties in the economic outlook,
for the retail sector and generally, which are now captured within
the impairment calculation. In accordance with IAS 39, these loans
were previously included in a collective impairment assessment with
provisions made only where there was objective evidence of incurred
credit losses. GBP0.2m of the increase in provision requirements
relates to securitised commercial loans. As the first loss exposure
of the Group has already been exceeded, the charge for these
additional impairment losses is not borne by the Group but by the
external loan note holders.
(v) The IFRS 9 provision for commercial loans which were
individually impaired under IAS 39 includes an allowance for
multiple economic scenarios, reflecting Brexit uncertainty and the
weakened outlook for the retail sector, in some cases over long
time periods. This increases the range of possible adverse outcomes
which must be considered in the forward-looking calculation of ECLs
resulting in significantly higher IFRS 9 loss allowances than those
previously recognised under IAS 39. GBP0.7m of the increase in
provision requirements relates to securitised commercial loans. As
the first loss exposure of the Group has already been exceeded, the
charge for these additional impairment losses is not borne by the
Group but by the external loan note holders.
(vi) Where the IFRS 9 models do not fully capture the credit
risk associated with certain portfolios due to, for example, low
volumes of historical defaults within the model development data
set, the expected loss arising from those risks is estimated and an
additional allowance recognised. The main element of the post model
adjustment provision is an allowance for the risk that a proportion
of interest only mortgages will not redeem at contractual maturity
due to the borrower being unable to repay the capital on the
loan.
g) Analysis of loans and advances to customers and impairment
provisions by IFRS 9 stage
The table below illustrates the staging distribution of loans
and advances to customers held at amortised cost and related
provisions on initial adoption of IFRS 9. Stage 2 loans have been
further analysed to show those which are more than 30 days past
due, the IFRS 9 backstop for identifying a significant increase in
credit risk (SICR), and those which meet other SICR criteria as
detailed in section (b)(ii).
Stage 2
Stage
Stage 1 Other SICR indicators > 30 days past due 3 Total
GBPm GBPm GBPm GBPm GBPm
At 1 April 2018 (unaudited)
Gross exposures
Loans fully secured on residential property 3,914.9 362.6 16.9 72.9 4,367.3
Loans fully secured on land 56.2 118.0 - 293.4 467.6
--------------------------------------------- -------- ---------------------- ------------------- ------ --------
Total 3,971.1 480.6 16.9 366.3 4,834.9
--------------------------------------------- -------- ---------------------- ------------------- ------ --------
Provisions
Loans fully secured on residential property 0.6 2.3 0.2 4.7 7.8
Loans fully secured on land 0.1 11.8 - 62.5 74.4
--------------------------------------------- -------- ---------------------- ------------------- ------ --------
Total 0.7 14.1 0.2 67.2 82.2
--------------------------------------------- -------- ---------------------- ------------------- ------ --------
Provision coverage % % % % %
Loans fully secured on residential property 0.02 0.63 1.18 6.45 0.18
Loans fully secured on land 0.18 10.00 - 21.30 15.91
--------------------------------------------- -------- ---------------------- ------------------- ------ --------
h) Critical accounting estimates and judgements in applying
accounting policies
In the process of implementing IFRS 9, the Group made various
judgements, estimates and assumptions which affected the amounts
recognised in the financial statements. Sources of estimation
uncertainty arising on IFRS 9 adoption are described in section
(ii) below.
(i) Significant judgements in applying IFRS 9 accounting
policies
Classification and measurement
Significant judgements made in applying IFRS 9 accounting
policies (other than those involving estimations) include the
business model and contractual cash flow assessments which
determine the measurement basis for financial assets in the scope
of IFRS 9.
These assessments are not limited to one factor but involve a
detailed review of relevant evidence including asset management
strategy, performance reporting and contractual documentation such
as mortgage terms and conditions.
For investment securities, past sales activity and, where
relevant (e.g. holdings of mortgage backed securities), the
contractual cash flow characteristics of underlying asset pools
have been assessed in arriving at the FVOCI classification.
Impairment
For IFRS 9 impairment, judgement is required to define the
staging criteria, i.e. what constitutes a significant increase in
credit risk (stage 2) and what circumstances give rise to a default
(stage 3). Where assets meet the stage 2 or 3 criteria, lifetime
ECL must be recognised.
In accordance with IFRS 9, forecasts of future macroeconomic
conditions are integral to the impairment modelling processes. The
selection of economic variables which are genuine drivers of credit
risk and adequately capture the impact of changes in the economic
outlook involves a degree of judgement.
The staging methodologies and macroeconomic scenario selection
processes for each portfolio are detailed in section (b)(ii). Model
monitoring and model validation procedures will be used to
continually evaluate the appropriateness of the staging criteria
and macroeconomic variable inputs.
(ii) Sources of estimation uncertainty
Impairment on loans and advances - forward-looking ECL
approach
The estimation of ECLs is inherently uncertain and the IFRS 9
impairment models incorporate a number of assumptions and
estimates, changes in which could materially affect the carrying
amounts of assets and liabilities within the next financial year.
The IFRS 9 requirements to incorporate forward-looking information
within the ECL calculation, including forecasts of future
macroeconomic conditions, necessitate judgement thereby increasing
the potential for volatility in future periods.
As described in section (b), the Group's impairment models
incorporate three macroeconomic forecasts (central, upside and
downside), each comprising a number of economic variables
considered to be credit risk drivers.
Impairment on loans and advances - residential mortgages (core
and second charge)
The following table indicates the main economic variables
included within the IFRS 9 macroeconomic scenarios at 30 September
2018 and the associated probability weightings.
Scenario
Central Upside Downside
% % %
Scenario probability weighting 60 10 30
------------------------------------- -------- ------- ---------
Economic variables (5 year average)
HPI growth 2.6 4.8 0.2
Unemployment rate 4.1 3.9 4.8
Household income growth 3.3 3.6 2.8
GDP growth 1.7 2.1 1.3
Bank Rate 1.0 2.0 0.5
------------------------------------- -------- ------- ---------
A key assumption for the residential portfolios is the
probability weighting of the macroeconomic forecasts which each
incorporate a different outlook for the economic variables shown in
the table above. The sensitivity of the residential provision
calculations to the scenario probability weightings is as
follows:
30-Sep-18
unaudited
GBPm
Residential mortgages
Probability-weighted ECL 6.3
------------------------------------ ----------------------
Increase/(Decrease) to ECL on 100%
weighting of scenario:
Central (0.8)
Upside (2.0)
Downside 2.7
------------------------------------ ----------------------
Impairment on loans and advances - commercial mortgages
Consistent with residential mortgages, the IFRS 9 ECL
calculation for the commercial portfolio incorporates central,
upside and downside economic scenarios with probability weightings
of 60%, 10% and 30% respectively.
In addition to the scenario probability weightings and
account-specific factors, the key model assumption for commercial
provisioning is considered to be the exit yield requirement, which
is used to estimate the cash flows arising from realisation of the
property values on sale. (While interest rates also have a
significant impact on the ECL, via the discount factor applied in
the model, compensating economic hedge arrangements would
substantially offset the movement in profit or loss terms).
Compared with the central economic forecast, the exit yield
requirement for each loan increases by 1.5% in the downside
scenario and reduces by 0.5% in the upside scenario.
The table below illustrates the sensitivity of the commercial
ECL calculation to the central scenario weighting and exit yield
requirement.
Increase/ (Decrease)
in impairment
provision
30-Sep-18
unaudited
Assumption Change to current assumption GBPm
Central scenario Increase weighting from 60%
weighting to 100% (13.6)
Increase of 0.5% across all
Exit yield requirement scenarios 5.3
------------------------ ------------------------------ ----------------------
Fair value of equity release mortgages
Under IFRS 9, the mature and closed book of equity release
mortgages is held at FVTPL with fair values determined using a
discounted cash flow model which incorporates a number of
judgemental assumptions to determine the amount and timing of
future cash flows arising on mortgage redemption. Certain model
inputs, such as redemption rates, are informed by historic
experience, with observed closure curves extrapolated to give an
expected maturity profile for the remaining book. Other model
assumptions, such as house price indices, are based on the Group's
view of future economic conditions. The discount factor used to
calculate the present value of the future cash flows has been
determined with due regard to credit, market and liquidity
risk.
Key sensitivities are in relation to HPI, discount rate and time
to redemption as shown in the table below.
Increase in
fair value
losses
30-Sep-18
unaudited
Assumption Change to current assumption GBPm
HPI growth Decrease of 0.5% p.a. 0.2
Discount rate Increase of 0.25% 0.1
Time to redemption Increase of 1 year 0.3
-------------------- ------------------------------ -------------------
Taxation
HMRC legislation states that tax on the IFRS 9 transitional
impact is realised over the 10 years following adoption of the
accounting standard. Deferred tax on IFRS 9 adoption has been
recognised at rates substantively enacted at the reporting date and
expected to apply when the deferred tax assets are realised. For
this purpose, deferred tax on IFRS 9 transition has been recognised
at 17%, rather than the current UK standard rate of 19% charged on
the statutory profit before tax in the period.
A full review of the tax position of the Society and its
subsidiaries will be carried out at the year-end date.
5 Liability Management Exercise
The Liability Management Exercise (LME) was undertaken to
modernise the Society's capital structure and secure its capital
position via the issue of qualifying Common Equity Tier 1 capital
instruments, namely core capital deferred shares (CCDS). This
negotiated arm's length transaction completed in April 2018 and
involved:
-- The exchange of 100% the Society's Profit Participating
Deferred Shares (PPDS) for a combination of new CCDS, new 11% Tier
2 subordinated notes (Tier 2 Notes) and cash. The exchanged PPDS
were cancelled on the settlement date.
-- The exchange of 77% of the Society's Permanent Interest
Bearing Shares (PIBS) for CCDS and cash. The exchanged PIBS were
cancelled on the settlement date.
-- The buyback of 11% of the Society's PIBS from retail
investors in exchange for cash. The settled PIBS were cancelled
immediately.
In accordance with IAS 32 'Financial Instruments: Presentation'
the cancellation of the exchanged PPDS and exchanged/tendered PIBS,
consideration paid and issue of CCDS have been recognised directly
in equity. The Tier 2 Notes are presented as subordinated
liabilities in the Statement of Financial Position. They have been
initially recognised at fair value, assessed as being the nominal
value of the Tier 2 Notes (GBP22.5m) net of directly attributable
issue costs, and subsequently measured at amortised cost using the
effective interest method.
The impact of the LME on Group equity is disclosed as 'capital
restructuring' in the condensed consolidated Statement of Changes
in Members' Interests and Equity. The transaction had the effect of
reducing overall equity by GBP62m and increasing members' general
reserves by GBP52m. These figures are quoted net of tax. Tax has
been recognised based on the Group's best estimate of the LME's tax
effect which is yet to be confirmed.
For the purposes of the condensed consolidated half-yearly
Statement of Cash Flows, the cash elements of the LME are disclosed
as 'capital restructuring' within cash flows from financing
activities.
The impact of the LME on regulatory capital was to increase
Common Equity Tier 1 capital by GBP3.9m; which is equivalent to a
0.16% increase to the Common Equity Tier 1 ratio.
6 Business segments
Operating segments are reported in accordance with the internal
reporting provided to the Group Board (the chief operating decision
maker), which is responsible for allocating resources to the
reportable segments and assessing their performance.
The Group has three main business segments:
- Retail - incorporating residential lending, savings,
investments and protection;
- Commercial - primarily representing loans for commercial
property investment; and
- Property - a portfolio of residential properties for rent.
Central Group operations have been included in Retail and
comprise risk management, finance, treasury services, human
resources and computer services, none of which constitute a
separately reportable segment.
There were no changes to reportable segments during the
period.
Transactions between the business segments are carried out at
arm's length. The revenue from external parties reported to the
Group Board is measured in a manner consistent with that in the
consolidated Income Statement.
Funds are ordinarily allocated between segments, resulting in
funding cost transfers disclosed in inter-segment net interest
income. Interest charged for these funds is based on the Group's
cost of capital. Central administrative costs are also allocated
between segments and are disclosed in inter-segment administrative
expenses. There are no other material items of income or expense
between the business segments.
The Group does not consider its operations to be cyclical or
seasonal in nature.
6 months ended 30 September Consolidation Total
2018 (unaudited) Retail Commercial Property adjustments Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and similar
income 54.2 8.4 - (8.3) 54.3
Interest expense and similar
charges (24.7) (7.4) (1.5) 8.3 (25.3)
------------------------------------- -------- ----------- --------- -------------- --------
Net interest receivable/(expense) 29.5 1.0 (1.5) - 29.0
Fees and commissions receivable 1.6 - - - 1.6
Other operating (expense)/income (0.1) - 2.1 - 2.0
Fair value (losses)/gains on
financial instruments (0.6) 0.8 - - 0.2
------------------------------------- -------- ----------- --------- -------------- --------
Total income 30.4 1.8 0.6 - 32.8
Administrative expenses (20.9) (0.6) (0.1) - (21.6)
Depreciation and amortisation (3.3) - - - (3.3)
------------------------------------- -------- ----------- --------- -------------- --------
Operating profit before revaluation
gains, impairment and provisions 6.2 1.2 0.5 - 7.9
Gains on investment properties - - 1.8 - 1.8
Impairment on loans and advances (0.3) (3.4) - - (3.7)
------------------------------------- -------- ----------- --------- -------------- --------
Profit/(Loss) before tax 5.9 (2.2) 2.3 - 6.0
------------------------------------- -------- ----------- --------- -------------- --------
Total assets 5,525.2 399.6 136.5 (502.3) 5,559.0
------------------------------------- -------- ----------- --------- -------------- --------
Total liabilities 5,133.7 490.7 123.2 (572.7) 5,174.9
------------------------------------- -------- ----------- --------- -------------- --------
Capital expenditure 2.5 - - - 2.5
------------------------------------- -------- ----------- --------- -------------- --------
6 months ended 30 September Consolidation Total
2017 (unaudited) Retail Commercial Property adjustments Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and similar
income 50.6 5.3 - (7.2) 48.7
Interest expense and similar
charges (19.7) (6.3) (1.5) 7.2 (20.3)
------------------------------------- -------- ----------- --------- -------------- --------
Net interest receivable/(expense) 30.9 (1.0) (1.5) - 28.4
Fees and commissions receivable 1.2 - - - 1.2
Other operating (expense)/income (0.1) - 2.0 - 1.9
Fair value (losses)/gains on
financial instruments (0.4) 2.7 - - 2.3
------------------------------------- -------- ----------- --------- -------------- --------
Total income 31.6 1.7 0.5 - 33.8
Administrative expenses (21.3) (0.7) (0.1) - (22.1)
Depreciation and amortisation (3.7) - - - (3.7)
------------------------------------- -------- ----------- --------- -------------- --------
Operating profit before revaluation
gains, impairment and provisions 6.6 1.0 0.4 - 8.0
Gains on investment properties - - 3.0 - 3.0
Impairment on loans and advances (0.7) (5.6) - - (6.3)
Provisions for liabilities and
charges (0.5) - - - (0.5)
------------------------------------- -------- ----------- --------- -------------- --------
Profit/(Loss) before tax 5.4 (4.6) 3.4 - 4.2
------------------------------------- -------- ----------- --------- -------------- --------
Total assets 5,677.3 491.9 134.2 (559.0) 5,744.4
------------------------------------- -------- ----------- --------- -------------- --------
Total liabilities 5,217.4 544.6 124.4 (610.8) 5,275.6
------------------------------------- -------- ----------- --------- -------------- --------
Capital expenditure 3.1 - - - 3.1
------------------------------------- -------- ----------- --------- -------------- --------
Consolidation Total
Year ended 31 March 2018 (audited) Retail Commercial Property adjustments Group
GBPm GBPm GBPm GBPm GBPm
Interest receivable and similar
income 97.4 13.3 - (13.4) 97.3
Interest expense and similar
charges (40.8) (11.5) (2.9) 13.4 (41.8)
------------------------------------- -------- ----------- --------- -------------- --------
Net interest receivable/(expense) 56.6 1.8 (2.9) - 55.5
Fees and commissions receivable 2.7 - - - 2.7
Other operating income (0.2) - 4.0 - 3.8
Fair value (losses)/gains on
financial instruments (0.5) 3.0 - - 2.5
------------------------------------- -------- ----------- --------- -------------- --------
Total income 58.6 4.8 1.1 - 64.5
Administrative expenses (41.8) (1.6) (0.1) - (43.5)
Depreciation and amortisation (7.2) - - - (7.2)
------------------------------------- -------- ----------- --------- -------------- --------
Operating profit before revaluation
gains, impairment and provisions 9.6 3.2 1.0 - 13.8
Gains on investment properties - - 3.8 - 3.8
Impairment on loans and advances 0.1 (8.0) - - (7.9)
Provisions for liabilities and
charges (0.9) - - - (0.9)
------------------------------------- -------- ----------- --------- -------------- --------
Profit/(Loss) before tax 8.8 (4.8) 4.8 - 8.8
------------------------------------- -------- ----------- --------- -------------- --------
Total assets 5,709.0 449.5 134.8 (511.8) 5,781.5
------------------------------------- -------- ----------- --------- -------------- --------
Total liabilities 5,259.8 507.9 124.0 (580.2) 5,311.5
------------------------------------- -------- ----------- --------- -------------- --------
Capital expenditure 7.3 - - - 7.3
------------------------------------- -------- ----------- --------- -------------- --------
7 Allowance for losses on loans and advances to customers
The Group adopted IFRS 9 'Financial Instruments' with effect
from 1 April 2018. In the table below, impairment provisions are
calculated under IAS 39 at 30 September 2017 and 31 March 2018 and
under IFRS 9 at 30 September 2018.
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Impairment charge for the period 3.7 6.3 7.9
---------------------------------------------- ---------- ---------- ----------
Impairment provision at end of period
Loans fully secured on residential property 6.3 16.4 13.2
Loans fully secured on land 77.4 50.6 42.1
---------------------------------------------- ---------- ---------- ----------
Total 83.7 67.0 55.3
---------------------------------------------- ---------- ---------- ----------
The table below analyses the movement in IFRS 9 impairment
provisions for the six months to 30 September 2018 by IFRS 9
stage.
Stage Stage Stage
1 2 3 Total
GBPm GBPm GBPm GBPm
IFRS 9 impairment provisions (unaudited)
At 1 April 2018 0.7 14.3 67.2 82.2
Amounts written off net of recoveries - - (2.7) (2.7)
Charge for the period comprising:
Decreases due to derecognition - - (0.3) (0.3)
Changes in credit risk (including stage
transfers) - (0.9) 5.8 4.9
Change in carrying value of debt securities
in issue - - (0.5) (0.5)
Recoveries of amounts previously written
off - - (0.4) (0.4)
----------------------------------------------- ------- ------- ------- -------
(Credit)/Charge for the period - (0.9) 4.6 3.7
----------------------------------------------- ------- ------- ------- -------
Non-recourse finance on securitised
advances - - 0.5 0.5
----------------------------------------------- ------- ------- ------- -------
At 30 September 2018 0.7 13.4 69.6 83.7
----------------------------------------------- ------- ------- ------- -------
8 Provisions for liabilities and charges
6 months ended 30 September 2018
(unaudited)
FSCS Other Total
GBPm GBPm GBPm
At beginning of
period 0.2 1.9 2.1
Utilised in the
period (0.2) (0.4) (0.6)
Charge for the
period - - -
At end of period - 1.5 1.5
----------------------------------- ------ ------ ------
6 months ended 30 September 2017
(unaudited)
FSCS Other Total
GBPm GBPm GBPm
At beginning of
period 0.8 2.3 3.1
Utilised in the
period (0.9) (0.2) (1.1)
Charge for the
period 0.5 - 0.5
At end of period 0.4 2.1 2.5
----------------------------------- ------ ------ ------
Year ended 31 March 2018
(audited)
FSCS Other Total
GBPm GBPm GBPm
At beginning of
period 0.8 2.3 3.1
Utilised in the
period (0.9) (1.0) (1.9)
Charge for the
period 0.3 0.6 0.9
At end of period 0.2 1.9 2.1
----------------------------------- ------ ------ ------
Financial Services Compensation Scheme (FSCS)
In common with all regulated UK deposit takers, the Society pays
levies to the FSCS. During the period, the FSCS repaid the
remaining loan owed to HM Treasury, in respect of certain Bradford
and Bingley assets, and confirmed that no further loan interest
would be levied. The provision at 31 March 2018 related to the
Society's share of interest costs for the 2017/18 scheme year and
was fully settled in the period. Since the end of the reporting
period, the FSCS has communicated its intention to raise a
supplementary levy for 2018/19 following a large credit union
failure. The Society's estimated share of this levy is not
material.
Other provisions
Other provisions primarily relate to Payment Protection
Insurance (PPI) redress and represent the amounts expected to be
settled based on the Financial Conduct Authority (FCA) deadline of
29 August 2019.
9 Loans and advances to customers
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Amortised cost
Loans fully secured on residential
property 4,476.4 4,410.8 4,403.9
Loans fully secured
on land 417.5 474.3 428.3
4,893.9 4,885.1 4,832.2
Fair value through profit or loss
Loans fully secured on residential
property 16.4 - -
Loans fully secured
on land - 12.2 8.5
4,910.3 4,897.3 4,840.7
Fair value adjustment for hedged
risk 17.0 36.0 20.0
Less: impairment provisions (83.7) (67.0) (55.3)
4,843.6 4,866.3 4,805.4
---- ------------------------------------ ------------------------- ---------- ----------
The Group adopted IFRS 9 'Financial Instruments' with effect
from 1 April 2018. Balances in the table above are presented on an
IFRS 9 basis at 30 September 2018 and an IAS 39 basis at 30
September 2017 and 31 March 2018.
Included within loans and advances to customers are GBP464.4m
(31 March 2018: GBP488.0m) of commercial lending balances of which
GBP40.5m (31 March 2018: GBP53.2m) have been sold by the Group to
bankruptcy remote structured entities. A further GBP971.7m (31
March 2018: GBP1,172.1m) of residential mortgage balances, included
with loans and advances, have also been sold by the Group to
structured entities. The structured entities have been funded by
issuing mortgage backed securities (MBSs) of which GBP650.5m (31
March 2018: GBP717.5m) are held by the Society.
10 Shares
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Held by individuals 3,867.9 4,158.3 4,050.0
Other shares 1.1 1.1 1.1
Fair value adjustment for
hedged risk 0.2 0.6 0.3
--------------------------- ---------- ---------- ----------
3,869.2 4,160.0 4,051.4
--------------------------- ---------- ---------- ----------
11 Property, plant, equipment and intangible assets
Intangible Tangible
assets assets
6 months ended 30 September 2018 (unaudited) GBPm GBPm
Net book value at 1 April 2018 15.3 30.2
Additions 1.4 1.1
Depreciation, amortisation, impairment and other
movements (1.6) (1.7)
------------------------------------------------- ------------- -------------
Net book value at 30 September 2018 15.1 29.6
------------------------------------------------- ------------- -------------
Intangible Tangible
assets assets
6 months ended 30 September 2017 (unaudited) GBPm GBPm
Net book value at 1 April 2017 13.3 32.1
Additions 1.8 1.3
Depreciation, amortisation, impairment and other
movements (1.4) (2.3)
------------------------------------------------- ------------- -------------
Net book value at 30 September 2017 13.7 31.1
------------------------------------------------- ------------- -------------
Intangible Tangible
assets assets
Year ended 31 March 2018 (audited) GBPm GBPm
Net book value at 1 April 2017 13.3 32.1
Additions 6.3 1.0
Depreciation, amortisation, impairment and other
movements (4.3) (2.9)
------------------------------------------------- ------------- -------------
Net book value at 31 March 2018 15.3 30.2
------------------------------------------------- ------------- -------------
Capital commitments
The Group has placed contracts amounting to a total of GBPnil
(31 March 2018: GBPnil) for future expenditure that was not
provided in the financial statements.
12 Investment properties
6 months 6 months Year
ended ended ended
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Valuation
At beginning of period 132.2 128.9 128.9
Disposals - (0.3) (0.5)
Revaluation gains 1.8 3.0 3.8
At end of period 134.0 131.6 132.2
------------------------------------- --------------- ---------------- -----------------
13 Debt securities in issue 30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Certificates of deposit 1.0 - -
Non-recourse finance on securitised
advances 368.7 169.3 493.3
------------------------------------- --------------- ---------------- -----------------
369.7 169.3 493.3
------------------------------------- --------------- ---------------- -----------------
The non-recourse finance comprises mortgage backed floating rate
notes (the Notes) secured over portfolios of mortgage loans secured
by first charges over residential and commercial properties in the
United Kingdom. Prior to redemption of the Notes on the final
interest payment date, the Notes will be subject to mandatory
and/or optional redemption, in certain circumstances, on each
interest payment date.
14 Profit participating deferred shares
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Book value
Nominal value - 182.5 182.5
Cumulative fair value adjustments
at date of transition - 3.8 3.8
Capitalised issue costs - (2.2) (2.2)
---------------------------------- --------- --------- ---------
- 184.1 184.1
Cumulative reserve deficit - (10.3) (9.1)
---------------------------------- --------- --------- ---------
Net value at end of period - 173.8 175.0
---------------------------------- --------- --------- ---------
The profit participating deferred shares (PPDS) were exchanged
and subsequently cancelled as part of the Liability Management
Exercise described in note 5. Prior to cancellation, the PPDS were
entitled to receive a distribution, at the discretion of the
Society, of up to 25% of the Group's post-tax profits (calculated
prior to payment of the PPDS dividend). No such distribution could
be made if the PPDS cumulative reserves were in deficit.
15 Core capital deferred shares
Number CCDS nominal Share
of shares amount premium Total
unaudited unaudited unaudited
GBPm GBPm GBPm
At 1 April 2018 - - - -
Issuance 1,288,813 1.3 127.6 128.9
Issue costs - - (1.9) (1.9)
At 30 September 2018 1,288,813 1.3 125.7 127.0
---------------------- ----------- ------------- ---------- ----------
In April 2018, the Society issued 1,288,813 core capital
deferred shares (CCDS).
CCDS are perpetual instruments and a form of Common Equity Tier
1 (CET 1) capital.
CCDS are the most junior-ranking capital instrument of the
Society, ranking behind the claims of all depositors, payables and
investing members.
Each holder of CCDS has one vote, regardless of the number of
CCDS held.
The CCDS holders are entitled to receive a distribution at the
discretion of the Society. The total distribution paid on each CCDS
in respect of any given financial year of the Society is subject to
a cap provided for in the Rules of the Society and adjusted
annually for inflation. The Directors have not declared a
distribution in respect of the period to 30 September 2018.
In the event of a winding up or dissolution of the Society, the
share of surplus assets (if any) a CCDS holder would be eligible to
receive is determined by the calculation of a core capital
contribution proportion, limited to a maximum of the average
principal amount, currently GBP100 per CCDS.
16 Related party transactions
Related party transactions for the six months to 30 September
2018 are within the normal course of business and of a similar
nature to those for the last financial year, full details of which
are disclosed in the Annual Report and Accounts for the year ended
31 March 2018.
17 Subscribed capital
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Permanent interest bearing shares 8.9 75.0 75.0
---------------------------------- --------------- --------- ---------
In a winding up or dissolution of the Society the claims of the
holders of permanent interest bearing shares (PIBS) would rank
behind all other creditors of the Society, with the exception of
holders of core capital deferred shares (CCDS). The holders of PIBS
are not entitled to any share in any final surplus upon winding up
or dissolution of the Society.
Future interest payments are at the discretion of the
Society
18 Subordinated liabilities
30-Sep-18 30-Sep-17 31-Mar-18
unaudited unaudited audited
GBPm GBPm GBPm
Subordinated notes due 2038 -
11.0% 22.8 - -
------------------------------ --------------- ---------------- -----------------
The Society issued subordinated notes in April 2018 as part of
its Liability Management Exercise described in note 5. The
Society's subordinated notes rank behind all other creditors of the
Society, with the exception of holders of CCDS and PIBS.
19 Financial instruments
Fair values of financial assets and financial liabilities
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Group determines
fair values by the following three tier valuation hierarchy:
Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2: Valuation techniques where all inputs are taken from
observable market data, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3: Valuation techniques where significant inputs are not
based on observable market data.
Valuation techniques include net present value and discounted
cash flow models, comparison to similar instruments for which
market observable prices exist and other valuation models.
Assumptions and market observable inputs used in valuation
techniques include risk-free and benchmark interest rates, equity
index prices and expected price volatilities. The objective of
valuation techniques is to arrive at a fair value determination
that reflects the price of the financial instrument at the
reporting date that would have been determined by market
participants acting at arm's length. Observable prices are those
that have been seen either from counterparties or from market
pricing sources including Bloomberg. The use of these depends upon
the liquidity of the relevant market.
Financial assets and financial liabilities held at amortised
cost
The tables below show the fair values of the Group's financial
assets and liabilities held at amortised cost in the Statement of
Financial Position, analysed according to the fair value hierarchy
described above.
6 months ended 30 September 2018
(unaudited) Carrying Fair value Fair value Fair value Fair value
Level Level Level
value 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with the Bank
of England 130.1 130.1 - - 130.1
Loans and advances to credit
institutions 106.0 - 106.0 - 106.0
Loans and advances to customers 4,827.2 - - 4,837.7 4,837.7
------------------------------------- ------------- --------------- --------------- --------------- -------------
5,063.3 130.1 106.0 4,837.7 5,073.8
------------------------------------- ------------- --------------- --------------- --------------- -------------
Financial liabilities
Shares 3,869.2 - - 3,849.4 3,849.4
Amounts due to credit institutions 760.1 - 760.1 - 760.1
Amounts due to other customers 96.7 - 96.7 - 96.7
Debt securities in issue 369.7 347.2 16.0 - 363.2
------------------------------------- ------------- --------------- --------------- --------------- -------------
5,095.7 347.2 872.8 3,849.4 5,069.4
------------------------------------- ------------- --------------- --------------- --------------- -------------
6 months ended 30 September 2017
(unaudited) Carrying Fair value Fair value Fair value Fair value
Level Level Level
value 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with the Bank
of England 212.4 212.4 - - 212.4
Loans and advances to credit
institutions 143.8 - 143.8 - 143.8
Loans and advances to customers 4,854.1 - - 4,940.1 4,940.1
--------------------------------------- ------------ --------------- --------------- --------------- ------------
5,210.3 212.4 143.8 4,940.1 5,296.3
--------------------------------------- ------------ --------------- --------------- --------------- ------------
Financial liabilities
Shares 4,160.0 - - 4,140.0 4,140.0
Amounts due to credit institutions 683.9 - 683.9 - 683.9
Amounts due to other customers 189.2 - 189.2 - 189.2
Debt securities in issue 152.7 143.5 7.2 - 150.7
--------------------------------------- ------------ --------------- --------------- --------------- ------------
5,185.8 143.5 880.3 4,140.0 5,163.8
--------------------------------------- ------------ --------------- --------------- --------------- ------------
Year ended 31 March 2018 (audited) Carrying Fair value Fair value Fair value Fair value
Level Level Level
value 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash and balances with the Bank
of England 324.7 324.7 - - 324.7
Loans and advances to credit
institutions 120.6 - 120.6 - 120.6
Loans and advances to customers 4,797.0 - - 4,781.7 4,781.7
--------------------------------------- ------------ --------------- --------------- --------------- ------------
5,242.3 324.7 120.6 4,781.7 5,227.0
--------------------------------------- ------------ --------------- --------------- --------------- ------------
Financial liabilities
Shares 4,051.4 - - 4,033.5 4,033.5
Amounts due to credit institutions 571.3 - 571.3 - 571.3
Amounts due to other customers 133.1 - 133.1 - 133.1
Debt securities in issue 480.8 471.3 7.9 - 479.2
--------------------------------------- ------------ --------------- --------------- --------------- ------------
5,236.6 471.3 712.3 4,033.5 5,217.1
--------------------------------------- ------------ --------------- --------------- --------------- ------------
The Group adopted IFRS 9 'Financial Instruments' with effect
from 1 April 2018. Balances in the tables above are presented in
accordance with their IFRS 9 classification at 30 September 2018
and on an IAS 39 basis at 30 September 2017 and 31 March 2018.
a) Loans and advances to customers
The fair value of loans and advances to customers has been
determined taking into account factors such as impairment and
interest rates. The fair values have been calculated on a product
basis and as such do not necessarily represent the value that could
have been obtained for a portfolio if it were sold at 30 September
2018.
b) Shares and borrowings
The estimated fair value of deposits with no stated maturity,
which includes non-interest bearing deposits, is the amount
repayable on demand. The estimated fair value of fixed
interest-bearing deposits and other borrowings without quoted
market price is based on discounted cash flows using interest rates
for new deposits with similar remaining maturity. The fair values
have been calculated on a product basis and as such do not
necessarily represent the value that could have been obtained for a
portfolio if it were sold at 30 September 2018.
c) Debt securities in issue
The aggregate fair values are calculated based on quoted market
prices. For those notes where quoted market prices are not
available, a discounted cash flow model is used based on a current
yield curve appropriate for the remaining term to maturity.
Financial assets and financial liabilities held at fair
value
The tables below show the fair values of the Group's financial
assets and liabilities held at fair value in the Statement of
Financial Position, analysed according to the fair value hierarchy
described previously.
6 months ended 30 September 2018 Level Level Level 3
(unaudited) 1 2 Total
GBPm GBPm GBPm GBPm
Financial assets
Investment securities 259.4 - - 259.4
Derivative financial instruments - 17.9 - 17.9
Loans and advances to customers - - 16.4 16.4
259.4 17.9 16.4 293.7
--------------------------------- --------------- --------------- ------- ----------------
Financial liabilities
Derivative financial instruments - 33.0 - 33.0
--------------------------------- --------------- --------------- ------- ----------------
Level Level
6 months ended 30 September 2017 (unaudited) 1 2 Total
GBPm GBPm GBPm
Financial assets
Investment securities 316.0 - 316.0
Derivative financial instruments - 11.2 11.2
Loans and advances to customers - 12.2 12.2
316.0 23.4 339.4
--------------------------------------------- --------------- --------------- -------------
Financial liabilities
Derivative financial instruments - 53.0 53.0
Debt securities in issue - 16.6 16.6
- 69.6 69.6
--------------------------------------------- --------------- --------------- -------------
Level
Year ended 31 March 2018 (audited) Level 1 2 Total
GBPm GBPm GBPm
Financial assets
Investment securities 311.9 - 311.9
Derivative financial instruments - 19.5 19.5
Loans and advances to customers - 8.4 8.4
311.9 27.9 339.8
----------------------------------- --------------- --------------- ---------------
Financial liabilities
Derivative financial instruments - 38.7 38.7
Debt securities in issue - 12.5 12.5
- 51.2 51.2
----------------------------------- --------------- --------------- ---------------
The Group adopted IFRS 9 'Financial Instruments' with effect
from 1 April 2018. Balances in the tables above are presented in
accordance with their IFRS 9 classification at 30 September 2018
and on an IAS 39 basis at 30 September 2017 and 31 March 2018. IFRS
9 adoption resulted in the reclassification of the Society's equity
release portfolio from an amortised cost to fair value measurement
basis. The mortgages are fair valued using a discounted cash flow
model for which key inputs are not based on observable market data.
The calculation therefore meets the definition of a level 3
valuation technique. Details of the key model assumptions and the
fair value impact of changes in those assumptions are given in note
4.
The table below analyses movements in the level 3 portfolio
during the period.
Equity release
portfolio
GBPm
At 1 April 2018 (unaudited) 18.4
Items recognised in the Income Statement
Interest receivable and similar income 0.5
Fair value losses on financial instruments (0.9)
Redemption payments (1.6)
At 30 September 2018 (unaudited) 16.4
------------------------------------------------ -----------------
There have been no transfers of financial assets or liabilities
between levels of the valuation hierarchy in the period.
20 Post balance sheet event (non-adjusting)
On 26 October 2018, the High Court ruled that defined benefit
pension schemes must equalise for the effect of Guaranteed Minimum
Pensions (GMPs) providing different benefits for men and women. The
Society is liaising with its scheme actuary to quantify the impact
of this decision on its Staff Retirement Scheme. There are a number
of matters to clarify to quantify the impact of this ruling. Based
on the information currently available the estimated present value
of the Society's defined benefit obligation could increase by up to
GBP2m.
As the change in defined benefit liability arises as a result of
a plan amendment occurring after the reporting date, it represents
a non-adjusting post balance sheet event. In accordance with IAS
19, 'Employee Benefits', the increase in obligation is expected to
be recognised as a past service cost (within administrative
expenses) in the second half of the financial year ended 31 March
2019.
21 Statement of Directors' responsibilities
The Directors confirm that this condensed set of financial
statements has been prepared in accordance with IAS 34 'Interim
Financial Reporting' as adopted by the European Union, and that the
interim management report herein includes a fair review of the
information required by DTR 4.2.7R and DTR 4.2.8R.
The Directors of West Bromwich Building Society are listed in
the West Bromwich Building Society Annual Report for the year ended
31 March 2018.
Signed on behalf of the Board of Directors:
Jonathan Westhoff Ashraf Piranie
Chief Executive Group Finance & Operations Director
6 December 2018
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR BSBDDGDGBGIL
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December 06, 2018 09:34 ET (14:34 GMT)
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