TIDMPCF
RNS Number : 9926H
PCF Group PLC
09 December 2020
9 December 2020
PCF Group plc
("PCF", the "Bank" or the "Group")
Preliminary Results for the year ended 30 September 2020
Proven business model underpins resilient performance in a year
of disruption
PCF Group plc, the AIM-listed specialist bank, today announces
its preliminary unaudited results for the year ended 30 September
2020. The Board is pleased to report full year results which show
resilience, both financially and operationally, in the most
extraordinary of years. We have remained cautious and prudent,
focussing our efforts on supporting our customers and ensuring the
well-being of our colleagues.
Highlights:
-- Underlying profit before tax(1) of GBP3.9 million (2019: GBP8.0 million)
-- Underlying profit reduction driven by credit impairment
charges of GBP7.8 million (2019: GBP2.2 million) including the
incremental cost of potential Covid-19 credit losses
-- Statutory profit before tax was GBP2.1 million (2019: GBP8.0
million ) including a partial impairment of goodwill on our
investment in Azule of GBP1.75 million
-- Focus on portfolio quality with 85% (2019: 74%) of current
year originations in the prime segment of the credit spectrum
-- Loan book growth to GBP434 million (2019: GBP339 million)
-- Portfolio forbearance continues to fall and is now GBP23
million, less than 7% of the loan book at 30 November 2020 (May
2020: 34%)
-- Operating income increased by 19% to GBP26.5 million (2019: GBP22.3 million)
-- Net Interest Margin ('NIM') reduced to 6.9% (2019: 7.8%)
reflecting the focus on higher quality lending partially offset by
a cheaper cost of funds
-- Cost to income ratio was unchanged at 55.6% (2019: 55.6%)
-- Strong new business originations of GBP270 million (2019: GBP276 million) comprising
o New business origination for 'own portfolio' increasing by 10%
to GBP244 million (2019: GBP222 million)
o GBP26 million (2019: GBP54 million) of brokered Azule new
business origination, generating commission income
o Includes property bridging finance lending of GBP60 million in
first full year (2019 9 months: GBP14 million)
-- Retail deposits total GBP342 million (2019: GBP267 million)
with over 7,950 retail deposit customers (2019: 6,250)
-- Drawings of GBP62 million (2019: GBP25 million) under the UK
Treasury Term Funding Schemes, in support of the SME sector
-- Dividend will be considered at the time of the FY21 Interim Results
-- Earnings per share of 0.6p (2019: 2.7p)
-- Underlying return on equity(2) of 5.4% (2019: 12.6%)
-- Statutory return on equity of 2.5% (2019: 12.6%)
-- CET1 Capital Ratio of 17.7% (2019: 18%)
-- Liquidity Coverage Ratio of 673% (2019: 553%)
(1) Statutory profit before tax GBP2.1
Impairment to goodwill GBP1.8
Underlying profit before tax GBP3.9
(2) Underlying return on equity adds back impairment of
goodwill
Tim Franklin, Chairman, commented : "This has been a challenging
year for people and businesses across the UK. I am incredibly proud
of the support that PCF Bank has provided to both our customers and
colleagues.
"Against this backdrop, we continue to be profitable and have
made progress towards our longer term business targets: growing the
size of our portfolio, moving further into the prime segment of our
lending markets and increasing the diversification in our loan
book.
"Whilst forbearance across the loan book has continued to fall,
we are aware that there may be further challenges in 2021. However,
we are optimistic that our continued investment in PCF Bank,
alongside the talent at the bank, place us in an excellent position
to emerge more strongly as economic conditions stabilise."
Dial in details
There will be a dial in facility available for an analyst and
investor call on Wednesday 9 December at 10am (GMT). The
presentation will be available on the investor section of the PCF
Bank website at the same time: https://pcf.bank/investors/
The access details for the call are as follows:
United Kingdom Toll-Free: 0800 358 9473
United Kingdom Toll: +44 333 3000804
Pin: 11764671
Further international dial in numbers can be found here:
https://event.sharefile.com/d-s7bae1d9235d495a8
For further information, please visit https://pcf.bank/ or
contact:
PCF Group Tel: +44 (0) 20 7222
Scott Maybury, Chief Executive Officer 2426
Robert Murray, Managing Director
Tavistock Communications Tel: +44 (0) 20 7920
Simon Hudson / Edward Lee / Tim Pearson 3150
Peel Hunt (Nominated Advisor and Broker) Tel: +44 (0) 20 7418
Andrew Buchanan / James Britton / Rishi 8900
Shah /
Duncan Littlejohns
Shore Capital (Joint Broker) Tel: +44 (0) 20 7408
Henry Willcocks - Corporate Broking 4080
About PCF Group plc ( www.pcf.bank )
Established in 1994, PCF Group plc is the AIM-quoted parent of
the specialist bank, PCF Bank Limited. Since commencing operations
as a bank in 2017, the Group has increased its lending portfolio
from GBP140 million to over GBP430 million. The Group continues to
focus on portfolio quality and lending to the prime segments of its
existing markets. The Group will continue to identify opportunities
to diversify its lending products and asset classes by setting up
new organic operations or through acquistion.
PCF Bank currently offers retail savings products for
individuals and then deploys those funds through its four lending
divisions:
-- Business asset finance which provides finance for vehicles, plant and equipment to SMEs;
-- Consumer motor finance which provides finance for motor vehicles to consumers;
-- Azule which provides finance to the broadcast and media industry; and
-- Property bridging finance which provides loans to companies
and sole traders investing in residential and commercial
property.
The Group has a track record of profitability and sustainability
through an efficient and scalable business model. Utilising its
technologically advanced platform, PCF Bank provides both
depositors and borrowers with a high level of service and a
straightforward, simple range of products tailored to suit their
needs.
Recently recorded video profiles of PCF's Property Bridging
Finance, Azule Broadcast Equipment Finance, and Savings divisions
are available at the Company's profile page on the London Stock
Exchange website:
https://profile.lsegissuerservices.com/PCFGroup/overview.
Chairman's Statement
For the year ended 30 September 2020
In the unprecedented circumstances faced by the bank, I am
pleased to report a resilient performance for the year ended 30
September 2020. The last nine months have presented individuals,
families, businesses and economies with challenges never seen
before in living memory. The impact of the pandemic has been felt
across our business and, while recent news on a vaccine provides
hope, the near-term outlook remains uncertain and our results
reflect this with increased impairment charges for potential credit
losses and a partial impairment of goodwill arising from the
acquisition of Azule. We entered the crisis in a strong position
and our proven business model, together with a further tightening
of our credit risk appetite, has underpinned our performance in the
year.
I am proud of the way the business has responded to Covid-19. By
adapting how we work, PCF Bank has continued to provide the same
levels of excellent service. Our priority throughout the year has
been to support customers whilst ensuring the well-being of our
colleagues. It has been a year for disciplined lending and
responsive risk management to mitigate the impact of the crisis and
to protect the core strengths of the business in order to continue
to thrive.
We have a highly committed and talented team with the experience
to navigate these challenges and I would like to thank them for
their efforts and dedication throughout the year.
Profitability, balance sheet strength and Covid-19 effect
Underlying profit before tax for the year was GBP3.9 million
(2019: GBP8.0 million). This performance has been delivered against
the backdrop of loan book growth and a firm control on costs.
Lending in consumer motor and property bridging finance were
strong, while business asset finance saw reduced demand due to
competing Government support schemes such as the Coronavirus
Business Interruption Scheme ("CBILS").
Statutory profit before tax was GBP2.1 million (2019: GBP8.0
million) after a GBP1.75 million impairment of the value of the
goodwill arising from our purchase of Azule. Azule's business was
curtailed by restrictions on live events and filming activities,
resulting in reduced origination levels and high levels of
forbearance, but we are confident in the long-term strength of this
business when the economy returns to growth. Indeed, producers of
entertainment content who are Azule's customers, should be
longer-term beneficiaries following the pandemic.
The results also include significant credit impairment charges
under IFRS9 to cover the potential losses from a prolonged economic
downturn and the effect on the collectability of our lending book
resulting from Covid-19. Credit impairment charges amounted to
GBP7.8 million (2019: GBP2.2 million).
As a result, our earnings per share fell to 0.6p (2019: 2.7p)
and underlying return on equity reduced to 5.4% (2019: 12.6%). In
the light of the current uncertainties, the Board has deferred a
decision on a dividend for the period until the 2021 Interim
Results, at which time we hope there will be greater certainty of
the impacts of Covid-19 and Brexit on the UK economy.
Net assets increased to GBP59.4 million (2019: GBP58.8 million)
and the total capital ratio remained a healthy 19.5% (2019: 18%).
Capital and liquidity management maintained a surplus position in
excess of our regulatory requirements.
Governance and culture
The Board provides continued support through the oversight of
risk. This was particularly relevant in a year when operational
challenges required agile decision making. We have held more board
meetings than ever before, on a weekly basis in the early months of
the lockdown, to ensure we maintained oversight of operations and
were able to respond quickly to fast-changing events. The Board was
externally assessed in the year, continues to work well and the
results of that assessment will inform the future development of
the Board.
The culture of the business continues to be a strength at a time
when most of our colleagues are working remotely. We have supported
them with a safe, healthy working environment and with increased
communications majoring on employee engagement and mental health
awareness.
Outlook
We are well-positioned despite an uncertain economic outlook. We
have a long-established and sustainable business model, which gives
us confidence that we will emerge strongly from the crisis, as
normality returns.
While we are yet to see the full impact of the pandemic on the
credit quality of our loan book, we believe that our impairment
provisioning is appropriate and prudent. At 30 September 2020, a
second lockdown had not been foreseen and the UK's future
relationship with Europe was still unclear. A cautious assessment
of the outlook was therefore essential.
Given the rapidly changing environment, it is not appropriate to
provide firm guidance on future performance, so the Group's
previous operating targets remain withdrawn. The level of growth in
the loan book will remain uncertain. We do, however, have some
certainty on net interest margin and costs and we expect that the
cost of risk in our current financial year will be substantially
lower, assuming no further deterioration in the economic
outlook.
This year, we have demonstrated an effective response in the
most difficult of trading conditions. While the news of a vaccine
and its effects are too early to factor into our forecasts, the
business stands ready to resume strong growth once the economic
benefits manifest themselves. Opportunity awaits a business that
navigates the crisis successfully and we have the experience and
expertise in our team to provide confidence in the way ahead.
Tim Franklin
Chairman
Chief Executive's Report
For the year ended 30 September 2020
2020 has been an extraordinary year. We continue to navigate
these challenging times in a way that will leave us well placed
once the UK emerges from the pandemic. This year's results
demonstrate a robust lending performance against the backdrop of an
inevitably higher impairment charge due to the potential for credit
losses as a result of Covid-19.
Covid-19 response
The second half of our financial year was disrupted by the
operational and economic impacts of the pandemic. The business
acted swiftly to deploy home working and, supported by our
technology team and resource, we had almost our entire team
operational within days, and without business interruption.
Throughout the crisis our focus has been on protecting our core
assets - our people, our customers and our balance sheet. This has
resulted in us changing the way we engage with all stakeholders
and, by adapting quickly, we have maintained service levels across
all business lines and functional areas. Of particular importance
to us was our effort to support staff well-being and customers who
may have suffered hardship through no fault of their own.
In respect of our colleagues we have put in place support
mechanisms and new ways of working which have enabled them to have
the flexibility to continue to contribute to our business successes
whilst ensuring that they are able to dedicate time to the care of
themselves and their loved ones. We are proud of the way they have
risen to challenges that they have faced.
Where our customers have approached us to assist them, we have
met all our regulatory obligations and where appropriate have gone
above and beyond these. This approach has meant that we have been
able to provide help when it was needed and through the period
until our customers were able to return to payment levels which
were in line with the contractual requirements. At its peak in May
2020, 34% of our loan book by value was in forbearance. This had
reduced to less than 10% by 30 September 2020 and has since trended
to less than 7%.
This excellent response and resultant outcome is a credit to
everybody at PCF Bank.
Trading and profitability
The Group reported an underlying profit before tax of GBP3.9
million (2019: GBP8.0 million) for the full year. This includes an
increase in the credit impairment charge to GBP7.8 million (2019:
GBP2.2 million). This additional provision anticipates the
potential impact of Covid-19, based on economic forecasts and the
expected payment performance of our loan book. Conditions remain
uncertain and events continue to be fast moving, but our approach
has been to apply an appropriate level of provisioning and overlays
to reflect the outlook at 30 September 2020. Whilst our provision
anticipates the potential for future losses the current level of
absolute write-offs remains low.
The total cost of risk in the year was 2.0% (2019: 0.8%) and the
Expected Credit Loss provisions held on the balance sheet increased
by 59% to 3.5% (2019: 2.2%).
The Group also partially impaired the goodwill paid on the
acquisition of Azule, its broadcast and media division, by GBP1.75
million. This impairment of goodwill was driven by reduced new
business originations and increased forbearance, resulting in a
divisional loss for the year and the likelihood of reduced
profitability in the near-term.
The statutory profit before tax was GBP2.1 million (2019: GBP8.0
million), generating an underlying return on equity of 5.4% (2019:
12.6%).
The net interest margin ('NIM') reduced to 6.9% (2019: 7.8%) as
the Group tightened its credit risk appetite and focussed on prime
business. The move to better quality origination had been underway
for several years but is particularly relevant in the current
economic environment.
Although overall new lending reduced against the previous year,
the loan book still grew albeit at a reduced rate of 28% (2019:
55%). The cost to income ratio was unchanged at 55.6% (2019:
55.6%). We continue to make significant investment in our operating
model, and it is pleasing to see that income growth has continued
to keep pace with costs.
Our customer base continues to grow and at year end we had over
29,500 customers (2019: 21,250).
Business lines and portfolio quality
New business origination in the year fell slightly to GBP270
million (2019: GBP276 million). This is entirely understandable in
the current climate, so we regard it as a strong performance with
the new diversification into property bridging finance contributing
to that success.
The quality of new business origination continues to improve,
with management making a conscious decision to manage credit risk
through the current cycle. 85% of business origination was in our
prime credit grades, compared to 74% the previous year.
The total loan book grew to GBP434 million (2019: GBP339
million) and the overall quality improved with 79% of the portfolio
in our prime credit grades (2019: 68%). Many of our customers have
required assistance through the crisis and at its peak GBP139
million of balances were in forbearance. However, many did this for
precautionary reasons and have since resumed payments. As a result,
the balance of forborne loans has progressive fallen since May 2020
and stood at GBP40 million at year end. At 30 November 2020 this
had further reduced to GBP23 million. We will continue to support
customers as required and remain ready to assist if we see the
position worsen as a result of the removal of the UK Government's
numerous support schemes.
Despite the challenges, the Bank continued to be cash generative
through all trading months through a combination of the embedded
recurring cashflows from our loan book and continued focus on cost
control. The loan book is reported net of unearned finance charges
of GBP69 million (2019: GBP63 million). This income will be
attributed to future accounting periods and supports the future
earnings performance.
The current demand for lending is uncertain but we remain
confident that the opportunity for strong lending growth will
return once the economy shows signs of recovery. We retain
relatively small shares of our chosen lending markets and the
potential to increase them remains unchanged.
Segmental business review
Consumer motor finance
The used motor vehicle finance market has proved resilient
through the period. After an initial fall in demand upon lockdown
in March, new business origination picked back up in May and
further increased when dealerships opened on 1 June. This is
consistent with data on used car sales and used car asset values.
As reported previously, a change in travel preferences by consumers
away from public transport has supported this market. The leisure
market has also been strong with good demand in particular for
motorhome finance as a greater number of people took holidays in
the UK.
New business originations in the year were GBP92 million (2019:
GBP73 million), an increase of 26% and the loan book grew by 30% to
GBP167 million (2019: GBP128 million). Credit quality was strong
with 93% of origination in prime credit grades (2019: 80%) and we
have maintained cautious underwriting terms in respect of loan to
value.
Levels of forbearance in this portfolio are relatively low but
we are alert to the risks of rising unemployment. The impairment
charge for the year was 2.1% (2019: 0.7%).
Business asset finance
New business origination in this division has been more
noticeably affected by lower demand. Sole traders and small
companies are understandably deferring investment decisions and
where working capital can be accessed through one of the
Government's support schemes, at preferential terms, our asset
finance products are less competitive. We remain focused on prudent
underwriting as the difficult trading conditions for most SMEs
raises affordability and sustainability concerns.
New business originations in the year were GBP79 million (2019:
GBP120 million) a decrease of 34% however the loan book continued
to grow slightly by 3%% to GBP184 million (2019: GBP178 million).
We were selective with credit quality with 78% of origination in
prime credit grades (2019: 71%).
Levels of forbearance have been high in this portfolio but had
reduced to 14% at 30 September 2020. The impairment charge for the
year was 1.8% (2019: 0.8%).
Azule
Our broadcast and media finance subsidiary has been particularly
affected by the lockdown with TV, film, sports and live events all
severely impacted. In the second half of the year the division
focussed its broking activity on assisting customers with
applications under the government CBILS scheme. The business has
more recently seen increased activity as large studio productions
are now back underway, however, we do not expect a full recovery
until the better weather and longer daylight hours of next
spring.
Despite the goodwill impairment for this division, we have an
expectation of a recovery over time with demand for content for the
on-demand streaming services like Netflix, Amazon Prime and Disney+
driving investment in new equipment.
New business originations in the year were GBP39 million (2019:
GBP69 million) a decrease of 43% and the loan book stands at GBP23
million (2019: GBP20 million).
Forbearance levels were initially very high in this portfolio
but have gradually improved. The impairment charge for the year was
4.4% (2019: 0.5%).
Property bridging finance
This division has seen strong demand and has a healthy pipeline
of transactions. We took advantage of several non-bank competitors
withdrawing from the market due to liquidity issues in the early
months of the pandemic and this has allowed us to build
relationships with new introducers. The quality and terms of
business are attractive, and we are very pleased with the
performance of this new business line in its first full year of
operation.
New business originations in the year were GBP60 million (2019 9
months: GBP14 million) and from a small base this division has been
a key contributor to the Group's loan book growth with a loan book
of GBP59 million (2019: GBP13 million). We lend primarily on
residential property with first charge security and conservative
loan to values.
This portfolio, due to the nature of the contractual terms, has
no forbearance cases but had an impairment charge applied of 1.3%
(2019: 0%) by way of protection against any future reduction of
real estate values.
Capital management and treasury
PCF entered this crisis in a strong position. We have a
diversified funding model utilising retail deposits, wholesale debt
and Bank of England mechanisms such as the Term Funding Schemes. As
at 30 September 2020 we had drawn GBP62 million (2019: GBP25
million) and held GBP342 million in retail deposits (2019: GBP267
million). Our range of deposit products has an average balance
outstanding of GBP42,500 (2019: GBP42,400) and an average term of
2.9 years (2019: 2.9 years), which is a sensible funding match
against our portfolio term.
The Group's cost of funding fell to 1.7% (2019: 2.2%) in the
year and we retain a strong liquidity position with a Liquidity
Coverage Ratio of 673% (2019: 553%).
The Group had a Total Capital Ratio of 19.5% (2019: 18%) which
exceeds our regulatory requirement and, with the current reduced
levels of new business origination, is expected to continue to
provide a comfortable capital position. The Group has utilised its
Tier 2 capital facility to the extent of GBP7 million (2019: NIL).
The prudent management of capital resources has been a key focus
since the start of the crisis to ensure we can continue to support
customers and the sectors in which we operate.
The PCF team
The application and attitude shown by our team has been
outstanding, so it has been a source of pride to observe their
flexibility and adaptability in the face of unforeseen challenges.
The experience of the team has been fundamental in protecting the
future of the Group and guiding us to a successful outcome for the
year. These skills and resources will remain of paramount
importance as further business failure and unemployment remain
risks and also as we adapt further to the way we work and interact
with each other and our customers.
In July we recruited a Chief Operating Officer (COO) designate,
Garry Stran. Garry is an experienced financial services
professional having previously had roles within banking, credit
management, corporate finance and advisory, most recently in the
fintech sector. Garry will assume his new role in January after
completing an operational review of business processes. We also
recently appointed Nick Price to the role of Interim Chief
Financial Officer while we undertake a search for a permanent
hire.
Current trading and outlook
Our primary objective during the second half of the reporting
period was to protect all stakeholders and support our staff and
customers. We have achieved this while delivering a robust trading
performance.
We will endeavour to maintain a prudent level of loan book
growth dictated by the risks that we perceive to be at play. Our
future strategy, therefore, will be to align the growth of the loan
book to those risks in order to best achieve the optimal outcome
for all stakeholders. Our portfolio is collateral-backed,
diversified and has a low average transaction size. These are all
characteristics which help to mitigate credit risk. We remain open
for business and continue to finance consumers and SME customers
across all our lending divisions. The decision to focus on
originating prime quality lending will lead to some further NIM
compression, however it is a prudent response to an uncertain
outlook and will be kept under review.
We are utilising this time of lower business activity to
undertake an operational review across all business lines and
functions. This will help position us for future success and, at
the appropriate point, we will refocus our strategic objectives and
reset our targets for growth. The objective is to emerge from this
period of disruption in the best possible financial position and to
take advantage of the opportunities that may present themselves in
the form of fewer market participants, further portfolio
diversification and sector consolidation.
We expect that lending across each of our business lines will
recover at different rates, but all areas retain the potential to
return to the strong growth seen in previous years. So, while the
near-term path to recovery may remain uncertain, we have the utmost
confidence that our proven business model will once again deliver
an attractive return on equity in the medium-term. A normalisation
of impairments, investment in our people and the digitalisation of
our processes will underpin that future success.
Scott Maybury
Chief Executive
GROUP STATEMENT OF PROFIT AND LOSS AND OTHER COMPREHENSIVE
INCOME
(GBP'000s) 12 months 12 months
ended ended
30 September 30 September
2020 2019
unaudited audited
Interest revenue calculated using the
effective interest method 42,344 34,499
Interest expense calculated using the
effective interest method (15,713) (12,884)
Net interest income 26,631 21,615
Fees and commission income 1,470 1,815
Fees and commission expense (1,594) (1,154)
-------------- --------------
Net fee and commission (expense) / income (124) 661
Net loss on financial instruments at
fair value through profit or loss (44) (63)
Impairment losses on financial assets (7,805) (2,175)
-------------- --------------
Net operating income 18,658 20,038
-------------- --------------
Administration expenses (14,800) (12,020)
Impairment losses on goodwill (1,750) -
-------------- --------------
(16,550) (12,020)
-------------- --------------
Profit before taxation 2,108 8,018
Income tax charge (655) (1,624)
-------------- --------------
Profit after taxation, being total comprehensive
income, attributable to owners 1,453 6,394
Earnings per 5p ordinary share - basic 0.6p 2.7p
Underlying adjustments
Profit before taxation 2,108 8,018
Acquisition costs - 89
Impairment losses on goodwill 1,750 -
--------- ----------
Underlying profit before taxation 3,858 8,107
Income tax charge (655) (1,624)
--------- ----------
Underlying profit after taxation, being
total comprehensive income, attributable
to owners 3,203 6,483
GROUP BALANCE SHEET
(GBP'000s)
30 September 30 September
2020 2019
unaudited audited
Assets
Cash and balances at central banks 24,731 7,371
Loan and advances to customers 433,694 338,503
Debt instruments at FVOCI 9,095 19,638
Office equipment, motor vehicles
and right-of-use assets 2,605 579
Goodwill and other intangible assets 4,260 5,941
Deferred tax assets 1,494 1,105
Trade and other assets 2,794 4,932
--------------- -------------
Total Assets 478,673 378,069
Liabilities
Due to banks 62,620 44,412
Due to customers 342,046 267,070
Other borrowed funds 7,126 -
Derivative financial liabilities 80 63
Trade and other liabilities 7,435 7,769
--------------- -------------
Total Liabilities 419,307 319,314
Equity
Share capital 12,510 12,510
Share premium account 17,619 17,619
Revaluation reserve 48 7
Own shares (355) (355)
Retained earnings 29,544 28,974
--------------- -------------
Total Equity 59,366 58,755
Total equity and liabilities 478,673 378,069
GROUP STATEMENT OF CHANGES IN EQUITY
(GBP'000s) 12 months 12-month
ended period
30 September 30 September
2020 2019
Unaudited audited
Profit after tax for the year 1,453 6,394
Impact on transition to IFRS9 - (502)
New share capital subscribed - 10,991
Share-based payments 117 79
Cash dividend (993) (750)
Fair value loss on debt instruments
at FVOCI 45 (8)
Fair value gain on cash flow
hedges (11) -
-------------- --------------
Net addition to shareholders'
funds 611 16,204
Opening shareholders' funds 58,755 42,551
-------------- --------------
Closing shareholders' funds 59,366 58,755
============== ==============
NOTES TO THE FINANCIAL STATEMENTS
1. The preliminary results are unaudited and do not constitute
statutory accounts as defined by section 434 of the Companies Act
2006. The comparative figures for the 12 months ended 30 September
2019 are based on the statutory accounts of the Group for that
period and have been reported on by the Group's auditor and
delivered to the Registrar of Companies. The report of the auditors
was unqualified and did not contain a statement under section 498
of the Companies Act 2006.
2. Other than the introduction of the accounting standard IFRS16
'Leases' (note 10), the preliminary results have been prepared on
the basis of the accounting policies set out in the Annual Report
& Financial Statements for the 12 months ended 30 September
2019. Hedge accounting for interest rate swaps used by the Treasury
function to manage interest rate risk has been applied for the
first time this year.
3. These consolidated financial statements have been prepared in
accordance with IFRS and its interpretations issued by the
International Accounting Standards Board, as adopted by the
European Union. This announcement has been approved and authorised
for issue by the Board of Directors.
4. The Group operates in the principal areas of consumer finance
for motor vehicles, business finance for vehicles, plant and
equipment and property bridging finance.
Profit on ordinary activities before taxation and loan loss
provisioning charge are detailed below:
(GBP'000s) 12 months 12 months
ended ended
30 September 30 September
2020 2019
unaudited audited
Consumer Finance Division (CFD) 1,315 3,880
Business Finance Division (BFD) 2,657 3,907
Azule (2,502) 663
Property Bridging Finance (PBF) Division 638 (432)
Profit on ordinary activities before
taxation 2,108 8,018
-------------- --------------
Consumer Finance Division (2,886) (778)
Business Finance Division (3,493) (1,345)
Azule (1,012) (46)
Property Bridging Finance Division (414) (6)
-------------- --------------
Loan loss provisioning charge (7,805) (2,175)
-------------- --------------
5. The income tax assessed for the period is equal to the
Corporation Tax in the UK of 19% (12-months period ended 30
September 2019 - 19%). The breakdown is below. Deferred tax
balances should be calculated at the rate which the balances are
expected to be settled, based on tax rates that have been
substantively enacted at the balance sheet date. Therefore, the
deferred tax balances have been calculated with reference to these
rates.
(GBP'000s) 12 Months
30 September
2020
Unaudited
Profit on ordinary activities before tax 2,108
==============
Profit on ordinary activities multiplied by the
standard rate of Corporation Tax in the UK of 19%
(2019 - 19%) (401)
Effects of:
Expenses not deductible for taxation purposes (354)
Impact of different overseas tax rate 4
Adjustments in respect of prior years 6
Shared base payments (25)
Change in tax rate 126
Unutilised losses (11)
Total tax charge for the year (655)
==============
6. In performing the annual impairment test, the Group assesses
the economic performance of each acquisition, the future prospects
of the business acquired and the useful economic life of each to
ensure that growth and profitability are at least of the same value
as the amount that was paid 'over and above' for the fair value of
the assets and liabilities acquired. To assess this, forecasted
Board approved profitability 5 year projections have been used and
discounted back to present value.
While both the CGU's acquired are expected to continue to
perform, as forecasting is only over the next 5 years, in order to
capture expected growth and cashflows beyond these dates there is a
Terminal valuation that is performed to assess whether goodwill has
been impaired or not. Following this assessment, the CGU forecast
for Azule was assessed to be lower than that of its net assets and
goodwill, resulting in a partial impairment of GBP1,750,000.
7. The calculation of basic earnings per ordinary share for the
12 months ending 30 September 2020 is based on a profit after
taxation of GBP1,453k for the period on 250,217,436 ordinary
shares, being the weighted average number of ordinary shares in
issue during the period.
The calculation of basic earnings per ordinary share for the 12
months ending 30 September 2019 is based on a profit of GBP6,394k
for the period on 234,102,363 ordinary shares, being the weighted
average number of ordinary shares in issue during the period.
8. Revaluation reserve includes revaluation of debt instruments
at Fair Value to Other Comprehensive Income ('FVOCI').
9. The Group is required to recognise Expected Credit Losses
('ECL') based on unbiased forward-looking information for all
financial assets at amortised cost, lease receivables, debt
financial assets at fair value through other comprehensive income,
loan commitments and financial guarantee contracts.
The Group uses the three-stage model for determination of
expected credit losses: (i) for loans where the credit risk has not
increased significantly since initial recognition, a provision is
recognised for the expected 12-month credit losses expected to be
incurred. (ii) for loans where there is deemed to be a significant
increase in credit risk, a provision for the expected lifetime
credit loss is recognised, and (iii) for loans that are in default,
the Group undertakes a specific impairment assessment. For loans
classified as either Stage 1 or 2, an assessment is performed on a
portfolio wide basis for impairment, with the key judgements and
estimates being:
-- The determination of significant increase in credit risk;
-- The probability of an account falling into arrears and subsequently defaulting;
-- Loss given default ('LGD'); and
-- Forward-looking information.
In addition to the above for Stage 3, the Group undertakes a
review of the recoverability of the exposure.
Significant increase in credit risk
The Group applies a series of criteria to determine if an
account has demonstrated a significant increase in credit risk
('SICR') and should therefore be moved to Stage 2:
-- Quantitative criteria: this considers the increase in an
exposure's remaining lifetime Probability of Default ('PD') at the
reporting date compared to the expected residual lifetime PD when
the exposure was originated. The Group segments its credit
portfolios into PD bands and has determined a relevant threshold
for each PD band, where a movement in excess of threshold is
considered to be significant. These thresholds have been determined
separately for each portfolio based on historical evidence of
delinquency, and
-- Backstop criteria: IFRS 9 includes a rebuttable presumption
that 30 days past due is an indicator of a significant increase in
credit risk. The Group considers 30 days past due to be an
appropriate backstop measure and does not rebut this
presumption.
Due to the impact and uncertainty introduced on the external
enviornment by Covid-19, it has been necessary to consider whether
a significant increase in credit risk has occurred for certain
loans, in particular where a Covid-19 payment concession or loan
extension has been granted. The granting of such a concession or an
extension has not in itself been considered an indication of a
significant increase in credit risk (transfer to Stage 2) in line
wth regulatory guidance but nevertheless it has been considered
prudent to calculate additional Post Model Adjustments ('PMA') for
such exposues within the Business Finance Division and within
Azule. For exposures within the Consumer Finance Division these
have been assessed based on their status immediately prior to
requesting forbearance and, if up to date, the forbearance has not
been considered a significant increase in credit risk. For Bridging
Property Finance all instances of forbearance have taken the form
of fee concessions or term extensions and are considered as
'business as usual' and therefore not considered as an indicator of
a significant increase in credit risk. In all cases these exposures
in all the divisions have remained in Stage 1 unless in arrears in
which case the exposure has been moved to Stage 2.
Definition of default, credit-impaired assets, cures, write-offs
and interest income recognition
The definition of default for the purpose of determining ECLs
has been aligned to the CRR article 178 definition of default, to
maintain a consistent approach with IFRS 9 and associated
regulatory advice. When exposures are identified as credit impaired
such interest income is calculated on the carrying value net of the
impaired allowance.
The Group applies a series of criteria to determine if an
account meets the definition of default and should therefore be
moved to Stage 3. These criteria include:
-- when the borrower is unlikely to pay its credit obligations
to the Group in full, without recourse by the Group to actions such
as realising security (if any is held); and
-- when the borrower is more than 90 days past due on any
material credit obligation to the Group.
When a loan falls into default and a formal process of
recovering the loan has taken place, the loan will initially be
fully impaired. The recovery will include a number of actions such
as selling the underlying assets and agreeing an arrangement to
repay. The Group will assess the likeliness of full recovery and
assign each loan into categories for which each will have a
different recovery percentage assigned.
If a loan is deemed no longer recoverable, the loan is written
off and put forward for a future debt sale. The Group policy does
not allow an exposure to be cured unless the loan has returned to
full payment and has been making such payments for at least the
last six months. This is a change from the policy of prior year and
has been implemented to be fully in line with IFRS9 .
Forward looking information
Expected credit losses ('ECL')
ECLs are an unbiased, probability-weighted estimate of credit
losses determined by evaluating a range of possible outcomes. They
are measured in a manner that reflects the time value of money and
uses reasonable and supportable information that is available
without undue cost or effort at the reporting date about past
events, current conditions and forecasts of future economic
conditions. Measurement of ECLs depends on the 'stage' of the
financial asset, based on changes in credit risk occurring since
initial recognition, as described below:
-- Stage 1. When a financial asset is first recognised, it is
assigned to Stage 1. If there is no significant increase in credit
risk from initial recognition, the financial asset remains in Stage
1. Stage 1 also includes financial assets where the credit risk has
improved, and the financial asset has been reclassified back from
Stage 2. For financial assets in Stage 1, a 12-month ECL is
recognised.
-- Stage 2. When a financial asset shows a significant increase
in credit risk from initial recognition, it is moved to Stage 2.
For financial assets in Stage 2, a lifetime ECL is recognised.
-- Stage 3. When there is objective evidence of impairment and
the financial asset is considered to be in default, or otherwise
credit-impaired, it is moved to Stage 3. For financial assets in
Stage 3, a lifetime ECL is recognised.
-- Lifetime ECL is defined as ECLs that result from all possible
default events over the expected behavioural life of a financial
instrument.
-- 12-month ECL is defined as the portion of lifetime ECL that
will result if a default occurs in the 12 months after the
reporting date, weighted by the probability of that default
occurring.
The Group considers three forward economic indicators for each
business line as follows:
CFD BFD Azule Bridging
Unemployment rate P P P P
---- ---- ------ ---------
ONS Used Car Price
Index P
---- ---- ------ ---------
CPI P P P
---- ---- ------ ---------
GDP P P P
---- ---- ------ ---------
Nationwide HPI P
---- ---- ------ ---------
The scenarios for UK economic growth, inflation, residential
property prices, unemployment and used car prices are obtained from
a reputable economic research consultancy firm.
The consultancy combines historical forecast errors with their
quantitative assessment of the current risks facing the economy to
produce robust forward-looking distributions. The method of
weighting the economic scenarios is based on the framework provided
by the consultancy.
Model calculation
The definitions of the ECL calculations are outlined below and
the key elements are, as follows:
-- PD - The Probability of Default (PD) is an estimate of the
likelihood of default over a given time horizon. A default may only
happen at a certain time over the assessed period, if the facility
has not been previously derecognised and is still in the
portfolio.
-- EAD - The Exposure at Default (EAD) is an estimate of the
exposure at a future default date, taking into account expected
changes in the exposure after the reporting date, including
repayments of principal and interest, whether scheduled by contract
or otherwise, expected drawdowns on committed facilities, and
accrued interest from missed payments.
-- LGD - The Loss Given Default (LGD) is an estimate of the loss
arising in the case where a default occurs at a given time. It is
based on the difference between the contractual cash flows due and
those that the lender would expect to receive, including from the
realisation of any collateral. It is usually expressed as a
percentage of the EAD.
ECLs are calculated by multiplying three main components, being
the PD, LGD and the EAD, discounted at the original EIR.
Management adjustments are made to modelled output to account
for situations where known or expected risk factors and information
have not been considered in the modelling process. In particular,
where segments of the portfolio have little or no historical
information to compute either PD or LGD, ECLs are extrapolated from
a related segment. This is particularly relevant for our highest
credit ranked business.
Expected life
Lifetime ECLs must be measured over the expected life. This is
restricted to the maximum contractual life and considers expected
prepayment and extension.
Discounting
ECLs are discounted at the Effective Interest Rate ('EIR') at
initial recognition or an approximation thereof and consistent with
income recognition. Lease receivables are discounted at the rate
implicit in the lease.
When estimating the ECLs, the model considers the different
economic scenarios. Each of these is associated with different PDs,
EADs and LGDs. When relevant, the assessment of multiple scenarios
also incorporates how defaulted loans are expected to be recovered,
including the value of collateral or the amount that might be
received for selling the asset.
The model assesses both Stage 1 on a 12-month ECL and Stage 2 on
a lifetime ECL basis.
For Stage 3, where loans are in default but are not in a formal
recovery process, the model above is followed and assesses ECL on a
lifetime basis.
Loans in formal recovery are assessed on a recovery basis having
initially recognised a 100% impairment charge. The Group assess the
likeliness of full recovery and assign each loan into categories
for which each will have a different recovery percentage
assigned.
The Group has an IFRS 9 Model Governance Control Framework which
states its objective to ensure the model inputs and outputs are
understood and agreed by relevant stakeholders. It incorporates
procedures for models, their development and validation.
Critical accounting estimates and judgements
IFRS 9 impairment involves several important areas of judgement,
including estimating forward looking modelled parameters (PD, LGD
and EAD), developing a range of unbiased future economic scenarios,
estimating expected lives and assessing significant increases in
credit risk, based on the Group's experience of managing credit
risk.
Within the BFD and CFD portfolios, which comprise large numbers
of small homogenous assets with similar risk characteristics where
credit scoring techniques are generally used, the impairment
allowance is calculated using forward looking modelled parameters
which are typically run at a cohort level.
For assets in Stage 3, impairment allowances are calculated on
an individual basis and all relevant considerations that have a
bearing on the expected future cash flows across a range of
recovery options are taken into account.
The Asset and Liability Committee ('ALCO') considers the
critical estimates and judgements on at least a quarterly basis
and, where necessary, puts forward changes to the Audit and Risk
Committee ('ARC') for approval. As of 30 September, 2020 the
committee has been split into an Audit Committee ('AC') and a Board
Risk Committee ('BRC') and ALCO now reports into BRC.
ECL Under ECL Under
(GBP'000) IFRS 9 IFRS 9
at 30 September at 30 September
2020 2019
unaudited audited
Consumer Finance Division 5,950 3,048
Business Finance Division 8,494 4,471
Azule 1,057 122
Property Bridging Finance Division 420 6
----------------- -----------------
15,921 7,647
----------------- -----------------
10. IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining
whether an Arrangement contains a Lease, SIC-15 Operating
Leases-Incentives and SIC-27 Evaluating the Substance of
Transactions Involving the Legal Form of a Lease. The standard came
into efffect for the Group from 1 October 2019 and it sets out the
principles for the recognition, measurement, presentation and
disclosure of leases and requires lessees to recognise most leases
on the balance sheet.
The Group recognised right-of-use assets and lease liabilities
for those leases previously classified as operating leases, except
for short-term leases and leases of low-value assets. The
right-of-use assets for most leases were recognised based on the
carrying amount as if the standard had always been applied, apart
from the use of incremental borrowing rate at the date of initial
application. In some leases, the right-of-use assets were
recognised based on the amount equal to the lease liabilities,
adjusted for any related prepaid and accrued lease payments
previously recognised. Lease liabilities were recognised based on
the present value of the remaining lease payments, discounted using
the incremental borrowing rate at the date of initial application.
The Group also applied the available practical expedients wherein
it:
-- Used a single discount rate to a portfolio of leases with
reasonably similar characteristics
-- Relied on its assessment of whether leases are onerous
immediately before the date of initial application
-- Applied the short-term leases exemptions to leases with lease
term that ends within 12 months of the date of initial
application
-- Excluded the initial direct costs from the measurement of the
right-of-use asset at the date of initial application
-- Used hindsight in determining the lease term where the
contract contained options to extend or terminate the lease
Based on the above, as at 1 October 2019:
-- Right-of--use assets of GBP2.2m were recognised and presented
in the statement of financial position within "Office equipment,
motor vehicles and right-of-use assets".
-- Additional lease liabilities of GBP2.1m (included in other liabilities) were recognised.
11. The 2020 Annual Report and Financial Statements will be
posted to all shareholders on 10 February 2021 or shortly
thereafter. Further copies can be obtained from the Company
Secretary at Pinners Hall, 105-108 Old Broad Street, London EC2N
1ER or can be downloaded from our website, www.pcf.bank .
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END
ACSUWOARRWUURUA
(END) Dow Jones Newswires
December 09, 2020 02:00 ET (07:00 GMT)
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