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OneSavings Bank plc - 2022 Annual Report and Accounts
In fulfilment of its obligations under section 4.1.3 and
6.3.5(1) of the Disclosure Guidance and Transparency Rules,
OneSavings Bank plc (the "Company") hereby releases the unedited
full text of its 2022 Annual Report and Accounts for the year ended
31 December 2022.
The document is now available on the Company's website at:
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www.osb.co.uk
A copy of the above document has been submitted to the National
Storage Mechanism and will shortly be available for inspection
at:
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Enquiries:
OSB GROUP PLC
Nickesha Graham-Burrell
Group Head of Company Secretariat t: 01634 835 796
Investor relations
Email:
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osbrelations@osb.co.uk t: 01634 838 973
Brunswick
Robin Wrench/Simone Selzer t: 020 7404 5959
About OSB GROUP PLC
OSB began trading as a bank on 1 February 2011 and was admitted
to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc
(CCFS) and its subsidiary businesses. On 30 November 2020, OSB
GROUP PLC became the listed entity and holding company for the OSB
Group. The Group provides specialist lending and retail savings and
is authorised by the Prudential Regulation Authority, part of the
Bank of England, and regulated by the Financial Conduct Authority
and Prudential Regulation Authority. The Group reports under two
segments, OneSavings Bank and Charter Court Financial Services.
OneSavings Bank
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take
a leading position and where it has established expertise,
platforms and capabilities. These include private rented sector
Buy-to-Let, commercial and semi-commercial mortgages, residential
development finance, bespoke and specialist residential lending,
secured funding lines and asset finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands
including Kent Reliance for Intermediaries and InterBay Commercial.
It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through
the long-established Kent Reliance name, which includes online and
postal channels as well as a network of branches in the South East
of England. Diversification of funding is currently provided by
securitisation programmes and the Bank of England's Term Funding
Scheme with additional incentives for SMEs.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and retail savings
products. It operates through its brands: Precise Mortgages and
Charter Savings Bank.
It is differentiated through risk management expertise and
best-of-breed automated technology and systems, ensuring efficient
processing, strong credit and collateral risk control and speed of
product development and innovation. These factors have enabled
strong balance sheet growth whilst maintaining high credit quality
mortgage assets.
CCFS is predominantly funded by retail savings originated
through its Charter Savings Bank brand. Diversification of funding
is currently provided by securitisation programmes and the Bank of
England's Term Funding Scheme with additional incentives for
SMEs.
OneSavings Bank plc
Annual Report and Financial Statements
For the Year Ended 31 December 2022
Company Number: 07312896
Company Information 2
Strategic Report 3
Directors' Report 70
Statement of Directors' Responsibilities in respect
of the Strategic Report, the Directors' Report and the
Financial Statements 76
Independent Auditor's Report 77
Statement of Comprehensive Income 92
Statement of Financial Position 93
Statement of Changes in Equity 94
Statement of Cash Flows 96
Notes to the Financial Statements 97
DIRECTORS Graham Allatt
Kalvinder Atwal
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Simon Walker
David Weymouth
COMPANY SECRETARY Jason Elphick
REGISTERED OFFICE Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
REGISTERED NUMBER 07312896 (England and Wales)
AUDITOR Deloitte LLP
Statutory Auditor
Birmingham
United Kingdom
The Directors present their Annual Report, including the
Strategic Report, Directors' Report and Statement of Directors'
Responsibilities, together with the audited Consolidated Financial
Statements and Auditor's Report for the year ended 31 December
2022.
OneSavings Bank plc (the Company or OSB) is a wholly-owned
subsidiary of OSB GROUP PLC (OSBG). The Group comprises OSB and its
subsidiaries; the OSB Group comprises OSBG and its
subsidiaries.
Our business model
The Group is a leading specialist mortgage lender, primarily
focused on carefully selected sub-segments of the UK mortgage
market. Our specialist lending is supported by our Kent Reliance
and Charter Savings Bank retail savings franchises. Our purpose is
to help our customers, colleagues and communities prosper.
Resources and relationships
Brands and heritage
We have a family of specialist lending brands targeting selected
segments of the mortgage market which are underserved by large UK
banking institutions. We have well-established savings franchises
through Kent Reliance, with its 150-year heritage, and the Charter
Savings Bank brand.
Colleagues
Our team of highly skilled employees possess expertise and
in-depth knowledge of the lending, property, capital and savings
markets, underwriting and risk assessment, and customer
management.
Infrastructure
We benefit from cost and efficiency advantages provided by our
wholly-owned subsidiaries, OSB India, as well as credit expertise
and mortgage administration services provided by Charter Court
Financial Services (CCFS).
Relationships with intermediaries and customers
Our strong and deep relationships with the mortgage
intermediaries that distribute our products continue to win us
industry recognition.
Capital strength
We have a strong common equity tier one (CET1) ratio and
capability to generate capital through profitability.
Our business model explained
The Group operates its lending business through two segments:
OSB and CCFS.
OneSavings Bank
Through our brands we tailor our lending proposition to the
specific needs of our borrowers. Under our Kent Reliance and
Interbay brands all of our loans are underwritten by experienced
and skilled underwriters, supported by technology to reduce the
administrative burden on underwriters and mortgage intermediaries.
We refer to scorecards and bureau data to support our skilled
underwriter loan assessments. We consider each loan on its own
merits, responding quickly and flexibly to offer the best solution
for each of our customers. No case is too complex for us, and for
those borrowers with more tailored or larger borrowing
requirements, our Transactional Credit Committee meets three times
each week, demonstrating our responsiveness to customer needs.
Buy-to-let/SME sub-segments
Buy-to-Let
We provide loans to limited companies and individuals, secured
on residential property held for investment purposes. We target
experienced and professional landlords or high net worth
individuals with established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured
on commercial and semi-commercial properties held for investment
purposes or for owner-occupation.
Residential development
We provide development loans to small and medium sized
developers of residential property.
Funding lines
We provide loans to non-bank finance companies secured against
portfolios of financial assets, principally mortgages.
Asset finance
We provide loans under hire purchase, leasing and refinancing
arrangements to UK SMEs and small corporates to finance
business-critical assets.
Residential sub-segment
First charge
We provide loans to individuals, secured by a first charge
against their residential home. Our target customers include those
with a high net worth and complex income streams, and near-prime
borrowers. We are also experts in shared ownership, lending to
first-time buyers and key workers buying a property in conjunction
with a housing association.
Our business model explained (continued)
Charter Court Financial Services
Specialist lending business
Our Precise Mortgages brand uses an automated underwriting
platform to manage mortgage applications and to deliver a rapid
decision in principle, based on rigorous lending policy rules and
credit scores. The platform is underpinned by extensive
underwriting expertise, enabling identification of new niches and
determining appropriate lending parameters. It allows for
consistent underwriting within the Group's risk appetite. Quick
response times help the Group to compete for the 'first look' at
credit opportunities, while a robust manual verification process
further strengthens the disciplined approach to credit risk.
Buy-to-Let
We provide products to professional and non-professional
landlords with good quality credit histories, through a wide
product offering, including personal and limited company
ownership.
Residential
We provide a range of competitive products to prime borrowers
and complex prime borrowers, including self-employed, as well as
near-prime borrowers.
Bridging
We focus on lending to customers with short-term cash flow
needs, for example, to cover light refurbishments, home
improvements, auction purchases and to 'bridge' delays in obtaining
mortgages and 'chain breaks'.
Second charge
Second charge products under the Precise Mortgage brand were
withdrawn in the first half of 2022 and are no longer available to
new customers.
Our business model explained (continued)
Retail savings
The Group is predominantly funded by retail savings deposits
sourced through two brands: Kent Reliance and Charter Savings Bank
(CSB).
Kent Reliance is an award-winning retail savings franchise with
over 150 years of heritage and nine branches in the South East of
England. It also takes deposits via post, telephone and online,
while CSB, a multi award-winning retail savings bank, offers its
products online and via post.
Both Banks have a wide range of savings products, including easy
access, fixed term bonds, cash ISAs and business savings accounts.
CSB and Kent Reliance have diversified their retail funding sources
through pooled funding platforms. The range of products sourced via
these platforms includes easy access, longer term bonds and
non-retail deposits.
In 2022, both Banks won industry awards, including the
prestigious Moneyfacts Consumer Awards for Best Bank Savings
Provider, Best Cash ISA Provider and ISA Provider of the Year for
CSB and Best Cash ISA Provider from Yourmoney.com Personal Finance
Awards for Kent Reliance.
Kent Reliance's proposition for savers is simple: to offer
consistently good-value savings products that meet customer needs
for cash savings and loyalty rates for existing customers.
CSB's philosophy is to maintain and develop its award-winning
business, offering competitively priced savings products. Operating
with an agile, nimble approach, CSB can respond quickly to the
funding requirements of the business at an advantageous cost of
funds.
Our securitisation platforms
The Group has built attractive diversification opportunities to
supplement its retail funding.
CCFS uses its securitisation platform as a means of providing
low-cost term funding. Wholesale funding enables the business to
rebalance the weighted average life of liabilities away from
shorter duration retail funding and thereby optimise the funding
mix. The Group recognises the cyclical nature of capital markets
funding and therefore utilises it opportunistically, taking
advantage of favourable market conditions.
CCFS is a programmatic issuer of high-quality residential
mortgage-backed securities (RMBS) through the Precise Mortgage
Funding and Charter Mortgage Funding (CMF) franchises, completing
14 securitisations worth more than GBP4.5bn to 31 December
2022.
In 2019, OSB established its Canterbury Finance securitisation
programme, to enable it to issue high-quality RMBS. It has since
issued five securitisations of organically originated mortgages
totalling GBP5.6bn to 31 December 2022.
OSB also issued three deals totalling GBP971m of owner-occupied
and Buy-to-Let acquired mortgages via Rochester Financing since
2013.
The Group also has the capability to engage in transactions
which could result in the full derecognition of the underlying
mortgage assets, through the sale of residual positions in its
securitisation vehicles.
The Group also takes advantage of the Bank of England's funding
schemes. Drawings under the Term Funding Scheme for SMEs remained
at GBP4.2bn and the drawings under Index Long-Term Repo were
GBP301m as at 31 December 2022 (2021: GBP4.2bn and GBPnil,
respectively).
Our business model explained (continued)
Unique operating model
Customer service
The Group operates customer service functions in multiple
locations across the UK including Chatham, Wolverhampton, Fareham,
London and Fleet. These, together with our wholly-owned subsidiary
OSB India, help us deliver on our aim of putting customers
first.
The Group has proven collections capabilities and expertise in
case management and supporting customers in financial
difficulty.
This offers valuable insights into, as well as the opportunity
to learn from, the performance of mortgage loan products. We have
deep credit expertise through strong data analytical
capabilities.
We deliver cost efficiencies through excellent process design
and management. We have an efficient, scalable and resilient
infrastructure supported by strong IT security and continue to
invest in enhancing our digital offering as customer demand
changes.
OSB India
OSB India (OSBI) is a wholly-owned subsidiary based in Bangalore
and Hyderabad, India.
OSBI puts customer service at the heart of everything it does
and we reward our colleagues based on the quality of service they
provide to customers, demonstrated by our excellent customer Net
Promoter Score (NPS).
At OSBI, we employ highly talented and motivated colleagues at a
competitive cost. We benchmark our processes against industry best
practice, challenging what we do and eliminating customer pain
points as they arise. We continue to invest in developing skills
that enable highly efficient service management, matching those to
business needs both in India and the UK.
Various functions are also supported by OSBI, including Support
Services, Operations, IT, Finance and Human Resources. We have a
one team approach between the UK and India. The employee turnover
in India compares favourably to local industry averages, despite an
increase in the regretted attrition rate to 24% in 2022 as a result
of an extremely buoyant recruitment market.
OSBI operates a fully paperless office -- all data and
processing are in the UK.
Environmental, social and governance (ESG)
We operate in a sustainable way with relevant Environmental,
Social and Governance matters at the heart of all everything we
do.
As a specialist lender, we have been long aware of our
responsibilities and the positive impact we can make in society
through our activities.
In 2022, we made progress on our path to achieve our commitment
to net zero greenhouse gas emissions by 2050. We also launched our
first of a range of mortgage products to improve the energy
efficiency of a property.
We also renewed our commitment to have 33% women in senior
management roles in the UK by 2023 and donated nearly GBP225k to
charitable causes in the year.
Relationships with our key stakeholders
Building strong relationships with all of our stakeholders
through regular engagement and open dialogue is fundamental to
achieving the Group's purpose to help our customers, colleagues and
communities prosper. Our relationships with our stakeholders are
central to the Group's strategy and culture; and are embedded in
the Board's responsibilities.
We outline below how the Group and its Directors engaged with
key stakeholders, and in doing so, discharged their duties under
section 172 of the Companies Act 2006.
Colleagues
Our colleagues are our key asset and our success depends on the
2,021 talented individuals we employ.
We have always favoured interactive communication between
management and our colleagues through regular town hall meetings,
informal sessions with management and opportunities to ask
questions anonymously directly to the Chief Executive Officer
(CEO), with the questions and responses available on the intranet.
These methods of engagement proved popular with employees and have
contributed to many initiatives that were undertaken by the
business during the year.
How the Board has engaged with colleagues
The Group has adopted a combination of methods for engaging with
its workforce, including the establishment of a formal workforce
advisory panel and a designated Non-Executive Director (NED).
During 2022, Mary McNamara was the NED appointed by the Board
with responsibility for representing employees at Board level and
she is a permanent member of the Workforce Advisory Forum (known
internally as OurVoice). Mary has direct engagement with the
workforce by attending OurVoice meetings and other events organised
by the Diversity and Inclusion Working Group. This provides her
with an insight into the culture and concerns of the workforce,
which she is able to bring to the attention of the Board. Sarah
Hedger will become a permanent member of OurVoice and will replace
Mary McNamara as the designated NED with responsibility for
OurVoice on 11 May 2023.
OurVoice gives the Board and management insight into a broadly
representative range of employee views to guide strategic decisions
for the future of the Group and oversee their alignment to the
Values.
OurVoice has its own Terms of Reference which outlines the
objectives and composition of the Forum. Members of the workforce
are invited to apply to become an employee representative.
Members of the Board and management attended OurVoice meetings
throughout the year in order to understand and discuss
employee-related issues directly with representatives across the
business. Employee representatives are encouraged to be open and
honest in their feedback at each meeting. The themes from OurVoice
discussions are shared and discussed with the Board and this
informs the approach towards new policies, benefits, resource
allocations and any other employee- related projects.
Engagement also took place via the annual Best Companies to Work
For survey. 82.5% of UK employees responded to the survey in 2022
demonstrating a high level of engagement. Following the results of
the survey, the Group received a 2 star accreditation which means
that it was recognised as an 'Outstanding' company to work for. The
Group Executive Committee and the Board reviewed the results,
considered the key themes that had emerged from the responses and
discussed what steps could be taken to capitalise on the positive
themes and also address areas for improvement. OSB India
participates in a separate engagement survey and was officially
certified a 'Great Place to Work' for a sixth consecutive year in
2022.
The Board and its Committees also received regular updates on
matters impacting employees from senior management and the Group's
HR function. Members of the Board oversee the Group's talent
management initiatives and senior management succession
planning.
Relationships with our key stakeholders (continued)
Finally, the Board has oversight of the Group's whistleblowing
activity and reviews and approves the Group's gender pay gap
reporting and its commitment to the Women in Finance Charter.
The Board monitors the effectiveness of its methods of engaging
with employees and adapts them where necessary.
Areas of continued focus include developing a broader people and
culture strategy for the Group and continuing to improve in the
areas that have been identified as lower scoring in the results of
employee surveys.
Outcomes following engagement
-- a key topic of discussion at Board level was the impact of continuing
interest rate rises and the cost of living and cost of borrowing on our
colleagues, both professionally and personally, their well-being and
mental health.
-- a one-off cost of living payment of GBP1,200 was made to lower paid
employees and two further payments of GBP600 have been approved for
payment in 2023 to the same population.
-- the Group became formally accredited as a Living Wage Employer.
-- refreshed the Group's Homeworking Policy to formalise employee hybrid
working arrangements.
-- approved a higher than usual salary increase arrangement for over 80% of
employees in light of the high rate of inflation.
Customers
We pride ourselves on building strong, long-term relationships
with our customers. Our continued commitment to providing excellent
service to borrowers and savers remained a priority in 2022 in
light of the rise in cost of living and borrowing.
We offer our savers an opportunity to let us know how we are
doing whenever they call or interact with the Banks by listening to
their views and acting upon what they tell us. Customer feedback is
collected
throughout the year and satisfaction scores produced as a
result.
During 2022, as the interest rates continued to rise, we saw a
significant increase in the volume of calls from our savers wishing
to benefit from attractively priced savings products and our
borrowers who were concerned about the rising cost of borrowing. As
a result, there was a decrease in the savings and the broker NPS
compared to 2021. Service levels have since improved and they
remain our key focus.
How the Board has engaged with customers
The Board's engagement with customers is indirect and Directors
are kept informed of customer-related matters through regular
reports, feedback and research. Satisfaction scores and retention
rates, together with the number of complaints and resolution times,
form part of the management and Board monthly reporting packs,
ensuring the visibility of our customers' experiences. Customer
satisfaction scores are also used as part of the Executive
remuneration assessment, and form the basis of new initiatives and
actions which continually improve customer experience.
In addition, each year, the Board allocates additional time at
one Board meeting for dedicated deep dives on a range of matters
related to how customers are treated.
Relationships with our key stakeholders (continued)
The Board was kept informed about progress in embedding the new
FCA Consumer Duty requirements as well as the support for customers
who require additional assistance.
Customers and intermediaries may be consulted when the business
is considering the launch of a new product to ensure it meets their
needs and any concerns raised are addressed.
Outcomes following engagement with customers
-- ensured that additional support was available to customers who need it.
-- a pledge of GBP50m to the newly-established Landlord Leader Fund to help
landords enhance energy efficiency.
-- introduced the first of a range of products for landlords wishing to
improve the energy efficiency of their properties.
The savings NPS for Kent Reliance in 2022 was +64 (2021: +70)
and for Charter Savings Bank was +61 (2021: +71).
Intermediaries
Our lending products, with the exception of funding lines and
residential development loans, are distributed via mortgage
brokers. Mortgage brokers are vital to our success; it is important
for us to understand the challenges they face and what they are
trying to achieve in terms of serving their customers, so we can
adapt the way in which we support them, to provide an even better
service.
How the Board has engaged with intermediaries
The Board's engagement with intermediaries is indirect and
Directors are kept informed of customer-related matters through
regular updates at Board meetings. Broker and borrower satisfaction
scores are tracked on a regular basis, along with details of all
complaints, and are reviewed by the Board and management within
monthly reporting packs.
Towards the end of 2022, research was commissioned with the aim
of supporting our brokers and landlords with improving the
sustainability of their investment properties. A number of key
findings were identified which included the creation of a Landlord
Leaders community to bring brokers, landlords and other industry
members together. The Board received updates and reviewed the
progress of this initiative. Further information on this can be
found on page 14.
We pride ourselves in providing unique and consistent lending
propositions across all lending brands, which fulfil our goal of
making it easier for intermediaries to serve their customers, our
borrowers. Regular engagement with the broker community extends
beyond our propositions and enables us to continuously enhance the
service we provide, with our business development managers working
closely with intermediaries to discuss cases and help to obtain
swift and reliable decisions.
The Group's Sales teams participated in 330 physical and virtual
intermediary events during 2022. The events are an opportunity for
the Sales team to interact with brokers, discuss their requirements
and keep up to date with industry developments.
Outcomes following engagement with intermediaries
-- launch of the Landlord Leaders thought leadership report and the creation
of a landlord leaders community, bringing brokers, landlords and other
industry members together.
The broker NPS for OSB in 2022 was +37 (2021: +55) and for CCFS
was +39 (2021: +42), both impacted by high application and
completion volumes as a result of the market disruption following
September's mini budget.
Relationships with our key stakeholders (continued)
Suppliers
Our business is supported by a large number of suppliers, which
allows the Group to provide high standards of service to our
customers.
How the Board engages with suppliers
The members of the Board do not interact directly with the
Group's suppliers; however, they are involved in overseeing the
Group's supplier relationships and are kept up to date by
management on supplier considerations and developments.
Supplier payment practice reports are published on a six-monthly
basis and approved and signed by the CFO and Chief Operating
Officer on behalf of the main operating entities. The Group enters
into standard terms with suppliers, which include terms requiring
payment within 30 days of the invoice date following receipt of a
valid invoice. Over 95% of all invoices are paid within 30 days in
line with the standard payment period for qualifying contracts. The
average time taken to pay invoices ranges from five to 11 days
across the Group. The maximum contractual payment period agreed
varies between 30 days to 45 days. There have been no changes to
the standard payment terms in the reporting period.
Any complaints received in respect of invoice payments are
considered as part of the dispute resolution process. During the
year, the Group did not deduct any sums from payments under
qualifying contracts as a charge for remaining on a supplier
list.
In 2022, the Board was also involved with the following aspects
of supplier relationships: consideration of the risks associated
with suppliers and the framework for assurance; oversight of key
supplier relationships including engagement between the Group Audit
Committee and the external auditor; and oversight of all levels of
insurance in place for the Group.
We are committed to complying with both the law and best
practice in respect of Modern Slavery, workforce rights and the
environment. We expect our suppliers to share that commitment by
complying with our Vendor Code of Conduct and Ethics.
The Group's Modern Slavery and Human Trafficking Statement is
reviewed and approved on an annual basis by the Board and can be
found on our website at
https://www.globenewswire.com/Tracker?data=OdWQtoEMZlq1a1ccMNDzIgojPOjYue8H3yU6q3XAZ3gHmbz8Hl_w-qAYPNATIxXk
www.osb.co.uk.
ESG is being embedded into every aspect of our business and part
of doing so is to ensure that our suppliers share similar values
and aspirations to our own.
During 2022, our suppliers and business partners were asked to
complete a questionnaire in order for us to understand how they are
addressing topics such as climate change, Diversity, Equity and
Inclusion and Modern Slavery and to identify areas of focus in the
future. We understand that organisations will be at various stages
of their own ESG and sustainability journey and we are committed to
encouraging and supporting our suppliers with their transition to
an ESG strategy that aligns to the Group's ambitions.
Outcomes following engagement with suppliers
-- enhanced understanding of suppliers' ESG and sustainability strategies to
ensure that they are in alignment with the Group's ESG ambitions.
Relationships with our key stakeholders (continued)
Regulators
The Board recognises the importance of having an open and
continuous dialogue with all of our regulators, as well as other
government bodies, trade associations and UK Finance.
How the Board engages with Regulators
The Group maintains a proactive dialogue with the Prudential
Regulation Authority (PRA) and Financial Conduct Authority (FCA).
Engagement typically takes the form of regular and ad hoc meetings
attended by both members of the Board and Executives, as well as
subject matter experts.
Even though the Directors do not participate in all meetings,
Executives, including the Group Chief Risk Officer and Group Chief
Credit and Compliance Officer, provide the Board and its Committees
with feedback and regular updates in respect of the broader
regulatory developments and compliance considerations. The PRA was
invited to and attended one Board meeting during 2022.
The Group also regularly interacts and has constructive
relationships with the Bank of England and HM Revenue &
Customs, amongst others, which helps to ensure that the Group is
aligned with the relevant regulatory frameworks and that the
business is engaged with issues impacting the financial services
industry.
Outcomes following engagement
-- Meetings held with regulators during the year covered, amongst other
topics, operational resilience, operational continuity in resolution,
resolvability assessment framework, business continuity, capital
management and the optimisation of our capital structure. These are all
areas that have been considered by the Board in its meetings.
Communities
The Group partners with national and local charities, which
offer employees the chance to make a difference both nationwide and
closer to home. Giving something back to our community is important
to all of us, whether it is through volunteering, fundraising or
efforts that help protect our environment, and aligns with the
Group's Values. Our nominated charity partners are chosen by
employees with the aim of making a meaningful impact to these
charities and to the lives of those that the charities help.
How the Board engages with communities
The Board and management actively encourage and fully support
engagement with our local communities to make a positive
impact.
Outcomes following engagement with communities
-- The total amount donated to charity partners and good causes by the Group
and colleagues in the year was nearly GBP225k.
Relationships with our key stakeholders (continued)
Environment
Sustainability is becoming increasingly important to the Board
and management. The Group operates under the highest governance and
ethical standards and is focused on reducing its impact on the
environment.
The Board and management are cognisant of the impact of social
and environmental change on our business and stakeholders and
regularly promote awareness of environmental issues among our
employees, as well as adhering to our plan to become a greener
organisation and comply with enhanced regulation and
disclosures.
The Board is responsible for encouraging and overseeing an
environmentally friendly culture and ensuring that the business is
ready to respond to the growing impact of climate change on the
Group's activities in line with its Stewardship value.
Section 172 statement
The Directors are bound by their duties under section 172(1)(a)
to (f) of the Companies Act 2006 and the manner in which these have
been discharged; in particular their duty to act in the way they
consider, in good faith, promotes the success of the Company for
the benefit of its shareholders as a whole.
The preceding pages 8 to 12 demonstrate how the Board has
engaged with the Group's key stakeholders (customers,
intermediaries, colleagues, shareholders, suppliers, regulators and
the local communities in which we are located). Examples of
strategic decisions which have impacted the Group's key
stakeholders are set out below. Pages 8 to 12 and those that
follow, set out examples of how Directors complied with the
requirements of section 172 during the year.
Decision making
The Board recognises that considering our stakeholders in key
business decisions is fundamental to our ability to deliver the
Group's strategy in line with our long-term values and operating
the business in a sustainable way. Balancing the needs and
expectations of our key stakeholders has been at the forefront of
the Board's thinking and has been more important than ever during
2022, as a result of the economic environment and the rising cost
of living. The Board acknowledges that some decisions will result
in different outcomes for each stakeholder.
Section 172 statement (continued)
Key strategic decisions in the year
Employee remuneration
The Board has considered the impact of ongoing interest rate
rises and the rising cost of living and cost of borrowing in the UK
on its employees, in terms of their financial and mental health
well-being.
The increase in the cost of living and its impact on employees
was discussed at the Workforce Advisory Forum (OurVoice), which
includes attendance from members of the Board and the Group
Executive Committee. In line with the Group's commitment to
ensuring that employees receive a fair deal, the Board supported
the decision approved by the Group Executive Committee in respect
of a one-off payment of GBP1,200 to all qualifying UK employees on
lower salary grades representing approximately 80% of the employee
population. The Board also supported the decision to increase
salaries of the Group's lowest paid employees in the UK to
GBP19,250 in line with the Living Wage Foundation. The Board
recognises the ongoing challenges faced by employees in the current
economic environment. In January 2023, the Group Remuneration and
People Committee discussed and approved the payment of two further
cost of living payments of GBP600 each for all qualifying UK
employees.
Landlord Leaders
The Board received updates on progress in relation to the
Landlord Leaders initiative. Following engagement with landlords
and brokers, and as part of its commitment to helping customers
prosper, the Group has committed to delivering a number of
initiatives to support the building of a future-focused sustainable
industry. The Group has pledged GBP50m of funding to the newly
established Landlord Leader Fund to help landlords enhance energy
efficiency. Other initiatives include the launch of new
products
to support landlords with refurbishing their properties,
redesigning the underwriting process and partnering with tax
specialists to provide advice and guidance on tax planning for
parttime landlords looking to professionalise. As part of this
commitment, the Group will create a new Landlord Leaders community
to bring brokers, landlords and other industry members
together.
Customer Experience
The Board was kept informed of a number of enhancements made to
the customer journey. In particular, the launch of a new,
simplified product range which was proactively communicated to
customers to ensure that they had sufficient time to take action
prior to the end of their fixed period. Additional resource was
allocated to improve the customer experience, including following
up with customers who had not taken action upon entering the
reversion period. In addition, enhancements were made to the
Group's eligibility criteria to enable more customers to take
advantage of the revised rates in order to minimise payment shocks
and redemptions.
Market review
The UK housing and mortgage market
The last 12 months were defined by changing market conditions
brought about by the war in Ukraine, continuing supply chain
issues, high inflation, rising cost of living and borrowing and the
disruption following September's mini-budget. Despite these
developments, the housing and mortgage markets were resilient and
activity levels remained strong.
Inflation gathered pace following the invasion of Ukraine,
exacerbating supply chain issues and leading to large increases in
energy and food prices. Data from the Office of National Statistics
(ONS) estimated that prices had seen a year on year increase of
10.5% at the end of December 2022, down slightly from a peak of
11.1% at the end of October.
The Bank of England implemented eight successive increases in
the base rate in 2022 to reduce inflation towards its 2.0% target.
Overall, the base rate rose to 3.5% in December 2022 from 0.25% in
December 2021.
Mortgage interest rates increased significantly over the course
of 2022, with rising cost of funds for lenders and volatile swap
spreads. According to the Bank of England, the average rate on a
new two-year fixed rate mortgage at 75% loan to value rose from
1.64% in January 2022 to 5.43% in December 2022, an increase of
+3.79%.
The most significant increase in mortgage rates during the year
was observed following September's mini-budget, which saw mortgage
lenders withdrawing products and increasing rates as a result of
volatile swap spreads.
Overall, the number of residential property transactions in the
UK fell by 14% to 1.3m in 2022 from a record high of 1.5m in 2021,
however activity levels in 2021 were inflated by the Stamp Duty
Land Tax holiday which saw a large number of property purchases
brought forward to benefit from lower transactional costs. Beyond
this year-on-year comparison, 2022 saw more property transactions
than any other year since 2007
UK gross mortgage lending increased by 4% to GBP322bn in 2022,
reflecting a resilient market that was buoyed by rising property
prices, with an average house price increasing by 9.8% in 2022,
stimulated by high levels of demand and a lack of supply.
The UK savings market
2022 marked the end to the 'accidental savings' brought about by
pandemic lockdowns, as the rising cost of living saw many customers
withdrawing from their savings, or not being able to add to
them.
There was more competition in the savings market as providers
passed on a proportion of the base rate rises to savers via
attractively priced savings products, despite the significant
delays in doing so during the first half of the year. The Bank of
England reported that savings balances in the UK grew by GBP67bn
from GBP2,135.3bn at the start of the year to GBP2,202.4bn in
December 2022.
There were also more providers and more savings accounts on
offer in the year, with 1,690 savings products promoted in December
2022 compared to 1,646 in December 2021.
According to the ONS, the household savings ratio that peaked at
26.8% in 2020, as a result of 'accidental savings', reduced to 9.0%
by the fourth quarter of 2022.
The base rate rises introduced by the Bank of England led to
higher rates across all types of savings accounts. By the end of
2022, fixed rate bonds had increased by 293bps over the year.
Market review (continued)
Easy access accounts held by financial institutions continued to
exceed fixed term accounts. This was driven in part by increased
rates on traditionally lower-earning easy access accounts, and a
likely desire by customers to remain nimble, according to the
Household Sector Deposits report.
The UK mortgage market and climate change
It has been estimated that privately owned residential
properties represent 15% of total carbon emissions in the UK and it
is acknowledged that there are significant barriers to implementing
energy efficiency improvements. The UK Government's focus on
achieving its net zero goals has highlighted the need to improve
the energy efficiency of UK housing stock.
Two key consultations relating to improving home energy
performance were held by the Department for Business, Energy and
Industrial Strategy, with outcomes yet to be published:
-- Improving the Energy Performance of Privately Rented Homes in England and
Wales closed in January 2021. The outcome is widely expected to introduce
a minimum requirement to ensure that all rental properties achieve an EPC
(Energy Performance Certificate) rating of C or higher from 2028. It is
also expected to increase the current required works cap (the maximum
amount that is expected to be paid to improve the property's EPC rating)
from GBP3,500 to GBP10,000, before exemptions can be applied.
-- Improving Home Energy Performance through Lenders closed in February
2021. The outcome is expected to impose a requirement on all lenders to
report on the EPC of their loan portfolio, along with a commitment to
show annual improvements towards an average rating of C or higher.
These changes could have a significant impact on the private
rented sector in the UK. The industry eagerly anticipates the
publication of the final outcomes from each of these consultations,
however discussion as well as action from lenders have already
taken place, with the emergence of a 'green finance sector'. The
Green Finance Institute reported that 19 Buy-to-Let lenders had
launched dedicated green finance products by the end of May 2022, a
notable increase from nine lenders at the end of 2021.
The Group's lending sub-segments
Buy-to-Let
According to UK Finance, Buy-to-Let gross advances reached
GBP55.7bn in 2022, a 17% increase from GBP47.4bn in 2021. This was
supported by strong refinancing activity in the year, with
Buy-to-Let remortgages increasing by 33% to GBP37.0bn as the early
wave of five-year fixed rate products taken post the PRA's changes
to the underwriting standards reached the end of their initial
term.
Research conducted by BVA BDRC on behalf of the Group showed
that the number of landlords planning to purchase new properties
fell to 9% in the fourth quarter of 2022 from 14% in 2021, and the
proportion of landlords looking to sell increased to 30% from 24%
in 2021. The Landlords Panel survey suggested that landlords with
larger portfolios were more likely to make changes to their
portfolio over the next year with 16% looking to buy and 44%
looking to sell. It also showed that of those who planned to
purchase new properties in the next 12 months, the majority (57%)
planned to do so within a limited company structure, further
supporting the market-wide trend towards professionalisation.
Market review (continued)
Tenant demand remained strong, with RICS reporting that demand
was still rising at the time of its December report, with supply
remaining weak as evidenced by a decline in landlord instructions
coming to market during that month. This imbalance between demand
and supply continued to exert upwards pressure on rents in support
of the fundamentals underpinning the Private Rented Sector.
Rightmove reported that the average asking rent increased by 15.7%
in Greater London during 2022 and rose by 9.7% across the rest of
the country.
Residential
According to UK Finance, total Residential loans to home owners
reached GBP251bn in 2022, a minor decrease from GBP255bn in 2021.
However this stability in overall lending volumes masked a shift in
the type of business written, with a buoyant refinancing market
compensating for a declining purchase market during the year.
Purchase completions decreased by 9% to GBP193bn in 2022 (2021:
GBP213bn) as the prior year benefitted from a spike in purchase
completions while the stamp duty holiday was in effect. Despite
this, annual purchase completions were still considerably higher
than the pre-pandemic period in 2019 (GBP158bn). Remortgage
completions increased by 30% to GBP107bn (2021: GBP83bn) as
borrowers sought to lock in to the best deals before mortgage
affordability deteriorated and rates increased further, with
remortgages representing 36% of the market total (2021: 28%).
Commercial
Throughout the first half of the year, there was a strong sense
of confidence in commercial property, supported by improving
valuations and rising rents. In the first quarter capital values
increased by 3.9% and by a further 3.0% in the second quarter, with
rents rising 1.5% and 1.0% respectively. However, wider
geopolitical and macroeconomic challenges began to impact in late
summer, reversing the value growth recorded in the first half,
although some property types were affected more significantly than
others.
Retail rents remained broadly static in 2022 according to CBRE,
with some insulation from further declines provided by
pandemic-induced price corrections throughout 2020 and 2021.
Mixed-use asset classes such as semi-commercial property, which
offer a diverse income stream underpinned by residential lettings,
remained attractive to investors. This property type demonstrated
more resilience due to the residential rentals outperforming
expectations. Overall, CBRE reported that capital values for 'all
retail' decreased by 8.1% during the year whilst rents increased by
approximately 0.7%.
During 2022, all commercial segments saw a 10% increase in
demand since 2021. The volume of transactions in commercial
property investment reached GBP50.4bn in 2022, just 8% below the
five-year average.
Residential development
Despite the withdrawal of the government's pandemic support,
housing demand remained strong throughout most of 2022, although
tailed off at the end of the year as a result of the uncertainty in
future economic conditions and increasing interest rates.
Demand remained strongest for houses that were affordable to
local populations. It was notable that sales rates for the few
apartment schemes funded in London were also high, seemingly
bucking that trend.
Key performance indicators (KPIs)
Throughout the Strategic report the Key performance indicators
(KPIs) are presented on a statutory and an underlying basis.
Management believes that the underlying results and the
underlying KPIs provide a more consistent basis for comparing the
Group's performance between financial periods. Underlying results
for 2022 and 2021 exclude exceptional items, integration costs and
other acquisition-related items.
For a reconciliation of statutory results to underlying results,
see page 29.
1. Gross new lending
Statutory GBP5.8bn (2021: GBP4.5bn)
Definition - Gross new lending is defined as gross new organic
lending before redemptions.
2022 performance:
Gross new lending increased 29% in the year and reflected a
return to pre-pandemic criteria in our core sub-segments including
the reintroduction of lending at higher LTVs for higher credit
quality customers.
2. Loan loss ratio
Statutory 13bps (2021: -2bps)
Underlying 14bps (2021: -2bps)
Definition - Loan loss ratio is defined as impairment losses
expressed as a percentage of a 13 point average of gross loans and
advances. It is a measure of the credit performance of the loan
book.
2022 performance:
Statutory and underlying loan loss ratios increased in the year
as the Group adopted more severe forward-looking macroeconomic
scenarios and post model adjustments to account for the potential
impact of rising cost of living and borrowing concerns. Loan book
growth and changes in the observed risk profile also added to the
charge and were partially offset by a release of pandemic-related
adjustments and house price appreciation.
3. Net interest margin (NIM)
Statutory 278bps (2021: 253bps)
Underlying 303bps (2021: 282bps)
Definition - NIM is defined as net interest income as a
percentage of a 13 point average of interest earning assets (cash,
investment securities, loans and advances to customers and credit
institutions). It represents the margin earned on loans and
advances and liquid assets after swap expense/income and cost of
funds.
2022 performance:
Both statutory and underlying NIM improved in 2022, primarily
due to the benefit of delays in the market passing on base rate
rises to savers in full, especially in the first half of the year,
partially offset by a net effective interest rate loss as higher
reversionary income was more than offset by customers refinancing
earlier.
Key performance indicators (continued)
4. Cost to income ratio
Statutory 27% (2021: 26%)
Underlying 25% (2021: 24%)
Definition - Cost to income ratio is defined as administrative
expenses as a percentage of total income. It is a measure of
operational efficiency.
2022 performance:
Statutory and underlying cost to income ratios increased in 2022
as a result of the growth in administrative expenses due primarily
to a more normalised level of post-pandemic spend, inflationary
headwinds and planned investment in the business, including
refreshing and upgrading our technology infrastructure
post-integration. These costs were moderated by strong income
generation in the year, including fair value gains on hedging
activities.
5. Management expense ratio
Statutory 81bps (2021: 71bps)
Underlying 80bps (2021: 70bps)
Definition - Management expense ratio is defined as
administrative expenses as a percentage of a 13 point average of
total assets. It is a measure of operational efficiency.
2022 performance:
Statutory and underlying management expense ratios increased in
2022 largely due to higher administrative costs that reflected a
more normalised level post-pandemic spend, inflationary headwinds
and planned investment in the business, including refreshing and
upgrading our technology infrastructure post-integration.
6. Return on equity
Statutory 20% (2021: 20%)
Underlying 23% (2021: 24%)
Definition - Return on equity (RoE) is defined as profit
attributable to ordinary shareholders, which is profit after tax
and after deducting coupons on AT1 securities, gross of tax, as a
percentage of a 13 point average of shareholders' equity (excluding
GBP150m of AT1 securities).
2022 performance:
Statutory and underlying return on equity remained strong in
2022 due to strong profitability in the year.
Key performance indicators (continued)
7. OSB solo CRD IV Common Equity Tier 1 capital ratio
The PRA has granted the Company a waiver to comply with the
Capital Requirements Regulation (CRR) as an individual
consolidation which includes the Company and subsidiaries except
for the offshore servicing entity OSBI, Special Purpose Vehicles
(SPVs) relating to securitisations and the CCFS entities acquired
in October 2019, defined as OSB solo.
OSB solo 18.4% (2021: 19.4%)
Definition
This is defined as CET1 capital as a percentage of risk-weighted
assets (calculated on a standardised basis) and is a measure of the
capital strength of the Company.
2022 performance:
The CET1 ratio remained strong, although reduced marginally as
capital generation from profitability in the year was offset by
loan book growth and payments of dividends.
8. Savings customer satisfaction -- Net Promoter Score (NPS)
OSB 64 (2021: 70)
CCFS 61 (2020: 71)
Definition - The NPS measures customers' satisfaction with
services and products. It is based on customer responses to the
question of whether they would recommend us to a friend. The
response scale is 0 for absolutely not to 10 for definitely yes.
Based on the score, a customer is a detractor between 0 and 6, a
passive between 7 and 8 and a promoter between 9 and 10.
Subtracting the percentage of detractors from promoters gives an
NPS of between -100 and +100.
2022 performance:
Savings customer NPS declined slightly due to very strong demand
in the year which temporarily impacted the service response times
and performance levels.
Financial review
Summary statutory results for 2022 and 2021
For the year ended For the year ended
31 December 31 December
2022 2021
Summary Profit or Loss GBPm GBPm
Net interest income 709.9 587.6
Net fair value gain on financial
instruments 58.9 29.5
Gain on sale of financial instruments -- 4.0
Other operating income 6.6 7.9
Administrative expenses (206.5) (166.5)
Provisions 1.6 (0.2)
Impairment of financial assets (29.8) 4.4
Impairment of intangible assets -- 3.1
Integration costs (7.9) (5.0)
Exceptional items -- (0.2)
Profit before taxation 532.8 464.6
Profit after taxation 411.3 345.0
Key ratios
Net interest margin 278bps 253bps
Cost to income ratio 27% 26%
Management expense ratio 81bps 71bps
Loan loss ratio 13bps -2bps
Return on equity 20% 20%
As at As at
31 December 31 December
2022 2021
Extracts from the Statement of Financial
Position GBPm GBPm
Loans and advances to customers 23,612.7 21,080.3
Retail deposits 19,755.8 17,526.4
Total assets 27,567.5 24,532.5
Financial review (continued)
Statutory profit
Group's statutory profit before tax increased by 15% to
GBP532.8m (2021: GBP464.6m) after exceptional items, integration
costs and other acquisition-related items of GBP59.6m (2021:
GBP57.6m). The increase was primarily due to growth in the loan
book, an improved net interest margin and net fair value gains on
financial instruments resulting from rising swap rates, partially
offset by higher administration costs and an impairment charge
compared to an impairment credit in 2021.
Statutory profit after tax was GBP411.3m in 2022, an increase of
19% from GBP345.0m in the prior year, and included after-tax
exceptional items, integration costs and other acquisition related
items of GBP38.7m (2021: GBP47.8m).
The Group's effective tax rate reduced to 22.8% compared to
25.7% in the prior year, primarily due to a reduction in the
deferred tax provision following the enactment of the expected
decrease in the bank surcharge from 8% to 3% from April 2023.
Statutory return on equity for 2022 was 20% (2021: 20%).
Net interest income
Statutory net interest income increased by 21% in 2022 to
GBP709.9m (2021: GBP587.6m), largely reflecting growth in the loan
book and an improved net interest margin.
Statutory net interest margin (NIM) was 278bps compared to
253bps in the prior year, up 25bps, primarily due to the benefit of
base rate rises. There were delays, especially in the first half of
the year, in the market passing base rate rises on to savers in
full. In addition, as rates rose, mortgage interest income
benefitted from higher expected reversionary income following the
end of the fixed product term. This benefit was partially offset by
an expectation that customers would on average spend less time on
the higher reversionary rate before refinancing. The impact of
this, together with other behavioural changes, resulted in a net
effective interest rate (EIR) reset loss of GBP31.6m (2021:
GBP11.5m gain).
Net fair value gain on financial instruments
Statutory net fair value gain on financial instruments of
GBP58.9m in 2022 (2021: GBP29.5m) included a GBP57.1m net gain on
unmatched swaps (2021: GBP10.3m) following the significant rise in
swap prices in the fourth quarter and a net loss of GBP8.1m (2021:
GBP2.4m gain) in respect of the ineffective portion of hedges.
The Group also recorded a GBP10.2m net gain (2021: GBP13.4m
gain) from the unwind of acquisition-related inception adjustments,
a GBP1.2m gain (2021: GBP3.0m) from the amortisation of hedge
accounting inception adjustments and a loss of GBP1.5m from other
items (2021: GBP0.4m gain).
The net gain on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages. This benefitted from a step up in
interest rate outlook on the SONIA yield curve largely in response
to the actions announced in the September 'mini budget'. The Group
economically hedges its committed pipeline of mortgages and this
unrealised gain unwinds over the life of the swaps through hedge
accounting inception adjustments.
Financial review (continued)
Gain on sale of financial instruments
There were no sales of financial instruments in 2022.
The gain on sale of financial instruments of GBP4.0m in 2021,
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
Other operating income
Statutory other operating income of GBP6.6m (2021: GBP7.9m)
mainly comprised CCFS' commissions and servicing fees, including
those from servicing securitised loans that have been derecognised
from the Group's balance sheet.
Administrative expenses
Statutory administrative expenses increased by 24% to GBP206.5m
in 2022 (2021: GBP166.5m), due primarily to spend returning to a
more normalised level post-pandemic, inflationary headwinds and
planned investment in the business, including refreshing and
upgrading our technology infrastructure post- integration.
The Group's statutory cost to income ratio increased to 27%
(2021: 26%) as a result of the growth in administrative expenses,
moderated by strong income generation in the year, including the
fair value gains on hedging activities.
The statutory management expense ratio increased to 81bps in
2022 (2021: 71bps) reflecting the higher administrative
expenses.
Impairment of financial assets
The Group recorded a statutory impairment charge of GBP29.8m in
2022 (2021: GBP4.4m credit) representing a statutory loan loss
ratio of 13bps (2021: -2bps).
The Group adopted more severe macroeconomic scenarios in its
IFRS 9 models as the outlook deteriorated, which led to a charge of
GBP11.6m. Post-model adjustments, to account for rising cost of
living and borrowing concerns amounted to a charge of GBP13.3m and
the strong loan book growth and changes in the risk profile in the
year resulted in a charge of GBP15.2m. These were partially offset
by a release of GBP10.3m due to house price appreciation in the
year and a GBP8.3m release from a reduction in pandemic-related
post-model adjustments and modelling enhancements. Other charges
amounted to
GBP8.3m.
In the prior year, the impairment credit was largely due to the
Group's adoption of less severe forward-looking macroeconomic
scenarios in its IFRS 9 models, reflecting an improved outlook
together with the benefit of strong house price performance in the
year.
Financial review (continued)
Impairment of intangible assets
There were no intangible asset impairments in 2022.
The impairment credit to intangible assets of GBP3.1m in the
prior year related to a partial reversal of the impairment of the
broker relationships intangible of GBP7.0m recorded in 2020, as
lending volumes in 2021 were higher than previously
anticipated.
Integration costs
The Group recorded GBP7.9m of integration costs in 2022 (2021:
GBP5.0m), which largely related to redundancy costs and consultant
fees for advice on the Group's future operating structure.
Exceptional items
There were no exceptional costs in 2022.
In the prior year, exceptional costs of GBP0.2m related to the
insertion of OSB GROUP PLC as the new holding company and listed
entity of the Group.
Balance sheet growth
On a statutory basis, net loans and advances to customers grew
by 12% to GBP23,612.7m in 2022 (31 December 2021: GBP21,080.3m),
supported by originations of GBP5.8bn in the year.
Total assets also grew by 12% to GBP27,567.5m (31 December 2021:
GBP24,532.5m), largely due to
the growth in loans and advances to customers and an increase in
liquid assets.
On a statutory basis, retail deposits increased by 13% to
GBP19,755.8m as at 31 December 2022 from GBP17,526.4m in the prior
year, as the Group's attractively priced savings products proved
popular with customers.
The Group complemented its retail deposits funding with drawings
under the Bank of England's schemes. Drawings under the Term
Funding Scheme for SMEs as at 31 December 2022 remained unchanged
from GBP4.2bn at the end of 2021 and drawings under the Index
Long-Term Repo scheme were GBP300.9m.
Liquidity
OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk.
Each Bank holds its own significant liquidity buffer of liquidity
coverage ratio (LCR) eligible high-quality liquid assets
(HQLA).
Each Bank operates within a target liquidity runway in excess of
the minimum LCR regulatory requirement, which is based on internal
stress testing. Each Bank has a range of contingent liquidity and
funding options available for possible stress periods.
As at 31 December 2022, OSB had GBP1,494.1m and CCFS had
GBP1,522.8m of HQLA (31 December 2021: GBP1,322.8m and GBP1,318.0m,
respectively).
Financial review (continued)
OSB and CCFS also held portfolios of unencumbered prepositioned
Bank of England level B and C eligible collateral in the Bank of
England Single Collateral Pool.
As at 31 December 2022, OSB had an LCR of 229% and CCFS 148% (31
December 2021: 240% and 158%, respectively) and the Group LCR was
185% (31 December 2021: 196%), all significantly in excess of the
regulatory minimum of 100% plus Individual Liquidity Guidance.
Capital
The OSB solo capital position remained strong with a CET1
capital ratio of 18.4% as at 31 December 2022 (31 December 2021:
19.4%).
Summary cash flow statement
For the year For the year
ended ended
31 December 31 December
2022 2021(1)
------------------------------------------- ------------ ------------
Profit before tax 532.8 464.6
Net cash generated/(used in):
Operating activities 428.2 (347.1)
Investing activities 63.2 80.6
Financing activities (184.0) 632.6
Net increase in cash and cash equivalents 307.4 366.1
Cash and cash equivalents at the beginning
of the period 2,736.7 2,370.6
Cash and cash equivalents at the end
of the period 3,044.1 2,736.7
1. 2021 figures were restated, see note 1 b) in the Group's
Consolidated Financial Statements for further details.
Cash flow statement
The Group's cash and cash equivalents increased by GBP307.4m
during the year to GBP3,044.1m as at 31 December 2022.
In 2022, loans and advances to customers increased by
GBP2,563.1m, primarily funded by GBP2,229.4m of deposits from
retail customers. The Group received GBP434.3m of cash collateral
on derivative exposures and
paid GBP137.5m of initial margin, reflecting new derivatives
during the year. Cash used from financing activities of GBP184.0m
included GBP300.9m drawings under the ILTR scheme offset by
GBP193.6m repayment of debt securities, GBP233.1m dividend payments
and GBP45.3m interest on financing liabilities. Total drawings
under the Bank of England's TFSME scheme remained unchanged at
GBP4.2bn. Cash generated from investing activities was
GBP63.2m.
In 2021, loans and advances to customers increased by
GBP1,844.0m during the year, partially funded by GBP923.3m of
deposits from retail customers and a decrease in loans and advances
to credit institutions (primarily the Bank of England call account)
of GBP167.4m. Additional funding was provided by cash generated
from financing activities of GBP632.6m included GBP633.9m of net
drawings under the Bank of England's TFS and TFSME schemes and
GBP36.1m of net proceeds from securitisation of mortgages offset by
GBP86.7m dividend payments and GBP8.4m interest on financing
liabilities during the year. Cash generated from investing
activities was GBP80.6m.
Financial review (continued)
Summary of underlying results for 2022 and 2021
For the year ended For the year ended
31 December 31 December
2022 2021
Summary Profit or Loss GBPm GBPm
Net interest income 769.1 650.5
Net fair value loss on financial
instruments 48.5 18.5
Gain on sale of financial instruments -- 2.3
Other operating income 6.6 7.9
Administrative expenses (202.7) (161.7)
Provisions 1.6 (0.2)
Impairment of financial assets (30.7) 4.9
Profit before taxation 592.4 522.2
Profit after taxation 450.0 392.8
Key ratios
Net interest margin 303bps 282bps
Cost to income ratio 25% 24%
Management expense ratio 80bps 70bps
Loan loss ratio 14bps -2bps
Return on equity 23% 24%
As at As at
31 December 31 December
2022 2021
Extracts from the Statement of
Financial Position GBPm GBPm
Loans and advances 23,529.8 20,936.9
Retail deposits 19,755.2 17,524.8
Total assets 27,488.4 24,404.2
Alternative performance measures
The Group presents alternative performance measures (APMs) in
this Strategic report as Management believe they provide a more
consistent basis for comparing the Group's performance between
financial periods.
Underlying results for 2022 and 2021 exclude exceptional items,
integration costs and other acquisition-related items. A
reconciliation of statutory to underlying results is disclosed on
page 29.
APMs reflect an important aspect of the way in which operating
targets are defined and performance is monitored by the Board.
However, any APMs in this document are not a substitute for IFRS
measures and readers should consider the IFRS measures as well.
Financial review (continued)
Underlying profit
The Group's underlying profit before tax increased by 13% to
GBP592.4m from GBP522.2m in 2021. The increase was primarily due to
growth in the loan book, an improved net interest margin and net
fair value gains on financial instruments resulting from rising
swap rates, partially offset by higher administration costs and an
impairment charge compared to an impairment credit in 2021.
Underlying profit after tax was GBP450.0m, up 15% (2021:
GBP392.8m), broadly in line with the increase in profit before tax.
The Group's effective tax rate on an underlying basis reduced to
24.0% for 2022 (2021: 24.8%).
On an underlying basis, return on equity for 2022 was 23% (2021:
24%).
Net interest income
Underlying net interest income increased by 18% to GBP769.1m in
2022 (2021: GBP650.5m), largely reflecting growth in the loan book
and an improved net interest margin.
The underlying net interest margin increased to 303bps from
282bps in 2021, primarily due to the benefit of base rate rises.
There were delays, especially in the first half of the year, in the
market passing base rate rises on to savers in full. In addition,
as rates rose, mortgage interest income benefitted from higher
expected reversionary income following the end of the fixed product
term. This benefit was partially offset by an expectation that
customers would on average spend less time on the higher
reversionary rate before refinancing. The impact of this, together
with other behavioural changes, resulted in a net effective
interest rate (EIR) reset loss of GBP23.1m (2021: GBP18.6m
gain).
Net fair value gain on financial instruments
Underlying net fair value gain on financial instruments of
GBP48.5m in 2022 compared to a gain of GBP18.5m in 2021. This
included a gain on unmatched swaps of GBP57.1m (2021: GBP10.3m)
following the significant rise in swap prices in the fourth
quarter, a loss of GBP8.1m (2021: GBP2.4m gain) from hedge
ineffectiveness. The Group also recorded a GBP1.2m gain (2021:
GBP5.4m) from the amortisation of hedge accounting inception
adjustments and a loss of GBP1.7m (2021: GBP0.4m gain) from other
items.
The net gain on unmatched swaps related primarily to fair value
movements on mortgage pipeline swaps prior to them being matched
against completed mortgages. This benefitted from a step up in
interest rate outlook on the SONIA yield curve largely in response
to the actions announced in the September mini budget. The Group
economically hedges its committed pipeline of mortgages and this
unrealised gain unwinds over the life of the swaps through hedge
accounting inception adjustments.
Gain on sale of financial instruments
There were no sales of financial instruments in 2022.
The gain on sale of financial instruments of GBP2.3m in 2021
related to the disposal of A2 notes in the PMF 2019-1B
securitisation in February 2021.
Financial review (continued)
Other operating income
On an underlying basis, other operating income was GBP6.6m in
2022 (2021: GBP7.9m) and mainly comprised CCFS' commissions and
servicing fees, including those from servicing securitised loans
that have been derecognised from the Group's balance sheet.
Administrative expenses
Underlying administrative expenses were up 25% to GBP202.7m in
2022 (2021: GBP161.7m), due primarily to spend returning to a more
normalised level post pandemic, inflationary headwinds and planned
investment in the business, including refreshing and upgrading our
technology infrastructure post- integration.
The Group's underlying cost to income ratio increased to 25%
(2021: 24%) as a result of the growth in administrative expenses,
moderated by strong income generation in the year, including the
fair value gains on hedging activities.
The underlying management expense ratio increased to 80bps in
2022 (2021: 70bps) reflecting the higher administrative
expenses.
Impairment of financial assets
The Group recorded an underlying impairment charge of GBP30.7m
in 2022 (2021: GBP4.9m credit) representing an underlying loan loss
ratio of 14bps (2021: -2bps).
The Group adopted more severe macroeconomic scenarios in its
IFRS 9 models as the outlook deteriorated, which led to a charge of
GBP11.6m. Post-model adjustments to account for rising cost of
living and borrowing concerns, amounted to a charge of GBP13.3m and
the strong loan book growth and changes in the risk profile in the
year resulted in a charge of GBP15.2m. These were partially offset
by a release of GBP10.3m due to house price appreciation in the
year and a GBP8.3m release from a reduction in pandemic-related
post-model adjustments and modelling enhancements. Other charges
amounted to
GBP9.2m.
In the prior year, the impairment credit was largely due the
Group's adoption of less severe forward-looking macroeconomic
scenarios in its IFRS 9 models, reflecting an improved outlook
together with the benefit of strong house price performance in the
year.
Balance sheet growth
On an underlying basis, net loans and advances to customers were
GBP23,529.8m (31 December 2021: GBP20,936.9m) an increase of 12%,
supported by gross originations of GBP5.8bn in the year.
Total underlying assets grew by 13% to GBP27,488.4m (31 December
2021: GBP24,404.2m), largely due to the growth in loans and
advances to customers and an increase in liquid assets.
On an underlying basis, retail deposits increased by 13% to
GBP19,755.2m (31 December 2021: GBP17,524.8m) as the Group's
attractively priced savings products proved popular with customers
in 2022.
The Group complemented its retail deposits funding with drawings
under the Bank of England's schemes. Drawings under the Term
Funding Scheme for SMEs (TFSME) at 31 December 2022 remained
unchanged from GBP4.2bn at the end of 2021 and drawings under the
Index Long-Term Repo scheme were GBP300.9m.
Financial review (continued)
Reconciliation of statutory to underlying results
2022 2021
----------------------
Statutory Reverse Reverse
results acquisition- related and exceptional items Underlying results Statutory results acquisition-related and exceptional items Underlying results
GBPm GBPm GBPm GBPm GBPm GBPm
------------------ ------------------------------------------
Net interest
income 709.9 59.21 769.1 587.6 62.9(1) 650.5
Net fair value
gain/(loss) on
financial
instruments 58.9 (10.4)2 48.5 29.5 (11.0)(2) 18.5
Gain on sale of
financial
instruments -- -- -- 4.0 (1.7)(3) 2.3
Other operating
income 6.6 -- 6.6 7.9 - 7.9
Total income 775.4 48.8 824.2 629.0 50.2 679.2
Administrative
expenses (206.5) 3.84 (202.7) (166.5) 4.8(4) (161.7)
Provisions 1.6 -- 1.6 (0.2) - (0.2)
Impairment of
financial
assets (29.8) (0.9)5 (30.7) 4.4 0.5(5) 4.9
Impairment of
intangible
assets -- -- -- 3.1 (3.1) -
Integration
costs (7.9) 7.97 -- (5.0) 5.0(6) -
Exceptional
items -- -- -- (0.2) 0.2(7) -
Profit before
tax 532.8 59.6 592.4 464.6 57.6 522.2
Profit after tax 411.3 38.7 450.0 345.0 47.8 392.8
Summary Balance Sheet
Loans and
advances to
customers 23,612.7 (82.9)9 23,529.8 21,080.3 (143.4)(8) 20,936.9
Other financial
assets 3,878.9 9.110 3,888.0 3,382.3 22.0(9) 3,404.3
Other
non-financial
assets 75.9 (5.3)11 70.6 69.9 (6.9)(10) 63.0
Total assets 27,567.5 (79.1) 27,488.4 24,532.5 (128.3) 24,404.2
Amounts owed to
retail
depositors 19,755.8 (0.6)12 19,755.2 17,526.4 (1.6)(11) 17,524.8
Other financial
liabilities 5,548.5 0.813 5,549.3 4,908.7 2.3(12) 4,911.0
Other
non-financial
liabilities 61.4 (30.2)14 31.2 72.6 (45.0)(13) 27.6
Total
liabilities 25,365.7 (30.0) 25,335.7 22,507.7 (44.3) 22,463.4
Net assets 2,201.8 (49.1) 2,152.7 2,024.8 (84.0) 1,940.8
1. Amortisation of the net fair value uplift to CCFS' mortgage
loans and retail deposits on Combination
2. Inception adjustment on CCFS' derivative assets and
liabilities on Combination
3. Recognition of a loss on sale of securitisation notes
4. Amortisation of intangible assets recognised on
Combination
5. Adjustment to expected credit losses on CCFS loans on
Combination
6. Reversal of impairment of intangible assets
7. Reversal of integration costs related to the Combination
8. Reversal of exceptional items
9. Recognition of a fair value uplift to CCFS' loan book less
accumulated amortisation of the fair value uplift and a movement on
credit provisions
10. Fair value adjustment to hedged assets
11. Recognition of acquired intangibles on Combination
12. Fair value adjustment to CCFS' retail deposits less
accumulated amortisation
13. Fair value adjustment to hedged liabilities
14. Adjustment to deferred tax liability and other
acquisition-related adjustments
Risk review
Executive summary
Progress was made in 2022 against the Group's strategic risk
management objectives for the year, including the priority areas
set out in the Annual Report and Accounts for the year ended 31
December 2021.
The Group delivered strong financial performance against the
backdrop of the United Kingdom's uncertain macroeconomic outlook
resulting from the high levels of inflation and the ongoing
conflict in Ukraine. The strong performance was delivered within
the confines of a prudent risk appetite. The Group operated within
the boundaries of its risk appetite limits during 2022.
The impact of the rising cost of living, the rising cost of
borrowing and the prospect of further increases in the Bank of
England base rate were key areas of focus for the Group in 2022.
The Group conducted
additional analysis and made adjustments to the macroeconomic
scenarios used in its modelling and provisioning to ensure the
impacts on customer affordability were covered.
The Group remained alert to the heightened cyber risk
environment driven by the situation in Ukraine and the embedding of
the hybrid working model for colleagues across the Group. Our cyber
security capabilities were maintained through continued investment
and frequent penetration testing.
The Group's overall asset quality remained stable with respect
to customer behaviour and affordability levels, whilst collateral
values improved during the year. Arrears levels remained broadly
stable. The Group has a negligible exposure to Ukrainian, Russian
and Belorussian customers and closely monitored and managed these
customers as required.
The Group's risk management framework ensures risks continued to
be identified, monitored and managed effectively, which in turn
supported the strong operational and financial performance in the
year. A full review of the risk appetite statements and limits
across all principal risk types was undertaken in 2022, which
informed the management of the Group's lending and retail savings
businesses in an uncertain and competitive operating environment.
Group risk appetite statements and limits were designed and
implemented, based on aligned approaches calibrated for
anticipated
financial forecasts and stress test analysis. Risk appetite is
monitored and managed at the Group and at the individual Bank
levels.
The Group also maintained strong levels of capital and funding
throughout 2022, being mindful of the heightened levels of future
uncertainty. Capital and funding levels were assessed against the
impacts of extreme but plausible economic, business and operational
shocks and reflected in the Group's solvency and liquidity risk
appetites. A number of reverse stress tests were performed to
identify what severity of macroeconomic scenario could result in
the Group and its entities breaching minimum regulatory
requirements, which were utilised in the going concern and
viability assessments.
The Group experienced some operational challenges during 2022.
The number of base rate rises was responsible for strong demand for
savings accounts and the number of product rate changes required
was operationally challenging. In the second half, the market saw
an increasing level of borrowers looking to refinance with their
existing lender and in some cases refinance early to avoid
anticipated future interest rate rises. This caused a spike in
enquiries and application timelines which also resulted in
elongated call wait times.
Risk review (continued)
The Group continues to focus on enhancing forecasting and stress
testing capabilities, with a particular focus on Internal Ratings
Based (IRB) stress testing and stress testing using Basel 3.1
scenarios.
The Group continues to advance towards IRB accreditation, with
progress made throughout the year. The Group has undertaken a
comprehensive self-assessment exercise to validate its level of
compliance, in conjunction with drafting all required module 1
submission documentation, which has passed through internal
governance. The Group has noted the PRA's industry level feedback
to ensure effective adherence to regulatory expectation.
Pre-application discussions have been held with the PRA to outline
the Group's approach to integrating IRB capabilities and
compliance. The Group is now actively engaging with the PRA
regarding a module 1 submission date. The programme continues to
integrate IRB capabilities informing the Group's business, key risk
and capital management disciplines.
Active monitoring and assessment of the Group's credit risk
portfolio drivers is a critical risk management discipline. This
was achieved through the active monitoring of credit portfolio
performance indicators, sensitivity and stress test analysis and
thematic deep dives.
Cross-functional expertise was leveraged to review emerging
trends and take pre-emptive actions in accordance with the defined
risk appetite and governance standards. The Group's investment in
advanced credit analytics greatly enhanced monitoring capabilities,
improved forward-looking assessments and supported stress testing
and capacity planning analysis. This in turn allowed the Board to
make more informed decisions in the uncertain macroeconomic and
political environment.
Ensuring that the Group continued to maintain appropriate
expected credit loss provisions was an important consideration of
the Board and senior management. The Group undertook detailed
analysis to assess portfolio risks and consider if these were
adequately accounted for in IFRS 9 models and frameworks. The Group
identified a number of areas requiring post-model adjustments, most
notably to account for the increased credit risk from the
heightened cost of living and cost of borrowing, resulting in an
increase in provisions and a more pronounced increase in the
balances of accounts in stage 2, which was expected given the
mechanics of the IFRS 9 framework. In addition, a new suite of IFRS
9 models were implemented, which further increased alignment across
the Group. Expected credit loss provisions were assessed using the
Group's revised IFRS 9 methodologies, individually assessed
provisioning approaches and portfolio segment based stress and
sensitivity analysis. Benchmarking analysis was provided to the
Board and senior management, enabling review and challenge of
provision coverage levels and underlying macroeconomic
scenarios.
Significant investment continues to be made across the Group's
risk management capabilities and resources, to ensure that all
categories of risk continue to be managed effectively. An
independent third-party review was undertaken during the year which
indicated that the Group's risk management framework was
well-designed and embedded to support the Group's current and
future strategic plans. The review's recommended actions confirmed
management's existing plans and will drive further enhancements
ensuring that the Group continues to meet emerging regulatory
expectations, whilst supporting shareholder returns via the
management of financial risks.
A number of deep dive thematic reviews across all core loan
portfolios were conducted to ensure that credit risk strategies and
operational capabilities remained appropriate. As a secured lender,
the Group has prudent credit risk appetite limits in place which,
together with well-established management capabilities, position
the Group well to manage the impact of any potential affordability
stress from the ongoing rising cost of living or further increases
in interest rates. The Group continues to conduct sensitivity and
stress testing analysis to understand the financial and operational
impact of differing scenarios on arrears levels, financial
performance metrics and prudential requirements. These scenarios
also support operational capacity planning to help ensure that the
correct level of resourcing is in place within the Servicing and
Collections function. During the pandemic, the Group demonstrated
the effectiveness of its capabilities in managing and supporting
customers during a period of stress.
Risk review (continued)
The ongoing delivery of planned enhancements to the Group's
operational resilience capabilities remains a key area of focus.
The Group's programme of work to ensure appropriate capabilities
and processes are in place to facilitate an orderly resolution of
the Group completed as planned, including the successful completion
of a resolution scenario fire drill which walked selected Board
members and senior management through the core steps of the
resolution timeline. The Group has put in place arrangements
designed to ensure that it is able to continue to serve customers
through resolution and any post-stabilisation restructuring.
The Group continues to implement a programme of work to further
embed the operational risk management framework across the Group,
including the completion of an enhanced risk and controls
selfassessment process and delivery of a more aligned approach to
the setting of operational risk appetite. The Group's Risk and
Control Self-Assessment (RCSA) process was integrated into a
Group-wide risk system which will ensure more dynamic and
continuous assessment, adherence to common standards, an improved
user interface and increased review and challenge.
The Group views fair customer outcomes and provision of timely
and effective support to customers in distress as a central pillar
supporting its Purpose, Vision and Values. The Group has
customer-centric policies and procedures in place which are subject
to ongoing reviews and benchmarking. The Group was also
appropriately attuned to the emerging industry and regulatory focus
on customer vulnerability recognising that Consumer Duty
regulations set higher expectations for the Group in terms of
demonstrating that good outcomes for its customers is at the heart
of the Group's strategy and business objectives.
The Group continued to embed its approach to managing climate
risk through the further development of its climate risk management
framework. A dedicated ESG Technical Committee ensures that
enhancements are delivered as required.
Priority areas for 2023
A significant level of uncertainty remains around the UK
economic outlook and the operating environment for 2023 and beyond.
Therefore, continued close monitoring of the Group's risk profile
and operating effectiveness remains a key priority for the Risk and
Compliance function. Other priorities include:
-- Continue to leverage the Group's Enterprise Risk Management Framework and
existing capabilities to actively identify, assess and manage risks in
line with approved risk appetite.
-- Leverage enhancements made across the Group's portfolio analytical
capabilities, including the implementation of an enhanced stress testing
capability to improve riskbased pricing, balance sheet management,
capital planning and stress testing.
-- Make continued progress in obtaining IRB accreditation and further
leverage capabilities within wider risk management disciplines such as
IFRS 9 Expected Credit Loss (ECL) calculations, underwriting, existing
customer management and collections to drive portfolio performance
benefits and improvements in shareholder returns.
-- Implement and embed the FCA's Consumer Duty rules and requirements, via 5
key pillars of activity, to ensure that the Group complies with the new
Consumer Principle, cross-cutting rules and the four Consumer Duty
outcomes by 31 July 2023 for new and existing products and 31 July 2024
for closed products.
-- Continue to strengthen engagement and support with the first line of
defence to enhance conduct, regulatory and financial crime risk awareness
and key preventative and detective controls.
-- Further enhance and embed the Group's resolution framework, including
testing valuation and funding in resolution capabilities and testing
interactions between other resolution barriers.
-- Maintain oversight of capital management including the impact of MREL,
Basel 3.1 and IRB.
Risk review (continued)
-- Continue the optimisation of funding strategy and enhancement of
sensitivity analysis around key liquidity drivers.
Enterprise Risk Management Framework
The Enterprise Risk Management Framework (ERMF) sets out the
principles and approach with respect to the management of the
Group's risk profile in order to successfully fulfil its business
strategy and objectives, including compliance with all conduct and
prudential regulatory objectives.
The ERMF is the overarching framework that enables the Board and
senior management to actively manage and optimise the risk profile
within the constraints of its risk appetite. The ERMF also enables
informed risk-based decisions to be taken in a timely manner,
ensuring that the interests and expectations of key stakeholders
can be met.
The ERMF also provides a structured mechanism to align critical
components of an effective approach to risk management. The ERMF
links overarching risk principles to day-to-day risk monitoring and
management activities.
The modular construct of the ERMF provides an agile approach to
keeping pace with the evolving nature of the risk profile and
underlying drivers. The ERMF and its core modular components are
subject to periodic review and approval by the Board and its
relevant Committees.
The key modules of the ERMF structure are as follows:
1. Risk principles and culture -- the Group established a set of
risk management and oversight principles that inform and guide all
underlying risk management and assessment activities. These
principles are informed by the Group's Purpose, Vision and
Values.
2. Risk strategy and appetite -- the Group established a clear
business vision and strategy which is supported by an articulated
risk vision and underlying principles. The Board is accountable for
ensuring that the Group's ERMF is structured against the strategic
vision and is delivered within agreed risk appetite thresholds.
3. Risk assessment and control -- the Group is committed to
building a safe and secure banking operation via an integrated and
effective enterprise strategic risk management framework.
4. Risk definitions and categorisation -- the Group sets out its
principal risks which represent the primary risks to which the
Group is exposed.
5. Risk analytics -- the Group uses quantitative analysis and
statistical modelling to help improve its business decisions.
Risk review (continued)
6. Stress testing and scenario development -- stress testing is
an important risk management tool which is used to evaluate the
potential effects of a specific event and or movement in a set of
variables to understand the impact on the Group's financial and
operating performance. The Group has a stress testing framework
which sets out the Group's approach.
7. Risk data and information technology -- the maintenance of
high-quality risk information, along with the Group's data
enrichment and aggregation capabilities, are central to the Risk
function's objectives being achieved.
8. Risk Management Framework's policies and procedures -- risk
frameworks, policies and supporting documentation outline the
process by which risk is effectively managed and governed within
the Group.
9. Risk management information and reporting -- the Group
established a comprehensive suite of risk Management Information
(MI) and reports covering all principal risk types.
10. Risk governance and function organisation -- risk governance
refers to the processes and structures established by the Board to
ensure that risks are assumed and managed within the Board-approved
risk appetite, with clear delineation between risk taking,
oversight and assurance responsibilities. The Group's risk
governance framework is structured to adhere to the 'three lines of
defence' model.
11. Use and embedding - dissemination of key framework
components across the Group to ensure that business activities and
decisionmaking are undertaken in line with the Board
expectations.
Group organisational structure
The Board has ultimate responsibility for the oversight of the
Group's risk profile and risk management framework and, where it
deems it appropriate, it delegates its authority to relevant
Committees. The Board and its Committees are provided with
appropriate and timely information relating to the nature and level
of the risks to which the Group is exposed and the adequacy of the
risk controls and mitigants.
The Internal Audit function provides independent assurance to
the Board and its Committees as to the effectiveness of the systems
and controls and the level of adherence to internal policies and
regulatory requirements. The Board also commissions third party
subject matter expert reviews and reports in relation to issues and
areas requiring deeper technical assessment and guidance.
Risk appetite
The Group aligns its strategic and business objectives with its
risk appetite, which defines the level of risk that the Group is
willing to accept, enabling the Board and senior management to
monitor the risk profile relative to its strategic and business
performance objectives. Risk appetite is a critical mechanism
through which the Board and senior management are able to identify
adverse trends and respond to unexpected developments in a timely
and considered manner.
The risk appetite is calibrated to reflect the Group's strategic
objectives, business operating plans, as well as external economic,
business and regulatory constraints. In particular, the risk
appetite is calibrated to ensure that the Group continues to
deliver against its strategic objectives and operates with
sufficient financial buffers even when subjected to plausible but
extreme stress scenarios. The objective of the Board's risk
appetite is to ensure that the strategy and business operating
model is sufficiently resilient.
Risk review (continued)
The Group's risk appetite is calibrated using statistical
analysis and stress testing to inform the process for setting
management triggers and limits against key risk indicators. The
calibration process is designed to ensure that timely and
appropriate actions are taken to maintain the risk profile within
approved thresholds. The Board and senior management actively
monitor actual performance against approved management triggers and
limits. Currently, there are two regulated banking entities within
the Group. Risk appetite metrics and thresholds are set at both
individual entity and Group levels.
The Group's risk appetite is subject to a full refresh annually
across all principal risk types and a mid-year review where any
metrics can be assessed and updated as appropriate.
Management of climate change risk
There was further embedding of the Group's approach to climate
risk during 2022, with the Climate Risk Management Framework and
ESG governance structures now established.
The Group is exposed to the following climate related risks:
-- Physical risk -- relates to climate or weather-related events such as
heatwaves, droughts, floods, storms, rising sea levels, coastal erosion
and subsidence. These risks could result in financial losses with respect
to the Group's own real estate and customer loan portfolios.
-- Transition risk -- arising from the effect of adjusting to a low-carbon
economy and changes to appetite, strategy, policy or technology. These
changes could result in a reassessment of asset values and increased
credit exposures for banks and other lenders as the costs and
opportunities arising from climate change become apparent. Reputational
risk arises from a failure to meet changing and more demanding societal,
investor and regulatory expectations.
Approach to analysing climate risk on the loan book
As part of the ICAAP, the Risk function engaged with a third
party to provide detailed climate change assessments at a
collateral level for the Group's loan portfolios. The data was in
turn utilised to conduct profiling and financial risk
assessments.
a) Climate scenarios considered
The standard metric for assessing climate change risk is the
global greenhouse gas concentration as measured by Representative
Concentration Pathway (RCP) levels. The four levels adopted by the
Intergovernmental Panel for Climate Change for its fifth assessment
report (AR5) in 2014 are:
Risk review (continued)
Emissions scenario
Scenario Change in temperature
(degC) by 2100
-------- ---------------------
RCP 2.6 1.6 (0.9 -- 2.3)
-------- ---------------------
RCP 4.5 2.4 (1.7 -- 3.2)
-------- ---------------------
RCP 6.0 2.8 (2.0 -- 3.7)
-------- ---------------------
RCP 8.5 4.3 (3.2 -- 5.4)
-------- ---------------------
Note: figures within the brackets above detail the range in
temperatures. Single figures outside the brackets indicate the
averages.
b) Climate risk perils considered
The following three physical perils of climate change were
assessed:
-- Flood - wetter winters and more concentrated rainfall events will
increase flooding.
-- Subsidence - drier summers will increase subsidence via the shrink or
swell of clay.
-- Coastal erosion - increased storm surge and rising sea levels will
increase the rate of erosion.
For each of the physical perils and climate scenarios detailed
above, a decade by decade prediction, from the current year to 2100
on the likelihood of each was provided.
For flood and subsidence, the likelihood took the form of a
probability that a flood or subsidence event would occur over the
next ten years. For coastal erosion the distance of the property to
the coast line is provided by scenario and decade.
All peril impacts are calculated at the property level to a one
metre accuracy. This resolution is essential because flood and
subsidence risk factors can vary considerably between neighbouring
properties.
In addition to the physical perils, the current Energy
Performance Certificate (EPC) of each property was considered to
allow for an assessment of transitional risk due to policy change.
EPC ratings are based on a Standard Energy Procedure (SAP)
calculation which uses a methodology to determine the energy
performance of properties by considering factors such as
construction materials, heating systems, insulation and air
leakage.
Both the OSB and CCFS portfolios were profiled against each of
the perils detailed under the best (RCP 2.6) and worst (RCP 8.5)
climate scenarios.
-- Flood risk
By the 2030's, at the Group level, the percentage of properties
predicted to experience a flood is expected to increase from 0.49%
in the least severe scenario to 0.51% in the most severe scenario.
Both scenarios represent a low proportion of the Group's loan
portfolios.
-- Subsidence
In the 2030's, at the Group level the percentage of properties
predicted to experience subsidence is expected to increase from
0.42% in the least severe scenario to 0.45% in the most severe
scenario. The outcome of both scenarios represents a low proportion
of the Group's loan portfolios.
-- Coastal erosion
There are two elements to coastal erosion risk. The first
relates to the proximity of the property to the coast. The second
depends on whether the area in which the property is located is
likely to experience coastal erosion in the future.
Risk review (continued)
Both Banks have over 93% of their portfolios more than 1000
metres from the coastline, indicating a very low coastal erosion
risk across the Group.
The CCFS bank entity has 32 properties within 100 metres of the
coastline, whilst the OSB bank entity has 34.
c) Energy Performance Certificate profile
The EPC profile of both bank entities follows a similar trend to
the national average. At the Group level 40% of properties have an
EPC of C or better, 45% have an EPC of D, 13% with an EPC of E and
negligible percentages in F or G. Over 90% of the properties
supporting the Group's loan portfolios have the potential to have
at least an EPC rating of C.
Value at Risk assessment
The Value at Risk to each Bank, measured through change to
Expected Credit Loss (ECL) and Standardised and IRB Risk Weighted
Assets (RWAs), is assessed through the application of stress to
collateral valuations as per the methodology outlined below.
Impacts are assessed against the latest year end position.
Climate change scenarios
To get the full range of impacts, the most and least severe
climate change stress scenarios were considered.
The most severe, RCP 8.5, assumes there will be no concerted
effort at a global level to reduce greenhouse gas emissions. Under
this scenario, the predicted increase in global temperature is 3.2
- 5.4degC by 2100.
The least severe scenario, RCP 2.6, assumes early action is
taken to limit future greenhouse gas emissions. Under this
scenario, the predicted increase in global temperature is
0.9-2.3degC by 2100.
Methodology -- physical risks
For the physical risks, updated valuations are produced to
reflect the impact of a flood, subsidence and coastal erosion
risk.
Methodology -- transitional risks
The Group's expectation is that, under the early action scenario
(RCP 2.6), the government will require all properties to achieve
EPC A, B and C grades where possible. We considered this risk for
Buy-to-Let accounts only.
d) Analysis outcome
The physical risks currently present an immaterial ECL or
capital risk to the Group. The sensitivity to transitional risk is
larger than that of physical risk, although still very small,
particularly when considering the aggressive time frames on
government policy relating to minimum EPC requirements.
e) Planned enhancements during 2023
In the future, the Group's climate risk data and scenario
analysis capabilities will continue to be enhanced.
Principal risks and uncertainties
1. Strategic and business risk
The risk to the Group's earnings and profitability arising from
its strategic decisions, change in business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Risk appetite statement: The Group's strategic and business risk
appetite states that the Group does not intend to undertake any
medium- to long-term strategic actions that would put at risk its
vision of being a leading specialist lender, backed by strong and
dependable savings franchises. The Group adopts a long-term
sustainable business model which, while focused on niche
sub-sectors, is capable of adapting to growth objectives and
external developments.
1.1 Performance against targets
Performance against strategic and business targets does not meet
stakeholder expectations. This has the potential to damage the
Group's franchise value and reputation.
Mitigation
Regular monitoring by the Board and the Group Executive
Committee of business and financial performance against the
strategic agenda and risk appetite. The financial plan is subject
to regular reforecasts. The balanced business scorecard is the
primary mechanism to support how the Board assesses management
performance against key targets. Use of stress testing to flex core
business planning assumptions to assess potential performance under
stressed operating conditions.
Direction: increased
The Group delivered strong performance against targets during
2022 despite the continued impact of inflation, increasing interest
rates and the conflict in Ukraine. The ongoing macroeconomic
uncertainty and its potential impact on net interest margin,
affordability levels and house prices present an increased risk to
the Group's performance in 2023.
1.2 Economic environment
The economic environment in the UK is an important factor
impacting the strategic and business risk profile.
A macroeconomic downturn may impact the credit quality of the
Group's existing loan portfolios and may influence future business
strategy as the Group's new business proposition becomes less
attractive due to lower returns.
Mitigation
The Group's business model as a secured lender helps limit
potential credit risk losses and supports performance through the
economic cycle. The Group continues to utilise and enhance its
stress testing capabilities to assess and minimise potential areas
of macroeconomic vulnerability.
Direction: increased
The increase in macroeconomic environment risk in 2022 related
to inflation and increasing interest rates creating a squeeze on
borrowers' affordability levels. The ongoing macroeconomic
uncertainty will continue into 2023 with an increased risk to the
Group's credit risk profile, including the possibility of a fall in
house prices.
1.3 Competition risk
The risk that new bank entrants and existing peer banks shift
focus to the Group's market sub-segments, increasing the level of
competition.
Principal risks and uncertainties (continued)
Mitigation
The Group continues to develop products and services that meet
the requirements of the markets in which it operates. The Group has
a diversified suite of products and capabilities to utilise,
together with significant financial resources to support a response
to changes in competition.
Direction: unchanged
The current economic outlook may limit the number of competitors
shifting their focus to the Group's key market subsegments.
2. Reputational risk
The potential risk of the Group's reputation being affected due
to factors such as unethical practices, adverse regulatory actions,
customer or broker dissatisfaction and complaints or
negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of any principal risk can
lead to a reputational risk impact.
The Group has a very low appetite for reputational risks. The
Group will not conduct its business or engage with stakeholders in
a manner that could adversely impact its reputation or franchise
value. The Group recognises that reputational risk is a consequence
of other risks materialising and in turn seeks to actively manage
all risks within Board-approved risk appetite levels. The Group
strives to protect and enhance its reputation at all times.
2. 1 Deterioration of reputation
Potential loss of trust and confidence that our stakeholders
place in us as a responsible and fair provider of financial
services.
Mitigation
Culture and commitment to treating customers fairly and being
open and transparent in communication with key stakeholders.
Established processes in place to proactively identify and manage
potential sources of reputational risk. Review of relevant
Management Information (MI) including complaint volumes, Net
Promoter Scores, Customer Satisfaction results, Social Media and
Trustpilot feedback.
Direction: increased
The challenging macroeconomic environment in 2022 resulted in
significant shifts within both the UK's lending and savings
markets. This has brought about the need for all banks to become
increasingly agile with products offered in order to ensure that
all core targets continued to be met. Operational scalability and
efficiency challenges have impacted the Group's reputational risk
profile.
3. Credit risk
Potential for loss due to the failure of a counterparty to meet
its contractual obligation to repay a debt in accordance with the
agreed terms.
Risk appetite statement: The Group seeks to maintain a
high-quality lending portfolio that generates adequate returns
under normal and stressed conditions. The portfolio is actively
managed to operate within set criteria and limits based on profit
volatility focusing on key sectors, recoverable values and
affordability and exposure levels. The Group aims to continue to
generate sufficient income and control credit losses to a level
such that it remains profitable even when subjected to a credit
portfolio stress of a 1 in 20 intensity stress scenario.
Principal risks and uncertainties (continued)
3.1 Individual borrower defaults
Borrowers may encounter idiosyncratic problems in repaying their
loans, for example loss of a job or execution problems with a
development project.
While in most cases of default the Group's lending is secured,
some borrowers may fail to maintain the value of the security,
which may result in a loss being incurred.
Mitigation
Across both OSB and CCFS, a robust underwriting assessment is
undertaken to ensure that a customer has the ability and propensity
to repay and sufficient security is available to support the new
loan requested. At CCFS, an automated scorecard approach is taken,
whilst OSB utilises a bespoke manual underwriting approach,
supplemented by bespoke application scorecards to inform the
lending decision.
Should there be problems with a loan, the Collections and
Recoveries team works with customers who are unable to meet their
loan service obligations to reach a satisfactory conclusion while
adhering to the principle of treating customers fairly.
Our strategic focus on lending to professional landlords means
that properties are likely to be well managed, with income from a
diversified portfolio mitigating the impact of rental voids or
maintenance costs. Lending to owner-occupiers is subject to a
detailed affordability assessment, including the borrower's ability
to continue payments if interest rates increase. Lending on
commercial property is based more on security, and is scrutinised
by the Group's independent Real Estate team as well as by external
valuers.
Development finance lending is extended only after a deep
investigation of the borrower's track record and stress testing the
economics of the specific project.
Direction: increased
The drivers of borrower default risk have shifted to rising
inflation and the consequential increases in interest rates which
impact affordability for accounts which revert onto higher interest
rates and increase the risk of borrower default.
3.2 Macroeconomic downturn
A broad deterioration in the UK economy would adversely impact
both the ability of borrowers to repay loans and the value of the
Group's security. Credit losses would impact the Group's lending
portfolios, even if individual impacts were to be small, the
aggregate impact on the Group could be significant.
Mitigation
The Group works within portfolio limits on LTV, affordability,
name, sector and geographic concentration that are approved by the
Group Risk Committee and the Board. These are reviewed on a
semi-annual basis. In addition, stress testing is performed to
ensure that the Group maintains sufficient capital to absorb losses
in an economic downturn and continues to meet its regulatory
requirements.
Direction: increased
The uncertain economic outlook and the ongoing geopolitical risk
due to the conflict in Ukraine resulted in high inflation and
increases in interest rates could drive higher levels of customer
defaults, rising impairment levels and falling residential and
commercial collateral values.
Principal risks and uncertainties (continued)
3.3 Wholesale credit risk
The Group has wholesale exposures both through call accounts
used for transactional and liquidity purposes and through
derivative exposures used for hedging.
Mitigation
The Group transacts only with high quality wholesale
counterparties. Derivative exposures include collateral agreements
to mitigate credit exposures.
Direction: unchanged
The Group's wholesale credit risk exposure remains limited to
high-quality counterparties, overnight exposures to clearing banks
and swap counterparties.
4. Market risk
Potential loss due to changes in market prices or values.
Risk appetite statement: The Group actively manages market risk
arising from structural interest rate positions. The Group does not
seek to take a significant interest rate position or a directional
view on interest rates and it limits its mismatched and basis risk
exposures.
4.1 Interest rate risk
The risk of loss from adverse movement in the overall level of
interest rates. It arises from mismatches in the timing of
repricing of assets and liabilities, both on and off balance sheet.
It includes the risks arising from imperfect hedging of exposures
and the risk of customer behaviour driven by interest rates, e.g.
early redemption.
Mitigation
The Group's Treasury function actively hedges to match the
timing of cash flows from assets and liabilities.
Direction: unchanged
Interest rate risk remained unchanged in 2022 due to the Group's
simple asset and liability structure and ongoing careful
management.
4.2 Basis risk
The risk of loss from an adverse divergence in interest rates.
It arises where assets and liabilities reprice from different
variable rate indices. These indices may be market, administered,
other discretionary variable rates, or that received on call
accounts with other banks.
Mitigation
The Group did not require active management of basis risk in
2022 due to its balance sheet structure.
Direction: decreased
Basis risk exposures reduced year on year as a result of the
LIBOR Transition at the end of 2021.
Principal risks and uncertainties (continued)
5. Liquidity and funding risk
The risk that the Group, although solvent, does not have
sufficient financial resources to enable it to meet its obligations
as they fall due.
Risk appetite statement: The Group will maintain sufficient
liquidity to meet its liabilities as they fall due under normal and
stressed business conditions; this will be achieved by maintaining
strong retail savings franchises, supported by high-quality liquid
asset portfolios comprised of cash and readily-monetisable assets,
and through access to pre-arranged secured funding facilities. The
Board requirement to maintain balance sheet resources sufficient to
survive a range of severe but plausible stress scenarios is
interpreted in terms of the liquidity coverage ratio and the ILAAP
stress scenarios.
5.1 Retail funding stress
As the Group is primarily funded by retail deposits, a retail
run could put it in a position where it could not meet its
financial obligations.
Increased competition for retail savings driving up funding
costs, adversely impacting retention levels and profitability.
Mitigation
The Group's funding strategy is focused on a highly stable
retail deposit franchise. The Group's large number of depositors
provides diversification, where a high proportion of balances are
covered by the FSCS protection scheme, largely mitigating the risk
of a retail run.
In addition, the Group performs in-depth liquidity stress
testing and maintains a liquid asset portfolio sufficient to meet
obligations under stress. The Group holds prudential liquidity
buffers to manage funding requirements under normal and stressed
conditions.
The Group has further diversified its retail channels by
expanding the range of pooled deposit providers used.
The Group proactively manages its savings proposition through
both the Liquidity Working Group and the Group Assets and
Liabilities Committee. Finally, the Group has prepositioned
mortgage collateral and securitised notes with the Bank of England,
which allows it to consider alternative funding sources to ensure
it is not solely reliant on retail savings. The Group also has a
mature Retail Mortgage
Backed Security (RMBS) programme.
Direction: increased
The Group's funding levels and mix remained strong throughout
the year.
In 2022, OSB and CCFS were able to attract significant flows of
new deposits and depositors, despite the volatile interest rate
environment and competitive savings market. During periods of
exceptionally high volatility, funding was drawn from the Bank of
England using the Index Long-term Repo scheme to support retail
funding and customer operations.
5.2 Wholesale funding stress
A market-wide stress could close securitisation markets or make
issuance costs unattractive for the Group.
Mitigation
The Group continuously monitors wholesale funding markets and is
experienced in taking proactive management actions where
required.
Principal risks and uncertainties (continued)
The Group issued one securitisation in 2022 and has a range of
wholesale funding options available outside retained
securitisation, including Bank of England facilities, for which
collateral has been prepositioned.
Direction: unchanged
The Group's range of wholesale funding options available,
including repo or sale of retained notes or collateral upgrade
trades remained broadly unchanged.
5. 3 Refinancing of TFSME
Current Term Funding Scheme for Small and Medium-sized
Enterprises (TFSME) borrowing by the Group remained at 4.2bn at the
end of 2022, with a refinancing concentration scheduled for October
2025.
Mitigation
The Group has other wholesale options available to it, including
securitisation programmes and repo or sale of held notes, as well
as retail funding via its strong franchises, to replace the TFSME
borrowing gradually over the next few years ahead of the maturity
of this funding.
Direction: unchanged
TFSME borrowing remained unchanged during the year; however, the
current funding plan to refinance TFSME requires significant
securitisation issuance. These markets have seen increased
volatility during 2022, which could continue into 2023 so
additional refinancing options are being considered.
6. Solvency risk
The potential inability of the Group to ensure that it maintains
sufficient capital levels for its business strategy and risk
profile under both the base and stress case financial
forecasts.
Risk appetite statement: the Group seeks to ensure that it is
able to meet its Board-level capital buffer requirements under a
severe but plausible stress scenario. The solvency risk appetite is
informed by the Group's prudential requirements and strategic and
financial objectives. We manage our capital resources in a manner
which avoids excessive leverage and allows us flexibility in
raising capital.
6.1 Deterioration of capital ratios
Key risks to solvency arise from balance sheet growth and
unexpected losses which can result in the Group's capital
requirements increasing, or capital resources being depleted, such
that it no longer meets the solvency ratios as mandated by the PRA
and Board risk appetite.
The regulatory capital regime is subject to change and could
lead to increases in the level and quality of capital that the
Group needs to hold to meet regulatory requirements. In particular,
we note the PRA's recently published consultation paper (CP) on the
implementation of Basel 3.1.
Mitigation
The Group operates from a strong capital position and has a
consistent record of strong profitability.
The Group actively monitors its capital requirements and
resources against financial forecasts and plans and undertakes
stress testing analysis to subject its solvency ratios to extreme
but plausible scenarios.
The Group also holds prudent levels of capital buffers based on
CRD IV requirements and expected balance sheet growth.
Principal risks and uncertainties (continued)
The Group engages actively with regulators, industry bodies and
advisers to keep abreast of potential changes and provides feedback
through the consultation process.
Direction: increased
The stable credit profile and ongoing profitability mean that
the Group's capital resources remain strong.
Risks remain around adverse credit profile performance resulting
from rising inflation and interest rates.
We have estimated the impact of Basel 3.1 on our 31 December
2022 CET1 ratio to be a reduction of up to 2% points, should the
proposed rules be implemented as drafted in the CP and prior to the
Group receiving Internal Ratings Based (IRB) accreditation.
7. Operational risk
The risk of loss or a negative impact on the Group resulting
from inadequate or failed internal processes, people or systems, or
from external events.
Risk appetite statement: The Group's operational processes,
systems and controls are designed to minimise disruption to
customers, damage to the Group's reputation and any detrimental
impact on financial performance. The Group actively promotes the
continuous evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is
not possible.
7.1 IT security (including cyber risk)
The risks resulting from a failure to protect the Group's
systems and the data within them. This includes both internal and
external threats.
Mitigation
The Group programme of IT and cyber improvements continued with
the aim of enhancing its protection against IT security threats,
deploying a series of tools designed to identify and prevent
network/system intrusions. This is further supported by documented
and tested procedures intended to ensure the effective response to
a security breach.
Direction: unchanged
The Group has processes in place to allow it to operate
effectively when employees work from home and manage the cyber
risks related to working remotely.
Whilst IT security risks continue to evolve, work continues to
enhance the level of maturity of the Group's controls and defences,
supported by dedicated IT security experts.
The Group has an ongoing programme of penetration testing in
place to drive enhancements by identifying potential areas of
risk.
7. 2 Data quality and completeness
The risks resulting from data being either inaccurate or
incomplete.
Mitigation
The Group previously established a dedicated Data Strategy
Programme, involving the recruitment of a Chief Data Officer and a
Data Governance Director, designed to ensure a consistent approach
to the maintenance and use of data. This includes both documented
procedures and frameworks and also tools intended to improve the
consistency of data use.
Principal risks and uncertainties (continued)
Direction: unchanged
Progress was made in 2022 to embed Group-wide governance
frameworks in part driven by the Group's IRB project. Further work
is planned for 2023, to move closer to the Group's target end
state.
7.3 Change management
The risks resulting from unsuccessful change management
implementations, including the failure to respond effectively to
release-related incidents.
Mitigation
The Group recognises that implementing change introduces
significant operational risk and has therefore implemented a series
of control gateways designed to ensure that each stage of the
change management process has the necessary level of oversight.
Direction: increased
The Group continued to adopt an ambitious change agenda, which
was monitored and managed well in 2022. We are now turning our
attention towards identifying opportunities to further digitise our
business operations, to deliver additional efficiencies and invest
in the Group to ensure it remains well-positioned to meet the
changing needs of our customers, brokers and wider
stakeholders.
7.4 IT failure
The risks resulting from a major IT application or
infrastructure failure impacting access to the Group's IT
systems.
Mitigation
The Group continues to invest in improving the resilience of its
core infrastructure. It has identified its prioritised business
services and the infrastructure that is required to support them.
Tests are performed regularly to validate its ability to recover
from an incident.
The Group has established a site in Hyderabad to ensure that, in
the event of an operational incident in Bangalore, services can be
maintained.
Direction: unchanged
Whilst progress was made in reducing both the likelihood and
impact of an IT failure, the risks remain, in particular due to new
hybrid working arrangement. Further work is planned during
2023.
8. Conduct risk
The risk that the Group's culture, organisation, behaviours and
actions result in poor outcomes and detriment for customers and/or
damage to consumer trust and integrity of the markets in which it
operates.
Risk appetite statement: The Group has a very low appetite to
assume risks which may result in either poor or unfair customer
outcomes and/or cause disruptions in the market segments in which
it operates. The Group aims to avoid causing detriment or harm to
its customers and operates to the highest standards of conduct. The
Group will treat its customers, third-party partners, investors and
regulators with respect, fairness and transparency. The Group will
proactively look to identify where its products and services could
lead to poor outcomes or harm to its customers, and will take
appropriate action to mitigate this. Where customer harm occurs,
the Group will ensure that effective solutions are implemented to
address the root cause and a fair outcome is achieved.
Principal risks and uncertainties (continued)
8.1 Conduct risk
The risk that the Group fails to meet its expectations with
respect to conduct risk.
Mitigation
The Group's culture is clearly defined and monitored via its
Purpose, Vision and Values driven behaviours.
The Group has a strategic commitment to provide simple, customer
focused products. In addition, a Product Governance framework is
established to oversee both the origination of new products and to
revisit the ongoing suitability of the existing product suite.
The Group has an embedded Conduct Risk Management Framework
which clearly define roles and responsibilities for conduct risk
management and oversight across the Group's three lines of
defence.
Direction: increased
The conduct risk level increased due to macroeconomic
uncertainty. Some customers, particularly those who are vulnerable,
may experience financial difficulty as a result of the rising cost
of living and cost of borrowing. Volatile lending and savings
markets led to unprecedented high volumes of new business adversely
impacting customer service level agreements and leading to
increased complaints and reputational risk.
Conduct losses have remained stable with no breaches of risk
appetite reported during the last 12 months.
9. Regulatory risk
The risk of failure to effectively identify, interpret,
implement and adhere to all regulatory or legislative change that
impacts the Group.
Risk appetite statement: The Group views ongoing conformance
with regulatory rules and standards across all the jurisdictions in
which it operates as a critical facet of its risk culture. The
Group has a very low appetite to assume regulatory risk, which
could result in poor customer outcomes, customer detriment,
regulatory sanctions, financial loss or damage to its reputation.
The Group will proactively monitor for and will not tolerate any
systemic failure to comply with applicable laws, regulations or
codes of conduct relevant to its business.
The Group acknowledges that regulatory rules and standards are
subject to interpretation and subsequent translation into internal
policies and procedures. The Group interprets requirements to
ensure adherence with the intended purpose and spirit of the
regulation whilst being cognisant of commercial considerations and
good customer outcomes. To minimise regulatory risk, the Group
proactively engages with its regulators in a transparent manner,
participates in industry forums and seeks external advice to
validate its interpretations, where appropriate.
9.1 Prudential regulatory changes
The Group continues to see a high volume of key compliance
regulatory changes that impact its business activities. These
include the implementation of Basel 3.1 capital rules and increased
Resolvability Assessment Framework requirements, including updated
minimum requirements for own funds and eligible liabilities
(MREL).
Principal risks and uncertainties (continued)
Mitigation
The Group has an effective horizon scanning process to identify
regulatory change.
All significant regulatory initiatives are managed by structured
programmes overseen by the Project Management team and sponsored at
Executive level.
The Group has proactively sought external expert opinions to
support interpretation of the requirements and validation of its
response, where required.
Direction: unchanged
The Group continued to have a high level of interaction with UK
regulators and continues to identify and respond effectively to all
regulatory changes.
9.2 Conduct regulation
Regulatory changes focused on the conduct of business could
force changes in the way the Group carries out business and impose
substantial compliance costs.
This includes the risk that product design, underwriting,
arrears and forbearance and vulnerable customer policies are
misaligned to regulatory expectations which result in customers not
being treated fairly, particularly those experiencing financial
hardship or vulnerable customers, with the potential for
reputational damage, redress and other regulatory actions.
Mitigation
The Group has a programme of regulatory horizon scanning linking
into a formal regulatory change management programme. In addition,
the focus on simple products and customer-oriented culture means
that current practice may not have to change significantly to meet
new conduct regulations.
All Group entities utilise underwriting, arrears and forbearance
and vulnerable customer policies, which are designed to comply with
regulatory principles, rules and expectations. These policies
articulate the Group's commitment to ensuring that all customers,
including those who are vulnerable or experiencing financial
hardship, are treated fairly, consistently and in a way that
considers their individual needs and circumstances.
The Group does not tolerate any systematic failure to deliver
fair customer outcomes. On an isolated basis, incidents can result
in detriment due to human and/or operational failures. Where such
incidents occur, they are thoroughly investigated, and the
appropriate remedial actions are taken to address any customer
detriment and prevent recurrence.
Direction: increased
The level of regulatory change continued to be high but the
Group has sufficient resources and capabilities to respond to any
changes in an effective and efficient manner.
The Group continues to proactively interact with regulatory
bodies to take part in thematic reviews and information requests,
as required.
Identifying, monitoring and supporting vulnerable customers
continues to be a key area of focus.
Ongoing reviews of long term arrears and forbearance customers,
continues to ensure that payment terms still remain
appropriate.
The Group has instigated a formal project to implement the FCA's
new Consumer Duty requirements within the required timelines.
Principal risks and uncertainties (continued)
10. Financial crime risk
The risk of financial or reputational loss resulting from
inadequate systems and controls to mitigate the risks from
financial crime.
Risk appetite statement: To minimise financial crime risk the
Group will design and maintain robust systems and controls to
identify, assess, manage and report any activity (internal or
external in nature) which exposes the Group to financial crime risk
in the form of money laundering, human trafficking, terrorist
financing, sanctions breaches, bribery, corruption and fraud. The
Group recognises the need to continuously review its systems and
controls to ensure that they are aligned to the nature and scale of
financial crime risk it is exposed to on a current and forward
looking basis.
10.1 Financial crime risk
The risk of financial or reputational loss resulting from a
failure to implement systems and controls to manage the risk from
money laundering, terrorist financing, sanctions, bribery,
corruption and cyber-crime.
Mitigation
The Group operates in a low-risk environment providing
relatively simple products to UK domiciled customers serviced
through a UK registered bank account. The Group has an established
screening programme that is deployed at the point of origination
and on a regular basis throughout the customer lifecycle. Where
applicable, enhanced due diligence is applied to ensure that any
increase in risk is appropriately managed and any activity remains
within risk appetite.
The Group has a horizon scanning programme that identifies
changes to money laundering regulations and any other financial
crime related legislation to ensure that we comply with all
regulatory obligations.
The Group reacted swiftly to the events in Ukraine and the
regular updates released in relation to the Russia and Belarus
financial sanctions regimes. The Group has negligible exposure to
the affected jurisdictions and no exposure to any specific
individual or entity contained within the revised sanctions
listings.
The Group's programme of cyber improvements continued with the
aim of enhancing its protection against IT security threats,
deploying a series of tools designed to identify and prevent
network/ system intrusions. The Group's Financial Crime team will
support the Information Security Team, where appropriate, to ensure
that there are robust and effective controls in place and
sufficient training and awareness for all colleagues.
Direction: Unchanged
The Group continues to focus primarily on the UK market with
accounts serviced from UK bank accounts.
The Group has processes in place to allow it to operate
effectively when employees work from home and manage the cyber
risks related to working remotely. Whilst IT security risks
continue to evolve, the level of maturity of the Group's controls
and defences has significantly increased, supported by dedicated IT
security experts.
Principal risks and uncertainties (continued)
10.2 Fraud risk
The risk of financial loss resulting from fraudulent action by a
person either internal or external.
Mitigation
The Group continues to invest in a range of systems and controls
that are deployed across its product range in order to detect and
prevent the exposure to fraud through the customer lifecycle. All
new business applications are subject to a range of controls to
identify and mitigate fraud. Customer activity is monitored in
order to detect suspicious activity or behaviour that may be
indicative of fraud.
These controls are further supported by documented policies and
procedures that are managed by experienced employees in a dedicated
Financial Crime function.
The Group continually monitors its detection capability with
periodic reviews of the parameters within its systems and control
framework to ensure that these remain fit for purpose and aligned
to mitigate any emerging risks.
Direction:Increased
The Group remains aware that any potential downturn in the wider
economic environment may increase the risk of fraud activity across
its product range and will closely monitor changes in trends that
may be indicative of any new or emerging risks.
Emerging risks
The Group proactively scans for emerging risks which may have an
impact on its ongoing operations and strategy and considers its top
emerging risks to be:
Political and macroeconomic uncertainty
The Group's lending activity is predominantly focused in the
United Kingdom (with a legacy back-book of mortgages in the Channel
Islands) and, as such, will be impacted by any risks emerging from
changes in the macroeconomic environment. Rising inflation and
interest rates pose risks to the Group's loan portfolio
performance.
Mitigation
The Group has mature and robust monitoring processes and via
various stress testing activities (i.e. ad hoc, risk appetite and
Internal Capital Adequacy Assessment Process (ICAAP)) understands
how the Group performs over a variety of macroeconomic stress
scenarios and has developed a suite of early warning indicators,
which are closely monitored to identify changes in the economic
environment. The Board and management review detailed portfolio
reports to identify any changes in the Group's risk profile.
Climate change
As the focus on climate change intensifies, both the physical
risks and the transitional risks associated with climate change
continue to grow. Climate change risks include:
-- Physical risks which relate to specific weather events, such as storms
and flooding, or to longer-term shifts in the climate, such as rising sea
levels. These risks could include adverse movements in the value of
certain properties that are in coastal and low-lying areas, or located in
areas prone to increased subsidence and heave.
-- Transitional risks may arise from the adjustment towards a low-carbon
economy, such as tightening energy efficiency standards for domestic and
commercial buildings. These risks could include a potential adverse
movement in the value of properties requiring substantial updates to meet
future energy performance requirements.
-- Reputational risk arising from a failure to meet changing societal,
investor or regulatory demands.
Principal risks and uncertainties (continued)
Mitigation
During 2022, the Group further embedded its approach to climate
risk management, which included the development of a climate risk
appetite. Further detail are set out in the OSBG annual report and
accounts Task Force on Climate-related Financial Disclosures (TCFD)
report.
The Group's Chief Risk Officer has designated senior management
responsibility for the management of climate change risk.
Model risk
The risk of financial loss, adverse regulatory outcomes,
reputational damage or customer detriment resulting from
deficiencies in the development, application or ongoing operation
of models and ratings systems.
The Group also notes changes in industry best practice with
respect to model risk management including a PRA consultation paper
containing proposed expectations regarding banks' management of
model risk.
Mitigation
The Group has well-established model risk governance
arrangements in place, with Board and Executive Committees in place
to ensure robust oversight of the Group's model risk profile.
Dedicated resources are in place to ensure that model governance
arrangements continue to meet any changes in industry and
regulatory expectations.
Regulatory change
The Group remains subject to high levels of regulatory oversight
and an extensive and broad ranging regulatory change agenda,
including meeting the requirements of the Resolvability Assessment
Framework and Operational Continuity in Resolution. The Group is
therefore required to respond to prudential and conduct-related
regulatory changes, taking part in thematic reviews, as
required.
There is also residual uncertainty in relation to the regulatory
landscape post the United Kingdom's exit from the European
Union.
Mitigation
The Group has established horizon scanning capabilities, coupled
with dedicated prudential and conduct regulatory experts in place
to ensure the Group manages future regulatory changes
effectively.
The Group also has strong relationships with regulatory bodies,
and via membership of UK Finance, inputs into upcoming regulatory
consultations.
Risk review
Risk profile performance overview
Credit risk
Group's loan portfolios performed robustly during 2022. Prudent
criteria for new originations delivered strong new business
quality, whilst the back book also outperformed forecast
expectations. In particular, the Group saw lower arrears levels
than forecast and better than expected house price inflation.
The Group's prudent credit risk appetite ensures that loan
portfolios are positioned to perform well in both benign and
stressed macroeconomic environments.
The Group delivered 12% net loan book growth in 2022 with strong
originations in the Group's core Buy-to-Let and residential
owner-occupier sub-segments, which more than offset reductions in
the second charge and funding lines sub-segments. New lending also
improved in semi-commercial and commercial as well as in the
Group's development finance sub-segments.
Favourable property price indexing resulted in a reduction in
the weighted average stock LTV for OSB and CCFS to 58% and 63%
respectively as at 31 December 2022 (31 December 2021: OSB 60% and
CCFS 65%), and a prudent weighted average LTV profile of 60% for
the Group, down from 62% at the end of 2021.
A low and stable level of arrears continued to be observed, with
just 1.1% of the Group's net loan balances being greater than three
months in arrears as at 31 December 2022, unchanged from the prior
year. Increasing arrears levels were observed across a small number
of portfolios as payment deferrals expired; however, these
increases were partially offset by improving performance across
other loan portfolios.
Solo bank interest coverage ratios for Buy-to-Let loans remained
strong during 2022 at 207% for OSB and 191% for CCFS (2021: 199%
OSB and 188% CCFS).
During 2022, forward-looking external credit bureau probability
of default and customer indebtedness scores remained strong, with
some reversion back to pre-pandemic levels as customers returned to
spending, once lockdown restrictions were relaxed.
Risk profile performance overview (continued)
Expected Credit Losses (ECL)
Balance sheet expected credit losses increased from GBP101.5m to
GBP130.0m as at 31 December 2022. Other non-material items further
contributed to the increase and resulted in a full year statutory
impairment charge of GBP29.8m representing a loan loss ratio of
13bps (2021: GBP4.4m release, -2bps,
respectively), with the provision charge primarily driven by
post-model adjustments to account for the rising cost of living and
cost of borrowing concerns, as well as the strong growth in the
loan book in the year.
A summary of the key impairment charge drivers for 2022
included:
1. -- positive House Price Index (HPI) movements and continued low
unemployment were observed throughout 2022, however, the outlook
deteriorated throughout the year due to the war between Russia and
Ukraine and the fallout from the mini budget. The economic outlook at the
end of 2022 was driven by rising interest rates, higher than target
inflation and most notably a decrease in house prices. The change in
economic outlook contributed GBP11.6m of impairment charge in 2022,
whilst the improvement in house prices drove a release of GBP10.3m.
2. Credit profile provision charges - impairment charges driven by changes
in the credit profile such as portfolio growth, portfolio product mix and
changes in staging mix totalled GBP15.2m. Other charges, including
changes to individually assessed provisions and write offs, totalled
GBP8.3m.
b. Model and staging enhancements -- enhancements were made to the Group's underlying models to ensure that estimates continued to reflect actual credit profile performance. Most notably, the Group's enhancements to models, as part of the IRB programme, were incorporated into the Group's IFRS 9 framework. In addition, the Group enhanced its Significant Increase in Credit Risk (SICR) framework to adopt a default risk trigger, sensitive to the economic outlook. The cumulative impact of these modelling and staging enhancements was an GBP8.3m release for 2022.
c. Post model adjustments -- the Group adopted a number of post-model adjustments, predominantly to account for external risks that were not sufficiently addressed in the model and staging framework. The most significant adjustments were made to the stage 2 approach to account for cost of borrowing and cost of living stresses due to the sharp increase in interest rates and the historically high inflation. In total, the postmodel adjustments contributed GBP13.3m of impairment charge in 2022.
The Group continued to closely monitor impairment coverage
levels in the year.
Impairment coverage levels were strengthened due to both the
observed cost of living and cost of borrowing drivers, and the
renewed uncertainty surrounding the macroeconomic outlook, with
coverage levels approaching those held at the peak of the pandemic.
The Group's Risk function conducted top-down analysis, assessing
portfolio-specific risks, which confirmed the appropriateness of
provision levels after taking into account the post-model
adjustments.
Risk profile performance overview (continued)
Coverage ratios table
Expected credit
As at 31 December Gross carrying amount losses
2022 GBPm GBPm Coverage ratio
Stage 1 18,722.3 7.2 0.04%
Stage 2 4,417.1 50.9 1.15%
Stage 3 (+ POCI) 588.7 71.9 12.21%
Total 23,728.1 130.0 0.55%
As at 31 December
2021
Stage 1 18,188.4 12.1 0.07%
Stage 2 2,413.6 25.0 1.04%
Stage 3 (+ POCI) 562.1 64.4 11.46%
Total 21,164.1 101.5 0.48%
Macroeconomic scenarios
The measurement of ECL under the IFRS 9 approach is complex and
requires a high level of judgement. The approach includes the
estimation of probability of default (PD), loss given default (LGD)
and likely exposure at default (EAD). An assessment of the maximum
contractual period with which the Group is exposed to the credit
risk of the asset is also undertaken.
IFRS 9 requires firms to calculate ECL allowances simulating the
effect of a range of possible economic outcomes, calculated on a
probability-weighted basis. This requires firms to formulate
forward-looking macroeconomic forecasts and incorporate them in ECL
calculations.
i. How macroeconomic variables and scenarios are selected
During the IFRS 9 modelling process, the relationship between
macroeconomic drivers and arrears, default rates and collateral
values is established. For example, if unemployment levels
increase, the Group would observe an increasing number of accounts
moving into arrears. If residential or commercial property prices
fall, the risk of losses being realised on the sale of a property
would increase.
The Group adopted an approach which utilises four macroeconomic
scenarios. These scenarios are provided by an industry-leading
economics advisory firm, that provides management and the Board
with advice.
A base case forecast is provided, together with a plausible
upside scenario. Two downside scenarios are also provided (downside
and a severe downside).
ii. How macroeconomic scenarios are utilised within ECL
calculations
Probability of default estimates are either scaled up or down
based on the macroeconomic scenarios utilised.
Loss given default estimates are principally impacted by
property price forecasts which are utilised within loss estimates,
should an account be possessed and sold.
Exposure at default estimates are not impacted by the
macroeconomic scenarios utilised.
Each of the above components are then directly utilised within
the ECL calculation process.
iii. Macroeconomic scenario governance
The Group has a robust governance process to oversee
macroeconomic scenarios and probability weightings used within ECL
calculations.
Risk profile performance overview (continued)
On a periodic basis, the Group's Risk function and economic
adviser provide the Group Risk and Audit Committees with an
overview of recent economic performance, together with updated
base, upside and two downside scenarios. The Risk function conducts
a review of the scenarios comparing them to other economic
forecasts, which results in a proposed course of action, which once
approved, is implemented.
iv. Changes made during 2022
Throughout 2022, the scenario suite was monitored and updated as
UK political and geopolitical developments occurred.
The Group's Risk and Audit Committees focused on assessing
whether specific risks had been captured within externally provided
forward-looking forecasts. Of particular focus were the risks
relating to rising costs of living and subsequent rising interest
rates to control inflation levels. The Group undertook a detailed
analysis to assess the portfolio risks and consider whether these
were adequately accounted for in the IFRS 9 models and frameworks,
and identified a number of areas requiring post-model adjustments,
most notably to account for the increased credit risk from the
heightened cost of living and cost of borrowing resulting in an
increase in the balance of accounts in stage 2.
The Board reflected on the ongoing appropriateness of
probabilities attached to the suite of IFRS 9 scenarios as the
macroeconomic outlook evolved throughout the year. Scenarios were
adjusted to a symmetrical probability, where the upside and
downside scenarios carry equal weightings, as a result of separate
post-model adjustments being raised to ensure that the current IFRS
9 framework adequately provisioned the underlying portfolio
risk.
Details relating to the scenarios utilised to set the 31
December 2022 IFRS 9 provision levels are provided in the table
below.
Forecast macroeconomic variables over a five-year period
Scenario %
Probability
weighting Economic Year end Year end Year end Year end Year end
Scenario (%) measure 2022 2023 2024 2025 2026
Base case 40 GDP 4.3 (0.7) 1.8 2.7 2.1
Unemployment 3.7 4.7 4.2 3.9 3.8
House Price
growth 9.0 (9.0) (3.4) 2.8 5.8
CPI 10.7 3.4 2.0 1.6 1.2
Bank Base
Rate 2.8 4.0 3.6 2.6 1.8
Upside 30 GDP 4.6 1.9 2.9 3.4 2.2
Unemployment 3.6 4.2 4.0 3.7 3.7
House Price
growth 10.6 (6.7) (1.3) 4.4 5.6
CPI 11.0 4.7 2.9 1.4 1.1
Bank Base
Rate 3.0 5.3 4.8 3.4 2.3
Downside 20 GDP 3.7 (4.4) 1.0 2.4 2.1
Unemployment 4.2 6.3 7.0 7.0 6.7
House Price
growth 6.8 (14.4) (8.0) (1.2) 6.1
CPI 10.2 1.6 1.5 1.8 0.8
Bank Base
Rate 2.9 3.8 3.1 1.9 1.3
Severe 10 GDP 3.2 (7.5) 0.1 1.9 2.1
downside Unemployment 4.3 6.8 7.6 7.6 7.2
House Price
growth 5.0 (18.6) (12.1) (5.0) 6.5
CPI 9.5 0.7 0.9 2.1 0.5
Bank Base
Rate 2.6 2.8 2.0 0.6 0.5
Risk profile performance overview (continued)
Forbearance
Where a borrower experiences financial difficulty, which impacts
their ability to service their financial commitments under the loan
agreement, forbearance may be used to achieve an outcome which is
mutually beneficial to both the borrower and the Group.
By identifying borrowers who are experiencing financial
difficulties pre-arrears or in arrears, a consultative process is
initiated to ascertain the underlying reasons and to establish the
best course of action to enable the borrower to develop credible
repayment plans to see them through the period of financial
stress.
The specific tools available to assist customers vary by product
and the customers' circumstances. The various options considered
for customers are as follows:
-- Temporary switch to interest only: a temporary account change to assist
customers through periods of financial difficulty where the contractual
monthly payment is reduced to the amount of interest owed in the month
for the duration of the account change. Any arrears existing at the
commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances, where
the borrower meets the required eligibility criteria, transfer the
mortgage to a lower contractual rate. Where this is a formal contractual
change, the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
-- Payment holiday: a temporary account change to assist customers through
periods of financial difficulty where capital and interest accruals
during the payment holiday period are repaid from the end of the payment
holiday over the remaining term. Any arrears existing at the commencement
of the arrangement are retained.
-- Voluntary-assisted sale: a period of time is given to allow borrowers to
sell the property and arrears accrue based on the contractual monthly
payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual monthly payment. Arrears continue to accrue based on
the contractual monthly payment.
-- Capitalisation of interest: arrears are added to the loan balance and are
repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where appropriate, the Group will
consider writing-off part of the debt. This may occur where the borrower
has an agreed sale and there will be a shortfall in the amount required
to redeem the Group's charge, in which case repayment of the shortfall
may be agreed over a period of time, subject to an affordability
assessment; or where possession has been taken by the Group, and on the
subsequent sale where there has been a shortfall loss.
Risk profile performance overview (continued)
-- Arrangement to pay: where an arrangement is made with the borrower to
repay an amount above the contractual monthly payment, which will repay
arrears over a period of time.
-- Promise to pay: where an arrangement is made with the borrower to defer
payment or pay a lump sum at a later date.
-- Bridging loans which are more than 30 days past their maturity date.
Repayment is rescheduled to receive a balloon or bullet payment at the
end of the term extension, where the institution can duly demonstrate
future cash-flow availability.
The Group aims to proactively identify and manage forborne
accounts, utilising external credit reference bureau information to
analyse probability of default and customer indebtedness trends
over time, feeding prearrears watch-list reports. Watch-list cases
are in turn carefully monitored and managed as appropriate.
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an
ongoing basis for accuracy and appropriateness. Commercial
properties are subject to quarterly indexing using Commercial Real
Estate (CRE) data. Residential properties are indexed at least
quarterly, using House Price Index data.
Solvency risk
The Group maintains an appropriate level and quality of capital
to support its prudential requirements with sufficient contingency
to withstand a severe but plausible stress scenario. The solvency
risk appetite is based on a stacking approach, whereby the various
capital requirements (Pillar 1, CRD IV buffers, Board and
management buffers) are incrementally aggregated as a percentage of
available capital (CET1 and total capital). Solvency risk is a
function of balance sheet growth, profitability, access to capital
markets and regulatory changes. The Group actively monitors all key
drivers of solvency risk and takes prompt action to maintain its
solvency ratios at acceptable levels. The Board and management also
assess solvency when reviewing the Group's business plans and
inorganic growth opportunities. The OSB solo fully-loaded CET1 and
total capital ratios under CRD IV reduced to 18.4% and 20.0%,
respectively as at 31 December 2022 (31 December 2021: 19.4% and
21.3%, respectively).
Liquidity and funding risk
The Group has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash-flow
imbalances and fluctuations in funding, under both normal and
stressed conditions, arising from market-wide and Bank-specific
events. OSB's and CCFS' liquidity risk appetites have been
calibrated to ensure that both Banks always operate above the
minimum prudential requirements with sufficient contingency for
unexpected stresses, whilst actively minimising the risk of holding
excessive liquidity, which would adversely impact the financial
efficiency of the business model.
The Group continues to attract new retail savers and has high
retention levels with existing customers. In addition, the Group is
able to access a wide range of wholesale funding options, including
securitisation issuances and use of retained notes from both Banks
as collateral for Bank of England facilities and repurchase
agreements with third parties.
In 2022, both Banks actively managed their respective liquidity
and funding profiles within the confines of their risk appetites as
set out in the Group's ILAAP.
Risk profile performance overview (continued)
Retail funding rates increased throughout the year due to the
significant increase in the Bank of England Base Rate. However,
swap rate increases during the year allowed both Banks to retain
more margin on savings rates offered to customers. There was a
short period towards the end of the first quarter where retail
funding was volatile as the first of the larger Base Rate increases
pushed competitor savings rates higher and increased competition;
however, both Banks were able to attract new depositors with
competitive rates.
Swap rate increases in 2022 also led to the Group receiving a
high level of variation margin collateral on the Group's interest
rate swaps. The Group has increased internal buffers to ensure that
sufficient funds are held at the Bank of England to meet any swap
margin calls that may arise if swap rates reduce.
Each Bank's risk appetite is based on internal stress tests that
cover a range of scenarios and time periods and therefore are a
more severe measure of resilience to a liquidity event than the
standalone liquidity coverage ratio (LCR). As at 31 December 2022,
OSB had a liquidity coverage ratio of 229% (2021: 240%) and CCFS
148% (2021: 158%), and the Group LCR was 185%, all significantly
above regulatory requirements.
Market risk
The Group proactively manages its risk profile in respect of
adverse movements in interest rates, foreign exchange rates and
counterparty exposures.
The Group accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage
lending, sight and fixed-term savings and the maintenance of a
portfolio of highquality liquid assets. Interest rate exposure is
mitigated on a continuous basis through portfolio diversification,
reserve allocation and the use of financial derivatives, within
limits set by the Group ALCO, and approved by the Board.
The Group's balance sheet is predominantly GBP denominated. The
Group has some minor foreign exchange risk from funding the OSBI
business. This is minimised by pre-funding a number of months in
advance and regularly monitoring GBP/INR rates. Wholesale
counterparty risk is measured on a daily basis and constrained by
counterparty risk limits.
Operational risk
The Group continues to adopt a proactive approach to the
management of operational risks. The operational risk management
framework has been designed to ensure a robust approach to the
identification, measurement and mitigation of operational risks,
utilising a combination of both qualitative and quantitative
evaluations. The Group's operational processes, systems and
controls are designed to minimise disruption to customers, damage
to the Group's reputation and any detrimental impact on financial
performance. The Group actively promotes the continual evolution of
its operating environment.
Where risks continue to exist, there are established processes
to provide the appropriate levels of governance and oversight,
together with an alignment to the level of risk appetite stated by
the Board.
A strong culture of transparency and escalation has been
cultivated throughout the organisation, with the Operational Risk
function having a Group-wide remit, ensuring a risk management
model that is well-embedded and consistently applied. In addition,
a community of Risk Champions representing each business line and
location has been identified, together with dedicated first line
risk and controls teams in some key areas of the business. Both the
dedicated first line risk and control teams and the Risk Champions
ensure that the operational risk identification and assessment
processes are established across the Group in a consistent manner.
Risk Champions are provided with appropriate support and training
by the Operational Risk function.
Risk profile performance overview (continued)
A hybrid working model has been adopted across the Group, with
the exception being front-line customer-facing colleagues,
following the return to the office after the COVID-19 pandemic.
With a high number of employees working and accessing systems from
home, the risk of a cyber-attack has heightened. Whilst IT security
risks continue to evolve, the level of maturity of the Group's
controls and defences has significantly increased, supported by
dedicated IT security experts. The Group's ongoing penetration
testing continues to drive enhancements by identifying potential
areas of risk.
The Group has established a site in Hyderabad to ensure that, in
the event of an operational incident in Bangalore, services can be
maintained.
Regulatory and compliance risk
The Group is committed to the highest standards of regulatory
conduct and aims to minimise breaches, financial costs and
reputational damage associated with non-compliance.
The Group has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation
and the impact of emerging regulation.
In order to minimise regulatory risk, the Group maintains a
proactive relationship with key regulators, engages with industry
bodies such as UK Finance and seeks external expert advice. The
Group also assesses the impact of forthcoming regulation on itself
and the market in which it operates, and undertakes robust
assurance assessments from within the Risk and Compliance
functions.
Conduct risk
The Group considers its culture and behaviour in ensuring the
fair treatment of customers and in maintaining the integrity of the
market sub-segments in which it operates to be a fundamental part
of its strategy and a key driver to sustainable profitability and
growth. The Group does not tolerate any systemic failure to deliver
fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to
human and/or operational failures. Where such incidents occur, they
are thoroughly investigated and the appropriate remedial actions
are taken to address any customer detriment and to prevent
recurrence.
The Group considers effective conduct risk management to be a
product of the positive behaviour of all employees, influenced by
the customer-centric culture throughout the organisation and
therefore continues to promote a strong sense of awareness and
accountability.
Financial crime risk
The Group operates in a low risk environment providing
relatively simple products to UK domiciled customers serviced
through a UK-registered bank account. The Group has an established
screening programme that is deployed at the point of origination
and on a regular basis throughout the customer lifecycle.
The Group continues to invest in a range of systems and controls
that are deployed across its product range in order to detect and
prevent the exposure to fraud through the customer lifecycle. All
new-to-business applications are subject to a range of controls to
identify and mitigate fraud. Customer activity is monitored in
order to detect suspicious activity or behaviour that may be
indicative of fraud.
Risk profile performance overview (continued)
Strategic and business risk
The Board has clearly articulated the Group's strategic vision
and business objectives supported by performance targets. The Group
does not intend to undertake any medium to long-term strategic
actions, which would put the Group's strategic or financial
objectives at risk.
To deliver against its strategic objectives and business plan,
the Group has adopted a sustainable business model based on a
focused approach to core niche market sub-segments where its
experience and capabilities give it a clear competitive
advantage.
The Group remains focused on delivering against its core
strategic and financial objectives, against a highly competitive
and uncertain backdrop.
Reputational risk
Reputational risk can arise from a variety of sources and is a
second order risk -- the crystallisation of another principal risk
can lead to a reputational risk impact.
The Group monitors reputational risk through tracking media
coverage, customer satisfaction scores, the share price and Net
Promoter Scores provided by brokers.
Non-Financial Information Statement
The requirements of sections 414CA and 414CB of the Companies
Act 2006 relating to non-financial reporting are addressed in this
section.
We have a range of policies and guidance that support key
outcomes for all our stakeholders. Performance against our
strategic non-financial performance measures is one indicator of
the effectiveness and outcomes of policies and statements. The
Group's policies and statements include, but are not limited to,
those summarised in the table below.
Non-Financial Information Statement
Due diligence undertaken Outcomes/Impacts/Risks
Description of policies/statement
Environmental matters
----------------------------------- ------------------------------ ----------------------------
Our Environmental Policy The Environmental The focus of actions
embodies our Stewardship Policy was reviewed in 2022 has been
value, outlining our commitment by the Environmental on establishing the
to taking responsibility Working Group, ESG Group's carbon reduction
for the environment. The Technical Committee plans in order to
policy commits to respecting and ESG Committee deliver on the commitments
the environment, minimising and approved by the set out within the
environmental impact and Board. Importantly Policy.
maintaining resilience the policy scope was Key highlights for
to environmental risks expanded to explicitly the year include:
and impacts and helping include operations -- defining the Group's
to limit the speed of within OSB India and high level carbon
climate change and resource the Group's alignment reduction plan towards
depletion. to the Paris Climate net zero direct emissions
The policy articulates Accord ambitions. by 2030;
the Group's ambition to The policy focuses -- initiating work
achieve net zero value on: on defining the Group's
chain Greenhouse Gas Emissions -- meeting or exceeding climate transition
by no later than 2050 all applicable legal plan for financed
in line with the ambitions and regulatory environmental emissions (Scope
of the Paris Climate Accord obligations, stakeholders' 3, category 15);
2015. expectations and obligations; -- approval of the
-- aligning with the Group's Climate Risk
Paris Climate Accord Management Framework;
ambitions of achieving -- completing a materiality
net zero value chain assessment of emission
Greenhouse gas emissions sources associated
no later than 2050; with Scope 3 categories
-- aligning policy 1-14 of the Greenhouse
objectives with the gas protocol;
Group's commitments -- continuing to
to the Net Zero Banking procure electricity
Alliance, Partnership from renewable energy
for Carbon Accounting tariffs where the
Financials and the Group is responsible
Science Based Targets for utilities procurement;
initiative. -- completing feasibility
studies on the installation
of Solar panels to
owned real estate
in the UK;
-- increasing the
number of electric
vehicle charging
points across our
UK real estate;
-- increasing management
information reporting
including climate
risk, utilities consumption
and carbon emissions;
-- key greenhouse
gas metrics subject
to independent assurance;
and
-- completing environmental
initiatives in the
UK and India to raise
awareness of environmental
issues.
Our Environmental, Social The ESG Metrics Policy Through the compilation
and is reviewed by the and reporting of
Governance (ESG) Metrics ESG team and approved non-financial metrics,
Policy by the Group Audit performance towards
sets out the non-financial Committee. achieving the Group's
performance indicators Non-financial metrics ESG strategy and
which include ethical, are subject to the commitments and management
sustainability and corporate ESG metrics lifecycle of risk is monitored.
governance considerations and principles of The ESG Technical
that are reported to relevant the Group's Data Quality Committee review
Committees. These metrics Policy. This is monitored and challenge the
have been determined to by the ESG team on reported metrics.
be important to the Group's a monthly basis. Functional Suitability of metrics
stakeholders and ESG strategy providers of information is reviewed annually
and commitments. and data are responsible and updates presented
for the management through the governance
and reporting of the process for approval.
ESG metrics. Accuracy of reported
Second line review metrics is a risk
and monitoring is that is managed through
provided by Risk and data quality processes
Compliance. Internal and controls.
Audit provide a third
line review and challenge
on an annual basis.
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Employee matters
--------------------------------- ------------------------------- ---------------------------
Our Group Flexible Working The Group Flexible We seek to accommodate,
Policy sets out a range Working Policy was where possible, all
of flexible working arrangements initially drafted requests for flexible
and the approach that by HR Management and working, with the
the Group will take in reviewed by the Group's majority of requests
reviewing formal Flexible Legal and Company being agreed.
Working Requests from Secretariat function. The Group Homeworking
employees. It was most recently Policy contains an
Our Group Homeworking updated and approved attestation for those
Policy is applicable to by the Group Executive working from home
all UK employees and provides Committee in (formally, informally
clarity in respect of August 2022. and on an enforced
the Group's approach regarding A similar process, basis), with this
formal homeworking arrangements as outlined above, requiring employees
(i.e. following a Flexible was followed for the who work from home
Working Request being Group Homeworking to confirm that they
agreed), informal arrangements Policy which, in line are aware of and
and enforced arrangements with policy review can appropriately
(e.g. COVID-19). requirements, was mitigate risks presented
last updated and subsequently by working from home
approved by the Group in respect of data
Executive Committee protection, information
in May 2022. security and health
and safety.
Our Group Diversity, Equity In order to ensure Our Group-wide Diversity
and Inclusion Policy sets appropriate Board and Inclusion Working
out the Group's commitment oversight of matters Group has progressed
to promoting equality relating to diversity a number of initiatives
of opportunity, providing and inclusion, updates and activities, some
an inclusive workplace are regularly provided of which supported
and eliminating any unfair to the Group Remuneration gender related focus
treatment or unlawful and People Committee. areas, such as progressing
discrimination. In addition, the Group towards our published
General Counsel and Women in Finance
Company Secretary, Charter target and
who is the Executive reducing our gender
responsible for diversity pay gap. The Diversity
and inclusion, issues and Inclusion Working
regular updates to Group has ensured
all employees in order a far broader focus
to drive awareness on other areas of
of ongoing internal diversity, which
initiatives and progress will be further enhanced
relating to diversity given the appointment
and inclusion. of a Diversity, Equity
The current version and Inclusion Specialist.
of the Group In 2022 we commenced
Diversity, Equity the process of collating
and Inclusion Policy diversity data from
has been reviewed our UK employee base
in line with the governance across the broad
and approval processes range of diversity
detailed above and categories which
will be subject to align with regulatory
a detailed review guidance. This will
by the Group's newly enable us to build
appointed Diversity, a picture of the
Equity and Inclusion diverse nature of
Specialist. our workforce and
understand areas
of under representation.
Our Group Whistleblowing A Whistleblowing Report The Group Audit Committee
Policy -- is presented to the is responsible for
Raising a Concern aims Group Audit Committee overseeing the effective
to encourage all employees, on a regular basis, operation of the
and others who have serious whilst the Annual policy; this aims
concerns about wrongdoing Whistleblowing Report to mitigate the risk
in the workplace, to raise is presented to the of undetected wrongdoing
their concerns at the Board. and unwanted exposure
earliest opportunity. The Chair of the Group for the Group.
The Group's whistleblowing Audit Committee is
arrangements endeavour the designated Whistleblowers'
to manage whistleblowing Champion.
cases fairly, consistently
and in a way which protects
individual whistleblowers.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Employee matters (continued)
-------------------------------- ------------------------------- --------------------------
Our Group Health and Safety The Group adopts a Health and safety
Policy outlines our approach robust approach to statistics are provided
and responsibilities under ensuring compliance on a dashboard shared
statutory legislation. with its internal monthly with the
We recognise our duty policies and all legislative Board along with
and responsibility and requirements. A range an annual Health
the Health and Safety of controls are in and Safety Report.
Policy ensures that the place and tested regularly Risk assessments
Group complies with legislation to ensure their effectiveness. are completed across
to protect its employees All controls are subject the Group annually.
and customers, and provides to independent oversight. Annual health and
a suitable and safe environment The Health and Safety safety training is
for employees, customers Working Group meets completed by all
and anyone affected by twice per annum to employees.
the Group's operations. review the objectives Health and Safety
of the Health and awareness in the
Safety Policy. Any workplace has increased
relevant matters arising with updates provided
from these meetings on the Group intranet
are reported to Operational to reduce the possibility
Risk. of injury to employees
An accountable Executive and customers.
is responsible for
the Health and Safety
Policy and a third
party adviser reviews
it annually prior
to it being approved
by the Board.
Social matters
Our Modern Slavery Statement The Modern Slavery The greatest modern
and Vendor Code of Conduct Statement is updated slavery risks to
and Ethics outlines the in line with the requirements. the Group are its
measures we have taken In addition, as part supply chain, its
to combat the risks of of an annual review, Indian operations
modern slavery and human the Group has updated and employment processes.
trafficking in our businesses both of its Vendor To sufficiently mitigate
and supply chains. Codes of Conduct and the risks, our Vendor
Ethics. The UK Vendor Management team includes
Code of Conduct and specific testing
Ethics (UK VCCE) is of key controls within
issued at the start the Vendor Management
of any new vendor Risk Assessment Matrix
relationship and on in line with the
an annual basis to Vendor Management
existing categorised Framework. The Group
and identified vendors. ensures that appropriate
The UK Code includes contractual wording
provisions on the is included in its
Group's Values, Diversity recruitment related
and Inclusion and contractual documentation
Human Rights. It also where appropriate.
provides details of The Group also ensures
breach reporting procedures. that suppliers are
OSB India also has paid in sufficiently
a Vendor Code of Conduct reasonable timescales.
which receives external There are breach
assurances from Indian reporting procedures
qualified legal professionals in place and there
and issued for all were no reportable
new third parties incidents in this
and annually to all financial year.
existing arrangements
in India. We perform
relevant checks via
the Organisation for
Economic Co-operation
and Development (OECD)
Watch at the onboarding
stage and, where required,
as part of our ongoing
due diligence checks.
In addition, we continue
to
ensure that our standard
contractual terms
include references
to modern slavery,
where relevant.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters (continued)
------------------------------- ------------------------------- --------------------------
The Group remains cognizant
of policies potentially
impacted by modern slavery
and human trafficking
and continues to ensure
that modern slavery
is referenced, where
appropriate.
All employees are required
to complete mandatory
training to raise awareness
with additional targeted
training provided to
our Branch Network in
recognition of their
face-to-face interactions
with our customers.
Our Group Vendor Management All third parties are We recognise the
and Outsourcing Policy classified according importance of building
sets out the core requirements to the nature of the strong relationships
which we must meet and services provided and and governance with
provides a structure the associated risk. our third parties
to efficiently manage Due diligence relating and of the possible
potential and contracted to issues such as data reputational risk
third party relationships security, financial this can impose.
ensuring the right level stability, legal and We actively monitor
of engagement and due reputational risks is our third parties
diligence, in compliance undertaken when onboarding, to ensure that they
with our regulatory monitoring and exiting are adhering to our
obligations. all third parties. requirements and
The monthly Vendor Management standards, so that
Committee reviews compliance we can in turn meet
with our Group Vendor our obligations to
Management and Outsourcing stakeholders.
Policy and the performance
of our key third parties.
There is regular reporting
to the Group Risk Committee
and an annual assurance
update is provided to
the Board.
Our Lending Policy sets All changes to the Lending The Group Risk Committee
out the parameters within Policy require approval challenges how the
which we are willing from the Group Credit Lending Policy is
to lend money responsibly Committee, with material applied to ensure
within our set criteria changes escalated to that the right outcomes
and credit risk appetite. the Group Risk Committee. are achieved.
As a second line of The credit risk appetite
defence, the Credit of the Group provides
Quality Assurance process a benchmark against
monitors adherence to preagreed trigger
the policy through a limits and therefore
riskbased sampling approach. is a measure of the
System parameters and overall performance
underwriting processes of the Lending Policy.
act as an additional Non-adherence to
control to ensure that the credit risk appetite
lending parameters are could lead to business
not breached. being written outside
The affordability approach the agreed risk appetite.
is calibrated to ensure The recent rise in
the recent cost of living the cost of certain
changes are reflected commodities (e.g.
in the assessment of energy and fuel)
a customer's creditworthiness. has been reflected
The Group applies interest within the Group's
rate stress tests to assessment of customers'
ensure that customers affordability.
will still be able to The interest rate
afford their mortgages stress tests have
during a rising interest been formally reviewed
rates market environment. to ensure that the
In line with policy, Group continues to
the Compliance function lend responsibly
conducts risk-based during this volatile
second line assurance rate environment.
reviews across the Group
to test regulatory adherence
and customer outcomes,
in accordance with its
annual Compliance Assurance
Plan.
Non-Financial Information Statement (continued)
Description of Due diligence undertaken Outcomes/Impacts/Risks
policies/statement
Social matters (continued)
--------------------------- -------------------------------- -------------------------------
Our Group Complaint We investigate complaints Complaints are also
Handling Policy outlines, competently, diligently a component of Executive
at a high level, our and impartially, supported bonus scheme metrics
regulatory expectations by appropriately trained affecting remuneration
for complaint handling employees. Our complaints outcomes.
from a customer-centric processes are designed Complaints may be an
perspective. to be easily accessible early warning of not
by all customers and ensure treating customers
that those in vulnerable fairly, which has regulatory
circumstances experience consequences for the
the same opportunities Group.
to complain and a service
that is tailored to individual
needs. Root cause analysis
is used to identify and
solve underlying issues
rather than apply
quick fixes.
Complaint performance
forms part of the management
information provided to
Management Committees
and to the Board.
Analysis of complaints
outcomes and potential
business and customer
impact is an integral
part of the Group's processes.
In line with policy, the
Compliance function conducts
risk-based second line
assurance reviews across
the Group to test regulatory
adherence and customer
outcomes, in accordance
with its annual Compliance
Assurance Plan.
Our Group Customer Regular case study reviews An enhanced training
Vulnerability through the Vulnerable programme has been
Policy sets the standards Customer Review Committee developed to focus
and approach for the ensure that best practice on more complex customer
identification and processes across the different scenarios including
treatment of vulnerable customer journeys are identifying vulnerable
customers and provides monitored and shared with customers and how best
guidance to all areas representatives from differing to serve them and their
of the Group to ensure customerfacing and second changing needs.
that vulnerable customers line functions. There is a potential
consistently receive In line with policy, the impact to our reputation
fair outcomes. Compliance function conducts and regulatory risks
risk-based second line for not treating customers
assurance reviews across fairly.
the Group to test regulatory Customer complaint
adherence and customer data shows that there
outcomes, in accordance were no systemic issues
with its annual Compliance in vulnerability processes
Assurance Plan. and outcomes for the
year.
Our Group Data Protection The Group Data Protection The privacy and security
Policy Officer reports twice of personal information
ensures that there each year, to the Group is respected and protected.
are adequate policies Executive Committee and We regard sound privacy
and procedures in place the Board, regarding compliance practices as a key
to enable compliance with legal requirements element of corporate
with the UK General and the Data Protection governance and accountability.
Data Protection Regulation Policy and reports on Non-compliance would
(GDPR) and the Data any data incidents and expose the Group to
Protection Act 2018; data subject access requests. the potential breach
and sets out the necessary of UK GDPR provisions
steps that should be and fines.
taken when processing
personal data.
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters (continued)
---------------------------------- ------------------------------ ----------------------------
Our Group Arrears Management As the second line Our arrears rates
and of defence, the Credit are monitored
Forbearance Policy ensures Quality Assurance through the Group
that we process monitors adherence Credit Committee
address the need for internal to the policy through on a monthly basis
systems a riskbased sampling to ensure senior
and processes to treat approach. management oversight
customers in Due consideration of arrears trends.
financial difficulties has been given to There is credit risk
fairly, including the implications of associated with credit
being proactive with customers customers reverting losses following
who from fixed rates to the ineffective
display characteristics a variable rate in management of customer
of being on the the face of the rising accounts.
cusp of financial difficulty. interest rate market The existing forbearance
environment. and collection toolkit
In line with policy, and mandates have
the Compliance been reviewed to
function conducts ensure that the sufficient
risk-based second level of support
line assurance reviews is available to customers
across the Group to experiencing financial
test regulatory adherence difficulties due
and customer outcomes to increased mortgage
in accordance with payments.
its annual
Compliance Assurance
Plan.
Our Anti-Bribery and Corruption The policy is subject No material issues
Policy outlines our stance to an annual review or breaches have
to conduct process with approval arisen from the Group's
all of our business in provided by the Group adherence to the
an honest and Audit Committee. existing Anti-Bribery
ethical manner. We take Anti-Bribery and Corruption and Corruption Policy
a zero-tolerance training and processes.
approach to bribery and forms part of the We recognise that
corruption and wider Financial Crime there may be
are committed to acting training package that instances where an
professionally, is mandatory for each employee may be exposed
fairly and with integrity employee to complete to the risk of bribery
in all of our on an annual basis. or corruption and,
business dealings and In addition, the requirements as result, provide
relationships. set out in the Anti-Bribery numerous channels
The purpose of the policy and Corruption Policy in which an employee
is to provide are incorporated into can report such an
employees, contractors the Group's Vendor event, including
and third party Management and Outsourcing via the whistleblowing
service providers with Policy. process.
clear guidelines Gifts, hospitality During the tender
to ensure that we conduct and donations process for a new
our activity are closely monitored supplier, all employees
in an ethical and appropriate through a log involved in the process
manner maintained by the must ensure compliance
including complying with Group Financial with the
the laws and Crime function in Anti-Bribery and
regulations of each jurisdiction accordance with our Corruption Policy
in which associated policy and requirements.
we operate. and procedures. This approach also
The policy forms an integral applies to the Conflicts
part of the of Interest Policy.
Group Financial Crime
Risk Management
Framework.
Our Conflicts of Interest The policy is subject No material issues
Policy aims to to an annual review or breaches have
identify, maintain and process with approval arisen from the Group's
operate effective provided by the Group adherence to the
organisational and administrative Executive Committee. existing Conflicts
arrangements to identify Conflicts of interest of Interest Policy
and take training forms part and
all reasonable steps in of the wider Financial processes.
order to avoid Crime training package As a financial services
conflicts where possible. that is mandatory provider, we face
for each employee the risk of actual
to complete on an and potential conflicts
annual basis. of interest periodically.
Conflicts of interest We recognise that
disclosures are there may be
typically made as instances where conflicts
part of the recruitment of interest are unavoidable
process, as part of and that a conflict
the annual attestation may exist even if
process and/or when no unethical or improper
there is a change act or outcome results
to circumstances, from it. Where it
such as a new potential is not possible to
conflict arising. avoid a potential
conflict of interest,
we are
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters (continued)
In addition, conflicts committed to ensuring
of interest that any conflicts
requirements are incorporated of interest that
into arise
the Group's Vendor are managed fairly
Management and Outsourcing and in the best
Policy. interests of our
Group Compliance maintains customers.
the
conflicts of interest
register, which
is reviewed quarterly
by the Group
Conduct Risk Management
Committee and escalated
to the Group Risk
Management Committee,
as required. In addition,
the Group Nomination
and
Governance Committee
annually reviews Executive
and Director conflicts.
Our Fraud Policy outlines The policy is subject As a financial services
our duty to comply with to an annual review provider, we recognise
prevailing legal and regulatory with approval provided that we are inherently
requirements and to have by the Group Audit exposed to the risk
appropriate systems and Committee. of fraud and that
controls in place to mitigate Fraud awareness training losses may occur
the risk of fraud. This forms part of the as a result of doing
includes ensuring that wider Financial Crime business. In
appropriate monitoring training package that order to deter, detect
and escalation procedures is mandatory for each and disrupt those
are in place and are operating employee to complete who would seek to
effectively. on an annual basis. use the Group to
Our strategy for managing External stakeholders, facilitate any form
fraud risk is to adopt customers, clients of financial crime
a zero-tolerance approach and relevant third we have appropriate
towards any form of fraud; parties are made aware systems and controls
however, we accept that of our robust stance in place.
incidents of fraud will towards fraud management Key risk and performance
occur as a result of doing through literature indicators are agreed
business. or similar communication by senior management
The purpose of the policy channels. and reviewed on a
and supporting All potential fraud regular basis. Management
procedures is to provide incidents are information on fraud
a consistent investigated by a related
approach throughout the dedicated Group activity is presented
Group to the Financial Crime team on a regular
prevention, detection that is specifically basis to senior management
and investigation of trained in identifying in order to provide
fraud. The policy forms and reporting fraudulent visibility of our
an integral part behaviour. fraud exposure and
of the Group Financial The Group will seek any associated loss.
Crime Framework. to recover all losses
arising from fraud-related
activities and to
take necessary action,
as appropriate. The
Group Conduct Risk
Management Committee,
Group Operational
Risk Management Committee,
Group Risk Management
Committee and Group
Risk Committee regularly
review and monitor
fraud reporting.
Our Anti-Money Laundering The policy is subject No material issues
and to an annual review or breaches have
Counter Terrorist Financing with approval provided arisen from the Group's
Policy by the Group Audit adherence to the
seeks to explain the responsibility Committee. existing Anti-Money
of Anti-money laundering Laundering and Counter
senior managers, the Money and counter Terrorist Financing
Laundering and Reporting terrorist financing Policy and
Officer (MLRO) and all forms part of the processes.
employees. The policy wider Financial Crime As a financial services
requires that the highest training package that provider, the Group
ethical standards are is mandatory for each recognises that it
met and requires all employees employee to complete is inherently exposed
to act with integrity on an annual basis. to the risk of financial
at all times. We have crime.
no appetite for breaching
legislation or regulation
regarding anti-moneylaundering
or counter terrorist financing.
OneSavings Bank plc
Strategic Report (continued)
For the Year Ended 31 December 2022
Non-Financial Information Statement (continued)
Description of policies/statement Due diligence undertaken Outcomes/Impacts/Risks
Social matters (continued)
--------------------------------- ------------------------------- ---------------------------------
The policy provides a We have documented Key risk and performance
consistent approach to processes and procedures indicators are agreed
the deterrence and detection in place to identify by senior management
of those suspected of the Group's customers and reviewed on a
laundering the proceeds prior to entering regular basis.
of crime or those involved into a relationship. Management information
in the funding of terrorism Systems and controls on financial crime-related
and the relevant disclosure have been adopted activity is presented
to the to identify and report to senior management
necessary authorities. activity deemed to in order to provide
The policy forms be suspicious. visibility of our
an integral part of the All suspicious activity exposure to financial
Group Financial is investigated by crime.
Crime Risk Management a dedicated Group
Framework. Financial Crime team
who are specifically
trained in identifying
and reporting suspicious
behaviour.
Our Group Operational The Group's response The Group continues to invest
Resilience throughout the COVID-19 in improving its infrastructure
Policy documents the approach pandemic was proportionate and is committed to delivering
and and pragmatic, and was a number of enhancements in
expectations of the Group designed to consider both the 2023 and beyond, with the aim
in establishing needs of our employees and of re-engineering how
and enhancing its levels our customers and the technology enables services
of resilience and services we provide. The provided by the Group.
recognises Operational widespread and prolonged Enhancing Operational
Resilience as a period of the pandemic Resilience remains a key
key area of focus for required the Group to adapt consideration when setting the
the Group. its approach reflecting both change management agenda. The
The implementation and the local challenges of our Group continues to maintain
ongoing business and the historical strong relationships with our
compliance with the requirements legacy differences in respect key third parties and validates
of this of governance; however, where that they are able to recover
Policy is achieved through a common Group-wide approach services in line with our
the Group's was required, it was applied. expectations and standards.
existing governance arrangements Whilst COVID-19 brought
and operational resilience into
overseen by the Group sharp focus, we recognize
Operational there are a number of threats
Resilience function. that will not be as slow to
The policy references impact or as prolonged and we
how the Group plan for these against a
complies with all relevant range of severe but plausible
UK regulatory scenarios. In the event of a
requirements (e.g. the disruptive incident, the
Financial Conduct Authority Group is well-placed to
(FCA) and Prudential Regulation respond and deliver our
Authority (PRA)) and aligns Important Business Services.
to industry good practice By assessing the level of
and standards. This includes risk our businesses face when
the March 2021 published exposed to a range of
FCA and PRA policies on possible scenarios,
Operational Resilience. developing the appropriate
These policies require plans and then testing those
all firms to adopt a proactive plans; the Group is well
approach to preventing positioned to respond to
a disruption to its services, disruptive events.
whilst also ensuring that
sufficient
planning and testing is
established in order to
respond effectively to
a disruptive incident.
The Group continues to
make progress
in implementing the requirements
of the
two regulatory policies.
Description of the business
model
A description of the business model is set out on pages 4 to 7
and includes non-financial KPIs relating to broker and customer
satisfaction scores, customer retention, greenhouse gas emissions,
sponsorship and donations and women in senior management roles.
Principal risks and uncertainties
A description of the principal risks and uncertainties is set
out on pages 38 to 50.
This Strategic report was approved by the Board and signed on
its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
30 March 2023
OneSavings Bank plc
Directors' Report
For the Year Ended 31 December 2022
The Directors present their Report, together with the audited
Financial Statements and Auditor's Report, for the year ended 31
December 2022.
Information presented in other sections
Information relating to future developments, principal risks and
uncertainties and engagement with suppliers, customers and others
has been included in the Strategic Report.
Information on financial instruments including financial risk
management objectives and policies including, the policy for
hedging the exposure of the Group to price risk, credit risk,
liquidity risk and cash flow risk can be found in the Risk review
on pages 30 to 60.
Details on how the Company has complied with section 172 can be
found throughout the Strategic and Directors' Reports and on pages
13 and 14.
Results
The results for the year are set out in the Statement of
Comprehensive Income on page 92.
Directors
The Directors who served during the year and to the date of this
report were as follows:
Graham Allatt
Kalvinder Atwal (appointed on 7 February 2023)
Andrew Golding
Noël Harwerth
Sarah Hedger
Rajan Kapoor
Mary McNamara
April Talintyre
Simon Walker
David Weymouth
None of the Directors had any interest either during or at the
end of the year in any material contract or arrangement with the
Company.
Directors' indemnities
The Articles provide, subject to the provisions of UK
legislation, an indemnity for Directors and Officers of the Group
in respect of liabilities they may incur in the discharge of their
duties or in the exercise of their powers, including any
liabilities relating to the defence of any proceedings brought
against them, which relate to anything done or omitted, or alleged
to have been done or omitted, by them as Officers or employees of
the Group. Directors' and Officers' Liability Insurance cover is in
place for all Directors and Officers.
Equal opportunities
The Group is committed to applying its Group Diversity, Equity
and Inclusion Policy at all stages of recruitment and selection.
Short-listing, interviewing and selection will always be conducted
without regard to gender, gender reassignment, sexual orientation,
marital or civil partnership status, colour, race, nationality,
ethnic or national origins, religion or belief, age, pregnancy or
maternity leave or trade union membership. Any candidate with a
disability will not be excluded unless it is clear that the
candidate is unable to perform a duty that is intrinsic to the
role, having taken into account reasonable adjustments. Reasonable
adjustments to the recruitment process will be made to ensure that
no applicant is disadvantaged because of disability. Line Managers
conducting recruitment interviews will ensure that the questions
they ask job applicants are not in any way discriminatory or
unnecessarily intrusive. This commitment also applies to existing
employees, with the necessary adjustments made, where there is a
change in circumstances.
Employee engagement
Employees are kept informed of developments within the business
and in respect of their employment through a variety of means, such
as employee meetings, briefings and the intranet. Employee
involvement is encouraged and views and suggestions are taken into
account when planning new products and projects.
The Sharesave 'save as you earn' Scheme is an all-employee share
option scheme which is open to all UK-based employees. The
Sharesave Scheme allows employees to purchase options by saving a
fixed amount of between GBP10 and GBP500 per month over a period of
three years, at the end of which the options, subject to leaver
provisions, are usually exercisable (options granted prior to 2021
have a lower limit of GBP5 and only three-year schemes will be
offered from 2021 onwards). The Sharesave Scheme has been in
operation since June 2014 and options are granted annually, with
the exercise price set at a 20% discount of the share price on the
date of grant.
The Workforce Advisory Forum (known as OurVoice) is in place to
gather the views of the workforce to enable the Board and Group
Executive Committee to consider a broadly representative range of
stakeholder perspectives to guide strategic decisions for the
future of the Group. OurVoice consists of volunteer representatives
(of which there are 33 in total) from each of the various business
areas and locations, as well as permanent members including a
designated NED, Mary McNamara; a member of the Group Executive
Committee, Jason Elphick; and a representative from HR Management.
Other NEDs and members of the Group Executive Committee are invited
to attend meetings throughout the year and do so on a regular
basis. Sarah Hedger will become a permanent member of OurVoice and
will replace Mary McNamara as the designated NED with
responsibility for OurVoice with effect from 11 May 2023.
Members of the Board are keen to engage with our employees
across all locations and find the experience of visiting our
branches and offices within the UK and India invaluable.
Three OurVoice meetings were held during 2022, with employee
representatives encouraged to engage with employees within their
nominated business areas and across all Group locations in advance
of each meeting in order to identify topics impacting the workforce
and which it is felt should be brought to the attention of the
Board and Group Executive Committee. A number of items were
considered and discussed by OurVoice, including 2021 Bonus and
Salary increase, Best Companies survey results and Mental Health
First Aiders, as well as topics relating to ESG matters such as
community activities, culture, diversity and inclusion and the
governance of pay within the Group. The permanent members of
OurVoice were particularly interested in feedback from the
workforce in respect of employee morale, employee engagement and
hybrid working/working from home.
The Group is committed to diversity and to making sure everyone
in our business feels included. The Diversity and Inclusion Working
Group continued to develop the Group's Diversity and Inclusion
Strategy in line with the Respect Others value throughout 2022. The
Diversity and Inclusion Working Group brings together a broad mix
of employees from across the UK business, as well as representation
from OSB India, to drive our diversity and inclusion agenda to
appreciate differences in age, gender, ethnicity, religion,
disability, sexual orientation, education, socio-economic
background and national origin and ensure that all employees are
treated fairly, with respect and given equal opportunities. Jason
Elphick, our Diversity Champion, along with the Diversity and
Inclusion Working Group, hosted a number of activities throughout
the year including International Women's Day with senior females
from across the business taking part in a Q&A panel, launching
the Group's menopause statement and National Inclusion Week 2022,
which included a range of daily activities under the annual theme
of 'Time to Act: the Power of Now' with a number of personal
stories from our employees. The 2022 annual calendar provided a
number of national days for our employees to celebrate.
Political donations
Neither the Company nor any of its subsidiaries made any
political donations this year.
Going concern statement
The Board undertakes regular rigorous assessments of whether the
Group is a going concern in light of current economic conditions
and all available information about future risks and
uncertainties.
In assessing whether the going concern basis is appropriate,
projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12
months from the date of approval of these financial statements.
These forecasts have been subject to sensitivity tests, including
stress scenarios, which have been compared to the latest economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests.
The assessments include the following:
-- Financial and capital forecasts were prepared under stress
scenarios which were assessed against the latest economic forecasts
provided by the Group's external economic advisors. Reverse stress
tests were also run, to assess what combinations of House Price
Index (HPI), unemployment, default rates and consumer price index
variables would result in the Group utilising its regulatory
capital buffers in full and breaching the Group's minimum
prudential requirements along with analysis and insight from the
Group's Internal Capital Adequacy Assessment Process (ICAAP). The
Directors assessed the likelihood of those reverse stress scenarios
occurring within the next 12 months and concluded that the
likelihood is remote.
-- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the Internal Liquidity Adequacy
Assessment Process (ILAAP) stress scenarios, with the Group
maintaining sufficient liquidity throughout the going concern
assessment period.
-- The Group continues to assess the resilience of its business
operating model and supporting infrastructure in the context of the
emerging economic, business and regulatory environment. The key
areas of focus continues to be on the provision of the Group's
Important Business Services, minimising the impact of any service
disruptions on the Group's customers or the wider financial
services industry. The Group's response to the COVID-19 pandemic
demonstrated the inherent resilience of its critical processes and
infrastructure and its agility in responding to changing
operational demands. The Group recognises the need to continually
invest in the resilience of its services, with specific focus in
2023 on ensuring that the third parties on which it depends have
the appropriate levels of resilience and in further automating
those processes that are sensitive to increases in volume.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
capital requirements as set out by the Prudential Regulation
Authority (PRA).
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in
excess of 12 months and as a result, it is appropriate to prepare
these financial statements on a going concern basis.
The role and structure of the Board
The Board of Directors (the Board) is responsible for the
long-term sustainable success of the Company and provides
leadership to the Group. The Board focuses on generating value for
shareholders by setting strategy, monitoring performance and
ensuring that appropriate systems, controls and resources are in
place to enable the Company to meet its objectives whilst
safeguarding the interests of stakeholders and maintaining
effective corporate governance.
The Board is responsible for setting the tone from the top in
relation to conduct, culture and values, for ensuring continuing
commitment to treating customers fairly, carrying out business
honestly and openly and preventing bribery, corruption, fraud or
the facilitation of tax evasion.
The Board operates in accordance with the Company's Articles of
Association (the Articles) and its own written terms of reference.
The Board has established an Audit and a Risk Committee, which each
have their own terms of reference and are reviewed at least
annually. Details of each Committee's activities during 2022 are
shown below.
The Board retains specific powers in relation to the approval of
the Group's strategic aims, policies and other matters, which must
be approved by it under legislation or the Articles. These powers
are set out in the Board's written terms of reference and Matters
Reserved to the Board which are reviewed at least annually.
The Board met 10 times during the year. The Board has a formal
meeting schedule with ad hoc meetings called as and when
circumstances require. There is an annual calendar of agenda items
to ensure that all matters are given due consideration and are
reviewed at the appropriate point in the regulatory and financial
cycle.
Roles of the Chairman, Chief Executive Officer and Senior
Independent Director
The roles of Chairman and Chief Executive Officer (CEO) are
distinct and held by different people. There is a clear division of
responsibilities, which has been agreed by the Board and is
formalised in a schedule of responsibilities for each.
The Chairman, David Weymouth, leads the Board and is responsible
for its overall effectiveness and for directing the Group. He
ensures that the Board has the right mix of skills, experience and
development so that it can focus on the key issues affecting the
business and for leading the Board and ensuring that it acts
effectively. Andy Golding, as CEO, has overall responsibility for
managing the Group and implementing the strategies and policies
agreed by the Board.
Noël Harwerth is the Senior Independent Director (SID). The
SID's role is to act as a sounding board for the Chairman and to
support him in the delivery of his objectives. This includes
ensuring that the views of all other Directors are communicated to,
and given due consideration by, the Chairman.
Balance and independence
The effectiveness of the Board and its Committees in discharging
their duties is essential for the success of the Company. In order
to operate effectively, the Board and its Committees comprise a
balance of skills, experience, independence and knowledge to
encourage constructive debate and challenge to the decision-making
process.
Audit Committee
The primary role of the Committee is to assist the Board in
overseeing the systems of internal control and external financial
reporting. The Committee's specific responsibilities are set out in
its terms of reference, which are reviewed at least annually. The
Audit Committee is chaired by Rajan Kapoor, the other members are
Graham Allatt, Noël Harwerth, Sarah Hedger and Simon Walker. The
Committee met seven times during 2022; all members attended these
meetings, except Noel Harwerth who attended six times. Graham
Allatt will cease to be a member of the Committee on 11 May 2023.
The Committee considered, on behalf of the Board, whether the 2022
Annual Report and Accounts taken as a whole are fair, balanced and
understandable and, whether the disclosures are appropriate.
Further details on the activities of the Committee are set out in
the OSB Group's annual report and accounts.
Risk Committee
The primary objective of the Committee is to support the Board
in discharging its risk oversight and governance responsibilities.
The Committee's specific responsibilities are set out in its terms
of reference, which are reviewed at least annually. The Committee
is chaired by Graham Allatt, the other members are Noël Harwerth,
Rajan Kapoor and Simon Walker. The Committee met seven times during
2022. All members attended these meetings. Further details on the
activities of the Committee are set out in the OSB Group's annual
report and accounts.
Environment
Environmental matters are considered in the Strategic report
above.
Internal Control
The Board retains ultimate responsibility for setting the
Company's risk appetite and ensuring that there is an effective
Risk Management Framework to maintain levels of risk within the
risk appetite. The Board regularly reviews its procedures for
identifying, evaluating and managing risk, acknowledging that a
sound system of internal control should be designed to manage
rather than eliminate the risk of failure to achieve business
objectives.
Key information in respect of the Group's ERMF and objectives
and processes for mitigating risks, including liquidity risk, are
set out in detail on pages 30 to 37.
OneSavings Bank plc
Directors' Report (continued)
For the Year Ended 31 December 2022
Auditor
Deloitte LLP was appointed as auditor for the year and has
indicated its willingness to continue in office as auditor. A
resolution to re-appoint Deloitte as external auditor will be
presented at the Company's Annual General Meeting.
Each of the persons who is a director at the date of approval of
this Annual Report confirms that:
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report and Directors' Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- the Director has taken all the steps that they ought to have taken as a
director in order to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information.
This confirmation is given and should be interpreted in
accordance with the provisions of s418 of the Companies Act
2006.
This report was approved by the Board on 30 March 2023 and
signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
OneSavings Bank plc
Statement of Directors' Responsibilities in respect of the
Strategic Report, the Directors' Report and the Financial
Statements
For the Year Ended 31 December 2022
The Directors are responsible for preparing the Annual Report
and the Group and parent Company financial statements in accordance
with applicable law and regulations.
Company law requires the Directors to prepare Group and parent
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements in
accordance with UK-adopted International Financial Reporting
Standards (IFRS) and applicable law and have elected to prepare the
parent Company financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent Company and of
their profit or loss for that period. In preparing each of the
Group and parent Company financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted
by the UK;
-- assess the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the parent Company and the Group
enabling them to ensure that the financial statements comply with
the Companies Act 2006. They are responsible for such internal
control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement,
whether due to fraud or error, and have general responsibility for
taking such steps as are reasonably open to them to safeguard the
assets of the Group and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report and Directors' Report
that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
30 March 2023
Independent Auditor's Report to the Members of OneSavings Bank
plc
For the Year Ended 31 December 2022
Report on the audit of the Financial Statements
1. Opinion
In our opinion:
-- the financial statements of OneSavings Bank plc (the parent company) and
its subsidiaries (the Group) give a true and fair view of the state of
the Group's and of the parent company's affairs as at 31 December 2022
and of the Group's profit for the year then ended;
-- the Group financial statements have been properly prepared in accordance
with United Kingdom adopted international accounting standards;
-- the parent company financial statements have been properly prepared in
accordance with United Kingdom adopted international accounting standards
and as applied in accordance with the provisions of the Companies Act
2006; and
-- the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
-- the Consolidated Statement of Comprehensive Income;
-- the consolidated and parent company Statements of Financial Position;
-- the consolidated and parent company Statements of Changes in Equity;
-- the consolidated and parent company Statements of Cash Flow; and
-- the related notes 1 to 53.
The financial reporting framework that has been applied in their
preparation is applicable law and United Kingdom adopted
international accounting standards and, as regards the parent
company financial statements, as applied in accordance with the
provisions of the Companies Act 2006.
1. Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
auditor's responsibilities for the audit of the financial
statements section of our report.
We are independent of the Group and the parent company in
accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the
Financial Reporting Council's (the FRC's) Ethical Standard as
applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these
requirements. The non-audit services provided to the Group and
parent company for the year are disclosed in note 8 to the
financial statements. We confirm that we have not provided any
non-audit services prohibited by the FRC's Ethical Standard to the
Group or the parent company.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
1. Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year
were:
-- loan impairment provisions; and
-- effective interest rate income recognition.
Within this report, key audit matters are identified as
follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
The materiality that we used for the Group financial statements
was GBP21.6m which was determined by reference to profit before tax
and net assets.
Scoping
Our Group audit scope focused primarily on three subsidiaries
subject to a full scope audit. The subsidiaries selected for a full
scope audit were OneSavings Bank plc, Charter Court Financial
Services Limited and Interbay ML Ltd. These three subsidiaries
account for 97% of the Group's interest receivable and similar
income, 94% of the Group's profit before tax, 98% of the Group's
total assets and 99% of the Group's total liabilities. All audit
work was performed by the Group engagement team.
Significant changes in our approach
In the current year, the Group has assessed how increases in
inflation and interest rates may impact customers, and has
recognised separate cost of living and cost of borrowing post model
adjustments (PMAs) in estimating provisions for expected credit
losses on loans to address these emerging risks. The calculation of
these PMAs is inherently judgemental because there is limited
recent data available to estimate how increases in inflation and
interest rates may impact customers. We have considered these PMAs
in our loan impairment provisions key audit matter.
In the prior year, our key audit matter in respect of effective
interest rate (EIR) income recognition included estimating EIRs in
respect of the Group's legacy acquired portfolios. The legacy
acquired portfolios continue to reduce in size and the Group's
income recognition on the acquired portfolios is less sensitive to
changes in customer prepayment behaviour relative to our audit
materiality. This area no longer features in our EIR income
recognition key audit matter.
1. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the
directors' use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our evaluation of the directors' assessment of the Group's and
parent company's ability to continue to adopt the going concern
basis of accounting included:
-- We obtained and read management's going concern assessment, which
included consideration of the Group's operational resilience, in order to
understand, challenge and evidence the key judgements made by management;
-- We obtained an understanding of relevant controls around management's
going concern assessment;
-- We obtained management's income statement, balance sheet and capital and
liquidity forecasts and assessed key assumptions, including climate risk
considerations, for reasonableness and their projected impact on capital
and liquidity ratios, particularly with respect to loan book growth and
potential credit losses;
-- Supported by our in-house prudential risk specialists, we read the most
recent ICAAP and ILAAP submissions, assessed management's capital and
liquidity projections, assessed the results of management's capital
reverse stress testing, evaluated key assumptions and methods used in the
capital reverse stress testing model and tested the mechanical accuracy
of the capital reverse stress testing model;
-- We read correspondence with regulators to understand the capital and
liquidity requirements imposed by the Group's regulators, and evidence
any changes to those requirements;
-- We met with the Group's lead regulator, the Prudential Regulation
Authority, and discussed their views on existing and emerging risks to
the Group and considered whether these were reflected appropriately in
management's forecasts and stress tests;
-- We assessed the historical accuracy of forecasts prepared by management;
-- We assessed the impact of the ongoing economic uncertainty, including how
further rises in living and borrowing costs may impact potential credit
losses; and
-- We evaluated the Group's disclosures on going concern against the
requirements of IFRS and in view of the FRC guidance.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group's and parent company's ability to continue as a going concern
for a period of at least twelve months from when the financial
statements are authorised for issue.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
1. Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team.
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
5.1. Loan impairment provisions
Refer to the judgements in applying accounting policies and
critical accounting estimates on page 115 and Note 22 on page
137.
------------------------------------------------------------------------------
Key audit matter IFRS 9 requires loan impairment provisions to be
description recognised on an expected credit loss (ECL) basis.
The estimation of ECL provisions in the Group's
loan portfolios is inherently uncertain and requires
significant judgements and estimates. We therefore
consider this to be a key audit matter due to the
risk of fraud or error in respect of the Group's
ECL provision. ECL provisions as at 31 December
2022 were GBP130.0m (2021: GBP101.5m), which represented
0.54% (2021: 0.48%) of loans and advances to customers.
ECLs are calculated both for individually significant
loans and collectively on a portfolio basis which
require the use of statistical models incorporating
loss data and assumptions on the recoverability
of customers' outstanding balances.
As set out on page 51 the Group has implemented
various model and staging enhancements during the
year as well as updating the IFRS 9 models as part
of the Internal Ratings Based (IRB) programme.
The uncertain economic environment continues to
increase the complexity in estimating ECLs, particularly
with regards to determining appropriate forward
looking macroeconomic scenarios and identifying
customers who have experienced significant increases
in credit risk. Additionally, rising living and
borrowing costs observed over the past year have
increased the degree of subjectivity in estimating
an appropriate probability of default (PD) for customers.
We identified four specific areas in relation to
ECL that require significant judgement or relate
to assumptions to which the overall ECL provision
is particularly sensitive.
-- Significant increase in credit risk (SICR): The
assessment of whether there has been a significant
increase in credit risk between the date of
origination of the exposure and 31 December 2022.
There is a risk that the Group's staging criteria
does not capture SICR or are applied incorrectly.
-- Macroeconomic scenarios: As set out on page 53, the
Group sources economic forecasts from a third-party
economics expert and then applies judgement to
determine which scenarios to select and the
probability weightings to assign. The Group
considered four probability weighted scenarios,
including base, upside, downside and severe downside
scenarios. The key economic variables used within the
macroeconomics model were determined to be the house
price index (HPI) and unemployment. The estimation of
these variables involves a high degree of
subjectivity and estimation uncertainty.
-- Post model adjustments (PMAs): The Group has assessed
how increases in inflation and interest rates may
impact customers, and has recognised separate cost of
living and cost of borrowing PMAs to reflect these
emerging risks. The calculation of these PMAs is
inherently judgemental because there is limited
recent data available to estimate how increases in
inflation and interest rates may impact customers.
-- Propensity to go into possession following default
(PPD) and forced sale discount (FSD) assumptions: PPD
measures the likelihood that a defaulted loan will
progress into repossession. FSD measures the
difference in sale proceeds between a sale under
normal conditions and sale at auction. The loss given
default (LGD) by loan assumed in the ECL provision
calculation is highly sensitive to the PPD and FSD
assumptions.
How the scope We obtained an understanding of the relevant financial controls
of our audit over the ECL provision with particular focus on controls over
responded significant assumptions and judgements used in the ECL
to the key determination.
audit matter To challenge the Group's SICR criteria, we:
-- Evaluated the Group's SICR policy and assessed
whether it complies with IFRS 9;
-- Assessed the quantitative and qualitative thresholds
used in the SICR assessment by reference to standard
validation metrics including the proportion of
transfers to stage two driven solely by being 30 days
past due, the volatility of loans in stage two and
the proportion of loans that spend little or no time
in stage two before moving to stage three;
-- Tested the completeness and accuracy of the data used
in applying the quantitative and qualitative criteria
in the SICR assessment to assess whether loans were
assigned to the correct stage;
-- Supported by our credit risk specialists, performed a
full review of the computer codes used to perform the
SICR assessment;
-- As part of our testing of the application of the SICR
criteria within the ECL model and with support from
our credit risk specialists, we independently
reperformed the Group's staging assessment across all
three stages using our in-house analytics tool; and
-- Performed an independent assessment for a sample of
loan accounts which exited forbearance, to determine
whether they had been appropriately allocated to the
correct stage.
To challenge the Group's macroeconomic scenarios and the
probability
weightings applied we:
-- Agreed the macroeconomics scenarios used in the ECL
model to reports prepared by the third-party
economics expert;
-- Assessed the competence, capability and objectivity
of the third-party economics expert, which included
making specific inquiries to understand their
approach and modelling assumptions to derive the
scenarios;
-- Supported by our economic specialists, assessed and
challenged the scenarios considered and the
probability weightings assigned to them in light of
the economic environment as at 31 December 2022;
-- With the involvement of our economic specialists
challenged the Group's economic outlook by reference
to other available economic outlook data;
-- Supported by our credit risk specialists, assessed
the model methodology and performed a full review of
the computer code used in the macroeconomics model
which applies the scenarios to the relevant ECL
components;
-- Compared the appropriateness of selected
macroeconomic variables (HPI and unemployment) and
the four probability weightings used in the
macroeconomics model to those used by peer lenders;
-- Supported by our credit risk specialists, assessed
the performance of the macroeconomic model to confirm
whether the economic variables previously selected
were still appropriate through considering the
modelled macroeconomic results relative to those
observed in historical recessions; and
-- For a sample of loans, we independently recalculated
the ECL using the macroeconomic variables to check
they were being applied appropriately.
To challenge the Group's cost of living and cost of borrowing
PMAs we:
-- Supported by our credit risk specialists, we assessed
whether the risks were already captured within the
existing macroeconomics models;
-- Evaluated the methodology , including key assumptions
and reviewed the computer codes used to determine the
PMAs; and
-- Tested the completeness, accuracy and relevance of
the data used.
To challenge the Group's PPD and FSD assumptions we:
-- Supported by our credit risk specialists, performed a
full review of the computer codes in the LGD models;
-- Recalculated the PPD rates observed on defaulted
loans and compared them to the rates used by the
Group in the ECL models;
-- Recalculated the FSD observed on recent property
sales on defaulted loans and compared them to the
rates used by the Group in the ECL models;
-- Considered the findings raised in the Group's model
monitoring and validation exercise and assessed the
impact on the year-end provision; and
-- Performed a stand back test to consider potential
contradictory evidence and assessed the
appropriateness of PPD and FSD assumptions by
comparison to industry peers.
------------- ---------------------------------------------------------------
Key observations We determined that the methodology used, and
the SICR criteria and PPD and FSD assumptions
in determining the ECL provision as at 31 December
2022 are reasonable.
We observed that the macroeconomic scenarios
selected by the directors and the probability
weightings applied generate an appropriate portfolio
loss distribution, and we determined the Group's
cost of living and cost of borrowing PMAs are
reasonable.
We therefore determined that loan impairment
provisions are appropriately stated.
---------------- -----------------------------------------------------
5.2. Effective interest rate income recognition
Refer to the judgements in applying accounting policies and critical
accounting estimates on page 117, the accounting policy on page 100
and Notes 3 and 4 on pages 118 and 119.
----------------------------------------------------------------------
Key audit matter In accordance with the requirements of IFRS
description 9, directly attributable fees, discounts,
incentives and commissions on a constant
yield basis (effective interest rate, EIR)
are required to be spread over the expected
life of the loan assets. EIR is complex and
the Group's approach to determining the EIR
involves the use of models and significant
estimation in determining the behavioural
life of loan assets. Given the complexity
and judgement involved in accounting for
EIR and given that revenue recognition is
an area susceptible to fraud, there is an
opportunity for management to manipulate
the amount of interest income reported in
the financial statements.
The Group's net interest income for the year
ended 31 December 2022 was GBP709.9m (2021:
GBP587.6m).
EIR adjustments arise from revisions to estimated
cash receipts or payments for loan assets
that occur for reasons other than a movement
in market interest rates or credit losses.
They result in an adjustment to the carrying
amount of the loan asset, with the adjustment
recognised in the income statement in interest
receivable and similar income. As the EIR
adjustments reflect changes to the timing
and volume of forecast customer redemptions,
they are inherently judgemental.
The level of judgement exercised is increased
where there is limited availability of historical
repayment information. For two of the loan
portfolios, Kent Reliance and Precise, the
EIR adjustments are sensitive to changes
in the behavioural life curves. As set out
on page 117, changes in the modelled behavioural
life of these portfolios during the year
resulted in an interest income loss of GBP31.6m
(2021: GBP11.0m gain). The EIR adjustments
have increased as a result of the rising
interest rate environment. The current economic
environment brings additional uncertainty
with regards to forecasting expected behavioural
lives and prepayment rates. We therefore
considered there to be an increased level
of risk in respect of this key audit matter
in the current year.
How the scope of We obtained an understanding of the relevant
our audit responded controls over EIR, focusing on the calculation
to the key audit and review of EIR adjustments and the determination
matter of prepayment curves.
For the two portfolios where the EIR adjustments
were most significant and sensitive to changes
in behavioural life, Kent Reliance and Precise,
with the involvement of our in-house analytics
and modelling specialists we run the loan data
for all products through our own independent
EIR model, using the behavioural life curves
derived by the Group. We compared our calculation
of the EIR adjustment required to the amount
recorded by the Group.
A number of assumptions are made to adjust actual
behavioural data over recent years to reflect
the Group's best estimate of expected future
behaviour. For material assumptions, we independently
challenged the reasonableness of the assumptions
considering the context of the rising rate environment
that has been experienced over the last year.
For the same portfolios referenced above, with
the involvement of our in-house analytics and
modelling specialists we independently derived
a behavioural life curve using the Group's actual
loan data over recent years and incorporating
those assumptions that we considered reasonable.
We used these curves in our own independent
EIR model to calculate the EIR adjustments.
We compared this output to the amounts recorded
by the Group.
We also tested the completeness and accuracy
of a sample of inputs into the EIR model for
originated loans.
-------------------- -------------------------------------------------------
Key observations We determined that the EIR models and assumptions
used are appropriate and that net interest income
for the period is appropriately stated.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the
financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or
influenced. We use materiality both in planning the scope of our
audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality
for the financial statements as a whole as follows:
Group financial statements Parent company financial statements
----------- ----------------------------------------------------------- ------------------------------------------------------
Materiality GBP21.6m (2021: GBP20.1m) GBP17.9m (2021: GBP16.7m)
Basis for We determined materiality for the Group to be approximately We determined materiality for the parent company by
determining 1% of net assets of GBP2,201.8m (GBP21.6m) which equates reference to 1% of net assets. This is consistent
materiality to 4% of statutory profit before tax of GBP532.8m. with prior year.
The basis of materiality is consistent with prior
year.
Rationale Consistent with the prior year, we considered both The parent company is principally a holding company
for the net assets and a profit before tax based measure as and we have therefore determined net assets to be
benchmark benchmarks for determining materiality. the most relevant benchmark to determine materiality.
applied We determined net assets to be the most relevant and
stable benchmark to determine materiality.
6.2. Performance materiality
We set performance materiality at a level lower than materiality
to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial
statements as a whole.
Group financial statements Parent company financial
statements
------------- ------------------------------ -------------------------------
Performance 70% (2021: 60%) of Group 70% (2021: 60%) of parent
materiality materiality company materiality
Basis and Group performance materiality was set at 70% of Group
rationale for materiality (2021: 60%). In determining performance
determining materiality, we considered a number of factors, including:
performance our understanding of the control environment; our
materiality understanding of the business; and the low number
of uncorrected misstatements identified in the prior
year.
In the prior year we maintained a reduced level of
performance materiality to reflect the continued uncertainty
arising as a result of the Covid-19 pandemic. Given
that the impact of Covid-19 has now reduced, we have
increased performance materiality for the current
year.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the
Committee all audit differences in excess of GBP1.1m (2021:
GBP1.0m), as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds. We also report to
the Audit Committee on disclosure matters that we identified when
assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the
Group and its environment, including Group-wide controls and
assessing the risks of material misstatement at the Group
level.
Our Group audit scope focused primarily on three subsidiaries:
the two main banking entities OneSavings Bank plc and Charter Court
Financial Services Limited, as well as Interbay ML Ltd, another
significant lending subsidiary. These three subsidiaries were
significant components and subject to a full scope audit (2021:
three significant components subject to a full scope audit). They
represent 97% (2021: 98%) of the Group's interest receivable and
similar income, 94% (2021: 96%) of profit before tax, 98% (2021:
97%) of total assets and 99% (2021: 99%) of total liabilities. The
subsidiaries were selected to provide an appropriate basis of
undertaking audit work to address the risks of material
misstatement including those identified as key audit matters above.
Our audits of each of the subsidiaries were performed using lower
levels of materiality based on their size relative to the Group.
The materiality for each subsidiary audit ranged from GBP6.6m to
GBP17.9m (2021: GBP5.5m to GBP16.7m).
We tested the Group's consolidation process and carried out
analytical procedures to confirm that there were no significant
risks of material misstatement in the aggregated financial
information of the remaining subsidiaries not subject to a full
scope audit or specified audit procedures.
7.2. Our consideration of the control environment
We identified the key IT systems relevant to the audit to be
those used in financial reporting, lending and savings areas. For
these controls with the involvement of our IT specialists we
performed testing over the general IT controls, including testing
of user access and change management systems.
Where deficiencies were identified in the control environment,
including deficiencies in IT controls, our risk assessment
procedures included an assessment of those deficiencies to
determine the impact on our audit plan. Where we were unable to
identify or test mitigating controls, we adopted a non-controls
reliance approach and performed additional substantive procedures.
As a result of deficiencies identified in internal IT access
controls across the Group, we amended our planned audit procedures
to adopt a non-controls reliance approach over lending and related
interest income, and over deposit balances and related interest
expense.
7.3. Our consideration of climate-related risks
In planning our audit, we have considered the impact of climate
change on the Group's operations and impact on its financial
statements. The Group has set out its commitments, aligned with the
goals of the Paris Climate Accord, to be a net zero bank by 2050.
Further information is provided in the Group's Environment, Social
and Governance report on page 7. The Group sets out its assessment
of the potential impact of climate change on ECL on page 51 of the
Risk Management section of the Annual Report and the potential
impact on the financial statements in note 22 on page 137.
In conjunction with our climate risk specialists, we have held
discussions with the Group to understand:
-- the process for identifying affected operations, including
the governance and controls over this process, and the subsequent
effect on the financial reporting for the Group; and
-- the long-term strategy to respond to climate change risks as
they evolve.
Our audit work has involved:
-- challenging the completeness of the physical and transition
risks identified and considered in the Group's climate risk
assessment and the conclusion that there is no material impact of
climate change risk on current year financial reporting;
-- with the involvement of our credit risk specialists,
assessing management's approach to the incorporation and
quantification of climate change risks within a PMA in the ECL
provision, which included:
-- assessing management's selected climate pathway used in order to quantify
the potential impact of physical risks on the Group's loan book and in
particular how the underlying property may be impacted as a result;
-- assessing how different lending segments may be impacted by transition
risks and in particular how the buy-to-let portfolio may be impacted by
more stringent EPC criteria; and
-- assessing the relevance of the data used in the assessment.
-- assessing disclosures in the Annual Report, and challenging
the consistency between the financial statements and the remainder
of the Annual Report.
8. Other information
The other information comprises the information included in the
Annual Report, other than the financial statements and our
auditor's report thereon. The directors are responsible for the
other information contained within the Annual Report.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the course of the audit, or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent
material misstatements, we are required to determine whether this
gives rise to a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities
statement, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's and the parent company's
ability to continue as a going concern, disclosing as applicable,
matters related to going concern and using the going concern basis
of accounting unless the directors either intend to liquidate the
Group or the parent company or to cease operations, or have no
realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the FRC's website at:
https://www.globenewswire.com/Tracker?data=OdWQtoEMZlq1a1ccMNDzIqtvMHiM_zDoRxRnhIWM-ud74uc_mT4jNmKVEmmPrZ9okzlQR3PjlHRJxuhqnG-imuksesuuhRWnHi5HI6M0rBCG0tkuKir5FLNwq481hrjAGTGMDjazhgD57jav_MjfWA==
www.frc.org.uk/auditorsresponsibilities. This description forms
part of our auditor's report.
11. Extent to which the audit was considered capable of
detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
1.
1. 1. Identifying and assessing potential risks
related to irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance with
laws and regulations, we considered the following:
-- the nature of the industry and sector, control environment and business
performance including the design of the Group's remuneration policies,
key drivers for directors' remuneration, bonus levels and performance
targets;
-- the Group's own assessment of the risks that irregularities may occur
either as a result of fraud or error that was approved by the Board;
-- results of our enquiries of management, internal audit and the Audit
Committee about their own identification and assessment of the risks of
irregularities;
-- any matters we identified having obtained and reviewed the Group's
documentation of their policies and procedures relating to:
-- identifying, evaluating and complying with laws and regulations and
whether they were aware of any instances of non-compliance;
-- detecting and responding to the risks of fraud and whether they have
knowledge of any actual, suspected or alleged fraud;
-- the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations; and
-- the matters discussed among the audit engagement team and relevant
internal specialists, including tax, valuations, real estate, IT, climate
risk, prudential risk, economics, credit risk and analytics and modelling
specialists regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
loan impairment provisions and effective interest rate income
recognition. In common with all audits under ISAs (UK), we are also
required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory
frameworks that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the financial
statements. The key laws and regulations we considered in this
context included the UK Companies Act, Listing Rules and tax
legislation.
In addition, we considered provisions of other laws and
regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the
Group's ability to operate or to avoid a material penalty. These
included the Group's prudential regulatory requirements and
capital, liquidity and conduct requirements.
1.
1. 2. Audit response to risks identified
As a result of performing the above, we identified loan
impairment provisions and effective interest rate income
recognition as key audit matters related to the potential risk of
fraud. The key audit matters section of our report explains the
matters in more detail and also describes the specific procedures
we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks
identified included the following:
-- reviewing the financial statement disclosures and testing to supporting
documentation to assess compliance with provisions of relevant laws and
regulations described as having a direct effect on the financial
statements;
-- enquiring of management, the Audit Committee and in-house and external
legal counsel concerning actual and potential litigation and claims;
-- performing analytical procedures to identify any unusual or unexpected
relationships that may indicate risks of material misstatement due to
fraud;
-- reading minutes of meetings of those charged with governance, reviewing
internal audit reports and reviewing correspondence with the Prudential
Regulation Authority, the Financial Conduct Authority and HMRC; and
-- in addressing the risk of fraud through management override of controls,
testing the appropriateness of journal entries and other adjustments;
assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of
any significant transactions that are unusual or outside the normal
course of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members, including
internal specialists, and remained alert to any indications of
fraud or non-compliance with laws and regulations throughout the
audit.
Independent Auditor's Report to the Members of OneSavings Bank
plc (continued)
For the Year Ended 31 December 2022
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken in the course of
the audit:
-- the information given in the strategic report and the directors' report
for the financial year for which the financial statements are prepared is
consistent with the financial statements; and
-- the strategic report and the directors' report have been prepared in
accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and
the parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the
strategic report or the directors' report.
13. Matters on which we are required to report by exception
1.
1. 1. Adequacy of explanations received and accounting
records
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
-- we have not received all the information and explanations we require for
our audit; or
-- adequate accounting records have not been kept by the parent company, or
returns adequate for our audit have not been received from branches not
visited by us; or
-- the parent company financial statements are not in agreement with the
accounting records and returns.
We have nothing to report in respect of these matters.
1.
1. 2. Directors' remuneration
Under the Companies Act 2006 we are also required to report if
in our opinion certain disclosures of directors' remuneration have
not been made.
We have nothing to report in respect of this matter.
14. Other matters which we are required to address
1.
1. 1. Auditor tenure
Following the recommendation of the Audit Committee, we were
appointed by the shareholders of the Group on 9 May 2019 to audit
the Group Financial Statements for the year ending 31 December 2019
and subsequent financial periods. The period of total uninterrupted
engagement including previous renewals and reappointments of the
firm is four years, covering the years ending 31 December 2019 to
31 December 2022.
1.
1. 2. Consistency of the audit report with the
additional report to the audit committee
Our audit opinion is consistent with the additional report to
the Audit Committee we are required to provide in accordance with
ISAs (UK).
15. Use of our report
This report is made solely to the company's members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company's members as a body,
for our audit work, for this report, or for the opinions we have
formed.
As required by the Financial Conduct Authority (FCA) Disclosure
Guidance and Transparency Rule (DTR) 4.1.14R, these financial
statements will form part of the European Single Electronic Format
(ESEF) prepared Annual Financial Report filed on the National
Storage Mechanism of the UK FCA in accordance with the ESEF
Regulatory Technical Standard ('ESEF RTS'). This auditor's report
provides no assurance over whether the annual financial report has
been prepared using the single electronic format specified in the
ESEF RTS. We have been engaged to provide assurance on whether the
annual financial report has been prepared using the single
electronic format specified in the ESEF RTS and will publicly
report separately to the members on this.
Neel Reed, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Birmingham, United Kingdom
30 March 2023
OneSavings Bank plc
Statement of Comprehensive Income
For the Year Ended 31 December 2022
Group Group
2022 2021
Note GBPm GBPm
Interest receivable and similar income 3 1,069.3 746.8
Interest payable and similar charges 4 (359.4) (159.2)
Net interest income 709.9 587.6
Fair value gains on financial instruments 5 58.9 29.5
Gain on sale of financial instruments 6 - 4.0
Other operating income 7 6.6 7.9
Total income 775.4 629.0
Administrative expenses 8 (206.5) (166.5)
Provisions 37 1.6 (0.2)
Impairment of financial assets 23 (29.8) 4.4
Impairment of intangible assets 9 - 3.1
Integration costs 12 (7.9) (5.0)
Exceptional items 13 - (0.2)
Profit before taxation 532.8 464.6
Taxation 14 (121.5) (119.6)
Profit for the year 411.3 345.0
Other comprehensive expense
Items which may be reclassified to profit
or loss:
Fair value changes on financial instruments
measured at fair value through other comprehensive
income (FVOCI):
Arising in the year 18 0.3 1.1
Amounts reclassified to profit or loss
for investment
securities at FVOCI (0.7) (2.0)
Tax on items in other comprehensive expense 0.1 0.5
Revaluation of foreign operations (0.2) (0.1)
Other comprehensive expense (0.5) (0.5)
---------------------------------------------------- ------- -------
Total comprehensive income for the year 410.8 344.5
The above results are derived wholly from continuing
operations.
The notes on pages 97 to 219 form part of these accounts.
The financial statements on pages 92 to 219 were approved by the
Board of Directors on 30 March 2023.
OneSavings Bank plc
Statement of Financial Position
As at 31 December 2022
Group Group Company Company
2022 2021 2022 2021
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.5 0.4 0.5
Loans and advances to credit
institutions 17 3,365.7 2,843.6 1,506.1 1,405.0
Investment securities 18 412.9 491.4 211.4 16.2
Loans and advances to customers 19 23,612.7 21,080.3 10,531.9 9,476.4
Fair value adjustments on hedged
assets 25 (789.0) (138.9) (200.8) 1.3
Derivative assets 24 888.1 185.7 234.0 50.5
Other assets 26 15.0 10.2 13.1 8.3
Current taxation asset 1.7 - 2.6 -
Deferred taxation asset 27 6.3 5.6 4.1 4.9
Deemed loan assets 20 - - 31.2 -
Property, plant and equipment 28 40.9 35.1 20.9 17.3
Intangible assets 29 12.0 18.4 6.5 7.7
Investments in subsidiaries and
intercompany loans 30 0.8 0.6 3,242.5 3,096.4
Total assets 27,567.5 24,532.5 15,603.9 14,084.5
--------------------------------- ---- -------- -------- -------- --------
Liabilities
Amounts owed to credit
institutions 31 5,092.9 4,319.6 2,568.5 2,420.7
Amounts owed to retail depositors 32 19,755.8 17,526.4 11,132.2 9,739.4
Fair value adjustments on hedged
liabilities 25 (55.1) (19.7) (33.7) (8.8)
Amounts owed to other customers 33 113.1 92.6 0.5 5.7
Debt securities in issue 34 265.9 460.3 - -
Derivative liabilities 24 106.6 19.7 63.8 8.7
Lease liabilities 35 9.9 10.7 3.6 3.9
Other liabilities 36 38.7 29.5 23.9 17.3
Provisions 37 0.4 2.0 0.1 1.9
Current taxation liability - 1.3 - 2.7
Deferred taxation liability 38 22.3 39.8 - -
Deemed loan liabilities 20 - - - 142.8
Intercompany loans 30 - - 33.3 33.2
Subordinated liabilities 39 - 10.3 - 10.3
Perpetual subordinated bonds 40 15.2 15.2 15.2 15.2
25,365.7 22,507.7 13,807.4 12,393.0
Equity
Share capital 42 4.5 4.5 4.5 4.5
Retained earnings 2,035.0 1,857.4 1,690.9 1,587.6
Other reserves 43 162.3 162.9 101.1 99.4
2,201.8 2,024.8 1,796.5 1,691.5
Total equity and liabilities 27,567.5 24,532.5 15,603.9 14,084.5
--------------------------------- ---- -------- -------- -------- --------
The profit after tax for the year ended 31 December 2022 of
OneSavings Bank plc as a company was GBP335.9m (2021: GBP255.1m).
As permitted by section 408 of the Companies Act 2006, no separate
Statement of Comprehensive Income is presented in respect of the
Company.
The notes on pages 97 to 219 form part of these accounts. The
financial statements on pages 92 to 219 were approved by the Board
of Directors on 30 March 2023 and signed on its behalf by:
Andy Golding April Talintyre
Chief Executive Officer Chief Financial Officer
Company number: 07312896
OneSavings Bank plc
Statement of Changes in Equity
For the Year Ended 31 December 2022
Foreign Share-based Additional
Share Capital exchange FVOCI payment Retained Tier 1 (AT1)
capital contribution reserve reserve reserve earnings securities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 4.5 - (1.0) 1.0 7.8 1,604.6 60.0 1,676.9
Profit for the year - - - - - 345.0 - 345.0
Other comprehensive expense - - (0.1) (0.9) - - - (1.0)
Tax on items in other comprehensive
expense - - - 0.5 - - - 0.5
Total comprehensive (expense)/income - - (0.1) (0.4) - 345.0 - 344.5
Coupon paid on AT1 securities - - - - - (4.7) - (4.7)
Dividends paid - - - - - (86.7) - (86.7)
Share-based payments - 1.7 - - 2.3 2.7 - 6.7
Redemption of AT1 securities - - - - - - (60.0) (60.0)
Transactions costs on redemption
of AT1 securities - - - - - (3.5) - (3.5)
Issuance of AT1 securities - - - - - - 150.0 150.0
Tax recognised in equity - - - - 1.6 - - 1.6
At 31 December 2021 4.5 1.7 (1.1) 0.6 11.7 1,857.4 150.0 2,024.8
Profit for the year - - - - - 411.3 - 411.3
Other comprehensive expense - - (0.2) (0.4) - - - (0.6)
Tax on items in other comprehensive
expense - - - 0.1 - - - 0.1
Total comprehensive (expense)/income - - (0.2) (0.3) - 411.3 - 410.8
Coupon paid on AT1 securities - - - - - (9.0) - (9.0)
Dividends paid - - - - - (233.1) - (233.1)
Share-based payments - (1.7) - - 1.6 8.4 - 8.3
At 31 December 2022 4.5 - (1.3) 0.3 13.3 2,035.0 150.0 2,201.8
------------------------------------ -------- ------------- --------- -------- ----------- --------- ------------- -------
Share capital is disclosed in note 42 and the reserves are
further disclosed in note 43.
OneSavings Bank plc
Statement of Changes in Equity (continued)
For the Year Ended 31 December 2022
Share FVOCI Share-based Retained AT1
capital reserve payment reserve earnings securities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 4.5 (0.1) 6.7 1,423.7 60.0 1,494.8
Profit for the year - - - 255.1 - 255.1
Other comprehensive income - 0.1 - - - 0.1
Total comprehensive income - 0.1 - 255.1 - 255.2
Coupon paid on AT1 securities - - - (4.7) - (4.7)
Dividends paid - - - (86.7) - (86.7)
Share-based payments - - 1.1 3.7 - 4.8
Redemption of AT1 securities - - - - (60.0) (60.0)
Transactions costs on redemption
of AT1 securities - - - (3.5) - (3.5)
Issuance of AT1 securities - - - - 90.0 90.0
Tax recognised in equity - - 1.6 - - 1.6
At 31 December 2021 4.5 - 9.4 1,587.6 90.0 1,691.5
Profit for the year - - - 335.9 - 335.9
Other comprehensive income - 0.3 - - - 0.3
Tax on items in other comprehensive
income - (0.1) - - - (0.1)
Total comprehensive income - 0.2 - 335.9 - 336.1
Coupon paid on AT1 securities - - - (5.4) - (5.4)
Dividends paid - - - (233.1) - (233.1)
Share-based payments - - 1.5 5.9 - 7.4
At 31 December 2022 4.5 0.2 10.9 1,690.9 90.0 1,796.5
------------------------------------ ------- ------- ---------------- --------- ---------- -------
Share capital is disclosed in note 42 and the reserves are
further disclosed in note 43.
OneSavings Bank plc
Statement of Cash Flows
For the Year Ended 31 December 2022
Group Group Company Company
2022 2021 2022 2021
Note GBPm GBPm GBPm GBPm
(Restated)(1) (Restated)(1)
Cash flows from operating activities
Profit before taxation 532.8 464.6 387.3 314.5
Adjustments for non-cash items 49 62.4 (10.0) 68.6 12.2
Changes in operating assets and
liabilities(1) 49 (24.5) (684.4) 276.6 (775.3)
Cash generated/(used) in operating
activities 570.7 (229.8) 732.5 (448.6)
Net tax paid (142.5) (117.3) (54.0) (53.2)
Net cash generated/(used) in
operating activities(1) 428.2 (347.1) 678.5 (501.8)
Cash flows from investing activities
Maturity and sales of investment
securities 663.7 547.7 451.0 215.4
Purchases of investment securities (596.5) (468.2) (556.4) (216.6)
Interest received on investment
securities 7.7 1.9 3.0 0.2
Investments in subsidiaries - - (3.2) -
Sales of financial instruments 6 - 4.0 - 0.3
Proceeds from sale of property,
plant and equipment 28 - 2.0 - 2.0
Purchases of property, plant
and equipment and intangible
assets 28,29 (11.7) (6.8) (7.2) (5.0)
Cash generated/(used) from investing
activities 63.2 80.6 (112.8) (3.7)
Cash flows from financing activities
Financing received(1) 41 429.5 4,943.2 120.0 3,121.5
Financing repaid 41 (324.2) (4,295.4) (304.1) (2,589.1)
Interest paid on financing 41 (45.3) (8.4) (25.5) (6.6)
Coupon paid on AT1 securities (9.0) (4.7) (5.4) (4.7)
Dividends paid 15 (233.1) (86.7) (233.1) (86.7)
Redemption of AT1 securities - (63.5) - (63.5)
Issuance of AT1 securities - 150.0 - 90.0
Cash payments on lease liabilities 35 (1.9) (1.9) (0.8) (0.7)
Cash (used)/generated from financing
activities (184.0) 632.6 (448.9) 460.2
Net increase/(decrease) in cash
and cash
equivalents 307.4 366.1 116.8 (45.3)
Cash and cash equivalents at
the beginning of the year 16 2,736.7 2,370.6 1,332.3 1,377.6
Cash and cash equivalents at
the end of the year 16 3,044.1 2,736.7 1,449.1 1,332.3
Movement in cash and cash equivalents 307.4 366.1 116.8 (45.3)
------- ------------- ------- -------------
1. 2021 figures restated see note 1 b) for further details.
OneSavings Bank plc
Notes to the Financial Statements
For the Year Ended 31 December 2022
1. Accounting policies
The principal accounting policies applied in the preparation of
the financial statements for the Group and the Company are set out
below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs) as adopted by
the United Kingdom (UK) and interpretations issued by the IFRS
Interpretations Committee (IFRS IC).
The financial statements have been prepared on a historical cost
basis, as modified by the revaluation of investment securities held
at FVOCI and derivative contracts and other financial assets held
at fair value through profit or loss (FVTPL) (see note 1 p)
vi.).
The financial statements are presented in Pounds Sterling. All
amounts in the financial statements have been rounded to the
nearest GBP0.1m (GBPm). Foreign operations are included in
accordance with the policies set out in this note.
b) Restatement
In the prior year, cash collateral and margin received on
interest rate swaps of GBP115.4m for the Group and GBP42.1m for the
Company was included in financing cash flows in the Statement of
Cash Flows. As the cash flows arise on hedging activities related
to items classified as operating assets and liabilities within the
Statement of Cash Flows, the cash flows should be included within
operating cash flows. In the current year, cash collateral and
margin received on interest rate swaps has been classified as an
operating cash flow and the 2021 Statement of Cash Flows restated
to reclassify a cash inflow of GBP115.4m for the Group and GBP42.1m
for the Company from financing activities to operating
activities.
c) Going concern
The Board undertakes regular rigorous assessments of whether the
Group is a going concern in light of current economic conditions
and all available information about future risks and
uncertainties.
In assessing whether the going concern basis is appropriate,
projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12
months from the date of approval of these financial statements.
These forecasts have been subject to sensitivity tests, including
stress scenarios, which have been compared to the latest economic
scenarios provided by the Group's external economic advisors, as
well as reverse stress tests.
The assessments include the following:
-- Financial and capital forecasts were prepared under stress
scenarios which were assessed against the latest economic forecasts
provided by the Group's external economic advisors. Reverse stress
tests were also run, to assess what combinations of House Price
Index (HPI), unemployment, default rates and consumer price index
variables would result in the Group utilising its regulatory
capital buffers in full and breaching the Group's minimum
prudential requirements along with analysis and insight from the
Group's Internal Capital Adequacy Assessment Process (ICAAP). The
Directors assessed the likelihood of those reverse stress scenarios
occurring within the next 12 months and concluded that the
likelihood is remote.
-- The latest liquidity and contingent liquidity positions and
forecasts were assessed against the Internal Liquidity Adequacy
Assessment Process (ILAAP) stress scenarios with the Group
maintaining sufficient liquidity throughout the going concern
assessment period.
OneSavings Bank plc
Notes to the Financial Statements (continued)
For the Year Ended 31 December 2022
1. Accounting policies (continued)
-- The Group continues to assess the resilience of its business
operating model and supporting infrastructure in the context of the
emerging economic, business and regulatory environment. The key
areas of focus continues to be on the provision of the Group's
Important Business Services, minimising the impact of any service
disruptions on the Group's customers or the wider financial
services industry. The Group's response to the COVID-19 pandemic
demonstrated the inherent resilience of its critical processes and
infrastructure and its agility in responding to changing
operational demands. The Group recognises the need to continually
invest in the resilience of its services, with specific focus in
2023 on ensuring that the third parties on which it depends have
the appropriate levels of resilience and in further automating
those processes that are sensitive to increases in volume.
The Group's financial projections demonstrate that the Group has
sufficient capital and liquidity to continue to meet its regulatory
capital requirements as set out by the Prudential Regulation
Authority (PRA).
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in
excess of 12 months and as a result, it is appropriate to prepare
these financial statements on a going concern basis.
d) Basis of consolidation
The Group accounts include the results of the Company and its
subsidiary undertakings. Subsidiaries are fully consolidated from
the date on which control is transferred to the Group and are
deconsolidated from the date that control ceases. Upon
consolidation, intercompany transactions, balances and unrealised
gains on transactions are eliminated. Unrealised losses are also
eliminated unless the transaction provides evidence of impairment
of the asset transferred. Accounting policies of subsidiaries have
been changed where necessary to ensure consistency, so far as is
possible, with the policies adopted by the Group.
Subsidiaries are those entities, including structured entities,
over which the Group has control. The Group controls an entity when
it is exposed, or has rights, to variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the investee. The Group has power
over an entity when it has existing rights that give it the current
ability to direct the activities that most significantly affect the
entity's returns. Power may be determined on the basis of voting
rights or, in the case of structured entities, other contractual
arrangements.
Where the Group does not retain a direct ownership interest in a
securitisation entity, but the Directors have determined that the
Group controls those entities, they are treated as subsidiaries and
are consolidated. Control is determined to exist if the Group has
the power to direct the activities of each entity (for example,
managing the performance of the underlying mortgage assets and
raising debt on those mortgage assets which is used to fund the
Group) and, in addition to this, control is exposed to a variable
return (for example, retaining the residual risk on the mortgage
assets). Securitisation structures that do not meet these criteria
are not treated as subsidiaries and are excluded from the
consolidated accounts. The Company applies the net approach in
accounting for securitisation structures where it retains an
interest in the securitisation, netting the loan notes held against
the deemed loan balance.
1. Accounting policies (continued)
The Group is not deemed to control an entity when it exercises
power over an entity in an agency capacity. In determining whether
the Group is acting as an agent, the Directors consider the overall
relationship between the Group, the investee and other parties to
the arrangement with respect to the following factors: (i) the
scope of the Group's decision-making power; (ii) the rights held by
other parties; (iii) the remuneration to which the Group is
entitled; and (iv) the Group's exposure to variability of returns.
The determination of control is based on the current facts and
circumstances and is continuously assessed. In some circumstances,
different factors and conditions may indicate that different
parties control an entity depending on whether those factors and
conditions are assessed in isolation or in totality. Judgement is
applied in assessing the relevant factors and conditions in
totality when determining whether the Group controls an entity.
Specifically, judgement is applied in assessing whether the Group
has substantive decision-making rights over the relevant activities
and whether it is exercising power as a principal or an agent.
e) Foreign currency translation
The consolidated financial statements are presented in Pounds
Sterling which is the presentation currency of the Group. The
financial statements of each of the Company's subsidiaries are
measured using the currency of the primary economic environment in
which the subsidiary operates (the functional currency). Foreign
currency transactions are translated into the functional currencies
using the exchange rates prevailing at the date of the
transactions. Monetary items denominated in foreign currencies are
retranslated at the rate prevailing at the period end.
Foreign exchange gains and losses resulting from the
retranslation and settlement of these items are recognised in
profit or loss. Non-monetary items measured at cost in the foreign
currency are translated using the spot foreign exchange rate at the
date of the transaction.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date.
The income and expenses of foreign operations are translated at the
rates on the dates of transactions. Exchange differences on foreign
operations are recognised in other comprehensive income (OCI) and
accumulated in the foreign exchange reserve within equity.
f) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis
of internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate
resources to segments and to assess their performance. For this
purpose, the chief operating decision maker of the Group is the
Board of Directors.
The Group provides loans and asset finance within the UK and the
Channel Islands only.
The Group segments its lending business and operates under two
segments:
-- OneSavings Bank (OSB)
-- Charter Court Financial Services (CCFS)
The Group has disclosed relevant risk management tables in note
45 at a sub-segment level to provide detailed analysis of the
Group's core lending business.
1. Accounting policies (continued)
g) Interest income and expense
Interest income and interest expense for all interest-bearing
financial instruments measured at amortised cost and FVOCI are
recognised in profit or loss using the effective interest rate
(EIR) method. The EIR is the rate which discounts the expected
future cash flows, over the expected life of the financial
instrument, to the net carrying value of the financial asset or
liability.
Interest income on financial assets categorised as stage 1 or 2
are recognised on a gross basis, with interest income on stage 3
assets recognised net of expected credit losses (ECL). For
purchased or credit-impaired assets (see note 1 p) vii.), interest
income is calculated by applying the credit-adjusted EIR to the
amortised cost of the asset. The calculation of interest income
does not revert to a gross basis even if the credit risk of the
asset improves. See note 1 p) ii.for further information on IFRS 9
stage classifications.
When calculating the EIR, the Group estimates cash flows
considering all contractual terms of the instrument and behavioural
aspects (for example, prepayment options) but not considering
future credit losses. The calculation of the EIR includes
transaction costs and fees paid or received that are an integral
part of the interest rate, together with the discounts or premiums
arising on the acquisition of loan portfolios. Transaction costs
include incremental costs that are directly attributable to the
acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each book and
resets cash flows on a monthly basis, discounted at the EIR to
derive a new carrying value, with changes taken to profit or loss
as interest income.
The EIR is adjusted where there is a movement in the reference
interest rate (SONIA, synthetic LIBOR or base rate) affecting
portfolios with a variable interest rate which will impact future
cash flows. The revised EIR is the rate which exactly discounts the
revised cash flows to the net carrying value of the loan
portfolio.
When the contractual terms of non-derivative financial
instruments have been amended as a direct consequence of IBOR
reform during 2021 and the new basis for determining the
contractual cash flows is economically equivalent to the previous
basis, the Group changes the basis for determining the contractual
cash flows prospectively by revising the EIR.
Interest income on investment securities is included in interest
receivable and similar income. Interest on derivatives is included
in interest receivable and similar income or interest expense and
similar charges following the underlying instrument it is
hedging.
Coupons paid on Additional Tier 1 (AT1) securities are
recognised directly in equity in the period in which they are
paid.
h) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption
charges within the EIR.
Fees received on mortgage administration services and mortgage
origination activities, which are not an integral part of the EIR,
are recorded in other operating income and accounted for in
accordance with IFRS 15 Revenue from Contracts with Customers, with
income recognised when the services are delivered and the benefits
are transferred to clients and customers.
1. Accounting policies (continued)
Other fees and commissions are recognised on the accruals basis
as services are provided or on the performance of a significant
act, net of VAT and similar taxes.
i) Integration costs and exceptional items
Integration costs and exceptional items are those items of
income or expense that do not relate to the Group's core operating
activities, are not expected to recur and are material in the
context of the Group's performance. These items are disclosed
separately within the Consolidated Statement of Comprehensive
Income and the Notes to the Consolidated Financial Statements.
j) Taxation
Income tax comprises current and deferred tax. It is recognised
in profit or loss, OCI or directly in equity, consistent with the
recognition of items it relates to. The Group recognises tax on
coupons paid on AT1 securities directly in profit or loss.
Current tax is the expected tax charge on the taxable income for
the year and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in
respect of temporary differences between the carrying amounts of
assets or liabilities for accounting purposes and carrying amounts
for tax purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise
the asset. The recognition of deferred tax is mainly dependent on
the projections of future taxable profits and future reversals of
temporary differences. The current projections of future taxable
income indicate that the Group will be able to utilise its deferred
tax asset within the foreseeable future.
Deferred tax liabilities are recognised for all taxable
temporary differences.
The Company and its tax-paying UK subsidiaries are in a group
payment arrangement for corporation tax and show a net corporation
tax liability and deferred tax liability accordingly, with the
exception of WSE Bourton Road Limited which is applying to join the
arrangement.
The Company and its UK subsidiaries are in the same VAT
group.
k) Dividends
Dividends are recognised in equity in the period in which they
are paid or, if earlier, approved by shareholders.
Dividend income from investments is recognised when the
shareholders' rights to receive payment have been established.
l) Cash and cash equivalents
For the purposes of the Consolidated Statement of Cash Flows,
cash and cash equivalents comprise cash, non-restricted balances
with credit institutions, highly liquid financial assets with
maturities of less than three months from date of acquisition and
subject to an insignificant risk of changes in their fair value and
are used by the Group in the management of its short-term
commitments.
1. Accounting policies (continued)
m) Intangible assets
Purchased software and costs directly associated with the
development of computer software are capitalised as intangible
assets where the software is a unique and identifiable asset
controlled by the Group and will generate future economic benefits.
Costs to establish technological feasibility or to maintain
existing levels of performance are recognised as an expense. The
Group only recognises internally generated intangible assets if all
of the following conditions are met:
-- an asset is being created that can be identified after establishing the
technical and commercial feasibility of the resulting product;
-- it is probable that the asset created will generate future economic
benefits; and
-- the development cost of the asset can be measured reliably.
Subsequent expenditure on an internally generated intangible
asset, after its purchase or completion, is recognised as an
expense in the period in which it is incurred. Where no internally
generated intangible asset can be recognised, development
expenditure is recognised as an expense in the period in which it
is incurred.
Software-as-a-service (SaaS), is an arrangement that provides
the Group with the right to receive access to the supplier's
application software in the future which is treated as a service
contract, rather than a software lease or the acquisition of a
software intangible asset.
An intangible asset is only recognised if:
-- The Group has the contractual right to take possession of the software
during the hosting period without significant penalty; and
-- It is feasible for the Group to run the software on its own hardware or
contract with a party unrelated to the supplier to host the software.
The costs of configuring or customising supplier application
software in a SaaS arrangement that is determined to be a service
contract is recognised as an expense or prepayment. Where the
configuration and customisation services are not distinct from the
right to receive access to the software, then the costs are
recognised as an expense over the term of the arrangement.
Intangible assets are reviewed for impairment semi-annually, and
if they are considered to be impaired, are written down immediately
to their recoverable amounts. Impairment losses previously
recognised for intangible assets, other than goodwill, are reversed
when there has been a change in the estimates used to determine the
asset's recoverable amount. An impairment loss reversal is
recognised in the Consolidated Statement of Comprehensive Income
and the carrying amount of the asset is increased to its
recoverable amount.
Intangible assets are amortised in profit or loss over their
estimated useful lives as follows:
Software and internally generated assets 5 year straight line
Development costs, brand and technology 4 year straight line
Broker relationships 5 year profile
Bank licence 3 year straight line
1. Accounting policies (continued)
For development costs that are under construction, no
amortisation will be applied until the asset is available for use
and is calculated using a full month when available for use.
The Group reviews the amortisation period on an annual basis. If
the expected useful life of assets is different from previous
assessments, the amortisation period is changed accordingly.
n) Property, plant and equipment
Property, plant and equipment comprise freehold land and
buildings, major alterations to office premises, computer equipment
and fixtures measured at cost less accumulated depreciation. These
assets are reviewed for impairment annually, and if they are
considered to be impaired, are written down immediately to their
recoverable amounts.
Items of property, plant and equipment are depreciated on a
straight-line basis over their estimated useful economic lives as
follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in
the period in which the expenditure is incurred.
o) Investment in subsidiaries
In the Company's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment.
A full list of the Company's subsidiaries which are included in the
Group's consolidated financial statements can be found in note
30.
The Company performs an annual impairment assessment of its
investment in subsidiary undertakings, assessing the carrying value
of the investment in each subsidiary against the subsidiary's net
asset values at the reporting date for indication of impairment.
Where there is indication of impairment, the Company estimates the
subsidiary's value in use by estimating future profitability and
the impact on the net assets of the subsidiary. The Company
recognises an impairment directly in profit or loss when the
recoverable amount, which is the greater of the value in use or the
fair value less costs to sell, is less than the carrying value of
the investment. Impairments are subsequently reversed if the
recoverable amount exceeds the carrying value.
1. Accounting policies (continued)
p) Financial instruments
1. Recognition
The Group initially recognises loans and advances, deposits,
debt securities issued and subordinated liabilities on the date on
which they are originated or acquired. All other financial
instruments are accounted for on the trade date which is when the
Group becomes a party to the contractual provisions of the
instrument.
For financial instruments classified as amortised cost or FVOCI,
the Group initially recognises financial assets and financial
liabilities at fair value plus transaction income or costs that are
directly attributable to its origination, acquisition or issue.
Financial instruments classified as amortised cost are subsequently
measured using the EIR method.
Transaction costs relating to the acquisition or issue of a
financial instrument at FVTPL are recognised in the profit or loss
as incurred.
AT1 securities are designated as equity instruments and
recognised at fair value on the date of issuance in equity along
with incremental costs directly attributable to the issuance of
equity instruments.
1. Classification
The Group classifies financial instruments based on the business
model and the contractual cash flow characteristics of the
financial instruments. Under IFRS 9, the Group classifies financial
assets into one of three measurement categories:
-- Amortised cost -- assets in a business model to hold financial assets in
order to collect contractual cash flows, where the contractual terms of
the financial asset give rise on specified dates to cash flows that are
solely payments of principal and interest (SPPI) on the principal amount
outstanding.
-- FVOCI -- assets held in a business model which collects contractual cash
flows and sells financial assets where the contractual terms of the
financial assets give rise on specified dates to cash flows that are SPPI
on the principal amount outstanding.
-- FVTPL -- assets not measured at amortised cost or FVOCI. The Group
measures derivatives, an acquired mortgage portfolio and an investment
security under this category.
The Group classifies non-derivative financial liabilities as
measured at amortised cost.
The Group has no non-derivative financial assets or liabilities
classified as held for trading.
The Group reassesses its business models each reporting
period.
The Group classifies certain financial instruments as equity
where they meet the following conditions:
-- the financial instrument includes no contractual obligation to deliver
cash or another financial asset on potentially unfavourable conditions;
-- the financial instrument is a non-derivative that includes no contractual
obligation for the issuer to deliver a variable number of its own equity
instruments; or
-- the financial instrument is a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a
fixed number of its own equity instruments.
1. Accounting policies (continued)
During the year equity financial instruments comprised own
shares and AT1 securities (2021: and non-controlling interest
securities). Accordingly, the coupons paid on the AT1 securities
are recognised directly in retained earnings when paid.
1. Derecognition
The Group derecognises financial assets when the contractual
rights to the cash flows expire or the Group transfers
substantially all risks and rewards of ownership of the financial
asset.
The Group offers refinancing options to customers which have
been assessed within the principles of IFRS 9 and relevant
guidance. The assessment concludes the original mortgage asset is
derecognised at the refinancing point with a new financial asset
recognised.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated
or otherwise modified. The Group considers the renegotiated or
modified cash flows are not a substantial modification from the
contractual cash flows and does not consider that forbearance
measures give rise to a derecognition event.
Financial liabilities are derecognised only when the obligation
is discharged, cancelled or has expired.
1. Offsetting
Financial assets and financial liabilities are offset and the
net amount presented in the Statement of Financial Position when,
and only when, the Group currently has a legally enforceable right
to offset the amounts and it intends either to settle them on a net
basis or to realise the asset and settle the liability
simultaneously.
The Group's derivatives are covered by industry standard master
netting agreements. Master netting agreements create a right of
set-off that becomes enforceable only following a specified event
of default or in other circumstances not expected to arise in the
normal course of business. These arrangements do not qualify for
offsetting and as such the Group reports derivatives on a gross
basis.
Collateral in respect of derivatives is subject to the standard
industry terms of International Swaps and Derivatives Association
(ISDA) Credit Support Annex. This means that the cash received or
given as collateral can be pledged or used during the term of the
transaction but must be returned on maturity of the transaction.
The terms also give each counterparty the right to terminate the
related transactions upon the counterparty's failure to post
collateral. Collateral paid or received does not qualify for
offsetting and is recognised in loans and advances to credit
institutions and amounts owed to credit institutions,
respectively.
1. Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, less principal payments or
receipts, plus or minus the cumulative amortisation using the EIR
method of any difference between the initial amount recognised and
the maturity amount, minus any reduction for impairment of
assets.
1. Accounting policies (continued)
1. Fair value measurement
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 in the principal or, in
its absence, the most advantageous market to which the Group has
access at that date.
When available, the Group measures the fair value of an
instrument using the quoted price in an active market for that
instrument. A market is regarded as active if transactions for the
asset or liability take place with sufficient frequency and volume
to provide pricing information on an ongoing basis. The Group
measures its investment securities and Perpetual Subordinated Bonds
(PSBs) at fair value using quoted market prices where
available.
If there is no quoted price in an active market, then the Group
uses valuation techniques that maximise the use of relevant
observable inputs and minimise the use of unobservable inputs.
The Group uses SONIA curves to value its derivatives, previously
a combination of LIBOR and SONIA curves. The fair value of the
Group's derivative financial instruments incorporates credit
valuation adjustments (CVA) and debit valuation adjustments (DVA).
The DVA and CVA take into account the respective credit ratings of
the Group's two banking entities and counterparty and whether the
derivative is collateralised or not. Derivatives are valued using
discounted cash flow models and observable market data and are
sensitive to benchmark interest and basis rate curves.
The fair value of investment securities held at FVTPL is
measured using a discounted cash flow model.
1. Identification and measurement of impairment of financial assets
The Group assesses all financial assets for impairment.
Loans and advances to customers
The Group uses the IFRS 9 three-stage ECL approach for measuring
impairment. The three impairment stages are as follows:
-- Stage 1 -- a 12 month ECL allowance is recognised where there is no
significant increase in credit risk (SICR) since initial recognition.
-- Stage 2 -- a lifetime ECL allowance is recognised for assets where a SICR
is identified since initial recognition. The assessment of whether credit
risk has increased significantly since initial recognition is performed
for each reporting period for the life of the loan.
-- Stage 3 -- requires objective evidence that an asset is credit impaired,
at which point a lifetime ECL allowance is recognised.
The Group measures impairment through the use of individual and
modelled assessments.
1. Accounting policies (continued)
Individual assessment
The Group's provisioning process requires individual assessment
for high exposure or higher risk loans, where Law of Property Act
(LPA) receivers have been appointed, the property is taken into
possession or there are other events that suggest a high
probability of credit loss. Loans are considered at a connection
level, i.e. including all loans connected to the customer.
The Group estimates cash flows from these loans, including
expected interest and principal payments, rental or sale proceeds,
selling and other costs. The Group obtains up-to-date independent
valuations for properties put up for sale.
For all individually assessed loans with a confirmed sale,
should the present value of estimated future cash flows discounted
at the original EIR be less than the carrying value of the loan, a
provision is recognised for the difference with such loans being
classified as impaired. However, should the present value of the
estimated future cash flows exceed the carrying value, no provision
is recognised. For all remaining individually assessed loans,
should a full loss be expected, the provision is set to the
carrying value, with all other individually assessed loans applying
the greater of either the modelled or individual assessment.
The Group applies a modelled assessment to all loans with no
individually assessed provision.
IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability weighted.
The ECL calculation is a product of an individual loan's
probability of default (PD), exposure at default (EAD) and loss
given default (LGD) discounted at the EIR. The ECL drivers of PD,
EAD and LGD are modelled at an account level. The assessment of
whether a SICR has occurred is based on quantitative relative PD
thresholds and a suite of qualitative triggers.
In accordance with PRA COVID-19 guidance, the Group did not
automatically consider the take-up of customer payment deferrals
during the pandemic to be an indication of a SICR and, in the
absence of other indicators such as previous arrears, low credit
score or high other indebtedness, the staging of these loans
remains unchanged in its ECL calculations.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR,
which results in an exposure being moved from stage 1 to stage
2.
At the point of initial recognition, a loan is assigned a PD
estimate. For each monthly reporting date thereafter, an updated PD
estimate is computed. The Group's transfer criteria analyses
relative changes in PD versus the PD assigned at the point of
origination, together with qualitative triggers using both internal
indicators, such as forbearance, and external information, such as
changes in income and adverse credit information to assess for
SICR. In the event that given early warning triggers have not
already identified SICR, an account more than 30 days past due is
considered to have experienced a SICR.
A borrower will move back into stage 1 only if the SICR
definition is no longer triggered.
1. Accounting policies (continued)
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria
to determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- If an account is more than 90 days past due.
-- Accounts that have moved into an unlikely to pay position, which includes
forbearance, bankruptcy, repossession and interest-only term expiry.
A borrower will move out of stage 3 when its credit risk
improves such that it no longer meets the 90 days past due and
unlikely to pay criteria and following this has completed an
internally approved probation period. The borrower will move to
stage 1 or stage 2 dependent on whether the SICR applies.
Forward-looking macroeconomic scenarios
The risk of default and ECL assessments take into consideration
expectations of economic changes that are deemed to be reasonably
possible.
The Group conducts analysis to determine the most significant
factors which may influence the likelihood of an exposure
defaulting in the future. The macroeconomic factors relate to the
HPI, unemployment rate (UR), Consumer Price Index (CPI), Gross
domestic product (GDP), Commercial Real Estate Index (CRE) and the
Bank of England Base Rate (BBR).
The Group has developed an approach for factoring
probability-weighted macroeconomic forecasts into ECL calculations,
adjusting PD and LGD estimates. The macroeconomic scenarios feed
directly into the ECL calculation, as the adjusted PD, lifetime PD
and LGD estimates are used within the individual account ECL
allowance calculations.
The Group sources economic forecast information from an
appropriately qualified third party when determining scenarios. The
Group considers four probability-weighted scenarios, base, upside,
downside and severe downside scenarios.
The base case is also utilised within the Group's impairment
forecasting process which in turn feeds the wider business planning
processes. The ECL models are also used to set the Group's credit
risk appetite thresholds and limits.
Period over which ECL is measured
ECL is measured from the initial recognition of the asset which
is the date at which the loan is originated or the date a loan is
purchased and at each balance sheet date thereafter. The maximum
period considered when measuring ECL (either 12 months or lifetime
ECL) is the maximum contractual period over which the Group is
exposed to the credit risk of the asset. For modelling purposes,
the Group considers the contractual maturity of the loan product
and then considers the behavioural trends of the asset.
Purchased or originated credit impaired (POCI)
Acquired loans that meet the Group's definition of default (90
days past due or an unlikely to pay position) at acquisition are
treated as POCI assets. These assets attract a lifetime ECL
allowance over the full term of the loan, even when these loans no
longer meet the definition of default post acquisition. The Group
does not originate credit-impaired loans.
1. Accounting policies (continued)
Intercompany loans
Intercompany receivables in the Company financial statements are
assessed for ECL based on an assessment of the PD and LGD,
discounted to a net present value.
Other financial assets
Other financial assets comprise cash balances with the Bank of
England (BoE) and other credit institutions and high grade
investment securities. The Group deems the likelihood of default
across these counterparties as low and does not recognise a
provision against the carrying balances.
q) Loans and advances to customers
Loans and advances to customers are predominantly mortgage loans
and advances to customers with fixed or determinable payments that
are not quoted in an active market and that the Group does not
intend to sell in the near term. They are initially recorded at
fair value plus any directly attributable transaction costs and are
subsequently measured at amortised cost using the EIR method, less
impairment losses. Where exposures are hedged by derivatives,
designated and qualifying as fair value hedges, the fair value
adjustment for the hedged risk to the carrying value of the hedged
loans and advances is reported in fair value adjustments for hedged
assets.
Loans and the related provision are written off when there is a
shortfall remaining after the underlying security is sold.
Subsequent recoveries of amounts previously written off are taken
through profit or loss.
Loans and advances to customers over which the Group transfers
its rights to the collateral thereon to the BoE under the Term
Funding Scheme with additional incentives for SMEs (TFSME) and
Index Long-Term Repo (ILTR) are not derecognised from the Statement
of Financial Position, as the Group retains substantially all the
risks and rewards of ownership, including all cash flows arising
from the loans and advances and exposure to credit risk. The Group
classifies TFSME as amortised cost under IFRS 9 Financial
Instruments.
Loans and advances to customers include a small acquired
mortgage portfolio where the contractual cash flows include
payments that are not SPPI and as such are measured at FVTPL.
Loans and advances to customers contain the Group's asset
finance lease lending. Finance leases are initially measured at an
amount equal to the net investment in the lease, using the interest
rate implicit in the finance lease. Direct costs are included in
the initial measurement of the net investment in the lease and
reduce the amount of income recognised over the lease term. Finance
income is recognised over the lease term, based on a pattern
reflecting a constant periodic rate of return on the net investment
in the lease.
r) Deemed loan
Mortgage assets remain on the Company's balance sheet for
securitisation transactions where the Company retains substantially
all the risks and rewards of the assets. The Company recognises a
deemed loan position for consideration received or transferred. In
each subsequent reporting period the deemed loan position is
updated to incorporate repayments of principal on notes held by
third parties, movements in liquidity and other cash reserves held
by the securitisation vehicle, and expenses incurred on the
securitisation arrangement. The expense recognised includes
interest payments on notes held by external parties, interest
payments paid/received on the swap, and servicing and other third
party costs as they are incurred.
1. Accounting policies (continued)
s) Investment securities
Investment securities include securities held for liquidity
purposes (UK treasury bills, UK Gilts and Residential
Mortgage-Backed Securities (RMBS)). These assets are
non-derivatives that are designated on an individual basis as
amortised cost, FVOCI or FVTPL.
Assets classified as amortised cost are initially recognised at
fair value and subsequently measured at amortised cost using the
EIR method, less impairment losses.
Assets held at FVOCI are measured at fair value with movements
taken to OCI and accumulated in the FVOCI reserve within equity,
except for impairment losses which are taken to profit or loss.
Where the instrument is sold, the gain or loss accumulated in
equity is reclassified to profit or loss.
Assets held at FVTPL are measured at fair value with movements
taken to the Statement of Comprehensive Income.
t) Deposits, debt securities in issue and subordinated liabilities
Deposits, debt securities in issue and subordinated liabilities
are the Group's sources of debt funding. They comprise deposits
from retail customers and credit institutions, including
collateralised loan advances from the BoE under the TFSME and ILTR,
asset-backed loan notes issued through the Group's securitisation
programmes and subordinated liabilities. Subordinated liabilities
include the Sterling PSBs where the terms allow no absolute
discretion over the payment of interest. These financial
liabilities are initially measured at fair value less direct
transaction costs, and subsequently held at amortised cost using
the EIR method.
Cash received under the TFSME and ILTR is recorded in amounts
owed to credit institutions. Interest is accrued over the life of
the agreements on an EIR basis.
u) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements (repo)
are retained in the financial statements if they fail derecognition
criteria of IFRS 9 described in paragraph p(iii) above. The
financial assets that are retained in the financial statements are
reflected as loans and advances to customers or investment
securities and the counterparty liability is included in amounts
owed to credit institutions or other customers. Financial assets
purchased under agreements to resell at a predetermined price where
the transaction is financing in nature (reverse repo) are accounted
for as loans and advances to credit institutions. The difference
between the sale and repurchase price is treated as interest and
accrued over the life of the agreement using the EIR method.
1. Accounting policies (continued)
v) Derivative financial instruments
The Group uses derivative financial instruments (interest rate
swaps) to manage its exposure to interest rate risk. In accordance
with the Group Market and Liquidity Risk Policy, the Group does not
hold or issue derivative financial instruments for proprietary
trading.
Derivative financial instruments are recognised at their fair
value with changes in their fair value taken to profit or loss.
Fair values are calculated by discounting cash flows at the
prevailing interest rates. All derivatives are classified as assets
when their fair value is positive and as liabilities when their
fair value is negative. If a derivative is cancelled, it is
derecognised from the Statement of Financial Position.
The Group also uses derivatives to hedge the interest rate risk
inherent in irrevocable offers to lend. This exposes the Group to
movements in the fair value of derivatives until the loan is drawn.
The changes to fair value are recognised in profit or loss in the
period.
w) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of
IFRS 9. The Group uses fair value hedge accounting for a portfolio
hedge of interest rate risk.
Portfolio hedge accounting allows for hedge effectiveness
testing and accounting over an entire portfolio of financial assets
or liabilities. To qualify for hedge accounting at inception, hedge
relationships are clearly documented and derivatives must be
expected to be highly effective in offsetting the hedged risks. In
addition, effectiveness must be tested throughout the life of the
hedge relationship. This applies to all derivatives including
SONIA-linked derivatives entered into to replace LIBOR-linked
derivatives, as a result of IBOR reforms during 2021.
The Group applies fair value portfolio hedge accounting to its
fixed rate portfolio of mortgages and saving accounts. The hedged
portfolio is analysed into repricing time periods based on expected
repricing dates, utilising the Group Assets and Liabilities
Committee (ALCO) approved prepayment curve. Interest rate swaps are
designated against the repricing time periods to establish the
hedge relationship. Hedge effectiveness is calculated as a
percentage of the fair value movement of the interest rate swap
against the fair value movement of the hedged item over the period
tested.
The Group considers the following as key sources of hedge
ineffectiveness:
-- the mismatch in maturity date of the swap and hedged item, as swaps with
a given maturity date cover a portfolio of hedged items which may mature
throughout the month;
-- the actual behaviour of the hedged item differing from expectations, such
as early repayments or withdrawals and arrears;
-- minimal movements in the yield curve leading to ineffectiveness where
hedge relationships are sensitive to small value changes; and
-- the transition relating to LIBOR reforms during 2021 whereby some hedged
instruments and hedged items are based on different benchmark rates.
1. Accounting policies (continued)
Where there is an effective hedge relationship for fair value
hedges, the Group recognises the change in fair value of each
hedged item in profit or loss with the cumulative movement in their
value being shown separately in the Statement of Financial Position
as fair value adjustments on hedged assets and liabilities. The
fair value changes of both the derivative and the hedge
substantially offset each other to reduce profit volatility.
The Group discontinues hedge accounting when the derivative
ceases through expiry, when the derivative is cancelled or the
underlying hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge
accounting or is cancelled whilst still effective, including
LIBOR-linked derivatives cancelled as a result of IBOR reforms
during 2021, the fair value adjustment relating to the hedged
assets or liabilities within the hedge relationship prior to the
derivative becoming ineffective or being cancelled remains on the
Statement of Financial Position and is amortised over the remaining
life of the hedged assets or liabilities. The rate of amortisation
over the remaining life is in line with expected income or cost
generated from the hedged assets or liabilities. Each reporting
period, the expectation is compared to actual with an accelerated
run-off applied where the two diverge by more than set
parameters.
x) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative
financial instruments. The DVA is based on the expected loss a
counterparty faces due to the risk of the Group's two banking
entities defaulting. The CVA reflects the Group's risk of the
counterparty's default.
The methodology is based on a standard calculation, taking into
account:
-- the one-year PD;
-- the expected EAD;
-- the expected LGD; and
-- the average maturity of the swaps.
y) Provisions and contingent liabilities
A provision is recognised when there is a present obligation as
a result of a past event, it is probable that the obligation will
be settled and the amount can be estimated reliably.
Provisions include ECLs on the Group's undrawn loan
commitments.
Contingent liabilities are possible obligations arising from
past events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events
which are either not probable or the amount of the obligation
cannot be reliably measured. Contingent liabilities are not
recognised but disclosed unless they are not material or their
probability is remote.
1. Accounting policies (continued)
z) Employee benefits -- defined contribution scheme
The Group contributes to defined contribution personal pension
plans or defined contribution retirement benefit schemes for all
qualifying employees who subscribe to the terms and conditions of
the schemes' policies.
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as
incurred.
aa) Share-based payments
Equity-settled share-based payments to employees providing
services are measured at the fair value of the equity instruments
at the grant date in accordance with IFRS 2. The fair value
excludes the effect of non-market-based vesting conditions.
The cost of the awards are charged on a straight-line basis to
profit or loss (with a corresponding increase in the share-based
payment reserve within equity) over the vesting period in which the
employees become unconditionally entitled to the awards. The
increase within the share-based payment reserve is reclassified to
retained earnings upon exercise.
The amount recognised as an expense for non-market conditions
and related service conditions is adjusted each reporting period to
reflect the actual number of awards expected to be met. The amount
recognised as an expense for awards subject to market conditions is
based on the proportion that is expected to meet the condition as
assessed at the grant date. No adjustment is made to the fair value
of each award calculated at grant date.
Share-based payments that are not subject to further vesting
conditions (i.e. the Deferred Share Bonus Plan (DSBP) for senior
managers) are expensed in the year services are received with a
corresponding increase in equity. Awards granted to Executive
Directors in March 2020 are subject to service conditions through
to vesting and are expensed over the vesting period. Awards granted
to Executive Directors from 2021 are not subject to future service
conditions and are expensed in the year where the service is deemed
to have been provided.
Where the allowable cost of share-based options or awards for
tax purposes is greater than the cost determined in accordance with
IFRS 2, the tax effect of the excess is taken to the share-based
payment reserve within equity. The tax effect is reclassified to
retained earnings upon vesting.
Employer's national insurance is charged to profit or loss at
the share price at the reporting date on the same service or
vesting schedules as the underlying options and awards.
1. Accounting policies (continued)
bb) Leases
The Group's leases are predominantly for offices and Kent
Reliance branches. The Group recognises right-of-use assets and
lease liabilities for leases over 12 months long. Right-of-use
assets and lease liabilities are initially recognised at the net
present value of future lease payments, discounted at the rate
implicit in the lease or, where not available, the Group's
incremental borrowing cost. Subsequent to initial recognition, the
right-of-use asset is depreciated on a straight-line basis over the
term of the lease. Future rental payments are deducted from the
lease liability, with interest charged on the lease liability using
the incremental borrowing cost at the time of initial recognition.
Lease liability payments are recognised within financing activities
in the Statement of Cash Flows.
The Group assesses the likely impact of early terminations in
recognising the right-of-use asset and lease liability where an
option to terminate early exists.
For modifications that increase the length of a lease; the
modified lease term is determined and the lease liability
remeasured by discounting the revised lease payments using a
revised discount rate, at the effective date of the lease
modification; a corresponding adjustment is made to the
right-of-use asset. Where modifications decrease the length of a
lease, the lease liability and right-of-use asset are reduced in
proportion to the reduction in the lease term, with any gain or
loss recognised in the profit or loss.
Leases with low future payments or terms less than 12 months are
recognised on an accruals basis directly in profit or loss.
cc) Adoption of new standards
International financial reporting standards issued and adopted
for the first time in the year ended 31 December 2022
There were a number of minor amendments to financial reporting
standards that are effective for the current year. There has been
no material impact on the financial statements of the Group from
the adoption of these financial reporting standard amendments and
interpretations.
International financial reporting standards issued but not yet
effective which are applicable to the Group
Certain amendments to accounting standards and interpretations
that were not effective on 31 December 2022 have not been early
adopted by the Group. The adoption of these amendments are not
expected to have a material impact on the financial statements of
the Group in future periods.
2. Judgements in applying accounting policies and critical accounting estimates
In preparing these financial statements, the Group has made
judgements, estimates and assumptions which affect the reported
amounts within the current and future financial years. Actual
results may differ from these estimates.
In preparing the financial statements, the Group has considered
the impact of climate-related risks on its financial position and
performance, including the impact on ECL and redemption profiles
included in EIR. While the effects of climate change represent a
source of uncertainty, the Group does not consider there to be a
material impact on its judgements and estimates from the physical
or transition risks in the short term. Accordingly there is no
significant risk of material adjustment of the carrying amounts of
assets and liabilities within the next financial year as a result
of climate change. As set out on page 52, whilst not material we
have recognised a post model adjustment (PMA) within the ECL
provision of GBP4.4m in relation to climate change.
Estimates and judgements are regularly reviewed based on past
experience, expectations of future events and other factors.
Judgements
The Group has made the following key judgements in applying the
accounting policies:
1. Loan book impairments
Significant increase in credit risk for classification in stage
2
The Group's SICR rules considers changes in default risk,
internal impairment measures, changes in customer credit bureau
files, or whether forbearance measures had been applied. As the
COVID-19 payment deferrals initiative has ceased, newly granted
payment holidays are considered a SICR event.
Other SICR adjustments made during the pandemic to account for
high risk accounts have since been removed with SICR adjustments
updated as the Group identified increases in credit risk as a
result of the Cost of Living and Cost of Borrowing stresses in the
UK, caused by high inflation and increases in interest rates.
1. IFRS 9 classification
Application of the 'business model' requirements under IFRS 9
requires the Group to conclude on the business models that it
operates and is a fundamental aspect in determining the
classification of the Group's financial assets.
Management assess the intention for holding financial assets and
the contractual terms of those assets, concluding that the Group's
business model is a 'held to collect' business model. This
conclusion was reached on the basis that the Group originates and
purchases loans and advances in order with the intention to collect
contractual cash flows over the life of the originated or purchased
financial instrument.
The Group considers whether the contractual terms of a financial
asset give rise on specified dates to cash flows that are SPPI on
the principal amount outstanding when applying the classification
criteria of IFRS 9. The majority of the Group's assets being loans
and advances to customers which have been accounted for under
amortised cost with the exception of one acquired mortgage book of
GBP14.6m (2021: GBP17.7m) that is recognised at FVTPL.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Estimates
The Group has made the following estimates in the application of
the accounting policies that have a significant risk of material
adjustment to the carrying amount of assets and liabilities within
the next financial year:
1. Loan book impairments
Set out below are details of the critical accounting estimates
which underpin loan impairment calculations. Less significant
estimates are not discussed as they do not have a material effect.
The Group has recognised total impairments of GBP130.0m (2021:
GBP101.5m) at the reporting date as disclosed in note 23.
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key
areas of estimation within modelled provisioning calculations
include those regarding the LGD and forward-looking macroeconomic
scenarios.
Loss given default model
The Group has a number of LGD models, which include estimates
regarding propensity to go to possession given default (PPD),
forced sale discount, time to sale and sale costs. The LGD is
sensitive to the application of the HPI, with a 10% haircut seen to
be a reasonable percentage change when reviewing historical and
expected 12 month outcomes. The table below shows the resulting
incremental provision required in a 10% house price haircut being
directly applied to all exposures which not only adjust the sale
discount but the propensity to go to PPD.
OSB segment CCFS segment Group
31 December 2022 GBP28.0m GBP10.7m GBP38.7m
31 December 2021 GBP22.7m GBP8.3m GBP31.0m
The Group's forecasts of HPI movements used in the impairment
models are disclosed in the Risk profile performance review on page
51.
Forward-looking macroeconomic scenarios
The forward-looking macroeconomic scenarios affect all model
components of the ECL thus the calculation remains sensitive to
both the scenarios utilised and their associated probability
weightings.
The Company has adopted an approach which utilises four
macroeconomic scenarios. These scenarios are provided by an
industry leading economics advisory firm, that provide management
and the Board with advice on which scenarios to utilise and the
probability weightings to attach to each scenario. A base case
forecast is provided, together with a plausible upside scenario.
Two downside scenarios are also provided (downside and a severe
downside). The Group's macroeconomic scenarios can be found in the
Credit Risk section of the Risk profile performance overview on
page 51.
The following tables detail the ECL scenario sensitivity
analysis with each scenario weighted at 100% probability. The
purpose of using multiple economic scenarios is to model the
non-linear impact of assumptions surrounding macroeconomic factors
and ECL calculated:
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
Weighted 100% Severe
(see note 100% Base 100% Upside 100% Downside downside
As at 31-Dec-22 22) case scenario scenario scenario scenario
Total loans before provisions,
GBPm 23,728.1 23,728.1 23,728.1 23,728.1 23,728.1
Modelled ECL, GBPm 54.4 41.7 32.8 79.3 120.0
Non-modelled ECL, GBPm 75.6 75.6 75.6 75.6 75.6
Total ECL, GBPm 130.0 117.3 108.4 154.9 195.6
---------- -------------- ----------- ------------- -----------
ECL coverage, % 0.55 0.49 0.46 0.65 0.82
As at 31-Dec-21
Total loans before provisions,
GBPm 21,164.1 21,164.1 21,164.1 21,164.1 21,164.1
Modelled ECL, GBPm 48.3 26.5 13.1 74.0 120.3
Non-modelled ECL, GBPm 53.2 53.2 53.2 53.2 53.2
Total ECL, GBPm 101.5 79.7 66.3 127.2 173.5
ECL coverage, % 0.48 0.38 0.31 0.60 0.82
---------- -------------- ----------- ------------- -----------
1. Effective interest rate on lending
Estimates are made when calculating the EIR for newly-originated
loan assets. These include the likely customer redemption profiles.
Mortgage products offered by the Group include directly
attributable net fee income and a period on reversion rates after
the fixed/discount period. Products revert to the standard variable
rate (SVR) or Base rate plus a margin for the Kent Reliance brand
or a SONIA/Base rate plus a margin for the Precise brand.
Subsequent to origination, changes in actual and expected customer
prepayment rates are reflected as increases or decreases in the
carrying value of loan assets with a corresponding increase or
decrease in interest income. The Group uses historical customer
behaviours, expected take-up rate of retention products and
macroeconomic forecasts in its assessment of expected prepayment
rates. Customer prepayments in a fixed rate or incentive period can
give rise to Early Repayment Charge (ERC) income.
Judgement is used in assessing whether and for how long
mortgages that reach the end of the initial product term stay on
reversion rates, and to the quantum and timing of prepayments that
incur ERCs. The estimate of customer weighted average life
determines the period over which net fee income and expected
reversionary income is recognised. Estimates are reviewed regularly
and, as a consequence of the reviews, adjustments with an adverse
impact of GBP31.6m were made in 2022 predominantly due to reducing
the time Precise customers are expected to spend on reversion rates
(2021: GBP19.0m favourable), decreasing net interest income and
loans and advances to customers.
There were a number of base rate rises in quick succession in
2022, increasing the sensitivity to changes in behavioural
assumptions because higher reversion rates both increase the income
earned on loans in the reversion period and can lead to higher
repayment rates and therefore less time spent on reversion.
A three months' reduction in the weighted average lives of loans
in the reversion period was considered to be a reasonably possible
change in assumption based on observed changes in repayment rates
in reversion periods over the last two years and what could happen
to repayment rates in a high interest rate environment and an
uncertain macroeconomic outlook.
1. Judgements in applying accounting policies and critical accounting
estimates (continued)
The sensitivity has been applied to both the Kent Reliance and
the Precise portfolios. In previous years the Precise portfolio
sensitivity was split between loans originated pre and post the
combination with CCFS on 4 October 2019. The combined sensitivity
reflects how the Group now assesses customer behaviour in the
portfolio.
Applying a three month reduction to the expected weighted
average life of the loan book in the reversion period would result
in a reset loss of c.GBP80.8m in 2023 (2021: c.GBP45.9m on a six
month basis in 2022).
3. Interest receivable and similar income
Group Group
2022 2021
GBPm GBPm
At amortised cost:
On OSB mortgages 591.6 541.3
On CCFS mortgages 411.2 342.9
On finance leases 9.4 6.3
On investment securities 4.7 2.1
On other liquid assets 39.3 2.7
Amortisation of fair value adjustments on CCFS
loan book at Combination (61.5) (66.1)
Amortisation of fair value adjustments on hedged
assets(1) (34.1) (39.9)
960.6 789.3
At FVTPL:
Net income/(expense) on derivative financial
instruments - lending activities 106.6 (42.9)
At FVOCI:
On investment securities 2.1 0.4
1,069.3 746.8
------------------------------------------------- ------- ------
1. The amortisation relates to hedged assets where the hedges were
terminated before maturity and were effective at the point of
termination.
4. Interest payable and similar charges
Group Group
2022 2021
GBPm GBPm
At amortised cost:
On retail deposits 257.7 156.7
On BoE borrowings 64.8 4.5
On PSBs 0.7 1.2
On subordinated liabilities 1.1 0.8
On wholesale borrowings 3.9 0.8
On debt securities in issue 7.7 3.9
On lease liabilities 0.2 0.3
Amortisation of fair value adjustments on CCFS customer
deposits at Combination (1.0) (1.5)
Amortisation of fair value adjustments on hedged
liabilities(1) (0.8) (1.1)
334.3 165.6
At FVTPL:
Net expense/(income) on derivative financial instruments
- savings activities 25.1 (6.4)
359.4 159.2
--------------------------------------------------------- ----- -----
1. The amortisation relates to hedged liabilities where the hedges were
terminated before maturity and were effective at the point of
termination.
5. Fair value gains on financial instruments
Group Group
2022 2021
GBPm GBPm
Fair value changes in hedged assets (620.6) (297.8)
Hedging of assets 621.9 298.9
Fair value changes in hedged liabilities 33.0 27.4
Hedging of liabilities (42.4) (26.1)
Ineffective portion of hedges (8.1) 2.4
Net gains on unmatched swaps 57.1 10.3
Amortisation of inception adjustments(1) 1.2 3.0
Amortisation of acquisition-related inception
adjustments(2) 10.2 13.4
Amortisation of de-designated hedge relationships(3) (0.1) 0.2
Fair value movements on mortgages at FVTPL (0.9) 1.2
Debit and credit valuation adjustment (0.5) (1.0)
58.9 29.5
------- -------
1. The amortisation of inception adjustment relates to the amortisation of
the hedging adjustments arising when hedge accounting commences,
primarily on derivative instruments previously taken out against the
mortgage pipeline and also on derivative instruments previously taken out
against new retail deposits.
2. Relates to hedge accounting assets and liabilities recognised on the
Combination. The inception adjustments are being amortised over the life
of the derivative instruments acquired on Combination subsequently
designated in hedging relationships.
3. Relates to the amortisation of hedged items where hedge accounting has
been discontinued due to ineffectiveness.
6. Gain on sales of financial instruments
There were no sales of financial instruments during the year
ended 31 December 2022.
On 10 February 2021, the Group sold the Precise Mortgage Funding
2019-1B plc A2 notes for GBP287.0m, generating a gain on sale of
GBP4.0m. Excluding the impact of the fair value adjustment on
Combination of GBP1.7m, the underlying gain on sale was
GBP2.3m.
7. Other operating income
Group Group
2022 2021
GBPm GBPm
Interest received on mortgages held at FVTPL 0.6 0.5
Fees and commissions receivable 6.0 7.4
6.6 7.9
--------------------------------------------- ----- -----
8. Administrative expenses
Group Group
2022 2021
GBPm GBPm
Staff costs 109.3 92.5
Facilities costs 6.4 6.0
Marketing costs 4.5 4.0
Support costs 31.2 25.3
Professional fees 28.9 16.9
Other costs 12.8 7.3
Depreciation (see note 28) 5.2 5.0
Amortisation (see note 29) 8.2 9.5
206.5 166.5
--------------------------- ----- -----
1. Administrative expenses (continued)
Included in professional fees are amounts paid to the Company's
auditor as follows:
Group Group
2022 2021
GBP'000 GBP'000
Fees payable to the Company's auditor for
the audit of the Company's annual accounts 669 608
Fees payable to the Company's auditor for
the audit of the accounts of subsidiaries 2,672 1,722
Total audit fees 3,341 2,330
-------
Audit-related assurance services(1) 254 248
Other assurance services(2) 70 121
Other non-audit services(3) 33 240
Total non-audit fees 357 609
--------------------------------------------
Total fees payable to the Company's auditor 3,698 2,939
------- -------
1. Includes review of interim financial information and profit
verifications.
2. Costs comprise assurance reviews of European Single Electronic Format
(ESEF) tagging (2021: assurance reviews of APMs, integration costs and
ESEF tagging).
3. Costs primarily comprise work related to the European Medium Term Note
(EMTN) programme (2021: work related to the AT1 securities issuance, a
gap analysis in relation to TCFD and the EMTN programme).
Staff costs comprise the following:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Salaries, incentive pay and
other benefits 87.3 72.9 53.4 37.5
Share-based payments 8.1 6.7 7.3 5.0
Social security costs 9.5 7.7 6.6 4.7
Other pension costs 4.4 5.2 3.0 3.5
109.3 92.5 70.3 50.7
----- ----- ------- -------
The average number of people employed by the Group and Company
(including Executive Directors) during the year is analysed
below.
Group Group Company Company
2022 2021 2022 2021
UK 1,274 1,220 777 580
India 622 535 - -
1,896 1,755 777 580
------ ----- ----- ------- -------
9. Impairment of intangible assets
Assets arising on the Combination with CCFS in 2019 included a
broker relationships intangible asset with a fair value of GBP17.1m
on Combination. During 2020 an impairment of GBP7.0m was recognised
arising from changes to CCFS anticipated lending volumes over three
years post combination, which are a key input to the calculation of
the fair value, and which were revised due to COVID-19 impacts.
During 2021 an impairment assessment was performed and as actual
lending volumes were higher than anticipated the Group has
recognised an impairment reversal of GBP3.1m. The remaining
carrying value of the broker relationships intangible asset at 31
December 2022 is GBP2.0m (2021: GBP5.0m).
10. Directors' emoluments and transactions
Company Company
2022 2021
GBP'000 GBP'000
Short-term employee benefits(1) 3,213 2,825
Post-employment benefits 109 106
Share-based payments(2) 2,291 1,267
5,613 4,198
-------------------------------- ------- -------
1. Short-term employee benefits comprise Directors' salary costs,
Non-Executive Directors' fees and other short-term incentive benefits,
which are disclosed in the Annual Report on Remuneration.
2. Share-based payments represent the amounts received by Directors for
schemes that vested during the year.
In addition to the total Directors' emoluments above, the
Executive Directors were granted deferred bonuses of GBP642k (2021:
GBP633k) in the form of shares. DSBP awards granted from April 2021
have a holding period of three to seven years with no further
conditions attached other than standard clawback situations. In
March 2020 and prior years, the DSBP awards were subject to either
a three or five year vesting period with conditions attached,
notably if the Director leaves prior to vesting, the award is
forfeited unless a good leaver reason applies such as redundancy,
retirement or ill-health.
The Executive Directors received a further share award under the
Performance Share Plan (PSP) with a grant date fair value of
GBP1,516k (2021: GBP1,458k) using a share price of GBP5.58 (2021:
GBP4.94) (the mid-market quotation on the day preceding the date of
grant). These shares vest annually from year three in tranches of
20 per cent, subject to performance conditions discussed in note 11
and the OSB GROUP PLC Annual Report on Remuneration.
No compensation was paid for loss of office during 2022 and
2021.
There were no outstanding loans granted in the ordinary course
of business to Directors and their connected persons as at 31
December 2022 and 2021.
The highest paid Director employed by the Company received
emoluments of GBP2,991k (2021: GBP2,506k) and payments in respect
of personal pension plans of GBP67k (2021: GBP65k) in the year.
The OSB GROUP PLC Annual Report on Remuneration and note 11
Share-based payments provide further details on Directors'
emoluments.
11. Share-based payments
The OSB Group operates the following share-based schemes:
Sharesave Scheme
SAYE or Sharesave Scheme is a share option scheme which is
available to all UK-based employees. The Sharesave Scheme allows
employees to purchase options by saving a fixed amount of between
GBP10 and GBP500 per month over a period of three years at the end
of which the options, subject to leaver provisions, are usually
exercisable. If not exercised, the amount saved is returned to the
employee. The Sharesave Scheme has been in operation since 2014 and
an invitation to join the scheme is usually extended annually, with
the option price calculated using the mid-market price of an OSBG
ordinary share over the three dealing days prior to the Invitation
Date and applying a discount of 20%.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior
managers with 50% of their performance bonuses to be deferred in
shares for three to seven years for Executive Directors and one
year for senior managers. There are no further performance or
vesting conditions attached to deferred awards for senior managers,
which also applies to Executive Directors for awards granted from
April 2021; the share awards are subject to clawback provisions.
The DSBP awards are expensed in the year services are received with
a corresponding increase in equity. Awards granted to Executive
Directors in March 2020 and prior, are subject to vesting
conditions and are expensed over the vesting period.
DSBP awards for senior managers carry entitlements to dividend
equivalents, which are paid when the awards vest. DSBP awards
granted from April 2021 to Executive Directors are entitled to
dividend equivalents; awards granted in prior years were not
entitled to dividend equivalents.
Performance Share Plan
Executive Directors and certain senior managers are also
eligible for a PSP award based on performance conditions which vest
in tranches over three to seven years.
The performance conditions that apply to PSP awards from 2020
are based on a combination of earnings per share (EPS) weighting of
35%, total shareholder return (TSR) 35%, risk-based 15% and return
on equity (ROE) 15%. Prior to 2020, PSP awards were based on a
combination of EPS weighting of 40%, TSR 40% and ROE 20%. The PSP
conditions are assessed independently. The EPS element assesses the
compound annual growth rate over the performance period, that is,
the annualised growth from a base year 0 to final year 3. For
example, the 2022 Award will measure the EPS growth from 1 January
2021 to 31 December 2024. For the TSR element, the Company's
ordinary shares relative performance is measured against the FTSE
250 (excluding investment trusts). The risk-based measure is
assessed against the risk management performance with regard to all
relevant risks including, but not limited to, an assessment of
regulatory risk, operational risk, conduct risk, liquidity risk,
funding risk, market risk and credit risk. For the ROE element,
growth rates are assessed against the Group's underlying profit
after taxation as a percentage of average shareholders' equity.
The share-based expense for the year includes a charge in
respect of the Sharesave Scheme, DSBP and PSP. All charges are
included in employee expenses within note 8 Administrative
expenses.
1. Share-based payments (continued)
The share-based payment expense during the year comprised the
following:
Group Group
2022 2021
GBPm GBPm
Sharesave Scheme 0.6 0.7
Deferred Share Bonus Plan 4.2 3.8
Performance Share Plan 3.3 2.2
8.1 6.7
-------------------------- ----- -----
Movements in the number of share awards and their weighted
average exercise prices are set out below:
Deferred
Share Bonus Performance
Sharesave Scheme Plan Share Plan
Weighted average
exercise price,
Number GBP Number Number
At 1 January 2022 2,421,260 2.65 797,116 5,225,080
Granted 596,692 4.29 478,901 1,761,174
Exercised/Vested (624,664) 2.67 (511,034) (1,181,949)
Forfeited (245,316) 2.82 (1,593) (413,036)
At 31 December
2022 2,147,972 3.08 763,390 5,391,269
------------------ --------- ---------------- ------------ -----------
Exercisable at:
31 December 2022 35,015 2.85 - -
--------- ---------------- ------------
At 1 January 2021 2,745,332 2.53 1,119,757 4,986,527
Granted 339,097 3.96 363,624 1,477,111
Exercised/Vested (270,709) 3.10 (683,456) (513,927)
Forfeited (392,460) 2.63 (2,809) (724,631)
At 31 December
2021 2,421,260 2.65 797,116 5,225,080
------------------ ---------------- ------------ -----------
Exercisable at:
31 December 2021 8,480 3.37 - -
--------- ---------------- ------------
For the share-based awards granted during the year, the weighted
average grant date fair value was 396 pence (2021: 286 pence).
1. Share-based payments (continued)
The range of exercise prices and weighted average remaining
contractual life of outstanding awards are as follows:
2022 2021
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
Sharesave Scheme
229 - 429 pence (2021: 227
- 335 pence) 2,147,972 1.8 2,421,260 2.0
Deferred Share Bonus Plan .
Nil 763,390 0.9 797,116 0.7
Performance Share Plan
Nil 5,391,269 2.7 5,225,080 2.4
8,302,631 2.3 8,443,456 2.1
--------------------------- --------- ------------- --------- -------------
Sharesave Scheme
2022 2021 2020 2019 2018 2017
Contractual life,
years 3 3 3 5 3 5 3 5 5
Share price at
issue, GBP 4.20 5.13 2.86 2.86 3.32 3.32 4.19 4.19 3.93
Exercise price,
GBP 4.29 3.96 2.29 2.29 2.65 2.65 3.35 3.35 3.15
Expected volatility,
% 31.4 37.9 57.6 57.6 31.9 31.9 16.1 16.5 17.3
Dividend yield,
% 7.3 4.5 3.3 3.3 4.8 4.8 4.4 4.4 4.1
Grant date fair
value, GBP 0.68 1.46 1.22 1.34 0.90 0.91 0.40 0.43 0.70
---------------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
The sharesave schemes are not entitled to dividends between the
option and exercise date. A Black Scholes model is used to
determine the grant date fair value with two inputs:
-- Expected volatility - from 2019, the expected volatility is
based on OSBG's share price post insertion, and the OSB share price prior
to insertion. Prior to this the Group used the FTSE 350 diversified
financials volatility as insufficient history was available for the
OSBG's share price.
-- Dividend -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Deferred Share Bonus Plan
2020 2019 2018 2017
Contractual life, years 3 3 3 5
Mid-market share price, GBP 2.58 3.96 3.80 4.04
Attrition rate, % - 8.4 9.7 11.8
Dividend yield, % 5.6 4.7 4.6 4.0
Grant date fair
value, GBP 2.21 3.47 3.34 3.37
---------------------------------- ---- ---- ---- ----
1. Share-based payments (continued)
For awards granted from 2021, there are no further performance
or vesting conditions attached to deferred awards, for further
details see DSBP above.
For DSBP awards where conditions exist, these schemes carry no
rights to dividend equivalents and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to scheme grant date.
Performance Share Plan
Performance awards are typically made annually at the discretion
of the Group Remuneration and People Committee. Awards are based on
a mixture of internal financial performance targets, risk-based
measures and relative TSR.
Non-market performance conditions exist for the scheme notably
that a participant is employed by the Company at the vesting date
with good leaver exceptions, and an attrition rate is applied as an
estimate of the actual number of awards that will meet the related
conditions at the vesting date.
The awards are not entitled to a dividend equivalent between
grant date and vesting and a Black Scholes model is used to
determine the grant date fair value with a dividend yield input
applied -- based on the average dividend yield across external
analyst reports for the quarter prior to the scheme grant date.
The fair value of an award that is subject to market conditions
(the relative share price element of the PSP) is determined at
grant date using a Monte Carlo model at the time of grant.
The inputs into the models are as follows:
2022 2021 2020 2019 2018
Contractual life, years 3-7 3-7 3-7 3 3
Mid-market share price, GBP 5.58 4.94 2.58 3.96 4.11
Attrition rate, % 6.9 12.8 7.3 8.4 9.7
Expected volatility, % 37.4 59.5 43.9 26.8 29.1
Dividend yield, % 4.7 3.8 5.6 4.7 4.6
Vesting rate - TSR % 32.3 40.8 27.8 44.9 54.0
Grant date fair value, GBP 4.64 4.26 2.06 3.47 3.61
--------------------------------- ---- ---- ---- ---- ----
12. Integration costs
Group Group
2022 2021
GBPm GBPm
Consultant fees 4.9 2.2
Staff costs 3.0 2.2
Impairment - 0.6
7.9 5.0
---------------- ----- -----
Consultant fees relate to advice on the Group's future operating
structure.
Staff costs relate to personnel who will leave or have left the
Group through the transition of operations to the new operating
model.
Impairment relates to a property sold during 2021.
13. Exceptional items
Group Group
2022 2021
GBPm GBPm
Consultant fees - -
Legal and professional fees - 0.2
- 0.2
---------------------------- ----- -----
Exceptional items relate to the insertion of OSBG as the new
holding company and listed entity of the Group.
14. Taxation
The Group publishes its tax strategy on its corporate website.
The table below shows the components of the Group's tax charge for
the year:
Group Group
2022 2021
GBPm GBPm
Corporation tax - current year 141.4 128.3
Corporation tax - prior year (0.9) -
Deferred tax - current year (1.2) (0.2)
Deferred tax - prior year (0.3) -
Release of deferred tax on CCFS Combination(1) (17.5) (8.5)
Total tax charge 121.5 119.6
----------------------------------------------- ------ -----
1. Release of deferred tax on CCFS Combination relates to the unwind of the
deferred tax liabilities recognised on the fair value adjustments of the
CCFS assets and liabilities at the acquisition date GBP(12.8)m (2021:
GBP(14.1)m) and the impact of the bank surcharge decrease on these
deferred tax liabilities GBP(4.7)m (2021: the impact of the corporation
tax rate increase GBP5.6m).
1. Taxation (continued)
The charge for taxation on the Group's profit before taxation
differs from the charge based on the standard rate of UK
Corporation Tax of 19% (2021: 19%) as follows:
Group Group
2022 2021
GBPm GBPm
Profit before taxation 532.8 464.6
Profit multiplied by the standard rate of
UK Corporation Tax (19%) 101.2 88.3
Bank surcharge(1) 30.2 27.7
Taxation effects of:
Expenses not deductible for taxation purposes 0.3 0.7
Securitisation profits not taxable (2.2) -
Impact of deferred tax rate change(2) (5.1) 5.2
Adjustments in respect of earlier years (1.2) -
Tax adjustments in respect of share-based
payments - 1.2
Tax on coupon paid on AT1 securities (1.7) (2.2)
Timing differences on capital items - (1.3)
Total tax charge 121.5 119.6
---------------------------------------------- ----- -----
1. Tax charge for the two banking entities of GBP34.3m (2021: GBP31.9m)
offset by the tax impact of unwinding CCFS Combination items of GBP4.1m
(2021: GBP4.2m).
2. Due to change in bank surcharge rate from 8% to 3% on 1 April 2023 (2021:
due to change in corporation tax rate from 19% to 25% on 1 April 2023).
Factors affecting tax charge for the year
The effective tax rate for the year ended 31 December 2022,
excluding the impact of adjustments in respect of earlier years and
the deferred tax rate change, was 24.0% (2021: 24.6%).
The GBP(5.1)m credit (2021: GBP5.2m charge) impact of the
deferred tax rate change relates predominantly to the deferred tax
liability from the CCFS combination (see note 27 and 38).
A tax charge of nil (comprising a deferred tax debit of GBP0.9m
and current tax credit of GBP0.9m) (2021: credit of GBP1.6m) has
been recognised directly within equity relating to the Group's
share-based payment schemes.
A tax credit of GBP0.1m (2021: credit of GBP0.5m) has been
recognised within OCI relating to investment securities classified
as FVOCI.
1. Taxation (continued)
Factors that may affect future tax charges
On 24 May 2021, the government substantively enacted legislation
to increase the corporation tax rate from 19% to 25% from 1 April
2023. Further, on 24 February 2022, the government substantively
enacted legislation to decrease the bank surcharge rate from 8% to
3% from 1 April 2023, together with an increase in the surcharge
annual allowance (the level of taxable profits above which are
subject to the surcharge) from GBP25m to GBP100m.
In September 2022, the government announced that the above
changes would be cancelled, but then in October 2022 announced that
the changes would go ahead as enacted.
Deferred tax expected to unwind after 1 April 2023 is recognised
for entities that incur the bank surcharge at 28% (2021: 33%).
15. Dividends
During the year, the Company paid the following dividends:
Company Company
2022 2021
Pence per Pence per
GBPm share GBPm share
Dividends paid to fund OSBG's
share repurchase programme 100.0 22.4 - -
Interim dividend for the current
year 133.1 29.8 86.7 19.4
233.1 86.7
--------------------------------- ----- --------- ---- ---------
The Directors do not recommend a final dividend (2021: nil).
16. Cash and cash equivalents
The following table analyses the cash and cash equivalents
disclosed in the Statement of Cash Flows:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Cash in hand 0.4 0.5 0.4 0.5
Unencumbered loans and advances
to credit institutions 2,953.7 2,636.2 1,358.7 1,331.8
Investment securities 90.0 100.0 90.0 -
3,044.1 2,736.7 1,449.1 1,332.3
-------------------------------- ------- ------- ------- -------
17. Loans and advances to credit institutions
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Unencumbered:
BoE call account 2,806.5 2,496.4 1,328.2 1,313.5
Call accounts 73.2 43.3 29.5 18.1
Cash held in special purpose
vehicles (SPVs)(1) 63.8 89.6 1.0 0.2
Term deposits 10.2 6.9 - -
Encumbered:
BoE cash ratio deposit 62.8 59.5 37.8 36.5
Cash held in SPVs(1) 111.8 48.0 - -
Cash margin given 237.4 99.9 109.6 36.7
3,365.7 2,843.6 1,506.1 1,405.0
----------------------------- ------- ------- ------- -------
1. Cash held in SPVs is ring-fenced for use in managing the Group's
securitised debt facilities under the terms of securitisation agreements.
Cash held in SPVs is treated as unencumbered in proportion to the
retained interest in the SPV based on the nominal value of the bonds held
by the Group to total bonds in the securitisation, and included in cash
and cash equivalents. Cash retained in SPVs designated as cash reserve
credit enhancement is treated as encumbered in proportion to the external
holdings in the SPV and excluded from cash and cash equivalents.
18. Investment securities
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Held at amortised cost:
UK Sovereign debt - 100.0 - -
RMBS loan notes 262.6 223.1 61.1 -
262.6 323.1 61.1 -
Less: Expected credit losses - - - -
262.6 323.1 61.1 -
Held at FVOCI:
UK Sovereign debt(1) 149.8 152.1 149.8 -
RMBS loan notes - 15.5 - 15.5
149.8 167.6 149.8 15.5
Held at FVTPL:
RMBS loan notes 0.5 0.7 0.5 0.7
0.5 0.7 0.5 0.7
412.9 491.4 211.4 16.2
----------------------------- ----- ----- ------- -------
1. Includes GBP90.0m of UK Treasury bills which had a maturity of less than
three months from date of acquisition (2021: nil).
1. Investment securities (continued)
At 31 December 2022, the Group had no RMBS held at FVOCI or
FVTPL (2021: nil) and GBP11.5m of RMBS held at amortised cost
(2021: GBP119.5m) sold under repos.
The Directors consider that the primary purpose of holding
investment securities is prudential. These securities are held as
liquid assets with the intention of use on a continuing basis in
the Group's activities and are classified as amortised cost, FVOCI
and FVTPL in accordance with the Group's business model for each
security.
The credit risk on investment securities held at amortised cost
has not significantly increased since initial recognition and are
categorised as stage 1. The ECLs are less than GBP0.1m.
Movements during the year in investment securities held by the
Group and Company are analysed as follows:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
At 1 January 491.4 471.2 16.2 15.0
Additions(1) 686.5 568.2 646.4 216.6
Disposals and maturities(2) (764.4) (549.7) (451.0) (215.4)
Movement in accrued interest (0.9) 0.6 (0.5) (0.1)
Changes in fair value 0.3 1.1 0.3 0.1
At 31 December 412.9 491.4 211.4 16.2
------- ------- ------- -------
1. Additions includes GBP90.0m of UK Treasury bills which had a maturity of
less than three months from date of acquisition (2021: GBP100.0m).
2. Disposals and maturities includes GBP100.0m of UK Treasury bills which
had a maturity of less than three months from date of acquisition (2021:
nil).
At 31 December 2022, investment securities included investments
in unconsolidated structured entities (see note 45) of GBP100.7m
notes in PMF 2020-1B (2021: GBP100.7m notes in PMF 2020-1B and
GBP21.0m notes in PMF 2017-1B). The investments represent the
maximum exposure to loss from unconsolidated structured
entities.
19. Loans and advances to customers
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Held at amortised cost:
Loans and advances (see note 20) 23,564.9 21,047.9 10,613.5 9,540.2
Finance leases (see note 21) 163.2 116.2 - -
23,728.1 21,164.1 10,613.5 9,540.2
Less: Expected credit losses (see
note 22) (130.0) (101.5) (81.6) (63.8)
23,598.1 21,062.6 10,531.9 9,476.4
Held at FVTPL:
Residential mortgages 14.6 17.7 - -
23,612.7 21,080.3 10,531.9 9,476.4
----------------------------------
20. Loans and advances
2022 2021
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 10,188.4 8,375.5 18,563.9 10,393.2 7,685.7 18,078.9
Stage 2(1) 2,508.9 1,907.4 4,416.3 1,142.3 1,269.8 2,412.1
Stage 3 345.7 156.0 501.7 360.4 99.1 459.5
Stage 3 (POCI) 38.5 44.5 83.0 45.2 52.2 97.4
13,081.5 10,483.4 23,564.9 11,941.1 9,106.8 21,047.9
------------------- -------- -------- -------- -------- ------- --------
1. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the risk review section
on pages 30 to 60.
2022 2021
Company GBPm GBPm
Gross carrying amount
Stage 1 7,939.0 8,220.7
Stage 2(1) 2,353.1 984.5
Stage 3 286.9 294.0
Stage 3 (POCI) 34.5 41.0
10,613.5 9,540.2
-------- -------
1. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the risk review section
on pages 30 to 60.
1. Loans and advances (continued)
The mortgage loan balances pledged as collateral for liabilities
are:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
BoE under TFSME and ILTR 6,439.7 5,887.2 3,295.2 3,390.5
Securitisation 265.4 486.5 124.6 288.4
6,705.1 6,373.7 3,419.8 3,678.9
------------------------- ------- ------- ------- -------
The Group's securitisation programmes and use of TFSME and ILTR
result in certain assets being encumbered as collateral against
such funding. As at 31 December 2022, the percentage of the Group's
gross loans and advances to customers that are encumbered was 28%
(2021: 30%).
The Company adopts a net accounting approach for retained
interests in securitisation transactions that are consolidated into
the Group, disclosing the net amount as a deemed loan
asset/(liability). The table below shows the breakdown of the
Company's deemed loan balance. The deemed loan balance is now an
asset, due to a large portion of the externally held loan notes
being repaid.
Company Company
2022 2021
GBPm GBPm
General Reserve fund 55.9 51.7
Loan notes held externally (124.1) (260.5)
Amount owed from SPVs 99.4 66.0
31.2 (142.8)
--------------------------- ------- -------
As at 31 December 2022, the Company had GBP1,079.6m (2021:
GBP1,581.7m) of the retained loan notes sold under repos or pledged
as collateral.
1. Loans and advances (continued)
The tables below show the movement in loans and advances to
customers by IFRS 9 stage during the year:
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 16,060.3 2,689.6 392.6 114.6 19,257.1
Originations(1) 4,523.4 - - - 4,523.4
Acquisitions(2) 277.7 - - 2.7 280.4
Disposals(2) (214.4) - - - (214.4)
Repayments and
write-offs(3) (2,539.8) (160.3) (78.6) (19.9) (2,798.6)
Transfers:
- To Stage 1 1,401.0 (1,370.2) (30.8) - -
- To Stage 2 (1,339.7) 1,384.1 (44.4) - -
- To Stage 3 (89.6) (131.1) 220.7 - -
At 31 December 2021 18,078.9 2,412.1 459.5 97.4 21,047.9
Originations(1) 5,829.6 - - - 5,829.6
Repayments and
write-offs(3) (2,855.3) (353.6) (89.3) (14.4) (3,312.6)
Transfers:
- To Stage 1 1,121.6 (1,098.0) (23.6) - -
- To Stage 2(4) (3,524.0) 3,574.6 (50.6) - -
- To Stage 3 (86.9) (118.8) 205.7 - -
At 31 December 2022 18,563.9 4,416.3 501.7 83.0 23,564.9
--------------------------- --------- --------- ------- ------- ---------
1. Originations include further advances and drawdowns on existing
commitments.
2. The Group acted as co-arranger in the re-securitisation of GBP229.6m of
third party mortgages from the Rochester Financing No.2 PLC
securitisation to the new Rochester Financing No.3 PLC securitisation on
15 June 2021. Neither securitisation is a subsidiary of the Group. Under
the terms of the mortgage sale agreements, the Group recognised the
mortgages as a purchase from Rochester Financing No.2 PLC and immediately
derecognised them as a sale to Rochester Financing No.3 PLC. OneSavings
Bank plc is the master servicer of the mortgages, and has retained 5% of
these mortgages, as required under the retention rules. In addition to
the Group acting as co-arranger for the re-securitisation of Rochester
Financing No.2 PLC, the Group purchased an external mortgage book, a c.
GBP55m portfolio of UK residential mortgages, at a discount to the then
current balances.
3. Repayments and write-offs include customer redemptions and write-offs
which are immaterial.
4. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the risk review section
on pages 30 to 60.
1. Loans and advances (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 7,080.4 1,215.2 255.2 45.4 8,596.2
Originations(1) 2,104.9 - - - 2,104.9
Acquisitions(2) 225.7 - - 0.9 226.6
Disposals(2) (214.4) - - - (214.4)
Repayments and write-offs(3) (1,006.2) (125.4) (36.2) (5.3) (1,173.1)
Transfers:
- To Stage 1 591.8 (577.2) (14.6) - -
- To Stage 2 (505.3) 536.5 (31.2) - -
- To Stage 3 (56.2) (64.6) 120.8 - -
At 31 December 2021 8,220.7 984.5 294.0 41.0 9,540.2
Originations(1) 2,343.3 - - - 2,343.3
Repayments and write-offs(3) (1,084.5) (128.7) (50.3) (6.5) (1,270.0)
Transfers:
- To Stage 1 440.4 (422.6) (17.8) - -
- To Stage 2(4) (1,930.1) 1,969.6 (39.5) - -
- To Stage 3 (50.8) (49.7) 100.5 - -
At 31 December 2022 7,939.0 2,353.1 286.9 34.5 10,613.5
----------------------------- --------- ------- ------- ------- ---------
1. Originations include further advances and drawdowns on existing
commitments.
2. The Company acted as co-arranger in the re-securitisation of GBP229.6m of
third party mortgages from the Rochester Financing No.2 PLC
securitisation to the new Rochester Financing No.3 PLC securitisation on
15 June 2021. Neither securitisation is a subsidiary of the Company.
Under the terms of the mortgage sale agreements, the Company recognised
the mortgages as a purchase from Rochester Financing No.2 PLC and
immediately derecognised them as a sale to Rochester Financing No.3 PLC.
The Company is the master servicer of the mortgages, and has retained 5%
of these mortgages, as required under the retention rules.
3. Repayments and write-offs include customer redemptions.
4. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the risk review section
on pages 30 to 60.
The contractual amount outstanding on loans and advances that
were written off during the reporting period and are still subject
to collections and recovery activity is GBP0.8m at 31 December 2022
(2021: GBP1.5m) for the Group and GBP0.6m for the Company (2021:
GBP1.2m).
As at 31 December 2022 GBP110.0m of loans and advances (2021:
GBP97.4m) for the Group and GBP65.3m for the Company (2021:
GBP71.2m) are in a probation period before they can move out of
Stage 3, see note 1 p) for further details.
21. Finance leases
The Group provides asset finance lending through InterBay Asset
Finance Limited.
Group Group
2022 2021
GBPm GBPm
Gross investment in finance leases, receivable
Less than one year 60.7 39.7
Between one and two years 49.5 27.7
Between two and three years 36.0 27.5
Between three and four years 23.4 17.2
Between four and five years 9.9 14.6
More than five years 1.3 0.9
180.8 127.6
Unearned finance income (17.6) (11.4)
Net investment in finance leases 163.2 116.2
----------------------------------------------- ------ ------
Net investment in finance leases, receivable
Less than one year 52.4 34.7
Between one and two years 44.4 26.0
Between two and three years 33.2 25.5
Between three and four years 22.3 15.8
Between four and five years 9.6 13.3
More than five years 1.3 0.9
163.2 116.2
------
The Group has recognised GBP4.8m of ECLs on finance leases as at
31 December 2022 (2021: GBP4.3m).
22. Expected credit losses
The ECL has been calculated based on various scenarios as set
out below:
2022 2021
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Group GBPm % GBPm GBPm % GBPm
Scenarios
Upside 32.8 30 9.8 13.1 20 2.6
Base case 41.7 40 16.7 26.5 40 10.6
Downside scenario 79.3 20 15.9 74.0 28 20.7
Severe downside
scenario 120.0 10 12.0 120.3 12 14.4
Total weighted
provisions 54.4 48.3
Non-modelled
provisions:
Individually assessed
provisions 45.8 40.4
Post model adjustments 29.8 12.8
Total provision 130.0 101.5
---------------------- --------- --------- -------------- --------- --------- --------------
2022 2021
ECL Weighted ECL Weighted
provision Weighting ECL provision provision Weighting ECL provision
Company GBPm % GBPm GBPm % GBPm
Scenarios
Upside 17.6 30 5.3 6.2 20 1.2
Base case 22.9 40 9.2 15.7 40 6.3
Downside scenario 45.6 20 9.1 47.8 28 13.4
Severe downside
scenario 70.5 10 7.1 79.9 12 9.6
Total weighted
provisions 30.7 30.5
Non-modelled
provisions:
Individually assessed
provisions 33.9 29.8
Post model adjustments 17.0 3.5
Total provision 81.6 63.8
---------------------- --------- --------- -------------- --------- --------- --------------
The Group reflected on the ongoing appropriateness of
probabilities attached to the suite of IFRS 9 scenarios as the
macroeconomic outlook evolved throughout the year. Scenarios were
adjusted to a symmetrical probability, where the upside and
downside scenarios carry equal weightings, as a result of separate
post-model adjustments being raised to ensure that the current IFRS
9 framework adequately provisioned for the underlying portfolio
risk.
1. Expected credit losses (continued)
As at 31 December 2022, the Group identified increases in credit
risk as a result of the cost of living and cost of borrowing
stresses caused by high inflation and increases in interest rates.
As a result, the Group held an additional GBP16.0m (GBP7.3m for
cost of living and GBP8.7m for cost of borrowing) and the Company
GBP8.2m (GBP3.9m for cost of living and GBP4.3m for cost of
borrowing), of ECL in PMA for risks not sufficiently accounted for
in the IFRS 9 framework as at 31 December 2022. The approach to
identify the PMA for the cost of living is an increase in PD
through analysing the effect of the increases in living costs, such
as house hold bills and groceries, on affordability, which is used
to increase the default risk to all customers, with those on lower
income more impacted. The cost of borrowing PMA specifically
identified those that are more at risk of default due to reverting
onto variable rate in the near future, causing a payment increase
and higher affordability risk, which is used both to apply an
additional significant increase in credit risk SICR and stage 2
criteria and in some cases a higher default risk.
The Group continued to observe an elongated time to sale, which
was in excess of modelled expectations and observations prior to
the pandemic which accounted for an additional GBP8.7m and the
Company GBP6.0m, as a PMA as at 31 December 2022. Whilst the Group
expects the process delays to reduce in time, a PMA was held to
reflect an extended time to sale in line with most recent
observations for those in default.
As part of the Group's appreciation of climate risk and overall
ESG agenda, the Group recognises that properties with lower energy
efficiency are likely to require investment to reach minimum energy
efficiency standards in the future. As a result, to reflect the
expected transition risk and physical risks of climate change, the
Group held GBP4.4m and the Company GBP2.5m, of PMA as at 31
December 2022.
To reflect the ongoing cladding concerns, the Group identified a
valuation risk to a small number of properties and accounted for a
further sale discount for these properties by a PMA of GBP0.7m and
the Company GBP0.3m, as at 31 December 2022.
The ECL by segment and IFRS 9 stage is shown below:
2022 2021
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 5.9 1.3 7.2 9.3 2.8 12.1
Stage 2 35.3 15.6 50.9 14.2 10.8 25.0
Stage 3 60.5 7.8 68.3 56.6 3.8 60.4
Stage 3 (POCI) 1.5 2.1 3.6 2.1 1.9 4.0
103.2 26.8 130.0 82.2 19.3 101.5
--------------- ----- ---- ----- ---- ---- -----
2022 2021
Company GBPm GBPm
Stage 1 1.8 6.1
Stage 2 31.7 12.1
Stage 3 46.8 43.6
Stage 3 (POCI) 1.3 2.0
81.6 63.8
--------------- ---- ----
1. Expected credit losses (continued)
The tables below show the movement in the ECL by IFRS 9 stage
during the year. ECLs on originations and acquisitions reflect the
IFRS 9 stage of loans originated or acquired during the year as at
31 December and not the date of origination. Re-measurement of loss
allowance relates to existing loans which did not redeem during the
year and includes the impact of loans moving between IFRS 9
stages.
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Group GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 21.2 31.0 51.7 7.1 111.0
Originations 5.7 - - - 5.7
Acquisitions 0.1 - - 0.1 0.2
Repayments and write-offs (2.8) (3.3) (7.4) (1.1) (14.6)
Re-measurement of
loss allowance (21.8) (0.8) 12.8 (2.1) (11.9)
Transfers:
- To Stage 1 11.3 (10.5) (0.8) - -
- To Stage 2 (2.3) 5.1 (2.8) - -
- To Stage 3 (0.3) (3.1) 3.4 - -
Changes in assumptions
and model parameters 1.0 6.6 3.5 - 11.1
At 31 December 2021 12.1 25.0 60.4 4.0 101.5
Originations 6.9 - - - 6.9
Repayments and write-offs (1.3) (3.0) (6.9) (0.3) (11.5)
Re-measurement of
loss allowance (15.1) 26.4 17.5 (0.7) 28.1
Transfers:
- To Stage 1 10.0 (9.2) (0.8) - -
- To Stage 2 (2.0) 3.9 (1.9) - -
- To Stage 3 (0.1) (2.1) 2.2 - -
Changes in assumptions
and model parameters (3.3) 9.9 (2.2) 0.6 5.0
At 31 December 2022 7.2 50.9 68.3 3.6 130.0
1. Expected credit losses (continued)
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) Total
Company GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 8.4 16.3 35.9 3.9 64.5
Originations 2.6 - - - 2.6
Repayments and write-offs (0.7) (1.6) (3.0) (0.2) (5.5)
Re-measurement of
loss allowance (8.9) 2.3 9.0 (1.6) 0.8
Transfers:
- To Stage 1 5.5 (5.0) (0.5) - -
- To Stage 2 (0.7) 2.0 (1.3) - -
- To Stage 3 (0.1) (2.2) 2.3 - -
Changes in assumptions
and model parameters - 0.3 1.2 (0.1) 1.4
At 31 December 2021 6.1 12.1 43.6 2.0 63.8
Originations 3.8 - - - 3.8
Repayments and write-offs (0.5) (1.5) (3.8) (0.1) (5.9)
Re-measurement of
loss allowance (7.8) 13.7 10.4 (0.7) 15.6
Transfers:
- To Stage 1 4.4 (3.9) (0.5) - -
- To Stage 2 (1.4) 2.8 (1.4) - -
- To Stage 3 - (1.1) 1.1 - -
Changes in assumptions
and model parameters (2.8) 9.6 (2.6) 0.1 4.3
At 31 December 2022 1.8 31.7 46.8 1.3 81.6
-------------------------- ------- ------- ------- ------- -----
The table below shows the stage 2 ECL balances by transfer
criteria:
2022 2021
Carrying Carrying
value ECL Coverage value ECL Coverage
Group GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 3,090.2 42.9 1.39 1,251.6 17.1 1.37
Qualitative measures 1,277.6 7.5 0.59 1,125.0 7.4 0.66
30 days past due
backstop 49.3 0.5 1.01 37.0 0.5 1.35
Total 4,417.1 50.9 1.15 2,413.6 25.0 1.04
--------------------- -------- ---- -------- -------- ---- --------
1. Expected credit losses (continued)
2022 2021
Carrying Carrying
value ECL Coverage value ECL Coverage
Company GBPm GBPm % GBPm GBPm %
Criteria:
Relative PD movement 1,692.3 26.9 1.59 425.8 7.7 1.81
Qualitative measures 631.2 4.5 0.71 543.8 4.1 0.75
30 days past due
backstop 29.6 0.3 1.01 14.9 0.3 2.01
Total 2,353.1 31.7 1.35 984.5 12.1 1.23
--------------------- -------- ---- -------- -------- ---- --------
The Group has a number of qualitative measures to determine
whether a SICR has taken place. These triggers utilise both
internal performance information, to analyse whether an account is
in distress but not yet in arrears, and external credit bureau
information, to determine whether the customer is experiencing
financial difficulty with an external credit obligation.
23. Impairment of financial assets
The charge/(credit) for impairment of financial assets in the
Statement of Comprehensive Income comprises:
Group Group
2022 2021
GBPm GBPm
Write-offs in year 2.1 6.7
Increase/(decrease) in ECL provision 27.7 (11.1)
29.8 (4.4)
------------------------------------- ----- ------
24. Derivatives
The table below reconciles the gross amount of derivative
contracts to the carrying balance shown in the Statement of
Financial Position:
Net amount Contracts subject
of financial to master netting Cash collateral
Gross amount assets / (liabilities) agreements paid / (received)
of recognised presented not offset not offset
financial in the Statement in the Statement in the Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
Group GBPm GBPm GBPm GBPm GBPm
At 31 December
2022
Derivative
assets:
Interest rate
risk hedging 888.1 888.1 (104.9) (545.7) 237.5
Derivative
liabilities:
Interest rate
risk hedging (106.6) (106.6) 104.9 206.9 205.2
At 31 December
2021
Derivative assets:
Interest rate
risk hedging 185.7 185.7 (16.9) (115.3) 53.5
Derivative liabilities:
Interest rate
risk hedging (19.7) (19.7) 16.9 98.3 95.5
Derivative assets and liabilities include an initial margin of
GBP198.6m with swap counterparties.
Included within the Group's derivative assets is GBP203.4m
(2021: GBP48.7m) relating to derivative contracts not covered by
master netting agreements on which no cash collateral has been
paid.
1. Derivatives (continued)
Net amount Contracts subject
of financial to master netting Cash collateral
Gross amount assets / (liabilities) agreements paid / (received)
of recognised presented not offset not offset
financial in the Statement in the Statement in the Statement
assets of Financial of Financial of Financial Net
/ (liabilities) Position Position Position amount
Company GBPm GBPm GBPm GBPm GBPm
At 31 December
2022
Derivative
assets:
Interest rate
risk hedging 234.0 234.0 (63.2) (173.4) (2.6)
Derivative
liabilities:
Interest rate
risk hedging (63.8) (63.8) 63.2 79.4 78.8
At 31 December
2021
Derivative assets:
Interest rate
risk hedging 50.5 50.5 (6.2) (42.1) 2.2
Derivative liabilities:
Interest rate
risk hedging (8.7) (8.7) 6.2 35.1 32.6
Derivative assets and liabilities include an initial margin of
GBP79.2m with swap counterparties.
Included within the Company's derivative liabilities is nil
(2021: nil) of derivative contracts not covered by master netting
agreements on which no cash collateral has been paid.
1. Derivatives (continued)
The table below profiles the maturity of nominal amounts for
interest rate risk hedging derivatives based on contractual
maturity:
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Group GBPm GBPm GBPm GBPm GBPm
At 31 December
2022
Derivative assets 15,662.6 624.1 4,056.6 10,849.9 132.0
Derivative
liabilities 9,518.0 1,503.0 6,001.0 1,869.0 145.0
25,180.6 2,127.1 10,057.6 12,718.9 277.0
----------------- ------------- --------- -------- ------------ ---------
At 31 December
2021
Derivative assets 12,968.3 245.2 2,345.4 10,235.7 142.0
Derivative
liabilities 7,378.0 1,361.0 4,747.0 1,150.0 120.0
20,346.3 1,606.2 7,092.4 11,385.7 262.0
----------------- ------------- --------- -------- ------------ ---------
The Group has 916 (2021: 841) derivative contracts with an
average fixed rate of 1.51% (2021: 0.34%).
Less than 3 - 12 More than
Total nominal 3 months months 1 - 5 years 5 years
Company GBPm GBPm GBPm GBPm GBPm
At 31 December
2022
Derivative assets 4,628.0 50.0 1,526.0 3,012.0 40.0
Derivative
liabilities 5,158.0 650.0 3,270.0 1,198.0 40.0
9,786.0 700.0 4,796.0 4,210.0 80.0
----------------- ------------- --------- -------- ------------ ---------
At 31 December
2021
Derivative assets 3,953.0 50.0 952.0 2,873.0 78.0
Derivative
liabilities 3,416.0 626.0 2,340.0 350.0 100.0
7,369.0 676.0 3,292.0 3,223.0 178.0
----------------- ------------- --------- -------- ------------ ---------
The Company has 123 (2021: 108) derivative contracts with an
average fixed rate of 2.17% (2021: 0.34%).
25. Hedge accounting
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Hedged assets
Current hedge relationships (827.9) (190.9) (204.0) (52.7)
Swap inception adjustment 44.1 (26.2) 17.8 0.9
Cancelled hedge relationships (5.2) 78.2 (14.6) 53.1
Fair value adjustments on hedged
assets (789.0) (138.9) (200.8) 1.3
---------------------------------- ------- ------- ------- -------
Hedged liabilities
Current hedge relationships 58.0 19.6 34.8 8.5
Swap inception adjustment (2.3) 3.3 (1.1) 0.1
Cancelled hedge relationships (0.6) (1.4) - 0.2
De-designated hedge relationships - (1.8) - -
Fair value adjustments on hedged
liabilities 55.1 19.7 33.7 8.8
---------------------------------- ------- ------- ------- -------
The swap inception adjustment relates to hedge accounting
adjustments arising when hedge accounting commences, primarily on
derivative instruments previously taken out against the mortgage
pipeline and on derivative instruments previously taken out against
new retail deposits.
De-designated hedge relationships relates to hedge accounting
adjustments on failed hedge accounting relationships. These
adjustments are amortised over the remaining lives of the original
hedged items.
Cancelled hedge relationships predominantly represent the
unamortised fair value adjustment for interest rate risk hedges
that have been cancelled and replaced due to securitisation
activities, legacy long-term fixed rate mortgages (c. 25 years at
origination) and during 2021 IBOR transition.
1. Hedge accounting (continued)
The tables below analyse the Group's and Company's portfolio
hedge accounting for fixed rate loans and advances to
customers:
Group 2022 Group 2021
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 14,493.8 14,667.7 12,364.3 12,550.2
Cumulative fair value adjustments
of hedged item/fair value of
hedging instrument (827.9) 833.2 (190.9) 187.4
Changes in the fair value adjustment
of hedged item/hedging instrument
used for recognising the hedge
ineffectiveness for the period (620.6) 621.9 (297.8) 298.9
Cumulative fair value on cancelled
hedge relationships (5.2) - 78.2 -
In the Statement of Financial Position, GBP854.3m (2021:
GBP187.7m) of hedging instruments were recognised within derivative
assets, and GBP21.1m (2021: GBP0.3m) within derivative
liabilities.
Company 2022 Company 2021
Hedged Hedging Hedged Hedging
item instrument item instrument
Loans and advances to customers GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 4,114.0 4,006.0 3,211.7 3,233.0
Cumulative fair value adjustments
of hedged item/fair value of
hedging instrument (204.0) 199.3 (52.7) 52.7
Changes in the fair value adjustment
of hedged item/hedging instrument
used for recognising the hedge
ineffectiveness for the period (177.5) 177.0 (104.1) 103.7
Cumulative fair value on cancelled
hedge relationships (14.6) - 53.1 -
The cumulative fair value adjustments of the hedging instrument
comprise GBP216.4m (2021: GBP52.8m) recognised within derivative
assets, and GBP17.1m (2021: GBP0.1m) recognised within derivative
liabilities.
25. Hedge accounting (continued)
The movement in cancelled hedge relationships is as follows:
Group Group Company Company
2022 2021 2022 2021
Hedged assets GBPm GBPm GBPm GBPm
At 1 January 78.2 84.6 53.1 42.7
New cancellations(1) (49.3) 33.5 (49.4) 32.9
Amortisation (34.1) (39.9) (18.3) (22.5)
At 31 December (5.2) 78.2 (14.6) 53.1
--------------------- ------ ------ ------- -------
1. Following the securitisation of mortgages during the year and LIBOR swaps
transferred to SONIA swaps through the IBOR transition during 2021, the
Group cancelled swaps which were effective prior to the event, with the
designated hedge moved to cancelled hedge relationships to be amortised
over the original life of the swap.
The tables below analyse the Group's and Company's portfolio
hedge accounting for fixed rate amounts owed to retail
depositors:
Group 2022 Group 2021
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 9,167.3 9,180.0 6,386.0 6,390.0
Cumulative fair value adjustments
of hedged item/fair value of
hedging instrument 58.0 (67.9) 19.6 (18.5)
Changes in the fair value adjustment
of hedged item/hedging instrument
used for recognising the hedge
ineffectiveness for the period 33.0 (42.4) 27.4 (26.1)
In the Statement of Financial Position, GBP2.4m (2021: GBP0.3m)
of hedging instruments were recognised within derivative assets and
GBP70.3m (2021: GBP18.8m) within derivative liabilities.
25. Hedge accounting (continued)
Company 2022 Company 2021
Hedged Hedging Hedged Hedging
item instrument item instrument
Customer deposits GBPm GBPm GBPm GBPm
Carrying amount of hedged item/nominal
value of hedging instrument 5,199.7 5,200.0 3,087.9 3,090.0
Cumulative fair value adjustments
of hedged item/fair value of
hedging instrument 34.8 (42.5) 8.5 (8.5)
Changes in the fair value adjustment
of hedged item/hedging instrument
used for recognising the hedge
ineffectiveness for the period 24.7 (32.5) 11.8 (11.6)
The cumulative fair value adjustments of the hedging instrument
comprise GBP0.6m (2021: GBP0.2m) recognised within derivative
assets and GBP43.1m (2021: GBP8.7m) recognised within derivative
liabilities.
26. Other assets
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Falling due within one year:
Prepayments 7.8 7.1 6.1 5.5
Other assets 1.8 0.9 2.0 0.9
Falling due more than one year:
Prepayments 5.4 2.2 5.0 1.9
15.0 10.2 13.1 8.3
-------------------------------- ----- ----- ------- -------
27. Deferred taxation asset
Losses
carried Accelerated Share-based IFRS 9 transitional
forward depreciation payments adjustments Others(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 0.9 0.4 3.1 0.7 (0.4) 4.7
Profit or loss
(charge)/credit (0.4) 0.1 1.7 - (1.2) 0.2
Transferred to corporation
tax liability - - (1.4) - - (1.4)
Tax taken directly to
OCI - - - - 0.5 0.5
Tax taken directly to
equity - - 1.6 - - 1.6
At 31 December 2021 0.5 0.5 5.0 0.7 (1.1) 5.6
Profit or loss
(charge)/credit(2) - (0.5) 0.5 (0.1) 1.6 1.5
Transferred to corporation
tax liability - - - - - -
Tax taken directly to
OCI - - - - 0.1 0.1
Tax taken directly to
equity - - (0.9) - - (0.9)
At 31 December 2022 0.5 - 4.6 0.6 0.6 6.3
--------------------------- -------- ------------- ----------- ------------------- --------- -----
1. Others includes deferred taxation assets recognised on financial assets
classified as FVOCI, derivatives and short-term timing differences.
2. Includes GBP0.3m in respect of prior year deferred tax.
In 2022, the profit or loss credit for deferred tax includes a
credit of GBP0.2m from the corporation tax rate change (2021:
credit of GBP0.4m).
As at 31 December 2022, the Group had GBP3.5m (2021: GBP3.5m) of
losses for which a deferred tax asset has not been recognised as
the Group does not expect sufficient future profits to be available
to utilise the losses.
As at 31 December 2022, deferred tax assets of GBP2.3m (2021:
GBP3.0m) are expected to be utilised within 12 months and GBP4.0m
(2021: GBP2.6m) utilised after 12 months.
1. Deferred taxation asset (continued)
Accelerated Share-based IFRS 9 transitional Unpaid
depreciation payments adjustments bonus Others(1) Total
Company GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2021 0.4 2.4 0.3 - - 3.1
Profit or loss
(charge)/credit (0.1) 1.4 - 0.2 - 1.5
Transferred to corporation
tax liability - (1.3) - - - (1.3)
Tax taken directly
to equity - 1.6 - - - 1.6
At 31 December 2021 0.3 4.1 0.3 0.2 - 4.9
Profit or loss
(charge)/credit (0.4) 0.6 (0.1) (0.2) 0.1 -
Tax taken directly
to OCI - - - - (0.1) (0.1)
Tax taken directly
to equity - (0.7) - - - (0.7)
At 31 December 2022 (0.1) 4.0 0.2 - - 4.1
--------------------------- ------------- ----------- ------------------- ------ --------- -----
1. Others includes deferred taxation assets recognised on financial assets
classified as FVOCI, derivatives and short-term timing differences.
As at 31 December 2022, deferred tax assets of GBP1.9m (2021:
GBP2.5m) are expected to be utilised within 12 months and GBP2.2m
(2021: GBP2.4m) utilised after 12 months.
28. Property, plant and equipment
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2021 19.2 3.0 13.8 13.1 1.3 50.4
Additions(1) - - 2.6 0.6 0.1 3.3
Disposals and
write-offs(2) (2.8) (0.1) (1.3) (0.5) (0.2) (4.9)
Foreign
exchange
difference 0.1 - 0.1 - - 0.2
At 31 December
2021 16.5 2.9 15.2 13.2 1.2 49.0
Additions(1) 3.5 0.1 2.9 0.9 3.5 10.9
Disposals and
write-offs(2) - - (1.7) (0.3) (0.1) (2.1)
Foreign
exchange
difference - - 0.1 - - 0.1
At 31 December
2022 20.0 3.0 16.5 13.8 4.6 57.9
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2021 1.4 0.9 6.0 2.6 0.3 11.2
Charged in
year(3) 0.9 0.2 2.9 1.5 0.1 5.6
Disposals and
write-offs(2) (0.8) (0.1) (1.3) (0.5) (0.2) (2.9)
At 31 December
2021 1.5 1.0 7.6 3.6 0.2 13.9
Charged in
year 0.2 0.2 3.0 1.6 0.2 5.2
Disposals and
write-offs(2) - - (1.7) (0.3) (0.1) (2.1)
At 31 December
2022 1.7 1.2 8.9 4.9 0.3 17.0
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2022 18.3 1.8 7.6 8.9 4.3 40.9
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2021 15.0 1.9 7.6 9.6 1.0 35.1
1. Additions include property leases modifications of GBP0.5m (2021:
GBP0.4m) of right of use assets.
2. In 2022, the Group wrote off fully depreciated assets of GBP2.1m. During
2021 the Group disposed of a property for proceeds of GBP2.0m and wrote
off fully depreciated assets of GBP2.9m.
3. 2021 includes GBP0.6m of impairment on property sold during the year
which is included in note 12 Integration costs.
1. Property, plant and equipment (continued)
Right of use
assets
Freehold
land and Leasehold Equipment Property Other
buildings improvements and fixtures leases leases Total
Company GBPm GBPm GBPm GBPm GBPm GBPm
Cost
At 1 January
2021 11.5 2.5 7.8 5.5 0.1 27.4
Additions(1) - - 1.4 0.6 - 2.0
Disposals and
write-offs(2) (2.8) (0.1) (1.2) (0.5) - (4.6)
At 31 December
2021 8.7 2.4 8.0 5.6 0.1 24.8
Additions(1) 3.5 0.1 2.2 0.4 - 6.2
Disposals and
write-offs(2) - - (1.6) (0.3) (0.1) (2.0)
At 31 December
2022 12.2 2.5 8.6 5.7 - 29.0
-------------- ---------- ------------- ------------- -------- ------- -----
Depreciation
At 1 January
2021 1.1 0.6 3.7 1.5 - 6.9
Charged in
year(3) 0.8 0.2 1.6 0.6 - 3.2
Disposals and
write-offs(2) (0.8) (0.1) (1.2) (0.5) - (2.6)
At 31 December
2021 1.1 0.7 4.1 1.6 - 7.5
Charged in
year 0.1 0.2 1.6 0.7 - 2.6
Disposals and
write-offs - - (1.6) (0.3) (0.1) (2.0)
At 31 December
2022 1.2 0.9 4.1 2.0 (0.1) 8.1
-------------- ---------- ------------- ------------- -------- ------- -----
Net book value
At 31 December
2022 11.0 1.6 4.5 3.7 0.1 20.9
-------------- ---------- ------------- ------------- -------- ------- -----
At 31 December
2021 7.6 1.7 3.9 4.0 0.1 17.3
1. Additions include property leases modifications of nil (2021: GBP0.4m) of
right of use assets.
2. In 2022, the Company wrote off fully depreciated assets of GBP2.0m.
During 2021 the Company disposed of a property for proceeds of GBP2.0m
and wrote off fully depreciated assets of GBP2.6m.
3. 2021 includes GBP0.6m of depreciation on property sold during the year
which is included in Integration cost.
29. Intangible assets
Computer
software
Development and Assets arising
costs licences on Combination(2) Total
Group GBPm GBPm GBPm GBPm
Cost
At 1 January 2021 2.3 16.7 23.6 42.6
Additions 1.4 2.8 - 4.2
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 3.7 16.0 23.4 43.1
Additions 0.1 1.7 - 1.8
Disposals and write-offs(1) - (3.6) (1.9) (5.5)
At 31 December 2022 3.8 14.1 21.5 39.4
--------------------------- ----------- --------- ------------------ -----
Amortisation
At 1 January 2021 0.1 9.1 12.8 22.0
Charged in year 0.5 3.2 5.8 9.5
Impairment in the year - - (3.1) (3.1)
Disposals and write-offs(1) - (3.5) (0.2) (3.7)
At 31 December 2021 0.6 8.8 15.3 24.7
Charged in year 0.7 3.2 4.3 8.2
Disposals and write-offs(1) - (3.6) (1.9) (5.5)
At 31 December 2022 1.3 8.4 17.7 27.4
---------------------------- --- ----- ----- -----
Net book value
At 31 December 2022 2.5 5.7 3.8 12.0
At 31 December 2021 3.1 7.2 8.1 18.4
1. During the year the Group wrote off fully amortised assets.
2. Assets arising on Combination comprise broker relationships of GBP2.0m
(2021: GBP5.0m), technology of GBP0.4m (2021: GBP1.9m), brand name of
GBP0.3m (2021: GBP0.8m) and banking licence of nil (2021: GBP0.4m). The
carrying value of the intangible assets are reviewed each reporting
period, no impairment reversal (2021: GBP3.1m impairment reversal) was
recognised in relation to broker relationships due to less severe impacts
of the COVID-19 pandemic than originally estimated.
The Directors have considered the carrying value of intangible
assets and determined that there are no indications of impairment
at the year end.
1. Intangible assets (continued)
Development Computer software
costs and licences Total
Company GBPm GBPm GBPm
Cost
At 1 January 2021 - 14.7 14.7
Additions 1.4 2.2 3.6
Disposals and write-offs(1) - (2.7) (2.7)
At 31 December 2021 1.4 14.2 15.6
Additions 0.1 1.3 1.4
Disposals and write-offs(1) - (3.3) (3.3)
At 31 December 2022 1.5 12.2 13.7
---------------------------- ----------- ----------------- -----
Amortisation
At 1 January 2021 - 7.7 7.7
Charged in year - 2.9 2.9
Disposals and write-offs(1) - (2.7) (2.7)
At 31 December 2021 - 7.9 7.9
Charged in year - 2.6 2.6
Disposals and write-offs(1) - (3.3) (3.3)
At 31 December 2022 - 7.2 7.2
---------------------------- ----------- ----------------- -----
Net book value
At 31 December 2022 1.5 5.0 6.5
At 31 December 2021 1.4 6.3 7.7
1. During the year the Company wrote off fully amortised assets.
1.
30. Investments in subsidiaries, intercompany loans and transactions with related parties
The Group
The balance between the Group and its ultimate parent at the
reporting date is summarised in the table below:
Intercompany Intercompany
loans receivable loans receivable
2022 2021
Group GBPm GBPm
At 1 January 0.6 -
Additions 2.1 0.6
Repayments (1.9) -
At 31 December 0.8 0.6
The transactions with OSBG during the year include GBP2.1m of
additions in relation to costs on shares repurchased funded by the
Company. Repayments of GBP1.9m comprise GBP1.6m of cash received on
behalf of OSBG from issuing shares under SAYE and GBP0.3m of tax
losses surrendered to the Company (2021: additions comprised
GBP1.4m transaction costs for the issuance of AT1 securities funded
by the Company and repayments of GBP0.8m comprised cash received on
behalf of OSBG from issuing shares under SAYE).
The Company
The balances between the Company, its parent and its
subsidiaries at the reporting date are summarised in the table
below:
Investment Intercompany Intercompany
in subsidiaries loans receivable loans payable
Company GBPm GBPm GBPm
At 1 January 2021 708.9 2,428.4 (37.9)
Additions - 85.7 (0.2)
Repayments - (126.6) 4.9
At 31 December 2021 708.9 2,387.5 (33.2)
Additions 3.2 177.3 (2.7)
Repayments - (33.1) 2.6
Impairment (1.3) - -
At 31 December 2022 710.8 2,531.7 (33.3)
-------------------- ---------------- ----------------- --------------
The Group and the Company assesses intercompany loans receivable
for impairment. The Company recognised GBP1.3m of impairment in
investment in subsidiaries during the year (2021: nil). The
investment in Prestige Finance Limited (PFL) has been impaired down
to PFL's share capital value following the cessation of trade in
PFL. The investment in Interbay Group Holdings Limited (IGHL)
impaired down to the net asset value as IGHL is being considered
for dissolution.
Investments in subsidiaries are financial assets and
intercompany loans are financial assets and liabilities, all
carried at amortised cost.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's direct subsidiaries for 2022 is shown
below:
At 31 December 2022
Registered
Direct investments Activity office Ownership
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
Land lease
WSE Bourton Road Limited investment OSB House 100%
The Company holds ordinary shares in all its direct
subsidiaries.
OSB India Private Limited is owned 70.28% by the Company, 29.72%
by Easioption Limited and 0.001% by Reliance Property Loans
Limited.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's indirect subsidiaries for 2022 is shown
below:
At 31 December 2022
Registered
Indirect investments Activity office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.2 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.3 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.4 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.5 Churchill
plc Special purpose vehicle Place -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Charter Mortgages Mortgage administration
Limited and analytical services Charter Court 100%
Churchill
CMF 2020-1 plc Special purpose vehicle Place -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I
Limited Holding company Reliance House 100%
Inter Bay Financial II
Limited Holding company Reliance House 100%
InterBay Asset Finance Asset finance and
Limited mortgage provider Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
All investments in subsidiaries are of ordinary shares.
Special purpose vehicles which the Group controls are treated as
subsidiaries for accounting purposes.
All of the entities listed above have been consolidated into the
Group's consolidated financial statements.
All of the above investments are reviewed annually for
impairment. Based on assessment of the future cash flows of each
entity no impairment has been recognised.
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's direct subsidiaries for 2021 is shown
below:
At 31 December 2021
Registered
Direct investments Activity Office Ownership
Charter Court Financial
Services Group Plc Holding company Charter Court 100%
Easioption Limited Holding company Reliance House 100%
Guernsey Home Loans Limited Mortgage provider Reliance House 100%
Guernsey Home Loans Limited
(Guernsey) Mortgage provider Guernsey 100%
Heritable Development Mortgage originator
Finance Limited and servicer Reliance House 100%
Interbay Group Holdings
Limited Holding company Reliance House 100%
Jersey Home Loans Limited Mortgage provider Reliance House 100%
Jersey Home Loans Limited
(Jersey) Mortgage provider Jersey 100%
Back office
OSB India Private Limited processing India 100%
Mortgage originator
Prestige Finance Limited and servicer Reliance House 100%
Reliance Property Loans
Limited Mortgage provider Reliance House 100%
Rochester Mortgages Limited Mortgage provider Reliance House 100%
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
A list of the Company's indirect subsidiaries for 2021 is shown
below:
At 31 December 2021
Registered
Indirect investments Activity office Ownership
5D Finance Limited Mortgage servicer Reliance House 100%
Broadlands Finance Mortgage administration
Limited services Charter Court 100%
Canterbury Finance No.2 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.3 Churchill
plc Special purpose vehicle Place -
Canterbury Finance No.4 Churchill
plc Special purpose vehicle Place -
Charter Court Financial Mortgage lending
Services Limited and deposit taking Charter Court 100%
Charter Mortgages Mortgage administration
Limited and analytical services Charter Court 100%
Churchill
CMF 2020-1 plc Special purpose vehicle Place -
CML Warehouse Number Churchill
2 Limited Special purpose vehicle Place -
Exact Mortgage Experts
Limited Group service company Charter Court 100%
Inter Bay Financial I
Limited Holding company Reliance House 100%
Inter Bay Financial II
Limited Holding company Reliance House 100%
InterBay Asset Finance Asset finance and
Limited mortgage provider Reliance House 100%
Interbay Funding, Ltd Mortgage servicer Reliance House 100%
Interbay Holdings Ltd Holding company Reliance House 100%
Interbay ML, Ltd Mortgage provider Reliance House 100%
The following are the registered offices of the
subsidiaries:
Charter Court -- 2 Charter Court, Broadlands, Wolverhampton,
WV10 6TD
Churchill Place -- 5 Churchill Place, 10(th) Floor, London, E14
5HU
Guernsey -- 1(st) Floor, Tudor House, Le Bordage, St Peter Port,
Guernsey, GY1 1DB
Great St. Helen's, London -- 35 Great St. Helen's, London, EC3A
6AP
India -- Salarpuria Magnificia No. 78, 9(th) & 10(th) floor,
Old Madras Road, Bangalore, India, 560016.
Jersey -- 26 New Street, St Helier, Jersey, JE2 3RA
OSB House -- Quayside, Chatham Maritime, Chatham, England, ME4
4QZ
Reliance House -- Reliance House, Sun Pier, Chatham, Kent, ME4
4ET
1. Investments in subsidiaries, intercompany loans and transactions with
related parties (continued)
In 2021, the Group issued GBP150.0m of Fixed Rate Resetting
Perpetual Subordinated Securities to OSBG. Included within this was
GBP90.0m of Fixed Rate Resetting Perpetual Subordinated Securities
issued by the Company to OSBG. For further details see note 40.
The transactions between the Company, its parent and its
subsidiaries are disclosed below:
2022 2021
Charged Charged
by/(to) by/(to)
the Company Balance the Company Balance
during the due to/(by) during the due to/(by)
year the Company year the Company
GBPm GBPm GBPm GBPm
Parent Company
OSB GROUP PLC - 0.8 - 0.6
Direct investments
Easioption Limited - 0.5 - 0.5
Guernsey Home Loans Limited 0.1 6.8 0.1 7.7
Guernsey Home Loans Limited
(Guernsey) 0.2 12.3 0.2 15.5
Heritable Development Finance
Limited (1.9) (1.2) (1.5) (0.7)
Jersey Home Loans Limited - 1.0 - 2.0
Jersey Home Loans Limited
(Jersey) 1.3 69.4 1.2 88.6
OSB India Private Limited (13.3) 9.1 (9.5) 4.6
Prestige Finance Limited - (0.2) (0.2) 0.2
Reliance Property Loans Limited - 2.4 - 2.8
Interbay Group Holdings Limited - (0.9) - -
Indirect investments
Charter Court Financial Services
Limited 19.4 (0.7) 9.0 1.1
Exact Mortgage Experts Limited (0.4) 2.5 (0.5) -
Charter Mortgages Limited - (0.4) - (0.1)
Broadlands Finance Limited - (0.1) - 0.1
5D Finance Limited 0.6 39.4 0.4 46.4
Canterbury Finance No.1 plc - - - -
Inter Bay Financial I Limited 0.3 20.0 0.2 19.7
Inter Bay Financial II Limited - (5.6) (0.1) (5.6)
InterBay Asset Finance Limited 2.8 169.6 1.2 133.8
Interbay Funding, Ltd (0.4) (24.2) (0.8) (26.8)
Interbay ML, Ltd 36.1 2,197.9 24.0 2,063.9
44.8 2,498.4 23.7 2,354.3
------------ ------------
In addition to the above subsidiaries, the Company had
transactions with Kent Reliance Provident Society (KRPS), one of
its founding shareholders. KRPS ran member engagement forums for
the Company. In exchange, the Company provided KRPS with various
services including IT, finance and other support functions. KRPS
was placed into liquidation on 25 July 2022. During the year the
Company was charged for services provided by KRPS amounting to less
than GBP0.1m (2021: GBP0.1m). As at 31 December 2022, KRPS had no
deposit with the Company (2021: GBP0.2m).
31. Amounts owed to credit institutions
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
BoE TFSME 4,232.0 4,203.1 2,395.0 2,378.6
BoE ILTR 300.9 - - -
Commercial repo 10.2 0.5 0.1 -
Loans from credit institutions 0.1 0.6 - -
4,543.2 4,204.2 2,395.1 2,378.6
Cash collateral and margin
received 549.7 115.4 173.4 42.1
5,092.9 4,319.6 2,568.5 2,420.7
------------------------------- ------- ------- ------- -------
32. Amounts owed to retail depositors
The table below shows the Group's retail depositors by operating
segment, where the OSB segment also represents the Company's retail
depositors:
2022 2021
OSB CCFS Total OSB CCFS Total
GBPm GBPm GBPm GBPm GBPm GBPm
Fixed rate deposits 8,085.9 5,899.6 13,985.5 6,221.7 4,703.4 10,925.1
Variable rate
deposits 3,046.3 2,724.0 5,770.3 3,517.7 3,083.6 6,601.3
11,132.2 8,623.6 19,755.8 9,739.4 7,787.0 17,526.4
--------------------- ------- ------- --------
33. Amounts owed to other customers
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Fixed rate deposits 100.9 50.3 0.5 5.7
Variable rate deposits 12.2 42.3 - -
113.1 92.6 0.5 5.7
34. Debt securities in issue
Group Group
2022 2021
GBPm GBPm
Asset-backed loan notes at
amortised cost 265.9 460.3
Amount due for settlement after 12
months 265.9 460.3
265.9 460.3
----------------------------------- ----- -----
1. Debt securities in issue (continued)
The asset-backed loan notes are secured on fixed and variable
rate mortgages and are redeemable in part from time to time, but
such redemptions are mainly from the net principal received from
borrowers in respect of underlying mortgage assets. The maturity
date of the funds matches the contractual maturity date of the
underlying mortgage assets. The Group expects that a large
proportion of the underlying mortgage assets, and therefore these
notes, will be repaid within five years.
Where the Group own the call rights for a transaction, they may
repurchase the asset-backed loan notes on any interest payment date
on or after the call dates, or on any interest payment date when
the current balance of the mortgages outstanding is less than or
equal to 10% of the principal amount outstanding on the loan notes
on the date they were issued.
Interest is payable at fixed margins above SONIA.
As at 31 December 2022, notes were issued through the following
funding vehicles:
Group Group
2022 2021
GBPm GBPm
CMF 2020-1 plc 141.8 199.8
Canterbury Finance No.3 plc 21.0 76.9
Canterbury Finance No.4 plc 103.1 183.6
265.9 460.3
---------------------------- ----- -----
35. Lease liabilities
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
At 1 January 10.7 11.7 3.9 3.9
New leases 0.9 0.7 0.4 0.6
Lease termination - (0.1) - -
Lease repayments (1.9) (1.9) (0.8) (0.7)
Interest accruals 0.2 0.3 0.1 0.1
At 31 December 9.9 10.7 3.6 3.9
------------------ ----- ----- ------- -------
During the year, the Group incurred expenses of GBP0.3m (2021:
GBP0.2m) in relation to short-term leases
36. Other liabilities
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Falling due within one year:
Accruals 28.0 23.1 18.6 13.1
Deferred income 0.6 0.9 0.6 0.9
Other creditors 10.1 5.5 4.7 3.3
38.7 29.5 23.9 17.3
----------------------------- ----- ----- ------- -------
37. Provisions and contingent liabilities
The Financial Services Compensation Scheme (FSCS) provides
protection of deposits for the customers of authorised financial
services firms, should a firm collapse. FSCS protects retail
deposits of up to GBP85k for single account holders and GBP170k for
joint holders. As OSB and CCFS both hold banking licences, the full
FSCS protection is available to customers of each Bank.
The compensation paid out to consumers is initially funded
through loans from the BoE and HM Treasury. In order to repay the
loans and cover its costs, the FSCS charges levies on firms
regulated by the PRA and the Financial Conduct Authority (FCA). The
Group is among those firms and pays the FSCS a levy based on its
share of total UK deposits.
The Group has reviewed its current exposure to Payment
Protection Insurance (PPI) claims, following the FCA deadline for
PPI claims on 29 August 2019 and has reduced its provision to less
than GBP0.1m as at 31 December 2022 (2021: GBP0.3m).
The Group has released its provision for conduct related
exposures of GBP1.2m following completion of an internal
review.
An analysis of the Group's and Company's FSCS and other
provisions is presented below:
2022 2021
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.5 0.4 2.0 0.1 1.5 0.2 1.8
(Credit)/charge (0.1) (1.5) - (1.6) - - 0.2 0.2
At 31 December - - 0.4 0.4 0.1 1.5 0.4 2.0
---------------- ----- ---------------- ---------------- ----- ---- ---------------- ---------------- -----
1. Provisions and contingent liabilities (continued)
2022 2021
ECL on ECL on
Other regulatory undrawn Other regulatory undrawn
FSCS provisions loan facilities Total FSCS provisions loan facilities Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.1 1.4 0.4 1.9 0.1 1.4 0.1 1.6
(Credit)/charge (0.1) (1.4) (0.3) (1.8) - - 0.3 0.3
At 31 December - - 0.1 0.1 0.1 1.4 0.4 1.9
---------------- ----- ---------------- ---------------- ----- ---- ---------------- ---------------- -----
In January 2020, the Group was contacted by the FCA in
connection with a multi-firm thematic review into forbearance
measures adopted by lenders in respect of a portion of the mortgage
market. The Group has responded to information requests from the
FCA. It is not possible to reliably predict or estimate the outcome
of the review and therefore its financial effect, if any, on the
Group.
38. Deferred taxation liability
The deferred tax liability recognised on the Combination relates
to the timing differences of the recognition of assets and
liabilities at fair value, where the fair values will unwind in
future periods in line with the underlying asset or liability. The
deferred tax liability has been measured using the relevant rates
for the expected periods of utilisation.
CCFS Combination
Group GBPm
At 1 January 2021 48.3
Profit or loss credit (8.5)
At 31 December 2021 39.8
Profit or loss credit (17.5)
At 31 December 2022 22.3
--------------------------
In 2022, the profit or loss credit includes GBP4.7m impact of
the corporation tax rate change (2021: a debit of GBP5.6m).
As at 31 December 2022 deferred tax liabilities of GBP5.6m
(2021: GBP17.5m) are expected to be due within 12 months and
GBP16.7m (2021: GBP22.3m) due after 12 months.
39. Subordinated liabilities
The Group's and Company's outstanding subordinated liabilities
are summarised below:
Group and Company Group and Company
2022 2021
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022
(LIBOR +2%) - 0.1
Fixed rate:
Subordinated liabilities 2024
(7.45%) - 10.2
- 10.3
--------------------------------------- ----------------- -----------------
The table below shows a reconciliation of the Group's
subordinated liabilities during the year:
Group and Company Group and Company
2022 2021
GBPm GBPm
At 1 January 10.3 10.5
Repayment of debt (10.3) (0.2)
At 31 December - 10.3
-------------------- ----------------- -----------------
During the year the fixed rate subordinated liabilities were
fully repaid at a premium of GBP0.7m, which is recognised in
interest payable and similar charges.
The LIBOR linked subordinated liabilities were redeemed in
September 2022.
40. Perpetual Subordinated Bonds
Group and Company Group and Company
2022 2021
GBPm GBPm
Sterling PSBs (4.6007%) 15.2 15.2
The bonds are listed on the London Stock Exchange.
The 4.6007% bonds were issued with no discretion over the
payment of interest and may not be settled in the Group's own
equity. They are therefore classified as financial liabilities. The
coupon rate is 4.6007% until the next reset date on 27 August
2024.
41. Reconciliation of cash flows for financing activities
The tables below show a reconciliation of the Group's and
Company's liabilities classified as financing activities within the
Statement of Cash Flows:
Amounts owed
to credit Debt securities Subordinated
institutions in issue liabilities PSBs
(see note (see note (see note (see note
31) 34) 39) 40) Total
Group GBPm GBPm GBPm GBPm GBPm
(Restated)(1)
At 1 January
2021 3,570.2 421.9 10.5 37.6 4,040.2
Cash
movements:
Principal
drawdowns(1) 4,747.6 195.6 - - 4,943.2
Principal
repayments (4,113.7) (159.5) (0.2) (22.0) (4,295.4)
Interest paid (4.4) (1.6) (0.8) (1.6) (8.4)
Non-cash
movements:
Interest
charged 4.5 3.9 0.8 1.2 10.4
At 31
December
2021(1) 4,204.2 460.3 10.3 15.2 4,690.0
Cash
movements:
Principal
drawdowns 429.5 - - - 429.5
Principal
repayments (120.5) (193.6) (10.1) - (324.2)
Interest paid (34.8) (8.5) (1.3) (0.7) (45.3)
Non-cash
movements:
Interest
charged 64.8 7.7 1.1 0.7 74.3
At 31
December
2022 4,543.2 265.9 - 15.2 4,824.3
------------- --------------- ------------ ---------- ---------
1. 2021 figures restated see note 1 b) for further details.
1. Reconciliation of cash flows for financing activities (continued)
Amounts owed
to credit Subordinated
institutions Deemed Loans liabilities PSBs
(see note (see note (see note (see note
31) 20) 39) 40) Total
Company GBPm GBPm GBPm GBPm GBPm
(Restated)(1)
At 1 January
2021 1,900.5 66.2 10.5 37.6 2,014.8
Cash
movements:
Principal
drawdowns(1) 2,923.1 198.4 - - 3,121.5
Principal
repayments (2,445.1) (121.8) (0.2) (22.0) (2,589.1)
Interest paid (2.2) - (0.8) (1.6) (4.6)
Non-cash
movements:
Interest
charged 2.3 - 0.8 1.2 4.3
At 31
December
2021(1) 2,378.6 142.8 10.3 15.2 2,546.9
Cash
movements:
Principal
drawdowns 120.0 - - - 120.0
Principal
repayments (120.0) (174.0) (10.1) - (304.1)
Interest paid (19.4) (4.1) (1.3) (0.7) (25.5)
Non-cash
movements:
Interest
charged 35.9 4.1 1.1 0.7 41.8
At 31
December
2022 2,395.1 (31.2) - 15.2 2,379.1
------------- ------------ ------------ ---------- ---------
1. 2021 figures restated see note 1 b) for further details.
42. Share capital
Number of
shares authorised Nominal
and fully value Premium
Ordinary shares of GBP0.01 each paid GBPm GBPm
At 31 December 2021 and 2022 447,304,198 4.5 -
The holders of ordinary shares are entitled to receive dividends
as declared from time to time, and are entitled to one vote per
share at meetings of the Company. All ordinary shares rank equally
with regard to the Company's residual assets.
All ordinary shares issued in the current and prior year were
fully paid.
43. Other reserves
The Group's and Company's other reserves are as follows:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Distributable:
Share-based payment 13.3 11.7 10.9 9.4
Capital contribution - 1.7 - -
FVOCI 0.3 0.6 0.2 -
Foreign exchange (1.3) (1.1) - -
AT1 securities 150.0 150.0 90.0 90.0
162.3 162.9 101.1 99.4
--------------------- ----- ----- ------- -------
FVOCI reserve
The FVOCI reserve represents the cumulative net change in the
fair value of investment securities measured at FVOCI.
Foreign exchange reserve
The foreign exchange reserve relates to the revaluation of the
Group's Indian subsidiary, OSB India Private Limited.
AT1 Securities
On 5 October 2021, OSBG issued in total GBP150.0m of new AT1
securities, GBP90.0m issued by the Company and GBP60.0m issued by
Charter Court Financial Services Limited. AT1 securities comprise
GBP150.0m of Fixed Rate Resetting Perpetual Subordinated Contingent
Convertible Securities that qualify as AT1 capital under CRD IV.
The securities will be subject to full conversion into ordinary
shares of OSBG in the event that the Group's Common Equity Tier 1
(CET1) capital ratio falls below 7%.The securities will pay
interest at a rate of 6% per annum until the first reset date of 7
April 2027, with the reset interest rate equal to 539.3 basis
points over the 5-year Gilt Rate (benchmark gilt) for such a
period. Interest is paid semi-annually in April and October. OSBG
may, at any time, cancel any interest payment at its full
discretion and must cancel interest payments in certain
circumstances specified in the terms and conditions of the
securities. The securities are perpetual with no fixed redemption
date.
OSBG may, in its discretion and subject to satisfying certain
conditions, redeem all (but not some) of the AT1 securities at the
principal amount outstanding plus any accrued but unpaid interest
from the first reset date and on any interest payment date
thereafter.
44. Financial commitments and guarantees
1. The Group did not have any contracted or anticipated capital expenditure
commitments not provided for as at 31 December 2022 (2021: nil).
2. The Group's minimum lease commitments under operating leases not subject
to IFRS 16 are summarised in the table below:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Land and buildings: due within:
One year 0.3 - 0.1 -
Two to five years 0.3 - - -
0.6 - 0.1 -
-------------------------------- ----- ----- ------- -------
1. Undrawn loan facilities:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
OSB mortgages 741.6 706.4 559.1 577.5
CCFS mortgages 455.1 434.5 - -
Asset finance 15.5 14.4 - -
1,212.2 1,155.3 559.1 577.5
--------------- ------- ------- ------- -------
Undrawn loan facilities are approved loan applications which
have not yet been exercised. They are payable on demand and are
usually drawn down or expire within three months.
1. The Group did not have any issued financial guarantees as at 31 December
2022 (2021: nil).
45. Risk management
Overview
Financial instruments form the vast majority of the Group's and
Company's assets and liabilities. The Group manages risk on a
consolidated basis and risk disclosures that follow are provided on
this basis.
Types of financial instrument
Financial instruments are a broad definition which includes
financial assets, financial liabilities and equity instruments. The
main financial assets of the Group are loans to customers and
liquid assets, which in turn consist of cash in the BoE call
accounts, call accounts with other credit institutions, RMBS and UK
sovereign debt. These are funded by a combination of financial
liabilities and equity instruments. Financial liability funding
comes predominantly from retail deposits and drawdowns under the
BoE TFSME and ILTR, supported by debt securities, wholesale and
other funding. Equity instruments include own shares and AT1
securities meeting the equity classification criteria. The Group's
main activity is mortgage lending; it raises funds or invests in
particular types of financial assets to meet customer demand and
manage the risks arising from its operations. The Group does not
trade in financial instruments for speculative purposes.
The Group uses derivative instruments to manage its financial
risks. Derivative financial instruments (derivatives) are financial
instruments whose value changes in response to changes in
underlying variables such as interest rates. The most common
derivatives are futures, forwards and swaps. Of these, the Group
only uses swaps.
Derivatives are used by the Group solely to reduce (hedge) the
risk of loss arising from changes in market rates. Derivatives are
not used for speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its
risk exposures are interest rate swaps. Interest rate swaps convert
fixed interest rates to floating or vice versa. As with other
derivatives, the underlying product is not sold and payments are
based on notional principal amounts.
Unhedged fixed rate liabilities create the risk of paying
above-the-market rate if interest rates subsequently decrease.
Unhedged fixed rate mortgages and liquid assets bear the opposite
risk of income below-the-market rate when rates go up. While fixed
rate assets and liabilities naturally hedge each other to a certain
extent, this hedge is usually never perfect because of maturity
mismatches and principal amounts.
The Group uses swaps to convert its instruments, such as
mortgages, deposits and liquid assets, from fixed or base
rate-linked rates to reference linked variable rates. This ensures
a guaranteed margin between the interest income and interest
expense, regardless of changes in the market rates.
Types of risk
The principal financial risks to which the Group is exposed are
credit, liquidity and market risks, the latter comprising interest
and exchange rate risk. In addition to financial risks, the Group
is exposed to various other risks, most notably operational,
conduct and compliance/regulatory, which are covered in the Risk
review on pages 30 to 60.
1. Risk management (continued)
Credit risk
Credit risk is the risk that losses may arise as a result of the
Group's borrowers or market counterparties failing to meet their
obligations to repay.
The Group has adopted the Standardised Approach for assessment
of credit risk regulatory capital requirements. This approach
considers risk weightings as defined under Basel II and Basel III
principles.
The classes of financial instruments to which the Group is most
exposed are loans and advances to customers, loans and advances to
credit institutions, cash in the BoE call account, call and current
accounts with other credit institutions and investment securities.
The maximum credit risk exposure equals the total carrying amount
of the above categories plus off-balance sheet undrawn committed
mortgage facilities.
The change, during the period and cumulatively, in the fair
value of investments in debt securities and loans and advances to
customers at FVOCI and FVTPL that is attributable to changes in
credit risk is not material.
Credit risk -- loans and advances to customers
Credit risk associated with mortgage lending is largely driven
by the housing market and level of unemployment. A recession and/or
high interest rates could cause pressure within the market,
resulting in rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's
Lending Policy. Changes to the policy are approved by the Group
Risk Committee, with mandates set for the approval of loan
applications.
The Group Credit Committee and ALCO regularly monitor lending
activity, taking appropriate actions to reprice products and adjust
lending criteria in order to control risk and manage exposure.
Where necessary and appropriate, changes to the Lending Policy are
recommended to the Group Risk Committee.
The following tables show the Group's and Company's maximum
exposure to credit risk and the impact of collateral held as
security, capped at the gross exposure amount, by impairment stage.
Capped collateral excludes the impact of forced sale discounts and
costs to sell. The collateral value is determined by indexing
against House Price Index data.
2022
OSB CCFS Total
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,346.8 10,320.4 8,375.5 8,374.4 18,722.3 18,694.8
Stage
2(1) 2,509.7 2,508.5 1,907.4 1,907.1 4,417.1 4,415.6
Stage 3 349.7 319.2 156.0 156.0 505.7 475.2
Stage 3
(POCI) 38.5 37.5 44.5 44.4 83.0 81.9
13,244.7 13,185.6 10,483.4 10,481.9 23,728.1 23,667.5
------- -------------- ----------- -------------- ----------- -------------- -----------
1. The increase in balance of accounts in Stage 2 is due to the increased
credit risk from heightened cost of living and cost of borrowing. For
further detail relating to movements by stage see the risk review section
on pages 30 to 60.
1. Risk management (continued)
2021
OSB CCFS Total
---------------------------
Capped Capped Capped
Gross carrying collateral Gross carrying collateral Gross carrying collateral
amount held amount held amount held
Group GBPm GBPm GBPm GBPm GBPm GBPm
Stage 1 10,502.7 10,478.1 7,685.7 7,684.6 18,188.4 18,162.7
Stage 2 1,143.8 1,141.9 1,269.8 1,269.7 2,413.6 2,411.6
Stage 3 365.6 337.9 99.1 99.1 464.7 437.0
Stage 3
(POCI) 45.2 43.6 52.2 52.2 97.4 95.8
12,057.3 12,001.5 9,106.8 9,105.6 21,164.1 21,107.1
------- -------------- ----------- -------------- ----------- -------------- -----------
The Group's main form of collateral held is property, based in
the UK and the Channel Islands.
The Group uses indexed loan to value (LTV) ratios to assess the
quality of the uncapped collateral held. Property values are
updated to reflect changes in the HPI. A breakdown of loans and
advances to customers by indexed LTV is as follows:
2022 2021
OSB CCFS Total OSB CCFS Total
Group GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 2,768.8 914.7 3,683.5 16 2,293.3 428.2 2,721.5 13
50% - 60% 2,770.7 1,361.1 4,131.8 17 1,935.3 490.1 2,425.4 11
60% - 70% 4,647.5 3,561.7 8,209.2 35 4,179.0 1,241.9 5,420.9 26
70% - 80% 2,150.7 4,277.3 6,428.0 26 2,887.7 6,100.7 8,988.4 43
80% - 90% 548.3 365.5 913.8 4 513.2 844.4 1,357.6 6
90% - 100% 181.3 2.5 183.8 1 77.8 1.5 79.3 -
>100% 177.4 0.6 178.0 1 171.0 - 171.0 1
Total loans before
provisions 13,244.7 10,483.4 23,728.1 100 12,057.3 9,106.8 21,164.1 100
------------------ -------- -------- -------- --- -------- ------- -------- ---
1. Risk management (continued)
The table below shows the LTV banding for the OSB segments' two
major lending streams:
2022 2021
BTL/SME Residential Total BTL/SME Residential Total
OSB GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 1,301.4 1,467.4 2,768.8 21 1,007.6 1,285.7 2,293.3 19
50% - 60% 2,497.2 273.5 2,770.7 21 1,693.7 241.6 1,935.3 16
60% - 70% 4,386.0 261.5 4,647.5 36 3,903.0 276.0 4,179.0 35
70% - 80% 1,977.1 173.6 2,150.7 16 2,647.7 240.0 2,887.7 24
80% - 90% 418.1 130.2 548.3 4 452.8 60.4 513.2 4
90% - 100% 167.3 14.0 181.3 1 66.2 11.6 77.8 1
>100% 172.9 4.5 177.4 1 165.1 5.9 171.0 1
Total loans
before provisions 10,920.0 2,324.7 13,244.7 100 9,936.1 2,121.2 12,057.3 100
------------------ -------- ----------- -------- --- ------- ----------- -------- ---
The tables below show the LTV analysis of the OSB BTL/SME
sub-segment:
2022
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,137.6 114.7 16.1 33.0 1,301.4
50% - 60% 2,324.1 112.8 57.2 3.1 2,497.2
60% - 70% 4,111.4 164.4 110.2 - 4,386.0
70% - 80% 1,741.5 235.6 - - 1,977.1
80% - 90% 232.8 151.6 - 33.7 418.1
90% - 100% 77.1 63.8 - 26.4 167.3
>100% 130.5 38.4 1.0 3.0 172.9
Total loans before
provisions 9,755.0 881.3 184.5 99.2 10,920.0
--------------------- ---------- ---------- ------------ ------- --------
1. Risk management (continued)
2021
Residential Funding
Buy-to-Let Commercial development lines Total
OSB GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 804.0 118.9 19.0 65.7 1,007.6
50% - 60% 1,532.0 105.1 40.1 16.5 1,693.7
60% - 70% 3,708.1 130.1 61.6 3.2 3,903.0
70% - 80% 2,423.7 224.0 - - 2,647.7
80% - 90% 249.5 165.9 - 37.4 452.8
90% - 100% 46.4 19.8 - - 66.2
>100% 104.0 30.6 - 30.5 165.1
Total loans before
provisions 8,867.7 794.4 120.7 153.3 9,936.1
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the LTV analysis of the OSB Residential
sub-segment:
2022 2021
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
OSB GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,357.6 109.8 - 1,467.4 1,173.3 111.8 0.6 1,285.7
50% - 60% 238.1 35.4 - 273.5 189.8 51.8 - 241.6
60% - 70% 242.9 18.6 - 261.5 240.2 35.8 - 276.0
70% - 80% 168.3 5.3 - 173.6 221.3 18.7 - 240.0
80% - 90% 128.8 1.4 - 130.2 56.5 3.9 - 60.4
90% - 100% 13.4 0.6 - 14.0 10.3 1.3 - 11.6
>100% 3.8 0.7 - 4.5 4.5 1.4 - 5.9
Total loans
before provisions 2,152.9 171.8 - 2,324.7 1,895.9 224.7 0.6 2,121.2
------------------ ------- ------- ------- ------- ------- ------- ------- -------
1. Risk management (continued)
The table below shows the LTV analysis of the four CCFS
sub-segment:
2022
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 308.6 498.3 62.9 44.9 914.7 9
50% - 60% 799.5 501.8 29.9 29.9 1,361.1 13
60% - 70% 2,587.6 924.2 25.6 24.3 3,561.7 34
70% - 80% 3,613.8 622.9 26.9 13.7 4,277.3 41
80% - 90% 215.1 146.8 2.4 1.2 365.5 3
90% - 100% 0.2 0.8 1.5 - 2.5 -
>100% - 0.1 0.5 - 0.6 -
Total loans before
provisions 7,524.8 2,694.9 149.7 114.0 10,483.4 100
------------------ ---------- ----------- -------- -------- -------- ---
2021
Second
charge
Buy-to-Let Residential Bridging lending Total
CCFS GBPm GBPm GBPm GBPm GBPm %
Band
0% - 50% 104.8 261.0 30.2 32.2 428.2 5
50% - 60% 205.4 246.8 9.3 28.6 490.1 5
60% - 70% 702.4 480.1 14.9 44.5 1,241.9 14
70% - 80% 4,827.7 1,234.5 1.4 37.1 6,100.7 67
80% - 90% 560.5 268.9 0.5 14.5 844.4 9
90% - 100% 0.1 1.4 - - 1.5 -
Total loans before
provisions 6,400.9 2,492.7 56.3 156.9 9,106.8 100
------------------- ---------- ----------- -------- -------- ------- ---
1. Risk management (continued)
The table below shows the LTV banding for the Company's
segments' two major lending streams:
2022 2021
BTL/SME Residential Total BTL/SME Residential Total
Company GBPm GBPm GBPm % GBPm GBPm GBPm %
Band
0% - 50% 919.9 1,398.4 2,318.3 22 708.3 1,213.9 1,922.2 20
50% - 60% 1,978.5 267.2 2,245.7 21 1,244.1 220.6 1,464.7 15
60% - 70% 3,695.1 259.7 3,954.8 37 3,167.5 273.4 3,440.9 37
70% - 80% 1,485.8 172.3 1,658.1 16 2,083.4 239.2 2,322.6 25
80% - 90% 224.9 130.2 355.1 3 249.0 59.8 308.8 3
90% - 100% 47.4 13.8 61.2 1 24.2 11.3 35.5 -
>100% 19.3 1.0 20.3 - 42.5 3.0 45.5 -
Total loans before
provisions 8,370.9 2,242.6 10,613.5 100 7,519.0 2,021.2 9,540.2 100
------------------ ------- ----------- -------- --- ------- ----------- ------- ---
The tables below show the LTV analysis of the Company's BTL/SME
sub-segment:
2022
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 861.9 8.9 16.1 33.0 919.9
50% - 60% 1,916.8 1.4 57.2 3.1 1,978.5
60% - 70% 3,585.4 - 109.7 - 3,695.1
70% - 80% 1,485.8 - - - 1,485.8
80% - 90% 191.2 - - 33.7 224.9
90% - 100% 21.0 - - 26.4 47.4
>100% 11.8 3.5 1.0 3.0 19.3
Total loans before
provisions 8,073.9 13.8 184.0 99.2 8,370.9
---------------------- ---------- ---------- ------------ ------- -------
1. Risk management (continued)
2021
Residential Funding
Buy-to-Let Commercial development lines Total
Company GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 616.8 6.8 19.0 65.7 708.3
50% - 60% 1,183.6 3.9 40.1 16.5 1,244.1
60% - 70% 3,102.7 - 61.6 3.2 3,167.5
70% - 80% 2,083.4 - - - 2,083.4
80% - 90% 211.6 - - 37.4 249.0
90% - 100% 24.2 - - - 24.2
>100% 8.5 3.5 - 30.5 42.5
Total loans before
provisions 7,230.8 14.2 120.7 153.3 7,519.0
---------------------- ---------- ---------- ------------ ------- -------
The tables below show the LTV analysis of the Company's
Residential sub-segment:
2022 2021
First Second Funding First Second Funding
charge charge lines Total charge charge lines Total
Company GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Band
0% - 50% 1,288.6 109.8 - 1,398.4 1,101.5 111.8 0.6 1,213.9
50% - 60% 231.8 35.4 - 267.2 168.8 51.8 - 220.6
60% - 70% 241.1 18.6 - 259.7 237.6 35.8 - 273.4
70% - 80% 167.0 5.3 - 172.3 220.6 18.6 - 239.2
80% - 90% 128.8 1.4 - 130.2 55.9 3.9 - 59.8
90% - 100% 13.2 0.6 - 13.8 10.0 1.3 - 11.3
>100% 0.3 0.7 - 1.0 1.6 1.4 - 3.0
Total loans
before provisions 2,070.8 171.8 - 2,242.6 1,796.0 224.6 0.6 2,021.2
------------------ ------- ------- ------- ------- ------- ------- ------- -------
1. Risk management (continued)
Forbearance measures undertaken
The Group has a range of options available where borrowers
experience financial difficulties that impact their ability to
service their financial commitments under the loan agreement. These
options are explained in the Risk review on pages 30 to 60.
A summary of the forbearance measures undertaken (excluding
COVID-19 related payment deferrals) during the year is shown below.
The balances disclosed reflect the year end balance of the accounts
where a forbearance measure was undertaken during the year.
Number At 31 December Number At 31 December
Group of accounts 2022 of accounts 2021
Forbearance type 2022 GBPm 2021 GBPm
Interest-only switch 70 12.2 159 18.6
Interest rate reduction 91 7.5 437 8.1
Term extension 53 2.9 271 16.6
Payment deferral 194 34.0 499 43.0
Voluntary-assisted sale 5 1.2 7 0.8
Payment concession (reduced monthly
payments) 55 12.0 51 12.1
Capitalisation of interest 27 9.0 65 1.1
Full or partial debt forgiveness 359 9.6 1,078 22.6
Total 854 88.4 2,567 122.9
------------------------------------ ------------- -------------- ------------ --------------
Loan type
First charge owner-occupier 217 27.8 424 34.8
Second charge owner-occupier(1) 460 8.9 1,931 38.7
Buy-to-Let 107 37.1 160 34.6
Commercial 70 14.6 52 14.8
Total 854 88.4 2,567 122.9
------------------------------------ ------------- -------------- ------------ --------------
1. Through 2021 and the first quarter of 2022, the Group undertook an
exercise and provided a series of forbearance solutions and options to
long-term arrears customers on our Second charge portfolio to support and
remedy the accrued delinquency.
1. Risk management (continued)
Number At 31 December Number At 31 December
Company of accounts 2022 of accounts 2021
Forbearance type 2022 GBPm 2021 GBPm
Interest-only switch 43 4.8 128 14.4
Interest rate reduction 83 6.5 435 7.6
Term extension 2 - 76 8.2
Payment deferral 92 15.5 346 18.0
Voluntary-assisted sale 5 1.3 3 0.4
Payment concession (reduced monthly
payments) 24 5.9 38 6.4
Capitalisation 26 1.3 65 1.1
Full or partial debt forgiveness 351 8.6 1,077 22.6
Total 626 43.9 2,168 78.7
------------------------------------ ------------- -------------- ------------ --------------
Loan type
First charge owner-occupier 110 13.5 148 16.5
Second charge owner-occupier(1) 452 8.5 1,892 38.0
Buy-to-Let 64 21.9 128 24.2
Total 626 43.9 2,168 78.7
------------------------------------ ------------- -------------- ------------ --------------
1. Through 2021 and the first quarter of 2022, the Company undertook an
exercise and provided a series of forbearance solutions and options to
long term arrears customers on our Second charge portfolio to support and
remedy the accrued delinquency.
1. Risk management (continued)
Geographical analysis by region
An analysis of loans, excluding asset finance leases, by region
is provided below:
Group Group
2022 2021
OSB CCFS Total OSB CCFS Total
Region GBPm GBPm GBPm % GBPm GBPm GBPm %
-------- -------- -------- ---- -------- ------- -------- ----
East Anglia 453.5 1,136.4 1,589.9 7 361.8 967.1 1,328.9 6
East Midlands 609.9 691.6 1,301.5 6 543.8 555.8 1,099.6 5
Greater London 5,559.3 3,293.0 8,852.3 38 4,983.7 3,052.6 8,036.3 39
Guernsey 21.5 - 21.5 - 26.3 - 26.3 -
Jersey 75.6 - 75.6 - 99.3 - 99.3 -
North East 169.8 274.5 444.3 2 153.9 244.4 398.3 2
North West 906.6 921.8 1,828.4 7 762.3 755.0 1,517.3 7
Northern Ireland 10.0 - 10.0 - 10.9 - 10.9 -
Scotland 36.9 261.3 298.2 1 35.2 226.0 261.2 1
South East 2,802.8 1,681.5 4,484.3 19 2,792.6 1,452.4 4,245.0 20
South West 893.7 659.6 1,553.3 7 825.5 544.3 1,369.8 7
Wales 297.5 284.7 582.2 2 272.1 240.6 512.7 2
West Midlands 908.9 761.3 1,670.2 7 706.9 629.8 1,336.7 7
Yorks and
Humberside 335.5 517.7 853.2 4 366.8 438.8 805.6 4
Total loans before
provisions 13,081.5 10,483.4 23,564.9 100 11,941.1 9,106.8 21,047.9 100
------------------- -------- -------- -------- ---- -------- ------- -------- ----
1. Risk management (continued)
Company Company
2022 2021
Region GBPm % GBPm %
-------- --- ------- ---
East Anglia 375.6 4 301.3 3
East Midlands 501.4 5 439.4 5
Greater London 4,491.2 42 3,989.0 43
North East 137.0 1 123.9 1
North West 702.4 7 586.4 6
Northern Ireland 10.0 - 10.8 -
Scotland 31.8 - 29.0 -
South East 2,353.2 22 2,300.4 24
South West 740.2 7 688.5 7
Wales 237.9 2 218.8 2
West Midlands 760.4 7 570.6 6
Yorks and Humberside 272.4 3 282.1 3
Total loans before provisions 10,613.5 100 9,540.2 100
------------------------------- -------- --- ------- ---
Approach to measurement of credit quality
The Group categorises the credit quality of loans and advances
to customers into internal risk grades based on the 12 month PD
calculated at the reporting date. The PDs include a combination of
internal behavioural and credit bureau characteristics and are
aligned with Capital models to generate the risk grades which are
then further grouped into the following credit quality
segments:
-- Excellent quality -- where there is a very high likelihood the asset will
be recovered in full with a negligible or very low risk of default.
-- Good quality -- where there is a high likelihood the asset will be
recovered in full with a low risk of default.
-- Satisfactory quality -- where the assets demonstrate a moderate default
risk.
-- Lower quality -- where the assets require closer monitoring and the risk
of default is of greater concern.
The following tables disclose the credit risk quality ratings of
loans and advances to customers by IFRS 9 stage. The assessment of
whether credit risk has increased significantly since initial
recognition is performed for each reporting period for the life of
the loan. Loans and advances to customers initially booked on very
low PDs and graded as excellent quality loans can experience a SICR
and therefore be moved to Stage 2. Such loans may still be graded
as excellent quality, if they meet the overall criteria.
1. Risk management (continued)
During 2022, the Group developed Capital models as part of the
IRB programme. As a result, the disclosures provided below are now
aligned to internal Capital models and Rating systems.
The 2021 Group figures have been updated to reflect the revised
alignment with Capital models which, compared to 2021 annual report
disclosures, has resulted in a reduction of 11% from OSB segment's
Excellent quality, a 6% increase in Good, a 3% increase in
Satisfactory and a 2% increase in Lower. CCFS segment figures
remain largely aligned with minor movements across segments.
Stage Stage 3 PD lower PD upper
Stage 1 Stage 2 3 (POCI) Total range range
Group 2022 GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 4,136.6 470.6 - - 4,607.2 - 0.3
Good 5,848.5 1,248.4 - - 7,096.9 0.3 2.0
Satisfactory 331.8 374.2 - - 706.0 2.0 7.4
Lower 29.9 416.5 - - 446.4 7.4 100.0
Impaired - - 349.7 - 349.7 100.0 100.0
POCI - - - 38.5 38.5 100.0 100.0
CCFS
Excellent 5,800.2 910.1 - - 6,710.3 - 0.3
Good 2,394.2 668.2 - - 3,062.4 0.3 2.0
Satisfactory 151.4 143.9 - - 295.3 2.0 7.4
Lower 29.7 185.2 - - 214.9 7.4 100.0
Impaired - - 156.0 - 156.0 100.0 100.0
POCI - - - 44.5 44.5 100.0 100.0
18,722.3 4,417.1 505.7 83.0 23,728.1
------------- -------- ------- ----- ------- -------- -------- --------
Stage Stage 3 PD lower PD upper
Stage 1 Stage 2 3 (POCI) Total range range
Group 2021 GBPm GBPm GBPm GBPm GBPm % %
OSB
Excellent 3,949.2 159.6 - - 4,108.8 - 0.3
Good 6,045.0 486.8 - - 6,531.8 0.3 2.0
Satisfactory 435.9 237.2 - - 673.1 2.0 7.4
Lower 72.6 260.2 - - 332.8 7.4 100.0
Impaired - - 365.6 - 365.6 100.0 100.0
POCI - - - 45.2 45.2 100.0 100.0
CCFS
Excellent 5,102.2 443.2 - - 5,545.4 - 0.3
Good 2,468.5 487.5 - - 2,956.0 0.3 2.0
Satisfactory 96.2 171.5 - - 267.7 2.0 7.4
Lower 18.8 167.6 - - 186.4 7.4 100.0
Impaired - - 99.1 - 99.1 100.0 100.0
POCI - - - 52.2 52.2 100.0 100.0
18,188.4 2,413.6 464.7 97.4 21,164.1
------------- -------- -------- -------- --------
1. Risk management (continued)
The 2021 Company figures have been updated to reflect the
revised alignment with Capital models which, compared to 2021
annual report disclosures, has resulted in a increase of 2% from
OSB segment's Excellent quality, a 7% decrease in Good, a 3%
increase in Satisfactory and a 3% increase in Lower.
Stage Stage 3 PD lower PD upper
Stage 1 Stage 2 3 (POCI) Total range range
Company 2022 GBPm GBPm GBPm GBPm GBPm % %
Excellent 3,936.9 470.6 - - 4,407.5 - 0.3
Good 3,686.0 1,146.2 - - 4,832.2 0.3 2.0
Satisfactory 287.1 342.8 - - 629.9 2.0 7.4
Lower 29.0 393.5 - - 422.5 7.4 100.0
Impaired - - 286.9 - 286.9 100.0 100.0
POCI - - - 34.5 34.5 100.0 100.0
7,939.0 2,353.1 286.9 34.5 10,613.5
------------- ------- ------- ------ ------- -------- -------- --------
Company 2021
Excellent 3,777.2 159.6 - - 3,936.8 - 0.3
Good 3,985.4 363.7 - - 4,349.1 0.3 2.0
Satisfactory 387.6 220.2 - - 607.8 2.0 7.4
Lower 70.5 241.0 - - 311.5 7.4 100.0
Impaired - - 294.0 - 294.0 100.0 100.0
POCI - - - 41.0 41.0 100.0 100.0
8,220.7 984.5 294.0 41.0 9,540.2
------------- ------- ------- ------ ------- -------- -------- --------
The tables below show the Group's other financial assets and
derivatives by credit risk rating grade. The credit grade is based
on the external credit rating of the counterparty; AAA to AA- are
rated Excellent; A+ to A- are rated Good; and BBB+ to BBB- are
rated Satisfactory.
Excellent Good Satisfactory Total
Group 2022 GBPm GBPm GBPm GBPm
Investment securities 412.9 - - 412.9
Loans and advances to credit
institutions 2,923.2 435.4 7.1 3,365.7
Derivative assets 400.1 488.0 - 888.1
3,736.2 923.4 7.1 4,666.7
----------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
Group 2021 GBPm GBPm GBPm GBPm
Investment securities 491.4 - - 491.4
Loans and advances to credit
institutions 2,688.9 151.8 2.9 2,843.6
Derivative assets 43.0 142.7 - 185.7
3,223.3 294.5 2.9 3,520.7
----------------------------- --------- ----- ------------ -------
1. Risk management (continued)
Excellent Good Satisfactory Total
Company 2022 GBPm GBPm GBPm GBPm
Investment securities 211.4 - - 211.4
Loans and advances to credit
institutions 1,409.6 96.5 - 1,506.1
Derivative assets 114.9 119.1 - 234.0
1,735.9 215.6 - 1,951.5
----------------------------- --------- ----- ------------ -------
Excellent Good Satisfactory Total
Company 2021 GBPm GBPm GBPm GBPm
Investment securities 16.2 - - 16.2
Loans and advances to credit
institutions 1,373.6 31.4 - 1,405.0
Derivative assets 9.7 40.8 - 50.5
1,399.5 72.2 - 1,471.7
----------------------------- --------- ---- ------------ -------
Credit risk -- loans and advances to credit institutions and
investment securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk
arising from these investments is closely monitored and managed by
the Group's Treasury function. In managing these assets, Group
Treasury operates within guidelines laid down in the Group Market
and Liquidity Risk Policy approved by ALCO and performance is
monitored and reported to ALCO monthly, including through the use
of an internally developed rating model based on counterparty
credit default swap spreads.
The Group has limited exposure to emerging markets (Indian
operations) and non-investment grade debt. ALCO is responsible for
approving treasury counterparties.
During the year, the average balance of cash in hand, loans and
advances to credit institutions and investment securities on a
monthly basis was GBP3,496.9m (2021: GBP2,926.0m).
The tables below show the industry sector of the Group's loans
and advances to credit institutions and investment securities:
Group Group Company Company
2022 2021 2022 2021
GBPm % GBPm % GBPm % GBPm %
BoE(1) 2,869.3 76 2,555.9 76 1,366.0 80 1,350.0 95
Other banks 496.4 13 287.7 9 140.1 8 55.0 4
Central government 149.8 4 252.1 8 149.8 8 - -
Securitisation 263.1 7 239.3 7 61.6 4 16.2 1
Total 3,778.6 100 3,335.0 100 1,717.5 100 1,421.2 100
------------------- ------- --- ------- --- ------- --- ------- ---
1. Balances with the BoE include GBP62.8m (2021: GBP59.5m) of Group and
GBP37.8m (2021: GBP36.5m) of the Company held in the cash ratio deposit.
1. Risk management (continued)
The tables below show the geographical exposure of the Group's
loans and advances to credit institutions and investment
securities:
Group Group Company Company
2022 2021 2022 2021
GBPm % GBPm % GBPm % GBPm %
United Kingdom 3,765.7 100 3,328.0 100 1,717.5 100 1,421.2 100
India 12.9 - 7.0 - - - - -
Total 3,778.6 100 3,335.0 100 1,717.5 100 1,421.2 100
--------------- ------- --- ------- --- ------- --- ------- ---
The Group monitors exposure concentrations against a variety of
criteria, including asset class, sector and geography. To avoid
refinancing risks associated with any one counterparty, sector or
geographical region, the Board has set appropriate limits.
For further information on credit risk see page 51.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets
to fulfil obligations as they become due or the cost of raising
liquid funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence
in the solvency of the Group and to enable the Group to meet its
financial obligations as they fall due. This is achieved through
maintaining a prudent level of liquid assets and control of the
growth of the business. The Group has established call accounts
with the BoE and has access to its contingent liquidity
facilities.
The Board has delegated the responsibility for liquidity
management to the Chief Executive Officer, assisted by ALCO, with
day-to-day management delegated to Treasury as detailed in the
Group Market and Liquidity Risk Policy. The Board is responsible
for setting risk appetite limits over the level and maturity
profile of funding and for monitoring the composition of the Group
financial position. The tables below analyse the financial assets
and liabilities of the Group based on the contractual maturity on
the remaining period at balance sheet date.
The Group also monitors a range of triggers, defined in the
recovery plan, which are designed to capture liquidity stresses in
advance in order to allow sufficient time for management action to
take effect. These are monitored daily by the Risk team, with
breaches immediately reported to the Group Chief Risk Officer,
Chief Executive Officer, Chief Financial Officer and the Group
Treasurer.
1. Risk management (continued)
The tables below show the maturity profile for the Group's
financial assets and liabilities based on contractual maturities at
the reporting date:
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 19,755.8 6,770.7 2,632.4 7,807.7 2,545.0 -
Amounts owed to credit
institutions 5,092.9 - 191.4 310.3 4,218.9 372.3
Amounts owed to other
customers 113.1 - 29.7 76.5 6.9 -
Derivative liabilities 106.6 - 7.5 46.3 43.8 9.0
Debt securities in
issue 265.9 - 0.3 - 265.6 -
Lease liabilities 9.9 - 0.4 1.3 7.6 0.6
Subordinated liabilities - - - - - -
PSBs 15.2 - - - 15.2 -
Total liabilities 25,359.4 6,770.7 2,861.7 8,242.1 7,103.0 381.9
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and advances
to credit institutions 3,365.7 3,104.0 71.4 - - 190.3
Investment securities 412.9 0.5 144.8 22.1 245.5 -
Loans and advances
to customers 23,612.7 2.3 223.8 421.8 1,341.6 21,623.2
Derivative assets 888.1 - 2.7 55.5 828.2 1.7
Total assets 28,279.8 3,107.2 442.7 499.4 2,415.3 21,815.2
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (3,663.5) (6,082.5) (13,825.2) (18,512.9) 2,920.4
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Group amount On demand 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 5,004.6 2,350.3 7,458.5 2,713.0 -
Amounts owed to credit
institutions 4,319.6 42.1 1.0 - 4,203.2 73.3
Amounts owed to other
customers 92.6 14.8 8.1 45.0 24.7 -
Derivative liabilities 19.7 - 0.7 10.4 8.6 -
Debt securities in
issue 460.3 - - - 460.3 -
Lease liabilities 10.7 - 0.3 0.6 3.7 6.1
Subordinated liabilities 10.3 - - 0.1 10.2 -
PSBs 15.2 - - - 15.2 -
Total liabilities 22,454.8 5,061.5 2,360.4 7,514.6 7,438.9 79.4
------------------------ -------- --------- --------- ---------- ---------- ---------
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 2,843.6 2,667.8 52.0 10.1 - 113.7
Investment securities 491.4 - 172.7 6.1 312.6 -
Loans and advances
to customers 21,080.3 3.3 163.8 383.5 1,327.4 19,202.3
Derivative assets 185.7 - 0.1 5.4 179.9 0.3
Total assets 24,601.5 2,671.6 388.6 405.1 1,819.9 19,316.3
------------------------ -------- --------- --------- ---------- ---------- ---------
Cumulative liquidity
gap (2,389.9) (4,361.7) (11,471.2) (17,090.2) 2,146.7
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 11,132.2 5,319.1 955.8 3,695.8 1,161.5 -
Amounts owed to credit
institutions 2,568.5 - 173.4 0.3 2,394.8 -
Amounts owed to other
customers 0.5 - 0.5 - - -
Derivative liabilities 63.8 - 4.1 24.0 29.8 5.9
Lease liabilities 3.6 - 0.2 0.5 2.8 0.1
Subordinated liabilities - - - - - -
PSBs 15.2 - - - 15.2 -
Total liabilities 13,783.8 5,319.1 1,134.0 3,720.6 3,604.1 6.0
------------------------ -------- --------- --------- --------- ---------- ---------
Financial asset by
type
Cash in hand 0.4 0.4 - - - -
Loans and advances
to credit institutions 1,506.1 1,468.3 - - - 37.8
Investment securities 211.4 0.5 139.9 9.9 61.1 -
Loans and advances
to customers 10,531.9 - 98.0 99.9 362.7 9,971.3
Derivative assets 234.0 - 0.8 22.5 210.2 0.5
Total assets 12,483.8 1,469.2 238.7 132.3 634.0 10,009.6
------------------------ -------- --------- --------- --------- ---------- ---------
Cumulative liquidity
gap (3,849.9) (4,745.2) (8,333.5) (11,303.6) (1,300.0)
1. Risk management (continued)
Carrying Less than 3 - 12 1 - 5 More than
Company amount On demand 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,739.4 3,157.5 1,361.7 3,889.5 1,330.7 -
Amounts owed to credit
institutions 2,420.7 42.1 - - 2,378.6 -
Amounts owed to other
customers 5.7 - 0.5 5.2 - -
Derivative liabilities 8.7 - 0.3 4.6 3.8 -
Lease liabilities 3.9 - - - 0.3 3.6
Subordinated liabilities 10.3 - - 0.1 10.2 -
PSBs 15.2 - - - 15.2 -
Total liabilities 12,203.9 3,199.6 1,362.5 3,899.4 3,738.8 3.6
------------------------ -------- --------- --------- --------- ---------- ---------
Financial asset by
type
Cash in hand 0.5 0.5 - - - -
Loans and advances
to credit institutions 1,405.0 1,368.5 - - - 36.5
Investment securities 16.2 - - - 16.2 -
Loans and advances
to customers 9,476.4 - 40.8 126.8 337.1 8,971.7
Derivative assets 50.5 - - 1.9 48.4 0.2
Total assets 10,948.6 1,369.0 40.8 128.7 401.7 9,008.4
------------------------ -------- --------- --------- --------- ---------- ---------
Cumulative liquidity
gap (1,830.6) (3,152.3) (6,923.0) (10,260.1) (1,255.3)
1. Risk management (continued)
Liquidity risk -- undiscounted contractual cash flows
The following tables provide an analysis of the Group's gross
contractual undiscounted cash flows, derived using interest rates
and contractual maturities at the reporting date and excluding
impacts of early payments or non-payments:
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 19,755.8 20,083.0 9,566.2 7,911.0 2,605.8 -
Amounts owed to credit
institutions 5,092.9 5,459.8 227.1 410.9 4,449.5 372.3
Amounts owed to other
customers 113.1 113.1 29.7 76.5 6.9 -
Derivative liabilities 106.6 103.9 16.2 39.1 46.7 1.9
Debt securities in
issue 265.9 277.3 34.4 64.5 178.4 -
Lease liabilities 9.9 11.4 0.5 1.5 8.8 0.6
Subordinated liabilities - - - - - -
PSBs 15.2 16.1 0.3 0.3 15.5 -
Total liabilities 25,359.4 26,064.6 9,874.4 8,503.8 7,311.6 374.8
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 1,212.2 1,212.2 1,212.2 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 3,365.7 3,365.7 3,175.4 - - 190.3
Investment securities 412.9 444.3 148.2 30.2 265.9 -
Loans and advances
to customers 23,612.7 57,940.1 430.7 1,657.2 8,028.9 47,823.3
Derivative assets 888.1 820.5 76.9 259.4 484.6 (0.4)
Total assets 28,279.8 62,571.0 3,831.6 1,946.8 8,779.4 48,013.2
------------------------ -------- ------------- --------- -------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Group amount outflow 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 17,526.4 17,554.7 9,305.7 5,883.7 2,365.3 -
Amounts owed to credit
institutions 4,319.6 4,359.8 45.2 5.2 4,236.1 73.3
Amounts owed to other
customers 92.6 92.6 22.9 45.0 24.7 -
Derivative liabilities 19.7 6.0 (0.4) 5.1 1.2 0.1
Debt securities in
issue 460.3 473.2 25.1 75.0 373.1 -
Lease liabilities 10.7 13.1 0.6 1.6 7.7 3.2
Subordinated liabilities 10.3 12.2 0.2 0.7 11.3 -
PSBs 15.2 16.8 0.2 0.5 16.1 -
Total liabilities 22,454.8 22,528.4 9,399.5 6,016.8 7,035.5 76.6
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 1,155.3 1,155.3 1,155.3 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 2,843.6 2,843.6 2,756.3 10.1 - 77.2
Investment securities 491.4 497.0 172.6 108.8 215.6 -
Loans and advances
to customers 21,080.3 41,290.2 374.4 1,331.0 5,711.9 33,872.9
Derivative assets 185.7 75.8 (1.4) 11.2 66.0 -
Total assets 24,601.5 44,707.1 3,302.4 1,461.1 5,993.5 33,950.1
------------------------ -------- ------------- --------- -------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 11,132.2 11,326.5 6,431.9 3,712.8 1,181.8 -
Amounts owed to credit
institutions 2,568.5 2,751.0 190.4 50.9 2,509.7 -
Amounts owed to other
customers 0.5 0.5 0.5 - - -
Derivative liabilities 63.8 67.3 3.9 30.5 31.0 1.9
Lease liabilities 3.6 3.9 0.2 0.6 3.0 0.1
Subordinated liabilities - - - - - -
PSBs 15.2 16.1 0.3 0.3 15.5 -
Total liabilities 13,783.8 14,165.3 6,627.2 3,795.1 3,741.0 2.0
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 559.1 559.1 559.1 - - -
Financial asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and advances
to credit institutions 1,506.1 1,506.1 1,468.3 - - 37.8
Investment securities 211.4 211.7 140.7 10.0 61.0 -
Loans and advances
to customers 10,531.9 26,949.1 158.8 764.1 3,457.4 22,568.8
Derivative assets 234.0 252.7 4.4 72.9 175.8 (0.4)
Total assets 12,483.8 28,920.0 1,772.6 847.0 3,694.2 22,606.2
------------------------ -------- ------------- --------- -------- ------- ---------
1. Risk management (continued)
Carrying Gross inflow/ Up to 3 - 12 1 - 5 More than
Company amount outflow 3 months months years 5 years
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial liability
by type
Amounts owed to retail
depositors 9,739.4 9,720.5 6,467.9 2,288.6 964.0 -
Amounts owed to credit
institutions 2,420.7 2,443.3 43.3 1.8 2,398.2 -
Amounts owed to other
customers 5.7 5.7 0.5 5.2 - -
Derivative liabilities 8.7 8.2 0.1 5.0 3.0 0.1
Lease liabilities 3.9 4.4 0.2 0.5 2.4 1.3
Subordinated liabilities 10.3 10.3 0.2 0.1 10.0 -
PSBs 15.2 15.2 0.2 - 15.0 -
Total liabilities 12,203.9 12,207.6 6,512.4 2,301.2 3,392.6 1.4
------------------------ -------- ------------- --------- -------- ------- ---------
Off-balance sheet loan
commitments 577.5 577.5 577.5 - - -
Financial asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and advances
to credit institutions 1,405.0 1,405.0 1,405.0 - - -
Investment securities 16.2 16.3 0.7 0.1 15.5 -
Loans and advances
to customers 9,476.4 19,793.6 129.0 659.0 2,531.0 16,474.6
Derivative assets 50.5 50.5 (0.6) 3.3 47.8 -
Total assets 10,948.6 21,265.9 1,534.6 662.4 2,594.3 16,474.6
------------------------ -------- ------------- --------- -------- ------- ---------
The actual repayment profile of retail deposits may differ from
the analysis above due to the option of early withdrawal with a
penalty.
Cash flows on PSBs are disclosed up to the next interest rate
reset date.
The actual repayment profile of loans and advances to customers
may differ from the analysis above since many mortgage loans are
repaid prior to the contractual end date.
1. Risk management (continued)
Liquidity risk -- asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following
tables provide an analysis of the Group's encumbered and
unencumbered assets:
Group
2022
Encumbered Unencumbered
-----------------------
Pledged Available
as collateral Other(1) as collateral Other Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to credit
institutions 237.4 174.6 2,806.5 147.2 3,365.7
Investment securities 46.4 - 366.5 - 412.9
Loans and advances to
customers(2) 6,705.1 - 16,424.5 483.1 23,612.7
Derivative assets - - - 888.1 888.1
Non-financial assets - - - (712.3) (712.3)
6,988.9 174.6 19,597.9 806.1 27,567.5
----------------------------- -------------- -------- -------------- ------- --------
Group
2021
Encumbered Unencumbered
------------------------
Pledged Available
as collateral Other(1) as collateral Other Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 99.9 107.5 2,496.4 139.8 2,843.6
Investment securities 121.8 - 369.6 - 491.4
Loans and advances to
customers(2) 6,373.7 - 2,746.3 11,960.3 21,080.3
Derivative assets - - - 185.7 185.7
Non-financial assets - - - (69.0) (69.0)
6,595.4 107.5 5,612.8 12,216.8 24,532.5
----------------------------- -------------- -------- -------------- -------- --------
1. Represents assets that are not pledged but that the Group believes it is
restricted from using to secure funding for legal or other reasons.
2. Unencumbered loans and advances to customers classified as other are
restricted for use as collateral as they are; registered outside of UK
(Jersey and Guernsey), not secured by immovable property or are
non-performing.
1. Risk management (continued)
Company
2022
Encumbered Unencumbered
-----------------------
Pledged Available
as collateral Other(1) as collateral Other Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to credit
institutions 109.6 37.8 1,328.2 30.5 1,506.1
Investment securities 34.8 - 176.6 - 211.4
Loans and advances to
customers(2) 3,419.8 - 6,989.2 122.9 10,531.9
Derivative assets - - - 234.0 234.0
Non-financial assets - - - 3,120.1 3,120.1
3,564.2 37.8 8,494.4 3,507.5 15,603.9
----------------------------- -------------- -------- -------------- ------- --------
Company
2021
Encumbered Unencumbered
-----------------------
Pledged Available
as collateral Other(1) as collateral Other Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to credit
institutions 36.7 36.5 1,313.5 18.3 1,405.0
Investment securities - - 16.2 - 16.2
Loans and advances to
customers(2) 3,678.9 - - 5,797.5 9,476.4
Derivative assets - - - 50.5 50.5
Non-financial assets - - - 3,135.9 3,135.9
3,715.6 36.5 1,330.2 9,002.2 14,084.5
----------------------------- -------------- -------- -------------- ------- --------
1. Represents assets that are not pledged but that the Group believes it is
restricted from using to secure funding for legal or other reasons.
2. Unencumbered loans and advances to customers classified as other are
restricted for use as collateral as they are; not secured by immovable
property or are non-performing.
1. Risk management (continued)
Liquidity risk -- liquidity reserves
The tables below analyse the Group's liquidity reserves, where
carrying value is considered to be equal to fair value:
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
Unencumbered balances with central
banks 2,806.5 2,496.4 1,328.2 1,313.5
Unencumbered cash and balances
with other banks 147.2 139.8 30.5 18.3
Other cash and cash equivalents 0.4 0.5 0.4 0.5
Unencumbered investment securities 366.5 369.6 176.6 16.2
3,320.6 3,006.3 1,535.7 1,348.5
----------------------------------- ------- ------- ------- -------
Market risk
Market risk is the risk of an adverse change in the Group's
income or the Group's net worth arising from movement in interest
rates, exchange rates or other market prices. Market risk exists,
to some extent, in all the Group's businesses. The Group recognises
that the effective management of market risk is essential to the
maintenance of stable earnings and preservation of shareholder
value.
Interest rate risk
The primary market risk faced by the Group is interest rate
risk. Interest rate risk is the risk of loss from adverse movement
in the overall level of interest rates. It arises from mismatches
in the timing of repricing of assets and liabilities, both on and
off-balance sheet. The Group does not run a trading book or take
speculative interest rate positions and therefore all interest rate
risk resides in the banking book (interest rate risk in the banking
book (IRRBB)). IRRBB is most prevalent in mortgage lending and in
fixed rate retail deposits. Exposure is mitigated on a continuous
basis through the use of natural offsets between mortgages and
savings with a similar tenor, interest rate derivatives and reserve
allocations.
Currently interest rate risk is managed separately for OSB and
CCFS due to the use of different treasury management and asset and
liability management (ALM) systems. However, the methodology
applied to the setting of risk appetites was aligned across the
Group in 2020. Both Banks apply an economic value at risk approach
as well as an earnings at risk approach for interest rate risk and
basis risk. The interest rate sensitivity is impacted by
behavioural assumptions used by the Group; the most significant of
which are prepayments and pipeline take up. Expected prepayments
are monitored and modelled on a regular basis based upon historical
analysis. The reserve allocation strategy is approved by ALCO and
set to reflect the current balance sheet and future plans.
Economic value at risk is measured using the impact of six
different internally derived interest rate scenarios. The internal
scenarios are defined by ALCO and are based on three 'shapes' of
curve movement (shift, twist and flex). Historical data is used to
calibrate the severity of the scenarios to the Group's risk
appetite. The Board has set limits on interest rate risk exposure
of 2.25% and 1% of CET1 for OSB and CCFS, respectively.
1. Risk management (continued)
The table below shows the maximum decreases to net interest
income under these scenarios after taking into account the
derivatives:
2022 2021
Group GBPm GBPm
OSB 13.5 9.9
CCFS 1.9 1.1
15.4 11.0
----
Exposure for earnings at risk as at 31 December 2022 is measured
by the impact of a +/-100bps parallel shift in interest rates on
the expected profitability of the Group in the next 12 months The
risk appetite limit is 4% of full year net interest income. The
table below shows the maximum decreases after taking into account
the derivatives:
2022 2021
Group GBPm GBPm
OSB(1) 7.5 0.5
CCFS(1,2) 8.8 (0.4)
16.3 0.1
---- -----
1. Exposure for earnings at risk as at 31 December 2021 was measured by the
impact of a +/-50bps parallel shift in interest rates on the expected
profitability of the Group in the next 12 months. The risk appetite limit
was 2% of full year net interest income.
2. Increases for CCFS 2021 due to product floors earnings increases in both
the +50bps and -50bps scenarios.
Exposure for earnings at risk measured by the impact of a
+/-100bps parallel shift in interest rates on the expected
profitability of the Group in the next 3 years. The risk appetite
limit is 4% of full year net interest income.
2022 2021(1)
GBPm GBPm
OSB 26.2 -
CCFS 24.1 -
50.3 -
---- -------
1. Not measured during 2021.
The Group is also exposed to basis risk. Basis risk is the risk
of loss from an adverse divergence in interest rates. It arises
where assets and liabilities reprice from different variable rate
indices. These indices may be market rates (e.g. bank base rate or
SONIA) or administered (e.g. the Group's SVR, other discretionary
variable rates, or that received on call accounts with other
banks).
1. Risk management (continued)
The Group measures basis risk using the impact of four scenarios
on net interest income over a one-year period including movements
such as diverging base, overnight and term SONIA rates. Historical
data is used to calibrate the severity of the scenarios to the
Group's risk appetite. The Board has set a limit on basis risk
exposure of 2.5% of full year net interest income. The table below
shows the maximum decreases to net interest income at 31 December
2022 and 2021:
2022 2021
Group GBPm GBPm
OSB 5.8 3.2
CCFS 4.5 3.8
10.3 7.0
----
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in
respect of its Indian operations. A 5% increase in exchange rates
would result in a GBP0.7m (2021: GBP0.4m) effect in profit or loss
and GBP0.5m (2021: GBP0.5m) in equity.
Structured entities
The structured entities consolidated within the Group at 31
December 2022 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 plc, Canterbury Finance No.5 plc
and CMF 2020-1 plc. These entities hold legal title to a pool of
mortgages which are used as a security for issued debt. The
transfer of mortgages fails derecognition criteria because the
Group retained the subordinated notes and residual certificates
issued and as such did not transfer substantially the risks and
rewards of ownership of the securitised mortgages. Therefore, the
Group is exposed to credit, interest rate and other risks on the
securitised mortgages.
Cash flows generated from the structured entities are
ring-fenced and are used to pay interest and principal of the
issued debt securities in a waterfall order according to the
seniority of the bonds. The structured entities are self-funded and
the Group is not contractually or constructively obliged to provide
further liquidity or financial support.
The structured entities consolidated within the Group at 31
December 2021 were Canterbury Finance No.2 plc, Canterbury Finance
No.3 plc, Canterbury Finance No.4 plc and CMF 2020-1 plc.
1. Risk management (continued)
Unconsolidated structured entities
Structured entities, which were sponsored by the Group include
Precise Mortgage Funding 2017-1B plc, Charter Mortgage Funding
2017-1 plc, Precise Mortgage Funding 2018-1B plc, Charter Mortgage
Funding 2018-1 plc, Precise Mortgage Funding 2019-1B plc,
Canterbury Finance No.1 plc and Precise Mortgage Funding 2020-1B
plc.
These structured entities are not consolidated by the Group, as
the Group does not control the entities and is not exposed to the
risks and rewards of ownership from the securitised mortgages. The
Group has no contractual arrangements with the unconsolidated
structured entities other than the investments disclosed in note 18
and servicing the structured entities' mortgage portfolios.
The Group has not provided any support to the unconsolidated
structured entities listed and has no obligation or intention to do
so.
During 2022 the Group received GBP2.6m interest income (2021:
GBP1.8m) and GBP4.3m servicing income (2021: GBP4.4m) from
unconsolidated structured entities.
46. Financial instruments and fair values
1. Financial assets and financial liabilities
The following table sets out the classification of financial
instruments in the Statement of Financial Position:
2022
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.4 0.4
Loans and advances to
credit institutions 17 - - - 3,365.7 3,365.7
Investment securities 18 0.5 - 149.8 262.6 412.9
Loans and advances to
customers 19 14.6 - - 23,598.1 23,612.7
Derivative assets 24 - 888.1 - - 888.1
Other assets(1) 26 - - - 1.8 1.8
15.1 888.1 149.8 27,228.6 28,281.6
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 19,755.8 19,755.8
Amounts owed to credit
institutions 31 - - - 5,092.9 5,092.9
Amounts owed to other
customers 33 - - - 113.1 113.1
Debt securities in
issue 34 - - - 265.9 265.9
Derivative liabilities 24 - 106.6 - - 106.6
Other liabilities(2) 36 - - - 38.1 38.1
Subordinated
liabilities 39 - - - - -
PSBs 40 - - - 15.2 15.2
- 106.6 - 25,281.0 25,387.6
----------------------- ---- ---------- ----------- ----- --------- ---------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
2021
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 17 - - - 2,843.6 2,843.6
Investment securities 18 0.7 - 167.6 323.1 491.4
Loans and advances to
customers 19 17.7 - - 21,062.6 21,080.3
Derivative assets 24 - 185.7 - - 185.7
Other assets(1) 26 - - - 0.9 0.9
18.4 185.7 167.6 24,230.7 24,602.4
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 17,526.4 17,526.4
Amounts owed to credit
institutions 31 - - - 4,319.6 4,319.6
Amounts owed to other
customers 33 - - - 92.6 92.6
Debt securities in
issue 34 - - - 460.3 460.3
Derivative liabilities 24 - 19.7 - - 19.7
Other liabilities(2) 36 - - - 28.6 28.6
Subordinated
liabilities 39 - - - 10.3 10.3
PSBs 40 - - - 15.2 15.2
- 19.7 - 22,453.0 22,472.7
----------------------- ---- ---------- ----------- ----- --------- ---------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
2022
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.4 0.4
Loans and advances to
credit institutions 17 - - - 1,506.1 1,506.1
Investment securities 18 0.5 - 149.8 61.1 211.4
Loans and advances to
customers 19 - - - 10,531.9 10,531.9
Derivative assets 24 - 234.0 - - 234.0
Other assets(1) 26 - - - 2.0 2.0
0.5 234.0 149.8 12,101.5 12,485.8
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 11,132.2 11,132.2
Amounts owed to credit
institutions 31 - - - 2,568.5 2,568.5
Amounts owed to other
customers 33 - - - 0.5 0.5
Derivative liabilities 24 - 63.8 - - 63.8
Other liabilities(2) 36 - - - 23.3 23.3
Subordinated
liabilities 39 - - - - -
PSBs 40 - - - 15.2 15.2
- 63.8 - 13,739.7 13,803.5
----------------------- ---- ---------- ----------- ----- --------- ---------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
2021
Total
Designated Mandatorily Amortised carrying
FVTPL FVTPL FVOCI cost amount
Company Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - - 0.5 0.5
Loans and advances to
credit institutions 17 - - - 1,405.0 1,405.0
Investment securities 18 0.7 - 15.5 - 16.2
Loans and advances to
customers 19 - - - 9,476.4 9,476.4
Derivative assets 24 - 50.5 - - 50.5
Other assets(1) 26 - - - - -
0.7 50.5 15.5 10,881.9 10,948.6
----------------------- ---- ---------- ----------- ----- --------- ---------
Liabilities
Amounts owed to retail
depositors 32 - - - 9,739.4 9,739.4
Amounts owed to credit
institutions 31 - - - 2,420.7 2,420.7
Amounts owed to other
customers 33 - - - 5.7 5.7
Derivative liabilities 24 - 8.7 - - 8.7
Other liabilities(2) 36 - - - 16.4 16.4
Subordinated
liabilities 39 - - - 10.3 10.3
PSBs 40 - - - 15.2 15.2
- 8.7 - 12,207.7 12,216.4
----------------------- ---- ---------- ----------- ----- --------- ---------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
The Group has no non-derivative financial assets or financial
liabilities classified as held for trading.
1. Financial instruments and fair values (continued)
1. Fair values
The following tables summarise the carrying value and estimated
fair value of financial instruments not measured at fair value in
the Statement of Financial Position:
2022 2021
Carrying Estimated Carrying Estimated
value fair value value fair value
Group GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 3,365.7 3,365.7 2,843.6 2,843.6
Investment securities 262.6 260.5 323.1 323.8
Loans and advances to customers 23,598.1 22,746.0 21,062.6 21,079.5
Other assets(1) 1.8 1.8 0.9 0.9
27,228.6 26,374.4 24,230.7 24,248.3
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 19,755.8 19,693.0 17,526.4 17,524.9
Amounts owed to credit
institutions 5,092.9 5,092.9 4,319.6 4,319.6
Amounts owed to other customers 113.1 113.1 92.6 92.6
Debt securities in issue 265.9 265.9 460.3 460.3
Other liabilities(2) 38.1 38.1 28.6 28.6
Subordinated liabilities - - 10.3 10.6
PSBs 15.2 14.0 15.2 14.7
25,281.0 25,217.0 22,453.0 22,451.3
-------------------------------- -------- ----------- -------- -----------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
2022 2021
Carrying Estimated Carrying Estimated
value fair value value fair value
Company GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 1,506.1 1,506.1 1,405.0 1,405.0
Loans and advances to customers 10,531.9 10,170.4 9,476.4 9,448.4
Other assets(1) 2.0 2.0 - -
12,040.4 11,678.9 10,881.9 10,853.9
-------------------------------- -------- ----------- -------- -----------
Liabilities
Amounts owed to retail
depositors 11,132.2 11,095.3 9,739.4 9,737.3
Amounts owed to credit
institutions 2,568.5 2,568.5 2,420.7 2,420.7
Amounts owed to other customers 0.5 0.5 5.7 5.7
Other liabilities(2) 23.3 23.3 16.4 16.4
Subordinated liabilities - - 10.3 10.6
PSBs 15.2 14.0 15.2 14.7
13,739.7 13,701.6 12,207.7 12,205.4
-------------------------------- -------- ----------- -------- -----------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
The fair values in these tables are estimated using the
valuation techniques below. The estimated fair value is stated as
at 31 December and may be significantly different from the amounts
which will actually be paid on the maturity or settlement dates of
each financial instrument.
Cash in hand
This represents physical cash across the Group's branch network
where fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current
accounts and call accounts with central governments and other banks
with an original maturity of less than three months. Fair value is
not considered to be materially different to carrying value.
Investment securities
Investment securities' fair values are provided by a third party
and are based on the market values of similar financial
instruments. The fair value of investment securities held at FVTPL
is measured using a discounted cash flow model.
Loans and advances to customers
This mainly represents secured mortgage lending to customers.
The fair value of fixed rate mortgages has been estimated by
discounting future cash flows at current market rates of interest.
Future cash flows include the impact of ECL. The interest rate on
variable rate mortgages is considered to be equal to current market
product rates and as such fair value is estimated to be equal to
carrying value.
1. Financial instruments and fair values (continued)
Other assets
Other assets disclosed in the table above exclude prepayments
and the fair value is considered to be equal to carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated
by discounting future cash flows at current market rates of
interest. Retail deposits at variable rates and deposits payable on
demand are considered to be at current market rates and as such
fair value is estimated to be equal to carrying value.
Amounts owed to credit institutions
This mainly represents amounts drawn down under the BoE TFSME
and commercial repos. Fair value is considered to be equal to
carrying value.
Amounts owed to other customers
This represents saving products to corporations and local
authorities. The fair value of fixed rate deposits is estimated by
discounting future cash flows at current market rates of interest.
Deposits at variable rates are considered to be at current market
rates and the fair value is estimated to be equal to carrying
value.
Debt securities in issue
While the Group's debt securities in issue are listed, the
quoted prices for an individual note may not be indicative of the
fair value of the issue as a whole, due to the specialised nature
of the market in such instruments and the limited number of
investors participating in it. Fair value is not considered to be
materially different to carrying value.
Other liabilities
Other liabilities disclosed in the table above exclude deferred
income and the fair value is considered to be equal to carrying
value.
Subordinated liabilities and PSBs
The fair value of subordinated liabilities is estimated by using
quoted market prices of similar instruments at the reporting date.
The PSBs are listed on the London Stock Exchange with fair value
being the quoted market price at the reporting date.
1. Financial instruments and fair values (continued)
1. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree
to which the fair value is observable:
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 150.3 150.5 149.8 - 0.5 150.3
Loans and advances to
customers 14.6 17.7 - - 14.6 14.6
Derivative assets 888.1 15,662.6 - 888.1 - 888.1
1,053.0 15,830.8 149.8 888.1 15.1 1,053.0
Financial liabilities
Derivative liabilities 106.6 9,518.0 - 106.6 - 106.6
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 168.3 166.2 152.1 15.5 0.7 168.3
Loans and advances to
customers 17.7 19.7 - - 17.7 17.7
Derivative assets 185.7 12,968.3 - 185.7 - 185.7
371.7 13,154.2 152.1 201.2 18.4 371.7
-----------------------------
Financial liabilities
Derivative liabilities 19.7 7,378.0 - 19.7 - 19.7
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 150.3 150.5 149.8 - 0.5 150.3
Derivative assets 234.0 4,628.0 - 234.0 - 234.0
384.3 4,778.5 149.8 234.0 0.5 384.3
Derivative liabilities 63.8 5,158.0 - 63.8 - 63.8
46. Financial instruments and fair values (continued)
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 16.2 16.2 - 15.5 0.7 16.2
Derivative assets 50.5 3,953.0 - 50.5 - 50.5
66.7 3,969.2 - 66.0 0.7 66.7
Financial liabilities
Derivative liabilities 8.7 3,416.0 - 8.7 - 8.7
Level 1: Fair values that are based entirely on quoted market
prices (unadjusted) in an actively traded market for identical
assets and liabilities that the Group has the ability to access.
Valuation adjustments and block discounts are not applied to Level
1 instruments. Since valuations are based on readily available
observable market prices, this makes them most reliable, reduces
the need for management judgement and estimation and also reduces
the uncertainty associated with determining fair values.
Level 2: Fair values that are based on one or more quoted prices
in markets that are not active or for which all significant inputs
are taken from directly or indirectly observable market data. These
include valuation models used to calculate the present value of
expected future cash flows and may be employed either when no
active market exists or when there are no quoted prices available
for similar instruments in active markets.
Level 3: Fair values for which any one or more significant input
is not based on observable market data and the unobservable inputs
have a significant effect on the instrument's fair value. Valuation
models that employ significant unobservable inputs require a higher
degree of management judgement and estimation in determining the
fair value. Management judgement and estimation are usually
required for the selection of the appropriate valuation model to be
used, determination of expected future cash flows on the financial
instruments being valued, determination of the probability of
counterparty default and prepayments, determination of expected
volatilities and correlations and the selection of appropriate
discount rates.
46. Financial instruments and fair values (continued)
The following tables provide an analysis of financial assets and
financial liabilities not measured at fair value in the Statement
of Financial Position grouped into Levels 1 to 3 based on the
degree to which the fair value is observable:
Estimated fair value
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 3,365.7 3,360.9 - 3,365.7 - 3,365.7
Investment securities 262.6 262.1 - 260.5 - 260.5
Loans and advances to
customers 23,598.1 23,646.2 - 2,515.0 20,231.0 22,746.0
Other assets(1) 1.8 1.8 - 1.8 - 1.8
27,228.6 27,271.4 - 6,143.4 20,231.0 26,374.4
----------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 19,755.8 19,620.8 - 5,770.3 13,922.7 19,693.0
Amounts owed to credit
institutions 5,092.9 5,057.8 - 5,092.9 - 5,092.9
Amounts owed to other
customers 113.1 112.1 - - 113.1 113.1
Debt securities in
issue 265.9 265.4 - 265.9 - 265.9
Other liabilities(2) 38.1 38.1 - 38.1 - 38.1
Subordinated
liabilities - - - -
PSBs 15.2 15.0 14.0 - - 14.0
25,281.0 25,109.2 14.0 11,167.2 14,035.8 25,217.0
----------------------- -------- --------- ----- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
Group amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 2,843.6 2,843.6 - 2,843.6 - 2,843.6
Investment securities 323.1 322.9 - 323.8 - 323.8
Loans and advances to
customers 21,062.6 21,076.7 - 3,323.0 17,756.5 21,079.5
Other assets(1) 0.9 0.9 - 0.9 - 0.9
24,230.7 24,244.6 - 6,491.8 17,756.5 24,248.3
----------------------- -------- --------- ----- -------- -------- --------
Financial liabilities
Amounts owed to retail
depositors 17,526.4 17,469.0 - 6,601.3 10,923.6 17,524.9
Amounts owed to credit
institutions 4,319.6 4,318.5 - 4,319.6 - 4,319.6
Amounts owed to other
customers 92.6 92.5 - - 92.6 92.6
Debt securities in
issue 460.3 460.2 - 460.3 - 460.3
Other liabilities(2) 28.6 28.6 - 28.6 - 28.6
Subordinated
liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
22,453.0 22,393.9 14.7 11,409.8 11,026.8 22,451.3
----------------------- -------- --------- ----- -------- -------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2022 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 1,506.1 1,504.0 - 1,506.1 - 1,506.1
Loans and advances to
customers 10,531.9 10,668.1 - 1,740.9 8,429.5 10,170.4
Other assets(1) 2.0 2.0 - 2.0 - 2.0
12,040.4 12,174.5 - 3,249.4 8,429.5 11,678.9
----------------------- -------- --------- ----- ------- ------- --------
Financial liabilities
Amounts owed to retail
depositors 11,132.2 11,052.0 - 3,046.3 8,049.0 11,095.3
Amounts owed to credit
institutions 2,568.5 2,551.4 - 2,568.5 - 2,568.5
Amounts owed to other
customers 0.5 0.5 - - 0.5 0.5
Other liabilities(2) 23.3 23.3 - 23.3 - 23.3
Subordinated
liabilities - - - - - -
PSBs 15.2 15.0 14.0 - - 14.0
13,739.7 13,642.2 14.0 5,638.1 8,049.5 13,701.6
----------------------- -------- --------- ----- ------- ------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
1. Financial instruments and fair values (continued)
Estimated fair value
Carrying Principal Level Level Level
Company amount amount 1 2 3 Total
2021 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 1,405.0 1,405.0 - 1,405.0 - 1,405.0
Loans and advances to
customers 9,476.4 9,611.8 - 2,402.8 7,045.6 9,448.4
Other assets(1) - - - - - -
10,881.9 11,017.3 - 3,808.3 7,045.6 10,853.9
----------------------- -------- --------- ----- ------- ------- --------
Financial liabilities
Amounts owed to retail
depositors 9,739.4 9,704.9 - 3,517.7 6,219.6 9,737.3
Amounts owed to credit
institutions 2,420.7 2,420.1 - 2,420.7 - 2,420.7
Amounts owed to other
customers 5.7 5.7 - - 5.7 5.7
Other liabilities(2) 16.4 16.4 - 16.4 - 16.4
Subordinated
liabilities 10.3 10.1 - - 10.6 10.6
PSBs 15.2 15.0 14.7 - - 14.7
12,207.7 12,172.2 14.7 5,954.8 6,235.9 12,205.4
----------------------- -------- --------- ----- ------- ------- --------
1. Balance excludes prepayments.
2. Balance excludes deferred income.
47. Pension scheme
Defined contribution scheme
The amount charged to profit or loss in respect of contributions
to the Group's defined contribution and stakeholder pension
arrangements is the contribution payable in the period. The total
pension cost in the year amounted to GBP4.4m (2021: GBP5.2m).
48. Operating segments
The Group segments its lending business and operates under two
segments in line with internal reporting to the Board:
-- OSB
-- CCFS
The Group separately discloses the impact of Combination
accounting but does not consider this a business segment.
The financial position and results of operations of the above
segments are summarised below:
OSB CCFS Combination Total
2022 GBPm GBPm GBPm GBPm
Balances at the reporting
date
Gross loans and advances
to customers 13,244.7 10,416.3 81.7 23,742.7
Expected credit losses (103.2) (28.0) 1.2 (130.0)
Loans and advances to customers 13,141.5 10,388.3 82.9 23,612.7
Capital expenditure 7.6 0.7 - 8.3
Depreciation and amortisation 6.2 3.4 3.8 13.4
Profit or loss for the year
Net interest income/(expense) 460.7 308.4 (59.2) 709.9
Other income 8.9 46.2 10.4 65.5
Total income/(expense) 469.6 354.6 (48.8) 775.4
Impairment of financial
assets (22.3) (8.4) 0.9 (29.8)
Contribution to profit 447.3 346.2 (47.9) 745.6
Administrative expenses (129.6) (73.1) (3.8) (206.5)
Provisions 1.6 - - 1.6
Integration costs (6.8) (1.1) - (7.9)
Profit/(loss) before taxation 312.5 272.0 (51.7) 532.8
Taxation(1) (70.1) (70.2) 18.8 (121.5)
Profit/(loss) for the year 242.4 201.8 (32.9) 411.3
--------
1. The taxation on Combination credit includes release of deferred taxation
on CCFS Combination relating to the unwind of the deferred tax
liabilities recognised on the fair value adjustments of the CCFS assets
and liabilities at the acquisition date of GBP17.5m and the release of
other deferred tax assets on Combination adjustments of GBP1.3m.
1. Operating segments (continued)
OSB CCFS Combination Total
2021 GBPm GBPm GBPm GBPm
Balances at the reporting
date
Gross loans and advances
to customers 12,057.3 8,981.4 143.1 21,181.8
Expected credit losses (82.2) (19.6) 0.3 (101.5)
Loans and advances to customers 11,975.1 8,961.8 143.4 21,080.3
Capital expenditure 5.0 1.8 - 6.8
Depreciation and amortisation 6.5 3.2 4.8 14.5
Profit or loss for the year
Net interest income/(expense) 414.8 235.7 (62.9) 587.6
Other income 8.7 20.0 12.7 41.4
Total income/(expense) 423.5 255.7 (50.2) 629.0
Impairment of financial
assets (3.5) 8.4 (0.5) 4.4
Contribution to profit 420.0 264.1 (50.7) 633.4
Administrative expenses (97.9) (63.8) (4.8) (166.5)
Provisions (0.3) 0.1 - (0.2)
Impairment of intangible
assets - - 3.1 3.1
Integration costs (4.0) (1.0) - (5.0)
Exceptional items (0.2) - - (0.2)
Profit/(loss) before taxation 317.6 199.4 (52.4) 464.6
Taxation(1) (76.3) (51.8) 8.5 (119.6)
Profit/(loss) for the year 241.3 147.6 (43.9) 345.0
-------- ------- -----------
1. The tax on Combination credit includes a credit of GBP14.1m relating to
the unwind of the deferred tax liabilities recognised on the fair value
adjustments of the CCFS assets and liabilities at the acquisition date,
offset by a GBP5.6m deferred tax charge due to the 6% increase in the
main rate of the corporation tax liability from 1 April 2023.
1.
49. Adjustments for non-cash items and changes in operating assets and liabilities
Group Group Company Company
2022 2021 2022 2021
GBPm GBPm GBPm GBPm
(Restated)(1) (Restated)(1)
Adjustments for non-cash items:
Depreciation and amortisation 13.4 14.5 5.2 5.5
Interest on investment securities (6.8) (2.5) (2.5) (0.1)
Integration cost - 0.6 - 0.6
Interest on subordinated liabilities 1.1 0.8 1.1 0.8
Interest on PSBs 0.7 1.2 0.7 1.2
Interest on securitised debt 7.7 3.9 4.1 -
Interest on financing debt 68.7 5.3 38.4 3.3
Impairment charge/(credit) on
loans 29.8 (4.4) 19.1 0.2
Impairment credit on intangible
assets acquired on Combination - (3.1) - -
Impairment on investment in
subsidiaries - - 1.3 -
Gain on sale of financial instruments - (4.0) - (0.3)
Provisions (1.6) 0.2 (1.8) 0.3
Interest on lease liabilities 0.2 0.3 0.1 0.1
Fair value gains on financial
instruments (58.9) (29.5) (4.4) (4.4)
Share-based payments 8.1 6.7 7.3 5.0
Total adjustments for non-cash
items 62.4 (10.0) 68.6 12.2
--------------------------------------- --------- ------------- --------- -------------
Changes in operating assets and
liabilities:
(Increase)/decrease in loans and
advances to credit institutions (204.6) 98.7 (74.2) 67.8
Increase in loans and advances
to customers (2,563.1) (1,844.0) (1,074.6) (944.9)
(Increase)/decrease in intercompany
balances (0.2) (0.6) (146.0) 36.2
Increase in amounts owed to retail
depositors 2,229.4 923.3 1,392.8 34.1
Increase in cash collateral and
margin received(1) 434.3 115.4 131.3 42.1
Net increase in other assets (4.7) (1.1) (4.8) (2.6)
Net increase/(decrease) in derivatives
and hedged items 59.1 3.6 53.2 (12.3)
Net increase/(decrease) in amounts
owed to other customers 16.6 18.9 (7.7) 0.9
Net increase in other liabilities 9.0 1.5 6.6 3.4
Exchange differences on working
capital (0.3) (0.1) - -
Total changes in operating assets
and liabilities(1) (24.5) (684.4) 276.6 (775.3)
--------------------------------------- --------- ------------- --------- -------------
1. 2021 figures restated see note 1 b) for further details.
50. Events after the reporting date
The Directors have proposed an interim dividend of GBP93.7m in
relation to profits for the year ended 31 December 2022 and a
special dividend of GBP50.3m as its contribution to the proposed
OSBG dividends. There is no final dividend proposed.
51. Controlling party
OSB GROUP PLC is the ultimate parent and controlling party
preparing consolidated financial statements as the largest group of
which the Company is a member. Copies of OSBG's financial
statements may be obtained from the Company Secretary at the
registered office: OSB House, Quayside, Chatham Maritime, Chatham,
Kent, ME4 4QZ.
52. Transactions with key management personnel
All related party transactions were made on terms equivalent to
those that prevail in arm's length transactions. During the year
there were no related party transactions between the key management
personnel and the Company other than as described below.
The Directors and Group Executive team are considered to be key
management personnel.
Directors' remuneration is disclosed in note 10 and in the OSB
GROUP PLC Annual Report on Remuneration. The table below shows the
Executive team's aggregate remuneration:
Group Group
2022 2021
GBP'000 GBP'000
Short-term employee benefits 4,000 5,144
Post-employment benefits 62 44
Share-based payments 2,667 2,414
6,729 7,602
----------------------------- ------- -------
Key management personnel and connected persons held deposits
with the Group of GBP2.1m (2021: GBP0.9m).
53. Capital management
The Company's capital management approach is to provide a
sufficient capital base to cover business risks and support future
business development. The Company remained, throughout the year,
compliant with its capital requirements as set out by the PRA, the
Group's primary prudential supervisor.
The Company manages and reports on an individual consolidation
basis (OSB solo) which includes the Company and subsidiaries except
for the offshore servicing entity OSBI, SPVs relating to
securitisations and the CCFS entities acquired in October 2019.
The capital management position is based on the three 'pillars'
of Basel II.
Under Pillar 1, the minimum capital requirements are based on 8%
of risk-weighted assets.
Under Pillar 2, the regulated entities complete an annual
self-assessment of risks known as ICAAP. The PRA applies additional
requirements to this assessment amount to cover risks under Pillar
2 to generate a Total Capital Requirement. Further, the PRA sets
capital buffers and the regulated entities apply for imposition of
the requirements and modification of rules incorporating the
capital buffers and Pillar 2 pursuant to the Financial Services and
Markets Act 2000.
Pillar 3 requires firms to publish a set of disclosures which
allow market participants to assess information on the Company's
capital, risk exposures and risk assessment process. The Company's
Pillar 3 disclosures can be found on the Company's website.
Basel III came into force through CRD IV. Basel III complements
and enhances Basel I and II with additional safety measures. Basel
III changed definitions of regulatory capital, introduced new
capital buffers, a non-risk adjusted leverage ratio, liquidity
ratios and modified the way regulatory capital is calculated.
The PRA issued, on 30(th) November 2022, a consultation paper on
the implementing Basel 3.1 in the UK. The Company has taken account
of this in planning for future capital requirements.
The ultimate responsibility for capital adequacy rests with the
Board of Directors. ALCO is responsible for the management of the
capital process within the risk appetite defined by the Board,
including approving policy, overseeing internal controls and
setting internal limits over capital ratios.
The regulated entities actively manage their capital position
and report this on a regular basis to the Board and senior
management via the ALCO and other governance committees. Capital
requirements are included within budgets, forecasts and strategic
plans with initiatives being executed against this plan.
1. Capital management (continued)
The OSB solo Pillar 1 capital information is presented
below:
(Unaudited) (Unaudited)
2022 2021
GBPm GBPm
CET1 capital
Called up share capital 4.5 4.5
Share premium, capital contribution and share-based
payment reserve 12.2 10.6
Retained earnings 1,826.0 1,739.5
Other reserves (1.1) (0.9)
Total equity attributable to ordinary shareholders 1,841.6 1,753.7
Foreseeable dividends(1) (79.1) (73.1)
IFRS 9 transitional adjustment(2) 0.7 1.4
COVID-19 ECL transitional adjustment(3) 18.9 12.1
Solo consolidation adjustments (13.6) (6.8)
Deductions from CET1 capital
Investment in subsidiary (533.0) (538.5)
Prudent valuation adjustment(4) (0.3) -
Intangible assets (6.6) (7.9)
Deferred tax asset (0.6) (0.5)
CET1 capital 1,228.0 1,140.4
----------- -----------
AT1 capital
AT1 securities 90.0 90.0
Total Tier 1 capital 1,318.0 1,230.4
----------- -----------
Tier 2 capital
Subordinated debt and PSBs 15.0 25.1
Deductions from Tier 2 capital - (4.6)
Total Tier 2 capital 15.0 20.5
Total regulatory capital 1,333.0 1,250.9
Risk-weighted assets (unaudited) 6,660.5 5,863.4
1. 2022 includes a special dividend of GBP30.3m (in support of the GBP50.0m
announced by the OSBG Board rounded up on a pence per share basis to
GBP50.3m).
2. The regulatory capital includes a GBP0.7m add-back under IFRS 9
transitional arrangements, being 25.0% remaining of the IFRS 9
transitional adjustment.
3. The COVID-19 ECL transitional adjustment relates to 75% of OSB solo's
increase in stage 1 and stage 2 ECL following the impacts of COVID-19 and
for which transitional rules are being adopted for regulatory capital
purposes.
4. OSB solo has adopted the simplified approach under the Prudent Valuation
rules, recognising a deduction equal to sum of absolute value to 0.1% of
fair value assets and liabilities excluding fair-valued assets and
liabilities.
1. Capital management (continued)
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2022 2021
GBPm GBPm
At 1 January 1,140.4 966.9
Movement in retained earnings 86.5 171.5
Movement in other reserves 1.4 2.8
Movement in investment in subsidiary 5.5 41.6
Movement in foreseeable dividends (6.0) (34.1)
Movement in solo consolidation adjustment (6.8) 1.0
IFRS 9 transitional adjustment (0.7) (0.6)
COVID-19 ECL transitional adjustment 6.8 (8.6)
Movement in prudent valuation adjustment (0.3) 0.1
Net decrease/(increase) in intangible assets 1.3 (0.6)
Movement in deferred tax asset for carried
forward losses (0.1) 0.4
At 31 December 1,228.0 1,140.4
--------------------------------------------- ----------- -----------
AGM Annual General Meeting IRB Internal Ratings-Based
approach to credit risk
ALCO Group Assets and Liabilities ISA Individual Savings Account
Committee
BoE Bank of England KRFI Kent Reliance for
Intermediaries
CCFS Charter Court Financial Services KRPS Kent Reliance Provident
Society Limited
CEO Chief Executive Officer LCR Liquidity Coverage Ratio
CET1 Common Equity Tier 1 LGD Loss Given Default
CFO Chief Financial Officer LIBOR London Interbank Offered
Rate
CRD Capital Requirements Directive LTIP Long-Term Incentive Plan
IV and Regulation
CRO Chief Risk Officer LTV Loan to value
DSBP Deferred Share Bonus Plan NIM Net Interest Margin
EAD Exposure at Default NPS Net Promoter Score
ECL Expected Credit Loss OSB OneSavings Bank plc
EIR Effective Interest Rate OSBG OSB GROUP PLC
EPS Earnings Per Share PD Probability of Default
EU European Union PPD Propensity to go to Possession
Given Default
FCA Financial Conduct Authority PRA Prudential Regulation
Authority
FRC Financial Reporting Council PSBs Perpetual Subordinated
Bonds
FSCS Financial Services Compensation PSP Performance Share Plan
Scheme
FSD Forced Sale Discount RMBS Residential Mortgage-Backed
Securities
FTSE Financial Times Stock Exchange RoE Return on equity
HMRC Her Majesty's Revenue and Customs RWA Risk weighted assets
HPI House Price Index SAYE Save As You Earn or Sharesave
IAS International Accounting Standards SDLT Stamp Duty Land Tax
IBOR Interbank Offered Rate SICR Significant Increase in
Credit Risk
ICAAP Internal Capital Adequacy Assessment SID Senior Independent Director
Process
ICR Interest Coverage Ratio SME Small and Medium Enterprises
IFRS International Financial Reporting SONIA Sterling Overnight Index
Standards Average
ILAAP Internal Liquidity Adequacy SRMF Strategic Risk Management
Assessment Process Framework
ILTR Index Long-Term Repo TFS Term Funding Scheme
IPO Initial Public Offering TFSME Term Funding Scheme with
additional incentives
for SMEs
(END) Dow Jones Newswires
March 31, 2023 02:05 ET (06:05 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
Osb (LSE:OSB)
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から 7 2023 まで 7 2024
