TIDMYBSC
RNS Number : 8341T
Yorkshire Building Society
27 July 2022
Yorkshire Building Society
Half-Yearly Financial Report June 2022
Interim Management Report
Introduction from the Interim Chief Executive
A purposeful start to 2022
I am pleased to introduce the 2022 half-yearly financial report
for the Yorkshire Building Society. In the first six months of this
year we have continued to demonstrate how committed we are to our
purpose of providing Real Help with Real Life.
Having been with the Society as Chief Finance Officer for the
last five years, I will be proud to serve in the role as Interim
Chief Executive until the process for appointing our next permanent
Chief Executive concludes. I offer my sincere thanks to Stephen
White as he leaves the Society for his excellent contributions over
the course of his time with us, both as our Chief Operating Officer
and most recently as our Interim Chief Executive.
Looking back on the first half of 2022, the environment in which
we operate has been subject to considerable change. External
factors including geopolitical and economic uncertainty, and the
conflict in Ukraine, have all had a bearing on the financial
services sector to some degree. Despite this, I am able to report
on a period where we have delivered against the key elements of our
purpose, as well as having delivered a balanced and positive set of
financial results.
Helping people to have a place to call home is one of our
central ambitions. In 2022, the market for mortgages has been
subject to a high degree of volatility and increased levels of
competition. Our adaptability and agility as an organisation have
helped us to perform strongly despite the challenging environment,
just as they helped us through the disruption experienced over the
last two years. As a result, we maintained a high level of gross
mortgage lending at GBP5.3 billion (2021 H1: GBP5.9 billion), and
so far this year we have helped 28,000 people to have a place to
call home (2021 H1: 49,000)(1) .
Actively participating in the local and national communities we
operate within speaks to our commitment to our social purpose and
to making a positive difference. In addition to working with our
charity partner, Age UK, this year we are proud to have expanded
two of our social initiatives. The first is the launch of our free
Money Minds website, which aims to help 11- to 19-year-olds feel
more confident about their finances and prepare them for the world
of employment. Secondly, we have expanded our partnership with
Citizen's Advice after a successful pilot. We are proud to support
this great initiative which allows both organisations to work in
harmony and facilitate much-needed support across a range of
issues, including improving financial wellbeing. The expansion will
mean that free, independent, face-to-face advice will be available
to members of the public from 18 of our branches.
The need to build greater financial resilience and wellbeing is
a long-standing issue for many in society, and the current state
and outlook of the economic environment has only served to make the
pressures many face more acute. Currently, one of the main concerns
is inflation and the rate at which it has risen. Sharp inflationary
rises can have significant ramifications on the cost of living and
personal finances for many, especially as household utilities and
travel costs are among the most impacted. What savings balances
people have may need to be relied upon more heavily as they try to
make ends meet. In this environment, being fairly rewarded for
saving also becomes more important than ever.
In response to inflationary pressures, the Bank of England
increased Bank Rate four times so far in 2022, increasing from
0.25% to 1.25%. When an increase to Bank Rate occurs, the Society
carefully considers strategies of how best to balance the prospect
of increases to customer rates with our long-term sustainability.
We need to generate sufficient capital to ensure that we can
continue to deliver on our purpose and be here to serve our members
and customers for many years to come. We raised the lowest rates we
pay our existing variable rate savers twice in the first half of
this year, once in February and once again in April, with a further
increase effected in early July. Our successful member loyalty
programme has also continued, having launched a loyalty ISA and a
loyalty fixed rate bond already this year, with more to come. We
are proud that the differential between the rates we offer our
savers and the average rate offered by the rest of the market has
widened - with our rates 0.38 percentage points higher(2) . Through
our savings accounts and community investment, so far this year we
have helped over 104,000 people toward building their financial
resilience (2021 H1: 59,000)(1) .
The rates we pay our savers is one way we can return value to
our members; another is through our investment in developing
products and services that meet their needs. Our Strategic
Blueprint and Transformation Roadmap will enable the Society to
keep up with the pace of digital adoption and meet the evolving
needs of our customers.
Good progress has been made on our strategic agenda so far this
year. We have sustained our focus on our Savings Rebooted priority,
improving the products and propositions we offer, as well as
working to optimise our customer experience including the journeys
for our online customers.
For our mortgage customers, we have delivered internal process
improvements to increase the speed and efficiency with which we can
launch our mortgage products and have also implemented a new
pricing proposition which will allow us to support even more
customers than before, many of whom are first-time buyers. We look
forward to delivering further enhancements in line with our
strategic priorities.
Progress is also being made on our strategy to manage the risks
and financial implications of climate change. YBS, along with the
wider financial services industry, has a role to play in helping to
mitigate and support the management of the risks posed by present
and future climate change. As part of our 2021 Annual Report and
Accounts, we included our Taskforce on Climate-related Financial
Disclosures (TCFD) report and announced our ten climate
commitments, which together describe the action we will take in
order to safeguard the interests of our members and customers. We
look forward to disclosing our progress against these commitments
in our 2022 Annual Report and Accounts and each year thereafter.
Alongside this, we have also re-focused our commitment to
Environmental, Social and Governance (ESG) issues; our first,
dedicated ESG report has now been published.
Our financial results for the first half of this year are
particularly strong - driven by our mortgage growth in the last
twelve months and supported by the impacts of the succession of
increases to Bank Rate. This has seen our cost to core income ratio
reduce to 42.3% from 50.4% a year ago, our core operating profit
increase to GBP192.5 million (2021 H1: GBP134.9 million) and
statutory profit before tax reach GBP243.4 million (2021 H1:
GBP147.7 million). Purposeful performance in our core markets has
supported balanced levels of growth, with mortgage lending funded
largely by a corresponding increase in retail savings balances. Our
levels of capital and liquidity remain robust and comfortably above
regulatory minimums.
After enabling us to return more in member value and broaden our
savings differential, the elevated levels of profits generated will
help to ensure that we are secure in our position, able to
withstand shocks, and able to adapt to the challenges that lie
ahead.
Finally, a note of thanks to our talented and dedicated
colleagues for their continued efforts in serving our members and
customers. All of this hard work is reflected in our Net Promoter
Score, a measure of how likely our customers are to recommend us,
which currently stands at +51 over the period - a promising
indicator for the remainder of the year to come.
Alasdair Lenman
Interim Chief Executive Officer
1. Place to call home measure based on average residents in
properties against which loans have been advanced in the period
(excluding remortgages and further advances but including
buy-to-let and social housing). Financial resilience measure based
on number of new access savers and the impact of our community
support programmes.
2. YBS Group average savings rate compared to rest of market
average rates. Data source: CACI's Current Account and Savings
Database (CSDB), Stock. Data period January - April 2022.
Performance at a Glance
Place to call home
Gross lending Gross mortgage Growth in mortgage New residential
market share(3) balances mortgages
GBP5.3bn 3.4% 3.3% 25,000
GBP5.9bn 30 June 3.2% 31 December 5.7% 30 June 27,000 30 June
2021 2021 2021 2021
This represents This represents This represents The number of
the amount we our share of all the growth in new residential
have provided mortgage lending our overall mortgage mortgage advances
to customers to in the UK housing balance over the in the period,
help finance properties market. period. helping our customers
over the period. to have a place
to call home.
----------------------- ------------------------- ----------------------
Financial wellbeing
Savings accounts Savings market Growth in retail Average savings
opened share(4) savings balances rate differential(5)
171,000 1.97% 6.3% 0.38%
153,000 30 June 1.92% 31 December 5.5% 30 June 0.32% over 2021
2021 2021 2021
The number of This reflects This shows the This shows how
accounts opened our share of the total deposits much higher the
by new and existing UK savings market. we use to fund rates we paid
members over the the mortgages our customers
period, helping we offer to our were compared
them save for customers. to the rest of
the future. market average.
------------------------ ------------------------ ----------------------------
Member value
Statutory Profit Core Operating Cost to core Average savings
before tax Profit(6) income ratio(6) rate paid
GBP243.4m GBP192.5m 42.3% 0.69%
GBP147.7m 30 GBP134.9m 30 50.4% 30 June 0.60% over 2021
June 2021 June 2021 2021
This is the profit This is the profit This ratio measures This shows the
we earned from we earned, excluding how efficiently benefit we are
our ongoing business taxes, fair value we run our Society giving back to
operations, excluding volatility and by showing how our members.
taxes. one-time charges. much we are spending
to generate every
pound of our income.
------------------------ ------------------------ -------------------------
Common Equity Liquidity ratio Leverage ratio Net Promoter
Tier 1 ratio Score (NPS(R))(7)
16.6% 22.1% 5.8% +51
16.8% 31 December 20.7% 31 December 5.9% 31 December +51 in 2021
2021 2021 2021
Maintaining this This ratio measures This ratio highlights This measures
ratio above a our ability to the capital we how willing our
certain minimum lend to borrowers, hold compared customers are
helps to protect give money back to our assets, to recommend us
ourselves against to savers when showing our ability to others.
unexpected losses. they want it, to cope with unexpected
and pay our bills. events.
------------------------ ------------------------ -------------------------
More detail on business performance can be found in the Business
Highlights below.
3. Based on Bank of England total industry gross lending. Data period January - May 2022
4. Based on analysis of BSA deposits Held by Households. Data period: May 2022.
5. YBS Group average savings rate compared to rest of market
average rates. Data source: CACI's Current Account and Savings
Database (CSDB), Stock. Data period: January - April 2022 (latest
data available). Comparative period: January - December 2021.
6. Definitions of alternative performance measures are provided
on pages 251 to 254 of the 2021 Annual Report and Accounts.
7. Net Promoter Score and NPS are trademarks of Bain &
Company, Inc., Fred Reichheld and Satmetrix Systems, Inc. Following
a change in the calculation methodology for Group NPS in 2022, the
comparative period FY 2021 has been restated on a consistent
basis.
Business Highlights
Over the course of the year so far, the external environment has
been subject to a great deal of volatility. Market uncertainty
remains and, among other factors, risks are posed by inflationary
pressures, shortages of skilled and unskilled labour, as well as
the trade consequences stemming from the conflict in Ukraine.
Despite this challenging environment, the Society has performed
well in our core markets of mortgages and savings, in a way that
aligns to our purpose.
Mortgages
Activity in the UK housing market has been at elevated levels
since the latter half of 2020; high demand began to drive an
acceleration in house price indices as buyers looked for larger
homes and sought to take advantage of the Stamp Duty Land Tax
(SDLT) relief, which was available until September 2021. Demand was
further supported by increased disposable incomes, which accrued
during the pandemic and a resilient jobs market. This level of high
demand has been sustained into 2022 and, accordingly, house price
growth has persisted, with the price of the average UK home having
increased by 12.4% over the year to April 2022(8) .
The multiple increases to Bank Rate, and the related speculation
of its future path, contributed to much volatility in the financial
markets throughout the first six months of 2022. The resulting rise
in funding costs caused downward pressure on asset margins and
lenders began to increase the rates customers pay on their
mortgages, fuelling a dynamic market where products were withdrawn
and replaced at pace.
Against this backdrop, our performance in the mortgage market
has been strong. Our application volumes have remained high -
achieving a record high in May - contributing to a healthy pipeline
of business as we proceed into the second half of the year.
In the first half of this year, we have managed to almost match
our H1 2021 net lending performance, reaching GBP2.1 billion (2021
H1: GBP2.4 billion), despite the fact that completion volumes in
the preceding year were boosted by external incentives including
the increase in the SDLT threshold. Our lending performance in 2022
has been supported by increased growth in our Accord Mortgages
Limited (Accord)intermediary buy-to-let channel, where our newly
launched product propositions and adjusted criteria were
well-received by brokers and customers. Throughout this period, we
were also able to keep our customer service levels high, supported
by our effective teamworking and investments in our mortgage
origination system and service.
In 2019, we relaunched our commercial lending strategy,
investing in broadening our geographical reach to diversify our
lending strategy and utilise our resources effectively. The
commercial lending market was impacted significantly by the
pandemic; activity has since resumed, and we are beginning to
generate momentum behind our plans to grow this part of the
business.
A high degree of price competition has been observed within the
mortgage market, which emphasises the importance of our strategy of
focusing on the value of our lending, not only the volume.
Identifying segments that offer value, whilst also aligning with
our purpose and our risk appetite, will not only help customers who
have fewer alternatives, but will also support our performance
should the more mainstream lending segments become saturated with
competition.
How our Transformation Roadmap has supported our mortgage
business this year
We are in continuous pursuit of easier and more efficient
processes. In February, we implemented a new approach to retention
pricing across our Yorkshire and Chelsea brands, allowing us to
tailor our transfer products to each maturity cohort. Additionally,
in April we introduced a new, automated process for the setup and
launch of our mortgage products. The greater speed to market this
provides will allow us to adjust our pricing swiftly to reflect the
latest market conditions and, ultimately, offer the best rates we
can to our customers - both new and existing.
Improved product setup and management capabilities also helped
us in launching a new pricing proposition. Enhancing our
understanding of, and ability to price for, specific risk profiles
is strongly aligned to our common-sense lending approach. Our
Cascade Score proposition, which is now live in our Accord
business, is designed to support customers who require loans with a
higher loan to value (LTV) and who pass our scorecard requirements
though not as highly as we would previously have asked. These
customers are typically those who have had little credit in the
past, including first-time buyers, and we are proud that we can
support these customers toward having a place to call home.
Savings
In recent years, the historically low interest rate environment
has suppressed the rates available to savers. This was further
exacerbated by the pandemic, which not only brought further cuts to
Bank Rate in 2020 but also resulted in an abundance of liquidity in
the UK retail banking system as Government funding schemes were
launched and customer deposits were bolstered by accruing
disposable incomes.
Since then, the most significant impacts of the pandemic have
subsided, but global supply and demand imbalances and rising energy
costs have driven inflation to levels not seen for more than 30
years. In response, the Bank of England raised Bank Rate four times
in quick succession in 2022, increasing from 0.25% to 1.25%. This
provided some stimulus to customer rates in the market, however
even the best rates are unable to keep pace with inflation, posing
challenges to household finances.
In light of the Bank Rate announcements, and building on the
rate increases we provided to our savers last year, we have
increased the lowest rates we pay our existing variable rate savers
multiple times in 2022. We raised our administered savings rates by
0.10 percentage points in February, passed a further 0.25
percentage points on in April and, with effect from early July, a
further increase of 0.25 percentage points has been enacted. After
these increases, we now pay a minimum savings rate of 1.00% for all
variable rate accounts(9) .
We strive to fairly reward all of our savings members, both
those new to the Society and those with whom we have enjoyed a
longer relationship. In March, we launched our first loyalty
product of 2022, our Loyalty Six Access Saver ISA, and followed
this up with the launch of our Loyalty Fixed Rate Bond in June.
These products were open to members who had been with us for 12
months or more and proved successful. That our existing members
feel valued is important to us, and there will be more to come from
our member loyalty programme later in the year.
In addition to our loyalty activity, the competitive rates we
offered supported strong growth in our savings balances, which have
increased by GBP2.2 billion since the end of 2021. We are proud
that the savings rates we offer compare favourably to the market -
on average 0.38 percentage points higher than the market average
over April year to date, meaning our members have benefitted from
higher interest payments.
How our Transformation Roadmap has supported our savings
business this year
One of our strategic priorities is Savings Rebooted, an element
of which is devoted to the transformation and enhancement of our
digital savings channel. We need to ensure that we adapt our
business model in line with the shift in customer preferences
toward digital interaction. Meeting the evolving needs of customers
over the long term will require continuous development and we are
working to add features to our online platform and mobile app, and
expand the range of self-serve capabilities available.
We are working toward the next phases of delivering improvements
for our savings customers, especially with respect to online
customer journeys. Our recent deliverables, including improvements
in the online account opening process, continue to make a
difference to both the experience our customers have when
interacting with us, and to our performance within the market. Our
online saving balances have increased by c.GBP2 billion since
December 2021, and a high proportion of our new customers are also
being acquired through digital channels.
8. Office of National Statistics: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/april2022
9. Excludes cash transactor and offset savings accounts.
Our Financial Performance
The following summary sets out the key drivers of our financial
results over the first half of the year, and the impact they have
on the condensed interim financial statements.
The table below presents the results of Yorkshire Building
Society ('YBS' or 'the Society') and its controlled entities
(collectively 'the Group' or 'YBS Group') for the half-year ended
30 June 2022. See note 1 to the condensed interim financial
statements for more information on the basis of preparation.
Income statement
Income and profitability for the first six months of 2022 are
materially stronger than in previous periods. Statutory profit
before tax for the six months to 30 June 2022 was GBP243.4 million
(30 June 2021: GBP147.7 million) and core operating profit for the
period was GBP192.5 million, up GBP57.6 million on the equivalent
period last year (30 June 2021: GBP134.9 million).
Our financial performance is monitored by our Board who, in
addition to looking at statutory profit before tax look at core
operating profit, as this is considered to be a more appropriate
measure of underlying business performance. Core operating profit
excludes items such as fair value volatility and one-time charges
that are either temporary or typically reverse over time and so do
not reflect the Group's day-to-day activities. In this reporting
period, a significant gain was recorded in respect of fair value
movements, GBP49.8 million of which relates to volatility on
derivatives and equity financial assets and has therefore been
excluded from core operating profit. This gain predominantly
relates to interest rate swaps purchased against our mortgage
pipeline. These swaps only qualify for hedge accounting when the
mortgage is advanced and, until such time, we are exposed to their
fair value movements driven by the external interest rate
environment.
The increase in core operating profit is predominantly driven by
improved net interest income performance which comes as a result of
the growth in mortgage balances achieved in the year, in addition
to the impact the rising rate environment has had on our balance
sheet.
The following table shows the items removed from statutory
profit before tax to arrive at core operating profit.
Half-year ended Half-year ended Year ended
30 June 2022 30 June 2021 31 December 2021
----------------------------- -----------------------------
Statutory Remove Core Statutory Remove Core Statutory Remove Core
non-core non-core non-core
items items items
--------- --------- ------- --------- --------- ------- --------- --------- -------
Notes GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
--------- --------- ------- --------- --------- ------- --------- --------- -------
Net interest income i 334.2 (1.3) 332.9 256.0 (1.9) 254.1 537.4 (3.2) 534.2
------------------- ---- --------- --------- ------- --------- --------- ------- --------- --------- -------
Other income 3.6 - 3.6 6.7 (0.1) 6.6 12.7 (2.5) 10.2
------------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Fair value gains
and losses ii 50.2 (49.8) 0.4 11.4 (11.4) - 26.7 (19.1) 7.6
------------------- ---- --------- --------- ------- --------- --------- ------- --------- --------- -------
Net realised gains 2.4 - 2.4 0.4 - 0.4 0.8 - 0.8
------------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Total income/core
income 390.4 (51.1) 339.3 274.5 (13.4) 261.1 577.6 (24.8) 552.8
------------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Management expenses (143.6) - (143.6) (132.6) - (132.6) (274.5) - (274.5)
------------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Impairment of financial
assets (0.7) - (0.7) 6.0 - 6.0 19.2 - 19.2
------------------------- --------- --------- ------- --------- --------- ------- --------- --------- -------
Movement in
provisions iii (2.7) 0.2 (2.5) (0.2) 0.6 0.4 (2.3) 2.1 (0.2)
------------------- ---- --------- --------- ------- --------- --------- ------- --------- --------- -------
Profit before tax/core
operating profit 243.4 (50.9) 192.5 147.7 (12.8) 134.9 320.0 (22.7) 297.3
--------- --------- ------- --------- --------- ------- --------- --------- -------
The notes below explain the adjustments made to statutory profit
to arrive at the core operating profit figure.
i. Historical fair value credit adjustments on acquired loans.
ii. Removed fair value volatility i.e. gains and losses on
derivatives not qualifying for hedge accounting, and on non-core
equity investments.
iii. Non-core elements of the restructuring provision - see note
7 to the condensed interim financial statements for more
information.
The following are the main items in the income statement that
contribute to core operating profit:
-- Net interest income for the year to June is GBP334.2 million
(2021 H1: GBP256.0 million), representing a net interest margin of
1.22%, an increase of 0.17 percentage points compared to the
equivalent period last year.
-- Other income of GBP3.6 million relates to fees, commissions,
and other operating income (2021 H1: GBP6.7 million).
-- Net realised gains of GBP2.4 million relate to profits from
the sale of liquid asset investments (2021 H1: GBP0.4 million).
-- Management expenses were GBP143.6 million, an increase of
GBP11.0 million against the same period in 2021, largely driven by
additional investment made in our transformation portfolio.
-- A GBP0.7 million impairment charge has been recorded in the
period (2021 H1: GBP6.0 million release). The charge relates to
post-model adjustments reflecting the increased risk due to the
cost-of-living crisis, although this is largely offset by the
impact of positive HPI movements in the period. See note 9 to the
condensed interim financial statements for more information on
expected credit losses, including the economic scenarios used.
As a mutual, we do not pay dividends to external shareholders;
our profit requirements are driven solely by our need for ongoing
capital to support our activities. Profit remains sufficient to
provide capital for our current and future growth aspirations and
ensure we are resilient to severe economic stresses. The Group's
business activities are focused within the UK and relate
predominantly to mortgage lending funded primarily through domestic
deposits. We continue to have a cautious approach to liquidity
management and as at 30 June 2022, the majority of our liquidity
portfolio consisted of exposures to the Bank of England and the UK
Government.
Balance Sheet
Half-year Half-year Year ended
ended ended 31 December
30 June 2022 30 June 2021 2021
GBPbn GBPbn GBPbn
-------------------- -------------------- --------------------
Liquid assets 11.4 7.7 10.0
-------------------------------- -------------------- -------------------- --------------------
Loan and advances to customers 43.3 41.0 41.9
-------------------------------- -------------------- -------------------- --------------------
Other Assets 1.7 0.7 0.8
-------------------------------- -------------------- -------------------- --------------------
Total assets 56.4 49.4 52.7
-------------------------------- -------------------- -------------------- --------------------
Shares - retail savings 37.7 35.2 35.5
-------------------------------- -------------------- -------------------- --------------------
Wholesale funding and other
deposits 13.7 10.2 12.9
-------------------------------- -------------------- -------------------- --------------------
Subordinated liabilities 1.1 0.6 0.9
-------------------------------- -------------------- -------------------- --------------------
Other liabilities 0.6 0.5 0.3
-------------------------------- -------------------- -------------------- --------------------
Total liabilities 53.1 46.5 49.6
-------------------------------- -------------------- -------------------- --------------------
Member's interest and equity 3.3 2.9 3.1
-------------------------------- -------------------- -------------------- --------------------
Total members' interest, equity
and liabilities 56.4 49.4 52.7
-------------------- -------------------- --------------------
Overall balance sheet growth achieved in the year to June stands
at 7.0% (2021 H1: 3.1%), having broadly matched our retail flows
across both savings and mortgages. Net lending performance was
maintained at a level similar to that in H1 2021, even without the
support of the external stimulus of SDLT relief. The relaunch of
our Accord intermediary buy-to-let lending channel also contributed
to this growth. Net savings flows were strong, owing to the
competitive positioning of our saving products, supported by the
increases to our back-book rates and member loyalty programme.
Our overall liquidity position remains stable, standing at 22.1%
(2021: 20.7%), supported by retail flows. Sufficient headroom to
regulatory requirements has been maintained and we continue to
diversify our high-quality liquid asset portfolio.
Our robust capital position has been maintained as demonstrated
by our key capital ratios. Our Common Equity Tier 1 ratio, which
represents the relationship between the strongest form of capital
(largely accumulated reserves) and risk weighted assets, is 16.6%
(2021: 16.8%). And our UK leverage ratio, which compares Tier 1
capital with total assets, stands at 5.8% (2021: 5.9%).
The Society has maintained an active presence within our chosen
markets for wholesale funding. In 2022, we have successfully issued
the following debt securities: the latest in our covered bond
programme, a Medium-Term Note (MTN) and a Senior Non-Preferred
(SNP) Note. Additionally, in January we repaid a portion of our
Bank of England term funding (TFSME) drawings, significantly ahead
of its contractual maturity, and we intend to make a further
repayment in the second half of the year.
The asset quality of our loan book has seen no deterioration.
The value of loans more than three months in arrears represents
0.30% of our mortgage book at 30 June 2022 (31 December 2021:
0.36%). The number of accounts which are more than three months in
arrears (including possessions) is 0.44% (31 December 2021: 0.50%),
which remains significantly better than the industry average(10)
0.79% (2021: 0.85%). The credit quality of our loan book is
continually monitored using a number of indicators, and we continue
to consider lending criteria carefully.
10. Industry average based on the latest available from UK Finance date: March 2022.
Regulatory Environment
Relevant updates with respect to the regulatory environment
include:
Pillar 3
Pillar 3 Disclosures, as required by Basel III, are designed to
promote market discipline through the disclosure of key information
about risk exposures and risk management processes. From 1 January
2022, specific 'tabular' requirements were implemented to encourage
consistency and comparability across institutions. As the Society
is categorised as a large institution, there is now a requirement
to publish quarterly disclosures. Our first quarterly disclosure
was published in June 2022, reporting on the period up to 31 March
2022, and can be found on our website ybs.co.uk. Subsequent
disclosures will be made in due course.
Consumer Duty
The Financial Conduct Authority (FCA) are expected to publish
rules relating to a new Consumer Duty by 31 July 2022, with firms
having until April 2023 to implement any changes required to meet
the new rules. The Duty will place increased requirements on
financial services firms, like YBS, to ensure customers receive
suitable products that are priced fairly and offer good value, as
well as providing appropriate support throughout the relationship,
and making sure customers have a good understanding of the products
and services they are using.
Regulations already require financial services firms to 'treat
customers fairly'; the new duty brings additional emphasis that
will require all firms to 'act to deliver good outcomes' for their
customers. As such, the Society will be required to take all
reasonable steps to avoid foreseeable harm to customers and to
enable them to achieve their financial objectives.
Regulator Plans and Strategies
During the first half of 2022, the FCA, the Prudential
Regulation Authority (PRA) and the Payment Systems Regulator (PSR)
refreshed their strategies and business plans which set out the
goals and areas of focus for each.
FCA Business Plan & Strategy
The FCA published its three-year strategy alongside its Business
Plan for the coming 12 months. The publications articulate the
regulator's direction of travel as it sets out to become more
innovative, assertive, and adaptive. In developing its strategy,
the FCA has considered the rising cost of living, digital
transformation, and geopolitical uncertainty and has listed the
following as areas of priority:
-- Reducing and preventing serious harm to consumers
-- Setting and testing higher standards for firms it regulates
-- Promoting competition and positive change in the UK Financial Services sector.
PRA Business Plan
The PRA has published its Business Plan for the year ahead. The
PRA undertook a strategic review in 2021 to consolidate lessons
from the first eight years of its existence. This review led to the
identification of the following four strategic priorities:
-- Retaining and building on the strength of the banking and
insurance sectors delivered by the financial crisis reforms
-- Being at the forefront of identifying new and emerging risks
and developing international policy
-- Supporting competitive and dynamic markets in the sectors that they regulate
-- Running an inclusive, efficient, and modern regulator.
PSR Strategy
The PSR has published its first formal strategy which sets out
its direction of travel over the next five years and details
several strategic priorities. The following items are particularly
relevant to YBS:
-- The PSR has vowed to protect access to cash for customers who rely on it
-- The regulator has reinforced its position that there should
be mandatory reimbursement for victims of scams who have done
nothing wrong.
The Government intends to legislate on these two priorities
through the 'Financial Services & Markets Bill' as announced in
the Queen's Speech, which also seeks to reform the UK Regulatory
Framework post-Brexit.
YBS continues to monitor the regulatory outputs to understand
regulatory expectations and ensure that we respond and adapt
appropriately.
Changes to the Board
A list of the Board of Directors can be found in the 2021 Annual
Report and Accounts; any subsequent changes are detailed below.
In June 2022, we announced that our Interim Chief Executive,
Stephen White, would be leaving the Society and confirmed the
appointment of Alasdair Lenman, our Chief Finance Officer, as
Interim Chief Executive with effect from 17 June 2022. Alasdair has
23 years' experience in finance and has worked in financial
services for 15 years. The process to appoint the next permanent
Chief Executive is well advanced.
The 2021 Annual Report and Accounts communicated that the
recruitment search for a new Non-Executive Director had commenced.
As a result of this search, the Board was pleased to announce the
appointment of Angela Darlington as a Non-Executive Director from
26 April 2022. Angela has over 30 years' experience in financial
services, including extensive experience in relation to risk,
regulation, and climate change.
Neeta Atkar, Non-Executive Director and Chair of our Group Risk
Committee, stepped down from the Board with effect from 22 June
2022 after more than five years. In accordance with the Board's
succession plans, Angela Darlington was appointed as the Chair of
our Group Risk Committee on 22 June 2022, subject to regulatory
approval.
As signposted in the Annual Report and Accounts:
-- David Morris, our Chief Commercial Officer was appointed as
Executive Director in January 2022, having been with the Society
since 2018.
-- Non-Executive Director, Guy Parsons, retired from the Board
at the conclusion of the Society's Annual General Meeting on 26
April 2022. Guy was succeeded as Chair of the Remuneration
Committee by Alison Hutchinson, Senior Independent Director and
Vice Chair.
Outlook
Elevated levels of uncertainty continue to characterise the
political and economic environment. Risks stemming from the
potential emergence of a new coronavirus variant remain, and
central banks will have to contend with the global inflationary
pressures which were further heightened following the invasion of
Ukraine.
There are expectations that consumer prices index (CPI)
inflation will rise over the remainder of 2022, averaging slightly
over 10% at its peak in the final quarter(11) . A main driver of
the increase is expected to be due to higher household energy and
food prices, exerting pressure on real disposable incomes. The
outlook for Gross Domestic Product (GDP) growth in the UK has
weakened due to the cost-of-living crisis and its impacts on
consumer spending.
The market expectations for the future path of Bank Rate may
make retail savings books increasingly attractive as a source of
funding. When coupled with the need for many UK banks and building
societies to refinance drawings from government funding schemes
over the next couple of years, this looks likely to drive increased
competition for the attraction and retention of savings
balances.
Whilst the mortgage market has been buoyant for a sustained
period, downside risks may impact the level of activity in the near
future. Whether house prices stay on their upward trajectory will
depend largely on the size of the market and whether the demand for
housing will continue to surpass the available supply of housing
stock.
Another concern is around higher interest rates and the impact
they may have on the affordability of mortgages. Those whose
mortgage deal is coming to an end may face a sharp increase in
their monthly repayments, and those looking to purchase a house may
fall short of lending criteria as a result.
Broader consequences of the cost-of-living crisis may emerge as
savings balances are increasingly relied upon to fund everyday
life, reducing customers' ability to service their debt should they
suffer a loss of income for any reason. Emergent challenges and
threats, of natures both economic and operational, will continue to
be monitored to ensure that the Yorkshire Building Society responds
appropriately and remains in a position of strength to continue to
serve our members.
11.
https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/may/monetary-policy-report-may-2022.pdf
Principal Risks and Uncertainties
The environment within which we operate, and the nature of the
threats that we face, is continually evolving. A description of the
principal risks and uncertainties to which we are exposed is
included in the table below, and further commentary on how these
risks have evolved is included after the table. We have performed
stress tests to assess the impact of a range of risk scenarios. It
is our belief that, whilst they each bring their individual
challenges, we are well placed to manage them.
We continue to invest in our risk management capability to
ensure that emerging and evolving risks are closely monitored, and
that timely and appropriate action is taken to protect the
interests of the YBS Group and its customers. Significant emerging
risks are regularly reviewed through the senior risk committees and
are considered as part of our planning process.
We have a robust risk management framework, strong capital
position, diverse funding sources and high liquidity levels; and we
remain confident in the financial resilience and the sustainability
of the Group.
Risk Description Principal mitigation
------------ -------------------------------------- -------------------------------
Strategic The risk to the Group's earnings We mitigate risks relating
Risk or sustainability which arises to the business environment
from changes in the business and our strategic choices
environment (Political, Economic, through horizon scanning,
Social and Technological), or corporate planning, scenario
from the effectiveness of decisions analysis and stress testing,
and actions relating to our strategic and ongoing monitoring and
response to those changes. reporting activity.
------------ -------------------------------------- -------------------------------
Retail & The risk to the Group of credit We set a risk appetite for
Commercial losses as a result of failure retail and commercial lending
Credit Risk to design, implement and monitor activities which manages
an appropriate credit risk appetite. exposure to higher risk
lending areas, and monitors
adherence to this.
------------ -------------------------------------- -------------------------------
Treasury The risk of losses following We set a risk appetite for
Risk default on exposures arising treasury risk and monitor
from balances with other financial adherence to this. We adopt
institutions, liquid asset holdings a low risk approach to our
and from derivative instruments treasury activities, investing
used to manage interest rate most of its liquidity in
and foreign exchange risk. the highest quality assets.
------------ -------------------------------------- -------------------------------
Funding The risk of the Group having We set a risk appetite and
& Liquidity inadequate cash flow to meet stress test our positions
Risk current or future requirements against this. We operate
and expectations. a diversified funding base,
primarily through retail
savings, supported by a
strong wholesale funding
franchise.
------------ -------------------------------------- -------------------------------
Market Risk The risk to the Group's earnings We adopt a low risk approach
or the value of its assets and to market risk, and stress
liabilities due to changes in test all positions against
external market rates. a range of scenarios.
------------ -------------------------------------- -------------------------------
Capital There is a risk that the Group We maintain a capital risk
Risk is not able to meet regulatory appetite and regularly stress
capital requirements or deliver test its positions against
on its strategic plans due to severe scenarios.
insufficient capital resources.
------------ -------------------------------------- -------------------------------
Model Risk The risk that the Group's models We operate a Model Risk
that are used to manage the business Management Maturity framework
are inaccurate, perform inadequately which includes monitoring
or are incorrectly used. of model suitability and
performance within agreed
risk appetite.
------------ -------------------------------------- -------------------------------
Operational The risk of direct or indirect We operate an internal control
Risk loss resulting from inadequate framework in line with the
or failed internal processes, Board risk appetite and
people and systems, or from external monitor adherence.
events.
------------ -------------------------------------- -------------------------------
Compliance The risk of direct or indirect We operate an internal control
& Conduct loss as a result of a failure framework in line with the
Risk to comply with regulation or Board risk appetite and
to ensure fair customer outcomes. monitor adherence.
============ ====================================== ===============================
Evolution of Principal Risk Exposures
The principal risks and uncertainties continue to evolve with
the key areas of focus through the first half of 2022 being cost of
living concerns, compounded by political, economic and supply chain
implications of geo-political conflict and the potential for
further Covid-19 variants, along with those that may still be seen
from the UK's withdrawal from the European Union in the context of
the Group's risk appetite, business model and strategy.
The Covid-19 pandemic placed significant operational demands on
all financial services organisations, requiring rapid changes to
working arrangements, and adapting existing processes to continue
to meet customer needs under unprecedented and challenging
circumstances.. As Government guidance and national measures were
lifted in the first half of 2022, we revised our strategic response
and implemented further changes to remove restrictions at our
office sites.
Economic, Social and Geo-political Uncertainties (Retail &
Commercial Credit Risk)
Pressure on mortgage affordability remains prevalent, with a
range of contributing economic, social, and geo-political factors.
Whilst the effects of Covid-19 have lessened in the first half of
2022, ongoing impacts of the pandemic continue to be seen, with a
degree of latent risk relating to the potential emergence of
arrears. There also remains a risk of new variants emerging and the
subsequent re-introduction of restrictions.
Additionally, whilst the UK has now officially left the EU with
a trade deal in place, the ongoing economic impacts remain unclear.
Our economic scenarios cover a range of impacts that reflect
different levels of productivity and output of the UK and the
subsequent impact on the broader economy. Most of our exposure
relates to UK-based residential and commercial property values, and
so risk arises from any potential economic downturn stemming from
the new trading relationship rather than any specific risks to any
particular business sector.
The ramifications of both the Russian military action in Ukraine
and the response from the international community have implications
for the global economy and, in turn, compound economic
uncertainties in the UK. It is a contributing factor to
inflationary pressures and has the potential to lead to wider
economic impacts. We have a responsibility to consider the specific
risk exposures that these implications create and will continue to
closely monitor these.
Inflation is predicted to rise over the short term, which will
place affordability stresses on mortgage borrowers, as well as
tenants of Buy to Let and Commercial landlords. The Bank of
England's response of raising interest rates has placed further
stress on borrowers.
Affordability for our new lending is assessed using a
sophisticated model, which currently incorporates a stressed
interest rate, and is reviewed every six months (as a minimum) to
ensure it remains an appropriate level of stress. Recent changes
have been made to this model to ensure that various "cost of
living" factors are accounted for, including National Insurance and
the impact of inflation on monthly expenditure. Equally,
comprehensive activity has taken place to understand the impact of,
and mitigate where appropriate, cost of living on our new and
existing portfolio.
We continue to consider lending criteria carefully using an
approach that is intended to balance the level of risk we take
against our purpose of providing Real Help with Real Life. At all
times we focus on our lending being responsible to protect
customers and to minimise arrears.
Attracting & Retaining Skills and Talent in High Demand
Areas (Operational Risk)
We are increasingly recognising that social changes brought
about by the Covid-19 pandemic, such as removal of geographical
barriers have accelerated changes in employee expectations. These
are resulting in increased competition in the recruitment and
retention of colleagues across all areas of the business, but
particularly those areas with high demand skills such as digital,
technology and data functions.
We continue to review our value proposition in relation to
talent acquisition and retention and undertake continual monitoring
of the recruitment market. We do not expect the recruitment market
to return to pre-pandemic levels and, as such, continually review
how and where we source talent. Effective resource planning and
forecasting is a priority and our resourcing practices are
regularly reviewed to ensure we proactively manage associated risks
in order to deliver our Strategic Blueprint.
Model Risk (Model Risk)
We continue to monitor and address the risks associated with the
use of models and specifically, the use of models that rely on
historical data being applied to less predictable future scenarios.
We continue to adapt and develop our approach to Model Risk
management and the underlying models themselves in line with
industry good practice and regulatory guidance.
Regulation and Fair Outcome (Compliance & Conduct Risk)
Compliance and conduct are central to our values and behaviours,
with an internal control framework that operates in line with the
Board risk appetite, and which monitors adherence. However, ongoing
focus and robust challenge will be required to keep pace with the
rapidly changing legal and regulatory environment. This will also
be vitally important as we move forward with our ambitious
transformation programme which will explore new initiatives and
ways of working.
Dialogue with our regulators continues to be open and
constructive, and we continue to work with regulators and industry
bodies to contribute to the developing regulatory agenda. This
includes matters such as the FCA's introduction of new Consumer
Duty regulation which sets higher expectations for the standard of
care that firms provide to consumers. As a mutual organisation,
fair customer treatment is already intrinsic to everything we do
and is aligned to our purpose to provide Real Help with Real
Life.
Climate Change Risk (Credit and Operational Risk)
We recognise that climate change is one of the most critical
issues facing the UK and global economy. The main climate change
risks impacting us are how physical risks such as flooding,
subsidence and coastal erosion affect our customers' homes.
Additionally, we recognise the risks posed by the transition to a
low-carbon economy such as energy efficiency regulation and any
exposure to sectors most affected by this change, particularly
buy-to-let.
In the first half of 2022, we reviewed and updated our
Environmental and Climate Change Risk Policy in order to integrate
the associated financial and operational risks; define how we
govern environmental and climate risks; and, to incorporate our
climate commitments.
We continue to develop our environmental and climate change risk
management capabilities to integrate these within our risk
management framework, ensure that we align with best practice and
are able to meet reporting and disclosure requirements.
Increased Competition and New Technology (Operational Risk)
Our digitalisation programme continues to develop wider access
to our products and services through expanded digital channels.
Challenger banks, FinTech firms and the digital transformation of
direct competitors continue to heighten the need to remain
competitive in these areas.
We continue to successfully deliver the first phase of our
programme and have maintained strong governance and extensive
oversight of the management of associated risks. There is, however,
a residual risk that the cost of delivering the level of change
necessary for some customer groups to keep pace with rapidly
changing technology may also prove unsustainable and require
investment choices which may not fully meet customer
expectations.
Further phases of our digitalisation programme will create
additional risks, and we will continue to identify, assess and
manage these as appropriate.
Financial Crime Threats (Compliance and Conduct Risk)
We already operate in a hostile and constantly evolving
financial crime environment, including phishing and spam attempts
that seek to take advantage of customers during this time of
uncertainty.
Whilst we have not seen a meaningful increase in financial crime
incidents directly attributable to these threats, the business
remains on high alert. Our continued focus on our financial crime
capability remains paramount to keep these evolving financial crime
exposures within our risk appetite. The Society continues to
deliver and implement proportionate and effective monitoring,
enhance our ability to identify threats and invest in financial
crime controls.
New and Evolving Cyber Security Threats (Operational Risk)
The increasing use of technology, and the pace of technological
change, exposes the UK financial services sector to ever-increasing
and evolving cyber security risks. Geo-political threats have
elevated the threat landscape, with ransomware a continued threat.
Resilience to such threats and an ability to effectively respond in
the event of an attack remains essential to protect the Group,
maintain the trust of customers and the confidence of
regulators.
We continue to invest in this area to ensure that our key
controls are appropriately maintained. A new security monitoring
team has been established to perform holistic monitoring across the
estate and we regularly review network upgrade requirements.
Continued Risk Management Effectiveness
Good progress has been made through the first half of 2022, with
the continued embedding of our risk management framework across the
business, evidenced by our ability to continue to adapt and respond
to rapid change in our operating environment and ongoing support in
the delivery of our Strategic Blueprint.
To further support the Strategic Blueprint, we have defined a
set of risk management priorities, which set out the role that risk
management plays in its delivery and, in turn, our customers,
colleagues and long-term sustainability. Priorities include but are
not limited to; ensuring operational resilience vulnerabilities are
identified and evaluated; building on existing capabilities to
enhance understanding of risks arising from climate change, and
delivering robust financial crime identification, prevention,
mitigation and reporting that will protect the Society and its
customers.
Forward-Looking Statements
This Interim Management Report has been prepared solely to
provide additional information to members to assess the Group's
performance and strategies, and should not be relied on by any
other party or for any other purpose. It contains certain
forward-looking statements, which are made by the directors in good
faith based on the information available to them up to the time of
their approval of this report. Such statements should be treated
with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such
forward-looking information.
Alasdair Lenman
Interim Chief Executive Officer
26 July 2022
Condensed Interim Financial Statements
Consolidated Income Statement
Half-year Half-year Year to
to to 31
30 June 30 June December
2022 2021 2021
(unaudited) (unaudited) (audited)
Notes GBPm GBPm GBPm
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
revenue
calculated
using the
effective
interest
method 3 534.5 461.0 962.7
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other interest
revenue 3 39.1 18.6 30.8
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
revenue 3 573.6 479.6 993.5
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest
expense 4 (239.4) (223.6) (456.1)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net interest
income 334.2 256.0 537.4
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Fee and
commission
revenue 11.5 13.8 24.1
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Fee and
commission
expense (8.5) (8.1) (15.2)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net fee and
commission
income 3.0 5.7 8.9
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Gains from
financial
instruments
held at fair
value 5 50.2 11.4 26.7
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Income from
investments - - 0.1
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net realised
gains on
disposal
of financial
instruments 2.4 0.4 0.8
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other operating
income 0.6 1.0 3.7
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Total income 390.4 274.5 577.6
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Administrative
expenses (132.7) (121.1) (251.8)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Depreciation
and
amortisation (10.9) (11.5) (22.7)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Impairment of
financial
assets 6 (0.7) 6.0 19.2
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Movement in
provisions 7 (2.7) (0.2) (2.3)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit before
tax 243.4 147.7 320.0
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Tax expense 8 (57.2) (26.5) (62.9)
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit for the
period 186.2 121.2 257.1
------------------------------- --------------------- --------------------------- --------------------------- -------------------------
Consolidated Statement of Comprehensive Income
Half-year Half-year Year to
to to 31
30 June 30 June December
2022 2021 2021
(Unaudited) (unaudited) (audited)
GBPm GBPm GBPm
------------------------------ --------------------------- --------------------------- -------------------------
Profit for the
period 186.2 121.2 257.1
------------------------------- --------------------------- --------------------------- -------------------------
Items that may be subsequently reclassified through profit or loss
--------------------------------------------------------------------------------------------------------------------
Cash flow
hedges:
------------------------------ --------------------------- --------------------------- -------------------------
Fair value movements taken
to
equity 18.6 - 15.3
------------------------------- --------------------------- --------------------------- -------------------------
Amounts transferred to the
income
statement (3.9) 0.2 0.4
------------------------------- --------------------------- --------------------------- -------------------------
Tax on amounts recognised
in
equity (4.2) (0.1) (4.2)
------------------------------- --------------------------- --------------------------- -------------------------
Effect of change in
corporation
tax rate 0.8 - (0.9)
------------------------------- --------------------------- --------------------------- -------------------------
Financial
assets
measured
through
other
comprehensive
income:
------------------------------ --------------------------- --------------------------- -------------------------
Fair value movements taken
to
equity (3.3) 3.6 18.3
------------------------------- --------------------------- --------------------------- -------------------------
Amounts transferred to the
income
statement 0.8 (0.8) (3.7)
------------------------------- --------------------------- --------------------------- -------------------------
Tax on amounts recognised
in
equity 0.6 (0.9) (4.0)
------------------------------- --------------------------- --------------------------- -------------------------
Effect of change in
corporation
tax rate 1.6 (1.1) (1.9)
------------------------------- --------------------------- --------------------------- -------------------------
Items that
will not be
reclassified
through profit
or loss
------------------------------ --------------------------- --------------------------- -------------------------
Remeasurement
of retirement
benefit
obligations (30.5) 4.7 30.5
------------------------------- --------------------------- --------------------------- -------------------------
Tax on
remeasurement
of retirement
benefit
obligations 8.4 (1.0) (8.0)
------------------------------- --------------------------- --------------------------- -------------------------
Effect of
change in
corporation
tax rate 6.0 (5.5) (7.2)
------------------------------- --------------------------- --------------------------- -------------------------
Total other
comprehensive
income (5.1) (0.9) 34.6
------------------------------- --------------------------- --------------------------- -------------------------
Total
comprehensive
income for
the period 181.1 120.3 291.7
------------------------------- --------------------------- --------------------------- -------------------------
Consolidated Statement of Financial Position
30 June 30 June 31
2022 2021 December
(unaudited) (unaudited) 2021
(audited)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Notes GBPm GBPm GBPm
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Assets
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash and
balances
with the
Bank
of England 5,526.9 2,871.1 5,539.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Loans and
advances to
credit
institutions 617.8 1,095.5 381.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Debt
securities 5,210.4 3,776.2 4,075.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Loans and
advances to
customers 9 43,312.3 41,026.8 41,922.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Derivative
financial
instruments 1,461.9 308.0 490.9
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Investments 5.2 14.0 5.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Intangible
assets 20.7 27.5 23.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Investment
properties 14.4 14.4 14.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Property held
for sale 0.3 7.7 0.3
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Property,
plant and
equipment 119.0 124.9 122.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Deferred tax - 12.7 -
assets
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Retirement
benefit
surplus 10 90.9 94.8 120.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other assets 30.5 26.1 27.2
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Total assets 56,410.3 49,399.7 52,723.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Liabilities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Shares 37,739.0 35,190.0 35,506.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Amounts owed
to credit
institutions 6,569.6 3,954.6 6,089.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other
deposits 1,123.3 472.6 873.5
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Debt
securities
in issue 6,008.9 5,733.8 5,890.9
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Derivative
financial
instruments 467.3 371.6 272.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Current tax
liabilities 9.4 3.1 4.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Deferred tax
liabilities 37.7 44.6 50.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Other
liabilities 75.9 75.7 83.6
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Provisions 6.6 5.6 6.1
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Subordinated
liabilities 1,102.9 630.9 857.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Total
liabilities 53,140.6 46,482.5 49,635.1
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Members'
interests
and equity 3,269.7 2,917.2 3,088.6
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Total
members'
interest,
equity
and
liabilities 56,410.3 49,399.7 52,723.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Consolidated Statement of Changes in Members' Interest and
Equity
General Cash Fair value Total
reserve flow through
hedge other
reserve comprehensive
income
GBPm GBPm GBPm GBPm
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
Half-year to
30 June 2022
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2022 (audited) 3,056.9 10.6 21.1 3,088.6
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 186.2 - - 186.2
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations (16.1) - - (16.1)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - 11.3 - 11.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through
other
comprehensive
income - - (0.3) (0.3)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 170.1 11.3 (0.3) 181.1
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 30 June 2022
(unaudited) 3,227.0 21.9 20.8 3,269.7
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Half-year to
30 June 2021
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2021 (audited) 2,784.5 - 12.4 2,796.9
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 121.2 - - 121.2
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations (1.8) - - (1.8)
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - 0.1 - 0.1
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through
other
comprehensive
income - - 0.8 0.8
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 119.4 0.1 0.8 120.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 30 June 2021
(unaudited) 2,903.9 0.1 13.2 2,917.2
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Year to 31
December 2021
------------------------------ ----------------------- ----------------------- ----------------------------- -----------------------
At 1 January
2021 (audited) 2,784.5 - 12.4 2,796.9
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Profit for the
period 257.1 - - 257.1
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net
remeasurement
of defined
benefit
obligations 15.3 - - 15.3
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
cash flow
hedges - 10.6 - 10.6
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Net movement in
fair value
through
other
comprehensive
income - - 8.7 8.7
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Total
comprehensive
income 272.4 10.6 8.7 291.7
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
At 31 December
2021 (audited) 3,056.9 10.6 21.1 3,088.6
------------------------------- ----------------------- ----------------------- ----------------------------- -----------------------
Consolidated Statement of Cash Flows
Half-year Half-year Year to
to to 31
30 June 30 June December
2022 2021 2021
(unaudited) (unaudited) (audited)
Notes GBPm GBPm GBPm
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
operating
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Profit before
tax 243.4 147.7 320.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Adjustments
to profit
before
tax 12 (46.5) (25.8) (45.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
assets 12 (2,346.7) (2,114.2) (3,155.4)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
liabilities 12 3,057.3 1,547.0 4,214.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Tax paid (51.3) (31.8) (66.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
operating
activities 856.2 (477.1) 1,267.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
investing
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Purchase of
property,
plant and
equipment,
and
intangible
assets (5.2) (7.8) (14.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Proceeds from
sale of
property,
plant and
equipment 0.2 0.8 13.1
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Purchase of
debt
securities (1,737.7) (1,217.8) (1,828.8)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Redemption of
debt
securities 602.7 304.9 628.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
investing
activities (1,140.0) (919.9) (1,201.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash flows
from
financing
activities
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Redemption of
debt
securities
in issue 12 (417.5) (660.1) (1,365.6)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Issue of debt
securities 12 635.0 475.6 1,424.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Issue of
subordinated
liabilities 12 300.0 - 250.0
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest paid
on
subordinated
liabilities
and
subscribed
capital (15.3) (11.1) (23.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Interest paid
on lease
liabilities (0.4) (0.5) (0.9)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Capital
repayments
on lease
liabilities (2.8) (2.8) (5.6)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net cash flow
from
financing
activities 499.0 (198.9) 278.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Net change in
cash and
cash
equivalents 215.2 (1,595.9) 344.3
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Opening
balance 5,765.7 5,421.4 5,421.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Closing cash
and liquid
cash
equivalents 5,980.9 3,825.5 5,765.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash and
liquid cash
equivalents
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Cash and cash
equivalents 5,526.9 2,871.1 5,539.8
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Less Bank of
England cash
ratio
deposit (163.8) (141.1) (155.5)
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Loans and
advances to
credit
institutions 617.8 1,095.5 381.4
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Closing cash
and liquid
cash
equivalents 5,980.9 3,825.5 5,765.7
----------------------------- --------------------- --------------------------- --------------------------- -------------------------
Notes to the Interim Financial Statements
1. Basis of Preparation
These condensed interim financial statements present the results
of Yorkshire Building Society ('YBS') and its controlled entities
(collectively 'the Group' or 'YBS Group') for the half-year ended
30 June 2022.
The accounting policies, presentation and measurement applied
during the period are consistent with those applied by the Group in
the 31 December 2021 audited annual financial statements being
International Accounting Standards (IAS), International Financial
Reporting Standards (IFRS) and interpretations (IFRICs) issued by
the International Accounting Standards Board (IASB) effective as at
31 December 2021 and endorsed by the European Union (EU).
As a result of the United Kingdom's exit from the EU, the Group
is now required under the Building Societies Act 1986 to apply
'UK-adopted international accounting standards.' The condensed
interim financial statements have therefore been prepared in
accordance with UK-adopted International Accounting Standard 34
Interim Financial Reporting and the Disclosure Guidance and
Transparency Rules of the United Kingdom's Financial Conduct
Authority.
Pounds sterling is both the functional currency of the YBS Group
and the presentation currency applied to these financial
statements. Except where otherwise stated, all figures in the
financial statements are presented in round hundreds of thousands
of pounds sterling (GBP0.0m).
During the half-year to 30 June 2022 there have been no changes
to the composition of the Group. The condensed interim financial
statements have been subject to a review and have not been
audited.
Accounting developments
The information on future accounting developments and their
potential effect on the financial statements are provided on page
159 of the 2021 Annual Report and Accounts.
Going concern
The YBS Board of Directors undertake regular rigorous
assessments of whether the Group is a going concern in light of
changing economic and market conditions, using all available
information about future risks and uncertainties. Details of the
review undertaken to support the 31 December 2021 financial
statements are given on page 138 of the 2021 Annual Report and
Accounts.
The directors confirm that, based on the latest formal review
undertaken in July 2022, and stress tests performed throughout the
period, they consider the Group has adequate resources to continue
in existence for the foreseeable future. Accordingly, they continue
to adopt the going concern basis in preparing these condensed
interim financial statements.
2. Critical accounting judgements and key sources of estimation uncertainty
In applying its accounting policies, the Group makes judgements
that have a significant impact on the amounts recognised in the
condensed interim financial statements.
In addition, estimates and assumptions are used which could
affect the reported amounts of assets and liabilities. The
estimates and underlying assumptions are reviewed on an ongoing
basis.
Other than the specific changes highlighted below, the key
sources of estimation uncertainty remain unchanged since those
disclosed on pages 165 to 166 of the 2021 Annual Report and
Accounts.
Impairment of loans and advances to customers
The impairment calculation of expected credit losses (ECL) for a
portfolio of mortgage loans is inherently uncertain. ECL are
calculated using historical default and loss experience but require
judgement to be applied in predicting future economic conditions
(e.g. interest rates and house prices) and customer behaviour (e.g.
default rates). The most critical judgements that lead to
estimation uncertainty are as follows.
Economic scenario and weightings
The UK economy is undergoing a number of developments as we
progress through 2022, with activity rebounding from the
Omicron-related dip at the end of 2021. The largest concerns are
the cost-of-living squeeze on consumer demand and the wide ranging
impact from Russia's invasion of Ukraine. The Group has assessed
these uncertainties, with the economic assumptions applied to the
ECL model adjusted to reflect the most recent view of the
macro-economic environment. In addition, a post model adjustment
has been raised to reflect the risks relating to affordability and
the impact of cost of living increases on our mortgage customers
(see note 9 for more details).
Furthermore, the Group determined that the continued application
of the combined 45% weighting to downside and stress scenarios as
at the balance sheet date still reflected a reasonable view of the
outturn for the UK economy. Consistent with 31 December 2021, the
Group continues to apply a 5% weighting to upside, 50% to core, 30%
to downside and 15% to stress scenarios.
The Group considered alternative sets of weightings. The most
severe applied weightings of 45% Core and 35% Downside - this would
result in a GBP1.9 million increase in ECL. The least severe
applied weightings of 55% Core and 10% Stress - this would result
in a GBP2.0 million decrease in ECL. These changes in weightings
have been fully modelled and been allowed to impact staging.
The determination, application and calculation of post model
adjustments (PMA) also requires judgement to be applied. Further
detail on economic assumptions, weightings and PMAs can be found in
note 9.
3. Interest revenue
Half-year Half-year Year to
to to 31 December
30 June 2022 30 June 2021 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ----------------------------
Calculated
using the
effective
interest
rate method:
---------------------------- ---------------------------- ---------------------------- ----------------------------
Loans secured on
residential property 482.3 437.2 912.3
---------------------------- ---------------------------- ---------------------------- ----------------------------
Other loans 11.1 9.3 19.2
---------------------------- ---------------------------- ---------------------------- ----------------------------
Liquid assets 19.3 2.3 4.8
---------------------------- ---------------------------- ---------------------------- ----------------------------
On debt securities 21.8 12.2 26.4
---------------------------- ---------------------------- ---------------------------- ----------------------------
Interest
revenue
calculated
using
the
effective
interest
rate method 534.5 461.0 962.7
---------------------------- ---------------------------- ---------------------------- ----------------------------
Other:
---------------------------- ---------------------------- ---------------------------- ----------------------------
Derivatives in hedge
relationships 34.6 9.8 16.4
---------------------------- ---------------------------- ---------------------------- ----------------------------
Derivatives not included
in hedge
relationships 4.5 8.8 14.4
---------------------------- ---------------------------- ---------------------------- ----------------------------
Other
interest
revenue 39.1 18.6 30.8
---------------------------- ---------------------------- ---------------------------- ----------------------------
Total
interest
revenue 573.6 479.6 993.5
---------------------------- ---------------------------- ----------------------------
4. Interest expense
Half-year Half-year Year to
to to 31 December
30 June 30 June 2021 2021
2022 (unaudited) (audited)
(unaudited)
GBPm GBPm GBPm
--------------------------- ---------------------------- ---------------------------
Shares held by
individuals 135.7 105.3 218.0
------------------------------ --------------------------- ---------------------------- ---------------------------
Deposits from
banks 19.9 1.8 4.4
------------------------------ --------------------------- ---------------------------- ---------------------------
Other deposits 2.1 0.1 0.2
------------------------------ --------------------------- ---------------------------- ---------------------------
Debt
securities in
issue 29.9 26.4 61.1
------------------------------ --------------------------- ---------------------------- ---------------------------
Subordinated
liabilities 15.3 11.1 23.5
------------------------------ --------------------------- ---------------------------- ---------------------------
Derivatives in
hedge
relationships 31.5 69.1 134.6
------------------------------ --------------------------- ---------------------------- ---------------------------
Derivatives
not included
in hedge
relationships 4.6 9.3 13.4
------------------------------ --------------------------- ---------------------------- ---------------------------
Interest
expense for
leasing
arrangements 0.4 0.5 0.9
------------------------------ --------------------------- ---------------------------- ---------------------------
Total interest
expense 239.4 223.6 456.1
--------------------------- ---------------------------- ---------------------------
5. Gains from financial instruments held at fair value
Half-year Half-year Year to
to to 31
30 June 30 June December
2022 2021 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------- --------------------------- --------------------------
Derivatives and
debt securities
not included in
hedge
relationships 60.3 8.5 30.2
-------------------------------- --------------------------- --------------------------- --------------------------
Hedge accounting
ineffectiveness (9.9) 2.5 (3.6)
-------------------------------- --------------------------- --------------------------- --------------------------
Equity
investments
held at fair
value (0.2) 0.4 0.1
-------------------------------- --------------------------- --------------------------- --------------------------
Total net gains
from financial
instruments
held at fair
value 50.2 11.4 26.7
--------------------------- --------------------------- --------------------------
Derivatives and hedging
Hedge accounting attempts to match the gains and losses on
derivatives against the items they are acquired to offset, however
the income statement is still impacted by fair value gains and
losses where the Group has either not achieved hedge accounting or
the nature of the hedge relationship has given rise to
ineffectiveness. The gain in the current year has been driven by
market movements resulting from rising interest rates.
6. Impairment of financial assets
The following table splits the income statement impairment of
financial assets into those elements impacting the ECL and other
items.
Half-year Half-year Year to
to to 31 December
30 June 30 June 2021
2022 2021 (audited)
(unaudited) (unaudited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ----------------------------
Impairment charge/(release)
on loans
and advances to customers 0.5 (5.6) (18.5)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Recoveries relating to loans
and
advances previously written
off 0.2 (0.6) (1.0)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Impairment of other
financial assets - 0.2 0.3
---------------------------- ---------------------------- ---------------------------- ----------------------------
Impairment charge/(release) 0.7 (6.0) (19.2)
---------------------------- ---------------------------- ----------------------------
7. Movement in provisions
The provisions charge for the period is outlined below:
Half-year Half-year Year to
to to 31 December
30 June 30 June 2021 2021
2022 (unaudited) (audited)
(unaudited)
GBPm GBPm GBPm
--------------------------- ---------------------------- ---------------------------
Customer
redress - (0.1) 0.1
------------------------------ --------------------------- ---------------------------- ---------------------------
Restructuring 0.5 0.2 2.0
------------------------------ --------------------------- ---------------------------- ---------------------------
Property
related
provision 2.2 0.3 0.4
------------------------------ --------------------------- ---------------------------- ---------------------------
Other - (0.2) (0.2)
------------------------------ --------------------------- ---------------------------- ---------------------------
Total
provisions
charge 2.7 0.2 2.3
--------------------------- ---------------------------- ---------------------------
8. Tax expense
From 1 April 2023 the UK corporation tax rate will increase from
19% to 25%. This measure was substantively enacted on 24 May 2021
and deferred tax assets and liabilities at 30 June 2022, at 31
December 2021 and at 30 June 2021 have all been calculated based on
the 25% rate.
From 1 April 2023 the banking surcharge will decrease from 8%
(on taxable profits in excess of GBP25 million) to 3% (on taxable
profits in excess of GBP100 million). This change was substantively
enacted on 2 February 2022. Deferred tax assets and liabilities at
30 June 2022 have been calculated using a banking surcharge rate of
3%. At 31 December 2021 and at 30 June 2021, deferred tax assets
and liabilities were calculated based on the 8% rate.
Where it is known that a temporary difference will reverse prior
to 1 April 2023, a blended rate has been applied for both
corporation tax and the banking surcharge as appropriate.
The Group has an effective tax rate of 23.5%, which is higher
than the UK statutory corporation tax rate of 19%. This is mainly
due to the 8% banking surcharge on the taxable profits of the
Society above GBP25 million.
9. Credit risk on loans and advances to customers
Gross contractual exposure
The table below splits the loans and advances to customers
balance per the Consolidated Statement of Financial Position into
its constituent parts and reconciles to the gross exposures used in
the Expected Credit Losses ('ECL') model. Effective Interest Rate
('EIR') and hedging adjustments have been excluded from the ECL
model as these do not form part of the contractual cash flows from
the assets.
EIR is the measurement method used for financial assets held at
amortised cost, including loans and advances to customers, which
spreads income and fees over the life of the asset. Hedging is
described in more detail in note 5. The fair value rate adjustment
reflects the market value adjustment on acquired portfolios of
mortgage assets in respect of interest rates on the underlying
products. This is amortised over the expected life of the acquired
portfolio.
ECL are calculated using models that take historical default and
loss experience and apply predictions of future economic conditions
(e.g. unemployment and house prices) and customer behaviour (e.g.
default rates). In certain circumstances, the core models may not
accurately reflect factors that are considered to result in an
increased credit risk. When this happens, post model adjustments
('PMA') are overlaid to reflect the impact on ECL. The economic
scenarios and the PMAs applied at 30 June 2022 are described
below.
30 June 2022 30 June 31 December
(unaudited) 2021 (unaudited) 2021 (audited)
GBPm GBPm
------------ ----------------- ---------------
Gross contractual exposures 44,265.9 41,012.9 42,211.5
-------------------------------------- ------------ ----------------- ---------------
EIR 49.9 50.9 52.8
-------------------------------------- ------------ ----------------- ---------------
Hedging (906.0) 89.0 (238.2)
-------------------------------------- ------------ ----------------- ---------------
Fair value rate adjustment (43.8) (57.2) (49.2)
-------------------------------------- ------------ ----------------- ---------------
Gross loans and advances to customers 43,366.0 41,095.6 41,976.9
-------------------------------------- ------------ ----------------- ---------------
Impairment (26.7) (38.7) (26.1)
-------------------------------------- ------------ ----------------- ---------------
Fair value credit adjustment (27.0) (30.1) (28.4)
-------------------------------------- ------------ ----------------- ---------------
ECL (53.7) (68.8) (54.5)
-------------------------------------- ------------ ----------------- ---------------
Loans and advances to customers 43,312.3 41,026.8 41,922.4
------------ ----------------- ---------------
Analysis of changes in ECL
The following tables analyse the changes in ECL, split by
impairment and fair value credit adjustments.
Half-year Half-year Year to
to to 31 December
30 June 2022 30 June 2021 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ----------------------------
Opening Impairment 26.1 43.9 43.9
---------------------------- ---------------------------- ---------------------------- ----------------------------
Amounts written off in the
period (0.4) (0.3) (0.6)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Discounting recognised in
net interest
income 0.5 0.7 1.3
---------------------------- ---------------------------- ---------------------------- ----------------------------
Charge/(release) for the
year recognised
in the income statement 0.5 (5.6) (18.5)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Impairment 26.7 38.7 26.1
---------------------------- ---------------------------- ----------------------------
Half-year Half-year Year to
to to 31 December
30 June 2022 30 June 2021 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
---------------------------- ---------------------------- ----------------------------
Opening fair value credit
adjustment 28.4 32.1 32.1
---------------------------- ---------------------------- ---------------------------- ----------------------------
Release recognised in the
income
statement through net
interest (1.3) (1.8) (3.2)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Write-offs (0.1) (0.2) (0.5)
---------------------------- ---------------------------- ---------------------------- ----------------------------
Fair value credit adjustment 27.0 30.1 28.4
---------------------------- ---------------------------- ----------------------------
ECL
Economic Scenarios
Accounting standards require ECL to be calculated by applying
multiple economic scenarios. Each economic scenario is provided a
weighting, and these are combined to arrive at the total ECL.
These scenarios are generated internally using external data,
statistical methodologies, and senior management judgement, to span
a range of plausible economic conditions. The Group continue to use
four scenarios: an upside scenario that assumes more benign
economic conditions; our core or central best estimate scenario; a
more negative downturn scenario; and a worst-case stress
scenario.
Scenarios are projected over a five-year window, reverting to
long term averages past that point. The Group allows all
macroeconomic scenarios to impact staging.
Current Macroeconomic Conditions
The UK economy grew in the first months of 2022 as activity
rebounded from the Omicron-related dip at the end of 2021, but the
post-Covid recovery in social consumption has now made way for the
cost-of-living squeeze on consumer demand.
Russia's invasion of Ukraine has had a wide-ranging impact on a
UK economy that was already starting to suffer from rising energy
prices. Extensive economic sanctions have added to the mix of
supply chain bottlenecks, exacerbating inflationary measures for
consumers and businesses.
The Bank of England responded to rising inflation with a
succession of rate rises, with the last one in June taking the
interest rate to 1.25%. Further increases are anticipated before
the end of the year.
Upside
This assumes continued sanctions lead to a softening in Russia's
stance on Ukraine and the conflict is deescalated; measures to
reduce inflation are highly effective; and vaccines continue to
successfully negate the impact of all new Covid-19 variants.
After a strong performance in the second half of 2022, GDP
reverts to pre-pandemic levels from 2023. Unemployment falls back
to multi-decade lows and house prices grow at 3% per annum over
2023 and 2.5% in 2024.
Core
The core scenario is the Group's best estimate of how the UK
economy will evolve and is aligned with the central scenario used
in the Group's financial planning processes. It assumes a continued
return to post-pandemic normality over the remainder of 2022 and
that supply chain issues in China are resolved as their local
lockdowns ease.
The initial economic shocks arising from Russia's invasion of
Ukraine level off over time as western economies seek alternative
sources to sanctioned Russian imports, particularly oil and gas,
and global food supplies adjust to the loss of output from
Ukraine.
Successive Bank Rate rises successfully bring inflation back to
the Bank of England's 2% target and the UK Government's cost of
living support packages help mitigate the impact of energy price
rises on the most vulnerable consumers.
House Price Index (HPI)
Core expects both the supply of, and demand for, housing stock
to normalise in 2022 with expectations of further interest rate
rises this year and next year to dramatically slow recent growth in
house prices. The steep rises in HPI growth seen in the first half
of the year are forecasted to ease in the second half of 2022 and
then revert to 2% from 2023.
Gross Domestic Product (GDP)
In this scenario GDP growth for 2022 has been revised down from
5.7% to 4.1%. This slowdown is driven by a fall in real household
disposable income as, whilst there is strong nominal wage growth,
this is eroded by rising inflation. However, GDP is not expected to
fall any further as it is assumed that households use excess
savings to finance spending.
Increased capital spending of cash stockpiled by large companies
continues to be reflected, albeit partially offset with growing
labour costs and component shortages. The UK economy returns to
near its pre-pandemic level in late 2022 but is structurally
marginally smaller due to lost investment, business closures and
labour market scarring (i.e. the longer a person is unemployed the
more difficult they find it to re-enter the job market even with
rising job vacancies).
Unemployment
As uncertainty fades and demand continues to grow, we anticipate
a recovery in business investment and therefore job creation, as a
result we expect unemployment to fall to 4.1% by the end of 2022
and a gradual increase to 4.5% by 2025 as labour supply
expands.
Downturn
The downturn scenario assumes that the war in Ukraine continues
to rumble on, with a longer lasting impact on energy and food
supplies, and intermittent waves of Covid-19 outbreaks and
lockdowns in China further impact supply chain issues. These
geo-political tensions keep inflation high and, although Bank Rate
is reduced to 0.5%, unemployment accelerates and earnings growth
falls behind inflation, reducing spending power.
In addition, the emergence of new Covid-19 variants resistant to
current vaccines result in spikes in hospitalisations and
fatalities. Delays in the rollout of effective boosters forces the
UK Government to reintroduce local and national restrictions to
ease the pressure on the healthcare system. In the absence of
direct government support, non-essential sectors are restricted
from trading, with the economy and consumer confidence continuing
to take a hit.
HPI
A combination of a rapid rise in unemployment, falling real
earnings and a collapse in consumer confidence drives house prices
down over the remainder of 2022 and by a further 5% in 2023, with
no recovery in values until 2025. A rise in repossessions drives
down valuations further.
GDP
GDP contracts over the second half of 2022, falls by 5.1% in
2023 but starts to grow slowly at 1.3% in 2024 as the restrictions
lift. Global supply chain issues ease and the economy recovers as
producer demand for raw materials grows. However, with weakness in
the labour markets, declining real earnings and low demand/business
investment, downturn forecasts growth rates of only 1.5% for 2025
and 2026.
Unemployment
With high inflation and increasing wage demand pressure,
businesses start to let staff go. In the absence of government
backed income support schemes for non-essential sectors,
unemployment starts to accelerate to a peak of 8.8%. As recovery
sets in, unemployment gradually starts to fall, although to a level
still high by recent standards.
Stress
The war in Ukraine escalates leading to a complete breakdown in
relations between Russia and the West. This is exacerbated by
worsening relations with China placing increasing pressure on
already stretched global supply chains. Business began to retrench
operations, diverting investment from productivity and growth
plans. Increased tensions between the EU and the UK put into doubt
the workability of the 2020 trade agreement, increasing uncertainty
in the business sector, again reducing investment, hiring and
growth.
Domestically, a virulent new strain of Covid-19 requires the UK
government to reimpose strict public health measures with a
national lockdown in winter 2022 and wider local restrictions for
much of early 2023. An updated booster vaccine emerges in early
2023 but supply chain and production issues mean it is not widely
available until late 2023.
There is no financial support for workers in non-essential
sectors and affected businesses as the UK government cannot
continue the level of support given during the 2020 first wave.
Although the Bank Rate is reduced to 0.1, unemployment accelerates
and earnings growth falls behind inflation, reducing spending
power. A contracting economy and a large public sector deficit put
pressure on sterling, giving rise to inflation and a decline in
real wage growth. The government embarks on its deficit reduction
strategies in 2023, taking demand out of the economy through higher
taxes and spending cuts. This adds further stress to household
finances and consumer spending in addition to the high level of
unemployment.
This scenario also incorporates a risk that UK supply chains are
also impacted by climate catastrophes on a global scale over the
5-year scenario horizon, further undermining recovery.
This results in a less pronounced GDP fall in 2023 than the
downturn scenario but leads to a more prolonged recession.
The following table shows the values of the key economic
variables used by each economic scenario for the period until
December 2026. The table includes the three key parameters used to
predict probability of default (PD) - unemployment, HPI and UK Bank
of England base rate. GDP is also presented as it is the key input
for determining the economic parameters used and provides context
to the nature of the overall scenario.
Note that, in itself, inflation is not a key input parameter
into the models and, as such, the risks arising from sharply rising
inflation, and the impact this has on customers' ability to meet
mortgage repayments, are not directly captured. See the
Affordability post model adjustment below for details on how this
risk has been assessed and incorporated into the ECL.
June 2022 Scenario (unaudited) December 2021 Scenario (audited)
2022 2023 2024 2025 2026 2022 2023 2024 2025 2026
------- ------- ------ ----- ----- -------- -------- ------ ----- -----
HPI
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Upside 11.0 3.0 2.5 2.5 2.5 4.0 3.0 3.0 2.0 2.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Core 8.4 2.0 2.0 2.0 2.0 1.2 2.0 2.0 2.0 2.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Downturn (7.7) (5.0) - 1.5 2.0 (12.7) (5.0) - 1.5 2.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Stress (8.1) (10.5) (5.0) - - (13.0) (10.5) (5.0) - 1.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
GDP
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Upside 6.3 2.1 2.0 2.0 2.0 6.3 2.1 2.0 2.0 2.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Core 4.1 1.8 1.6 1.6 1.6 5.9 1.8 1.6 1.6 1.6
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Downturn (5.7) (5.1) 1.3 1.5 1.5 (5.6) (5.0) 1.3 1.5 1.5
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Stress (5.1) (2.0) (0.7) - - (5.1) (2.0) (0.7) - -
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Unemployment
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Upside 3.9 3.8 3.8 3.8 3.8 4.3 4.3 4.2 4.1 4.1
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Core 4.3 4.4 4.4 4.5 4.5 4.7 4.7 4.5 4.4 4.4
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Downturn 7.0 8.8 7.8 7.5 7.0 7.0 8.8 7.8 7.5 7.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Stress 8.4 11.2 10.0 8.3 7.3 10.0 11.9 9.0 8.0 7.0
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Bank Rate
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Upside 1.0 1.0 1.0 1.0 1.0 0.5 0.8 0.8 0.8 0.8
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Core 2.0 2.3 2.0 1.5 1.5 0.5 0.8 0.8 0.8 0.8
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Downturn 0.5 0.5 0.5 0.5 0.5 - - - - -
------------- ------- ------- ------ ----- ----- -------- -------- ------ ----- -----
Stress 0.1 0.1 0.1 0.1 0.1 - - - - -
============= ======= ======= ====== ===== ===== ======== ======== ====== ===== =====
Weightings
The following table shows the expected credit loss under each of
our four economic scenarios along with the weightings that have
been applied to arrive at the weighted average ECL:
30 June 2022 (unaudited) 31 December 2021
(audited)
Weighted ECL Weighted ECL
---------------- -------- ---------- ------
Scenario % GBPm % GBPm
---------------- -------- ---------- ------
Upside Scenario 5 32.7 5 29.7
------------------------- ---------------- -------- ---------- ------
Core Scenario 50 33.8 50 30.9
------------------------- ---------------- -------- ---------- ------
Downturn Scenario 30 71.5 30 74.9
------------------------- ---------------- -------- ---------- ------
Stress Scenario 15 91.4 15 100.5
------------------------- ---------------- -------- ---------- ------
Probability weighted ECL 100 53.7 100 54.5
---------------- -------- ---------- ------
The relative weighting of the scenarios has not changed since
2021 year end but this will continue to be monitored during the
second half of the year.
Post Model Adjustments
Post model adjustments ('PMA') are applied when an increase in
credit risk is identified that is not effectively captured in the
core expected credit loss models. A rigorous review of the 2021
year end PMAs has been performed to determine whether the
identified risks are still applicable. Changes in credit risk not
deemed to be captured in the underlying models resulting from the
spike in inflation have also been assessed and an affordability PMA
included to reflect this.
The PMAs applied at 30 June 2022 are as follows:
30 June 2022 31 December
(unaudited) 2021 (audited)
GBPm GBPm
------------------- -----------------
Affordability 5.7 -
---------------------- ------------------- -----------------
Methodology changes 5.5 6.4
---------------------- ------------------- -----------------
Model recalibration 1.2 1.4
---------------------- ------------------- -----------------
Extended time to sale 1.1 2.2
---------------------- ------------------- -----------------
Cladding 1.2 1.3
---------------------- ------------------- -----------------
Uncertainty 3.6 3.6
---------------------- ------------------- -----------------
Total PMA 18.3 14.9
------------------- -----------------
Affordability
Inflation is not a direct input into the underlying ECL models
and, as such, does not have a direct influence on the output.
Secondary impacts on other measures such as house prices will
eventually feed into the model but there is an element of
short-term insensitivity, particularly in a period of high
inflation.
As a result, a new post model adjustment has been applied for
half year to reflect the risks of rising inflation, and its impact
on customers' ability to meet repayments on their mortgage, not
captured in the underlying ECL models.
Although the lending undertaken by YBS Group is risk-averse,
with a significant amount of affordability assessment undertaken as
part of the decision to advance mortgage loans, there are several
segments of the mortgage book that are likely to be at greater risk
of affordability due to the cost of living pressures.
The PMA was established using the following factors:
-- The core modelled population was broken down by several risk
drivers within the book and all accounts which meet at least three
of these at-risk criteria were reallocated to Stage 2.
-- Further consideration was given to affordability levels of
the mortgage book by applying a stress to the monthly expenditure
amounts in their affordability calculation. With affordability only
measured at application stage, additional considerations were
applied to earnings, indexing using UK wage growth since
completion.
The accounts reallocated from stage 1 to stage 2 per the first
point above accounted for GBP642.5 million of gross exposures and
GBP1.9 million of the PMA. The element relating to stress on
monthly expenditure remaining in stage 1 amounted to GBP8,569.8
million of gross exposure and the remaining GBP3.8m of the PMA.
Methodology Changes
The Group has updated the definition of default ('DoD') and the
probability of default ('PD') rating scale on the back of a
comprehensive review as part of the transition to the
fourth-generation internal ratings based (Gen 4 IRB) method of
calculating regulatory capital. However, given the time and
governance required to manage the introduction of amendments into
the core underlying models, they will not be updated to reflect
these changes until the second half of 2022. A PMA was established
to provide a high-level overlay to the models to reflect the
impacts, primarily:
-- the additional accounts that would be classified as being
Stage 3 due to meeting the additional default criteria;
-- the accounts that would be more likely to be classified as
Stage 2 due to an increase in risk, either by their transition to a
higher rating grade, and potentially to a higher risk PD model.
-- to reflect changes to the eligibility of accounts meeting the
definition of a significant increase in credit risk ('SICR'). The
changes reflect using initial recognition PD as a comparison point
for SICR rather than lifetime PD.
Model Recalibration
Regular model performance monitoring has highlighted that the
observed default rates (ODRs) of certain risk grades have moved
above their upper tolerance thresholds and are expected to remain
that way for an extended period. This PMA represents the
recalibration of the behavioural and application score to grade
mappings to correct the tolerance breaches.
Extended Time to Sale
In response to the Covid-19 pandemic, the FCA put in place a
moratorium on the enforcement of lender repossessions, and this
remained in place until April 2021. This led to an industry-wide
backlog of repossessions and impacted some of the model parameters,
specifically those related to time to sale.
This post model adjustment adjusted for this by increasing each
of the time from default to possession ('TFDP') parameters by 12
months to reflect the under-estimation present in the core
model.
Subsequent to 31 December 2021, a review of the repossession
activity was performed, and it was determined that this could now
be reduced to a 6 month extension as it was showing signs of
improving. This change has resulted in a GBP1.1 million
release.
This PMA will continue to be monitored and is expected to be
fully released as the repossession activity reverts back to
historic levels as backlogs are cleared .
Cladding
Following the Grenfell Tower fire in June 2017, the UK
Government mandated that aluminium composite material (ACM), the
cladding type used on Grenfell Tower, be removed from all blocks of
flats in excess of 18 metres or six storeys high. In January 2020
the Ministry for Housing, Communities & Local Government also
published guidelines that introduced a duty on freeholders to
obtain a detailed assessment, and undertake remedial works, on any
potentially combustible elements of any cladding, of any height, on
all blocks of flats.
Subsequently, the Fire Safety Act 2021 legislated that repair
costs could be passed onto leaseholders in accordance with the
standard lease terms and that the obligation to pay for remediation
works would fall to the current leaseholder. The main area of risk
therefore is residential leaseholders that have these costs passed
on to them and this impacts their ability to meet mortgage
payments. In addition, whilst the Group does not have exposure to
individual residential freehold flats, there are a number of block
freeholds within the Commercial lending portfolio. In the cases
affected, the freeholder is able to recover the costs of any
necessary works from the leaseholders but there is a risk of
non-recovery if the leaseholder has neither the means nor the
desire to pay.
However, at this point in time, there is insufficient data to
determine which accounts may be subject to cladding, or other fire
safety issues, and therefore require remedial work. As such,
quantification of the Group's exposure has been calculated at this
stage via a series of assumptions applied to the portfolio. As more
data becomes available, this exposure will be assessed and
monitored at a more granular, account-by-account level.
In January 2022 the UK Government's announced proposals for
ensuring leaseholders do not pay the remediation costs associated
with cladding on properties greater than 11 metres in height. This
has been reviewed and the PMA has not been adjusted as a result as
they remain proposals at this stage.
Whilst these recommendations are welcome, they do not resolve a
number of fire safety issues that would still require leaseholder
funded remediation like fire stopping, internal fire doors,
balconies and service voids. The impact on the PMA will be
considered once a final agreed position between a government and
the industry is reached.
Uncertainty
Whilst we incorporate a range of economic assumptions in the
scenarios and probability weightings used to calculate ECL, this
approach still has certain limitations, particularly given the
current volatility in market conditions. The resulting unusual and
largely unforeseen impacts on the credit risks faced by the YBS
Group have given rise to several assumption uncertainties and a PMA
has been established to aim to correct for these.
The key risks that this PMA provides an estimate for are
provided below.
House Price Volatility
This PMA has been raised in response to recent significant
growth in house prices and, in particular, the limitations of the
underlying models to cope with the HPI being applied at regional
level. In a rising market, we expect there to be significant local
variances in house price inflation between areas within a region.
The uncertainty being modelled in this PMA is that the HPI
increases at a regional level are not evenly distributed and the
ECL impact of changes in collateral values is non-linear.
This PMA seeks to correct for the standard deviation from the
regional type mean and is not an attempt to correct for any
perceived current market wide over-valuation. The HPI assumptions
applied in the underlying economic scenarios estimate the impacts
of future HPI trends at a macro level based on the current
baseline.
Climate risk
We have assessed the risks associated with climate change, both
physical and transitional, in the context of ECL and concluded that
the majority of these risks do not meet the requirements for
recognition as:
-- There have been no observed climate related defaults and
therefore no identifiable significant increase in credit risk
('SICR'); and
-- The material transition risks identified are expected to
occur over a timescale in excess of the current behavioural life of
our portfolio (i.e. the average term before a customer either moves
onto an alternative deal or transfers to another provider) and, as
such, any potential impact would be against loans yet to be
underwritten.
We have, however, assessed the impact on our current loan book
from properties subject to significant flood risk. The detailed
assessment conducted for the purposes of Climate Biennial
Exploratory Scenario ('CBES') reporting (see the Building a Greener
Society section of the 2021 Annual Report and Accounts) have yet to
be incorporated into the core ECL models so a PMA is therefore
required to assess the current level of risk.
This has been estimated by taking the proportion of properties
at risk based on an external benchmark and applying a 10%
additional loss against these properties. Factoring in the 12-month
loss window for stage 1 balances, and assuming that the loss would
be incurred as a result of a 1 in 25 flood event, a GBP1 million
PMA has been raised as an estimate of the impact. We will continue
to evaluate the need for this PMA as our modelling evolves and the
full exposure to physical risks, and transition risks as they
emerge, are embedded into the ECL process.
Buy-to-Let ('BTL')
This PMA was a response to the increasing level of risk and
uncertainty in BTL sector with the gradually phased in increases in
tax rates to landlords starting to impact market behaviour.
Furthermore, whilst there had not been an increase in BTL defaults
over the preceding 12 months, it was assumed that this had been due
to landlords meeting mortgage obligations by means other than
rental and there was a latent risk that defaults were masked behind
the lack of arrears.
Although the increase in credit risk is still appropriate given
the current climate, the methodology changes and affordability PMAs
have been deemed to provide sufficient coverage of this risk.
As a result, this PMA was fully released at 30 June 2022.
Staging and POCI
The tables below shows the staging of loans and advances plus
assets considered to be purchased or originated credit impaired
('POCI') recognised as part of the acquisitions of Norwich &
Peterborough Building Society ('N&P') and Chelsea Building
Society ('CBS'). The discount on acquisition is recognised as the
fair value credit adjustment.
The Group has GBP415.6 million of POCI loans. Of these, 88% are
now considered performing loans but are not permitted to be
reclassified to stage 1 or 2. Problem loans represent the total of
the Group's stage 3 balances and the non-performing portion of our
POCI loans.
30 June 2022 31 December
2021
(unaudited) (audited)
GBPm % GBPm %
------------------------------------------- ----- -------- -----
Gross exposures by stage
------------------------------------------- -------- ----- -------- -----
Stage 1 38,949.2 88.0 37,614.0 89.1
------------------------------------------- -------- ----- -------- -----
Stage 2 4,558.6 10.3 3,791.2 9.0
------------------------------------------- -------- ----- -------- -----
Stage 3 342.5 0.8 366.2 0.9
------------------------------------------- -------- ----- -------- -----
POCI 415.6 0.9 440.1 1.0
------------------------------------------- -------- ----- -------- -----
Total gross exposures 44,265.9 100.0 42,211.5 100.0
------------------------------------------- -------- ----- -------- -----
Problem loans (stage 3 plus non-performing
POCI) 393.5 0.9 423.7 1.0
-------- ----- -------- -----
ECL and coverage ratio by stage
------------------------------------------- -------- ----- -------- -----
Stage 1 9.7 - 5.6 -
------------------------------------------- -------- ----- -------- -----
Stage 2 17.6 0.4 17.5 0.5
------------------------------------------- -------- ----- -------- -----
Stage 3 11.5 3.4 15.4 4.2
------------------------------------------- -------- ----- -------- -----
POCI 14.9 3.6 16.0 3.6
------------------------------------------- -------- ----- -------- -----
Total ECL 53.7 0.1 54.5 0.1
------------------------------------------- ----- -------- -----
The following table shows the staging split by days overdue.
Gross Exposure ECL
30 June 31 December 30 June 31 December
2022 (unaudited) 2021 2022 (unaudited) 2021
(audited) (audited)
------------------ ------------- ------------------ -------------
GBPm GBPm GBPm GBPm
Stage 1 38,949.2 37,614.0 9.7 5.6
----------------------------- ------------------ ------------- ------------------ -------------
Stage 2:
----------------------------- ------------------ ------------- ------------------ -------------
Less than 30 days past due 4,469.6 3,700.0 16.2 16.3
----------------------------- ------------------ ------------- ------------------ -------------
More than 30 days past due 89.0 91.2 1.4 1.2
----------------------------- ------------------ ------------- ------------------ -------------
Stage 3:
----------------------------- ------------------ ------------- ------------------ -------------
Less than 30 days past due 170.5 183.6 3.6 4.9
----------------------------- ------------------ ------------- ------------------ -------------
30-90 days past due 57.8 57.3 1.2 1.6
----------------------------- ------------------ ------------- ------------------ -------------
More than 90 days past due 114.2 125.3 6.7 8.9
----------------------------- ------------------ ------------- ------------------ -------------
POCI:
----------------------------- ------------------ ------------- ------------------ -------------
Less than 30 days past due 374.3 392.7 11.8 12.5
----------------------------- ------------------ ------------- ------------------ -------------
30-90 days past due 24.0 26.5 1.2 1.3
----------------------------- ------------------ ------------- ------------------ -------------
More than 90 days past due 17.3 20.9 1.9 2.2
----------------------------- ------------------ ------------- ------------------ -------------
Total 44,265.9 42,211.5 53.7 54.5
------------------ ------------- ------------------ -------------
All accounts in stage 1 are less than 30 days past due.
Risk Assessment
The following tables are included to give an overview of the
Group's credit risk.
Lending by Risk Grade
30 June 2022 (unaudited) 31 December
2021
(audited)
Gross Exposure ECL Gross Exposure
-------------------------------------------- ----- --------------
Stage Stage Stage POCI Total
1 2 3
-------- ------- ------ ------ --------- ----- --------------
Probability of default GBPm GBPm GBPm GBPm GBPm GBPm GBPm
range
----------------------- -------- ------- ------ ------ --------- ----- --------------
0.00%-<0.15% 31,537.0 2,776.3 - - 34,313.3 1.9 32,958.3
----------------------- -------- ------- ------ ------ --------- ----- --------------
0.15%-<0.25% 526.2 148.2 - - 674.4 0.7 794.0
----------------------- -------- ------- ------ ------ --------- ----- --------------
0.25%-<0.50% 295.1 281.3 - - 576.4 0.7 552.6
----------------------- -------- ------- ------ ------ --------- ----- --------------
0.50%-<0.75% 293.2 325.7 - - 618.9 0.8 631.4
----------------------- -------- ------- ------ ------ --------- ----- --------------
0.75%-<1.00% 136.3 190.7 - - 327.0 0.9 337.1
----------------------- -------- ------- ------ ------ --------- ----- --------------
1.00%-<2.50% 245.9 390.3 - - 636.2 4.0 657.1
----------------------- -------- ------- ------ ------ --------- ----- --------------
2.50%-<10.0% 32.3 142.3 - - 174.6 2.4 181.5
----------------------- -------- ------- ------ ------ --------- ----- --------------
10.0%-<100% 1.1 102.2 - - 103.3 1.9 95.5
----------------------- -------- ------- ------ ------ --------- ----- --------------
Default - - 342.5 51.0 393.5 12.1 423.6
----------------------- -------- ------- ------ ------ --------- ----- --------------
Other* 5,882.1 201.6 - 364.6 6,448.3 28.3 5,580.4
----------------------- -------- ------- ------ ------ --------- ----- --------------
Total 38,949.2 4,558.6 342.5 415.6 44,265.9 53.7 42,211.5
-------- ------- ------ ------ --------- ----- --------------
* Other includes Accord BTL, Registered Social Landlords,
Commercial Lending and POCI accounts.
Lending by origination year
30 June 2022 (unaudited) 31 December
2021
(audited)
Gross Exposure ECL Gross ECL
Exposure
----------------------------------------- ---- --------- ----
Stage Stage Stage POCI Total
1 2 3
-------- ------- ----- ----- -------- ---- --------- ----
Origination year GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------- ----- ----- -------- ---- --------- ----
2022 4,612.7 182.6 0.7 - 4,796.0 2.4 - -
----------------- -------- ------- ----- ----- -------- ---- --------- ----
2021 9,351.9 383.3 17.8 - 9,752.9 5.0 10,143.8 4.2
----------------- -------- ------- ----- ----- -------- ---- --------- ----
2020 5,663.4 320.2 20.8 - 6,004.4 3.0 6,368.6 2.5
----------------- -------- ------- ----- ----- -------- ---- --------- ----
2019 4,717.4 351.2 28.1 - 5,096.7 2.9 5,515.4 2.8
----------------- -------- ------- ----- ----- -------- ---- --------- ----
2013 - 2018 12,012.1 1,572.2 72.3 - 13,656.6 7.9 14,840.2 7.5
----------------- -------- ------- ----- ----- -------- ---- --------- ----
2009 - 2012 827.0 345.0 8.2 - 1,180.2 0.6 1,278.8 0.5
----------------- -------- ------- ----- ----- -------- ---- --------- ----
Pre-2009 815.2 806.8 118.1 - 1,740.1 6.8 1,880.6 8.7
----------------- -------- ------- ----- ----- -------- ---- --------- ----
Acquired loans 949.5 597.3 76.5 415.6 2,039.0 25.1 2,184.1 28.3
----------------- -------- ------- ----- ----- -------- ---- --------- ----
Total 38,949.2 4,558.6 342.5 415.6 44,265.9 53.7 42,211.5 54.5
-------- ------- ----- ----- -------- ---- --------- ----
Lending by Loan to Value
30 June 2022 (unaudited) 31 December
2021
(audited)
Gross Exposure Gross Exposure
----------------------------------------- --------------
Stage Stage Stage POCI Total
1 2 3
-------- ------- ----- ----- -------- --------------
Loan-to-value GBPm GBPm GBPm GBPm GBPm GBPm
-------- ------- ----- ----- -------- --------------
Less than 60% 18,317.5 3,179.1 226.7 335.2 22,058.5 19,690.6
--------------- -------- ------- ----- ----- -------- --------------
60% to 75% 13,724.7 974.3 94.6 65.1 14,858.7 13,583.3
--------------- -------- ------- ----- ----- -------- --------------
75% to 90% 6,690.9 389.2 17.4 9.3 7,106.8 8,485.0
--------------- -------- ------- ----- ----- -------- --------------
90% or greater 216.1 16.0 3.8 6.0 241.9 452.6
--------------- -------- ------- ----- ----- -------- --------------
Total 38,949.2 4,558.6 342.5 415.6 44,265.9 42,211.5
--------------- -------- ------- ----- ----- -------- --------------
Average LTV (%) 50.4 34.7 41.6 43.2 48.2 49.6
=============== ======== ======= ===== ===== ======== ==============
Movement Analysis
The following tables detail the movement in the gross exposures
and ECL from the beginning to the end of the reporting period split
by stage.
Stage Stage Stage
1 2 3 POCI Total
GBPm GBPm GBPm GBPm GBPm
--------- ------- ------ ------ ---------
Gross exposure at 31
December 2021 37,614.0 3,791.2 366.2 440.1 42,211.5
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
1 to 2 (1,484.1) 1,484.1 - - -
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
1 to 3 (20.1) - 20.1 - -
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
2 to 1 619.2 (619.2) - - -
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
2 to 3 - (40.4) 40.4 - -
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
3 to 1 17.5 - (17.5) - -
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
3 to 2 - 32.0 (32.0) - -
------------------------------ --------- ------- ------ ------ ---------
Changes to carrying value (1,044.0) 130.1 (0.1) (3.2) (917.2)
------------------------------ --------- ------- ------ ------ ---------
New financial assets
originated or purchased 5,211.0 - - - 5,211.0
------------------------------ --------- ------- ------ ------ ---------
Financial assets derecognised
during the period (1,964.3) (219.2) (33.0) (21.0) (2,237.5)
------------------------------ --------- ------- ------ ------ ---------
Write-offs - - (1.6) (0.3) (1.9)
------------------------------ --------- ------- ------ ------ ---------
Gross exposure at 30
June 2022 38,949.2 4,558.6 342.5 415.6 44,265.9
------------------------------ --------- ------- ------ ------ ---------
ECL at 31 December 2021 5.6 17.5 15.4 16.0 54.5
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
1 to 2 (0.1) 1.7 - - 1.6
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
1 to 3 (0.1) - 0.6 - 0.5
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
2 to 1 0.2 (1.6) - - (1.4)
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
2 to 3 - (0.5) 1.0 - 0.5
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
3 to 1 0.1 - (0.4) - (0.3)
------------------------------ --------- ------- ------ ------ ---------
Transfers from stage
3 to 2 - 0.4 (0.6) - (0.2)
------------------------------ --------- ------- ------ ------ ---------
Changes in PDs/LGDs/EADs (0.8) 2.4 0.4 (0.2) 1.8
------------------------------ --------- ------- ------ ------ ---------
New financial assets
originated or purchased 1.2 - - - 1.2
------------------------------ --------- ------- ------ ------ ---------
Changes to model assumptions
and methodologies (0.6) (2.4) (1.7) (0.2) (4.9)
------------------------------ --------- ------- ------ ------ ---------
Unwind of discount - - 0.2 0.3 0.5
------------------------------ --------- ------- ------ ------ ---------
Financial assets derecognised
during the period (0.1) (0.7) (1.3) (0.9) (3.0)
------------------------------ --------- ------- ------ ------ ---------
Write-offs - - (0.4) (0.1) (0.5)
------------------------------ --------- ------- ------ ------ ---------
PMA 4.3 0.8 (1.7) - 3.4
------------------------------ --------- ------- ------ ------ ---------
ECL at 30 June 2022 9.7 17.6 11.5 14.9 53.7
--------- ------- ------ ------ ---------
Loans Purchased Credit Impaired (POCI)
The table below shows the status of the Group's POCI loans. A
substantial proportion of POCI balances, were they not required to
classified as stage 3 by accounting standards, would transfer to
other stages. The table below shows that 71.4% (2021: 70.4%) of
balances have been fully up to date for the last 24 months and only
12.3% (2021: 13.1%) of balances would be classified as in
default.
Up to date for the last 24 Some arrears in the last Meets definition of Total
months 24 months default
GBPm GBPm GBPm GBPm
-------------------------- ------------------------- -------------------------- ------
At 30 June 2022 (unaudited)
--------------------------- -------------------------- ------------------------- -------------------------- ------
Gross Exposure 296.9 67.7 51.0 415.6
--------------------------- -------------------------- ------------------------- -------------------------- ------
ECL 8.1 3.7 3.1 14.9
-------------------------- ------------------------- -------------------------- ------
At 31 December 2021
(audited)
--------------------------- -------------------------- ------------------------- -------------------------- ------
Gross Exposure 309.8 72.8 57.5 440.1
--------------------------- -------------------------- ------------------------- -------------------------- ------
ECL 8.8 4.0 3.2 16.0
=========================== ========================== ========================= ========================== ======
10. Retirement benefit obligations
30 June 30 June 31
2022 2021 December
(unaudited) (unaudited) 2021
(audited)
GBPm GBPm GBPm
--------------------------- --------------------------- -------------------------
Present value of
defined benefit
retirement
obligations (696.4) (907.5) (928.2)
---------------------------------- --------------------------- --------------------------- -------------------------
Assets at fair
value 787.3 1,002.3 1,049.0
---------------------------------- --------------------------- --------------------------- -------------------------
Funded
status/defined
benefit
asset/(liability) 90.9 94.8 120.8
--------------------------- --------------------------- -------------------------
The present value of the defined benefit obligations as at 30
June 2022 has been derived applying the same methodology as that
used at 31 December 2021.
Corporate bond yields have increased over the first half of
2022, which has the effect of increasing the discount rate and
decreasing liabilities. Actual inflation has been higher than
expected and this has served to increase the liabilities, all else
being equal. Future long-term expectations of inflation have
reduced slightly over the first half of the year. There has been a
reduction in the amount of benefits transferred out of the Scheme,
with transfers paid out totalling GBP0.04 million over the half
year to 30 June 2022, compared with around GBP3.5 million over the
half year to 30 June 2021. As per previous years, these transfers
have been reflected in the liabilities.
Asset returns over the first half of the year have been less
than the discount rate. While this has been largely offset by the
decrease in liabilities over the half year, the overall result is a
weakening in the funding position by GBP29.9m.
11. Related parties
There have been no material changes to related parties and the
associated related party transactions since the year end. For
further information on these see pages 236 to 238 of the 2021
Annual Report and Accounts.
12. Notes to the consolidated statement of cash flows
Half-year Half-year Year to
to to 31
30 June 30 June December
2022 2021 2021
(unaudited) (unaudited) (audited)
GBPm GBPm GBPm
--------------------------- --------------------------- -------------------------
Depreciation and
amortisation 10.9 11.5 22.7
--------------------------------- --------------------------- --------------------------- -------------------------
Loss/(profit) on sale of assets - (0.1) (2.5)
--------------------------------- --------------------------- --------------------------- -------------------------
Interest on subordinated
liabilities 15.3 11.1 23.5
--------------------------------- --------------------------- --------------------------- -------------------------
Impairment
charge/(release) 0.7 (6.0) (19.2)
--------------------------------- --------------------------- --------------------------- -------------------------
Provisions charge 2.7 0.2 2.3
--------------------------------- --------------------------- --------------------------- -------------------------
Non-cash movement in subordinated
liabilities (54.8) (14.1) (37.3)
--------------------------------- --------------------------- --------------------------- -------------------------
(Gain)/loss on realisation of
debt
securities (2.4) (0.4) (0.8)
--------------------------------- --------------------------- --------------------------- -------------------------
(Increase) in cash ratio deposit,
other assets and non-OCI element
of retirement benefit surplus (12.2) (21.5) (37.2)
--------------------------------- --------------------------- --------------------------- -------------------------
Cash movements in other
liabilities
and provisions (6.7) (6.5) 3.0
--------------------------------- --------------------------- --------------------------- -------------------------
Adjustments to
profit before
tax (46.5) (25.8) (45.5)
--------------------------------- --------------------------- --------------------------- -------------------------
Net change in
operating assets
--------------------------------- --------------------------- --------------------------- -------------------------
Non-impairment change in loans
and
advances to customers (1,390.6) (2,222.2) (3,104.6)
--------------------------------- --------------------------- --------------------------- -------------------------
Investments 0.2 (0.4) 8.2
--------------------------------- --------------------------- --------------------------- -------------------------
Non-OCI elements
of derivative
financial
assets (956.3) 108.4 (59.0)
--------------------------------- --------------------------- --------------------------- -------------------------
Net change in
operating assets (2,346.7) (2,114.2) (3,155.4)
--------------------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
liabilities
--------------------------------- --------------------------- --------------------------- -------------------------
Shares 2,232.6 1,821.7 2,138.1
--------------------------------- --------------------------- --------------------------- -------------------------
Amounts owed to credit
institutions 479.8 117.7 2,252.9
--------------------------------- --------------------------- --------------------------- -------------------------
Non-cash movements on debt
securities
in issue (99.5) (210.0) (295.8)
--------------------------------- --------------------------- --------------------------- -------------------------
Other deposits 249.8 (63.1) 337.8
--------------------------------- --------------------------- --------------------------- -------------------------
Derivative
financial
liabilities 194.6 (119.3) (218.2)
--------------------------------- --------------------------- --------------------------- -------------------------
Net change in
operating
liabilities 3,057.3 1,547.0 4,214.8
--------------------------- --------------------------- -------------------------
The following tables reconcile liabilities arising from
financing activities.
Liabilities Brought Cash flows Non-cash Carried
from forward forward
financing (audited) (unaudited)
activities
Redemption Issue Foreign Accrued Fair value
exchange interest adjustments
-------------------------- ----------------------- ------------------------ ------------------------ ---------------------------
Period to 30
June 2022 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Debt
securities
in issue 5,890.9 (417.5) 635.0 102.9 (3.1) (199.3) 6,008.9
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 857.7 - 300.0 - 4.8 (59.6) 1,102.9
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,748.6 (417.5) 935.0 102.9 1.7 (258.9) 7,111.8
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Period to 30 June 2021
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Debt
securities
in issue 6,128.3 (660.1) 475.6 (166.0) (12.9) (31.1) 5,733.8
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 645.0 - - - 0.9 (15.0) 630.9
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,773.3 (660.1) 475.6 (166.0) (12.0) (46.1) 6,364.7
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Year to 31 December 2021
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Debt
securities
in issue 6,128.3 (1,365.6) 1,424.0 (228.8) (6.4) (60.6) 5,890.9
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Subordinated
liabilities 645.0 - 250.0 - 1.1 (38.4) 857.7
---------------------------- ------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Total 6,773.3 (1,365.6) 1,674.0 (228.8) (5.3) (99.0) 6,748.6
------------------------- -------------------------- ----------------------- ------------------------ ------------------------ --------------------------- ---------------------------
Cash and balances with central banks
Cash and cash equivalents excludes cash ratio deposits of
GBP163.8 million held with the Bank of England, which are not
available for use in the Group's day-to-day operations.
13. Fair values
Fair value is the price that would be received on the sale of an
asset or the price paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Where external market prices are available, they have been used to
determine fair value. Otherwise, internal pricing models using
external market data have been used. The Group measures fair value
using the following fair value hierarchy:
Level 1: Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: Inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
The table below summarises the carrying value and fair value of
financial assets and liabilities measured at amortised cost as at
the Statement of Financial Position date.
Held at Carrying Fair Values Total
amortised value fair
cost value
Level Level Level 3
1 2
----------------------- ------------------------ ------------------------
30 June 2022
(unaudited) GBPm GBPm GBPm GBPm GBPm
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Assets
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to credit
institutions 617.8 - 617.8 - 617.8
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 43,312.3 - - 43,891.9 43,891.9
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 980.0 949.8 - - 949.8
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 37,739.0 - 37,662.4 - 37,662.4
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 6,569.6 - 6,569.6 - 6,569.6
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 1,123.3 - 1,123.3 - 1,123.3
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 6,008.9 6,428.7 783.8 - 7,212.5
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 1,102.9 1,029.8 35.9 - 1,065.7
------------------------ ----------------------- ------------------------ ------------------------ ------------------------
30 June 2021
(unaudited)
Assets
Loans and advances to credit
institutions 1,095.5 - 1,095.5 - 1,095.5
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 41,026.8 - - 41,151.2 41,151.2
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 562.8 562.8 - - 562.8
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 35,190.0 - 35,194.4 - 35,194.4
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 3,954.6 - 3,954.6 - 3,954.6
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 472.6 - 472.6 - 472.6
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 5,733.8 4,808.0 991.0 - 5,799.0
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 630.9 621.6 41.8 - 663.4
31 December
2021
(audited)
Assets
Loans and advances to credit
institutions 381.4 - 381.4 - 381.4
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Loans and advances to
customers 41,922.4 - - 41,974.7 41,974.7
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities - amortised
cost 791.5 791.3 - - 791.3
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Liabilities
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Shares 35,506.4 - 35,475.4 - 35,475.4
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Amounts owed to credit
institutions 6,089.8 - 6,089.8 - 6,089.8
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Other deposits 873.5 - 873.5 - 873.5
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Debt securities in issue 5,890.9 5,087.6 884.0 - 5,971.6
---------------------------- ------------------------ ----------------------- ------------------------ ------------------------ ------------------------
Subordinated liabilities 857.7 846.9 39.5 - 886.4
============================ ======================== ======================= ======================== ======================== ========================
The table below classifies all financial instruments held at
fair value according to the method used to establish the fair
value.
Held at fair Fair Values Total
value fair
value
Level 1 Level 2 Level
3
----------------------- ----------------------- ----------------------
30 June 2022 GBPm GBPm GBPm GBPm
(unaudited)
----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 26.3 - - 26.3
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 4,204.1 - - 4,204.1
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 1,444.6 17.3 1,461.9
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Investments - - 5.2 5.2
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities - (467.0) (0.3) (467.3)
----------------------- ----------------------- ---------------------- -----------------------
30 June 2021
(unaudited)
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 26.6 - - 26.6
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 3,186.8 - - 3,186.8
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 308.0 - 308.0
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Investments 8.3 - 5.7 14.0
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities - (358.7) (12.9) (371.6)
----------------------- ----------------------- ---------------------- -----------------------
31 December
2021
(audited)
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through income statement 28.6 - - 28.6
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Debt securities - fair value
through other comprehensive
income 3,255.4 - - 3,255.4
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial assets - 487.2 3.7 490.9
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Investments - - 5.4 5.4
---------------------------- ----------------------- ----------------------- ---------------------- -----------------------
Derivative financial
liabilities - (265.3) (7.4) (272.7)
============================ ======================= ======================= ====================== =======================
Level 3 instruments
Derivative financial instruments within Level 3 are interest
rate swaps held in some of the Group's securitisation entities.
These are valued using similar valuation technique as Level 2
derivatives, namely present value calculations using interest rate
curves, but these are not based on market observable data.
The interest rate swaps are balance tracking and the swap
notional is projected, and changes over time to match the balance
of the underlying mortgage portfolio. The changes in the fair value
of these instruments from movements in Level 3 parameters related
to prepayment risk will largely offset across the interest rate
swaps as the Group is hedged across these positions. A sensitivity
to the individual Level 3 parameters has not been disclosed given
the minimal impact these inputs have on the Group's income
statement.
Investments classified in Level 3 relate to the Group's holding
in equity preference shares. These shares are convertible into
common equity shares at various intervals during the life of the
instrument, based on a conversion factor set by the issuer. The
valuation method therefore uses the quoted share price of the
unrestricted stock as a base, applies the current estimated
conversion factor as advised by the issuer and applies a discount
to reflect the illiquidity of the stock and risks to the actual
conversion rate at exercise. Whilst the valuation is primarily
based on an observable market price, the level and significance of
the unobservable input relating to the calculation of the discount
moves this asset into Level 3.
Changes in the carrying value of Level 3 financial instruments
in the period all relate to changes in fair value. There have been
no changes in methodology, redemption, additions or transfers in or
out of Level 3 in the year.
Details of valuation techniques are disclosed on pages 234 to
235 of the 2021 Annual Report and Accounts.
14. Events occurring after the end the reporting period
There have been no material post balance sheet events between 30
June 2022 and the approval of the condensed interim financial
statements.
Responsibility Statements
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with UK-adopted International Accounting Standard 34
Interim Financial Reporting; and
-- the interim management report includes a fair review of the
information required by DTR 4.2.7R (indication of important events
during the first six months and description of principal risks and
uncertainties for the remaining six months of the year).
By order of the Board
Alasdair Lenman Rob Purdy
Interim Chief Executive Officer Interim Chief Finance Officer
26 July 2022
Independent review report to Yorkshire Building Society
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Yorkshire Building Society's condensed
consolidated interim financial statements (the "interim financial
statements") in the Half-Yearly Financial Report of Yorkshire
Building Society for the 6 month period ended 30 June 2022 (the
"period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the Consolidated Statement of Financial Position as at 30 June 2022;
-- the Consolidated Income Statement and Consolidated Statement
of Comprehensive Income for the period then ended;
-- the Consolidated Statement of Cash Flows for the period then ended;
-- the Consolidated Statement of Changes in Members' Interest
and Equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half-Yearly
Financial Report of Yorkshire Building Society have been prepared
in accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom. A review of interim financial information consists
of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half-Yearly
Financial Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with this ISRE.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half-Yearly Financial Report, including the interim
financial statements, is the responsibility of, and has been
approved by the directors. The directors are responsible for
preparing the Half-Yearly Financial Report in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority. In preparing the Half-Yearly
Financial Report, including the interim financial statements, the
directors are responsible for assessing the group'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 to cease operations, or have no realistic alternative but
to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Half-Yearly Financial Report based on
our review. Our conclusion, including our Conclusions relating to
going concern, is based on procedures that are less extensive than
audit procedures, as described in the Basis for conclusion
paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of
complying with the Disclosure Guidance and Transparency Rules
sourcebook of the United Kingdom's Financial Conduct Authority and
for no other purpose. We do not, in giving this conclusion, accept
or assume responsibility for any other purpose or to any other
person to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing .
PricewaterhouseCoopers LLP
Chartered Accountants
Leeds
26 July 2022
Other information
The information set out in this document is unaudited and does
not constitute accounts within the meaning of section 73 of the
Building Societies Act 1986. The financial information for the year
ended 31 December 2021 has been extracted from the Annual Accounts
for that year. The Annual Accounts for the year ended 31 December
2021 have been filed with the Financial Conduct Authority.
The Auditor's report on the Annual Accounts was unqualified and
did not include any matters to which the Auditor drew attention by
way of emphasis without qualifying their report.
A copy of the Half-Yearly Financial Report is placed on
Yorkshire Building Society's website. The directors are responsible
for the maintenance and integrity of the information on the
website. Information published on the internet is accessible in
many countries with different legal requirements. Legislation in
the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
This information is provided by RNS, the news service of the
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