TIDMOSB
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
(the Company)
2018 Annual Report and Accounts
The following regulated information, disseminated pursuant to DTR6.3.5,
comprises the 2018 Annual Report and Accounts which was sent to
shareholders of the Company on 29 March 2019. A copy of the Annual
Report and Accounts is available at www.osb.co.uk.
Enquiries:
OneSavings Bank plc
Nickesha Graham-Burrell
Head of Company Secretariat t:
01634 835 796
Brunswick
Robin Wrench / Simone Selzer t:
020 7404 5959
Notes to Editors
About OneSavings Bank plc
OneSavings Bank plc began trading as a bank on 1 February 2011 and was
admitted to the main market of the London Stock Exchange in June 2014
(OSB.L). OSB joined the FTSE 250 index in June 2015. OSB is a specialist
lending and retail savings group authorised by the Prudential Regulation
Authority, part of the Bank of England, and regulated by the Financial
Conduct Authority and Prudential Regulation Authority.
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending, secured funding lines and asset
finance. OSB originates organically through specialist brokers and
independent financial advisers. It is differentiated through its use of
high skilled, bespoke underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by access to a
securitisation programme and the Term Funding Scheme.
OneSavings Bank plc Annual Report and Accounts 2018
OneSavings Bank
Experts in specialist lending
Annual Report and Accounts 2018
Contents
Chairman's statement 01
Strategic report
Highlights 02
Our business model 04
Market review 10
Chief Executive Officer's statement 14
Strategic framework 18
Strategy in action 20
Operating and financial review 24
Key performance indicators 30
Financial review 32
Risk review 36
Principal risks and uncertainties 41
Viability statement 51
Corporate responsibility report 52
Governance
Directors' Report
Board of Directors (biographies) 68
Executive team (biographies) 70
Corporate Governance Report 72
Nomination and Governance Committee Report 80
Audit Committee Report 82
Risk Committee Report 87
Directors' Remuneration Report 90
Directors' Report: Other Information 106
Statement of Directors' responsibilities 108
Financial statements and notes
Independent auditor's report 110
Statement of Comprehensive Income 118
Statement of Financial Position 119
Statement of Changes in Equity 120
Statement of Cash Flows 121
Notes to the Financial Statements 122
Glossary 183
Company information 184
Key reads
Chief Executive Officer's statement
For more information go to page 14
Market review
For more information go to page 10
Our business model
For more information go to page 4
OneSavings Bank is a specialist lender, primarily focused on carefully
selected sub-sectors of the mortgage market. Our specialist lending is
supported by a stable retail savings franchise with over 150 years of
heritage, and a unique cost efficient operating model.
Our investor site gives you direct access to a wide range of information
about OSB:
www.osb.co.uk
Chairman's statement
2018 was another successful year for OSB, as we continued to deliver
growth in our chosen market segments.
This strong performance has enabled the Board to recommend a final
dividend of 10.3 pence per share. If approved at the Annual General
Meeting, this will take the full year dividend to 14.6 pence per share,
an increase of 14% over 2017.
I am proud that we continue to make progress towards becoming our
customers' favourite bank, improving our customer net promoter score
from +62 to +63 for the year and we welcomed more than 40,000 new savers
to our Kent Reliance franchise. In addition to our core lending segments,
we identified and developed propositions in adjacent product areas and
over time these will add some diversification to our balance sheet, as
well as leverage the Group's core capabilities to grow our high quality
secured lending portfolio.
Our relaunched Mission, Vision and Values (described in more detail on
page 62) added focus to the efforts of our talented and dedicated
people. I am particularly pleased to see this reflected in our entry
into The Sunday Times Top 100 Best Companies to Work For, underpinned by
a record 94% participation.
We added expertise to our Board and I am delighted to welcome Sarah
Hedger as a Non-Executive Director of the Bank. Sarah brings a wealth of
corporate finance experience and I look forward to working with her. I
would also like to extend my personal thanks to Andrew Doman who stepped
down from the Board in May 2018.
No chairman's report would be complete at the moment without
highlighting the uncertain and inclement economic climate in which we
operate, exacerbated by lack of clarity about the eventual Brexit
outcome. However, I am confident that the combination of our engaged
workforce, highly-focused executive team and committed Board will stand
us in good stead. This, coupled with our focus on delivering value for
our customers and a sensible approach to risk, means I am confident that
OneSavings Bank will continue to deliver growth and strong returns for
our owners.
David Weymouth
Non-Executive Chairman
Highlights
Gross new lending
+15%
2018: GBP3.0bn
2017: GBP2.6bn
Net loan book
+23%
2018: GBP9.0bn
2017: GBP7.3bn
Net interest margin
-12bps
2018: 304bps
2017: 316bps
Cost to income ratio
+1pp
2018: 28%
2017: 27%
Profit before tax
+10%
2018: GBP183.8m
2017: GBP167.7m
Underlying profit before tax
+15%
2018: GBP193.6m
2017: GBP167.7m
Basic EPS
+9%
2018: 55.5p
2017: 51.1p
Underlying basic EPS
+14%
2018: 58.5p
2017: 51.1p
Full year dividend per share
+14%
2018: 14.6p
2017: 12.8p
Fully-loaded Common Equity Tier 1 ratio
-0.4pp
2018: 13.3%
2017: 13.7%
For more information and definitions, see Key performance indicators on
page 30.
Strategic report
Strategic report
OneSavings Bank's business model and 2018 operating and financial review
Key reads within this section:
Chief Executive's message
"Another excellent year for OneSavings Bank"
For more information go to page 14
Operating and financial review
"Delivering value for our stakeholders"
For more information go to page 24
Risk review
"Low and stable risk profile"
For more information go to page 36
Corporate responsibility report
"Putting customers at the heart of everything we do"
For more information go to page 52
Contents
Our business model 04
Market review 10
Chief Executive Officer's statement 14
Strategic framework 18
Strategy in action 20
Operating and financial review 24
Key performance indicators 30
Financial review 32
Risk review 36
Principal risks and uncertainties 41
Viability statement 51
Corporate responsibility report 52
Our business model
Our purpose is to enable our customers to achieve their personal and
business goals by providing access to fair financial services.
Resources and relationships
Brands and heritage
We have a family of specialist lending brands supported by our savings
franchise with a 150-year heritage.
Employees
Our team of highly skilled employees possess expertise and in-depth
knowledge of the property and savings markets.
Infrastructure
We benefit from cost and efficiency advantages provided by our
wholly-owned subsidiary OSBIndia.
Relationships with intermediaries
We have strong and deep relationships with the mortgage intermediaries
who distribute our products.
Financial
We have a strong CET1 ratio and proven capital generation capability to
support significant loan book growth through profitability.
What we do
Attractive retail savings
Our key strengths
-- Stable funding platform
-- Customer focused
-- Transparent, good value savings products
Our channels
Strategic priorities
-- Provide a stable funding platform for the Bank to grow its loan book
-- Maintain and build upon over 150 years of heritage in savings
-- Deliver good and consistent value savings products
For more information go to page 18
Strategy in action
Customer satisfaction and retention
-- Improved ISA transfer process leading to successful ISA season raising
deposits at below our target cost of funds
-- Increased bond retention to 95%2 despite high profile competitor launches
supported by significant marketing spend
Specialist lending business
Our key strengths
-- Excellent loan performance
-- Award-winning products
-- Strong relationships with intermediaries
Our segments
Strategic priorities
-- Be a leading specialist lender in our chosen markets
-- Retain focus on bespoke and responsive underwriting
-- Further deepen relationships and reputation for delivery with
intermediaries
For more information go to page 18
Strategy in action
Exploring core and adjacent areas for growth
-- Successfully launched InterBay asset finance targeting hard assets
critical to businesses
-- Successful pilot introduction of new residential product range
For more information go to page 21
Unique operating model
Our key strengths
-- Integrated multi-brand approach
-- Best-in-class customer service
-- High employee retention rates
-- OSBIndia
Cost to income ratio
Strategic priorities
-- Deliver distribution, sales and risk processes under a coordinated
structure
-- Leverage our unique and cost efficient operating model
-- Maintain an efficient, scalable and resilient infrastructure
-- For more information go to page 18
Strategy in action
OSBIndia - unique competitive advantage
-- Excellent customer experience
-- High customer Net Promoter Score
-- Highly qualified and dedicated staff with market leading employee
retention rate
For more information go to page 23
Underpinned by our core values
Stronger together
Aim high
Take ownership
Create your future
For more information go to page 62
Outcomes and value creation
For shareholders
Underlying basic EPS(1)
58.5p
Dividend per share
14.6p
For customers
Customer NPS
+63
Customer retention(2)
95%
For intermediaries
Broker NPS
+28
For employees
Number of employees promoted in 2018
88
Number of learning events attended by employees in 2018
1,258
For communities
Sponsorship and donations
GBP260k
1. 25% of underlying profit after tax attributable to ordinary
shareholders.
2. Retention is defined as average maturing fixed contractual
retail deposits that remain with the Bank on their maturity date.
Our business model explained
Leveraging our unique business model to differentiate ourselves from
competition, offering well-defined propositions in our chosen markets.
Attractive retail savings
Our retail savings brand
2018 balance by channel
Online Direct Branches
39% 38% 23%
2017: 36% 2017: 41% 2017: 23%
Online
We attract retail savings deposits via the internet.
Direct
The direct channel sources savings products via telephone and post.
High street branches
Our Kent Reliance branded network operates in the South East of England
and offers a variety of fixed, notice, easy access and regular savings
products, including ISAs.
Specialist lending business
Our Buy-to-Let/SME brands
2018 Buy-to-Let/SME
Net loans and advances Gross new lending Average book LTV at 31 December
GBP7.4bn GBP2.8bn 70%
2017: GBP5.6bn 2017: GBP2.4bn 2017: 69%
Buy-to-Let mortgages
We provide loans to limited companies and individuals, secured on
residential property held for investment purposes. Our target market is
experienced and professional landlords or high net worth individuals
with established and extensive property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals, secured on
commercial and semi-commercial properties held for investment purposes
or for owner-occupation.
Residential development
We provide development loans to small and medium-sized developers of
residential property. Loans are staged, with monitoring surveyors
signing off each stage of the development before funds are released.
Funding lines
We provide funding lines (loans) to non-bank finance companies secured
against portfolios of financial assets, principally mortgages and
leases.
Asset finance
We provide loans under hire purchase, leasing and refinancing
arrangements to UK SMEs and small corporates to finance
business-critical assets.
For further information about Buy-to-Let/SME segment, go to page 26.
Our residential mortgage brands
2018 Residential mortgages
Net loans and advances Gross new lending Average book LTV at 31 December
GBP1.6bn GBP0.3bn 56%
2017: GBP1.7bn 2017: GBP0.2bn 2017: 56%
First charge
We provide loans to individuals, secured by a first charge against their
residential home. Our target market includes high net worth and complex
income customers.
We are also experts in shared ownership, lending to first-time buyers
and key workers buying a property in conjunction with a housing
association.
Second charge
We provide loans to individuals seeking to raise additional funds
secured by a second charge against their residential home.
We predominantly target good credit quality borrowers.
Funding lines
We provide funding lines to non-bank lenders who operate in high
yielding, specialist sub-segments such as residential bridge finance.
Unique operating model
Our brand
OSBIndia ('OSBI') is a wholly-owned subsidiary based in Bangalore,
India.
OSBI puts customer service at the heart of everything it does
demonstrated by our excellent customer Net Promoter Score.
Various functions are supported by OSBI, including support services,
operations, IT, finance and human resources.
We have a one team approach between the UK and India.
OSBI operates a fully paperless office - all data and processing are in
the UK.
For further information about Residential segment, go to page 28.
Relationships with our key stakeholders
Our vision is to become our customers' favourite bank; one that delivers
its very best, challenges convention and opens doors that others can't.
Our success depends on close relationships and effective engagement with
our key stakeholders and upholding the values to which we operate.
Strong relationships with our stakeholders are fundamental to achieving
this vision, and are central to the Bank's culture. We encourage
effective and honest engagement from all of our people when dealing with
stakeholders including customers, shareholders, business partners,
colleagues, and the communities in which we operate.
Customers
We pride ourselves on delivering straightforward and transparent
products and propositions to both our borrowers and our savers.
Our value 'Aim High' encourages us to keep our customers at the centre
of everything we do. Every time a customer calls or interacts with the
Bank we offer them the opportunity to let us know how we did. We listen
to them and act upon what they tell us. Customer satisfaction is high
and our customer Net Promoter Score increased to +63 which is testament
to the outstanding customer service we provide.
We added over 40,000 new savings customers in the year and we pride
ourselves on high retention rates for savings and borrowing customers.
Shareholders
OSB maintains an open dialogue with its shareholders and is recognised
for its straightforward and uncomplicated approach.
Clear and comprehensive reporting is supported by the OSB Investor
Relations team. Management is available for meetings with shareholders
through investor roadshows, conferences and one to one meetings. These
interactions provide us with direct feedback on the market and
Bank-specific issues that interest our shareholders.
The Annual General Meeting is attended by the members of the Board and
Management.
The Investor Relations team also maintains strong relationships with
analysts and attends relevant conferences. In 2018, OSB met 130
individual investors.
The Group's results are available on our website at
www.osb.co.uk/investors.
Communities
OSB cares about the communities in which it is based. Each year OSB
engages with the people in the county of Kent taking part in a variety
of charitable events and partnerships.
In 2018, the Bank raised GBP260,000 for its charity partners and our
employees dedicated time in a variety of volunteering activities.
OSBIndia is also heavily involved with the community local to the office
in Bangalore, as well as in areas where there are critical needs. For
more information on how the Group engages with the communities it
operates in, see page 64.
Intermediaries
Our straightforward lending proposition is based on our goal to make it
easier for intermediaries to serve our borrowers. We continuously
enhance relationships with our intermediaries through training and
growing our team as the number of intermediaries grow. Our business
development managers listen and work with intermediaries, making
themselves available to discuss cases and helping to obtain swift and
reliable decisions.
The OSB Sales team attended 170 intermediary events during 2018,
interacting with brokers and keeping abreast of industry developments
and intermediary requirements. The broker NPS score was +28 at the end
of 2018.
Colleagues
Our experienced and dedicated colleagues work together to create a
business in which we can all take pride and prosper. Our people are a
key asset and our success depends on the talented individuals we employ.
In 2018, we reached a milestone of 1,000 employees across the UK and
India. What our employees think is paramount to us and we regularly ask
for their opinion in company-wide surveys. Responses from UK employees
enabled us to enhance the working experience, resulting in the Bank
being included for the first time in The Sunday Times 100 Best Companies
to Work For in 2018. We take the same approach at OSBIndia, which was
officially certified as a 'Great place to work' in 2018.
The Group also engages with employees via a new dedicated intranet site
launched in 2018, regular newsletters and company-wide events, including
the Mission, Vision and Values events, for more details, see page 62.
For more information on how Directors engaged with our key stakeholders,
see the Corporate Governance Report on page 72.
For more detail about OSB non-financial information regarding
environmental, employees and social matters, respect for human rights,
anti-corruption and anti-bribery matters, see the Corporate
Responsibility Report on page 52.
Market review
UK Buy-to-Let gross advances
GBP37.1bn
Source: UK Finance, New and outstanding Buy-to-Let mortgages, Feb 2019
UK average house price inflation
2.5%
Source: ONS, UK house price index, Dec 2018
The UK housing and mortgage market
In 2018, the housing market saw a continuation of trends seen in the
previous year. Whilst political uncertainty surrounding Brexit has
undoubtedly had some impact, the combination of affordability challenges
and low housing supply also contributed to slowing levels of activity in
some parts of the country. Price growth declined and even reversed in
some parts of London and the South East, whilst in other parts of the
country, house prices continued to grow, including in many of the UK's
major cities. The record low mortgage rates in mainstream markets, as
high street banks competed for market share, continued to support the
market with low loan servicing costs but deposits required were still a
barrier to entry for many. This drove the extension of the government's
Help to Buy equity loan scheme.
Government policy and the intention to support home ownership and
increase the supply of social housing has been positive, including
lifting the borrowing cap for councils and the move to abolish stamp
duty land tax for first-time buyers on properties worth up to
GBP300,000. However, this activity was somewhat overshadowed by
political uncertainty and noise surrounding Brexit. It is reasonable to
expect increased support for building new homes and the housing market
in general once clarity around the political landscape returns.
According to UK Finance, gross mortgage lending reached GBP269.3bn in
2018, up 3% compared to GBP260.4bn in 2017(1) with remortgage activity
driving lending growth.
1. UK Finance, New mortgage lending by purpose of loan, 30 Jan
2019.
The UK savings market
The UK savings market continued to grow in 2018 with c. GBP64bn added in
the year to reach a total of GBP1,671bn (2017: GBP1,607bn).(2)
The year also saw new competition entering the market offering
attractive rates to savers, with existing banks taking note. Savings
rates showed a gradual increase during 2018 with average one-year fixed
rate bonds paying 1.45% in December 2018, up from an average of 1.16% at
the start of the year. Average rates on no-notice accounts increased
from 0.45% to 0.63% at the end of 2018, demonstrating that the Bank of
England base rate rise to 0.75% in August 2018 had some effect on the
wider savings market.(3)
Aside from the rate offered, two clear trends are emerging in the
savings market:
-- there are signs that customers are becoming more technologically aware
and are choosing their savings providers based on service and convenience
over their return, and some new entrants to the market are exploiting
this opportunity. We expect this trend to continue, however;
-- it has also been observed that traditional ways of interacting with
savings customers, via branches, are regaining popularity.
Variable rate easy access products proved to be popular accounts for the
industry in 2018, as customers sought flexibility and accessibility of
their funds over higher returns, potentially reflecting the current
macroeconomic uncertainty.
OneSavings Bank's lending markets
UK Buy-to-Let/specialist SME market
PRS broadly stable
The Private Rented Sector ('PRS') remained at approximately 4.5 million
households in 2017-18, broadly stable for the last five years.(4) As has
been well documented, the lack of growth is attributable to the
political and regulatory interventions announced under the previous
Conservative administration. These delivered the desired reduction in
Buy-to-Let market growth. In the year, new Buy-to -Let lending of
GBP37.1bn was up 4% on 2017 (GBP35.8bn), a figure that should be
measured against the context of 2016's GBP40.6bn.(5) However, despite a
softening of house price inflation, house prices are still generally up,
and affordability measures have not eased, hence, the changes to
Buy-to-Let taxation have arguably done little to achieve their primary
political aim, of increasing levels of home ownership. Given this
continuing context of a shortage of housing supply that keeps house
prices relatively high and mortgage regulation and mortgage finance
beyond the reach of many, the market for rental property is expected to
remain strong.
This demand is, however, being met by a reducing number of landlords.
The 'dinner party landlords' who flocked to the market in the period
from approximately 2012-2015, have diminished, put off by, in particular,
changes to personal taxation. This has left professional landlords,
those whose primary income is obtained from their property portfolio, to
pick up demand. The professional market, whilst not immune to the
changes, has persisted because of the strong fundamentals which underpin
it: sustained demand from tenants and the potential for long-term
capital gains.
This long-term perspective drove a change in buying behaviour from
professional landlords, in the form of significant growth in the market
for long-term fixed mortgage rates. In a time of economic turmoil, these
provide a degree of certainty as well as enable greater leverage under
the PRA rules.
Borrowing through limited company structures also continues to be a
feature of this market, with professional landlords continuing to
mitigate the impact of income tax changes via this route. OSB is a
respected lender within the specialist Buy-to -Let sector, with a strong
reputation for limited company lending which has been beneficial to date
and is expected to continue to be so.
2. Bank of England, Monthly amounts outstanding of monetary
financial institutions' sterling retail deposits from private sector (in
sterling millions) seasonally adjusted, LPMB3SF, 20 Feb 2019.
3. Moneyfacts, UK Savings Trends Treasury Report, Dec 2018.
4. English Housing Survey, Headline Report 2017-18, 31 Jan 2019.
5. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb
2019.
Commercial
Resilience in UK yields
The UK commercial property market saw investment reduce in 2018 compared
to 2017, although the total exceeded GBP55bn for the fifth consecutive
year.(6) The uncertainty surrounding the UK's withdrawal from the EU
continues to have an effect, with indications that some investment
decisions are being delayed until a clear way forward has been agreed.
However, the UK remains an attractive investment proposition. Yields are
high compared to much of Europe and Asia, while sterling is weak and
interest rates are relatively low. As a result, overseas investments
accounted for more than half of investments in 2018, an established
trend that is expected to continue.(7)
Furthermore, high demand for offices in and around London, partly due to
a lack of development opportunities, suggests that London may be more
resilient to Brexit than initially thought.(8)
Research from Savills highlights increasing demand for industrial and
warehouse properties which provide logistical support, usually for
e-commerce. Also featured is the potential for commercial property
growth in regions outside London and the South East, aided by stronger
house prices and consumer confidence, together with a relative lack of
supply.(8)
As in previous years, yields weakened across the retail property sector
(except in prime central London), reflecting the rise of technology,
changing consumer habits and a resulting lack of demand. This trend is
not expected to change, but it may create opportunities for investors
looking to repurpose vacant shops, creating a greater mix of uses and
services.(8)
The lending market is dominated by the high street banks. Opportunity
exists for specialist lenders whose manual underwriting approach, and
willingness to engage in a dialogue to ensure a robust understanding of
customer requirements, can provide a service differential.
Residential development
Continued under-supply
The UK has experienced a long-term upward trend in real house prices,
creating affordability problems as demand for housing outstripped both
supply and real wage growth. Turnover in the second-hand housing market
has fallen, resulting in reduced liquidity within this market.
The new-build market has also been adversely affected, especially in
London, with some regions structurally reliant on the government's Help
to Buy product, which will be restricted to first time buyers and be
subject to regional caps from April 2021. The support required by the
small and medium-sized developers who form our core audience for
development finance will continue to increase.
Specialist residential lending
New initiatives gaining traction
OneSavings Bank's manual underwriting and individual case assessment
model provides a strong platform for specialist residential lending.
Customers with non-standard asset and income structures, or complex
credit histories as well as those seeking shared ownership mortgages,
are ill-served by the commoditised and inflexible decision-making
processes of mainstream lenders.
OneSavings Bank implemented a number of tactical product initiatives in
this market in 2018. We are seeing encouraging results which we will
build on in 2019.
6. Colliers International, UK Property Snapshot, Jan 2019.
7. CBRE Research, UK Real Estate Market Outlook 2019.
8. Savills, UK cross sector outlook, 8 Jan 2019.
Second charge lending
Controlled high standards
The second charge market saw approximately GBP1.07bn of gross new
lending in 2018 (2017: GBP1.02bn).(9) This market continues to adjust to
the changes in regulation that came into effect in March 2016 and the
short-term outlook remains neutral; any significant increase in market
size is considered unlikely.
2018 saw the first regulatory reviews of lending practice in the sector,
leading to some lenders revising their risk appetite and lending
practices. We expect further regulatory involvement in the broker market
in the short term. This is expected to maintain the subdued outlook for
this market.
As a regulated lender in other markets, OSB has always maintained high
standards of conduct and prudential regulation so we do not see this
having any material impact on our lending.
Funding lines
Strong pipeline
There are a number of successful non-bank or alternative providers of
finance to retail and SME customers in the UK. These businesses are
funded through a variety of means including wholesale finance provided
by banks and securitisation/bond markets, high net worth investors and
market-based/peer-to-peer platforms.
OSB is an active provider of secured funding lines to these specialty
finance providers, to date focusing on short-term real estate finance,
leasing and development finance. Through these activities the Bank has
achieved senior secured exposure at attractive returns to asset classes
that it knows well. This financing activity covers a broad range of
business sectors and its overall size is thus difficult to quantify. OSB
sees a regular flow of opportunities, adopts a very selective approach
and has a strong pipeline of new business.
9. FLA, Second charge mortgage market reports volumes up by 13%
in December, 8 Feb 2019.
Chief Executive Officer's statement
Continued strong performance
We are well-placed to continue to deliver attractive returns.
ANDY GOLDING
CHIEF EXECUTIVE
Statutory basic earnings per share
55.5p
+9%
2017: 51.1p
Dividend per share
14.6p
+14%
2017: 12.8p
.professional landlords recognise the strength of our proposition.
I am delighted to report another excellent year for OneSavings Bank
('OSB'). The Group achieved strong results as we worked together to
deliver our vision of being our customers' favourite bank. Underlying
basic earnings per share grew by 14% to 58.5 pence with underlying
pre-tax profit up 15% to GBP193.6m. Our strategy continues to provide us
with a platform to grow profitably and develop the business whilst we
are ever mindful of the uncertain economic and political environment in
which we are operating.
Our ability to raise and retain retail funds given the long-standing
heritage of the Kent Reliance brand, track record of raising funds
whenever needed and our leading retention rate of 95%, means we can
safely and confidently fund the lending business we wish to write. The
strength of our proposition continues to attract new customers. Our
manual underwriting process, strong risk management and enhanced stress
testing, including numerous Brexit scenarios, give us a deep
understanding of the markets in which we operate.
We flex our lending in different business areas according to the
opportunities present, always underpinned by appropriate prudence given
the current uncharted political and economic environment. Whilst Brexit
may impact certain business opportunities, our balance sheet remains
strong, our core markets remain extremely attractive and we have a
high-quality secured asset portfolio. Combined with an excellent funding
franchise and customer proposition, this positions us well to continue
to deliver value for our shareholders regardless of the uncertain
macroeconomic backdrop.
Our customer franchises
An award-winning secured lender
The Group grew its loan book by 23% to GBP9.0bn in 2018 and, whilst
maintaining its discipline on understanding and pricing for risk,
delivered a strong net interest margin ('NIM') of 3.04% for the year.
Our core Buy-to-Let business continues to grow as professional landlords
recognise the strength of our proposition and enjoy the excellent levels
of customer service that they receive.
New Buy-to- Let/SME mortgage origination increased to GBP2.8bn during
2018, reflecting our specialism and expertise in lending to limited
companies and large portfolio landlords. We are particularly proud of
our lending growth as it was achieved in the context of industry-wide
gross Buy-to-Let advances increasing by 4% in the year to GBP37.1bn.(1)
Our target market of professional/multi-property landlords accounted for
81% of completions for OSB by value during 2018, with a continued high
proportion of professional landlords choosing to remortgage with us.
This performance demonstrates the sustainable strength of our
proposition, in particular our specialist, manual underwriting, as well
as our deep and historic relationships with mortgage intermediaries.
We have seen significant growth in the commercial side of our Buy-to-
Let/SME segment through the InterBay brand. We have used our strong
understanding of this market to invest in products, service and
innovation that have proved increasingly popular with commercial
borrowers. We developed the proposition further following our successful
entry into the bespoke bridging market and in August 2018, we
successfully launched InterBay Asset Finance, with the first of its
flexible asset finance deals funded in October. I am pleased with the
success our commercial business is enjoying and the positive start for
our asset finance business. As with all new business segments that we
enter, we do so cautiously on a test, assess and grow basis.
Our more cyclical commercial businesses continued to perform strongly
throughout 2018. The Bank's Heritable Development Finance business
provides development finance to small and medium-sized residential
developers operating in areas of the UK where demand for housing is
consistently strong. We are delighted with the performance of the
Heritable joint venture ('the JV') since it started lending in early
2014. We had the opportunity to acquire the JV partners' interest in
2019 and in doing so recognised an exceptional cost of GBP9.8m in 2018
in respect of this option. We are particularly pleased that we were able
to retain the key individuals in the business going forward, whilst
continuing to offer them the opportunity to lend alongside the Bank to
align interests. We also saw controlled growth in the provision of
secured funding lines to other lenders that operate in certain high
yielding, specialist sub-segments, such as residential bridge finance
and asset finance.
As we flagged earlier in 2018, originations in the residential segment
increased in 2018 with attractive opportunities in more complex prime
and second charge markets. However new organic lending was more than
offset by redemptions in the back book and acquired mortgages in run-off,
contributing to the first charge gross loan book reducing marginally to
GBP1,224m from GBP1,241m at the end of 2017. We piloted new specialist
products in the residential segment in 2018 and are seeing encouraging
results. Over the medium term, we see an opportunity to deliver
attractive risk-adjusted returns from this new product range,
particularly once we transition to IRB.
Our focus on new and existing customers means we are always investing in
and improving our sales capability across our brands. We continued to
gain recognition from mortgage customers and intermediaries, winning
multiple awards during the year. I am particularly pleased that OSB won
multiple awards including Best BDM Team, Best Specialist Lender and Best
Buy -to-Let Lender, all from Mortgage Strategy Awards and Moneyfacts
Best Specialist Mortgage Provider in 2018. In addition our Sales
Director, Adrian Moloney, was awarded Business Leader: Complex Buy-to-
Let Lender by British Specialist Lending Awards.
Through the Bank's mortgage product transfer scheme, Choices, we are
consistently increasing the proportion of borrowers who choose a new
product within three months of their initial product ending and this
grew to around 69% by December 2018. This is driven by success in
highlighting opportunities available to borrowers who might otherwise
revert to standard variable rate ('SVR') and who should ensure that they
are actively choosing appropriate mortgage pricing and features.
Sustainable funding with award-winning savings
Our stable and award winning retail funding franchise continues to
support lending growth, with retail deposits up 21% to GBP8.1bn during
the year. Over 40,000 new savings customers joined the Bank in 2018. Key
to our vision is becoming our customers' favourite bank and we put our
customers at the heart of everything we do. This is demonstrated by our
market-leading 95% retention rate amongst customers with maturing fixed
rate bonds and ISAs. The strength and fairness of our retail savings
proposition, coupled with excellent customer service and high retention
rates, allow the Bank to raise significant funds when required without
needing to price at the very top of the best buy tables and provides a
consistent and stable source of liquidity.
We continue to develop our savings proposition and following investment
in a new ISA transfer management system, we had a particularly strong
ISA season in 2018. We opened a record number of accounts, raising a
significant amount of fixed term savings at a price below our target
cost of funds, further demonstrating the value of the Bank's strong
retail presence.
I am delighted that Kent Reliance was recognised by winning the Savings
Account Provider of the Year from MoneyAge and was commended for Best No
Notice Account Provider by Moneyfacts Awards in 2018. These awards are a
testament to our savings proposition and to the outstanding customer
service delivered by our staff.
The Bank remained predominantly retail funded in 2018, with a loan to
deposit ratio for the year of 93%(2) delivering on our strategy to
primarily fund our loan book using retail deposits. At the close of the
Bank of England's Term Funding Scheme ('TFS') in February 2018, the Bank
had drawdowns of GBP1.5bn. The TFS funding is repayable by the end of
February 2022. Along with our proven ability to raise retail funds, the
Bank was ready to re- commence its RMBS programme in Q4 2018, but market
conditions and pricing were unattractive. In addition, the Bank
participated in the Bank of England's Indexed Long-Term Repo scheme
('ILTR') with a total of GBP80m ILTR borrowings outstanding at the year
end.
Leveraging and investing in our unique business model
The low cost to income ratio of 28% reflects our efficient and scalable
operating platform. Through 2018 we invested significantly in future
proofing the business by delivering regulatory projects, principally
General Data Protection Regulation ('GDPR'), the Second Payment Services
Directive ('PSD 2') and the ongoing project to deliver IRB. We also
started upgrading our IT infrastructure, including customer platforms.
This increased expenditure was partially offset by our continuous focus
on finding efficiencies in the costs of running the Bank on a 'business
as usual basis', through maintaining disciplined cost management,
increased benefits of scale and leveraging our unique operating platform
in India ('OSBI'). I am particularly pleased that finding these
efficiencies reduced our management expense ratio to 0.84% from 0.86% in
the prior year.
The Group's first generation IRB models were delivered on schedule in
late 2016 and we ran them for the second year in 2018. We remain pleased
with progress towards our IRB application and believe that the new
calibrations, combined with the final IRB output floors outlined in
Basel III, will be beneficial to the Bank's capital requirements.
OSBI undertakes a range of primary processing services at a
significantly lower cost than an equivalent UK-based operation, whilst
delivering consistently high quality service levels. I am especially
pleased that we continue to achieve this whilst maintaining our focus on
our customer-led vision, borne out by an increase in customer NPS to an
outstanding +63 (2017: +62).
A strong and sustainable business
The Group continued to exercise strong diligence over loan and customer
assessment. The loan loss ratio increased to 10bps in the year to 31
December 2018 (2017: 7bps), largely as we modelled the potential for a
more severe impact from the outcome of the Brexit negotiations in our
economic scenarios. Removing the impact of this additional scenario, the
loan loss ratio was consistent with the prior year as we saw no
deterioration in the credit quality of the book across our lending
businesses. The modelling of more severe economic scenarios surrounding
Brexit increased our focus on the resilience of our business model to
House Price Index and commercial real estate risk and we continue to
assess our lending appetites in relation to these risks.
Our front book of mortgages continues to demonstrate our excellent
credit management. From more than 48,500 loans totalling GBP11bn of new
organic originations since the Bank's creation in February 2011, we have
only 206 cases of arrears over three months in duration, with an
aggregate balance of GBP53.5m and an average loan to value ('LTV') of
just 62%, reflecting the continued strength of the Bank's underwriting
and lending criteria.
The weighted average LTV of the overall mortgage book remained low at
66% at the end of 2018, with an average LTV of 69% on new origination
during the year.
The lower NIM of 3.04% (2017: 3.16%) reflects the changing mix of the
loan book despite broadly stable asset pricing and wider average five
year swap spreads, partially offset by a relatively favourable cost of
retail funds and additional benefit from the Bank of England's Term
Funding Scheme ('TFS'). The mix of the loan book continues to change
with new origination forming a growing proportion of the total book,
diluting the impact of loans originated or acquired several years ago
when yields were exceptionally high. The favourable cost of retail funds
was due primarily to the retail savings market not pricing in the full
November 2017 and August 2018 Bank of England Base Rate rises. Five year
fixed rate mortgages accounted for c. 56% of Buy-to-Let completions for
our Kent Reliance brand in 2018, up from 43% in 2017.
Our achievements in 2018 are a testament to the management and staff of
OSB and I would like to thank my colleagues for their hard work and
commitment throughout the year.
Looking forward to 2019
Despite the macroeconomic and political uncertainty surrounding the
outcome of the negotiations of the UK's departure from the EU, trading
conditions in our core markets remain positive and current application
levels in our Buy-to-Let and commercial businesses are strong as we head
into 2019 with a robust pipeline of new business.
Whilst OSB may be less directly affected by Brexit than companies which
trade in the EU, we have considered and planned for the potential
implications carefully, both strategically and operationally in expected
and stressed conditions. The Board has commissioned a number of reviews
from external experts and economic advisers to assist in this work. In
our planning, we considered our own particular circumstances, including
our location, regulatory environment, customer credit profiles, loan
securities, location of our stakeholders, including key customers and
suppliers, as well as our workforce. We have analysed the potential
impact of a range of scenarios such as the effect of a 'no-deal' Brexit,
including falling property prices, on loan loss provisions, including
the Group's IFRS 9 impairment process, which are covered in the Risk
review. We have also analysed the potential impact of various Brexit
scenarios on different portfolio segments with a view to coordinating
strategic actions across the credit risk lifecycle if a deterioration in
the macroeconomic outlook were to occur. This same plan could be
deployed should the Group observe credit profile deterioration post a
'no-deal' Brexit.
Outside our core Buy-to-Let market, we also see good opportunities in
other segments of the lending market where we already have expertise and
a platform to build on. In particular, we expect to grow further through
our InterBay Commercial brand and we see more opportunities to grow our
residential lending franchise in the medium to longer term. We will,
however exercise caution and grow sensibly into new markets as we adjust
to a potentially new economic outlook.
Following the statement released on 9 March 2019 confirming that Charter
Court Financial Services and OneSavings Bank were in advanced
discussions regarding a possible all-share combination of the two
companies, we are today pleased to announce the recommended all-share
combination of the two organisations. This statement and any future
public documents relating to the possible combination will be placed on
the Investors section of the OSB website at www.osb.co.uk. As such, we
are not able to provide our usual extent of guidance for the financial
year ahead.
We recognise the macroeconomic uncertainty caused by the Brexit
negotiations, however, based on what we are currently seeing in our core
markets and assuming current application levels continue, we would
expect to deliver mid-teens net loan book growth in 2019. Based on
current asset pricing, swap spreads and cost of funds, we would
anticipate NIM for 2019 to be marginally lower than in 2018, due to the
changing mix of the loan book, despite broadly stable asset pricing.
Whilst we will continue to investment in the business for growth in
2019, as always, we will maintain a strong focus on cost efficiency and
control as reflected in our cost to income and management expense
ratios.
We start 2019 with a fully loaded CET1 ratio of 13.3% and a proven
organic capital generation capability through profitability. Our
dividend policy remains a payout ratio of at least 25% of underlying
profit after taxation attributable to ordinary shareholders.
I believe that OneSavings Bank's customer-focused business model and the
strength of both our lending and savings franchises, mean we are
exceptionally well-placed to continue to generate attractive returns for
our shareholders.
Andy Golding
Chief Executive Officer
14 March 2019
Our vision & values
Our vision is to become our customers' favourite bank; one that delivers
its very best, challenges convention and opens doors that others can't.
Our values guide us to the success we are all striving towards - for
ourselves and our customers.
Stronger together
Aim high
Take ownership
Create your future
For more information go to page 62.
1. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb
2019.
2. Excluding the impact of TFS and ILTR drawdowns. The
unadjusted ratio was 111% as at 31 December 2018 (2017: 109%).
Strategic framework
Our vision is to become our customers' favourite bank; one that delivers
its very best, challenges convention and opens doors that others can't.
Priorities Our goals 2018 progress Looking forward Key risks KPI
Specialist lending business Grow profitable loan origination in key markets -- Buy-to-Let/SME origination up 15% to GBP2.8bn -- Focus on organic growth in our target sub-sectors Net loan book GBP9.0bn
Be a leading specialist lender in our chosen markets -- Deliver strong end-to-end propositions in target -- GBP223m originations in commercial lending through -- Further develop commercial lending opportunities -- Market conditions affecting long-term demand +23%
markets our InterBay brand -- Further enhance our proposition in residential
-- Established InterBay Asset Finance business lending in light of the opportunities under IRB -- Increased regulatory pressure
-- Deliver incremental, non-organic business -- Received multiple awards including Best Specialist -- Build on the successful pilot into bridge finance
Lender (Mortgage Strategy Awards) and Best Specialist and cautiously grow InterBay Asset Finance -- Continued political and economic uncertainty
-- Invest in highly responsive, customer-focused Mortgage Provider (Moneyfacts Awards) -- Identify new market sub-sectors with high returns on
culture a risk-adjusted basis -- New specialist lenders entering the market
-- Innovate to secure sustainable long-term market
leadership
Specialist lending business High quality decisions protecting the business -- Identify additional technology to support Loan loss ratio 10bps
Retain focus on bespoke and responsive underwriting -- Skilled manual underwriting supported by clever -- More than 48,500 loans totalling GBP11.0bn decision-making -- Changing regulation for underwriting increased by 3bps
technology originated since the Bank's creation in 2011 with -- Continue training and coaching to further strengthen
only 206 cases of arrears over 3 months, with an the underwriting expertise of our team -- More complex underwriting requirements
-- Deliver a quality, differentiated service supported aggregate balance of GBP53.5m and an average LTV of -- Maintain focus on consistent decision-making
by highly responsive decision-making 62% outcomes -- Difficulty in recruiting experienced staff
-- Find ways to be even more responsive to
-- Clear decisions recognised by intermediaries for -- Transactional Credit Committee met twice a week in intermediaries and borrowers whilst remaining a -- Increasing intermediary demands
their quality and fairness - a critical friend 2018 to assist with more complex or larger new critical friend
mortgage applications -- Demands of ever-changing technology
-- Integrated underwriting across all brands
Specialist lending business Increase partner reach in response to demand -- Choices programme had another successful year -- Develop enhanced intermediary education programme Gross new lending GBP3.0bn
Further deepen relationships and reputation for delivery -- Access to specialist products developed by listening increasing retention rates in 2018 -- Continue to deliver direct relationships with high -- Loss of key broker relationships +15%
with intermediaries to intermediary partners -- Restructured relationship team to increase levels of quality intermediaries
-- Be accessible and available to intermediaries engagement -- Deliver deeper relationships with more of our target -- Competition reducing pricing below OSB's
-- One distribution model -- Attended c. 170 intermediary events across our intermediaries risk-adjusted return appetite
-- Gain intermediary recognition for delivering target geographies -- Deliver best in class service performance as we grow
sustainable proposition -- Enhanced marketing and brand support for and enter new market sub-sectors -- More complex underwriting requirements slowing the
-- Deliver bespoke solutions to meet intermediary and intermediaries process
customer needs -- Published periodic market leading 'Buy-to-Let
Britain' reports
Attractive retail savings Stable, high quality funding platform -- Gained c.40,000 new savings customers -- Increased competition for retail funds Customer NPS +63
Maintain and build upon over 150 years of heritage -- Be primarily funded through attracting and retaining -- Achieved 95% customer retention -- Enhance service proposition by investing in -- Increased customer expectation for technology increased by 1
in savings a loyal retail savings customer base -- Received multiple awards for savings products including technology for digital transformation compared to difficulty and cost of delivery
-- Provide access to our service for customers through Savings Account Provider of the Year -- Increased burden of regulatory compliance - for
their channel of choice -- Loan to deposit ratio of 93%(1) -- Continue to invest in and diversify distribution example, Open Banking (which currently does not appl
-- Ensure liquidity requirements are met through the 1. Excluding impact of TFS and ILTR drawdowns. channels from branches to digital y
economic cycle to OSB)
-- Deliver a proposition offering transparent, -- Broaden savings propositions further to include
straightforward savings products, providing long-term wider savings needs
value combined with excellent service levels
Unique operating model Best in class customer service -- Extend measurement by benchmarking to best in class -- Difficulty in continuous service improvement as OSB Cost to income ratio 28%
Leverage unique and cost-efficient operating model -- Customer service at the heart of everything that we -- Investments in training and process development -- Introduce robotics technology and improve workflows grows increased 1pp
do contributed to enhanced customer NPS of +63 to further enhance primary servicing -- Global economic uncertainty increasing costs in
-- Extend activity in OSBIndia, developing high quality -- Increase change capacity through enhanced end-to-end India
areas of excellence -- Increased OSBI headcount by 20% to 440 project management capability -- Increasing complexity from compliance with changing
-- Deliver cost efficiencies through excellent process regulation
design and management -- Lack of operational resilience due to rapid growth
Strategy in action
We continue to invest in the Group to ensure we remain a leader in our
markets and become our customers' favourite bank, enabling us to create
sustainable growth and returns.
Be a leading specialist lender in our chosen markets
Leading lender in our chosen markets
Our key strengths
-- Focus on specialist market sub-segments
-- Bespoke underwriting
-- Deep relationships with intermediaries
The market sub-segments we focus on are:
-- Buy-to-Let
-- commercial and semi-commercial
-- residential development
-- bespoke specialist residential
-- second charge residential
-- shared ownership
-- bridging and short-term loans
-- funding lines, and
-- asset finance.
Bespoke underwriting
At OSB, we do not use automated or scorecard-based processes. All of our
loans are underwritten by experienced and skilled underwriters,
supported by technology to reduce the administrative burden on our
underwriters and mortgage intermediaries. We take each loan on its own
merit, responding quickly and flexibly to offer the best solution for
each of our customers. No case is too complex for us and for those
borrowers with more tailored or larger borrowing requirements our
Transactional Credit Committee meets twice a week demonstrating our
responsiveness to broker needs.
Intermediary relationships
Access to our specialist products and multiple brands is via
intermediaries. Relationships are key and partnerships continue to
flourish with our panel of selected specialist mortgage intermediaries,
who are leaders in their sub-segments.
Gross new organic lending
+15%
2018: GBP3.0bn
2017: GBP2.6bn
Maintain and build upon over 150 years of heritage in savings
Customer satisfaction and retention
Our key strengths
-- Customer focused
-- Transparent, good value savings products
Customer retention
95%
2017: 90%
Stable retail savings platform
OSB's proposition for savers is simple; we offer consistently good value
savings products to attract and retain a loyal customer base. Our retail
savings franchise has been a valued and recognised brand for over 150
years.
Transparent savings products
We deliver straightforward products that meet customer needs for cash
savings. We offer good and consistent value, without having to price at
the very top of the best buy tables, and existing customers benefit from
loyalty rates.
We attracted over 40,000 new savings customers during 2018, and retained
95% of maturing fixed term deposit balances, demonstrating the strength
of our long-term proposition.
Provide access to customers through the channel of their choice.
Leverage unique and cost-efficient operating model
OSBIndia - unique competitive advantage
Focused on customers
Our customer service functions, based in our wholly-owned subsidiary
OSBIndia, support our aim of putting customers first.
We reward our people based on the quality of service they provide to
customers, further protecting our retail savings franchise and leading
to high customer satisfaction with a customer NPS of +63.
Focused on quality and cost discipline
At OSBI we employ highly talented and motivated employees at a
competitive cost. We benchmark our processes against industry best
practice, challenging what we do and eliminating customer pain points as
they arise. We continue investing in developing skills that enable
highly efficient service management, matching those to business needs
both in India and the UK.
We are proud of our low employee turnover in India, with a remarkable
11% regretted attrition rate, substantially outperforming industry
averages.
Investment in infrastructure and systems
We aim to deliver efficient, scalable and resilient infrastructure and
invest in IT security, supported by market leading data security and
resilience experts.
Our key strengths
-- Excellent customer experience
-- High customer NPS
-- High employee retention rates
Put customer service at the heart of everything that we do.
Cost to income ratio
28%
2017: 27%
Operating and financial review
OneSavings Bank
Group overview
2018 was another year of exceptional performance, underpinned by organic
originations of GBP3.0bn at attractive margins, strong risk management,
cost efficiency and discipline.
Business highlights
2018 was a year of excellent performance for the Bank, further building
on our strengths and creating a business that can withstand
macroeconomic uncertainty and deliver value for all of our stakeholders.
The Group wrote GBP3.0bn of gross organic originations in the year
(2017: GBP 2.6bn) at attractive margins despite continuing competition,
especially for five year fixed rate Buy-to-Let products.
The strongest lending growth was achieved in our Buy-to-Let /SME segment
which caters for our core audience of large professional landlords and
also provides commercial, semi-commercial, bridging and more complex Buy
-to -Let products via our InterBay brand. In the second half of 2018,
the Group launched its InterBay Asset Finance business, funding its
first deals in October 2018 and exceeding our lending targets. Overall,
the Buy -to-Let/ SME net loan book increased by 31% to GBP7.4bn as at 31
December 2018.
Organic origination in our residential segment also increased in the
year to GBP0.3bn (2017: GBP0.2bn) as the specialist residential products
launched in the second half of 2018 received a positive response from
borrowers. However, the Residential net loan book decreased to GBP1.6bn,
down 4% compared with 2017 year end as redemptions in the back book and
acquired mortgages in run-off more than offset new lending.
Overall, the Group's net loan book was up 23%, reaching GBP9.0bn by the
end of 2018, with Buy-to-Let/SME comprising 82% and Residential 18% of
the total net loan book.
The Group remained predominantly retail funded during the year, with a
loan to deposit ratio of 93%(1) as at 31 December 2018 (2017: 92%).
Retail deposits were up 21% to GBP8.1bn for the year as we welcomed over
40,000 new retail customers and had a particularly successful ISA
season. Our focus on providing fair and transparent savings products and
outstanding customer service was reflected in a +63 customer net
promoter score ('NPS') and retention rate of 95% for maturing fixed term
bond and ISA balances in 2018 (2017: +62 and 90% respectively). Our
business savings accounts were also popular with SMEs, with total
deposits constituting just over 1% of the entire savings book, or GBP80m
of the total balance as at 31 December 2018.
Case study
More than ticking boxes
David Morgan - Senior Legal Counsel - Group Data Protection Officer
2018 was a busy year for new regulation and this included a
comprehensive programme at the Bank to meet the new General Data
Protection Regulation ('GDPR') - the biggest change to UK data
protection law in 20 years.
Multiple streams of work were required, ranging from the Bank's data
governance framework, system modifications and procedures to deal with
enhanced customer documentation.
Alongside this, a detailed programme of training and awareness was
undertaken to ensure that staff understood the implications of the new
regulation.
What most impressed me was the determined and collaborative way in which
teams across the Group, with our external advisers, worked together to
navigate the requirements and implement the changes. The result is that
it's been more than just a tick-box exercise. The clear opportunity was,
and remains, to continually enhance customer experience.
The Bank's Heritable Development Finance business provides development
finance to small and medium -sized residential developers operating in
areas of the UK where demand for housing is consistently strong. The
business operates as a joint venture ('the JV') between the Bank and
certain senior members of the Heritable team ('the JV partners'). In
2019, the Bank had the opportunity to acquire the JV partners' interest
and recognised an exceptional cost of GBP9.8m in 2018 in respect of this
option. The Bank was able to retain the senior members of the team in
the business going forward, whilst continuing to offer them the
opportunity to continue to lend alongside the Bank. The new revenue
sharing arrangement is on more favourable terms for the Bank, reflecting
the maturity of the business.
In 2018, OSB used the Bank of England's Indexed Long Term Repo scheme
for the first time, complementing retail and TFS funding with GBP80.0m
borrowing at base rate +15bps which was 90bps as at 31 December 2018.
The borrowing is offered as a collateralised cash loan repayable in six
months.
Profitable lending in the year allowed us to achieve an attractive
return on equity of 26% for 2018 (2017: 28%).
The Group ended the year with a CET1 ratio of 13.3% (2017: 13.7%),
demonstrating the strength of the capital generation capability of the
business to support significant growth through profitability. The
Group's total capital ratio of 15.8% and leverage ratio of 5.9% remained
strong (2017: 16.9% and 6.0% respectively).
Financial overview
The Group reported strong profit growth in 2018. Statutory profit before
taxation of GBP183.8m was 10% higher than in 2017 (2017: GBP167.7m). On
an underlying basis, before the exceptional cost of GBP9.8m due to the
Heritable option, profit before taxation increased by 15% to GBP193.6m
(2017: GBP167.7m). This strong underlying profitability reflects the
continued attractiveness of our lending and funding franchises and our
efficient operating model.
Statutory basic earnings per share ('EPS') was 55.5 pence, up 9% from
51.1 pence in 2017 and underlying basic EPS strengthened to 58.5 pence
(2017: 51.1p). Our focus on cost discipline and efficiency continued
throughout 2018, helping to deliver a very strong cost to income ratio
of 28% (2017: 27%) despite increased investment in the business and in
meeting the growing cost of regulation.
The Board is recommending a final dividend of 10.3 pence per share,
which together with the interim dividend of 4.3 pence per share,
represents 25% of underlying profit after taxation attributable to
ordinary shareholders for the year, in line with the Bank's stated
dividend policy.
1. Excluding the impact of TFS and ILTR drawdowns. The
unadjusted ratio was 111% as at 31 December 2018 (2017: 109%).
Buy-to-Let/SME
Gross loan book
GBP7,389.2m
+31%
2017: GBP5,654.1m
Net interest income
GBP220.0m
+24%
2017: GBP177.1m
Contribution to profit
GBP213.3m
+22%
2017: GBP174.8m
This segment comprises Buy-to-Let mortgages secured on residential
property held for investment purposes by experienced and professional
landlords, commercial mortgages secured on commercial and
semi-commercial properties held for investment purposes or for
owner-occupation, bridge finance, residential development finance to
small and medium-sized developers, secured funding lines to other
lenders and asset finance.
Buy-to-Let/SME sub-segment: gross loans
Group Group
31-Dec-2018 31-Dec-2017
GBPm GBPm
Buy-to-Let 6,517.5 5,033.8
Commercial 547.8 370.8
Residential development 155.8 143.9
Funding lines 168.1 104.5
Personal loans(1) - 1.1
Total 7,389.2 5,654.1
In 2018, market-wide Buy-to-Let gross advances were GBP37.1bn, up 4%
compared to GBP35.8bn in 2017.(2) The Group's market share of new
Buy-to-Let mortgages remained flat in 2018 at approximately 6%.
It has been widely reported that a combination of tax and regulatory
changes impacted the Buy-to-Let market, reducing lending levels from the
post-crisis high of 2016. Whilst no further interventions have been
announced since changes to affordability assessments were introduced in
October 2017, the gradual reduction in personal tax relief continues and,
as a result, any growth in overall lending levels is expected to be
muted in the short term. This downward trend in new lending masks,
however, a more subtle change, which has seen professional landlords
persist, with the reduction therefore attributable to smaller amateur
landlords. OSB has always targeted professional landlords, and it is the
sustainable demand from this audience that has underpinned our continued
growth when at face value, the Buy-to-Let market is facing various
challenges. The systemic issues in the UK housing market remain largely
untouched by the government, and it is reasonable to expect demand from
tenants to continue as they are faced with ongoing challenges around
house prices relative to incomes, and mortgage regulation that
constrains lending. The opportunity for professional landlords is
therefore expected to remain resilient for at least the medium term.
The prospect of the UK's exit from the European Union creates
uncertainties for consumers. These uncertainties have led to some
short-term fluctuations in house prices, including falls in some parts
of London despite a national picture of price rises, albeit modest in
scale. Our target audience is, however, focused on the long-term, and
over this longer period, asset prices have consistently risen. This
long-term view, alongside continuing tenant demand as referenced above,
will maintain sector attractiveness for the professional investor.
The volume of the Group's new organic lending in this segment reached
GBP2,769.7m in 2018, an increase of 15% from GBP2,413.7n in 2017. The
segment gross loans were GBP7,389.2m, up 31% from GBP5,654.1m in 2017.
The Buy-to-Let/SME net loan book represented 82% of total OSB net loans
as at 31 December 2018.
Gross loans in the Buy-to-Let sub-segment increased by 29% to
GBP6,517.5m (2017: GBP5,033.8m) in the year mostly due to continued
activity from professional, multi-property and incorporated landlords
and the withdrawal of amateur landlords. Professional landlords
accounted for 81% of completions by value for OSB in 2018 (2017: 80%).
The share of purchase applications that came from incorporated landlords
continued to rise to 70% for our Kent Reliance brand in the year (2017:
69%) as borrowers mitigated reductions in yield resulting from recent
changes to personal taxation.
A large proportion of Buy-to-Let lending comes from refinancing and in
2018, remortgages represented 58% of lending for our main Kent Reliance
brand. Around 69% of existing borrowers chose a new product with the
Group within three months of the original product ending. Many of our
borrowers also chose to lock in the attractive mortgage rates for a
longer period of time and five year fixed rate products represented 56%
of completions for the Kent Reliance brand in 2018 (2017: 43%). The
weighted average loan to value ('LTV') of the Buy-to-Let book was 70%
with an average loan size of GBP260,000. The weighted average interest
coverage ratio ('ICR') for Buy-to-Let origination during 2018 reduced to
171% (2017: 185%).
The InterBay commercial business, which offers commercial,
semi-commercial, bridging and more complex Buy-to-Let mortgages had a
very successful year with the commercial and semi-commercial gross loan
book up 48% to GBP547.8m (2017: GBP370.8m). Initiatives introduced in
the first half of 2018 included the launch of our bridging proposition
and the expansion of our distribution network to reach a wider broker
audience. As ever, these were supported by the Bank's core strengths in
rapid and effective underwriting and our ability to deal with large and
complex cases. In the second half of the year, InterBay Asset Finance
was launched, funding its first deals in October 2018 and exceeding our
lending targets. The weighted average LTV in this sub-segment remained
low at 66% and the average loan size was GBP360,000 in 2018.
Our Heritable Development Finance business, which was set up as a joint
venture with the Heritable team in late 2013, provides development
finance to small and medium-sized residential developers operating in
areas of the UK where demand for housing is consistently strong. New
applications come primarily from a mixture of repeat business from the
team's extensive existing relationships and from referrals. The business
continued to grow in spite of new entrants to the market, as customers
sought an experienced and prudent lender. In light of macroeconomic
uncertainty, many experienced developers appear to have taken a cautious
approach and therefore the number of potential schemes that withstand
the business' stringent stress testing remains low.
The residential development funding gross loan book at the end of 2018
was GBP155.8m, with a further GBP90.3m committed (31 December 2017:
GBP143.9m and GBP78.0m respectively). Gross advances during 2018
totalled GBP137.6m (2017: GBP123.7m).
In addition, the Bank continued to provide secured funding lines to
non-bank lenders which operate in certain high -yielding, specialist sub
-segments, such as bridging finance and asset finance. Total credit
approved limits as at 31 December 2018 were GBP385.0m with total loans
outstanding of GBP168.1m (31 December 2017: GBP 303.0m and GBP104.5m
respectively). During 2018, one facility was repaid and three new
funding lines were added and credit approved limits increased by a
further GBP47.0m across four existing funding lines. The pipeline
remains robust, however, given the macroeconomic uncertainty, the Bank
continues to adopt a cautious approach.
In the second half of 2018, the Group established its asset finance
business under the InterBay brand targeting underserved markets where we
can bring our expertise to the fore to generate attractive returns on a
risk- adjusted basis. The first deals were funded in October, working
with a small number of brokers and targeting predominantly UK SMEs and
small corporates for whom the Group finances business-critical assets.
The assets are mostly plant and machinery, construction equipment and
commercial vehicles, all with an established inherent resale value. The
gross carrying amount under finance leases was GBP7.2m as at 31 December
2018.
OSB's combined Buy-to-Let/SME net loan book grew by 31% in 2018 to
GBP7,389.2m (2017: GBP 5,654.1m) due to gross new lending in the year,
partially offset by back book redemptions, and it is the Group's largest
segment. Buy-to-Let/SME made a contribution to profit of GBP213.3m in
2018, up 22% compared to GBP174.8m in 2017, primarily due to the growth
in new lending, partially offset by higher impairment losses of GBP5.7m
(2017: GBP0.8m), due to the addition of a 'no-deal' Brexit downside
economic scenario in our IFRS 9 modelling. Removing the impact of this
additional scenario, loan loss provisions remained broadly flat year on
year.
The Group remains highly focused on the quality of new lending as
demonstrated by the average LTV in the Buy-to-Let/SME segment as at 31
December 2018 of 70% (31 December 2017: 69%) with only 0.6% of loans
exceeding 90% LTV (31 December 2017: 0.7%). The average LTV for new
Buy-to-Let/SME origination was 70% (2017: 70%).
1. The personal loan portfolio was disposed of in the year, for
more information see note 6 to the financial statements.
2. UK Finance, New and outstanding buy-to-let mortgages, 19 Feb
2019.
Residential mortgages
Gross loan book
GBP1,616.0m
-3%
2017: GBP1,673.5m
Net interest income
GBP67.3m
-1%
2017: GBP68.3m
Contribution to profit
GBP60.7m
+3%
2017: GBP58.9m
This segment comprises lending to owner occupiers, secured via either
first or second charges against the residential home. The Bank provides
funding lines to non-bank lenders who operate in high-yielding,
specialist sub-segments such as residential bridge finance.
Residential sub-segment: gross loans
Group Group
31-Dec-2018 31-Dec-2017
GBPm GBPm
First charge 1,223.9 1,240.6
Second charge 368.0 415.3
Funding lines 24.1 17.6
Total 1,616.0 1,673.5
As at 31 December 2018, the Residential gross loan book was GBP1,616.0m,
down 3% compared to the previous year (2017: GBP1,673.5m) with GBP280.1m
of organic originations in the segment, up 15% from GBP243.9m in 2017.
The first charge gross loan book reduced to GBP1,223.9m from GBP1,240.6m
in 2017 as a result of new organic lending being more than offset by
redemptions in the back book and acquired mortgages in run-off.
Our Kent Reliance brand provides bespoke first charge mortgages,
typically to prime credit quality borrowers with more complex
circumstances, for example high net worth borrowers with multiple income
sources and self-employed borrowers. These circumstances often preclude
them from the mainstream lenders, as most favour automated
decision-making over manual underwriting. In 2018, the Group made a
tactical entry into the near-prime residential market. This market
provides the Bank with a strategic opportunity as we pursue our internal
ratings-based approach to risk weighting. Kent Reliance also operates in
the shared ownership market, where borrowers buy a property in
conjunction with a housing association.
Our second charge mortgage brand, Prestige Finance, provides secured
finance to good credit quality borrowers who are seeking a loan to raise
funds rather than to refinance their first charge mortgage. Competitive
pressure in the second charge market kept pricing low and we continued
to manage our market share to ensure we appropriately price for risk.
The second charge residential loan book had a gross value as at 31
December 2018 of GBP368.0m (2017: GBP415.3m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub-segments, such as
residential bridge finance. The Bank continued to adopt a cautious
approach in the more cyclical businesses given macroeconomic
uncertainty. Total credit approved limits at 31 December 2018 were
GBP51.8m with total loans outstanding of GBP 24.1m (2017: GBP 33.6m and
GBP17.6m respectively). During 2018, the credit limit for one facility
was increased by GBP20.0m and its maturity date extended.
OSB's total residential loan portfolio had a net carrying value of
GBP1,605.1m as at 31 December 2018 (2017: GBP1,665.1m). The average LTV
remained low at 56% (2017: 56%) with only 3% of loans by value with LTVs
exceeding 90% (2017: 3%). The average LTV of new residential origination
during 2018 was 68% (2017: 65%).
Residential mortgages made a contribution to Group profit of GBP60.7m in
2018, up 3% from GBP58.9m in 2017, reflecting slightly lower net
interest income, more than offset by lower third party servicing fees,
lower amortisation of the fair value adjustment on hedged assets
relating to cancelled swaps and lower loan losses.
Case study
Creating our asset finance company
Jennifer Calver - Head of Operations, InterBay Asset Finance
Joining OSB in the summer of 2018 to launch the asset finance business
was a great opportunity. My first few months were varied as we prepared
for launch. Funding our first deals in October 2018 was an achievement
for the whole team and now that we are up and running, no two days are
alike. As the business levels increase, I am involved in recruiting for
my team, developing processes and enhancing our systems and working
practices.
The most rewarding part of it all however, has always been providing our
customers with the best service possible by working with our colleagues
across the Bank. We created InterBay Asset Finance business from the
ground up and I am really excited to be part of this growing business.
Residential
BTL/SME mortgages Total
YEARED 31-DEC-2018 GBPm GBPm GBPm
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers 7,389.2 1,616.0 9,005.2
Provision for impairment losses on loans and
advances (11.0) (10.9) (21.9)
Loans and advances to customers 7,378.2 1,605.1 8,983.3
Risk weighted assets 3,453.8 758.0 4,211.8
PROFIT OR LOSS FOR THE YEAR
Net interest income 220.0 67.3 287.3
Other expense (1.0) (4.2) (5.2)
Total income 219.0 63.1 282.1
Impairment losses (5.7) (2.4) (8.1)
Contribution to profit 213.3 60.7 274.0
Residential
BTL/SME mortgages Total
YEARED 31-DEC-2017 GBPm GBPm GBPm
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses on loans and
advances (13.2) (8.4) (21.6)
Loans and advances to customers 5,640.9 1,665.1 7,306.0
Risk weighted assets 2,642.8 705.7 3,348.5
PROFIT OR LOSS FOR THE YEAR
Net interest income 177.1 68.3 245.4
Other expense (1.5) (5.8) (7.3)
Total income 175.6 62.5 238.1
Impairment losses (0.8) (3.6) (4.4)
Contribution to profit 174.8 58.9 233.7
Key performance indicators
KPI Definition 2018 performance
1. Gross new lending This is defined as gross new organic lending before Gross new lending reflects growth in new origination,
Performance GBP3.0bn redemptions. primarily in the BTL/SME segment.
+15%
2. Net interest margin This is defined as net interest income as a percentage Net interest margin down on prior year mostly due
Performance 304bps of average interest bearing assets (cash, investment to a change in asset mix with an increasing proportion
-12bps securities, loans and advances to customers and credit of lower-yielding front book mortgages diluting the
institutions), including off-balance sheet FLS drawings. higher-yielding back book and wider average five year
It represents the margin earned on loans and advances swap spreads partially offset by a relatively favourable
and liquid assets after swap expense/income and cost cost of retail funds.
of funds.
3. Cost to income ratio This is defined as administrative expenses including Cost to income ratio of 28%, despite the additional
Performance 28% depreciation and amortisation as a percentage of total costs of meeting regulatory requirements and investment
+1pp income. It is a measure of operational efficiency. in the business, continues to be market leading.
4. Underlying profit before tax This is defined as statutory profit before tax before The increase reflects strong balance sheet growth,
Performance GBP193.6m exceptional items. See reconciliation of statutory stable front book pricing, continued focus on cost
+15% profit to underlying profit in Alternative performance discipline and efficiency, and low loan losses.
measures on page 33. Statutory profit before tax of GBP183.8m in 2018 increased
by 10% compared to GBP167.7m in 2017.
5. Underlying basic EPS This is defined as underlying profit attributable The strong growth is in line with the significant
Performance 58.5 pence per share to ordinary shareholders, which is profit after taxation increase in underlying profitability of the Bank.
+14% before exceptional items less the after tax effect On a statutory basis basic EPS increased to 55.5 pence
of coupons on equity PSBs and AT1 securities, divided per share in 2018 from 51.1 pence per share in 2017.
by the weighted average number of ordinary shares
in issue.
See reconciliation of statutory profit to underlying
profit in Alternative performance measures on page
33.
6. Return on equity This is defined as underlying profit after tax and Return on equity remained strong at 26% (2017: 28%)
Performance 26% after deducting the after tax effect of coupons on despite our strengthened capital position.
-2pp equity PSBs and AT1 securities as a percentage of
average shareholders' equity (excluding equity PSBs
of GBP22m and GBP60m of AT1 securities).
For further information on underlying profit after
tax, see reconciliation of statutory profit to underlying
profit in Alternative performance measures on page
33.
7. Dividend per share This is defined as the sum of the recommended final The Board will recommend a final dividend of 10.3
Performance 14.6 pence per share dividend for 2018 plus the interim dividend divided pence per share in respect of 2018 at the Bank's AGM
+14% by the number of ordinary shares in issue at the year on 9 May 2019. This, together with the interim dividend
end. of 4.3 pence per share, represents 25% of underlying
profit after tax attributable to ordinary shareholders
(after deducting the after tax impact of coupons on
equity PSBs and AT1 securities) for 2018, in line
with the Bank's target dividend payout ratio.
8. CRD IV fully-loaded Common Equity Tier 1 capital This is defined as Common Equity Tier 1 capital as The capital ratio of 13.3% reflects the ability of
ratio a percentage of risk-weighted assets (calculated on the business to generate capital to support significant
Performance 13.3% a standardised basis) and is a measure of the capital loan book growth through profitability.
-0.4pp strength of the Bank.
9. Loan loss ratio This is defined as impairment losses expressed as The loan loss ratio of 10bps for 2018 (2017: 7bps)
Performance 10bps a percentage of average gross loans and advances. is primarily due to the implementation of 'no-deal'
+3bps It is a measure of the credit performance of the loan Brexit scenario assumptions in the calculation of
book. expected loan loss provisions. Removing the impact
of the more severe Brexit scenario, the Group's loan
loss ratio would have been c.6bps.
The ratio also reflects the continued strong performance
from the front book of loans. From more than 48,500
loans totalling GBP11bn of new organic originations
since the Bank's creation in February 2011, we have
only 206 cases of arrears over three months in duration,
with an aggregate balance of GBP53.5m and average
LTV of 62%.
10. Customer satisfaction - Net Promoter Score The Net Promoter Score measures our customers' satisfaction The customer NPS improved to an outstanding +63. This
Performance +63 with our service and products. It is based on customer demonstrates that our investment in customer service
+1 responses to the question of whether they would recommend in the UK and India and customer-centric strategy
us to a friend. The question scale is 0 for absolutely of providing transparent savings products which offer
not to 10 for definitely yes. Based on the score, long-term value for money continue to deliver high
a customer is defined as a detractor between 0 and levels of customer satisfaction.
6, a passive between 7 and 8 and a promoter between
9 and 10. Subtracting the percentage of detractors
from the percentage of promoters gives a net promoter
score of between -100 and +100.
Financial review
Group Group
31-Dec-2018 31-Dec-2017
Summary profit or loss GBPm GBPm
Net interest income 287.3 245.4
Net losses on financial instruments (5.2) (6.3)
Net fees and commissions 0.6 0.5
External servicing fees (0.6) (1.5)
Administrative expenses(1) (79.6) (65.1)
FSCS and other regulatory provisions (0.8) (0.9)
Impairment losses (8.1) (4.4)
Exceptional cost-Heritable option (9.8) -
Profit before taxation 183.8 167.7
Profit after taxation 140.3 126.9
Underlying profit before taxation(2) 193.6 167.7
Underlying profit after taxation(2) 147.5 126.9
Key ratios
Net interest margin(2) 304bps 316bps
Cost to income ratio(2) 28% 27%
Management expense ratio(3) 0.84% 0.86%
Loan loss ratio(2) 0.10% 0.07%
Basic EPS(2) , pence per share 55.5 51.1
Underlying basic EPS(2) , pence per share 58.5 51.1
Return on equity(2) 26% 28%
Dividend per share, pence per share 14.6 12.8
Extracts from the Statement of Financial Position GBPm GBPm
Loans and advances 8,983.3 7,306.0
Retail deposits 8,071.9 6,650.3
Total assets 10,460.2 8,589.1
Key ratios
Liquidity ratio(4) 14.5% 15.2%
Common Equity Tier 1 ratio(5) 13.3% 13.7%
Total capital ratio 15.8% 16.9%
Leverage ratio 5.9% 6.0%
1. Including depreciation and amortisation.
2. See definition in Key performance indicators table on pages
30-31.
3. Administrative expenses including depreciation and
amortisation as a percentage of average total assets.
4. Liquid assets as a percentage of funding liabilities.
5. Fully-loaded under Basel III/CRD IV.
Strong profit growth
The Group reported profit growth of 10% in 2018 with statutory profit
before taxation of GBP183.8m (2017: GBP167.7m) including the exceptional
cost of GBP9.8m relating to the Heritable option. On an underlying basis,
before this exceptional item, the Bank recorded a 15% increase in
underlying profit before taxation to GBP193.6m (2017: GBP167.7m)
reflecting strong balance sheet growth supported by lending at
attractive margins and our efficient cost base.
Profit after taxation in 2018 increased by 11% to GBP140.3m (2017:
GBP126.9m) including the after tax exceptional cost of GBP7.2m for the
Heritable option. On an underlying basis, profit after taxation
increased by 16% to GBP147.5m (2017: GBP126.9m). The Group's effective
tax rate was 23.7%(1) in 2018 (2017: 24.1%), with a lower proportion of
the Group's profits subject to the Bank Corporation Tax Surcharge.
Net interest margin
The Group reported an increase in net interest income of 17% to
GBP287.3m in 2018 (2017: GBP245.4m) reflecting the strong growth in the
loan book and NIM of 304bps (2017: 316bps).
The lower NIM reflects the changing mix of the loan book despite broadly
stable asset pricing and wider average five year swap spreads, partially
offset by a relatively favourable cost of retail funds and additional
benefit from the Bank of England's Term Funding Scheme ('TFS'). The mix
of the loan book continues to change with new origination forming a
growing proportion of the total book, diluting the impact of loans
originated or acquired several years ago when yields were exceptionally
high. The favourable cost of retail funds was due primarily to the
retail savings market not pricing in the full November 2017 and August
2018 Bank of England Base Rate rises.
Alternative performance measures
OSB believes that the use of alternative performance measures ('APMs')
for profitability and earnings per share provides valuable information
to the readers of the financial statements and presents a more
consistent basis for comparing the Group's performance between financial
periods, by adjusting for exceptional non-recurring items.
APMs also reflect an important aspect of the way in which operating
targets are defined and performance is monitored by the Board. However,
any APMs in this document are not a substitute for IFRS measures and
readers should consider the IFRS measures as well.
Reconciliation of statutory profit to underlying profit
Profit before tax Profit after tax
Group Group Group Group
31-Dec-2018 31-Dec-2017 31-Dec-2018 31-Dec-2017
GBPm GBPm GBPm GBPm
Statutory profit 183.8 167.7 140.3 126.9
Exceptional
cost-Heritable
option 9.8 - 7.2 -
Underlying profit 193.6 167.7 147.5 126.9
Statutory basic EPS of 55.5 pence per share (2017: 51.1 pence per share)
is calculated by dividing profit attributable to ordinary shareholders
of GBP135.6m (2017: GBP124.2m) which is profit after tax of GBP140.3m
(2017: GBP126.9m) less coupons on equity PSBs, including the tax effect
of GBP0.7m (2017: GBP0.7m) and coupons on AT1 securities, including the
tax effect of GBP4.0m (2017: GBP2.0m) by the weighted average number of
ordinary shares in issue during the year of 244.2m (2017: 243.2m).
Underlying basic EPS of 58.5 pence per share (2017: 51.1 pence per
share) is calculated by dividing underlying profit attributable to
ordinary shareholders of GBP142.8m (2017: GBP124.2m), which is
underlying profit after tax of GBP147.5m (2017: GBP126.9m) less coupons
on equity PSBs, including the tax effect of GBP0.7m (2017: GBP0.7m) and
coupons on AT1 securities, including the tax effect of GBP4.0m (2017:
GBP 2.0m) by the weighted average number of ordinary shares in issue
during the year of 244.2m (2017: 243.2m).
Losses on financial instruments
The fair value loss on financial instruments in 2018 of GBP5.2m (2017:
GBP6.3m) includes a net loss of GBP0.3m from the Group's hedging
activities (2017: GBP1.1m gain) and GBP4.6m amortisation of fair value
adjustments on hedged assets relating to cancelled swaps (2017:
GBP7.3m). The amortisation of fair value adjustments in both years
includes the impact of accelerating the amortisation in line with the
run-off of the underlying legacy long-term fixed rate mortgages, due to
faster than expected prepayments.
In 2018, the Group also made a GBP0.1m loss on disposal of the residual
amount of the personal loan portfolio. For more detail, see note 6 to
the financial statements.
Net fees and commission
Net fees and commission income of GBP0.6m (2017: GBP0.5m) comprises fees
and commission receivable of GBP1.7m (2017: GBP1.5m) partially offset by
commission expense of GBP1.1m (2017: GBP1.0m).
Fees and commissions receivable grew by GBP0.2m which is mostly
attributable to an increase in InterBay application fees resulting from
business growth.
Fees and commissions payable remained broadly flat in 2018 and related
to branch agency fees and commissions paid to the Kent Reliance
Provident Society for conducting member engagement activities for the
Bank.
External servicing fees
External servicing fees decreased to GBP0.6m in 2018 (2017: GBP1.5m) due
to the transfer of servicing for the majority of acquired first charge
residential loan books to the Bank's operation in India during the year
and the disposal of the remaining personal loans portfolio.
Efficient and scalable operating platform
Administrative expenses, including depreciation and amortisation, were
up 22% to GBP79.6m in 2018 (2017: GBP65.1m), reflecting the growth in
the loan book and increased spend incurred in delivering regulatory
projects, principally General Data Protection Regulation ('GDPR'), the
Second Payment Services Directive ('PSD2') and the ongoing project to
deliver IRB. In addition, the Bank also commenced work on upgrading its
customer platforms and made significant improvements to the IT
infrastructure.
Despite the project spend, the Group's cost to income ratio of 28% and
the management expense ratio of 0.84% remained strong (2017: 27% and
0.86% respectively) reflecting continuous focus on finding efficiencies
in the costs of running the Bank on a 'business as usual basis' and use
of its scalable low cost back office based in Bangalore, India.
FSCS and other regulatory provisions
Regulatory provisions expense remained stable at GBP0.8m (2017:
GBP0.9m). This includes levies due to the Financial Services
Compensation Scheme which continued to decrease in the year and other
regulatory provisions on acquired books.
Impairment losses
Since 1 January 2018 the Group has calculated expected credit loss
provisions under IFRS 9. Impairment losses increased to GBP8.1m in 2018
(2017: GBP4.4m) representing 10bps on average gross loans and advances
(2017: 7bps).
On adoption of IFRS 9, the Group utilised three macroeconomic scenarios
(upside, base and downside) within expected credit loss calculations.
Due to ongoing uncertainty relating to the UK's exit from the European
Union, the Board deemed it appropriate to implement a fourth scenario of
a disorderly 'no-deal' Brexit, which increased the Group's provision
requirements.
Removing the impact of the additional Brexit scenario, the Group's loan
loss ratio would have been c. 6bps.
The performance of the front book of mortgages remains strong,
reflecting the continued strength of the Bank's underwriting and lending
criteria. We kept tight control on credit quality, as seen in our
reportable arrears statistics. From more than 48,500 loans totalling
GBP11.0bn of new organic originations since the Bank's creation in
February 2011, there were only 206 cases of arrears over three months or
more as at 31 December 2018, with an aggregate value of just GBP53.5m
and average LTV of 62%.
IFRS 9
The Group successfully implemented IFRS 9 as at 1 January 2018. The day
1 impact of implementation was an increase in impairment provisions of
GBP3.6m.
The stage 3 provisions increase relates to a higher balance of loans
which are in arrears greater than three months and the Group's IFRS 9
methodology, which includes a probation period before returning to a
non-default status. Following a review, the Group also made changes to
the threshold criteria for classification into stage 2 which resulted in
an increased balance of loans in stage 2.
Exceptional items
The Heritable Development Finance business, which started lending in
2014, operates as a joint venture ('the JV') between the Bank and
certain senior members of the Heritable team ('the JV partners'). Under
the JV the parties agreed to co-operate in developing the business and
to lend alongside each other, sharing revenues in accordance with a
profit waterfall. The JV agreement also included a put/call option ('the
Heritable option') over the JV partners' share of the business,
exercisable from 2019, subject to certain conditions. During 2018, the
conditions of exercise were met and an exceptional cost of GBP9.8m was
recognised for the fair value of the option.
In 2019, the Heritable option was surrendered for a one-off payment of
GBP9.8m and the Bank acquired the JV partners' interest in the business.
At the same time a new revenue sharing arrangement was signed allowing
the JV partner to continue to lend alongside the Bank
There were no exceptional items in 2017.
Dividend
The Board recommends a final dividend for 2018 of 10.3 pence per share.
Together with the 2018 interim dividend of 4.3 pence per share, this
represents 25% of underlying profit after taxation attributable to
ordinary shareholders for 2018, in line with the Bank's target dividend
payout ratio. The proposed final dividend will be paid on 15 May 2019,
subject to approval at the AGM on 9 May 2019, with an ex-dividend date
of 21 March 2019 and a record date of 22 March 2019.
Balance sheet growth
Net loans and advances grew by 23% in 2018 to GBP8,983.3m (31 December
2017: GBP7,306.0m) primarily due to an increase in new lending in our
Buy-to-Let and commercial sub-segments.
Retail deposits and total assets grew by 21% and 22%, respectively in
2018 with the final drawings under the TFS funding of GBP 250.0m in the
first quarter of 2018, taking the balance under the scheme as at the
year end to GBP1,502.9m (31 December 2017: GBP1,250.0m).
The TFS drawdowns are offered in the form of collateralised cash loans.
The scheme closed to new drawings at the end of February 2018 and the
Group has four years from the date of the drawing to repay the existing
loans.
In 2018, the Group also took the opportunity to complement its retail
and TFS funding by borrowing GBP80.0m under the Bank of England's
Indexed Long-Term Repo scheme ('ILTR') at base rate +15bps which was
90bps as at 31 December 2018. The ILTR is an auction and the borrowings
are offered as a collateralised cash loan repayable in six months.
Liquidity
OneSavings Bank operates under the PRA's liquidity regime. The Bank
operates within a target liquidity runway in excess of the minimum
regulatory requirement. In addition, the Bank maintains a strong
retention track record on fixed term bond and ISA maturities.
As at 31 December 2018, our liquidity coverage ratio of 224% (2017:
250%) was significantly in excess of the 2018 regulatory minimum of 100%,
including drawings under the Bank of England TFS funding facilities. The
Group's liquidity ratio as at 31 December 2018 was 14.5% (31 December
2017: 15.2%).
The Bank's retail savings franchise continued to provide the business
with long-term sustainable funding for balance sheet growth as evidenced
by the retention rate for maturing deposits of 95% and an exceptional
level of customer satisfaction with a Net Promoter Score of +63.
Capital
The Bank's fully-loaded CET1 capital ratio under CRD IV remained robust
at 13.3% as at 31 December 2018 (31 December 2017: 13.7%), demonstrating
the strong organic capital generation capability of the business to
support significant growth through profitability.
The Bank had a total capital ratio of 15.8% and a leverage ratio of 5.9%
as at 31 December 2018 (31 December 2017: 16.9% and 6.0% respectively).
The Bank had a Pillar 2a requirement of 1.1% of risk- weighted assets as
at 31 December 2018 (31 December 2017: 1.1%).
Cash flow statement
The Group's cash and cash equivalents increased by GBP158.3m during the
year to GBP1,324.2m as at 31 December 2018.
During the year, the increase in the Group's loans and advances to
customers of GBP1,689.5m was largely funded by GBP1,421.6m of deposits
from retail customers and contributed to GBP85.1m of cash used in
operating activities. The remaining funding came largely from the final
drawdown under the TFS of GBP250.0m and GBP80.0m of funding under the
Bank of England's Indexed Long-Term Repo scheme, which generated
GBP289.0m of cash from financing activities. Cash used in investing
activities was GBP45.6m, primarily driven by net purchases and
maturities of investment securities of GBP40.0m.
In 2017, the Group replaced GBP524.6m of the Bank of England FLS off
balance sheet securities with cash drawn down under the TFS. This led to
cash and cash equivalents increasing by GBP680.6m during the year to
GBP1,165.9m as at 31 December 2017.
The Group's loans and advances to customers grew by GBP1,371.2m during
the year, partially funded by an additional GBP697.9m of deposits from
retail customers which mainly contributed to GBP511.1m of cash used in
operating activities. The remaining funding came primarily from
additional drawdowns under the TFS, which, in conjunction with replacing
the FLS securities, totalled GBP1,149.0m during the year. Together with
GBP59.4m of funding from the issuance of AT1 securities, this generated
GBP1,165.7m of cash from financing activities. Cash generated from
investing activities was GBP26.0m, primarily driven by the sale and
maturity of investment securities and the purchase of additional
equipment and intangible assets.
Group Group
31-Dec-2018 31-Dec-2017(2)
Summary cash flow statement GBPm GBPm
Profit before tax 183.8 167.7
Net cash generated/(used in):
Operating activities (85.1) (511.1)
Investing activities (45.6) 26.0
Financing activities 289.0 1,165.7
Net increase in cash and cash equivalents 158.3 680.6
Cash and cash equivalents at the beginning of the
period 1,165.9 485.3
Cash and cash equivalents at the end of the period 1,324.2 1,165.9
1. Effective tax rate excludes GBP0.1m of adjustments relating
to prior years.
2. The comparative information has been reclassified to include
interest paid on bonds and subordinated debt, which was previously shown
within operating activities, within financing activities.
Case study
Stronger together - bringing our values to life
Anita Hughes - Internal Communications Manager
2018 was a challenging and exciting year for the Internal Communications
team, which included us supporting the launch of our new Mission, Vision
and Values with colleagues across both the UK and India.
Our Mission, Vision and Values were designed using insight gathered from
colleagues across all areas of the business, so when the time came to
share them, it was important we did this in a meaningful way - by
bringing everyone together, sharing real life stories, videos and
creating activities that brought our values to life.
The response to our light-hearted teaser campaign and employee events
was very positive; but it was a truly collective effort. We engaged the
support of colleagues across the business to help create our campaign
and embed it within our different locations, ensuring maximum impact,
which as it turned out saw one of our new values already in action -
stronger together!
Risk review
Executive summary
During the year, the Group maintained a low and stable risk profile, in
line with the Board's risk management objectives. The Group continued to
enhance its risk identification and management capabilities to ensure
ongoing compliance with emerging industry and regulatory standards.
By leveraging its risk management framework, the Group actively managed
its risk profile in accordance with the Board-approved risk appetite.
Through continuous monitoring and assessment of the underlying risk
drivers, the Group took appropriate and timely actions in response to
the changing economic, business and regulatory environment.
The Group has maintained its focus on risk-based investment to enhance
data governance and controls, and made good progress towards building
Internal Ratings-Based Approach ('IRB') capabilities. The discipline
associated with effective operational resilience has continued to be an
important area of enhanced risk management. The Group has established
effective and scalable operating models across all risk functions, which
include leveraging its OSBI operations.
The Group delivered strong and profitable growth whilst maintaining a
low and stable risk profile. The loan assets have continued to exhibit
strong performance and the Group has maintained high quality capital and
liquidity buffers to meet its current and future requirements.
Ongoing stress testing demonstrates that the Group is resilient to
extreme but plausible scenarios in the context of the ongoing
uncertainty surrounding the economic, political and regulatory
environment. In particular, the Group continues to actively monitor the
developments relating to Brexit negotiations.
The Group has successfully managed its funding and liquidity profile
post the withdrawal of the Term Funding Scheme by the Bank of England in
February 2018.
The other key regulatory developments to which the Group is responding
include the General Data Protection Regulation ('GDPR') and the Second
Payment Services Directive ('PSD2'). The Group has appropriate systems
and controls to comply with the requirements and these continue to be
enhanced as the Group improves its capabilities.
Key risk Commentary
indicators
CET1 ratio The Group's fully-loaded CET1 ratio remained well
above regulatory minimums at 13.3% at the end of 2018
(2017: 13.7%).
Total capital The Group's total capital ratio remained strong at
ratio 15.8% in 2018 (2017: 16.9%).
3+ months in The percentage of loans more than three months in
arrears* arrears was 1.5% in 2018 (2017: 1.2%).
Cost of risk Impairments increased to 0.10% (2017: 0.07%) driven
by changes to the IFRS 9 impairment approach, specifically
the implementation of a fourth macroeconomic scenario,
aligned to a disorderly 'no-deal' Brexit scenario,
which increased the Group's provision requirements.
Liquidity ratio The Group's liquidity ratio remained well above regulatory
and risk appetite limits in 2018 finishing the year
at 14.5% (2017: 15.2%).
The liquidity coverage ratio of 224% (2017: 250%)
is significantly above the regulatory minimum of 100%.
* Note: 3+ months in arrears ratio excludes legacy problem
loans.
High level key risk indicators
The Group aligns its risk appetite to a select range of key performance
indicators that are used to assess its success against strategic,
business, operational and regulatory objectives. Actual performance
against these indicators is continually assessed and reported. The table
opposite outlines the comparative analysis of the leading risk
indicators with supporting commentary.
Key achievements in 2018
The Group continued to improve its risk appetite and stress testing
procedures to identify, monitor and manage the risks associated with
Brexit. In particular, the Group has leveraged its IRB and IFRS 9 models
to assess capital and provision requirements across a range of
macroeconomic and business scenarios.
Liquidity and funding forecasting procedures have further improved and
the Group is fully prepared to access wholesale funding through
securitisation at a commercially opportune time. The Group continues to
make investment to further enhance its retail and SME funding
propositions.
Good progress continues to be made on delivering a robust and compliant
IRB programme. The IRB programme has been focused on the delivery of
second generation IRB models, further embedding model governance and
validation procedures and improved adherence to regulatory requirements.
Improvements have been made to the Group's data management and
governance capabilities driven by the Group's strategic data management
objectives. This initiative is designed to deliver integrated data
controls, aggregation and reporting capabilities.
The Group established the core components of an effective and regulatory
compliant operational resilience framework. The operational resilience
framework ensures that all critical services and operations are
supported by a resilient infrastructure of systems and processes which
are subject to ongoing monitoring and testing. The Group has improved
its procedures relating to business continuity planning and disaster
recovery.
The launch of our asset finance business was subject to extensive review
and development of appropriate policies, systems and controls to ensure
that the underlying risks were fully understood and appropriately priced
and managed.
The Group continued to make significant investment in people across the
Risk and Compliance functions, ensuring that there is sufficient
capacity and capability to ensure it is well positioned to deliver
against its growth strategy.
Risk-based management information has been an important area of
continued improvement across all risk types.
Priority areas for 2019
The Group has established a comprehensive and scalable risk management
framework covering current and forward-looking risks. During 2019, the
Group will further refine and embed its risk management capabilities in
the context of changing economic, business and operating conditions. In
particular, the Group has identified the following key areas to further
improve its risk and compliance capabilities:
-- Delivery of an enhanced and integrated data governance and
controls framework which is integrated with the Group's risk, financial
and regulatory reporting procedures.
-- Integration of second generation IRB credit risk models with
credit portfolio monitoring, stress testing and capital planning, risk
appetite and risk-based pricing.
-- Development of IRB waiver documentation demonstrating compliance
with approval requirements.
The Board and senior management continue to provide appropriate
oversight and direction to all risk and compliance initiatives. The
Group also engages external subject matter experts and consults with
supervisory authorities to ensure appropriate levels of transparency and
successful outcomes are achieved.
Risk management
Approach to risk management
The Group views its capabilities to effectively identify, assess and
manage its risk profile as critical to its growth strategy. The Group's
approach to risk management is outlined within the Strategic Risk
Management Framework ('SRMF').
The SRMF is the overarching framework which enables the Board and senior
management to actively manage and optimise the risk profile within the
constraints of the risk appetite. The SRMF also enables informed
decisions to be taken in a timely manner by factoring the interests and
expectations of key stakeholders.
The SRMF also provides a structured mechanism to align all components of
an effective approach to risk management. The SRMF links overarching
risk principles to day-to-day risk management activities.
The modular construct of the SRMF provides for an agile approach to
keeping pace with the evolving nature of the risk profile and underlying
drivers. The SRMF and its core modular components are subject to
periodic review and approval by the Board and its relevant Committees.
The key modules of the SRMF structure are as follows:
1: Risk principles and culture
2: Risk strategy and appetite
3: Risk governance and function organisation
4: Risk definitions and categorisation
Further detail on these modules is set out in the Group's Pillar 3
Disclosures.
The following diagrams outline the core components of the SRMF and the
organisational arrangements to ensure that the Group operates in
accordance with the requirements of the SRMF.
Strategic Risk Management Framework ('SRMF')
Key elements Risk principles and culture
Risk strategy and appetite
Risk governance and function organization
Risk definitions and categorisation
Principal risks Financial risks Non-financial risks
Credit risk Strategic and business risk Operational risk
Market risk Reputational risk Conduct risk
Liquidity risk Compliance/regulatory risk
Solvency risk
Capabilities Risk framework Risk data and IT Risk analytics Risk MI
and policies
Risk regulatory ICAAP ILAAP Recovery Plan/
submissions Resolution Pack
The OSB risk organisational structure is detailed below:
Board Board of Directors
Committees
Remuneration Committee Nomination and Governance Committee Audit Committee Risk Committee
Management Executive Committee
Committees
Credit Committee Executive M&A Committee Operations Committee Risk Management Committee Regulatory Governance Assets and Executive
Committee Liabilities Disclosure
Committee Committee
Business First Line of Defence Second Line of Defence Third Line of Defence
and
control
functions
Ensures that risks are identified, measured, monitored Provides an independent Provides independent assurance on the effectiveness
and reported in line with policy in an effective manner. review and challenge to the of the SRMF, compliance with regulations, adherence
Key Brands business and control to policies and effectiveness of controls.
Finance and HR functions to ensure that all aspects of the risk profile Internal Audit
Operations are managed in adherence to risk appetite and policies.
IT and Change Risk and Compliance
Commercial Credit Strategy
Sales and Marketing
Legal and Regulation
Executives Chief Executive Officer
Chief Financial Officer Chief Risk Officer Chief Internal Auditor
Group Chief Operating Officer Group Chief Credit Officer
Chief Information Officer
Group General Counsel
and Company Secretary
Group Commercial Director
Brand-Level Senior Management
Risk appetite
The Group aligns its strategic and business objectives with its risk
appetite, enabling the Board and senior management to monitor the risk
profile relative to its strategic and business performance objectives.
Risk appetite is a critical mechanism through which the Board and senior
management are able to identify adverse trends and respond to unexpected
developments in a timely and considered manner.
Risk appetite is calibrated to reflect the Group's strategic objectives,
business operating plans, as well as external economic, business and
regulatory constraints. In particular, risk appetite is calibrated to
ensure that the Bank continues to deliver against its strategic and
business objectives and maintains sufficient financial resource buffers
to withstand plausible but extreme stresses. The primary objective of
the risk appetite is to ensure that the Group's strategy and business
operating model is sufficiently resilient.
The risk appetite is calibrated using statistical analysis and stress
testing to inform the process for setting management triggers and limits
against key risk indicators. The calibration process is designed to
ensure that timely and appropriate actions are taken to maintain the
risk profile within approved thresholds. The Board and senior management
actively monitor actual performance against approved management triggers
and limits.
Overarching risk appetite statement
The Group aims to ensure that it is able to withstand a severe but
plausible stress without breaching its key performance indicators and
underlying risk limits. In particular, it should remain profitable and
meet its prudential requirements under a 1 in 20 intensity stress (where
applicable), by factoring for corrective management actions.
The Group has a prudent and proportionate approach to risk taking and
management, which is reflective of its straightforward business model.
The inherent resilience of the Group's business model is underpinned by
the fact that the Group only lends on a secured basis, has established
robust underwriting practices and relies on intermediary-based
distribution. The Group supports its lending activities by being
predominantly reliant on stable retail funding, with strong and high
quality financial buffers. The highly efficient business operating model
is an important source of competitive advantage. The Group also places
significant importance on its strong conduct and compliance culture as
an important driver of its overall success.
Current assessment of our principal risks
The Bank's principal risks are set out in the following heat map and in
detail on pages 41 to 46.
1. Strategic and business risk
2. Reputational risk
3. Credit risk
4. Market risk
5. Liquidity and funding risk
6. Solvency risk
7. Operational risk
8. Conduct risk
9. Compliance/regulatory risk
Principal risks and uncertainties
The Board has carried out a robust assessment of the principal risks and
uncertainties facing the Group, including those that could threaten its
strategic objectives, business operating model, future financial
performance and regulatory compliance commitments. The principal risks
and uncertainties are outlined in the table below:
1 Strategic and business risk
Definition
The risk to the Bank's earnings and profitability arising from its
strategic decisions, change in the business conditions, improper
implementation of decisions or lack of responsiveness to industry
changes.
Risk appetite statement
The Group's strategic and business risk appetite states that the Group
does not intend to undertake any medium to long-term strategic actions
that would put at risk its vision of being a leading specialist lender,
backed by a strong and dependable savings franchise.
The Group adopts a long-term sustainable business model which, while
focused on niche sub-sectors, is capable of adapting to growth
objectives and external developments.
Risk Mitigation Direction
Performance against targets Regular monitoring by the Board and the Executive Increased
Performance against strategic and business targets Committee of business and financial performance against The Group's strategic and business operating environments
does not meet stakeholder expectations. This has the its strategic agenda and risk appetite. The Balanced are subject to ongoing changes primarily driven by
potential to damage the Group's franchise value and Business Scorecard is the primary mechanism to support market competition, economic outlook and regulation.
reputation. the Board and assesses management performance against
key targets. Use of stress testing to flex core business
planning assumptions to assess potential performance
under stressed operating conditions.
Regulatory and economic environment The Group's robust underwriting standards and its Increased
The regulatory and economic environment are important focus on professional landlords have helped mitigate The Group's strategic and business risk profile is
factors impacting the strategic and business risk the impact of the regulatory changes and enabled the impacted by the uncertainty surrounding Brexit negotiations
profile. In particular, the new regulatory underwriting Group to continue to grow its share of the sector. and potential future changes to regulatory standards.
standards and tax changes impacting the Buy-to- Let The Group has continued to utilise and enhance its
sector have resulted in a general slowdown in the stress testing capabilities to assess and minimise
sector. potential areas of macroeconomic vulnerability.
Regulatory requirements The Group continues to invest in its IT and data management Increased
The potential for emerging regulatory requirements capabilities to increase the ability to respond to The level and sophistication of emerging regulatory
to increase the demands on the Group's operational regulatory change. requirements place increasing demands on the Group's
capacity and increase the cost of compliance. A structured approach to change management and fully operational capacity.
leveraging internal and external expertise allow the
Group to respond effectively to regulatory change.
2 Reputational risk
Definition
The potential risk of adverse effects that can arise from the Bank's
reputation being sullied due to factors such as unethical practices,
adverse regulatory actions, customer dissatisfaction and complaints or
negative/adverse publicity.
Reputational risk can arise from a variety of sources and is a second
order risk - the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
Risk appetite statement
The Group does not knowingly conduct business or organise its operations
to put its reputation and franchise value at risk.
Risk Mitigation Direction
Deterioration of reputation Culture and commitment to treating customers fairly Unchanged
Potential loss of trust and confidence that our stakeholders and being open and transparent in communication with The Group has increased the size and capabilities
place in us as a responsible and fair provider of key stakeholders. Established processes to proactively of its Risk and Compliance function to ensure appropriate
financial services. identify and manage potential sources of reputational oversight and challenge to how the Group discharges
risk. its responsibilities to the various stakeholders.
3 Credit risk
Definition
Potential for loss due to the failure of a counterparty to meet its
contractual obligation to repay a debt in accordance with the agreed
terms.
Risk appetite statement
The Group seeks to maintain a high quality lending portfolio that
generates adequate returns, under normal and stressed periods. The
portfolio is actively managed to operate within set criteria and limits
based on profit volatility, focusing on key sectors, recoverable values,
and affordability and exposure levels. The Group aims to continue to
generate sufficient income and control credit losses to a level such
that it remains profitable even when subjected to a credit portfolio
stress of a 1 in 20 intensity scenario.
Risk Mitigation Direction
Individual borrower defaults All loans are extended only after thorough bespoke Unchanged
Borrowers may encounter idiosyncratic problems in and expert underwriting to ensure ability and propensity The Group continues to observe strong and stable credit
repaying their loans, for example, loss of a job or of borrowers to repay and sufficient security in case profile performance.
execution problems with a development project. of default.
While in most cases the Bank's lending is secured, Should there be problems with a loan, the Collections
some borrowers may fail to maintain the value of the and Recoveries team works with customers unable to
security. meet their loan service obligations to reach a satisfactory
conclusion while adhering to the principle of treating
customers fairly.
Our strategic focus on lending to professional landlords
means that properties are likely to be well managed,
with income from a diversified portfolio mitigating
the impact of rental voids or maintenance costs. Lending
to owner-occupiers is subject to a detailed affordability
assessment, including the borrower's ability to continue
payments if interest rates increase. Lending on commercial
property is more based on security, and is scrutinised
by the Group's independent Real Estate team as well
as by valuers.
Development lending is extended only after a deep
investigation of the borrower's track record and stress
testing the economics of the specific project.
The Group's Transactional Credit Committee actively
reviews and approves larger or more complex mortgage
applications.
Macroeconomic downturn The Group works within portfolio limits on LTV, affordability, Increased
A broad deterioration in the economy would adversely name, sector and geographic concentration that are The economic outlook is uncertain with the final terms
impact both the ability of borrowers to repay loans approved by the Risk Committee and the Board. These of Brexit to be confirmed. The likelihood of a 'no-deal'
and the value of the Group's security. Credit losses are reviewed on a semi-annual basis. In addition, Brexit has increased.
would impact across the lending portfolio, so even stress testing is performed to ensure that the Group
if individual impacts were to be small, the aggregate maintains sufficient capital to absorb losses in an
impact on the Group could be significant. economic downturn and continue to meet its regulatory
requirements.
Wholesale credit risk The Group transacts only with high quality wholesale Unchanged
The Bank has wholesale exposures both through call counterparties. Derivative exposures include collateral The Group continues to utilise a reserve account with
accounts used for transactional and liquidity purposes agreements to mitigate credit exposures. the Bank of England, enabling it to minimise credit
and through derivative exposures used for hedging. risk on most of its liquidity portfolio.
4 Market risk
Definition
Potential loss due to changes in market prices or values.
Risk appetite statement
The Group actively manages market risk arising from structural interest
rate positions. The Group does not seek to take a significant interest
rate position or a directional view on rates and it limits its
mismatched and basis risk exposures.
Risk Mitigation Direction
Interest rate risk The Group's Treasury department actively hedges to Unchanged
An adverse movement in the overall level of interest match the timing of cash flows from assets and liabilities. The Group continues to assess interest rates on a
rates could lead to a loss in value due to mismatches monthly basis ensuring that the interest rate risk
in the duration of assets and liabilities. exposure is limited in the current economic environment.
Basis risk The Group's Basis Risk exposure is measured on a monthly Unchanged
A divergence in market rates could lead to a loss basis against a range of stress scenarios. Product design and balance sheet strategy has enabled
in value, as assets and liabilities are linked to Exposure is constrained by risk appetite with balance the Group to maintain the overall level of basis risk
different rates. sheet strategy and hedging used to minimise mismatches. through the year.
5 Liquidity and funding risk
Definition
The risk that the Group will be unable to meet its financial obligations
as they fall due.
Risk appetite statement
The Group actively maintains stable and efficient access to liquidity
and funding to support its ongoing operations. It also maintains an
appropriate level and quality of liquid asset buffer so as to withstand
market and idiosyncratic liquidity-related stresses.
Risk Mitigation Direction
Retail funding stress The Group's funding strategy is focused on a highly Unchanged
As the Group is primarily funded by retail deposits, stable retail deposit franchise. The large number The Group's funding mix remained stable throughout
a retail run could put it in a position where it could of depositors and mix of easy access, one and two the year.
not meet its financial obligations. year term products, provides diversification, with
Increased competition for retail savings driving up a high proportion of balances covered by the FSCS
funding costs, adversely impacting retention levels and so at no material risk of a retail run.
and wider damage to the OSB franchise. In addition, the Group performs in-depth liquidity
stress testing and maintains a liquid asset portfolio
sufficient to meet obligations under stress. The Group
holds prudential liquidity buffers to manage funding
requirements under normal and stressed conditions.
The Group proactively manages its savings proposition
through both the Liquidity Working Group and the Assets
and Liabilities Committee (ALCO).
Finally, the Group has prepositioned mortgage collateral
with the Bank of England which allows it to consider
other alternative funding sources to ensure it is
not solely reliant on retail savings.
6 Solvency risk
Definition
The potential inability of the Bank to ensure that it maintains
sufficient capital levels for its business strategy and risk profile
under both the base and stress case financial forecasts.
Risk appetite statement
OSB seeks to ensure that it is able to meet its Board level capital
buffer requirements under a 1 in 20 stress scenario. The Group's
solvency risk appetite is constrained within leverage ratio related
requirements. We manage our capital resources in a manner which avoids
excessive leverage and allows us flexibility in raising capital.
Risk Mitigation Direction
Deterioration of capital ratios Currently the Bank operates from a strong capital Unchanged
Key risks to solvency arise from balance sheet growth position and has a consistent record of strong profitability. The Group has maintained a prudent and stable CET1
and unexpected losses, which can result in the Bank's The Bank actively monitors its capital requirements capital and total capital position providing resilience
capital requirements increasing or capital resources and resources against financial forecasts and plans against unexpected losses.
being depleted such that it no longer meets the solvency and undertakes stress testing analysis to subject
ratios as mandated by the PRA and Board risk appetite. its solvency ratios to extreme but plausible scenarios.
The regulatory capital regime is subject to change The Bank also holds prudent levels of capital buffers
and could lead to increases in the level and quality based on CRD IV requirements and expected balance
of capital that the Group needs to hold to meet regulatory sheet growth.
requirements. The Group engages actively with regulators, industry
bodies, and advisers to keep abreast of potential
changes and provide feedback through the consultation
process.
7 Operational risk
Definition
The risk of loss or negative impact to the Group resulting from
inadequate or failed internal processes, people, or systems or from
external events.
Risk appetite statement
The Group's operational processes, systems and controls are designed to
minimise disruption to customers, damage to the Bank's reputation and
any detrimental impact on financial performance. The Bank actively
promotes the continual evolution of its operating environment through
the identification, evaluation and mitigation of risks, whilst
recognising that the complete elimination of operational risk is not
possible.
Risk Mitigation Direction
Cyber/data security risk A series of tools designed to identify and prevent Increased
The risk of loss of customer or proprietary data as network/system intrusions are deployed across the Whilst the Bank continues to make enhancements to
a result of malicious activities or through ineffective Group. its defences with respect to IT security threats,
data management. The effectiveness of the controls is overseen by a it recognises that the threats to the industry continue
dedicated IT Security Governance Committee, with specialist to grow both in respect of volume and level of sophistication.
IT security staff employed by the Bank.
Data risk The Bank continues to invest in and enhance its data Increased
The use of inaccurate, incomplete or outdated data management architecture, systems, governance and controls. The increase in data risk has been primarily driven
may result in a range of risks impacting risk management Oversight is achieved via a Data Strategy programme, by the increased scale of operations and the multiple
and reporting services. designed to ensure a consistency of approach and implementation. sources from which data is derived.
Operational and IT resilience The completion of all modules of the Operational Resilience Increased
The inability of the Bank to maintain the provision programme has delivered a Group-wide approach in respect The increased risk is primarily driven by the expanding
of its high priority services in the event of a major to planning and testing. scale of the Bank's operations and the continued evolution
incident impacting its IT infrastructure, facilities, The Bank has developed a thorough testing schedule of cyber-based threats. However the Bank has invested
people or the third parties on which it relies to intended to validate its response to a range of significant significantly in its operational resilience frameworks,
provide those services. scenarios. In addition, a series of training and awareness capabilities and testing to better address the emerging
activities are intended to increase the Bank's readiness risks.
to respond to an incident.
A range of back-up technologies employed to provide
real-time replication of various critical systems
while disaster recovery capabilities are tested annually.
Real-time system performance monitoring established
and a dedicated testing team in place.
Operational execution and scalability Whilst the Bank adopts a risk-based approach to automation, Unchanged
The inability of the Bank to automate current operational it recognises that a number of manual processes remain, The ongoing growth of the Bank has challenged its
processes at the speed the business requires in order which have a proportionate level of controls associated automation programmes and resulted in an increase
to successfully meet future growth. with them. in the number of manual processes. Whilst key manual
processes are well managed and there is continuing
investment in automation, the challenges presented
by the pace of growth remain a key area of management
focus.
8 Conduct risk
Definition
The risk that the Group's behaviours or actions result in customer
detriment or have a negative impact on the integrity of the market
segments in which it operates.
Risk appetite statement
The Bank considers its culture and behaviours in ensuring the fair
treatment of customers and in maintaining the integrity of the market
segments in which it operates, a fundamental part of its strategy and a
key driver to sustainable profitability and growth.
OSB does not tolerate any systemic failure to deliver fair customer
outcomes. On an isolated basis incidents can result in detriment owing
to human and/ or operational failures. Where such incidents occur they
are thoroughly investigated, and the appropriate remedial actions are
taken to address any customer detriment and to prevent recurrence.
Risk Mitigation Direction
Product suitability The Group has a strategic commitment to provide simple, Unchanged
Whilst the Group originates relatively simple products, customer-focused products. In addition, a Product Whilst this risk has remained low as a result of increased
there remains a risk that (primarily legacy) products Governance framework is established to oversee both awareness and dedicated oversight; the Bank remains
may be deemed to be unfit for their original purpose the origination of new products and to revisit the aware of the changes to the regulatory environment
in line with the current regulatory definitions. ongoing suitability of the existing product suite. and their possible impact on product suitability.
Data protection In addition to a series of network/system controls, Unchanged
The risk that customer data is accessed inappropriately the Bank performs extensive root cause analysis of Despite a number of additional controls being introduced
either as a consequence of network/system intrusion any data leaks in order to ensure that the appropriate in 2018 the network/system threats continue to increase
or through operational errors in the management of mitigating actions are taken. in both volume and sophistication.
the data.
9 Compliance/regulatory risk
Definition
The risk that a change in legislation or regulation or an interpretation
that differs from the Group's will adversely impact the Group.
Risk appetite statement
The Group views ongoing conformance with regulatory rules and standards
across all the jurisdictions in which it operates as a critical facet of
its risk culture. The Group does not knowingly accept compliance risk,
which could result in regulatory sanctions, financial loss or damage to
its reputation. The Group will not tolerate any systemic failure to
comply with applicable laws, regulations or codes of conduct relevant to
its business operating model.
Risk Mitigation Direction
Regulation changes The Bank has an effective horizon scanning process Increased
Key compliance and regulatory changes that impacted to identify regulatory change. The Bank has historically responded effectively to
the Bank include changes in the standardised approach All significant regulatory initiatives are managed regulatory changes, however, the level and sophistication
to capital rules, implementation of an IRB floor and by structured programmes overseen by the Project and of emerging regulation continues to increase.
introduction of IFRS 9 accounting standard for computing Change Management team and sponsored at Executive
impairment allowance requirements. level.
The Bank has proactively sought external expert opinions
to support interpretation of the requirements and
validation of its response, where required.
Conduct regulation The Group has a programme of regulatory horizon scanning Increased
Regulatory changes focused on the conduct of business linking into a formal regulatory change management The regulatory environment has tightened and this
could force changes in the way the Group carries out programme. In addition, the focus on simple products is likely to continue, exposing the Group to increased
business and impose substantial compliance costs. and customer-oriented culture means that current practice risk.
For example, the Financial Conduct Authority's Discussion may not have to change significantly to meet new conduct
Paper on Price Discrimination in the Cash Savings regulations.
Market or HM Treasury's consultation on Breathing
Space and Statutory Debt Repayment Plan must be considered.
The Group proactively scans for emerging risks which may have an impact
on its ongoing operations and strategy. The Group considers its top
emerging risk to be:
Emerging risk Description Mitigation action
Political and As the outcome of Brexit remains unclear, there is The Group implemented robust monitoring processes
macroeconomic an increased likelihood of a period of macroeconomic and via various stress testing activity (i.e. ad hoc,
uncertainty. uncertainty. The Group's lending activity is solely risk appetite and ICAAP) understands how the Group
focused in the United Kingdom and, as such, will be performs over a variety of macroeconomic stress scenarios
impacted by any risks emerging from changes in the and subsequently developed a suite of early warning
macroeconomic environment such as changes to house indicators which are closely monitored to identify
prices, interest rates and unemployment rates. changes in the economic environment.
The Group has no European operations outside of the
UK and has minimal deposits from non-UK customers
limiting its exposure to Brexit-related operational
risks.
RISK PROFILE PERFORMANCE OVERVIEW
Credit risk
Credit profile performance
The Group's credit profile performed strongly in 2018, driven by deep
market knowledge of the specialist markets in which it operates, prudent
lending policies and sound credit risk management.
During the year, the Group's loan portfolio composition continued to
evolve with pre-2011 lending (prior to OneSavings Bank plc being
established) continuing to run off. Legacy problem loans reduced further
in 2018 from GBP8.6m to GBP5.6m, following careful management by our
experienced Collections team. The Group's acquired portfolios also
continued to perform in line with expectations in terms of run-off rates
and credit profile performance.
The Group's funding lines and development finance businesses delivered a
strong performance in 2018, with no impairment recognised across either
portfolio.
Strong Group originations performance was observed in 2018, driven by
performance across the Buy-to-Let/SME segment. Importantly, this lending
was underwritten at sensible LTV levels, where tightened underwriting
policy, following the UK's decision to leave the European Union,
resulted in a greater clustering of LTV levels against the portfolio
average.
Post-2011 lending, incorporating enhanced lending criteria, continued to
make up an increasing proportion of the Group's total loans and advances
to customers. From 48,500 loans which were underwritten post 2011, 206
loans are greater than three months in arrears, totalling GBP53.5m with
a weighted average LTV of just 62%.
Strong credit risk management and continuing favourable economic
conditions, supported the portfolio arrears rate of 1.5% as at 31
December 2018 (31 December 2017: 1.2%).
Segment Measure 31-Dec-2018 31-Dec-2017 Variance Commentary
BTL/SME New origination average LTV 70% 70% - New lending average LTV remained stable
Weighted average Interest Coverage Ratio for new Resulting from a higher proportion of five year products
lending 171% 185% -14% and a rising base rate
Residential
lending New origination average LTV 68% 65% +3% Increase in new average LTV from new product mix
Percentage of new residential lending with a loan
to income (LTI) greater than 4.5 3.2% 3.2% - Remained stable year on year
Other key risk measures also performed strongly within the period:
-- Gross exposure to commercial lending grew to GBP547.8m through the
year with a weighted average LTV of 66%.
-- Gross exposure to residential development finance remains low at
GBP155.8m with a further GBP90.3m committed with a weighted average LTV
of 35.2%.
-- The Group has limited exposure to high LTV loans on properties
worth more than GBP2m. In total only 6% of the Group's loan portfolio is
secured on properties valued at greater than GBP2m with a LTV greater
than 65%.
Forbearance
Where borrowers experience financial difficulties which impacts their
ability to service their financial commitments under the loan agreement,
forbearance may be used to achieve an outcome which is mutually
beneficial to both the borrower and the Bank.
By identifying borrowers who are experiencing financial difficulties
pre-arrears or in arrears, a consultative process is initiated to
ascertain the underlying reasons and to establish the best course of
action to enable the borrower to develop credible repayment plans and to
see them through the period of financial stress.
The specific tools available to assist customers vary by product and the
customers' status. The various treatments considered for customers are
as follows:
-- Temporary switch to interest only: a temporary account change to
assist customers through periods of financial difficulty where arrears do
not accrue at the original contractual payment. Any arrears existing at
the commencement of the arrangement are retained.
-- Interest rate reduction: the Group may, in certain circumstances,
where the borrower meets the required eligibility criteria, transfer the
mortgages to a lower contractual rate. Where this is a formal contractual
change the borrower will be requested to obtain independent financial
advice as part of the process.
-- Loan term extension: a permanent account change for customers in
financial distress where the overall term of the mortgage is extended,
resulting in a lower contractual monthly payment.
-- Payment holiday: a temporary account change to assist customers
through periods of financial difficulty where arrears accrue at the
original contractual payment. Any arrears existing at the commencement of
the arrangement are retained.
-- Voluntary assisted sale: a period of time is given to allow
borrowers to sell the property and arrears accrue based on the
contractual payment.
-- Reduced monthly payments: a temporary arrangement for customers in
financial distress. For example, a short-term arrangement to pay less
than the contractual payment. Arrears continue to accrue based on the
contractual payment.
-- Capitalisation of interest: arrears are added to the loan balance
and are repaid over the remaining term of the facility or at maturity for
interest only products. A new payment is calculated, which will be higher
than the previous payment.
-- Full or partial debt forgiveness: where considered appropriate,
the Group will consider writing off part of the debt. This may occur
where the borrower has an agreed sale and there will be a shortfall in
the amount required to redeem the Group's charge, in which case repayment
of the shortfall may be agreed over a period of time, subject to an
affordability assessment or where possession has been taken by the Group,
and on the subsequent sale where there has been a shortfall loss.
The Group aims to proactively identify and manage forborne accounts,
utilising external credit reference bureau information to analyse
probability of default and customer indebtedness trends over time,
feeding pre-arrears watch list reports. Watch list cases are in turn
carefully monitored and managed as appropriate.
Further information regarding forbearance can be found in note 39 to the
financial statements.
Fair value of collateral methodology
The Group ensures that security valuations are reviewed on an ongoing
basis for accuracy and appropriateness. Commercial properties are
subject to annual indexing, whereas residential properties are indexed
against monthly house price index ('HPI') data. Where the Group
identifies that an index is not representative, a formal review is
carried out by the Group Real Estate function to ensure that property
valuations remain appropriate.
The Group Real Estate function ensures that newly underwritten lending
cases are written to appropriate valuations, where an independent
assessment is carried out by an appointed, qualified surveyor accredited
by RICS.
Impairment performance
Low arrears, sensible loan to values and growth in loans and advances to
customers resulted in the Group observing low impairment performance for
the full year to 31 December 2018.
Since 1 January 2018, the Group has been calculating expected credit
loss provisions under an IFRS 9 approach, replacing the previous IAS 39
accounting standard.
Impairment losses totalled GBP8.1m during the full year to 31 December
2018 (2017: GBP4.4m) representing a loan loss ratio of 10bps (2017:
7bps). During 2018, the Group made a number of enhancements to its IFRS
9 impairment approach, including the implementation of a new probability
of default model, enhancements to the Group's definition of default,
cure criteria from stage 3 and the transfer criteria logic to move
accounts from stage 1 to 2.
At the point of adoption of the IFRS 9 accounting standard the Group
utilised three macroeconomic scenarios (upside, base and downside)
within expected credit loss calculations. Due to ongoing uncertainty
relating to Brexit, the Board deemed it appropriate to implement a
fourth disorderly 'no -deal' Brexit scenario during December 2018, which
increased the Group's provision requirements.
Removing the impact of this additional Brexit scenario, the loan loss
ratio would have been c. 6bps.
Loan losses across the Buy-to- Let/SME segment increased during 2018,
predominantly driven by the increased provision required post
implementation of the Group's further downside disorderly 'no-deal'
Brexit scenario. In addition, individually assessed provisions raised
against a small number of high exposure new arrears cases and legacy
problem loans within the period prior to resolution also contributed to
the higher loan losses observed against this segment.
Across the Residential segment the stable loan to value profile and
continued portfolio run down, predominantly driven by the run off of
acquired and second charge originated mortgage portfolios, resulted in a
lower loan loss ratio during the full year to 31 December 2018, versus
the full year 2017.
The Group continues to closely monitor impairment coverage levels:
Gross
carrying Incurred loss
amount Provisions remaining(1) Coverage
At 31 December 2018 (GBPm) (GBPm) (GBPm) ratio(2)
Stage 1 8,286.8 4.3 - 0.05%
Stage 2 436.8 5.6 - 1.28%
Stage 3 (+ POCI) 281.6 11.8 7.2 6.75%
Undrawn loan facilities - 0.2 - -
Total 9,005.2 21.9 7.2 0.32%
At 1 January 2018 (post IFRS
9 transitional adjustment)
Stage 1 6,782.5 7.8 - 0.12%
Stage 2 292.4 2.3 - 0.79%
Stage 3 (+ POCI) 252.7 15.1 7.9 9.10%
Undrawn loan facilities - - - -
Total 7,327.6 25.2 7.9 0.45%
At 1 January 2018 (IAS 39)
Total 7,327.6 21.6 7.9 0.40%
1. Incurred loss is the expected loss of the portfolio at the
point of acquisition and is offset against the modelled future cash
flows to derive the effective interest rate for the book. The incurred
loss protection is therefore recognised over the life of the book
against the unwind of any purchase discount or premium through interest
income. Incurred loss remaining is this protection reduced by the
cumulative losses observed since acquisition.
2. Coverage ratio is the total provisions plus incurred losses
remaining versus gross loans and advances.
The total coverage ratio with respect to loans and advances to customers
reduced to 0.33% from 0.40% as at 31 December 2017 (0.45% post IFRS 9
transitional adjustment) driven by the resolution of a number of
significant individually assessed legacy problem loans. As these loans
move to write off, the provision against the loans is released
decreasing total book impairment.
Solvency risk
The Bank has maintained an appropriate level and quality of capital to
support its prudential requirements with sufficient contingency to
withstand a severe but plausible stress scenario. The solvency risk
appetite is based on a stacking approach, whereby the various capital
requirements (Pillar 1, ICG, CRD IV buffers, Board and management
buffers) are incrementally aggregated as a percentage of available
capital (CET1 and total capital).
Solvency risk is a function of balance sheet growth, profitability,
access to capital markets and regulatory changes. The Bank actively
monitors all key drivers of solvency risk and takes prompt action to
maintain its solvency ratios at acceptable levels. The Board and
management also assess solvency when reviewing the Bank's business plans
and inorganic growth opportunities.
The Bank's fully-loaded CET1 capital ratio under CRD IV remained robust
at 13.3% as at 31 December 2018 (31 December 2017: 13.7%), demonstrating
the strong organic capital generation capability of the business to
support significant growth through profitability. The Bank had a total
capital ratio of 15.8% and a leverage ratio of 5.9% as at 31 December
2018 (31 December 2017: 16.9% and 6.0% respectively).
Liquidity and funding risk
The Bank has a prudent approach to liquidity management through
maintaining sufficient liquidity resources to cover cash flow imbalances
and fluctuations in funding under both normal and stressed conditions
arising from market-wide and Bank-specific events. The Bank's liquidity
risk appetite has been calibrated to ensure that the Bank always
operates above the minimum prudential requirements with sufficient
contingency for unexpected stresses, whilst actively minimising the risk
of holding excessive liquidity which would adversely impact the
financial efficiency of the business model.
The Bank continues to attract new retail savers and retain existing
customers through loyalty-based product offerings.
In 2018, the Bank actively managed its liquidity and funding profile
within the confines of its risk appetite as set out in the Internal
Liquidity Adequacy Assessment Process ('ILAAP'). The Group's liquidity
coverage ratio ('LCR') at 224% remains well above risk appetite and
regulatory minimums.
Market risk
The Bank proactively manages its risk profile in respect of adverse
movements in interest rates, foreign exchange rates and counterparty
exposures. The Bank accepts interest rate risk and basis risk as a
consequence of structural mismatches between fixed rate mortgage lending,
sight and fixed term savings and the maintenance of a portfolio of high
quality liquid assets. Interest rate exposure is mitigated on a
continuous basis through portfolio diversification, reserve allocation
and the use of financial derivatives within limits set by ALCO and
approved by the Board.
Transition away from LIBOR
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector LIBOR remains a key benchmark and
for each market impacted, solutions to this issue are progressing
through various industry bodies.
In 2018, OSB set up an internal working group comprised of all of the
key business lines that are involved with this change with strong
oversight from the compliance and risk departments. Risk assessments are
currently underway to ensure this process is managed in a measured and
controlled manner.
Interest rate risk
The Bank does not actively assume interest rate risk, does not execute
client or speculative securities transactions for its own account, and
does not seek to take a significant directional interest rate position.
Limits have been set to allow management to run occasional unhedged
positions in response to balance sheet dynamics and capital has been
allocated for this. Exposure limits are calibrated in accordance with a
statistically- derived risk appetite, and are calibrated in proportion
to available CET1 capital in order to accommodate balance sheet growth.
The Group sets limits on the tenor and rate reset mismatches between
fixed rate assets and liabilities, including derivatives hedges, with
exposure and risk appetite assessed with reference to historic and
potential stress scenarios cast at consistent levels of modelled
severity.
Throughout 2018, the Bank managed its interest rate risk exposure within
its risk appetite limits.
Basis risk
Basis risk arises from assets and liabilities repricing with reference
to different interest rate indices, including positions which reference
variable market, policy and managed rates. As with structural interest
rate risk, the Bank does not seek to take a significant basis risk
position, but maintains defined limits to allow operational flexibility.
As with structural interest rate risk, capital allocation has been set
in proportion to CET1 capital, with exposure assessed and monitored
monthly across a range of 'business as usual' and stressed scenarios.
Throughout 2018, the Bank managed its basis risk exposure within its
risk appetite limits.
Operational risk
OSB continues to adopt a proactive approach to the management of
operational risks. The operational risk management framework has been
designed to ensure a robust approach to the identification, measurement
and mitigation of operational risks, utilising a combination of both
qualitative and quantitative evaluations in order to promote an
environment of progressive operational risk management. The Group's
operational processes, systems and controls are designed to minimise
disruption to customers, damage to the Bank's reputation and any
detrimental impact on financial performance. The Bank actively promotes
the continual evolution of its operating environment through the
identification, evaluation and mitigation of risks, whilst recognising
that the complete elimination of operational risk is not possible.
Where risks continue to exist, there are established processes to
provide the appropriate levels of governance and oversight, together
with an alignment to the level of risk appetite stated by the OSB Board.
A strong culture of transparency and escalation has been cultivated
throughout the organisation, with the operational risk function having a
Group-wide remit, ensuring a risk management model that is well embedded
and consistently applied. In addition, a community of Risk Champions
representing each business line and location have been identified.
Operational Risk Champions ensure that the operational risk
identification and assessment processes are established across the Group
in a consistent manner. Risk Champions are provided with appropriate
support and training by the Operational Risk function.
Regulatory and compliance risk
The Bank is committed to the highest standards of regulatory conduct and
aims to minimise breaches, financial costs and reputational damage
associated with non-compliance. However, given the growing scale and
complexity of regulatory changes, it is acknowledged that there may be
isolated instances whereby the Bank's interpretation and response to new
regulatory requirements reflects the Bank's specific circumstances and
its desire to get the best customer outcomes.
The Bank has an established Compliance function which actively
identifies, assesses and monitors adherence with current regulation and
the impact of emerging regulation.
In order to minimise regulatory risk, OSB maintains a proactive
relationship with key regulators, engages with industry bodies such as
UK Finance, and seeks external advice from our auditors and/or other
third parties. The Group also assesses the impact of upstream regulation
on OSB and the wider market in which we operate, and undertakes robust
assurance assessments from within the Risk and Compliance functions.
Conduct risk
The Bank considers its culture and behaviour in ensuring the fair
treatment of customers and in maintaining the integrity of the market
segments in which it operates to be a fundamental part of its strategy
and a key driver to sustainable profitability and growth. OSB does not
tolerate any systemic failure to deliver fair customer outcomes.
On an isolated basis, incidents can result in detriment owing to human
and/or operational failures. Where such incidents occur they are
thoroughly investigated, and the appropriate remedial actions are taken
to address any customer detriment and to prevent recurrence.
OSB considers effective conduct risk management to be a product of the
positive behaviour of all employees, influenced by the culture
throughout the organisation and therefore continues to promote a strong
sense of awareness and accountability.
Strategic and business risk
The Board has clearly articulated the Bank's strategic vision and
business objectives supported by performance targets. The Bank does not
intend to undertake any medium to long-term strategic actions, which
would put at risk the Bank's vision 'to become our customers' favourite
bank; one that delivers its very best, challenges convention and opens
doors that others can't.'
To deliver against its strategic objectives and business plan, the Bank
has adopted a sustainable business model based on a focused approach to
core niche market segments where its experience and capabilities give it
a clear competitive advantage.
The Bank remains highly focused on delivering against its core strategic
objectives and strengthening its position further through strong and
sustainable financial performance.
Reputational risk
Reputational risk can arise from a variety of sources and is a second
order risk - the crystallisation of a credit risk or operational risk
can lead to a reputational risk impact.
The Bank monitors reputational risk through tracking media coverage,
customer satisfaction scores, the share price and net promoter scores
provided by brokers.
OSBIndia - a great place to work
OSBIndia is an integral part of the Group. We attract talented and
dedicated employees who provide leading service both to the Bank's
customers and to the rest of the Group. We were delighted to be
certified as a 'Great place to work' in 2018. We work hard to ensure our
vision and values are embedded in everything we do and this is reflected
in the great culture that our employees love.
The benefits of being a great place to work go beyond providing a great
service. Another business benefit is that our employee retention rates
for 2018 are class leading. This has been confirmed and benchmarked
against the best in the industry. Even against the biggest brands, we
attract and retain great people, making us even more efficient.
Viability statement
In accordance with provision C.2.2 of the UK Corporate Governance Code,
the Board of Directors have assessed the prospects and viability of the
Group over a three-year period by comprehensively assessing the
principal risks and uncertainties to which it is exposed and have
concluded that they have a reasonable expectation that the Group will be
able to continue to operate and meet its liabilities as they fall due
over that period.
The three-year time period was selected for the following reasons:
-- The Group's operating and financial plan covers a three-year
period
-- The three-year operating and financial plan considers, among other
matters: the Board's risk appetite, macroeconomic outlook, market
opportunity, the competitive landscape, and sensitivity of the financial
plan to volumes, margin pressures and capital requirements
-- The ongoing assessment of financial performance and prudential
requirements through the use of scenario and sensitivity analysis
covering this period, and
-- It incorporates a forward-looking time period which captures
business and economic uncertainty following the EU referendum outcome.
The Company is authorised by the PRA, and regulated by the FCA and the
PRA, and undertakes regular analysis of its risk profile and
assumptions. It has a robust set of policies, procedures and systems to
undertake a comprehensive assessment of all the principal risks and
uncertainties to which it is exposed on a current and forward- looking
basis (as described in Principal risks and uncertainties on pages 41 to
46).
The Group manages and monitors its risk profile through its Strategic
Risk Management Framework, in particular through its risk appetite
statement and risk limits (as described in the Risk review on pages 36
to 40). Potential changes in its risk profile are assessed across the
business planning horizon by subjecting the operating and financial plan
to severe but plausible macroeconomic and idiosyncratic scenarios.
Stress testing is an integral risk management discipline, used to assess
the financial and operational resilience of the Group. The Group
developed bespoke stress testing capabilities to assess the impact of
extreme but plausible scenarios in the context of its principal risks
impacting the primary strategic, financial and regulatory objectives.
Stress test scenarios are identified in the context of the Bank's
operating model, identified risks, business and economic outlook. The
Group actively engages external experts to inform the process by which
it develops business and economic stress scenarios. A broad range of
stress scenarios have been analysed, including the economic impact of
differing outcomes for the UK leaving the European Union, regulatory
changes relating to lending into the UK housing sector, governmental
housing policy shifts and scenarios prescribed by the Bank of England.
Stresses are applied to lending volumes, capital requirements, liquidity
and funding mix, interest margins and credit and operational losses.
Stress testing also supports key regulatory submissions such as the
ICAAP, ILAAP and the Recovery Plan. The Group's stress testing
activities generally test the viability of the Group over a five-year
period.
The Group has identified a broad suite of credible management actions
which can be implemented to manage and mitigate the impact of stress
scenarios. These management actions are assessed under a range of
scenarios varying in severity and duration. Management actions are
evaluated based on speed of implementation, second order consequences
and dependency on market conditions and counterparties. Management
actions are used to inform capital, liquidity and recovery planning
under stress conditions.
In addition, the Group identifies a range of catastrophic scenarios,
which could result in the failure of its current business model.
Business model failure scenarios (Reverse Stress Tests or 'RSTs') are
primarily used to inform the Board and executive management of the outer
limits of the Group's risk profile. RSTs play an important role in
helping the Board and its executives assess the available recovery
options to revive a failing business model. The RSTs exercise is based
on analysing a range of scenarios, including an extreme macroeconomic
downturn (1 in 200 severity), a cyber-attack leading to a loss of
customer data which is used for fraudulent activities, extreme
regulatory and taxation changes impacting Buy-to-Let lending volumes and
a liquidity crisis caused by severe market conditions combined with
idiosyncratic consequences.
The Group has established a comprehensive operational resilience
framework to actively assess the vulnerabilities and recoverability of
its critical services. The Group also conducts regular business
continuity and disaster recovery exercises.
The ongoing monitoring of all principal risks and uncertainties that
could impact the operating and financial plan, together with the use of
stress testing to ensure that the Group could survive a severe but
plausible stress, enables the Board to reasonably assess the viability
of the business model over a three-year period.
The UK's departure from the European Union without defined and agreed
terms could have a significant impact on the economic and business
outlook for the Group. To address this uncertainty the Group has develop
a range of Brexit-related scenarios of varying severities and
probabilities to inform its IFRS 9 and capital planning processes.
Corporate responsibility report
Operating sustainably and responsibly is integral to our business model
and strategy.
We take a SPECIALIST approach to everything we do - we ensure we
understand our stakeholders' requirements and use our creativity, skill
and expertise to fulfil them with honesty and integrity
We take a PERSONAL approach to everything we do - we treat everyone with
respect and take accountability for our actions
We take a FLEXIBLE approach to everything we do - we ensure that we work
collaboratively with our colleagues, customers and other stakeholders to
achieve shared positive outcomes
What we achieved in 2018
In 2018, we successfully delivered on a number of initiatives across the
business aimed at improving our relationships with key stakeholders and
achieving strong results, including:
-- Customers - consistently high consumer net promoter score: +63
-- Employees - OSB was certified as one of the 100 Best Companies to
Work for by The Sunday Times and OSBIndia as a Great Place to Work
-- Communities - donated over GBP260,000 to community and charitable
causes
Building on OneSavings Bank's long tradition of putting the customer at
the heart of everything we do.
Focused on our customers
OneSavings Bank encourages a culture that aims to:
-- Communicate and deal with each customer on an individual basis
-- Act with consistency across all channels
-- Promote a confident, open and trustworthy workforce
-- Offer simplicity and ease of business
-- Offer long-term value for money, and
-- Offer transparent products without the use of short-term bonus
rates, and to offer existing customers the benefit of loyalty rates.
Our customers are part of our success and we aim to become a financial
services provider of choice. To achieve that, the Group established a
governance framework for consistent best practice across the Group to
ensure there are robust policies and procedures to minimise the risk of
failure to deliver the service our customers have come to expect from
us.
The relevant policies include:
-- Conduct Risk Policy, including treating customers fairly to ensure
the Group conducts its business fairly and without causing customer
detriment
-- Responsible Lending Policy to ensure that the Group lends money
responsibly
-- Complaints Handling Policy to ensure the Group responds to
complaints swiftly, fairly and consistently
-- Vulnerable Customer and Suicide Awareness Policy to ensure that
employees can identify vulnerability and potential suicide risks in our
customers and put in place appropriate actions to deal with such issues
as effectively as possible
-- Anti-Money Laundering and Counter Terrorist Financing Policy to
ensure the Group is not used to further criminal activities
-- Anti-Bribery and Corruption Policy to ensure the Group carries out
its business honestly
-- A Conflicts of Interest Policy to ensure the Group can identify
and, if possible, avoid conflicts, and where this is not possible to
manage conflicts fairly
-- Data Protection and Retention Policies to ensure the Group
protects its customer data, manages and retains it fairly and
appropriately
-- Whistleblowing Policy to ensure that any employee who raises
concerns around misconduct is protected
-- Arrears, Repossessions and Forbearance Policy to ensure that
handling of arrears and repossessions deliver fair and suitable outcomes
based on the individual circumstances of the customer
-- Environmental Policy to conduct our business in an environmentally
aware manner, and
-- Diversity and Equality Policy to promote diversity and equality in
our workforce.
Employees have mandatory training on all the key policies, with a
completion rate of 96% in 2018.
Case study
Enhancing customer experience
Simon King - Bastion Development Team Lead
In the past year, the IT teams at OSB completed a number of major
projects, one of which was the launch of a streamlined ISA transfer
management system. Our core savings platform is administered and
continuously upgraded by teams at OSB and we are always looking to add
innovative solutions to enhance our customer experience. The improved
ISA transfer system is an example of this and its success was shown
through the particularly strong ISA season that we had in 2018.
The new savings platform was a result of months of work across various
IT and Business teams using up to date technology, and showed how well
we work together. The new system is a sleek and smooth process that
allows OneSavings Bank's customers to transfer their Cash ISA accounts
to us via a choice of routes: in branch, online or by post, and a
process that once took a couple of weeks now completes in a few days.
Customer engagement
We take a personal approach to our customers, treating each customer as
an individual and listening to their needs. Many of our customers are
also members of the Kent Reliance Provident Society, the Society that
took over the management of the membership of the former Kent Reliance
Building Society. The Bank and the Society have benefited from member
engagement through the online 'portal' launched late in 2015 enabling
input from a geographically broader range of members. Topics of
engagement have included key areas of customer literature, working with
saving and borrowing members to help the Bank maximise clarity and
understanding, and product retention process enhancement. Each year we
hold an AGM at which members can engage with senior management and
discuss their ideas for improving our customer experience.
Customer complaints
Whilst we concentrate on providing an excellent service, when things
have gone wrong, we aim to put them right and learn from any mistakes
made. We have a comprehensive, Group-wide complaints handling system and
our staff complete rigorous training programmes to ensure a compliant
and fair process is followed.
Our commitment to our customers is evidenced in the strong Net Promoter
Score (a measure of how likely a customer is to recommend a business on
a scale of -100 to +100) we achieve across our lending and saving
franchises, which in 2018 was an outstanding +63. In addition, we won
numerous awards for being the best provider for a range of services from
cash ISAs to Buy-to-Let mortgages.
Focused on our employees
The goal of making OSB the best workplace it can be was central to all
employee activities undertaken throughout 2018. Our employees are our
key asset. Their skills, expertise and enthusiasm are fundamental to
achieving our strategic goals, and we continue to invest in training,
development and employee engagement activities.
In 2017 we established the Talent Acquisition team to better assist the
growing business and to provide bespoke support to hiring managers and
by the end of 2018 we had four recruitment specialists. Throughout the
year, around a quarter of new hires came via the Talent Acquisition team
saving the business substantial recruitment fees. The team was
shortlisted for the best Newcomer Award at the 2018 In-house Recruitment
Awards winning the bronze award.
Our recruitment procedures are fair and inclusive, with shortlisting,
interviewing and selection always carried out without regard to gender
reassignment, sexual orientation, marital or civil partnership status,
colour, race, caste, nationality, ethnic or national origin, religion or
belief, age, pregnancy or maternity leave or trade union membership.
No candidate with a disability is excluded unless it is clear that the
candidate is unable to perform a duty that is intrinsic to the role,
having taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process are made to ensure that no applicant is
disadvantaged because of their disability and questions asked during the
process are not discriminatory or unnecessarily intrusive. This
commitment to actively promote an environment where disabled candidates
and employees are welcome was further strengthened in July 2018 when the
Group achieved Disability Confident Employer (Level Two) status building
on our initial success as Disability Confident Committed in 2017.
In 2018, we welcomed 165 new employees in the UK and 147 new employees
in India and in August we reached a milestone of 1,000 employees for the
Group. The InterBay Asset Finance business, which was launched in 2018
now employs a team of nine and operates from a new office in Fleet.
Training and development
Our employees are our key asset, and our approach to development is
focused on encouraging staff to be the best they can be. Our People
Development team provide learning and development opportunities for all
employees, using a mix of internal and externally sourced content, which
are delivered through a range of media, including workshop and digital
formats. Highlights in 2018 saw the function deliver bespoke management
development programmes, regulatory training, generic skills-based
workshops and business change content to support operational and
systemic training needs. In 2018, there were 995 attendees of 160
separate workshops or learning events delivered by the People
Development Team in the UK and a further 263 OSB attendees at 97 other
events delivered by external training providers. The completion rate for
our mandatory regulatory training throughout the year was 96%,
demonstrating the importance we continue to place on ensuring our
employees are suitably aware of key requirements.
At OSBIndia ('OSBI'), we strive to make all those who join the Group
feel welcome and be given as much training as possible to perform to
their best ability. In 2018, new joiners undertook on average 120 hours
of training. An initiative to improve and develop various managerial
competencies and skills was also launched in the year, with a series of
management development programmes for all managers in Bangalore.
The Group is also committed to supporting employees undertaking
professional development and in 2018, 16 employees received financial
support to pursue professional qualifications.
Since launching our Apprenticeship Scheme in late 2017, we have hired
six apprentices who work in a number of different functions throughout
the business. The scheme runs for two years and we hope it will lead to
the start of many successful careers at OSB.
Talent management and leadership programmes
During the year, the Group again undertook a robust mapping exercise to
identify the 2018 Primary Talent Group, who were exposed to a programme
of talent management activities which aimed to aid their ongoing
progression. The range of activities were enhanced from the previous
year based on feedback received and the ever-evolving profile of a
business leader. The programme provided a group-based stretch assignment,
access to a Board level/Executive level mentor, career focused
discussions, a psychometric profiling exercise and a bespoke workshop
delivered via an external Business School. The Group considers this
initiative as an integral part of retaining and developing our emerging
talent; either as technical specialists or as potential leaders of the
future.
The People Development function also delivered a Management Development
programme, recognising the significant role our managers play in the
delivery of outstanding customer service, staff engagement and delivery
of the Group's business objectives. Divided into two phases, the first
being a detailed and robust programme to support newly promoted or
appointed line managers, providing them with the tools needed to become
effective line managers; with the second phase being a development
centre, designed to allow experienced managers to participate in a
variety of exercises, encouraging the individuals to identify their
development needs across a range of management behaviours and skills.
While we are still a relatively small business in terms of employee
numbers, we advertise vacancies internally on a weekly basis in order to
provide career development opportunities for existing employees. In
2018, we filled 22% of vacancies with internal candidates (49 out of
224).
OSB has a genuine desire to retain, support and develop its employee
base. During 2018, 44 employees in the UK and 42 employees in India were
formally promoted to a more senior grade. Our regretted attrition rate
for 2018 was 9% for UK employees and a remarkable 11% for our employees
in India, far exceeding industry averages.
Kent Reliance savings
WINNER
Savings Account Provider of the Year
MoneyAge Awards 2018
Best Business Access Account Provider
Savings Champion
COMMED
Best No Notice Account
Moneyfacts Awards 2018
Remuneration and benefits
We believe in rewarding our employees fairly and transparently, enabling
them to share in the success of the business. Details of the Group's
remuneration policies can be found in the Remuneration Report on pages
99 to 105.
We offer our employees a comprehensive range of benefits, and continue
to review these to ensure they are in line with market practice.
Although the list is not exhaustive, our standard benefits offering
includes pension contributions, permanent health insurance, private
medical insurance, life cover, a holiday purchase scheme, interest-free
season ticket loan and a cycle purchase scheme. In 2018, we conducted a
benchmarking exercise to ensure that core benefits remained aligned with
market practice. As a result, we increased standard annual leave
allocations and discretionary bonus opportunities for all employees, up
to our management. In addition, we launched Total Rewards Statements and
a pension salary sacrifice scheme, with 53% of pension scheme members
transitioning during the year. A significant number of OSB employees
also participate in the Pennies from Heaven scheme, donating the small
change from their monthly salary directly to the Bank's charity.
We also encourage our employees to hold shares in the Bank for the long
term, via an annual Sharesave Scheme. The scheme is open to all UK-based
employees and allows them to save a fixed amount of between GBP5 and
GBP500 per month over either three or five years in order to use these
savings at the end of the qualifying period to buy the Company's shares
at a fixed option price. The Group first launched its annual Sharesave
Scheme in June 2014 and over 50% of employees are members of one of the
schemes.
In 2018, 77 employees saw their 2015 Sharesave Scheme mature, with the
total value of their respective individual plans increasing by over 80%.
Employee engagement
In October 2018, UK employees were invited, for the fourth time, to
participate in the 2019 Sunday Times Best Companies Employee Engagement
survey, which saw an outstanding 94% of employees submit their
responses.
The results demonstrated an overall score increase of 2.1% and for the
second year in a row, OSB achieved the One Star Accreditation Rating,
signifying very good levels of workplace engagement. The continuous
score improvement has seen the Bank included within The Sunday Times 100
Best Companies to Work For list for the first time and the improved
results related primarily to proactive local engagement plans being
created within all departments and the broader identification and
implementation of initiatives by the Engagement Steering Group.
In addition, both UK and India employees took part, for the second time,
in the Banking Standards Board survey, which aims to influence positive
change throughout the banking sector with a participation rate of 81%.
The survey provided an insight into employees' perceptions of the
application of their company's values, potential barriers to challenge
and to speak up along with their observations of unethical or
inappropriate behaviour. The results from this survey showed an increase
in all categories leading to OSB being ranked on average 13(th) out of
25 participating banks.
OSBI takes part in its own survey, run by the Great Place to Work
Institute. In 2018, OSBI was officially certified as a 'Great place to
work', with a strong performance in all indicators, including
organisation trust, credibility of management, respect for people,
fairness at the workplace, camaraderie and culture. OSBI's overall Trust
index score improved significantly to 75, up from 66 in 2016/2017, and
it received the highest score in Pride, reflecting the strong brand and
culture that has been created. 90% of our India colleagues participated
in this year's survey.
Employee awards
Mortgage Personality of the Year: Adrian Moloney
Mortgage Strategy Awards 2018
Provider: Underwriter - Craig Richardson
The British Specialist Lending Awards 2018
Business Leader: Commercial Finance Lender - Darrell Walker
The British Specialist Lending Awards 2018
Business Leader: Complex Buy-to-Let Lender - Adrian Moloney
The British Specialist Lending Awards 2018
In 2018, OSB partnered with specialist external consultants to design
and launch the Group's Mission, Vision and Values. Through engaging
employees and the executive team in discussion groups and interviews,
the Group defined its mission, vision and the underpinning four core
values. These were then launched to all employees via a number of
all-day interactive sessions, hosted by the Executive Committee, the
first event on this scale ever launched by OSB. The events were followed
by a range of related actions that have assisted in embedding the new
values and proactively driving positive cultural change throughout the
business.
Employee recognition and awards
In 2018, the significant tenure of 55 employees who reached a 5, 10, 15,
20, 25 or 30 year milestone for employment with the Group were
recognised through our Long Service Award programme. There were three
employees who reached 30 years' service with the Group and our
longest-serving employee has over 31 years' service to date.
Every quarter, employees are invited to nominate their colleagues as
part of OSB's employee recognition scheme, which has now been aligned
with our four values. Throughout 2018 there were 431 nominations made
via the scheme from which 13 individual awards were presented.
The expertise of our employees was also recognised by the mortgage
industry and in 2018 Adrian Moloney, Darrell Walker and Craig Richardson
were recognised by The British Specialist Lending Awards in the
categories of Complex Buy-to-Let, Commercial Finance Lender and
Underwriter, respectively.
Health and safety
We have a duty of care to all of our employees, and a safe and healthy
work environment is paramount at OneSavings Bank. We are committed to
fostering and maintaining a working environment in which our employees
can flourish, and our customers can safely transact with us.
We operate a Group Health and Safety Policy and we review our employee
and customer environment regularly.
In 2018, the annual mandatory health and safety training was completed
by all Group employees. This year, we also turned the display screen
equipment assessment into a process that is more straightforward for our
employees, more cost effective and a single Group -wide procedure.
Finally, we undertook a full review of all of the Group's real estate in
partnership with external consultants. The review demonstrated that all
sites are compliant with statutory health and safety regulations and
provided us with additional best practice improvements and
recommendations which will be implemented in the future.
Kent Reliance for Intermediaries
WINNER
Best Specialist Lender
Best Business Development Managers Team
Best Buy-to-Let Lender
Mortgage Strategy Awards 2018
Best Specialist Mortgage Provider -
Moneyfacts Awards 2018
Best Specialist Lender
MoneyAge Awards 2018
Diversity and inclusion
At OSB, we recognise the benefits that diversity of our people brings to
the business and we actively promote and encourage a culture and
environment which values and celebrates our differences. In 2018, we
continued our journey to become a truly diverse and inclusive
organisation, which is committed to providing equal opportunities
through the recruitment, training and development of our employees.
Some of our achievements included:
-- Mental Health Awareness sessions were introduced and are available
to all employees to help understand how stress symptoms, if left
unaddressed, can develop into mental health problems.
-- Attaining Disability Confident Employer (Level Two) status with
further commitment from the Group to attract, employ, support and retain
those with disabilities. As a holder of this accreditation, OSB is able
to evidence that we get the right people for the business despite their
considered barriers to employment due to disability, that we are
retaining and developing our employees who have individual needs related
to disability and that we are ensuring that disabled people, and those
with long-term health conditions, have the opportunities to fulfil their
potential and realise their aspirations within the Group.
-- Each office location with over 100 employees now has a private
employee room, which can be used both as a prayer room and a private
space for breastfeeding mothers.
-- We partnered with ShawTrust, a charity that specialises in helping
people with barriers to secure employment. One of the outcomes of this
partnership was a focus group with those with disabilities where we asked
for advice on how to better attract and support talented people who may
need additional help at work. The valuable insight from this partnership
is being implemented by OSB to ensure the Group becomes a truly welcoming
employer for those with disabilities.
OSB publishes its gender pay gap data in line with legislation that
applies to all UK companies with more than 250 employees. The full
publication is available on the Group's website: www.osb.co.uk.
OSB's median gender pay gap as at the snapshot date of 5 April 2018 was
44%, with the mean gap of 45.5%, these figures reducing from the 2017
reported figures of 46% and 47%, respectively. Whilst this signifies
progression, reducing the gap further remains a long-term commitment for
OSB and it will not be until the 2019 data is collated that we can
establish the degree to which the specific activities that were
identified and implemented in 2018 have helped to close our gap.
Fundamentally, OSB's gap relates to the structure of our workforce and
reflects the fact that we have more men than women in senior roles and
more female employees undertaking clerical roles. Whilst progress has
been made in 2018 to positively impact both aspects of our workforce
structure, we remain confident that our gap will continue to close and
the level of attention that we pay to the salaries of male and female
incumbents undertaking the same role provides us with comfort that we do
not have an issue in respect of the equal pay.
We recognise that we need to focus on improving our gender balance and
have a number of initiatives in place to do so:
-- In 2018, we embedded the mandatory recruitment requirement to
ensure that we interviewed at least one credible female candidate for
senior roles and at least one credible male candidate for roles at junior
levels. Our senior external recruitment activity in 2018 saw us hire an
equal split in terms of gender and at more junior grades 40% of the
vacancies were filled with male candidates. We firmly believe that our
approach to seeking to interview credible male and female candidates is
making a tangible difference and over the long-term will positively
impact our gender pay gap.
-- We made solid progress towards our commitment as a signatory of HM
Treasury's Women in Finance Charter. By the end of 2018, we had 28% of
all senior roles being undertaken by female employees, a solid
progression towards our target of at least 30% of senior roles occupied
by women by 2020.
-- OSB's Women's Networking Forum had a very successful year. This
group, which is focused on helping to identify and break down the
barriers that prevent women from progressing within financial services,
provided regular opportunity throughout the year for relevant discussions,
guest speakers, development tips and encouragement regarding career
progression.
In 2018, over 58% of our UK workforce was female, we had three female
Directors (38% of the Board) and two female members of the Executive
Committee (20%).
In our office in India, women constitute 41% of the total workforce.
Male Female
Number of Board Directors 5 3
Number of Directors of subsidiaries 16 1
Number of senior managers (not Directors) 45 23
All other employees(1) 462 525
1. Includes OSBI.
We have 10% of our UK employees working under flexible working
arrangements, with the majority of these employees working part-time
hours and we will be seeking to further develop this by revising our
Flexible Working Policy to provide increased support to those employees
with parental and carer responsibilities.
Human rights
We want each member of our workforce and other stakeholders to be
treated with dignity and respect. OSB endorses the UN Declaration of
Human Rights and supports the UN Guiding Principles of Business and
Human Rights. The Group adheres to the International Labour Organisation
Fundamental Conventions. We seek to engage with stakeholders with
fairness, dignity and respect. The Company does not tolerate child
labour or forced labour. OSB respects freedom of association and the
rights of employees to be represented by trade unions or works councils.
The Group is a fair employer and does not discriminate on the basis of
gender, religion, age, caste, disability or ethnicity. Our policy
applies throughout the Group and is communicated to our employees during
induction training.
The Group's second annual statement under the Modern Slavery Act 2015
was published on our website in June 2018. We reviewed relevant policies
and we worked with an external supplier to increase the monitoring of
risks in our supply chain. None of our suppliers are considered to be of
higher risk. In addition, 100% of our suppliers received our new Vendor
Code of Conduct informing them of our commitment to acting in an ethical
and honest way. This year, all employees completed a more detailed
module which built on last year's modern slavery learning, helping to
increase awareness and understanding.
OSBIndia
OSBIndia is a wholly-owned subsidiary of the Group. OSBI operates from
an office in Bangalore and currently employs 440 staff of which 41% are
women. OSBI supports the Bank across various functions including Support
Services, Operations, IT, Finance and Human Resources. We actively
promote integration between our colleagues in the UK and India with
frequent employee exchanges, transfers, overseas training, staff and
management visits.
As part of the Group, OSBI falls under the same Group policies that are
in force in the UK offices, most importantly, equal opportunities,
non-discrimination and harassment, whistleblowing, information security
and clear desk policies. There are only very slight differences in the
Group's main HR policies due to local legislation.
OSBI is a holder of ISO 27001: 2018 certified which demonstrates high
standards of information security. To that end, the business continuity
site in Hyderabad, which was opened in 2017, became fully operational
this year. OSBI prides itself on excellence in customer service and the
ISO 9001: 2018 certified is a testament to meeting customer and
regulatory requirements by providing outstanding customer service. In
2018, OSBI undertook a benchmarking exercise against industry peers and
was noted as Class Leading in Customer Service by an independent
consultant.
In compliance with the Modern Slavery Act, we do not support excessive
overtime and our employees in India are encouraged to work in accordance
with local legislation. Employees in our Bangalore office enjoy a range
of benefits which include 22 days of annual leave, 12 days' sick leave
and cafeteria services.
Focused on the environment
2018 was yet another year when the Group took on initiatives, or
advanced existing ones, to achieve its goal of becoming a greener
organisation.
As an office- based financial services provider, we have a relatively
low impact on the environment due to many improvements to the Group's
real estate introduced over the years. The Group sources all of its
energy from 'green' energy providers and we monitor and control the
electricity and gas consumption to avoid unnecessary waste.
In addition to these improvements, we have policies in place that allow
us to minimise our negative impact on the environment in which we
operate. Our 'Zero to Landfill' waste policy means that all of our waste
is either recycled, reused or sent to a dedicated Energy from Waste
facility. We also consider the environmental impact on supply chain when
buying from suppliers and our procurement policy actively incorporates
these aspects when appointing new partners. Finally, secure print
solutions were introduced in all offices which significantly lowered
paper consumption.
The Group is also committed to promoting awareness of environmental
issues amongst our employees. The OSB Magazine frequently includes
recycling tips and monthly green challenges which see positive uptake by
the business. This year, we focused on reducing single use plastic
consumption and installed recycling stations across all sites.
Greenhouse gas emissions 2018
Location- Market-
based based
method method
Emission type Units 2018 2018
Scope 1: Combustion tCO(2) e 76 N/A
Scope 1: Facility operation tCO(2) e 5 N/A
Total scope 1 tCO(2) e 81 0
Scope 2: Purchased energy tCO(2) e 951 0
Scope 2: Purchased energy MWh 2,180 1,025
Total scope 2 tCO(2) e 951 0
Scope 3: Combustion tCO(2) e N/A N/A
Scope 3: Facility operation tCO(2) e N/A N/A
Total scope 3 tCO(2) e N/A N/A
Total emissions tCO(2) e 1,032 0
1. Location-based figure used where market-based not available.
Emissions breakdown by source (tCO(2) e)
Emissions breakdown by category (tCO(2) e)
Mandatory greenhouse gas report
Reporting scope
-- The reporting period is 1/01/18 to 31/12/18, which was selected
because it is the company's financial year.
-- This report was compiled in line with the September 2009 DEFRA
'Guidance on how to measure and report your greenhouse gas emissions'
which is based on the GHG Protocol.
-- All measured emissions from activities which the organisation has
financial control over are included unless otherwise stated in the
exclusions statement, as required under The Companies Act 2006 (Strategic
and Director's Reports) Regulations 2013.
-- The intensity measurement of turnover was selected in order to
compare emissions with company growth and for consistency, with similarly
reporting businesses for review of the market position.
-- Emissions factors used:
Fuel type Emissions conversion factor source
UK electricity-location based (excluding transmission Department for Business, Energy and Industrial Strategy
and distribution), UK gas, diesel, R410A, R32 and 2018
R22 F-gas
UK electricity-market based SSE Green-100%
renewable energy factsheet, opusenergy.com/our-energy-sources/,
ssebusinessenergy.co.uk/help-and-advice/standard-fuel-mix/
Overseas electricity http://www.carbon-calculator.org.uk/
Statement of exclusions
Scope 1 exclusions
-- All company owned transport was excluded due to unavailability of
data. OSB is putting processes in place to collate this for next year's
report.
Scope 2 exclusions
-- Scope 2 purchased electricity does not include the transmission
and distribution element as this is owned by the supplier.
-- Three sites have electricity use that is excluded as it is part of
the service charge from the landlord and OSB have no visibility of
consumption or an apportionment of the buildings' consumption. These are
Fleet, InterBay and London, Heritable.
-- The gas consumption for Prestige Finance was excluded as the
meters were removed. The meters are still recorded as they are in the
process of being closed down and final billed by the supplier.
Scope 3 exclusions
-- No scope 3 emissions were included as they are voluntary.
Year on year emissions changes
-- There are a total of three new sites in this year's report. Fleet
is excluded as a landlord site and so has no impact on consumption. The
other new sites are Newman Street and Canterbury (12-13) High St.
-- The Maidstone branch moved location in November 2017, the old site
(code 04189-10-05) is vacant and so has very low consumption. The new
site is code 04189-10-18.
-- F-gas recharges was much lower than last year.
-- Natural gas emissions are lower than last year as the two meters
at Prestige Finance were removed.
Estimation methods used
-- Usage per day apportionment - total usage for period divided by
days in period multiplied by missing days.
-- Comparable site - client has advised of a site of a similar size
and operation which should have a comparable level of consumption.
-- Floor area apportioned - total usage for the year for whole floor
area the meter serves divided by 100% multiplied by floor area the client
occupies.
-- Run time - standby fuel consumption from the generator
specification sheets multiplied by run time.
Our new values
Our renewed company mission and values help us overcome the challenges
we face and allow us to capitalise on the opportunities.
Our mission
To enable our customers to achieve their personal and business goals by
providing access to fair financial solutions.
Our vision
To become our customers' favourite bank; one that delivers its very best,
challenges convention and opens doors that others can't.
Our values
Our values will guide us to the success we're all striving towards - for
ourselves and our customers.
Stronger together
We are OneTeam, working together to create a business in which we can
all take pride and prosper. We work hard to build trust, respect and
openness across the Company, pool our talents and energy when we need to,
and pull together to challenge - and surpass - our competitors.
Aim high
We need to set our bar high for our customers, be bold in our
decision-making and dynamic in our actions on their behalf. They are the
ones who know when we're going above and beyond. They can tell when
they've been listened to. They remember the promises we keep. And, in
even the smallest action or service, they sense the standards we set
ourselves.
Take ownership
Each one of us bears responsibility for what we do, and for our share of
the mission this Company sets itself every day. We help each other, show
respect for each other and listen to what others have to say. And if
there's a question to be asked or challenge to be faced, we don't look
away.
Create your future
Our bank is about making opportunities and taking opportunities. It's a
place where each one of us can take control of our future - where we can
all fulfil our need for personal growth and build a future for
ourselves. So, seize the opportunities that come your way, and make the
most of them to move forward in your career.
oneteam
OneSavings Bank has grown from 200 people in two sites to more than
1,000 across seven sites in the UK and in India.
So much of the work behind the renewed mission, vision and values was
done to ensure that as a much larger business we can continue to work
positively together, doing great things for our customers.
Our values have been cemented into the way we set our individual
objectives as well as at a company level. Everyone in the Group has
identified opportunities to develop themselves and the Bank all linking
together to support great customer outcomes.
Total employees
1,000
Focused on our community
OneSavings Bank is proud of its strong links with the local community,
especially through the Kent Reliance brand which has been synonymous
with the county of Kent and a passionate supporter of its local
community for over 150 years.
As one of the largest employers in the region, many of our employees
live locally and therefore have a personal affinity with local causes
and projects. Employees' views are actively sought in helping to decide
where our support is best placed and feedback is shared throughout the
business to boost active participation.
Our community strategy is built primarily around three key pillars
consisting of volunteering, fundraising and community investment, all of
which provide a platform for OneSavings Bank to share its vision and
values.
In 2018, we implemented a revised community services programme that
enabled employees to have a greater influence on the charities that
matter to them. We continue to encourage an active "hands on" approach
through fundraising and volunteering opportunities. Our volunteering
activities have encouraged our employees to use their "Day to make a
difference". This is a paid day, available to all employees, to help
support any registered charity or community group. For example, the
annual community-based campaign, "Project Kent", that Kent Reliance runs
alongside the radio station kmfm, incorporates a whole week of
volunteering opportunities for employees. Furthermore, if employees
choose to undertake additional fundraising activities, the Bank will
match any funds raised up to a specific amount.
During 2018, employees chose to support a variety of charities through
their volunteering day, which included working at the central sorting
warehouse for Demelza Children's Hospice, painting and decorating
offices for the Young Lives Foundation as part of Project Kent and
getting their hands dirty for a local Medway-based charity allotment
scheme helping local school children to grow fruit and vegetables over
the school holidays to tackle holiday hunger.
Overall, the Bank has contributed a total of GBP260,000 to community and
charitable causes in 2018 through charity fundraisers, donations and
additional support.
Demelza Hospice Care for Children
Demelza is a children's hospice charity in the South East, providing
compassionate and expert care for babies, children, young people and
their families. As a registered charity, Demelza offers bespoke support,
free of charge, to families and is available 24 hours a day, 365 days a
year. In order to provide these vital services, it needs to raise over
GBP10m a year.
In 2018, Kent Reliance branches continued to support Demelza as their
local charity partner and marked the occasion with the launch of a
dedicated Demelza Children's Account, whereby the charity receives an
annual donation equivalent to an agreed percentage of the combined funds
held across the associated accounts at the end of the year.
In 2018, GBP4,151 was raised primarily through the Kent Reliance
branches and the annual charity donation arising from the Demelza
Children's Account.
During 2018, 53 employees from across OneSavings Bank volunteered their
time in the Demelza Warehouse, Maidstone, providing much needed
additional support as the centre filters approximately five million
items per year with most of this work supported by volunteers.
Kent Reliance also takes huge pride in raising money for Demelza through
a range of annual fundraising events such as teddy bear picnics, bake
sales and Halloween themed events.
Aside from straightforward fundraising, the branches also engage with
the local community by offering the branch network as collection and
promotion outlets for the charity.
Winston's Wish
During 2018, the Bank continued to support its nominated national
charity, Winston's Wish, the first charity to establish child
bereavement support services across the UK. Winston's Wish provides
specialist support programmes for children affected by deaths related to
homicide and suicide, as well as for military families who have been
bereaved.
The end of 2018 marked the end of its two year partnership but there was
a silver lining as, in total, the Bank managed to raise over GBP26,000
for Winston's Wish, which included the sponsorship of their national
support helpline on Christmas Eve.
Project Kent
Kent Reliance's Project Kent rolled into its second year, in partnership
with the KM Media Group and led by its radio station kmfm. This
community initiative was powered by nominations from local people who
were asked to nominate a local charity or group which benefits the local
community. The campaign was promoted via the Kent Reliance branches and
nominations reached over 130 this year, a big increase on the previous
year, as the annual project becomes more established. Following a
lengthy judging process, "The Young Lives Foundation" was selected; a
Maidstone based charity that helps improve the lives of disadvantaged
young people across Kent. Their offices and meeting rooms were in a poor
decorative state meaning they were not being used to their full
potential.
A team of 50 OSB volunteers helped transform the downstairs area into a
warm and friendly environment which included new display areas and new
furniture, which resulted in an amazing transformation for its staff and
young visitors.
Through the associated profile raising activity, the charity also
benefited from a ripple effect with offers of additional fundraising,
recruiting staff as adult mentors and increased awareness throughout the
county that resulted in further offers of help from other local
businesses.
Make Someone's Christmas
The Make Someone's Christmas campaign encourages listeners and readers
of kmfm and the KM Media Group, and customers of Kent Reliance branches,
to nominate those people they feel deserve an extra special treat during
the festive season.
The 2018 campaign was very successful and achieved over 500 nominations
which led to us helping ten special people in Kent in a variety of ways
to ensure they enjoyed Christmas this year. As always, it was an
extremely hard decision for the judging panel but the selected
nominations really stood out.
The selected nominees included treating a special young person who made
great efforts to look after the health of his eight year old best friend,
by missing out on break times and calling for adult help if needed, a
young carer who never put herself first and was trying to write her
first book using an old typewriter which we swapped for a new laptop,
and a young mum diagnosed with cancer who wanted to treat her family to
a day out to thank them for their support. Each of the selected nominees
was announced live on the radio during a two-week period and received a
variety of prizes ranging from high street vouchers to a weekend away.
OSBI fundraising
Corporate social responsibility ('CSR') is extremely important to OSBI.
The concept of helping society is embedded in its corporate governance
structure through the CSR policy and also through employee engagement.
As part of the OSBI CSR policy, funds are kept aside each year to spend
on social causes. This is governed by a CSR Committee and implemented by
the Corporate and Social Responsibility Group. The focus is to help and
contribute in areas where there is critical need and within the office
locality so they are also able to contribute their time.
In 2018, the CSR Group agreed to support the areas of child welfare,
education and healthcare.
Child welfare and education
OSBI has partnered with SOS Children's Village, located in Bangalore, to
fund education, food, clothing and housing for 20 orphans. Working
together with SOS, OSBI employees helped to provide support for the
holistic development of orphans and women and children belonging to
vulnerable families. OSBI also hosted some events at SOS for employees
to engage with the children, which was highly appreciated by both the
children and employees.
Healthcare
OSBI is currently supporting HBS Hospital to provide dialysis sessions
to 20 individuals who live below the poverty line. HBS Hospital is a
non-profit hospital which provides critical healthcare to members of
society who could otherwise not afford the care they need.
OSBI continued its support in maintaining the gardens at CV Raman
General Hospital for the second year. Hospital staff and patients have
appreciated the positive impact such a space has had on patients, their
relatives and the hospital staff.
Looking forward to 2019
By partnering with national and local charities, we hope to offer
employees the chance to make a difference both nationwide and closer to
home. By focusing our efforts on our nominated charities, we hope to
make a meaningful impact to our chosen charities, and to the lives of
those that the charities help.
The OSB 2019 national charity partner, chosen by employees is My Shining
Star: Children's Cancer Charity. This charity supports families through
the financial hardship associated with childhood cancer.
Around 1,600 children are diagnosed with cancer in the UK every year.
That means 1 in 500 children across the UK are diagnosed with cancer
before they turn 14.
Families spend an extra GBP600 per month, on average, during their
child's cancer treatment (mainly for transport, food and accommodation)
and many fall into debt as a result, or families become separated as
siblings of the child are left at home.
To learn more about My Shining Star, the services it provides, and the
families it supports, visit its website:
https://www.myshiningstaruk.co.uk/
The Strategic report is approved by the Board and signed on its behalf
by:
Jason Elphick
Group General Counsel and Company
Secretary
14 March 2019
Governance
How our Board and Executive team set the strategic direction and provide
oversight and control.
Key reads within this section:
Corporate Governance Report
"We are pleased to report full compliance"
> For more information go to page 72
Risk Committee Report
"We continued to enhance and integrate the Strategic Risk Management
Framework"
> For more information go to page 87
Remuneration Report
"Extensive engagement with shareholders"
> For more information go to page 90
Contents
Governance
Directors' Report
Board of Directors (biographies) 68
Executive team (biographies) 70
Corporate Governance Report 72
Nomination and Governance
Committee Report 80
Audit Committee Report 82
Risk Committee Report 87
Directors' Remuneration Report 90
Directors' Report: Other Information 106
Statement of Directors' responsibilities 108
Directors' Report
Board of Directors (biographies)
David Weymouth* Andy Golding April Talintyre Graham Allatt* Eric Anstee*
Non-Executive Chairman Chief Executive Officer Chief Financial Officer Non-Executive Director Non-Executive Director
Appointment Appointment Appointment Appointment Appointment
David was appointed to the Board in September 2017. Andy was appointed to the Board in December 2011. April joined the Bank in May 2012 and was appointed Graham was appointed to the Board in May 2014. Eric was appointed to the Board in December 2015.
to the Board in June 2012.
Committee membership Committee membership Committee membership Committee membership Committee membership
Member of the Nomination and Governance Committee None. Member of the Risk Committee. Chair of the Risk Committee and member of the Audit Chair of the Audit Committee and member of the Risk
and the Remuneration Committee. Committee. Committee.
Key skills Key skills Key skills Key skills Key skills
David has over 40 years' experience in the financial Andy has over 30 years' experience in financial services. April has broad financial services experience. She Graham has significant banking, credit risk and financial Eric has extensive corporate finance and mergers and
services industry and has a degree in Modern Languages has been a member of the services experience. acquisitions experience over a broad range of business
from University College London and an MBA from the Institute of Chartered Accountants in England and sectors.
University of Exeter. Wales since 1992. He is a member of the Takeover Panel Appeals Board
and Visiting Professor, London Metropolitan University
Business School.
Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications
David was previously Chief Information Officer at Andy was previously CEO of Saffron Building Society, April was previously an Executive Director in the Graham was previously Acting Group Credit Director Eric was Chairman of CPP Group plc from 2014 to 2015.
Barclays Bank plc and Chief Risk Officer at RSA Insurance where he had been since 2004. Prior to that he held Rothesay Life pensions insurance business of Goldman at Lloyds TSB and Chief Credit Officer at Abbey National. Prior to this he was Chief Executive of the City of
Group plc. He sat on the Executive Committee of both senior positions at NatWest, John Charcol and Bradford Sachs and worked for Goldman Sachs International for Prior to this he spent 18 years in the NatWest Group London Group plc, the first Chief Executive of the
companies. He served as a Non- Executive Director & Bingley. Andy currently holds a number of posts over 16 years, including as an Executive Director culminating in the role of Managing Director, Credit Institute of Chartered Accountants in England and
of Bank of Ireland (UK) plc. His experience as an with industry institutions including membership of in the Controllers division in London and New York. Risk at NatWest Markets. A Fellow of the Institute Wales and Group Finance Director of Old Mutual plc.
executive includes a wide range of senior roles in the UK Finance Executive Committee, the Building Societies April began her career at KPMG in a general audit of Chartered Accountants, Graham was involved with Eric was also Group Finance Director at The Energy
operations, technology, risk and leadership. David Association's Council and the Financial Conduct Authority's department. housing associations for nearly 30 years as Treasurer Group plc and advisor to Lord Hanson on the demerger
is also Chairman of Mizuho International Plc and his Small Business Practitioners Panel. He is also a Director and Board member in the North of England and in London. of Hanson plc. Prior to this Eric spent 17 years at
other current Non-Executive directorships include of the Building Societies Trust and has served as Ernst & Young. Eric is also a Non -Executive Director
Fidelity International Holdings (UK) Limited and The a Non-Executive Director for Northamptonshire NHS of Sun Life Financial of Canada Limited and Insight
Royal London Mutual Insurance Society. and Kreditech. Asset Management Limited.
* Independent Non-Executive Director.
Sarah Hedger* Rod Duke* Margaret Hassall* Mary McNamara*
Non-Executive Director Senior Independent Director Non-Executive Director Non-Executive Director
Appointment Appointment Appointment Appointment
Sarah was appointed to the Board in February 2019. Rod was appointed to the Board in July 2012 and was Margaret was appointed to the Board in July 2016. Mary was appointed to the Board in May 2014.
appointed Senior Independent Director in 2014.
Committee membership Committee membership Committee membership Committee membership
None. Chair of the Nomination and Governance Committee and Member of Audit and Risk Committees. Chair of Remuneration and member of Risk and Nomination
member of the Remuneration Committee. and Governance Committees.
Key skills Key skills Key skills Key skills
Sarah has significant capital management and mergers Rod has extensive experience in operations, investments, Margaret brings a broad range of experience developed Mary has broad senior management experience in the
and acquisitions experience in financial services. risk management and corporate finance across retail across various industry sectors including manufacturing, banking and finance sectors.
She is a qualified chartered accountant. and commercial banking. utilities and financial services.
Experience & qualifications Experience & qualifications Experience & qualifications Experience & qualifications
Sarah held leadership positions at General Electric Rod was previously Group General Manager, HSBC with Margaret spent seven years working for Deloitte and Mary is a Non-Executive Director of Dignity plc and
for 12 years in its Corporate, Aviation and Capital responsibility for UK distribution - branches, call Touche as a consultant and led the financial services Motorpoint plc. She was previously CEO of the Commercial
business development teams, leaving General Electric centres and internet banking - for both personal and consulting business for Charteris Plc. More latterly, Division and Board Director of the Banking Division
as Leader of Business Development and M&A for its commercial customers. Rod was with HSBC for 33 years. Margaret has been engaged as Chief Operations Officer at Close Brothers Group PLC. Prior to that, Mary was
global GE Capital division. Prior to General Electric, Previous directorships include VISA (UK), HFC Bank or Chief Information Officer for divisions within Chief Operating Officer of Skandia, the European arm
she worked at Lazard & Co., Limited for 11 years, plc and HSBC Life. He also served on the Board of some of the of Old Mutual Group. Mary spent 17 years at GE Capital,
leaving as Director, Corporate Finance. Sarah also Alliance & Leicester plc until its takeover by Santander. world's largest banks, namely Bank of America Merrill running a number of businesses including GE Fleet
spent five years as an auditor at PricewaterhouseCoopers. Rod is a Fellow of the Institute of Financial Services. Lynch, Barclays and RBS. Margaret is a Non-Executive Services Europe and GE Equipment Finance.
Sarah is an Independent Non-Executive Director of Director for Ascension Trust (Scotland)
Balta Group NV, a Belgian company listed on Euronext. and, since July 2018, of Nucleus Financial Group plc.
Executive team (biographies)
Jason Elphick
Group General Counsel and Company Secretary
Experience & qualifications
Jason joined the Bank in June 2016. He has over 20 years of legal
private practice and in-house financial services experience.
Jason's private practice experience was primarily in Australia with King
& Wood Mallesons and in New York with Sidley Austin LLP and he has been
admitted to practice in Australia, New York and England and Wales.
Jason's in-house financial services experience was most recently as
Director and Head of Bank Legal at Santander in London. Prior to this
Jason held various roles at National Australia Bank, including General
Counsel Capital and Funding, Head of Governance, Company Secretary and
General Counsel Product, Regulation and Resolution.
Richard Wilson
Group Chief Credit Officer
Experience & qualifications
Richard joined the Bank in 2013.
Prior to joining the Bank, Richard was head of the credit function for
Morgan Stanley's UK origination business and subsequently looked after
Credit and Collections strategy within its UK, Russian and Italian
businesses. Between 1988 and 2006, Richard held various roles at
Yorkshire Building Society, including the position of Mortgage
Application Centre Manager.
Jens Bech
Group Commercial Director
Experience & qualifications
Jens joined the Bank as Chief Risk Officer in 2012, before becoming
Group Commercial Director in 2014.
Jens joined the Bank from the Asset Protection Agency, an executive arm
of HM Treasury, where he held the position of Chief Risk Officer. Prior
to joining the Asset Protection Agency, Jens spent nearly a decade at
management consultancy Oliver Wyman where he advised a global portfolio
of financial services firms and supervisors on strategy and risk
management. Jens led Oliver Wyman's support of Iceland during the
financial crisis.
Lisa Odendaal
Chief Internal Auditor
Experience & qualifications
Lisa joined the Bank in April 2016 as Group Head of Internal Audit.
Prior to joining the Bank, Lisa worked for Grant Thornton where she was
an Associate Director within its Business Risk Services division.
Lisa has over 20 years of internal audit and operational experience
gained in the UK, UAE and Switzerland, having worked at several
financial institutions, including PwC, Morgan Stanley, HSBC and Man
Investments.
Hasan Kazmi
Chief Risk Officer
Experience & qualifications
Hasan joined the Bank in September 2015 as Chief Risk Officer.
Hasan has over 19 years of risk experience having worked at several
financial institutions, including Barclays Capital, Royal Bank of Canada
and Standard Chartered Bank. Prior to joining the Bank, Hasan was a
Senior Director at Deloitte within the Risk and Regulatory practice with
responsibility for leading the firm's enterprise risk, capital,
liquidity, recovery and resolution practice. Hasan graduated from the
London School of Economics with a MSc in Systems Design and Analysis and
a BSc in Management.
Clive Kornitzer
Group Chief Operating Officer
Experience & qualifications
Clive joined the Bank in 2013. Clive has over 25 years of financial
services experience, having worked at several financial organisations
including Yorkshire Building Society, John Charcol and Bradford and
Bingley.
Prior to joining the Bank, Clive spent six years at Santander where he
was the Chief Operating Officer for the intermediary mortgage business.
Clive has also held positions at the European Financial Management
Association and has been the Chair of the FS Forums Retail Banking
Sub-Committee. Clive is a Fellow of the Chartered Institute of Bankers.
Richard Davis
Chief Information Officer
Experience & qualifications
Richard joined the Bank in 2013. Richard has worked in financial
services for 20 years, rising to Chief Information Officer at GE Money
UK in 2004.
He subsequently helped launch MoneyPartners (an Investec subsidiary), as
IT Director, through to the eventual sale to Goldman Sachs. Prior to
joining the Bank, Richard worked for four years at Morgan Stanley
covering IT, Projects and Transaction Management for the European
residential business as an Interim Director.
Top row from left to right:
Clive Kornitzer; Jason Elphick; Lisa Odendaal; Richard Wilson.
Bottom row from left to right:
Jens Bech; Richard Davis; Hasan Kazmi.
Corporate Governance Report
The statement of corporate governance practices, including the Reports
of Committees, set out on pages 72 to 108 and information incorporated
by reference, constitutes the Corporate Governance Report of OneSavings
Bank.
UK Corporate Governance Code ('the Code')
- Compliance Statement
During 2018, the Company applied all of the main principles of the 2016
Code and has complied with all Code provisions. The Code is available at
www.frc.org.uk.
Dear Shareholder,
I am pleased to present to you the Company's Corporate Governance Report
for 2018, and to report our full compliance throughout the year with the
Code as updated in 2016.
I am pleased to report that the Board continues to be committed to the
highest standards of corporate governance and considers that good
corporate governance is essential to provide the Executive team with the
environment and culture in which to drive the success of the business.
The Board and its Committees have undertaken a formal performance review
exercise during 2018, details of which are set out in the Report below.
The review highlighted that the Board and its Committees continue to
operate effectively. An externally facilitated Board evaluation will be
undertaken during 2019.
Andrew Doman left the Board during 2018. I would like to thank him for
his contribution towards the success of the Bank and I wish him well in
all his future ventures. I would also like to welcome Sarah Hedger who
joined the Board on 1 February 2019.
The Investor Relations function continues to assist the Board in
developing a programme of meetings and presentations to both
institutional and private shareholders, details of which are also set
out in the Report. We welcome shareholders to attend the AGM, which will
be held at the offices of Addleshaw Goddard LLP, 60 Chiswell Street,
London EC1Y 4AG on 9 May 2019 at 11am.
David Weymouth
Non-Executive Chairman
14 March 2019
The role and structure of the Board
The Board of Directors (the 'Board') is responsible for the long-term
success of the Company and provides leadership to the Group. The Board
focuses on setting strategy, monitoring performance and ensures that the
necessary financial and human resources are in place to enable the
Company to meet its objectives. In addition, it ensures appropriate
financial and business systems and controls are in place to safeguard
shareholders' interests and to maintain effective corporate governance.
The Board is also responsible for setting the tone from the top in
relation to conduct, culture and values, for ensuring continuing
commitment to treating customers fairly, carrying out business honestly
and openly and preventing bribery, corruption, fraud or the facilitation
of tax evasion.
The Board operates in accordance with the Company's Articles of
Association (the 'Articles') and its own written terms of reference. The
Board has established a number of Committees as indicated in the chart
on page 39. Each Committee has its own terms of reference which are
reviewed at least annually. Details of each Committee's activities
during 2018 are shown in the Nomination and Governance, Audit, Risk and
Remuneration Committee reports on pages 80 to 105.
The Board retains specific powers in relation to the approval of the
Bank's strategic aims, policies and other matters, which must be
approved by it under legislation or the Articles. These powers are set
out in the Board's written terms of reference and Matters Reserved to
the Board which are reviewed at least annually.
A summary of the matters reserved for decision by the Board is set out
below:
Strategy and management
-- Overall strategy of the Group
-- Approval of long-term objectives
-- Approval of annual operating and capital expenditure budgets
-- Review of performance against strategy and objectives
Structure and capital
-- Changes to the Group's capital or corporate structure
-- Changes to the Group's management and control structure
Risk management
-- Overall risk appetite of the Group
-- Approval of the strategic risk management framework
Financial reporting and controls
-- Approval of financial statements
-- Approval of dividend policy
-- Approval of significant changes in accounting policies
-- Ensuring maintenance of a sound system of internal control and risk
management
Remuneration
-- Determining the remuneration of the Non-Executive Directors
-- Introduction of new share incentive plans or major changes to existing
plans
Corporate governance
-- Review of the Group's overall governance structure
-- Determining the independence of Directors
Board members
-- Changes to the structure, size and composition of the Board
-- Appointment or removal of the Chairman, CEO, SID and Company Secretary
Other
-- The making of political donations
-- Approval of the overall levels of insurance for the Group
Accountability
In line with the Code provisions, the Board ensures that a fair,
balanced and understandable assessment of the Group's position and
prospects is presented in all financial and business reporting. The
Board is responsible for determining the nature and extent of the
principal risks it is willing to take in achieving its strategic
objectives and maintains sound risk management and internal control
systems. The Board has established formal and transparent arrangements
for considering how it should apply the corporate reporting, risk
management and internal control principles and for maintaining an
appropriate relationship with the Group's auditors.
Financial and business reporting
The Board is committed to ensuring that all external financial reporting
presents a fair, balanced and understandable assessment of the Group's
position and prospects. To achieve this, the Board reviews each report
and considers the level of consistency throughout: whether there is a
balanced review of the competitive landscape; the use of sufficiently
simple language; the analysis of risks facing the business; and that
there is equal prominence given to statutory and underlying profit. The
Board has established an Audit Committee to assist in making its
assessment. The activities of the Audit Committee are set out on pages
82 to 86.
Risk management and internal control
The Board retains ultimate responsibility for setting the Group's risk
appetite and ensuring that there is an effective risk management
framework to maintain levels of risk within the risk appetite. The Board
regularly reviews its procedures for identifying, evaluating and
managing risk, acknowledging that a sound system of internal control
should be designed to manage rather than eliminate the risk of failure
to achieve business objectives.
The Board has carried out a robust assessment of the principal risks
facing the business, including those that would threaten its business
model, future performance, solvency or liquidity. Further details are
contained in the viability statement on page 51.
The Board has established a Risk Committee to which it has delegated
authority for oversight of the Group's risk appetite, risk monitoring
and capital management. The Risk Committee provides oversight and advice
to the Board on current risk exposures and future risk strategy and
assists the Board in fostering a culture within the Group, which
emphasises and demonstrates the benefits of a risk-based approach to
internal control and management.
Further details of the Group's risk management approach, structure and
principal risks are set out in the Risk review on pages 36 to 49. The
Board has delegated authority to the Audit Committee for reviewing the
effectiveness of the Company's internal control systems. The Audit
Committee is supported by the Internal Audit function in discharging
this responsibility, and receives regular reports from the Chief
Internal Auditor as to the overall effectiveness of the control system
within the Group. Details of the review of the effectiveness of the
Company's internal control systems are set out in the Audit Committee
report on page 84.
Control environment
The Group is organised along the 'three lines of defence' model to
ensure at least three stages of independent oversight to protect the
customer and the Group from undue influence, conflict of interest and
poor controls.
The first line of defence is provided by the operational business lines
which measure, assess and control risks through the day -to-day
activities of the business within the frameworks set by the second line
of defence. The second line of defence is provided by the risk,
compliance and governance functions which include the Board and
Executive Committee. As noted above, the Board sets the Company's risk
appetite and is ultimately responsible for ensuring an effective risk
management framework is in place. The Compliance function maintains the
'key controls framework' which tracks and reports on key controls within
the business to ensure compliance with the main provisions of the
Financial Conduct Authority ('FCA') and the Prudential Regulation
Authority ('PRA') handbooks. Policy documents also include key controls
that map back to the key controls framework. The third line of defence
is the Internal Audit function.
The Board is committed to the consistent application of appropriate
ethical standards, and the Conduct Risk Policy sets out the basic
principles to be followed to ensure ethical considerations are embedded
in all business processes and decision-making forums. The Group also
maintains detailed policies and procedures in relation to the prevention
of bribery and corruption, and a Whistleblowing Policy.
Directors
The Directors who served during the year are listed in the table below.
Andrew Doman ceased to be a Director 10 May 2018. The Board currently
consists of nine Directors; the Chairman, two Executive Directors and
six independent Non- Executive Directors. The biographies of the
Directors can be found on pages 68 to 69.
Board meetings and attendance
The Board met nine times during the year. The Board has a formal meeting
schedule with ad hoc meetings called as and when circumstances require.
This includes an annual calendar of agenda items to ensure that all
matters are given due consideration and are reviewed at the appropriate
point in the regulatory and financial cycle. The Board has established a
number of Committees as shown in the table below. The table also shows
each Director's attendance at the Board and Committee meetings they were
eligible to attend in 2018.
Nomination and
Audit Remuneration Governance Risk
Director Board Committee Committee Committee Committee
David Weymouth(1)
(Chairman) 9/9 n/a 4/4 5/5 n/a
Graham Allatt 9/9 5/5 n/a n/a 6/7
Eric Anstee 9/9 5/5 n/a n/a 7/7
Andrew Doman(2) 4/4 1/1 2/2 n/a 2/3
Rod Duke 9/9 n/a 6/6 5/5 n/a
Andy Golding 9/9 n/a n/a n/a n/a
Margaret Hassall 9/9 5/5 n/a n/a 7/7
Mary McNamara 8/9 n/a 6/6 5/5 7/7
April Talintyre 9/9 n/a n/a n/a 6/7
1. Appointed to the Remuneration Committee on 1 May 2018.
2. Retired from the Board on 10 May 2018.
All Directors are expected to attend all meetings of the Board and any
Committees of which they are members, and to devote sufficient time to
the Company's affairs to fulfil their duties as Directors. Where
Directors are unable to attend a meeting, they are encouraged to submit
any comments on the meeting materials in advance to the Chair, to ensure
that their views are recorded and taken into account during the meeting.
Key Board activities during the year included:
-- Strategy - the Board convened a strategy away day in October 2018
-- Risk monitoring and review
-- Governance and compliance
-- External affairs and competitor analysis
-- Talent review/succession planning
-- Annual, interim and quarterly reporting
-- Customer/brand/product review
-- Policy review and update
-- Investment proposals
-- Mission, Vision and Values
Role of the Chairman and Chief Executive Officer
The roles of Chairman and Chief Executive Officer ('CEO') are held by
different people. There is a clear division of responsibilities, which
has been agreed by the Board and is formalised in a schedule of
responsibilities for each.
As Chairman, David Weymouth is responsible for setting the 'tone at the
top' and ensuring that the Board has the right mix of skills, experience
and development so that it can focus on the key issues affecting the
business and for leading the Board and ensuring it acts effectively. Our
CEO, Andy Golding, has overall responsibility for managing the Group and
implementing the strategies and policies agreed by the Board. A summary
of the key areas of responsibility of the Chairman and CEO, and how
these have been discharged during the year, are set out below and
overleaf.
Chairman's responsibilities Activities carried out in 2018
Chairing the Board and general meetings of the Company. The Chairman chaired all of the Board meetings held
in 2018 and the 2018 AGM.
Setting the Board agenda and ensuring that adequate The Chairman, in liaison with the Company Secretary,
time is available for discussion of all agenda items. set the annual calendar of Board business and the
agendas for the individual meetings. Time is allocated
for each item of business at meetings.
Promoting the highest standards of integrity, probity The Board received regular updates from its Committees
and corporate governance throughout the Company. on changes in corporate governance and its application
to the Company.
Ensuring that the Board receives accurate, timely The Chairman, in liaison with the Company Secretary
and clear information in advance of meetings. and the CEO, agreed the information to be distributed
to the Board in advance of each meeting.
Promoting a culture of openness and debate by facilitating The Chairman ran the meetings in an open and constructive
the effective contribution of all Non-Executive Directors. way, encouraging contribution from all Directors.
Ensuring constructive relations between Executive He regularly met with the Non-Executive Directors
and Non-Executive Directors and the CEO in particular. without management present so that any concerns could
be expressed.
Regularly considering succession planning and the The Board received regular updates from the Nomination
composition of the Board. and Governance Committee. Details of the Committee's
activities are explained in the Nomination and Governance
Committee report on pages 80 and 81.
Ensuring training and development needs of all Directors The Chairman, in liaison with the Company Secretary,
are met, and that all new Directors receive a full has reviewed Directors training requirements. Details
induction. of induction and training held during the year are
given on page 77.
Ensuring effective communication with shareholders The Chairman, along with the Board, and assisted by
and stakeholders. the Chief Executive Officer, Chief Financial Officer
and Investor Relations team, agreed a programme of
investor relations meetings. Details of meetings carried
out during the year are shown on page 78.
Chief Executive Officer's responsibilities
Andy Golding's responsibilities as CEO are to ensure that the Company
operates effectively at strategic, operational and administrative
levels. He is responsible for all the Group's activities; he provides
leadership and direction to encourage others to effect strategies agreed
by the Board; channels expertise, energy and enthusiasm; builds
individuals' capabilities within the team; develops and encourages
talent within the business; identifies commercial and business
opportunities for the Group, building strengths in key areas; and is
responsible for all commercial activities of the Group, liaising with
regulatory authorities where appropriate. He is responsible for the
quality and financial wellbeing of the Group, represents the Group to
external organisations and builds awareness of the Group externally.
An experienced Executive team, comprising specialists in finance,
banking, risk, legal, and IT matters assist the CEO in carrying out his
responsibilities. The biographies for the Executive team are set out on
page 70.
Executive Committee
The CEO chairs the Executive Committee ('ExCo'), whose members also
include the Chief Financial Officer, Group Chief Operating Officer,
Chief Risk Officer, Group General Counsel and Company Secretary, Group
Commercial Director, Chief Information Officer, Group Chief Credit
Officer and the Chief Internal Auditor. The ExCo is supported by a
number of Management Committees.
The purpose of the ExCo is to assist the CEO in the performance of his
duties, including:
-- The development and implementation of the strategic plan as approved by
the Board.
-- The development, implementation and oversight of a strong operating model
that supports the strategic plan.
-- The development and implementation of systems and controls to support the
strategic plan.
-- To review and oversee operational and financial performance.
-- To prioritise and allocate the Group's resources in accordance with the
strategic plan.
-- To oversee the development of a high performing senior management team.
-- To oversee the customer proposition and experience to ensure consistency
with the Group's obligation to treat customers fairly.
-- To oversee the appropriate protection and control of private and
confidential data.
The ExCo's activities during the year included:
-- Business review
-- Capital and funding
-- Human resources and succession planning
-- Governance, control and risk environment - current and forward-looking
-- System transformation
-- Monitoring target operating model progress
-- Mission, Vision and Values.
Senior Independent Director
Rod Duke is the Senior Independent Director ('SID'). His role is to act
as a sounding board for the Chairman and to support him in the delivery
of his objectives. This includes ensuring that the views of all other
Directors are communicated to, and given due consideration by, the
Chairman. In addition, the SID is responsible for leading the annual
appraisal of the Chairman's performance.
The SID is also available to shareholders should they wish to discuss
concerns about the Company other than through the Chairman and CEO.
Company Secretary
The Company Secretary, Jason Elphick, plays a key role within the
Company, advising on good governance and assisting the Board to
discharge its responsibilities, acting with integrity and independence
to protect the interests of the Company, its shareholders and employees.
Jason advises the Company to ensure that it complies with all statutory
and regulatory requirements and he works closely with the Chairman, CEO
and Chairs of the Committees of the Board so that Board procedures
(including setting agendas and the timely distribution of papers) are
complied with, and that there is a good communication flow between the
Board, its Committees, senior management and Non-Executive Directors.
Jason also provides the Directors with advice and support, including
facilitating induction programmes and training in conjunction with the
Chairman.
Effectiveness
Balance and independence
The effectiveness of the Board and its Committees in discharging their
duties is essential for the success of the Company. In order to operate
effectively, the Board and its Committees comprise a balance of skills,
experience, independence and knowledge to encourage constructive debate
and challenge to the decision-making process.
The Board comprises seven Non-Executive Directors including the Chairman
and two Executive Directors. All of the Non-Executive Directors
including the Chairman have been determined by the Board to be
independent in character and judgement and free from relationships or
circumstances which may affect, or could appear to affect, the relevant
individual's judgement. The independence of the Non-Executive Directors
is reviewed continuously, including formal annual review.
The size and composition of the Board is kept under review by the
Nomination and Governance Committee and the Board to ensure an
appropriate balance of skills and experience is represented. The Board
is satisfied that its current composition allows it to operate
effectively and that all Directors are able to bring specific insights
and make valuable contributions to the Board due to their varied
commercial backgrounds. The Non-Executive Directors provide constructive
challenge to the Executives, and the Chairman ensures that the views of
all Directors are taken into consideration in the Board's deliberations.
The Directors' biographies can be found on pages 68 and 69.
Non-Executive Directors terms of appointment
Non-Executive Directors are appointed for terms of three years, subject
to annual re -election by shareholders. The initial term may be renewed
up to a maximum of three terms (nine years). The terms of appointment of
the Non- Executive Directors specify the amount of time they are
expected to devote to the business, which is a minimum of two and half
days per month, calculated based on the time required to prepare for and
attend Board and Committee meetings, the AGM, meetings with shareholders
and training. Their commitment also extends to working such additional
hours as may be required in exceptional circumstances.
Non- Executive Directors are required to confirm annually that they
continue to have sufficient time to devote to the role.
Appointment, retirement and re-election of Directors
The Board may appoint a Director, either to fill a vacancy or as an
addition to the existing Board. The new Director must then retire at the
next AGM and is put forward for election by the shareholders. All other
Directors are put forward for re-election annually. In addition to any
power of removal conferred by the Companies Act, any Director may be
removed by special resolution, before the expiration of his or her
period of office and, subject to the Articles, another person who is
willing to act as a Director may be appointed by ordinary resolution in
his or her place.
Conflicts of interest
The Company's Articles set out the policy for dealing with Directors'
conflicts of interest and are in line with the Companies Act 2006. The
Articles permit the Board to authorise conflicts and potential conflicts,
as long as the potentially conflicted Director is not counted in the
quorum and does not vote on the resolution to authorise the conflict.
Directors are required to complete an annual confirmation including a
fitness and propriety questionnaire, which requires declarations of
external interests and potential conflicts. In addition, all Directors
are required to declare their interests in the business to be discussed
at each Board meeting. The interests of new Directors are reviewed
during the recruitment process and authorised, if appropriate, by the
Board at the time of their appointment. The Nomination and Governance
Committee also annually reviews conflicts of interest relating to
Directors.
The Group has also adopted a Conflicts of Interest Policy, which
includes a procedure for identifying potential conflicts of interest
within the Group.
No Director had a material interest in any contract of significance in
relation to the Group's business at any time during the year or at the
date of this report.
Directors' indemnities
The Articles provide, subject to the provisions of UK legislation, an
indemnity for Directors and Officers of the Group in respect of
liabilities they may incur in the discharge of their duties or in the
exercise of their powers, including any liabilities relating to the
defence of any proceedings brought against them which relate to anything
done or omitted, or alleged to have been done or omitted, by them as
Officers or employees of the Group. Directors' and Officers' liability
insurance cover is in place in respect of all Directors.
Directors' powers
As set out in the Articles, the business of the Company is managed by
the Board who may exercise all the powers of the Company. In particular,
save as otherwise provided in company law or in the Articles, the
Directors may allot (with or without conferring a right of renunciation),
grant options over, offer, or otherwise deal with or dispose of shares
in the Company to such persons at such times and generally on such terms
and conditions as they may determine. The Directors may at any time
after the allotment of any share but before any person has been entered
in the Register as the holder, recognise a renunciation thereof by the
allottee in favour of some other person and may accord to any allottee
of a share a right to effect such renunciation upon and subject to such
terms and conditions as the Directors may think fit to impose. Subject
to the provisions of company law, the Company may purchase any of its
own shares (including any redeemable shares).
Training and development
The Chairman ensures that all Directors receive a tailored induction on
joining the Board, with the aim of providing a new Director with the
information required to allow him or her to contribute to the running of
the Group as soon as possible. The induction programme is facilitated
and monitored by the Company Secretary to ensure that all information
provided is fully understood by the new Director and that any queries
are dealt with. Typically, the induction programme will include a
combination of key documents and face-to-face sessions covering the
governance, regulatory and other arrangements of the Group.
As senior managers, under the Senior Managers Regime operated by the PRA
and FCA, all Directors have had to maintain the skills, knowledge and
expertise required to meet the demands of their positions of
'significant influence' within the Bank. As part of the annual fitness
and propriety assessment, Directors are required to complete a
self-certification that they have undertaken sufficient training during
the year to maintain their skills, knowledge and expertise and to make
declarations as to their fitness and propriety. The Company Secretary
supports the Directors to identify relevant internal and external
courses to ensure Directors are kept up -to-date with key regulatory
changes, their responsibilities as senior managers and other matters
impacting on the business.
Information and support
The Company Secretary and the Chairman agree an annual calendar of
matters to be discussed at each Board meeting to ensure that all key
Board responsibilities are discharged over the year. Board agendas are
then distributed with accompanying detailed papers to the Board in
advance of each Board and Committee meeting. These include reports from
Executive Directors and other members of senior management. All
Directors have direct access to senior management should they require
additional information on any of the items to be discussed. The Board
and Audit Committee also receive further regular and specific reports to
allow the monitoring of the adequacy of the Group's systems and
controls.
The information supplied to the Board and its Committees is kept under
review and formally assessed on an annual basis as part of the Board
evaluation exercise to ensure it is fit for purpose and that it enables
sound decision-making.
There is a formal procedure through which Directors may obtain
independent professional advice at the Group's expense. The Directors
also have access to the services of the Company Secretary as described
on page 76.
Board evaluation
The Board undertakes an evaluation of its performance and that of its
Committees and individual Directors annually with an external review
every third year. The last externally facilitated review was conducted
in 2016. In 2018, the internal review concluded that the Board,
including its Committees, discharged its duties effectively; and that
the current Directors have an appropriate range of knowledge and
experience giving rise to open and effective challenge, scrutiny and
debate; and the structure of the governance arrangements works well. The
relationship between the Board and senior management is open and
transparent and is reflected in Board discussions. The Board was
satisfied that no individual or group of Directors dominated the
discussions or had undue influence in the decision-making process. The
review indicated that enhancements could be made to the induction and
succession planning process which are being addressed. An externally
facilitated Board evaluation will be undertaken during 2019.
Treasury operations
There are policies in place setting out the Group's approach to the
management of risks from treasury operations. Day-to-day responsibility
for management of the Group's treasury function is delegated to the
Assets and Liabilities Committee ('ALCO') which reports to the Risk
Committee.
Whistleblowing
The Group has established procedures by which employees may, in
confidence, raise concerns relating to possible improprieties in matters
of financial reporting, financial control or any other matter. The
Whistleblowing Policy applies to all employees of the Group and are
benchmarked against industry standards. The Audit Committee is
responsible for monitoring the Group's whistleblowing arrangements and
the policy. Where concerns have been raised, a detailed report is
provided on the investigation, actions taken, lessons learnt and changes
made as a result. The Chair of the Audit Committee has overall
responsibility for whistleblowing arrangements with oversight from the
Board.
The Group is confident that the arrangements are effective, facilitate
the proportionate and independent investigation of reported matters, and
allow appropriate follow-up action to be taken.
Relations with shareholders
Dialogue with shareholders
The Company has a dedicated Investor Relations function to liaise with
institutional investors and analysts. Updates on investor relations
activity and changes to the share register are regular items on the
Board agenda.
An ongoing dialogue with the key stakeholders continued throughout the
year on topics relating to the performance of the Group, including
strategy and new developments. In 2018, the Company engaged in active
discussion with shareholders and investors, both on an individual basis
and through attendance at investor conferences and events. Following
full year and interim results presentations, senior management undertake
results roadshows and meet with larger investors. The Investor Relations
team and management held a total of 130 meetings with individual
existing and potential investors during 2018.
A comprehensive plan of Investor Relations activity is in place for the
coming year. The Chairman, Senior Independent Director and other
Non-Executive Directors are available to discuss any matter stakeholders
might wish to raise and to attend meetings with investors and analysts.
In addition, shareholders are able to contact the Company through the
Investor Relations function or the Company Secretariat.
Annual General Meeting
The AGM will be held at the offices of Addleshaw Goddard LLP, 60
Chiswell Street, London EC1Y 4AG on 9 May 2019 at 11am. The Chairs of
each of the Committees of the Board will be present to answer questions
put to them by shareholders. Due to unforeseen circumstances, the Chair
of the Audit Committee was unable to attend the 2018 AGM. The Annual
Report and Accounts and Notice of the AGM will be sent to shareholders
at least 20 working days prior to the date of the meeting.
Shareholders are encouraged to participate in the AGM process, and all
resolutions will be proposed and voted on at the meeting on an
individual basis by shareholders or their proxies. Voting results will
be announced and made available on the Company's website, www.osb.co.uk.
Shareholders may require the Directors to call a general meeting other
than an AGM as provided by the Companies Act 2006. Requests to call a
general meeting may be made by members representing at least 5% of the
paid-up capital of the Company as carries the right of voting at general
meetings of the Company (excluding any paid-up capital held as treasury
shares). A request must state the general nature of the business to be
dealt with at the meeting and may include the text of a resolution that
may properly be moved and is intended to be moved at the meeting. A
request may be in hard copy form or in electronic form and must be
authenticated by the person or persons making it. A request may be made
in writing to the Company Secretary to the registered office or by
sending an email to company.secretariat@osb.co.uk. At any general
meeting convened on such request, no business shall be transacted,
except that stated by the requisition or proposed by the Board.
Nomination and Governance Committee Report
Dear Shareholder,
I am pleased to present the report of the Nomination and Governance
Committee.
Membership and meetings
The Committee met five times during 2018.
The members of this Committee are David Weymouth, Chairman of the Board,
myself (Rod Duke) and Mary McNamara.
We considered a number of items during 2018, with the main focus being
on recruiting a Non-Executive Director with the appropriate skills to
the Board. The Committee appointed Per Ardua(1) to assist with the
recruitment process. We examined the revised UK Corporate Governance
Code against our practices to ensure that we are compliant at the
earliest opportunity. We also reviewed the Bank's progress in achieving
the commitments set out in the Women in Finance Charter and various
diversity initiatives.
Further details on areas considered by the Committee are provided below.
Rod Duke
Chair of the Nomination and Governance Committee and
Senior Independent Director
14 March 2019
1. Per Ardua has no other connection with the Company.
Responsibilities
The specific responsibilities and duties of the Committee are set out in
its terms of reference which are available on our website,
www.osb.co.uk.
Composition of the Board and its Committees
The Committee conducted a review of the composition of the Audit,
Remuneration and Risk Committees and its own composition during 2018,
carefully considering the skills of the existing members and looking at
any skills gaps applicable to each Committee. During the year, David
Weymouth was appointed as a member of the Remuneration Committee.
In addition, the Committee discussed and considered the size of the
Board and its range of skills. It was determined that the Board would
benefit from an additional Non- Executive Director and a job
specification was drafted based on an audit of skills the Board
currently possessed and those that would add even more value. The brief
to Per Ardua was to include an equal number of male and female
candidates. From the list presented to the Committee, three candidates
were interviewed and the preferred candidate was chosen and recommended
to the Board for appointment. As a result, the Board appointed Sarah
Hedger to join the Board with effect from 1 February 2019.
Succession planning
The Committee considered both Board and Executive level succession
planning during 2018, including ways in which skills could be developed.
As a result Executives are regularly invited to attend Board and
Committee meetings. The Committee also received updates on the
performance of the wider employee population, particularly the 2018
Primary Talent Group.
Diversity
Our Bank recognises and embraces the benefits of having a diverse Board
and workforce, and sees diversity at Board level as an essential element
in maintaining a competitive advantage. We believe that a truly diverse
Board and workforce will include and make good use of differences in the
skills, regional and industry experience, age, background, race, gender
and other distinctions between people. The Board recognises for itself
that diversity is the key to better decision-making and avoiding 'group
think'.
These differences are considered in determining the optimum composition
of the Board and, where possible, will be balanced appropriately. All
Board appointments are made on merit, in the context of the skills,
experience, independence and knowledge which the Board as a whole
requires to be effective.
The Committee regularly reviews diversity initiatives including its
annual review of the Equality and Diversity Policy. The Board remains
committed to the Women in Finance Charter and has introduced measurable
objectives with our aim continuing to be that 30% of senior management
positions within the Group's UK population will be undertaken by female
employees by the end of 2020. Currently 28% of senior management and 44%
of our Board are female, placing us in the top 10 of the FTSE 250 for
gender diversity. Our Bank has also appointed a Diversity Champion to
promote a series of diversity initiatives such as our commitment to
those with a disability, mental health in the workplace and unconscious
bias training. The Group achieved Disability Confident Employer Level 2
status during 2018.
Further details relating to diversity and inclusion are set out on page
58.
Governance
The Committee reviewed changes in the regulatory landscape, particularly,
the changes to the UK Corporate Governance Code.
Activities during 2018
In last year's report the Committee identified nine key priorities.
A summary of actions taken and outcomes are set out in the table below.
Objective Action taken
Continue to focus on fulfilling our commitment to A mandatory requirement was introduced that, for senior
the Women in Finance Charter roles, at least one credible female candidate must
be interviewed face to face.
Oversee the development and implementation of our The Committee reviewed the action plan for Gender
action plan for Gender Pay Gap Reporting Pay Gap Reporting.
Oversee a revised approach to cultural engagement The Mission, Vision and Values was launched at an
within the Group all-employee three-day event during September 2018.
Corporate governance reform The Committee receives regular updates on corporate
governance changes in the industry, including the
steps being taken by the Bank to ensure compliance
with any relevant changes.
Corporate purpose and sustainability The Committee reviewed the Environmental Policy and
the actions being taken to enable the Bank to continue
to operate sustainably.
Board and Committee succession planning The Committee reviewed the skills and mix of the Board
and as a result a new Non-Executive Director has been
appointed. The membership of Committees is periodically
reviewed to ensure continuity.
Embedding diversity initiatives The Bank has raised awareness of the various initiatives,
which have been put in place to support diversity.
Such initiatives relate to disabled facilities, mental
health awareness workshops, the introduction of a
Women's Networking Forum and unconscious bias training.
Regular updates are provided to the Committee on the
progress of diversity initiatives.
Board and Committee effectiveness The Board and its Committees completed an internal
effectiveness evaluation during the last quarter of
2018 with very positive results overall. An external
evaluation of the Board and its Committees will be
undertaken during 2019.
Oversee development of the talent pipeline Members of the Committee met with the 2018 Primary
Talent Group ('PTG') to understand the level of support
provided to them and what other support would be beneficial.
The Committee also received periodic reports of the
activities undertaken by the PTG.
Priorities for 2019
The Committee's priorities for 2019 are:
-- Consider the approach to Board and Executive succession planning, and the
extent to which that planning incorporates a range of diversity criteria
beyond gender diversity.
-- Consider further training and development needs for Committee members.
-- Provide oversight of how the Mission, Vision and Values are being
embedded.
-- Corporate governance reform.
-- Embedding of diversity initiatives and reduction of the gender pay gap.
-- External Board and Committee effectiveness review.
-- Oversee progress with the Group's purpose and sustainability.
-- Oversee the development of the talent pipeline.
Audit Committee Report
Dear Shareholder,
I am pleased to present the report of the Audit Committee for 2018.
During the year, the Committee continued to focus on areas of
significant judgement in the financial statements as set out in the
report below.
The Committee also completed a competitive tender process for the
external audit of the Group from 2019, resulting in Deloitte LLP being
selected as external auditor for the year ended 31 December 2019.
Membership and meetings
The Committee met five times in 2018. The members of the Committee,
namely Graham Allatt, myself and Margaret Hassall are Independent
Non-Executive Directors. As Chair of the Committee, I, Eric Anstee, have
a wealth of recent and relevant financial and accounting experience in
financial services and, taken as a whole, the Committee has an
appropriate balance of skills, including recent and relevant financial
experience. In addition to members, standing invitations are extended to
the Executive Directors, Chief Risk Officer, Chief Internal Auditor and
Group Head of Compliance and Conduct Risk, all of whom attend meetings
as a matter of practice. Other non -members may be invited to attend all
or part of any meeting as and when appropriate.
Margaret Hassall joined the Committee at the beginning of the year and
Andrew Doman left in May 2018.
The Company Secretary acts as Secretary to the Committee. The Chief
Internal Auditor and the external auditor attended all meetings and also
meet in private with the Committee; they also have regular contact with
the Chair throughout the year. I discuss and agree the agenda with the
Chief Financial Officer and Chief Internal Auditor in advance of each
meeting and receive a full briefing on the key agenda items.
Further details on the activities of the Committee during the year and
how it discharged its responsibilities are provided in the report below.
I would like to thank our outgoing auditor, KPMG LLP, for their service
over the years and welcome our incoming external auditor, Deloitte LLP.
Eric Anstee
Chair of the Audit Committee
14 March 2019
Responsibilities
The primary role of the Committee is to assist the Board in overseeing
the systems of internal control and external financial reporting across
the Group. The Committee's specific responsibilities are set out in its
terms of reference, which are reviewed at least annually. These are
available on the Company's website, www.osb.co.uk, and cover external
and internal audit, financial and narrative reporting, compliance,
whistleblowing, fraud and internal controls.
In addition, the Chair of the Audit Committee is available to meet with
the Company's investors on request, in accordance with the Financial
Reporting Council's Stewardship Code.
Activities during 2018
The principal activities undertaken by the Committee during the year are
described below.
Significant areas of judgement considered by the Committee
The following significant accounting judgements were considered by the
Committee in relation to the 2018 Annual Report and financial
statements. In its assessment, the Committee considered and challenged
reports from management prior to both the interim and full year results,
explaining each area of judgement and management's recommended approach.
The Committee also received reports from the external auditor setting
out its views on the accounting treatment and judgements underpinning
the financial statements.
Loan book Expected Credit Losses
The Group conducts individual impairment assessments for high value
loans (GBP0.5m) which are more than three months in arrears, estimating
future cash flows, including the cost of obtaining and selling
collateral, likely sale proceeds and any rental income prior to sale.
All assets without an individual impairment assessment are assessed
under a modelled expected credit loss ('ECL') approach, which are
unbiased and probability weighted using a number of macroeconomic
scenarios. ECL is measured on either a 12 month (stage 1) or lifetime
(stage 2) basis depending on whether a significant increase in credit
risk has occurred since initial recognition or where an account meets
the Group's definition of default (stage 3).
The modelled ECL calculation is a product of an individual loan's
probability of default ('PD'), exposure at default ('EAD') and loss
given default ('LGD'), discounted at the effective interest rate
('EIR'). The ECL drivers of PD, EAD and LGD are modelled at an account
level.
Key estimates and assumptions which feed modelled ECL calculations
relate to (1) macroeconomic scenarios which are probability weighted (2)
significant increase in credit risk ('SICR') thresholds (3) forced sale
discount rates (4) time to sale assumptions (5) propensity to go to
possession given default rates ('PPD') (6) sale cost estimates (7) cure
criteria utilised to transition accounts from stage 3 to stage 2 or 1.
The Committee received and challenged reports from management prior to
each reporting date, explaining the approach taken to provisioning and
the resulting changes in provision levels during the period. The
Committee assessed the appropriateness of proposed enhancements to the
methodologies, judgements and estimates underpinning expected credit
loss calculations.
During the year, management implemented an enhanced probability of
default model, which replaced one of four PD models utilised by the
Group, enhanced the definition of default criteria to more closely align
with industry and regulatory best practice and adjusted the Group's
stage 3 cure criteria, whilst enhancing the significant increase in
credit risk criteria. The Committee reviewed and challenged the
appropriateness of these changes prior to implementation.
Throughout the year, the Committee reviewed proposed updates to the
macroeconomic scenarios utilised within ECL calculations. In particular,
the Committee debated management's proposals to include an additional
no-deal disorderly Brexit macroeconomic scenario, to support the
existing upside, base and other downside scenarios, and changes to the
probability weightings attached to each scenario.
The Committee reviewed additional information by loan book during the
year including provision coverage ratios, assumed probability of default,
loss given default and loan to value ratios for loans three months or
more in arrears; and impaired balances to help with its assessment of
the reasonableness of provisions. The Committee asked the Risk Committee
to review and provide advice on the collective provision methodologies
and assumptions and to review the 'top 20' impaired loans for the half
year and year end. At least three members of the Committee were also
members of the Risk Committee throughout 2018 and as such received
additional detailed credit information on the loan book throughout the
year.
The Committee is satisfied that the approach taken and judgements made
were reasonable. The Committee also received regular reports from
management on the Group's compliance with IFRS 9: Financial Instruments,
which became effective on 1 January 2018. The reports covered the
classification and measurement of financial instruments and the
determination of impairment provisions and a hedging update. The key
focus was on IFRS 9 models, interpretation of results, key assumptions
and judgements, scenario and macroeconomic variables used within models,
the results of the 2018 parallel run and the proposed ongoing business
as usual model as well as model governance, controls and procedures.
Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant
judgement is required in calculating their effective interest rate
('EIR'), using cash flow models which include assumptions on the likely
macroeconomic environment, including HPI, unemployment levels and
interest rates, as well as loan level and portfolio attributes and
history used to derive prepayment rates, the probability and timing of
defaults and the amount of incurred losses. The EIRs on loan books
purchased at significant discounts are particularly sensitive to the
prepayment and default rates derived as the purchase discount is
recognised over the expected life of the loan book through the EIR. New
defaults are modelled at zero loss (as losses will be recognised in
profit and loss as impairment losses and therefore have the same impact
on EIR as prepayments). Incurred losses at acquisition are calculated
using the Group's collective provision model. The Committee reviewed and
challenged reports from management before each reporting date on the
approach taken. Particular focus was given to loan books where
performance varied from expectation. The Committee reviewed a comparison
of actual cash flows to those assumed in the cash flow models by book to
challenge management's assessment of the need to update cash flow
projections and adjust carrying values accordingly. In addition, the
Committee reviewed sensitivity analysis on the potential impact of
Brexit-related downside economic scenarios on future prepayment and
default rates and expected cash flows. Based on this work, the Committee
is satisfied that the approach taken and judgements made were
reasonable.
Effective interest rate
A number of assumptions are made when calculating the effective interest
rate for newly originated loan assets. These include their expected
lives, likely redemption profiles and the anticipated level of any early
redemption charges ('ERCs'). Certain mortgage products offered by the
Bank include significant directly-attributable net fee income, in
particular Buy-to-Let, and/or those that revert to the standard variable
rate ('SVR') after an initial discount or fixed period. Judgement is
used in assessing the expected rate of prepayment during the discounted
or fixed period of these mortgages and the expected life of those that
prepay. The Group uses historical experience in its assessment.
Judgement is also used in assessing whether and for how long mortgages
that reach the end of the product term stay on SVR. The most significant
area of judgement is the period spent on SVR. Prior to 2018, the Group
prudently assumed no period on SVR before the borrower refinanced onto a
new product or redeemed until a consistent behavioural trend could
emerge following a new enhanced broker-led retention programme. At the
2018 year end, the Committee concluded that there was sufficient
behavioural data to incorporate a period spent on SVR in the effective
interest rate. This was based on a careful consideration of actual
behavioural data post the enhanced programme and the potential impact of
the economic and regulatory outlook and additional planned changes to
the programme on future behaviour. The Committee also reviewed and
challenged other assumptions used in the EIR calculations, in particular
the redemption profile over which net fee income is spread and expected
ERCs for fixed rate products. The Committee received and reviewed
sensitivity analysis for key assumptions. Based on this work, the
Committee is satisfied that the approach taken and judgements made were
reasonable.
Further details of the above significant areas of judgement can be found
in note 2 to the financial statements.
In addition, the Committee reviewed the Group's approach to hedge
accounting and received reports on the effectiveness of the Group's
macro-hedging throughout the year.
The Committee also considered the results of management's regular
reviews of the amortisation profile of fair value adjustments on hedged
assets associated with cancelled swaps against the roll-off of the
underlying legacy back book of long-dated fixed rate mortgages. The
Group accelerated the amortisation of fair value adjustments on hedged
assets in line with the mortgage asset run-off, due to faster than
expected prepayments.
In addition, the Committee reviewed the accounting treatment for the
exceptional cost of fair valuing the option to acquire the JV partners'
interest in the Heritable Development Finance business from our joint
venture partners.
Fair, balanced and understandable
The Committee considered, on behalf of the Board, whether the 2018
Annual Report and financial statements taken as a whole are fair,
balanced and understandable, and whether the disclosures are
appropriate. The Committee reviewed the Group's procedures around the
preparation, review and challenge of the Annual Report and the
consistency of the narrative sections with the financial statements and
the use of alternative performance measures and associated disclosures.
Following its review, the Committee is satisfied that the Annual Report
is fair, balanced and understandable, and provides the information
necessary for shareholders and other stakeholders to assess the Group's
position and performance, business model and strategy, and has advised
the Board accordingly.
Pillar 3 disclosures - The Committee approved the Group's Pillar 3
regulatory disclosures for publication on the Group's website, following
a review of the governance and control procedures around their
preparation.
Internal Audit
The Chief Internal Auditor and her team is supported by a panel of
external accountancy firms who provide expert resource, when requested,
on specific internal audits.
The primary role of Internal Audit is to help the Board and senior
management to protect the Group's assets, reputation and sustainability.
It assists the Group in accomplishing its objectives by bringing a
systematic and disciplined approach to evaluate and improve the
effectiveness of the risk management, control and governance processes.
The Internal Audit Charter, which formally defines internal audit's
purpose, authority and responsibility, was approved by the Committee in
December 2018. The Committee also approved the annual Internal Audit
Plan, which was developed, based on a prioritisation of the audit
universe using a risk-based methodology, including input from senior
management and the Committee. A written report is prepared following the
conclusion of each Internal Audit engagement and distributed to the
Committee and senior management. Responsibility for ensuring appropriate
corrective action is taken, lies with management. The Internal Audit
function follows up on engagement findings and recommendations until
remedial actions have been completed. The Committee reviewed in detail
high and medium findings within internal audit reports and monitored the
associated management actions until closed.
The Committee carries out an annual review of the effectiveness of the
Internal Audit function. In 2018 this was facilitated by a survey
completed by Committee members, certain executives and the external
auditors who had interacted with the Internal Audit function during the
year. Following the review, the Committee was satisfied that the
Internal Audit function operated effectively during the year.
Systems of internal control and risk management
The Committee received regular reports from the Internal Audit function
during 2018, which included progress updates against the Internal Audit
Plan, the results of audits undertaken and any outstanding audit action
points. The Committee approved the annual review of the Compliance Risk
Assessment and Assurance Plan and received regular reports from the
Group's Compliance function. The Committee used the Internal Audit and
Compliance Reports as the basis for its assessment of the effectiveness
of the Group's system of internal controls and risk management. The
Committee also received a report on the effectiveness of the Group's
system of controls from the CEO, which was based on a self-assessment
process completed by senior managers and executives in the Group.
The Committee received and reviewed reports from management on the
status of the substantiation of balance sheet general ledger accounts
prior to the reporting date.
The Committee reviewed and approved a number of policies following their
annual update, including: anti-bribery and corruption, data protection,
data retention and record management, fraud, sanctions, whistleblowing
and anti-money laundering and counter terrorist financing. The Committee
received reports on fraud prevention arrangements, fraud incidents,
whistleblowing and an annual report from the Group's Money Laundering
Reporting Officer during the year.
The Committee also received regular updates on data governance and
controls as the Group continued to enhance its data governance
arrangements in connection with its planned application for an Internal
Ratings-Based ('IRB') model for capital requirements.
External auditor
The Committee is responsible for overseeing the Group's relationship
with its external auditor, KPMG LLP ('KPMG'). This includes the ongoing
assessment of the auditor's independence and the effectiveness of the
external audit process, the results of which inform the Committee's
recommendation to the Board relating to the auditor's appointment
(subject to shareholder approval) or otherwise.
Appointment and tenure
KPMG was appointed as the first external auditor of the Group for the
period ended 31 December 2011. Prior to that date it fulfilled the
external audit function for Kent Reliance Building Society from the
period ended 31 December 2010. The current lead audit partner, Pamela
McIntyre, has been in role since the 2016 audit. The Audit Committee
confirms that the Group has complied with the Statutory Audit Services
for Large Companies Market Investigation (mandatory use of competitive
tender processes and Audit Committee Responsibilities) Order 2014, which
requires FTSE 350 companies to put their statutory audit services out to
tender no less frequently than every ten years.
New EU legislation adopted by the UK in 2016 set a maximum audit tenure
of 20 years and also requires a tender at least every ten years. The new
legislation is effective for financial periods commencing on or after 17
June 2016. Against this backdrop, the Group put the external audit
contract out for tender for its 2019 financial year. There are no
restrictive contractual provisions limiting the Company's choice of
auditor.
A formal tender process was launched in the fourth quarter of 2017 with
a desk top review of audit firms, focusing on expertise and experience
in FTSE 350 audits in financial services. A number of firms were then
invited to take part in a request for information ('RFI') process in
December 2017, followed by face-to -face meetings between the proposed
lead audit partners and senior managers and a sub-set of the Committee
in early 2018. The Committee then selected a shortlist of two firms,
PricewaterhouseCoopers LLP and Deloitte LLP, in March 2018 to take
through to a formal request for proposal ('RFP') process. As a result of
the RFP process Deloitte LLP was selected as external auditor for the
year ending 31 December 2019.
Effectiveness
The Committee assesses the effectiveness of the external audit function
on an annual basis. In 2018, the review was facilitated through a survey
completed by members of the Committee, certain Executive Directors and
other key employees who had significant interaction with the external
audit team during the year. The survey assessed the effectiveness of the
lead partner and audit team, the audit approach and execution, the role
of management in the audit process, communication, reporting and support
to the Committee as well as the independence and objectivity of the
external auditor. The assessment concluded that the external audit
process was effective throughout 2018.
Non-audit services
The engagement of the external auditor to provide non-audit services to
the Group could impact the assessment of its independence and
objectivity. The Group has therefore established a policy governing the
use of the external auditor for non-audit services. The policy specifies
prohibited and approved permitted services (as detailed in the table on
page 86 for 2018) and sets the framework within which permitted
non-audit services may be provided. Prohibited services comprise
activities that are generally perceived to involve the auditor making
judgements or decisions that are the responsibility of management.
The Group's policy governing the use of the external auditor for non-
audit services was updated in 2017 and 2018 to comply with new EU
statutory audit market reform legislation adopted in the UK.
Restrictions on the nature of permissible non-audit services became
effective for financial periods commencing on or after 17 June 2016.
These included certain restrictions on the use of the statutory auditor
for tax compliance and advice. Accordingly, the Group ceased using KPMG
for tax compliance or advice after 31 December 2016.
The Group maintains active relationships with several other large firms
and any decision to appoint the external auditor for non-audit services
is taken in the context of its understanding of the Group, which can
place it in a better position than other firms to undertake the work and
includes an assessment of the cost-effectiveness and practicality of
using an alternative firm.
The new EU statutory audit market reform legislation adopted in the UK
also applies a cap on permissible non -audit services of 70% of the
preceding three-year average of audit fees. This is applicable for
financial periods commencing on or after 17 June 2019.
The Committee pre-approved a number of permitted services in 2018,
including interim profit verifications and the half year review. The
Committee also pre- approved other permitted non-audit services subject
to an overall threshold of 50% of the final cost of 2018 Group annual
audit services and subject to any single item above GBP100,000 being
pre-agreed with the Committee Chair. The Committee regularly reviews a
schedule of year-to-date non-audit services.
The fees paid to the external auditor in respect of non-audit services
during 2018 totalled GBP135,000 representing 17% of 2018 Group audit
services of GBP814,000 (2017: GBP151,000 representing 19% of 2017 Group
audit services of GBP816,000) and are detailed in the table below.
Group Group
2018 2017
GBP'000 GBP'000
Fees payable to the Company's auditor for the audit
of the Company's annual accounts 626 638
Fees payable to the Company's auditor and its associates
for other services:
Audit of the accounts of subsidiaries 188 178
Audit-related assurance services 95 96
Tax compliance services 9 8
Other assurance services 31 47
Prohibited services Approved permitted services
Book-keeping and preparing accounting records and General accounting advice on the application of IFRS
financial statements and training support
Financial information systems design and implementation. Regulatory advice and reporting tools
Internal control or risk management procedures relating
to financial information design or implementation
Valuation services, including those in connection Comfort letters, accounting opinions as required by
with actuarial or litigation support services the regulator, FLS/TFS net lending assurance opinions,
agreed upon procedures in relation to securitisations
HR and payroll services Other audit-related services; interim profit verification;
half year review
Services linked to the financing, capital structure OSBI tax audit required under the Indian Income Tax
and allocation and investment strategy of the Company Act
other than assurance services in relation to the financial
statements such as comfort letters
Promoting, dealing in or underwriting shares in the Such other activities as may be agreed by the Committee
Company from time to time
Legal services with respect to the provision of general
counsel, negotiating on behalf of the audit entity
and acting in an advocacy role in the resolution of
litigation or litigation support
Internal audit services
Tax services, including tax compliance and advice
Services that play any part in the management or decision-making
of the Company
Remuneration services such as quantum of remuneration
package or measurement criteria for a Director in
key management position
Restructuring services in relation to matters that
are material to the financial statements
Included within the audit of the Bank and Group accounts is GBP150k
(2017: GBP165k) relating to the audit of IFRS 9. Other assurance
services in 2018 include a review of data submitted to the Bank of
England under the TFS and a review of the OSB India Private Limited
financial statements as required by Indian income tax rules.
The Committee's assessment of the external auditor's independence in
2018 took into account the non-audit services provided during the year,
and confirmations given by KPMG as to its continued independence at
various stages in the year.
Training
The Committee undertook a significant amount of training during the year,
including making extensive use of the Audit Committee Institute and
training programmes run by the major accountancy firms. The members of
the Committee attended seminars and update meetings held by the
Financial Reporting Council. In addition, Committee members attended a
number of executive level Committee meetings and met with key staff
during the year to increase their knowledge and understanding of the
business.
Effectiveness
The Committee formally considers its effectiveness annually. In 2018,
the assessment was facilitated using a survey completed by members of
the Committee. The review concluded that the Committee operated
effectively throughout 2018 with no significant improvements required.
Risk Committee Report
Dear Shareholder,
I am pleased to present the report of the Risk Committee.
The Risk Committee met seven times in 2018. The members of this
Committee are myself (Graham Allat), Eric Anstee, Margaret Hassall, Mary
McNamara and April Talintyre. Only members of the Committee are entitled
to attend meetings however, the Chief Risk Officer ('CRO'), Chief
Executive Officer ('CEO') and Group Chief Credit Officer ('CCO') have
standing invitations to the Committee, unless the Chairman of the
Committee informs any of them that they should not attend a particular
meeting or discussion.
The Committee actively challenged the Group's performance against the
Board approved risk appetite, ensuring appropriate and timely
consideration was given to business, economic and regulatory factors
impacting the Group's risk profile. The Committee maintained oversight
of the Group's risk management framework to ensure that it remained fit
for purpose to support the Group's strategic growth objectives.
The Committee assessed and recommended for approval by the Board key
regulatory submissions including the Internal Capital Adequacy
Assessment Process ('ICAAP'), the Group Recovery Plan and the Internal
Liquidity Adequacy Assessment Process ('ILAAP'). In discharging this
responsibility, the Committee focused on risk quantification techniques,
underlying assumptions and the resulting risk assessment.
The Committee retains oversight of the strategic risk-based initiatives,
including Internal Ratings-Based (IRB), operational resilience and data
enhancement programme.
Further information on the role and activities of the Committee is
provided in the following Report.
Graham Allatt
Chair of Risk Committee
14 March 2019
Responsibilities
The primary objective of the Committee is to support the Board in
discharging its risk oversight and governance responsibilities. In
particular, the Committee enables the Board to:
-- Set a clear tone from the top in relation to a risk-based culture which
fosters individual and collective accountability for risk management.
-- Continuously review, challenge and recommend enhancements to the Group's
risk management framework.
-- Ensure adequacy of how the Group organises and resources its risk
management and oversight functions across first and second line
functions.
-- Actively assess performance against risk appetite and challenge
management to ensure that the Board's strategic, business and regulatory
objectives are not put at unacceptable levels of risk.
The Committee's specific responsibilities are set out in its terms of
reference, which are available on the Company's website at
www.osb.co.uk.
Activity during 2018
In 2018, the Group continued to enhance and further integrate its
Strategic Risk Management Framework (SRMF), which represents the
overarching framework established to manage its risk profile in line
with the Board strategy and risk appetite. The detailed overview of the
SRMF is provided in the Group's Pillar 3 Disclosures. The key areas of
the Committee's focus during 2018 are outlined below.
Risk appetite
The Committee played an active role is shaping and assessing the design
of the Group's risk appetite in the context of economic and business
outlook and uncertainties, the strategic growth agenda of the Group and
regulatory developments. The Committee members held a focused risk
appetite workshop in which risk appetite statements, risk metrics and
guiding limits and triggers were discussed and challenged prior to
recommendation to the Board for approval. The Committee sought
independent business and economic insights to inform and validate the
risk appetite. The Committee also ensured that the proposed risk
appetite was subject to appropriate alignment to the Group's strategic
agenda, business plans and stress testing capabilities.
The Committee also reviewed the Group's position against risk appetite
across all principal risks and escalated issues to the Board where
appropriate.
Credit risk
The Committee has monitored the performance of the Group loan book on
aggregated and asset class sub-segment levels by assessing the key
indicators of credit quality, security coverage, affordability and
borrower risk profile. The Committee also assessed forward-looking
credit risk indicators in the form of bureau data on customer credit
scores, mover alerts and indebtedness, business and economic early
warning indicators.
The Committee challenged and approved updates to policies including the
Group Lending Policy, the Arrears, Repossessions and Forbearance
Policies and the Loan Impairment Provisioning Policy. The Committee also
exercised oversight over credit risk models and provided an appropriate
level of challenge in relation to model construction and validation to
ensure that the models are appropriate and robust. The Committee has
also directed management on how to monitor model performance.
During 2018, the Committee oversaw and was involved in the Group making
further developments to model governance, particularly in light of the
IRB programme. The Committee reviewed and approved methodologies
underpinning impairment calculations on collectively assessed accounts
under IAS 39 and also reviewed and approved key judgement and estimate
assumptions which feed IFRS 9 expected credit loss calculations. The
Committee also assessed and approved the Group's provision adequacy
levels throughout the year.
Market risk and liquidity risk
Market risk and liquidity risk are continually monitored by the Assets
and Liabilities Committee ('ALCO') which reports to the Committee. The
Committee reviewed ALCO's regular assessments of the UK macroeconomic
environment and potential impacts on the Group's assets and liquidity.
The Committee undertook an extensive assessment of the ILAAP prior to
submission to the Board for approval. Key areas of Committee focus was
in relation to scenarios, funding assumptions under stress and
calibration of liquidity and funding risk appetites.
Solvency risk and ICAAP
The Committee was involved with the design and approval of appropriate
macroeconomic scenarios to be used in the Group's ICAAP. The ICAAP
demonstrates how the Group would manage its business and capital during
adverse macroeconomic and idiosyncratic stresses. The Committee assessed
the results of all the risk-based capital assessments and stress testing
results before finally recommending the full ICAAP document to the Board
for approval.
The Committee also reviewed and challenged the Group Capital Plan and
monitored total capital and CET1 forecasts throughout the year ensuring
risks were understood and managed appropriately.
Operational risk
The Committee received reports on operational risks at each of its
meetings. The reports covered risk incidents that had arisen to allow
the Committee to assess management's response and remedial action
proposed. The reports also covered key risk indicators ('KRI'), which
can be quantitative or qualitative and provided insights regarding
changes in the Group's operational risk profile.
Although there were operational incidents during the course of 2018, the
Committee requested a detailed analysis of incidents to further
understand any causes and trends. The Committee was satisfied that
actions taken were appropriate and that the control of operational
incidents continued to improve.
The Committee reviewed and commented on the Group-wide risk and control
self-assessment exercise and an enhanced Operational Risk Management
Framework.
Compliance and regulatory risk
The Committee received reports covering compliance and financial crime
KRIs, which can be quantitative or qualitative and provide insights
regarding changes in the Group's compliance and regulatory risk profile.
The Committee reviewed the Compliance and Financial Crime Target
Operating Model. The Committee also assessed and recommended
enhancements to the compliance and financial crime risk appetite before
recommending it for approval by the Board.
Other risk types
The Committee reviewed the Group profiles of conduct risk, reputational
risk and business and strategic risk against their respective risk
appetites.
Recovery Plan
The recovery plan process is designed to ensure that in a time of stress
the Group has a credible recovery plan that can be implemented in a
timely manner. The Committee reviewed and commented on the proposed set
of recovery options within its plan.
Risk Committee - key responsibilities
Risk appetite and assessment
-- Advise the Board on overall risk appetite, tolerance and strategy
-- Review risk assessment processes that inform the Board's decision-making
-- Consider the Group's capability to identify and manage new risks
-- Advise the Board on proposed strategic transactions, including
acquisitions or disposals, ensuring risk aspects and implications for
risk appetite and tolerance are considered
Risk monitoring and framework
-- Review credit risk, interest rate risk, liquidity risk, market risk,
compliance and regulatory risks, solvency risk, conduct risk,
reputational risk and operational risk exposures by reference to risk
appetite
-- Challenge and endorse the Strategic Risk Management Framework
-- Provide challenge and oversight to the ICAAP framework
-- Monitor actual and forecast risk and regulatory capital positions
-- Recommend changes to capital utilisation
-- Provide challenge and oversight to the ILAAP framework
-- Monitor the actual and forecast liquidity position
-- Review reports on risk appetite thresholds, identify where a risk of a
material breach of risk limits exists and ensure proposed actions are
adequate
-- Provide challenge and oversight to the Recovery Plan framework
CRO and risk governance structure
-- Consider and approve the remit of the risk management function
-- Recommend to the Board the appointment and removal of the CRO
-- Review promptly all reports of the CRO
-- Review and monitor management's responsiveness to the findings of the CRO
-- Receive reports from the Assets and Liabilities and Risk Management
Committees
Directors' Remuneration Report
Annual Statement by the Chair of the Remuneration Committee
Dear Shareholder,
I am pleased to present the 2018 Directors' Remuneration Report which
sets out details of Directors' remuneration in respect of 2018 and how
we intend to implement the Policy in 2019.
Overview of 2018 performance
The Bank has continued to deliver strong financial and operational
performance in 2018. Underlying pre-tax profits grew by 15% to GBP193.6m
and the loan book grew by 23% to GBP9.0bn whilst delivering a strong net
interest margin at 3.04% and cost to income ratio of 28%.
The financial growth was achieved whilst maintaining a strong focus on
our customers and employees. Customer Net Promoter Score (NPS) was
improved to an outstanding +63 and the 2018 employee engagement survey
placed the Bank in the Sunday Times 100 Best Companies to Work For list.
The Bank has also developed its operations during the year including the
launch of new specialist products in the residential segment and the
launch of the InterBay Asset Finance business with the first deals being
funded in October 2018.
Incentive outcomes for 2018
The 2018 Executive Bonus Scheme was based 90% on the Business Balanced
Scorecard, which measures corporate performance against financial,
customer, quality and staff metrics and 10% on personal objectives.
Targets for each measure were set at the start of the year and were
assessed by the Committee following the end of the financial year.
There was strong performance across the 2018 Scorecard with many of the
maximum targets being met including those for profit, net loan book
growth, customer NPS, levels of complaints, number of high severity
operational incidents and employee engagement. There was, however, room
for improvement under the employee and broker NPS metrics. Alongside the
excellent performance against individual targets, the Committee
determined that 91.75% and 91.25% of the bonus was earned by both the
Chief Executive Officer and Chief Financial Officer respectively. Full
details are set out on pages 100 to 103. As in previous years, 50% of
this award will be deferred into shares for a three-year period.
The 2016 Award under the Performance Share Plan (PSP) will vest in March
2019 at 50% of maximum based on performance over the three-year
performance period ending on 31 December 2018. Given the strong
financial performance over this period, OSB has met the Earnings Per
Share (EPS) growth target in full, however, given recent weakness in our
share price (and the relatively high share price three years ago, from
where our Total Shareholder Return (TSR) performance was based) the TSR
element will lapse.
Overall the Committee is comfortable that there has been a clear and
strong link between reward and performance and that discretion should
not be exercised to adjust the incentive outcome.
Implementation of Policy in 2019
The Committee is comfortable that the current Policy is operating
effectively and as such there are only minor changes to its proposed
implementation in 2019.
The CEO's salary will be increased by 3.03% to GBP520,000 and the CFO's
salary will be increased by 3.5% to GBP350,300. This is in line with the
average salary increases provided to the wider employee population.
There are no changes to pension or benefits.
The 2019 annual bonus will continue to be based 90% on the Business
Balanced Scorecard (50% based on financial measures) and 10% on personal
performance. The Committee has reviewed the metrics and these will
largely remain the same, however the portion based on the Common Equity
Tier One (CET1) ratio will be removed with a corresponding increase in
weighting on the other financial metrics. Maintaining the CET1 ratio
will continue to be a financial underpin to the payment of any bonus.
PSP awards of 150% of salary will be made to the Executive Directors in
2019 with performance being measured over the period to 31 December 2021
based on stock market out-performance (TSR, 40% weighting), EPS growth
(40% weighting) and return on equity (ROE) (20% weighting). As for the
2018 Award, at the time of vesting the Committee will assess whether the
formulaic vesting outcome is aligned with the underlying performance,
risk appetite and individual conduct over the period.
Given the current growth expectations as the Company matures, and in
light of the prevailing market conditions, the EPS targets will require
5% p.a. growth for threshold vesting, rising to 10% p.a. for full
vesting. This will be measured from the 2018 EPS which outperformed
expectations. The TSR and ROE targets remain unchanged. The Committee is
comfortable that these provide the appropriate stretch, taking into
account the business plan, external operating environment and market
expectations.
Consideration of shareholder views and response to the new UK Corporate
Governance Code
The Committee undertook extensive engagement with shareholders during
the review of the Policy in the lead-up to its approval at the 2018 AGM.
We were pleased that shareholders were generally supportive with 83.71%
voting in favour. However, we recognise that 16.29% of shareholders were
not supportive. During 2018, the Committee has engaged with shareholders
to understand their concerns, which related to the increase in the
incentive opportunity last year. We will continue to ensure that the
additional opportunity will be subject to appropriately stretching
performance conditions.
The Committee has also considered the updated UK Corporate Governance
Code (the Code) and updates to shareholder and proxy advisor guidelines
and is taking steps to ensure that the practices at the Bank remain in
line with best practice. The structure of our incentive policy is
already in line with Code recommendations and we have broadened our
clawback provisions and ensured that they remain fully enforceable.
During the year we will review our policy for Directors' shareholding
requirements, including post cessation of employment.
Consideration of employee policies and views
I am pleased to have been appointed as the Non- Executive Director
representing the workforce on the Board. As a result, I regularly meet
with employees, individually and through forums such as the 2018 Primary
Talent Group and the Women's Networking Forum, to understand their views
and report those to the Board.
The Committee oversaw a review of pay and benefits across the Group
resulting in improvements in some salaries and bonus opportunity.
We have prepared and reported the CEO to employee pay ratio in line with
the regulations and we will monitor its movement over time to ensure it
is aligned with the performance of the CEO and the implementation of our
Group remuneration policies.
Concluding remarks
I would like to thank Andrew Doman who stepped down as a member of the
Committee when he left the Board in May 2018 and to thank David Weymouth
for his contribution since joining the Committee in place of Andrew.
I look forward to your support for the resolution to approve the
Remuneration Report at the 2019 AGM.
Mary McNamara
Chair of the Remuneration Committee
14 March 2019
Remuneration Policy
This section describes our Directors' Remuneration Policy, which was
approved by shareholders at the AGM on 10 May 2018 and came into effect
from that date.
Policy overview
This Policy has been prepared in accordance with the Large and
Medium-sized Companies and Groups (Accounts and Reports) Regulations
2008, as amended in 2013. The Policy has been developed taking into
account a number of regulatory and governance principles, including:
-- The UK Corporate Governance Code 2016
-- The regulatory framework applying to the Financial Services Sector
(including the Dual-regulated firms Remuneration Code and provisions of
CRD IV)
-- The executive remuneration guidelines of the main institutional investors
and their representative bodies.
Objectives of the Remuneration Policy
The overarching principles of the Remuneration Policy are to:
-- Promote the long-term success of the Company.
-- Attract, motivate and retain high-performing employees.
-- Adhere to and respond to the regulatory framework for the financial
services sector and UK listed companies more generally.
-- Strike an appropriate balance between risk-taking and reward.
-- Encourage and support a strong sales and service culture to meet the
needs of our customers.
-- Reward the achievement of the overall business objectives of the Group.
-- Align employees' interests with those of shareholders and customers.
-- Be consistent with the Group's risk policies and systems to guard against
inappropriate risk-taking.
How the views of employees and shareholders are taken into account
The Committee does not formally consult directly with employees on
executive pay but receives periodic updates in relation to salary and
bonus reviews across the Company. As set out in the policy table
overleaf, in setting remuneration for the Executive Directors, the
Committee takes note of the overall approach to reward for employees in
the Company and salary increases will ordinarily be in line (in
percentage of salary terms) with those of the wider workforce. Thus, the
Committee is satisfied that the decisions made in relation to Executive
Directors' pay are made with an appropriate understanding of the wider
workforce. The Board has begun work to examine how it can engage more
widely with stakeholders, including employees. As part of this
initiative, the Committee will look into the best way to engage with
employees on how executive pay aligns with the pay of the wider
workforce.
The Committee undertook extensive engagement with shareholders during
the review of the Policy in the lead up to its approval at the 2018 AGM.
The Committee will seek to engage with major shareholders and the main
shareholder representative bodies and proxy advisory firms when it is
proposed that any material changes are to be made to the Remuneration
Policy or its implementation. In addition, we will consider any
shareholder feedback received in relation to the AGM.
This, plus any additional feedback received from time to time, will be
considered as part of the Committee's annual review of the effectiveness
of the Remuneration Policy.
THE REMUNERATION POLICY FOR EXECUTIVE DIRECTORS
The table below and accompanying notes describe the Policy for Executive
Directors.
Element Purpose and link to strategy Operation and performance conditions Maximum
Salary To reward Executives for the role and duties required. Paid monthly. Increases will generally be broadly in line with the
Recognises individual's experience, responsibility Base salaries are usually reviewed annually, with average of the workforce. Higher increases may be
and performance. any changes usually effective from 1 April. awarded in exceptional circumstances such as a material
No performance conditions apply to the payment of increase in the scope of the role, following the appointment
salary. However, when setting salaries, account is of a new executive (which could also include internal
taken of an individual's specific role, duties, experience promotions) to bring an initially below-market package
and contribution to the organisation. in line with market over time or in response to market
As part of the salary review process, the Committee factors.
takes account of individual and corporate performance,
increases provided to the wider workforce and the
external market for UK listed companies both in the
financial services sector and across all sectors.
Benefits To provide market competitive benefits to ensure the The Company currently provides: There is no maximum cap on benefits, as the cost of
well-being of employees. -- car allowance benefits may vary according to the external market.
-- life assurance
-- income protection
-- private medical insurance, and
-- may pay other benefits as appropriate for the role.
Pension To provide retirement planning to employees. Directors may participate in a defined contribution Up to 13% of salary.
plan, or, if they are in excess of the HMRC annual
or lifetime allowances for contributions, may elect
to receive cash in lieu of all or some of such benefit.
Annual bonus To incentivise and reward individuals for the achievement The annual bonus targets will have a 90% weighting The maximum bonus opportunity is 150% of salary.
of pre-defined, Committee approved, annual financial, based on performance under an agreed balanced scorecard The threshold level for payment is up to 25% for any
operational and individual objectives which are closely which includes an element of risk appraisal. Within measure.
linked to the corporate strategy. the scorecard at least 50% of the bonus will be based
on financial performance. 10% of the bonus will be
based on personal performance targets.
The objectives in the scorecard, and the weightings
on each element will be set annually, and may be flexed
according to role. Each element will be assessed independently,
but with Committee discretion to flex the payout (including
to zero) to ensure there is a strong link between
payout and performance.
50% of any bonus earned will be deferred into an award
over shares. These deferred shares will normally vest
after three years provided that the Executive remains
in employment at the end of the three-year period.
Clawback/malus provisions apply, as described in note
1 overleaf.
Performance Share Plan To incentivise and recognise execution of the business PSP awards will typically be made annually at the The maximum PSP grant limit is 200% of salary in respect
strategy over the longer term. discretion of the Committee, usually following the of any financial year.
Rewards strong financial performance over a sustained announcement of full year results. The threshold level for payment is 25% for any measure.
period. Normally, awards will be based on a mixture of internal
financial performance targets and relative TSR.
The performance targets will normally be measured
over three years.
Any vesting will be subject to an underpin, whereby
the Committee must be satisfied (i) that the vesting
reflects the underlying performance of the Company;
(ii) that the business has operated within the Board's
risk appetite framework; and (iii) that individual
conduct has been satisfactory.
Awards granted after 1 January 2018 will include a
holding period whereby any shares earned at the end
of the performance period may not be sold for a further
two years, other than to pay tax.
Clawback and malus provisions apply as described in
note 1 below.
All-employee share incentive plan (Share save All employees including Executive Directors are encouraged Tax favoured plan under which regular monthly savings Maximum permitted savings based on HMRC limits.
Plan) to become shareholders through the operation of an may be made over a three or five-year period and can
all-employee share plan. be used to fund the exercise of an option, where the
exercise price is discounted by up to 20%.
Share ownership guidelines To increase alignment between executives and shareholders. Executive Directors are expected to build and maintain At least 250% of salary for the CEO and at least 200%
a minimum holding of shares. of salary for the CFO or such higher level as the
Executives must retain at least 50% of the shares Committee may determine from time to time.
acquired on vesting of any share awards (net of tax)
until the required holding is attained.
1. Clawback and malus provisions apply to both the annual bonus,
including amounts deferred into shares, and PSP. These provide for
incentive recovery in the event of (i) the discovery of a material
misstatement of results, (ii) an error which has resulted in higher
incentive payouts than would have otherwise been earned, (iii) a
significant failure of risk management, (iv) regulatory censure, (v) in
instances of individual gross misconduct discovered within five years of
the end of the performance period (vi) or any other exceptional
circumstance as determined by the Board. A further two years may be
applied following such a discovery, in order to allow for the
investigation of any such event. In order to effect any such clawback,
the Committee may use a variety of methods: withhold deferred bonus
shares, future PSP awards or cash bonuses, or seek to recoup cash
already paid.
Choice of performance measures for Executive Directors' awards
The use of a balanced scorecard for the annual bonus reflects the
balance of financial and non-financial business drivers across the
Company. The combination of performance measures ties the bonus plan to
both the delivery of corporate targets and strategic/ personal
objectives. This ensures there is an appropriate focus on the balance
between financial and non-financial targets, with the scorecard
composition being set by the Committee from year to year depending on
the corporate plan.
The PSP is based on a mixture of financial measures and relative TSR, in
line with our key objectives of sustained growth in earnings leading to
the creation of shareholder value over the long term. TSR provides a
close alignment between the relative returns experienced by our
shareholders and the rewards to executives.
There is an underpin in place on the PSP to ensure that the payouts are
aligned with underlying performance, financial and non-financial risk
and individual conduct.
In line with HMRC regulations for such schemes, the Sharesave Plan does
not operate performance conditions.
How the Remuneration Committee operates the variable pay policy
The Committee operates the share plans in accordance with their
respective rules, the Listing Rules and HMRC requirements where
relevant. The Committee, consistent with market practice, retains
discretion over a number of areas relating to the operation and
administration of certain plans, including:
-- Who participates in the plans
-- The form of the award (i.e. conditional share award or nil cost option)
-- When to make awards and payments; how to determine the size of an award;
a payment and when and how much of an award should vest
-- The testing of a performance condition over a shortened performance
period
-- How to deal with a change of control or restructuring of the Group
-- Whether a participant is a good/bad leaver for incentive plan purposes;
what proportion of an award vests at the original vesting date or whether
and what proportion of an award may vest at the time of leaving
-- How and whether an award may be adjusted in certain circumstances (e.g.
for a rights issue, a corporate restructuring or for special dividends)
-- What the weighting, measures and targets should be for the annual bonus
plan and PSP from year to year.
The Committee also retains the discretion within the Policy to adjust
existing targets and/or set different measures for the annual bonus. For
the PSP, if events happen that cause it to determine that the targets
are no longer appropriate, an amendment is required so they can achieve
their original intended purpose and ensure the new targets are not
materially less difficult to satisfy.
Any use of the above discretions would, where relevant, be explained in
the Annual Report on Remuneration and may, as appropriate, be the
subject of consultation with the Company's major shareholders.
OSB operates in a heavily regulated sector, the rules of which are
subject to frequent evolution. The Committee therefore also retains the
discretion to make adjustments to payments under this Policy as required
by financial services regulations. For example, this may include
increasing the proportion of bonus deferred or extending the time
horizons for variable pay.
Awards granted prior to the effective date
Any commitments entered into with Directors prior to the effective date
of this Policy will be honoured. Details of any such payments will be
set out in the Annual Report on Remuneration as they arise.
Remuneration Policy for other employees
The Committee has regard to pay structures across the wider Group when
setting the Remuneration Policy for Executive Directors and ensures that
policies at and below the executive level are coherent. There are no
significant differences in the overall remuneration philosophy, although
pay is generally more variable and linked more to the long term for
those at more senior levels. The Committee's primary reference point for
the salary reviews for the Executive Directors is the average salary
increase for the broader workforce.
A highly collegiate approach is followed in the assessment of the annual
bonus, with our corporate scorecard being used to assess bonus outcomes
throughout the organisation, with measures weighted according to role,
where relevant.
Overall, the Remuneration Policy for the Executive Directors is more
heavily weighted towards performance-related pay than for other
employees. In particular, performance-related long-term incentives are
not provided outside of the most senior executive population as they are
reserved for those considered to have the greatest potential to
influence overall levels of performance.
Although PSP is awarded only to the most senior managers in the Group,
the Company is committed to widespread equity ownership. Accordingly, in
2014, our Sharesave Plan was launched for all employees. Executive
Directors are eligible to participate in this plan on the same basis as
other employees.
Illustrations of application of Remuneration Policy
The chart below illustrates how the composition of the Executive
Directors' remuneration packages, as it is intended the Policy will be
implemented in 2019, would vary under various performance scenarios.
Remuneration GBP'000s
1. Minimum performance assumes no award is earned under the
annual bonus plan and no vesting is achieved under the LTIP - only fixed
pay (salary, benefits and pension are payable).
2. At on-target, half of the annual bonus is earned (i.e. 75% of
salary) and 25% of maximum is achieved under the LTIP (i.e. 37.5% of
salary).
3. At maximum full vesting is achieved under both plans (i.e.
150% of salary). This scenario also shows the effect of a 50% increase
in the share price for LTIP awards.
Other than as noted above, share price growth and all-employee share
plan participation are not considered in these scenarios.
Service contracts
The terms and provisions that relate to remuneration in the Executive
Directors' service agreements are set out below. Service contracts are
available for inspection at the Company's registered office.
Provision Policy
Notice period 12 months on either side.
Termination A payment in lieu of notice may be made on termination
payments to the value of their basic salary at the time of
termination. Such payments may be made in instalments
and in such circumstances can be reduced to the extent
that the Executive Directors mitigate their loss.
Rights to DSBP and PSP awards on termination are shown
below. The employment of each Executive Director is
terminable with immediate effect without notice in
certain circumstances, including gross misconduct,
fraud or financial dishonesty, bankruptcy or material
breach of obligations under their service agreements.
Remuneration Salary, pension and core benefits are specified in
the agreements. There is no contractual right to participate
in the annual bonus plan or to receive long-term incentive
awards.
Post-termination These include six-month post-termination restrictive
covenants against competing with the Company; nine-month
restrictive covenants against dealing with clients
or suppliers of the Company; and nine-month restrictive
covenants against soliciting clients, suppliers and
key employees.
Contract date Andy Golding 4 June 2014, April Talintyre 19 May 2014.
Unexpired term Rolling contracts.
Payments for loss of office
On termination, other than for gross misconduct, the Executives will be
contractually entitled to salary, pension and contractual benefits (car
allowance, private medical cover, life assurance and income protection)
over their notice period. The Company may make a payment in lieu of
notice equivalent to the salary for the remaining notice period.
Payments in lieu of notice may be phased and subject to mitigation.
The Company may also pay reasonable legal costs in respect of any
compromise settlement.
Annual bonus on termination
There is no automatic/contractual right to bonus payments and the
default position is that the individual will not receive a payment. The
Committee may determine that an individual is a 'good leaver' and may
elect to pay a pro-rata bonus for the period of employment at its
discretion and based on full year performance.
DSBP awards on termination
Awards normally lapse on termination of employment. However, in certain
good leaver situations, awards may instead vest on the normal vesting
date (or on cessation of employment in exceptional circumstances). Good
leaver scenarios include (i) death; (ii) injury, ill-health or
disability; (iii) retirement with the agreement of the Company; (iv)
redundancy; (v) the employing company ceasing to be a member of the
Group; or (vi) any other circumstance the Committee determines good
leaver treatment is appropriate.
PSP awards on termination
Awards normally lapse on termination of employment. However, in certain
good leaver situations, awards may vest on the normal vesting date and
to the extent that the performance conditions are met. The Committee is,
however, permitted under the rules to allow early vesting of the award
to the extent it considers appropriate, taking into account performance
to date. Unless the Committee determines otherwise, awards vesting in
good leaver situations will be pro-rated for time employed during the
performance period.
Approach to recruitment and promotions
The ongoing remuneration package for a new Director would be set in
accordance with the terms of the Company's approved Remuneration Policy.
On recruitment, the salary may (but need not necessarily) be set at a
lower rate, with phased increases (which may be above the average for
the wider employee population) as the executive gains experience. The
salary would in all cases be set to reflect the individual's experience
and skills and the scope of the role.
The Company may take into account and compensate for remuneration
foregone upon leaving a previous employer using cash awards; the
Company's share plans or awards under Listing Rule 9.4.2 as may be
required. This included the quantum foregone; the extent to which
performance conditions apply; form of award; and the time left to
vesting. For all appointments, the Committee may agree that the Company
will meet certain appropriate relocation costs.
For an internal appointment, including the situation where a Director is
appointed following corporate activity, any variable pay element awarded
in respect of their prior role would be allowed to pay out broadly
according to its terms. Any other ongoing remuneration obligations
existing prior to appointment may continue, provided that they are put
to shareholders for approval at the earliest opportunity.
Should an individual be appointed to a role (executive or non-executive)
on an interim basis, the Company may provide additional remuneration, in
line with the Policy for the specific role, for the duration the
individual holds the interim role.
For the appointment of a new Chairman or Non-Executive Director, the fee
arrangement would be in accordance with the approved Remuneration Policy
in force at that time.
External appointments
Executive Directors may accept directorships of other quoted and
non-quoted companies with the consent of the Board, which will consider
the time commitment required. It is also at the discretion of the Board
as to whether the Executive Director will be able to retain any fees
from such an appointment.
THE REMUNERATION POLICY FOR THE CHAIRMAN AND NON-EXECUTIVE DIRECTORS
Element Purpose and link to strategy Operation Maximum opportunity
Fees To attract and retain a high-calibre Chairman and The Chairman and Non-Executive Directors are entitled There is no prescribed maximum annual increase. The
Non-Executive Directors by offering a market competitive to an annual fee, with supplementary fees payable Committee is guided by the general increase in the
fee level. for additional responsibilities including the Chair non-executive market but on occasion may need to recognise,
of the Audit, Remuneration, Nomination and Risk Committees for example, change in responsibility and/or time
and for acting as the Senior Independent Director. commitments.
Fees are reviewed periodically.
The Chairman and Non-Executive Directors are entitled
to reimbursement of travel and other reasonable expenses
incurred in the performance of their duties.
Letters of appointment
The Non-Executive Directors are appointed by letters of appointment that
set out their duties and responsibilities. The key terms are:
Provision Policy
Period of appointment Initial three-year term.
Notice periods Three months on either side.
The appointments are also terminable with immediate
effect and without compensation or payment in lieu
of notice if the Chairman or Non-Executive Director
is not re-elected to their position as a Director
of the Company by shareholders.
Payment in lieu of The Company is entitled to make a payment in lieu
notice of notice on termination.
Letters of appointment are available for inspection at the Company's
registered office.
2018 Annual Report on Remuneration
Introduction
This section sets out details of the remuneration received by Executive
and Non-Executive Directors in respect of the financial year ended 31
December 2018. This Annual Report on Remuneration will, in conjunction
with the Annual Statement of the Committee Chair on pages 90 to 91, be
proposed for an advisory vote by shareholders at the forthcoming AGM to
be held on 9 May 2019. Where required, data has been audited by KPMG LLP
and this is indicated where applicable.
Membership
The Committee met six times during the year. Mary McNamara (Chair) and
Rod Duke were members of the Committee throughout the year. Andrew
Dolman was a member until he ceased to be a Director of the Company on
10 May 2018. David Weymouth, Chairman of the Board, subsequently became
a member of the Committee. The attendance of individual Committee
members is set out in the Corporate Governance Report.
The Board considers each of the members of the Committee to be
independent in accordance with the UK Corporate Governance Code.
Responsibilities
The Committee's responsibilities are set out in its terms of reference
which are available on the Company's website. In summary, the
responsibilities of the Committee include:
-- Pay for employees under the Committee's scope:
- Setting the Remuneration Policy
- Determining total individual remuneration (including salary
increases, bonus opportunities and outcomes and LTIP awards)
- Ensuring that contractual terms on termination, and any payments
made, are fair to the individual, and the Company, that failure is not
rewarded and that the duty to mitigate loss is fully recognised
-- Approving the design of, and determining targets for, any
performance-related pay schemes operated by the Company and approving
total payments made under such schemes.
Employees under the Committee's scope include Executive Directors, the
Chairman of the Board, the Company Secretary and all employees that are
identified as Material Risk takers for the purposes of the PRA and FCA's
Dual Regulated Remuneration Code ('Code Staff').
Key matters considered by the Committee
Key issues reviewed and discussed by the Committee during the year
included:
-- For employees under the Committee's scope:
- Review and approve salary increases
- Review and approve bonus awards
- Determine the grants under the Performance Share Plan
-- Consider and approve the 2018 Directors' Remuneration Report
-- Consider market trend and regulatory updates.
Advisers to the Committee
Korn Ferry provided independent advice to the Committee during 2018,
having been appointed following a competitive tender process in 2017.
The total fees paid to Korn Ferry in 2018 were GBP113,000.
Korn Ferry has no other connection with the Group and therefore the
Committee is satisfied that it provides objective and independent
advice. Korn Ferry is a member of the Remuneration Consultants Group and
abides by the voluntary code of conduct of that body, which is designed
to ensure objective and independent advice is given to remuneration
committees.
The Committee consults with the Chief Executive Officer ('CEO'), as
appropriate, and seeks input from the Risk Committee to ensure that any
remuneration or pay scheme reflects the Company's risk appetite and
profile and considers current and potential future risks.
The Committee also receives input on senior executive remuneration from
the Chief Financial Officer (CFO) and Group HR Director. The Group
General Counsel and Company Secretary acts as Secretary to the Committee
and advises on regulatory and technical matters, ensuring that the
Committee fulfils its duties under its terms of reference. No individual
is present in discussions directly relating to their own pay.
DIRECTORS' PAY OUTCOMES FOR 2018
Remuneration and fees payable for 2018 - (audited information)
The table below sets out a single figure for the total remuneration
received by each Executive Director and Non-Executive Director for the
years ending 31 December 2018 and 31 December 2017.
Amount
Taxable Annual bonus
Basic bonus
salary benefits(1) Pension paid(2) deferred(2) LTIP(3) Total
Executive
Directors Year GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Andy
Golding 2018 501 21 65 347 347 293 1,574
2017 480 19 62 208 208 637 1,614
April
Talintyre 2018 336 16 44 232 232 207 1,067
2017 324 14 42 138 138 450 1,106
1 Taxable benefits received include car allowance (CEO
GBP20,000; CFO GBP15,000) and private medical cover.
2. 50% of bonus is payable in cash and 50% in shares deferred
for three years.
3. The 2017 LTIP figure has been restated based on the share
price on vesting of GBP3.72.
Total fees GBP'000 2017 2018
Chairman
David Weymouth (from 1 September 2017) 83 250
Mike Fairey (until 10 May 2017) 69 -
Non-Executive Directors
Graham Allatt 88 89
Eric Anstee 78 83
Andrew Doman (until 10 May 2018) 60 22
Rod Duke 138 78
Tim Hanford (paid to JC Flowers until 31 December
2017) 60 -
Margaret Hassall 60 63
Mary McNamara 70 78
Nathan Moss (until 31 May 2017) 25 -
Total 731 663
Non-Executive Directors cannot participate in any of the Company's share
schemes and are not eligible to join the Company pension scheme.
Executive bonus scheme: 2018 performance against the Business Balanced
Scorecard (audited)
Targets
Threshold Budget Max Actual Outcome Outcome
Key
performance
Category indicator (25%) (50%) (100%) result CEO (%) CFO (%)
Financial
(50%) Underlying PBT GBP172m GBP176m GBP184m GBP193.6m 50 50
All-in ROE 22.7% 23.7% 25.7% 26.0%
Cost to income ratio 31.6% 30.6% 28.6% 28.2%
Net loan book growth 17.4% 18.4% 20.4% 22.9%
CET1 ratio <12% 12.0% >13% 13.3%
Customer Customer
(15%) satisfaction 35 40 50 63 12 12
Broker satisfaction 27.5 30 35 28
Complaints 0.8% 0.5% 0.1% 0.1%
Quality Overdue
(15%) actions 3 2 <1 2 11.25 11.25
Arrears 1.25% 1% 0.50% 0.66%
High-severity incidents 4 3 1 1
Staff
(10%) Diversity(1) 26% 27% 29% 28% 9 9
Employee engagement(2) 3 4 6 6
Vary by
executive-see
Personal section
(10%) below 9.5 9
Total 91.75 91.25
1. Diversity - based on the gender diversity of the senior
leadership team.
2. Employee engagement - the employee engagement represents the
number of categories which showed improvement versus the prior year.
2018 personal performance
The Executive Directors were allocated up to a maximum of 10% of their
bonus based on their personal performance against agreed objectives.
The priorities for 2018 were identified in our 2017 Annual Report and
objectives built around these. Performance against the objectives for
both executives was outstanding as was their overall leadership of the
Bank.
The objectives set at the start of the year and the Committee's
assessment of performance against them are set out below:
Objectives Key achievements
CEO Oversee the progression of all established 2018 strategic Strong delivery of 2018 strategic objectives in line
objectives in line with the operating plan and to with the operating plan including launch of InterBay
the satisfaction of the Board. Asset Finance which funded its first deals in October
2018, acquisition of the JV partners' interest in
the Heritable joint venture, oversight of GDPR, PSD
2 and IRB projects.
Maintain strong relationships with regulators, ensuring Open and honest relationship with regulators maintained
ongoing and proactive communication. throughout 2018.
Champion the design and implementation of the new Mission, Vision and Values successfully implemented
Mission, Vision and Values and the associated activities with positive outcomes highlighted by the inclusion
that will assist in embedding these Group-wide and of the Bank in The Sunday Times 2018 Best Companies
positively impacting on employee survey results. to Work For list and the report from the Banking Standards
Board.
Establish and maintain strong relationships with key Relationships with key stakeholders strengthened by
investors, brokers and analysts, ensuring active and the outstanding performance on the investor roadshows
engaging ongoing communication, with a specific focus during 2018.
on the 'sell side'.
CFO Deliver all Board-approved BAU and strategic projects, Good progress made on these projects, which now have
with a particular focus on People, Data and MI. strong visibility at Management Committees and the
Board.
Successful implementation of new risk reporting systems. Successful implementation using a phased approach
throughout 2018.
Enhance Opex reporting to improve tracking of projects Strong Opex reporting in place. A requirement for
and Board reporting. a procurement system in order to report on and control
costs more effectively was identified in the year
and a new purchase order system was selected. Implementation
of the new system is on schedule to go live by the
end of the first quarter of 2019.
Strengthen relationships with shareholders and other This is an area of strength and the focus for 2019
stakeholders, including regulators and NEDs. will be on relationships with the regulator and the
new Non-Executive Director.
Effective oversight of the management of the Bank's A capital working group has been formed to enhance
capital and funding. the capital management process with a dedicated resource
to focus on regulatory policy and change management.
Based on this performance, the Committee determined that 9.5% and 9.0%
of a possible 10% for the individual element of the bonus should be paid
to the CEO and CFO respectively.
Long-term incentive plan
The 2016 LTIP award was granted on 17 March 2016 and measured
performance over the three financial years to 31 December 2018. Awards
will vest after publication of this report, based on the EPS and TSR
performance, at 50% of maximum, as set out below.
TSR
performance Vesting of
Percentage
of versus TSR part
that part Vesting TSR (50%
of the EPS element EPS of of FTSE 250 (50% of total
Performance award (50% of total EPS total
level vesting award) performance part award) constituents award)
Below Less than 8% Below
'threshold' 0% CAGR 19% 100% median 7% 0%
'Threshold' 25% 8% CAGR Above Median Below
stretch
'Stretch' 100% 15% CAGR Upper median
quartile
The 2016 PSP awards will therefore vest as follows:
Number of Number of Value from Total value
shares shares share price vesting
Executive Directors awarded due to vest increase(1) GBP'000(2)
Andy Golding 162,055 81,027 88,238 293,240
April Talintyre 114,625 57,312 62,413 207,412
1. Value of share price increase based on a GBP2.53 share price
at the time of grant of the award, to the three-month average share
price of GBP3.6190 to 31 December 2018.
2. Value of shares based on a three-month average share price of
GBP3.6190 to 31 December 2018. This value will be restated next year
based on the actual share price on the date of vesting.
EXECUTIVE PAY OUTCOMES IN CONTEXT
Percentage change in the remuneration of the Chief Executive Officer
The table below sets out the percentage change in base salary, value of
taxable benefits and bonus for the CEO compared with the average
percentage change for employees. For these purposes, UK employees who
have been employed for over a year (and therefore eligible for a salary
increase) have been used as a comparator group as they are the analogous
population (based on service and location).
Average percentage change 2017-2018
Taxable Annual
Salary benefits bonus
CEO 4.4% 10.5% 66.8%
UK employees 5.8% 0.0% 9.6%
Comparison of Company performance and CEO remuneration
The following table summarises the CEO single figure for total
remuneration, annual bonus and LTIP pay-out as a percentage of maximum
opportunity in 2013-2018:
2013 2014 2015 2016 2017 2018
Andy Golding
Annual bonus (as a percentage of
maximum opportunity) 92.5% 92.63% 93.00% 88.75% 85% 91.75%
LTIP vesting (as a percentage of
maximum opportunity) - - - - 100% 50%
CEO single figure of
remuneration (GBP'000) 518 777 848 910 1,614 1,574
Total shareholder return
The table below shows the total shareholder return (TSR) performance of
the Company over the period from listing to 31 December 2018 compared to
the performance of the FTSE All Share Index. This index is considered to
be the most appropriate index against which to measure performance as
the Company is a member of this index.
Total shareholder return
Source: Datastream (Thomson Reuters)
This graph shows the value, at 31 December 2018, of GBP100 invested in
OneSavings Bank plc on admission (5 June 2014) compared with the value
of GBP100 invested in the FTSE All Share Index on the same date.
The other points plotted are the values at intervening financial
year-ends.
CEO pay ratios
The ratio of the CEO's single figure of total pay to employee pay is
illustrated in the table below for 2017 and 2018. The median ratio has
fallen from 46:1 in 2017 to 39:1 in 2018. This is as a result of a
combination of factors including a decrease in the total paid to the CEO,
positive changes to the Group's pay policy and changes in the employee
population between 2017 and 2018.
2017 Basic Salary Total CEO Pay Ratio
Andy Golding 480 1,614
Employee A 25th 22 26 62.1
Employee B Median 30 35 46.1
Employee C 75th 53 65 24.8
2018 Basic Salary Total CEO Pay Ratio
Andy Golding 501 1,574
Employee A 25th 21.88 26.9 58.4
Employee B Median 35.55 40 39.4
Employee C 75th 57.95 71.9 21.9
Relative importance of the spend on employee pay
The table below shows the Company's total employee remuneration
(including the Directors) compared to distributions to shareholders and
operating profit before tax for the year under review and the prior
year. In order to provide context for these figures, underlying
operating profit as a key financial metric used for remuneration
purposes has been shown.
2017 2018
Total employee costs GBP35.9m GBP43.6m
Distributions to shareholders GBP31.2m GBP35.7m
Underlying profit before tax GBP167.7m GBP193.6m
Total employee costs v PBT 21.4% 22.5%
Average headcount 813 989
Average PBT per employee GBP206,273 GBP195,753
OTHER DISCLOSURES RELATING TO 2018 EXECUTIVE REMUNERATION
Scheme interests awarded during the financial year
The table below shows the conditional share awards made to Executive
Directors in 2018 under the Performance Share Plan and the performance
conditions attached to these awards:
Percentage
Face value of
awards
of award released Performance
Face value for
(percentage of of Number achieving End of conditions
of threshold performance
Executive salary) award shares targets period (weighting)
Andy
Golding 150% GBP757,050 180,439 EPS (40%)
31 December
25% 2020 TSR (40%)
April
Talintyre 150% GBP507,690 121,005 ROE (20%)
1. The number of shares awarded was calculated using a share
price of GBP4.1956 (the average mid-market quotation for the preceding
five days before grant on 24 May 2018).
2. Performance conditions are (i) 40% TSR versus the FTSE 250
(25% vesting for median performance increasing to maximum vesting for
upper quartile performance); (ii) 40% EPS (25% vesting for growth in EPS
of 6% per annum increasing to maximum vesting for 12% per annum); and
(iii) 20% ROE (25% vesting for average ROE of 20% increasing to maximum
vesting for an average of 25%).
Statement of Directors' shareholdings and share interests (audited
information)
Total shares owned by Directors:
Interest in shares Interest in share awards Shareholding requirements
Without Subject to
Beneficially Beneficially performance performance Shareholding Current
conditions conditions
owned at owned at at as at requirement shareholding
1 January 31 December 31 December 31 December (percentage of (percentage of
basic
2018 2018 2018 2018 basic salary) salary)(1)
Executive
Andy Golding 1,100,000 680,429 174,462 486,038 250% 472% (Met)
April
Talintyre 336,131 263,001 117,766 311,696 200% 272% (Met)
Non-Executive
Eric Anstee 4,960 4,960
Rod Duke 94,537 80,000
Mary McNamara 22,350 22,350
David Weymouth 13,178 13,178
1. Shareholding based on the closing share price on 31 December
2018 - GBP3.50 and year end salaries.
External appointments
Andy Golding is a Director/Trustee of the Building Societies Trust
Limited. He receives no remuneration for this position.
Andy Golding receives GBP10,000 per annum as a member of the Financial
Conduct Authority's Small Business Practitioners Panel.
Payments to departing Directors
During the year, the Company did not make any payments to past
Directors; neither has it made any payments to Directors for loss of
office.
HOW WE WILL IMPLEMENT THE REMUNERATION POLICY FOR DIRECTORS IN 2019
Base salary
The CEO's and CFO's salaries will be increased by 3.03% and 3.5%
respectively to GBP520,000 and GBP350,300 respectively. Benefits and
pension provision will remain unchanged.
Annual bonus
The performance measures for the 2019 annual bonus have been set in line
with the Business Balanced Scorecard. Accordingly, the balance of the
metrics are as follows:
Financial Customer Quality Staff Personal objectives
50% of 15% of bonus 15% of bonus 10% of 10% of bonus opportunity
bonus opportunity opportunity bonus
opportunity opportunity
Underlying Customer Overdue Diversity Vary by executive
PBT satisfaction management
All-in ROE Broker actions Employee Details of objectives (and performance against these)
satisfaction engagement will be disclosed retrospectively in next year's report
Cost to Complaints Arrears
income
ratio
Net loan High-severity
book incidents
growth
Performance targets are considered to be commercially sensitive so will
not be published in advance. However, there will be full disclosure of
the targets set and the extent of their achievement in the 2019 Annual
Report on Remuneration. The Committee may apply discretion to adjust the
resultant bonus from the Business Balanced Scorecard if the result fails
to reflect broader performance and the wider shareholder experience.
Similar to 2018, the maximum opportunity will be 150% of salary with
half of any bonus earned deferred in shares for three years.
Performance Share Plan
PSP awards of 150% of salary will be made to the Executive Directors in
2019. Similar to the 2018 awards, the performance conditions will be EPS
(40% weighting), relative TSR (40% weighting) and return on equity (20%
weighting). At the time of vesting, the Committee will assess whether
the formulaic vesting outcome is aligned with the underlying performance,
risk appetite and individual conduct over the period.
Following vesting, shares must be held for a further two years (after
selling sufficient shares to cover tax charges). The performance targets
are set out in the table below. The financial targets have been set
taking into account the external market, shareholder expectations and
expected business growth. Whilst the ROE targets remain the same as for
the 2018 Awards, the EPS targets will require threshold EPS growth of 5%
per annum, and full vesting at 10% per annum, over the period to 2021.
The Committee is cognisant that on a percentage growth basis, these are
lower than the targets for the 2018 Award of 6% to 12% per annum.
However, they are measured from an EPS figure that is around 15% higher
than last year so in absolute terms do represent significant growth
above the EPS required to be achieved for the 2018 targets; the
Committee is comfortable that they are appropriately stretching in light
of the business plan and external consensus forecasts and no less
challenging than the EPS range set for the 2018 awards.
Return on
equity Percentage of
that part of
EPS element TSR element (20% of total the
Performance (40% of total (40% of total
level award) award) award) award vesting
Below Less than 5%
'threshold' CAGR Below median Below 20% 0%
'Threshold' 5% CAGR Median 20% 25%
'Stretch' 10% CAGR Upper quartile 25% 100%
Pro rata vesting in between
the above points
Share ownership guidelines
The CEO and the CFO are required to accumulate and maintain a holding in
ordinary shares in the Company equivalent to no less than 250% of salary
and 200% of salary respectively. This is calculated on the basis of the
value of beneficially owned shares plus the net of tax value of deferred
bonus shares. Half of any vested share awards must be retained until the
guideline is achieved. Based on the current share price, the CEO and CFO
hold shares in excess of these levels.
Chairman and Non-Executive Director fees
The current Non-Executive Director fees are as follows:
Base fees GBP'000
Chairman 250
Non-Executive Director 65
Additional fees
Senior Independent Director 10
Nomination and Governance Committee Chair 10
Audit Committee Chair 20
Remuneration Committee Chair 20
Risk Committee Chair 20
Statement of voting at the Annual General Meeting
Shareholders were asked to approve the 2017 Annual Report on
Remuneration and the 2018 Directors' Remuneration Policy at the 2018
AGM. The votes received were:
% of Votes % of Total Votes
votes votes
Resolution Votes for cast against cast votes cast withheld
To approve
the 2017
Remuneration
Report (2018
AGM) 202,260,789 99.44 1,129,179 0.56 203,389,968 1,071,307
To approve
the 2018
Remuneration
Policy (2018
AGM) 164,447,865 83.71 32,004,658 16.29 196,452,523 8,008,753
The Committee has continued to engage with shareholders and has written
to shareholders who voted against the Remuneration Policy in 2018 to
understand their rationale, which related to the increase in incentive
opportunity. In response, the Committee will continue to ensure that
incentives are subject to stretching performance conditions commensurate
with the overall level of remuneration payable.
Approval
This report was approved by the Board of Directors, on the
recommendation of the Remuneration Committee, on 14 March 2019 and
signed on its behalf by:
Mary McNamara
Chair of the Remuneration Committee
14 March 2019
Directors' Report: Other Information
Share capital and rights attaching to shares
The Company had 244,487,537 ordinary shares of GBP0.01 each in issue as
at 31 December 2018. 1,022,849 ordinary shares were issued during 2018,
159,407 at a price of GBP2.27, 860,756 at a price of GBP0.01 and 2,686
at a price of GBP1.34. Further details relating to share capital can be
found in note 36.
Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any share in the
Company may be issued with such rights (including preferred, deferred or
other special rights) or such restrictions, whether in regard to
dividend, voting, return of capital or otherwise as the Company may from
time to time by ordinary resolution determine (or, in the absence of any
such determination, as the Directors may determine).
Authorities to allot and pre-emption rights
At the 2018 AGM, shareholders renewed the general authority for the
Directors to allot up to GBP814,409 of the nominal value of ordinary
shares of GBP0.01 each. In addition, shareholders gave authority for the
Directors to grant rights to subscribe for, or to convert any security
into regulatory capital convertible instruments up to GBP293,187 of the
nominal value of ordinary shares equivalent to 12% of issued share
capital.
Repurchase of shares
The Company has an unexpired authority to repurchase ordinary shares up
to a maximum of 24,432,250 ordinary shares. The Company did not
repurchase any of its ordinary shares during 2018 (2017: none).
Employee share schemes
The details of the Company's employee share schemes are set out on pages
93 to 94 in the Remuneration Report.
Results and dividends
The results for the year are set out in the Statement of Profit or Loss
on page 118. Our dividend policy for 2019 remains a pay-out ratio of at
least 25% of underlying profit after taxation to ordinary shareholders.
The Directors recommend the payment of a final dividend of 10.3 pence
per share on 15 May 2019, subject to approval at the AGM on 9 May 2019,
with an ex-dividend date of 21 March 2019 and a record date of 22 March
2019. This is in addition to the 2018 interim dividend of 4.3 pence per
share paid during the year (2017: 12.8 pence total dividend).
Directors and Directors' interests
The names of Directors who served during the year can be found in the
attendance chart on page 74.
Directors' interests in the shares of the Company are set out on page
103 in the Remuneration Report. None of the Directors had interests in
shares of the Company greater than 0.6% of the ordinary shares in issue.
There have been no changes to Directors' interests in shares since 31
December 2018.
Equal opportunities
The Group is committed to applying its Equality and Diversity Policy at
all stages of recruitment and selection. Short-listing, interviewing and
selection will always be carried out without regard to gender, gender
reassignment, sexual orientation, marital or civil partnership status,
colour, race, nationality, ethnic or national origins, religion or
belief, age, pregnancy or maternity leave or trade union membership. Any
candidate with a disability will not be excluded unless it is clear that
the candidate is unable to perform a duty that is intrinsic to the role,
having taken into account reasonable adjustments. Reasonable adjustments
to the recruitment process will be made to ensure that no applicant is
disadvantaged because of his/her disability. Line managers conducting
recruitment interviews will ensure that the questions that they ask job
applicants are not in any way discriminatory or unnecessarily intrusive.
This commitment also applies to existing employees.
Employee engagement
Employees are kept informed of developments within the business and in
respect of their employment through a variety of means, such as employee
meetings, briefings and the intranet. Employee involvement is encouraged
and views and suggestions are taken into account when planning new
products and projects. The Sharesave 'save as you earn' Scheme is an
all-employee share option scheme which is open to all UK-based
employees. The Sharesave Scheme allows employees to purchase options by
saving a fixed amount of between GBP5 and GBP500 per month over a period
of either three or five years at the end of which the options, subject
to leaver provisions, are usually exercisable. The Sharesave Scheme has
been in operation since June 2014 and is granted annually, with the
exercise price set at a 20% discount of the share price on the date of
grant.
Greenhouse gas emissions
Information relating to greenhouse gas emissions can be found on page 60
in the Strategic report.
Political donations
Shareholder authority to make aggregate political donations not
exceeding GBP50,000 was obtained at the 2018 AGM. Neither the Company
nor any of its subsidiaries made any political donations this year.
Notifiable interests in share capital
At 31 December 2018, the Company had received the following
notifications of major holdings of voting rights pursuant to the
requirements of Rule 5 of the Disclosure Guidance and Transparency
Rules:
No. of % of issued
ordinary shares share capital
Norges Bank 7,732,546 3.18
Merian Global Investors(1) 37,271,516 15.26
Standard Life Aberdeen plc 22,788,566 9.33
1. Formerly known as Old Mutual Global Investors.
There have been no notifications since 31 December 2018.
Annual General Meeting
Accompanying this report is the Notice of the AGM which sets out the
resolutions to be proposed to the meeting, together with an explanation
of each. This year's AGM will be held at the offices of Addleshaw
Goddard, 60 Chiswell Street, London EC1Y 4AG on 9 May 2019. The meeting
will start at 11am with registration from 10.30am.
Other information
Likely future developments in the Group are contained in the Strategic
Report on pages 2 to 65.
Information on financial instruments including financial risk management
objectives and policies including the policy for hedging the exposure of
the Group to price risk, credit risk, liquidity risk and cash flow risk
can be found in the Risk Review of pages 36 to 49.
Going concern statement
The Directors have undertaken a going concern assessment in accordance
with 'Guidance on Risk Management, Internal Control and Related
Financial and Business Reporting', published by the Financial Reporting
Council in September 2014.
As a result of this assessment, the Directors are satisfied that the
Group and the Company have adequate resources to continue to operate as
a going concern for a period in excess of 12 months from the date of
this report and have prepared the financial statements on that basis. In
assessing whether the going concern basis is appropriate, the Directors
have considered the information contained in the financial statements,
the latest business plan, profit forecasts and the latest working
capital forecasts.
These forecasts have been subject to sensitivity tests, including stress
scenarios relating to Brexit, and having reviewed the ICAAP and ILAAP,
the Directors are satisfied that the Group and the Company have adequate
resources to continue in operational existence for a period in excess of
12 months.
Key information in respect of the Group's strategic risk management
framework, objectives and processes for mitigating risks including
liquidity risk are set out in detail on pages 36 to 49.
Jason Elphick
Group General Counsel and Company Secretary
OneSavings Bank plc
Registered number: 07312896
14 March 2019
Statement of Directors' responsibilities
in respect of the Annual Report and the financial statements
The Directors are responsible for preparing the Annual Report and the
Group and parent Company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company
financial statements for each financial year. Under that law they are
required to prepare the Group financial statements in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs as adopted by the EU) and applicable law and have elected
to prepare the parent Company financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and parent Company and of their
profit or loss for that period. In preparing each of the Group and
parent Company financial statements, the Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted
by the EU;
-- assess the Group and parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and
-- use the going concern basis of accounting unless they either intend to
liquidate the Group or the parent Company or to cease operations, or have
no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the parent Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the parent Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They are
responsible for such internal control as they determine is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error, and have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors are also responsible
for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that complies
with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual
financial report
-- the financial statements, prepared in accordance with the applicable set
of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
-- the Strategic Report/Directors' Report includes a fair review of the
development and performance of the business and the position of the
issuer and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
Each of the persons who is a Director at the date of approval of this
report confirms that:
-- so far as the Director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
-- they have taken all the steps they ought to have taken as a Director in
order to make themselves aware of any relevant audit information and to
establish that the Company's auditors are aware of that information.
Approved by the Board and signed on its behalf by:
Jason Elphick
Group General Counsel and Company Secretary
14 March 2019
Financial statements and notes
Group's financial statements and notes for the year ended 31 December
2018 and the report from the independent auditor.
Contents
Independent auditor's report 110
Statement of Comprehensive Income 118
Statement of Financial Position 119
Statement of Changes in Equity 120
Statement of Cash Flows 121
Notes to the Financial Statements 122
Glossary 183
Company information 184
Independent auditor's report
to the members of OneSavings Bank plc
1. Our opinion is unmodified
We have audited the financial statements of OneSavings Bank plc ("the
Company") for the year ended 31 December 2018 which comprise the
Consolidated Statement of Comprehensive Income, the Consolidated and
Bank Statements of Financial Position, the Consolidated and Bank
Statements of Changes in Equity, the Consolidated and Bank Statements of
Cash Flows, and the related notes, including the accounting policies in
note 1.
In our opinion:
- the financial statements give a true and fair view of the state
of the Group's and of the parent Company's affairs as at 31 December
2018 and of the Group's profit for the year then ended;
- the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards as adopted
by the European Union (IFRSs as adopted by the EU);
- the parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as applied in
accordance with the provisions of the Companies Act 2006; and
- the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006 and, as regards the Group
financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is
a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the Audit Committee.
We were first appointed as auditor on 28 May 2010. The period of total
uninterrupted engagement is for the 9 financial years ended 31 December
2018. We have fulfilled our ethical responsibilities under, and we
remain independent of the Group in accordance with, UK ethical
requirements including the FRC Ethical Standard as applied to listed
public interest entities. No non-audit services prohibited by that
standard were provided.
Overview
Materiality: GBP7.1 million (2017:GBP6.4 million) 4% (2017: 4%)
of group profit before tax
group
financial
statements as
a whole
Coverage 100% (2017:100%) of group profit before tax
Key audit vs 2017
matters
Other matter The impact of uncertainties due to Britain exiting New matter
the European Union on our audit
Recurring Loan impairment ^
risks
Recognition of revenue on organic and acquired <>
loans
2. Key audit matters: including our assessment of risks of material
misstatement
Key audit matters are those matters that, in our professional judgment,
were of most significance in the audit of the financial statements and
include the most significant assessed risks of material misstatement
(whether or not due to fraud) identified by us, including those which
had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement
team. We summarise below the key audit matters in arriving at our audit
opinion above, together with our key audit procedures to address those
matters and, as required for public interest entities, our results from
those procedures. These matters were addressed, and our results are
based on procedures undertaken, in the context of, and solely for the
purpose of, our audit of the financial statements as a whole, and in
forming our opinion thereon, and consequently are incidental to that
opinion, and we do not provide a separate opinion on these matters.
The impact of uncertainties due to Britain exiting
the European Union on our audit
Refer to Audit Committee report (page 83), Risk Review
(pages 36 to 49) and the CEO's Report (pages 15 to
17).
The risk Our response
Group and Parent We have developed a standardised firm-wide approach
Unprecedented levels of uncertainty to the consideration of the uncertainties arising
All audits assess and challenge the reasonableness from Brexit in planning and performing our audits.
of estimates, in particular as described in loan impairment, Our procedures included:
recognition of revenue on originated and acquired - Our Brexit knowledge - We considered the directors'
loans, related disclosures and the appropriateness assessment of Brexit-related sources of risk for the
of the going concern basis of preparation of the annual Group's business and financial resources compared
accounts. All of these depend on assessments of the with our own understanding of the risks. We considered
future economic environment and the Group's future the directors' plans to take action to mitigate the
prospects and performance. risks.
In addition, we are required to consider the other - Sensitivity analysis - When addressing loan impairment
information presented in the Annual Report including and recognition of revenue on originated and acquired
the principal risks disclosure and the viability statement loans and other areas that depend on forecasts, we
and to consider the directors' statement that the compared the directors' sensitivity analysis to our
annual report and financial statements taken as a assessment of the full range of reasonably possible
whole is fair, balanced and understandable and provides scenarios resulting from Brexit uncertainty
the information necessary for shareholders to assess - Assessing transparency - As well as assessing individual
the Group's position and performance, business model disclosures as part of our procedures on loan impairment
and strategy. and recognition of revenue on originated and acquired
Brexit is one of the most significant economic events loans we considered all the Brexit related disclosures
for the UK and at the date of this report its effects together, including those in the strategic report,
are subject to unprecedented levels of uncertainty comparing the overall picture against our understanding
of outcomes, with the full range of possible effects of the risks.
unknown. Our results
As reported under loan impairment and recognition
of revenue on originated and acquired loans, we found
the resulting estimates and related disclosures of
sensitivity and disclosures in relation to going concern
to be acceptable. However, no audit should be expected
to predict the unknowable factors or all possible
future implications for a Group and this is particularly
the case in relation to Brexit.
Loan impairment
Group - GBP21.9 million; 2017: GBP21.6 million
Parent - GBP16.1 million; 2017: GBP15.5 million
Refer to page 83 (Audit Committee Report), pages 125
to 127 (accounting policy) and pages 142 to 143 (financial
disclosures).
The risk Our response
Group and Parent Our audit procedures included:
Subjective estimate - Controls testing: We performed end to end process
Credit risk is an area of significant estimate due walk-throughs to identify the key systems, applications
to the assumptions involved and is further complicated and controls used in the ECL processes. We tested
by the adoption of IFRS 9, effective 1 January 2018. the relevant general IT and applications controls
As a result we have assessed the risk relating to over key systems used in the ECL process.
this estimate to have increased. - Test of details: We tested the completeness of the
The expected credit loss ('ECL') relating to the Group Group and Parent's watchlist. We performed credit
and Parent's loan portfolios requires the directors file reviews over a risk assessed sample basis; and
to make significant judgments and assumptions over independently recalculated the probability weighted
the recoverability of loans and receivables. Following ECL for a sample of loans.
the transition to IFRS 9 - Financial Instruments, - Historical comparisons: We critically assessed the
the Group and Parent are required to determine the Group and Parent's assumptions in respect of significant
ECL using a three stage model: increase in credit risk; likely collateral valuations,
i. For loans and advances to customers where the credit including timing of recovery; and the probability
risk has not increased significantly since initial of possession given default by comparing them to the
recognition, the loss allowance is calculated at an Group and Parent's historical experience. For the
amount equal to 12 month expected credit losses; Group and Parent's probability of default models we
ii. For loans and advances to customers where a significant assessed the reasonableness of the model predictions
increase in credit risk is considered to have occurred, by comparing them against actual results.
the ECL is calculated based on expected losses over - Benchmarking assumptions: We compared the Group
the loans behavioural life; and and Parent's key assumptions on significant increase
iii. For loans and advances to customers that meet in credit risk; likely collateral valuations, including
the Group and Parent's definition of default, the timing of recovery; probability of possession given
ECL is calculated based on expected losses over the default; and the probability weightings attached to
loans behavioural life. Where applicable this is assessed each economic scenario to comparable peer group organisations.
on an individual basis. - Our sector experience: We challenged the Group and
For loans classified as either stage 1 or 2 and those Parent's key assumptions on significant increase in
in stage 3 that are not individually assessed, an credit risk; the definition of default; likely collateral
assessment is performed on a modelled basis for impairment, valuations, including timing of recovery; probability
with the key assumptions being: of default; probability of possession given default
- The definition of the significant increase in credit based on our knowledge of the Group and experience
risk; of the industry in which it operates.
- The loan's probability of default ('PD') on either - Modelling expertise: We involved our own economic
a 12 month or lifetime basis; specialists to assist us in assessing the appropriateness
- The loan's loss given default ('LGD'); and of the Group and Parent's methodology for determining
- The incorporation of forward economic guidance. the economic scenarios used and the probability weightings
For loans classified as stage 3 that are individually applied to them.
assessed, an impairment assessment is required at - Sensitivity analysis: We performed sensitivity analysis
an individual loan level, based on estimated future over the Group and Parent's key assumptions on significant
cash flows discounted to present value at the loans increase in credit risk; likely collateral valuations,
effective interest rate ('EIR'). There are a number including timing of recovery; probability of possession
of data inputs and assumptions including the cost given default; and the probability weightings attached
of obtaining and selling potentially repossessed property, to each economic scenario.
probable sale proceeds and any rental income prior - Assessing transparency: We evaluated whether the
to sale. For purchased or credit impaired ('POCI') disclosures appropriately reflect and address the
loans held in stage 3, an assessment is performed uncertainty which exists when determining the expected
on a portfolio basis, unless the loan satisfies the credit losses. As a part of this, we assessed the
Group and Parent's definition of default. sensitivity analysis that is disclosed. In addition,
There is a risk that the overall ECL is not reflective we challenged whether the disclosure of the key judgments
of the expected losses of a loan over its behavioural and assumptions made was sufficiently clear.
life. This may be due to the ECL calculation incorporating Our results
inappropriate assumptions and/or the Group and Parent's We found the ECL provision recognised and the related
transfer criteria not effectively capturing a significant disclosures to be acceptable (2017: acceptable).
increase in credit risk.
The effect of these matters is that, as part of our
risk assessment, we determined that the impairment
of loans and advances to customers has a high degree
of estimation uncertainty, with a potential range
of reasonable outcomes greater than our materiality
for the financial statements as a whole. Note 2 of
the financial statements discloses the sensitivities
estimated by the Group and Parent.
Disclosure quality
The disclosures regarding the Group and Parent's application
of IFRS 9 are key to understanding the change from
IAS 39 as well as explaining the key judgments and
material inputs to the IFRS 9 ECL results.
Recognition of revenue on originated and acquired
loans
Group - GBP407.9 million; 2017: GBP332.7 million
Refer to pages 83 to 84 (Audit Committee Report),
page 123 (accounting policy) and page 132 (financial
disclosures).
The risk Our response
Group For originated loans our procedures included:
Subjective Estimate
The recognition of revenue (interest receivable on -- Methodology implementation: We tested the consistency
loans and advances to customers under the effective of methodology and application across the Group's
interest rate ('EIR') method) requires management loan portfolios.
to apply judgment, with the most critical estimate
being the loans' expected behavioural life. -- Test of details: We tested the accuracy of data
Acquired loan portfolios inputs from the mortgage systems into the effective
For the Group's acquired loan portfolios, the risk interest rate calculations, including interest rates,
is that estimated future cash collections do not equal fees and product lives. We assessed the
actual cash receipts. Given the nature of the acquired appropriateness of the Group's expected life
loan portfolios, estimation of future cash collections assumptions on its various mortgage products with
requires significant estimation in respect of the reference to historical customer repayment behaviour
value and timing of expected future cash flows. Any and any qualitative factors management considered
change in the repayment profile results in the discount relevant to future customer trends.
received or premium paid on purchase of the portfolio
to be adjusted through a 'catch 'up' adjustment and -- Sensitivity analysis: We performed stress testing
spread over the revised expected life. analysis on the key assumptions.
Originated assets
The Group applies judgment in deciding which cash -- Independent re-performance: We tested the
flows are spread on an EIR basis and assessing the mathematical accuracy of the calculations through
expected life assumptions used to spread those cash re-performance.
flows.
The expected life assumptions utilise repayment profiles -- Historical comparisons: We considered whether any
which represent when customers are expected to repay 'catch up' adjustments are required on portfolios
based on past customer behaviour and any qualitative where the repayment profile actual cash flow
factors management considered relevant to future customer experience differs from that originally predicted.
trends. For those loans where catch up adjustments have been
Due to the relatively low levels of historical organic recorded, we assessed the appropriateness of the
lending on certain tenors of longer fixed period lending, revised repayment profiles.
the Group has limited information available from which
to assess trends in prepayment, redemption and product For acquired loans we also performed the following:
transfers. As a result there is increased subjectivity
in these assumptions as detailed patterns of customer -- Control operations: We visited each of the servicers
behaviour have not been clearly established from which for the mortgage books where these are not
to estimate expected customer behaviour. administered by the Group to test the relevant
The effect of these matters is that, as part of our controls over the recording of loan balances and
risk assessment, we determined that the recognition interest at these entities; and
of revenue on originated and acquired loans has a
high degree of estimation uncertainty, with a potential -- Data capture: We performed sample testing to assess
range of reasonable outcomes greater than our materiality the accuracy and consistency of the information
for the financial statements as a whole, and possibly provided by the servicer companies to the Group; and
many times that amount. Note 2 discloses the sensitivities that this is appropriately captured in the models.
estimated by the Group.
For both organic loans and acquired loans our procedures
included:
- Assessing transparency: We evaluated whether the
disclosures appropriately reflect and address the
level of subjective estimation that exists when determining
revenue recognition on the Group's loan portfolios.
In addition, we challenged whether the disclosure
of the key estimates and assumptions made was sufficiently
clear.
Our results
- We found the resulting revenue recognition on originated
and acquired loans to be acceptable (2017: acceptable).
3. Our application of materiality and an overview of the scope of our
audit
Materiality
Materiality for the group financial statements as a whole was set at
GBP7.1 million, determined with reference to a benchmark of group profit
before tax, of which it represents 4% (2017: 4% of group profit before
tax).
Materiality for the parent company financial statements as a whole was
set at GBP5.3 million, determined with reference to a benchmark of
company profit before tax, of which it represents 4%.
We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements exceeding GBP0.36 million, in addition to other
identified misstatements that warranted reporting on qualitative
grounds.
Scope - Group
In 2018, as in 2017, the Group audit team performed the audit of the
Group as if it was a single aggregated set of financial information. The
audit was performed using the materiality level set out above and
covered 100% of total Group revenue, Group profit before tax, and total
Group assets.
Group profit before tax
GBP183.8m (2017: GBP159.2m)
Group materiality
GBP7.1m (2017: GBP6.4m)
GBP7.1 million
Whole financial statements materiality (2017: GBP6.4m)
GBP4.65 million
Performance materiality to respond to aggregation risk (2017: GBP4.13
million)
GBP0.36 million
Misstatements reported to the audit committee (2017: GBP0.3 million)
4. We have nothing to report on going concern
The Directors have prepared the financial statements on the going
concern basis as they do not intend to liquidate the Company or the
Group or to cease their operations, and as they have concluded that the
Company's and the Group's financial position means that this is
realistic. They have also concluded that there are no material
uncertainties that could have cast significant doubt over their ability
to continue as a going concern for at least a year from the date of
approval of the financial statements ("the going concern period").
Our responsibility is to conclude on the appropriateness of the
Directors' conclusions and, had there been a material uncertainty
related to going concern, to make reference to that in this audit
report. However, as we cannot predict all future events or conditions
and as subsequent events may result in outcomes that are inconsistent
with judgments that were reasonable at the time they were made, the
absence of reference to a material uncertainty in this auditor's report
is not a guarantee that the group or the company will continue in
operation.
In our evaluation of the Directors' conclusions, we considered the
inherent risks to the Group's and Company's business model and analysed
how those risks might affect the Group's and Company's financial
resources or ability to continue operations over the going concern
period. The risks that we considered most likely to adversely affect the
Group's and Company's available financial resources over this period was
the impact of Brexit on the Group and Company's liquidity and capital
resources.
- availability of funding and liquidity in the event of a market
wide stress scenario including the impact of Brexit, and
- impact on regulatory capital requirements in the event of an
economic slowdown or recession.
As these were risks that could potentially cast significant doubt on the
Group's and the Company's ability to continue as a going concern, we
considered sensitivities over the level of available financial resources
indicated by the Group's financial forecasts taking account of
reasonably possible (but not unrealistic) adverse effects that could
arise from these risks individually and collectively and evaluated the
achievability of the actions the Directors consider they would take to
improve the position should the risks materialise.
Based on this work, we are required to report to you if:
- we have concluded that the use of the going concern basis of
accounting is inappropriate or there is an undisclosed material
uncertainty that may cast significant doubt over the use of that basis
for a period of at least a year from the date of approval of the
financial statements.
- The related statement under the Listing Rules set out on page
107 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify
going concern as a key audit matter.
5. We have nothing to report on the other information in the Annual
Report
The directors are responsible for the other information presented in the
Annual Report together with the financial statements. Our opinion on the
financial statements does not cover the other information and,
accordingly, we do not express an audit opinion or, except as explicitly
stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so,
consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the
financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and directors' report
Based solely on our work on the other information:
- we have not identified material misstatements in the strategic
report and the directors' report;
- in our opinion the information given in those reports for the
financial year is consistent with the financial statements; and
- in our opinion those reports have been prepared in accordance
with the Companies Act 2006.
Directors' remuneration report
In our opinion the part of the Directors' Remuneration Report to be
audited has been properly prepared in accordance with the Companies Act
2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit,
we have nothing material to add or draw attention to in relation to:
- the directors' confirmation within the viability statement on
page 51 that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business
model, future performance, solvency and liquidity;
- the Principal Risks and uncertainty disclosures describing these
risks and explaining how they are being managed and mitigated; and
- the directors' explanation in the viability statement of how
they have assessed the prospects of the Group, over what period they
have done so and why they considered that period to be appropriate, and
their statement as to whether they have a reasonable expectation that
the Group will be able to continue in operation and meet its liabilities
as they fall due over the period of their assessment, including any
related disclosures drawing attention to any necessary qualifications or
assumptions.
Under the Listing Rules we are required to review the viability
statement. We have nothing to report in this respect.
Our work is limited to assessing these matters in the context of only
the knowledge acquired during our financial statements audit. As we
cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgments that were
reasonable at the time they were made, the absence of anything to report
on these statements is not a guarantee as to the Group's and Company's
longer-term viability.
Corporate governance disclosures
We are required to report to you if:
- we have identified material inconsistencies between the
knowledge we acquired during our financial statements audit and the
directors' statement that they consider that the annual report and
financial statements taken as a whole is fair, balanced and
understandable and provides the information necessary for shareholders
to assess the Group's position and performance, business model and
strategy; or
- the section of the annual report describing the work of the
Audit Committee does not appropriately address matters communicated by
us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement
does not properly disclose a departure from the eleven provisions of the
UK Corporate Governance Code specified by the Listing Rules for our
review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are
required to report by exception
Under the Companies Act 2006, we are required to report to you if, in
our opinion:
- adequate accounting records have not been kept by the parent
Company, or returns adequate for our audit have not been received from
branches not visited by us; or
- the parent Company financial statements and the part of the
Directors' Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
- certain disclosures of directors' remuneration specified by law
are not made; or
- we have not received all the information and explanations we
require for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors' responsibilities
As explained more fully in their statement set out on page 108, the
directors are responsible for: the preparation of the financial
statements including being satisfied that they give a true and fair
view; such internal control as they determine is necessary to enable the
preparation of financial statements that are free from material
misstatement, whether due to fraud or error; assessing the Group and
parent Company's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate the
Group or the parent Company or to cease operations, or have no realistic
alternative but to do so.
Auditor's responsibilities
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or other irregularities (see below), or error, and
to issue our opinion in an auditor's report. Reasonable assurance is a
high level of assurance, but does not guarantee that an audit conducted
in accordance with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud, other irregularities
or error and are considered material if, individually or in aggregate,
they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC's
website at www.frc.org.uk/auditorsresponsibilities.
Irregularities - ability to detect
We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the annual accounts from our
general commercial and sector experience, through discussion with the
directors (as required by auditing standards), and from inspection of
the Group's regulatory correspondence and discussed with the directors
the policies and procedures regarding compliance with laws and
regulations. We communicated identified laws and regulations throughout
our team and remained alert to any indications of non - compliance
throughout the audit. The potential effect of these laws and regulations
on the annual accounts varies considerably.
Firstly, the Group is subject to laws and regulations that directly
affect the annual accounts including financial reporting legislation
(including related companies legislation, distributable profits
legislation and taxation legislation), and we assessed the extent of
compliance with these laws and regulations as part of our procedures on
the related annual account items.
Secondly, the Group is subject to many other laws and regulations where
the consequences of non-compliance could have a material effect on
amounts or disclosures in the annual accounts, for instance through the
imposition of fines or litigation or the loss of the Group's licence to
operate. We identified the following areas as those most likely to have
such an effect: regulatory capital and liquidity and certain aspects of
company legislation recognising the financial and regulated nature of
the Group's activities. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and regulations to
enquiry of the directors and inspection of regulatory and legal
correspondence, if any.
These limited procedures did not identify actual or suspected
non-compliance.
Owing to the inherent limitations of an audit, there is an unavoidable
risk that we may not have detected some material misstatements in the
annual accounts, even though we have properly planned and performed our
audit in accordance with auditing standards. For example, the further
removed non-compliance with laws and regulations (irregularities) is
from the events and transactions reflected in the annual accounts, the
less likely the inherently limited procedures required by auditing
standards would identify it. In addition, as with any audit, there
remained a higher risk of non-detection of irregularities, as these may
involve collusion, forgery, intentional omissions, misrepresentations,
or the override of internal controls. We are not responsible for
preventing non-compliance and cannot be expected to detect
non-compliance with all laws and regulations.
8. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company's members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company's
members those matters we are required to state to them in an auditor's
report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
Company and the Company's members, as a body, for our audit work, for
this report, or for the opinions we have formed.
Pamela McIntyre
(Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
14 March 2019
Statement of Comprehensive Income
For the year ended 31 December 2018
Group Group
2018 2017
Notes GBPm GBPm
Interest receivable and similar income 3 407.9 332.7
Interest payable and similar charges 4 (120.6) (87.3)
Net interest income 287.3 245.4
Fair value losses on financial instruments 5 (5.1) (6.3)
Loss on sale of financial instruments 6 (0.1) -
Fees and commissions receivable 1.7 1.5
Fees and commissions payable (1.1) (1.0)
External servicing fees (0.6) (1.5)
Total income 282.1 238.1
Administrative expenses 7 (74.9) (61.6)
Depreciation and amortisation 25, 26 (4.7) (3.5)
Impairment losses 21 (8.1) (4.4)
FSCS and other regulatory provisions 33 (0.8) (0.9)
Exceptional cost-Heritable option 10 (9.8) -
Profit before taxation 183.8 167.7
Taxation 11 (43.5) (40.8)
Profit for the year 140.3 126.9
Other comprehensive expense
Items which may be reclassified to profit or loss:
Fair value changes on financial instruments measured
as FVOCI (2017: available-for-sale):
Arising in the year (0.2) 0.1
Revaluation of foreign operations (0.2) (0.3)
Other comprehensive expense (0.4) (0.2)
Total comprehensive income for the year 139.9 126.7
Dividend, pence per share 13 14.6 12.8
Earnings per share, pence per share
Basic 12 55.5 51.1
Diluted 12 55.0 50.7
The above results are derived wholly from continuing operations.
The notes on pages 122 to 182 form part of these accounts.
The financial statements on pages 118 to 182 were approved by the Board
of Directors on 14 March 2019.
Statement of Financial Position
As at 31 December 2018
Group Group Bank Bank
2018 2017 2018 2017
Note GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.5 0.4 0.5
Loans and advances to credit
institutions 15 1,347.3 1,187.2 1,340.0 1,179.3
Investment securities 16 58.9 19.1 58.9 19.1
Loans and advances to customers 17 8,983.3 7,306.0 7,208.2 6,051.0
Derivative assets 22 11.7 6.1 11.7 6.1
Fair value adjustments on hedged
assets 23 19.8 31.9 19.8 31.9
Deferred taxation asset 27 3.5 5.1 1.6 2.5
Intangible assets 25 7.8 6.8 7.1 6.1
Property, plant and equipment 26 21.8 21.5 15.6 15.4
Investments in subsidiaries and
intercompany loans 24 - - 1,900.7 1,194.3
Other assets 28 5.7 4.9 5.5 4.7
Total assets 10,460.2 8,589.1 10,569.5 8,510.9
Liabilities
Amounts owed to retail depositors 29 8,071.9 6,650.3 8,071.9 6,650.3
Amounts owed to credit
institutions 30 1,584.0 1,250.3 1,584.0 1,250.3
Amounts owed to other customers 31 32.9 25.7 32.9 25.7
Derivative liabilities 22 24.9 21.8 24.9 21.8
Current taxation liability 19.2 18.3 15.0 14.8
Intercompany loans 24 - - 262.4 31.2
Other liabilities 32 18.7 16.3 14.7 13.4
FSCS and other regulatory
provisions 33 1.8 1.4 1.8 1.4
Subordinated liabilities 34 10.8 10.9 10.8 10.9
Perpetual subordinated bonds 35 15.3 15.3 15.3 15.3
9,779.5 8,010.3 10,033.7 8,035.1
Equity
Share capital 36 2.4 2.4 2.4 2.4
Share premium 36 158.8 158.4 158.8 158.4
Retained earnings 439.6 337.5 297.0 237.1
Other reserves 37 79.9 80.5 77.6 77.9
680.7 578.8 535.8 475.8
Total equity and liabilities 10,460.2 8,589.1 10,569.5 8,510.9
The profit after tax for the year ended 31 December 2018 of OneSavings
Bank plc as a Company was GBP96.2m (2017: GBP91.9m). As permitted by
section 408 of the Companies Act 2006, no separate Statement of
Comprehensive Income is presented in respect of the Company.
The notes on pages 122 to 182 form part of these accounts.
The financial statements on pages 118 to 182 were approved by the Board
of Directors on 14 March 2019.
Andy Golding April Talintyre
Chief Executive Officer Chief
Financial Officer
14 March 2019 14 March 2019
Company number: 07312896
Statement of Changes in Equity
For the year ended 31 December 2018
Share-
Foreign Available- based
Share Share Capital Transfer exchange FVOCI for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve reserve earnings bonds(1) Total
Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2017 2.4 157.9 6.2 (12.8) 0.1 - - 1.9 240.7 22.0 418.4
Profit for the
year - - - - - - - - 126.9 - 126.9
Coupon paid on
equity bonds - - - - - - - - (3.7) - (3.7)
Dividends paid - - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - (0.3) - 0.1 - - - (0.2)
Share-based
payments - 0.5 0.2 - - - - 2.1 0.2 - 3.0
Additional
Tier 1
securities
issuance - - - - - - - - (0.8) 60.0 59.2
Tax recognised
in equity - - - - - - - 1.0 1.2 - 2.2
At 31 December
2017 2.4 158.4 6.4 (12.8) (0.2) - 0.1 5.0 337.5 82.0 578.8
IFRS 9
transitional
adjustment - - - - - 0.1 (0.1) - (3.6) - (3.6)
Tax on IFRS 9 - - - - - - - - 0.7 - 0.7
Restated at 31
December
2017 2.4 158.4 6.4 (12.8) (0.2) 0.1 - 5.0 334.6 82.0 575.9
Profit for the
year - - - - - - - - 140.3 - 140.3
Coupon paid on
equity bonds - - - - - - - - (6.5) - (6.5)
Dividends paid - - - - - - - - (33.2) - (33.2)
Other
comprehensive
income - - - - (0.2) (0.2) - - - - (0.4)
Share-based
payments - 0.4 0.1 - - - - (0.3) 2.6 - 2.8
Tax recognised
in equity - - - - - - - - 1.8 - 1.8
At 31 December
2018 2.4 158.8 6.5 (12.8) (0.4) (0.1) - 4.7 439.6 82.0 680.7
Share-
Foreign Available- based
Share Share Capital Transfer exchange FVOCI for-sale payment Retained Equity
capital premium contribution reserve reserve reserve reserve reserve earnings bonds(1) Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January
2017 2.4 157.9 5.9 (15.2) - - - 1.9 175.3 22.0 350.2
Profit for the
year - - - - - - - - 91.9 - 91.9
Coupon paid on
equity bonds - - - - - - - - (3.7) - (3.7)
Dividends paid - - - - - - - - (27.0) - (27.0)
Other
comprehensive
income - - - - - - 0.1 - - - 0.1
Share-based
payments - 0.5 0.2 - - - - 2.0 0.2 - 2.9
Additional
Tier 1
securities
issuance - - - - - - - - (0.8) 60.0 59.2
Tax recognised
in equity - - - - - - - 1.0 1.2 - 2.2
At 31 December
2017 2.4 158.4 6.1 (15.2) - - 0.1 4.9 237.1 82.0 475.8
IFRS 9
transitional
adjustment - - - - - 0.1 (0.1) - (1.3) - (1.3)
Tax on IFRS 9 - - - - - - - - 0.3 - 0.3
Restated at 31
December
2017 2.4 158.4 6.1 (15.2) - 0.1 - 4.9 236.1 82.0 474.8
Profit for the
year - - - - - - - - 96.2 - 96.2
Coupon paid on
equity bonds - - - - - - - - (6.5) - (6.5)
Dividends paid - - - - - - - - (33.2) - (33.2)
Other
comprehensive
income - - - - - (0.2) - - - - (0.2)
Share-based
payments - 0.4 0.1 - - - - (0.2) 2.6 - 2.9
Tax recognised
in equity - - - - - - - - 1.8 - 1.8
At 31 December
2018 2.4 158.8 6.2 (15.2) - (0.1) - 4.7 297.0 82.0 535.8
1. Equity bonds comprise GBP22m of Perpetual Subordinated Bonds
and GBP60m of Additional Tier 1 securities ('AT1 securities').
The reserves are further disclosed in note 37.
Statement of Cash Flows
For the year ended 31 December 2018
Group Group Bank Bank
2018 2017 2018 2017
Notes GBPm GBPm GBPm GBPm
Cash flows from operating activities
Profit before taxation 183.8 167.7 129.6 124.0
Adjustments for non-cash items 45 32.7 19.3 31.1 16.3
Changes in operating assets and liabilities 45 (262.1) (655.0) (215.3) (623.1)
Cash used in operating activities (45.6) (468.0) (54.6) (482.8)
FSCS and other provisions paid (0.4) (1.0) (0.4) (1.0)
Net tax paid (39.1) (42.1) (30.3) (34.4)
Net cash used in operating activities (85.1) (511.1) (85.3) (518.2)
Cash flows from investing activities
Maturity and sales of investment securities 16 39.9 40.0 39.7 40.0
Purchases of investment securities 16 (79.9) - (79.7) -
Sales of financial instruments 6 0.4 - 0.4 -
Purchases of equipment and intangible assets 25, 26 (6.0) (14.0) (5.2) (10.5)
Cash (used in)/generated from investing activities (45.6) 26.0 (44.8) 29.5
Cash flows from financing activities
Bank of England TFS drawdowns 30 250.0 1,149.0 250.0 1,149.0
Bank of England ILTR received 30 80.0 - 80.0 -
Interest paid on bonds and subordinated debt(1) (1.6) (1.8) (1.6) (1.8)
Coupon paid on equity bonds (6.5) (3.7) (6.5) (3.7)
Dividends paid 13 (33.2) (27.0) (33.2) (27.0)
AT1 securities issuance net of costs 37 - 59.4 - 59.4
Proceeds from issuance of shares under employee SAYE
schemes 36 0.4 0.5 0.4 0.5
Repayment of debt(2) 34 (0.1) (10.7) (0.1) (10.7)
Cash generated from financing activities 289.0 1,165.7 289.0 1,165.7
Net increase in cash and cash equivalents 158.3 680.6 158.9 677.0
Cash and cash equivalents at the beginning of the
year 14 1,165.9 485.3 1,158.0 481.0
Cash and cash equivalents at the end of the year 14 1,324.2 1,165.9 1,316.9 1,158.0
Movement in cash and cash equivalents 158.3 680.6 158.9 677.0
1. The comparative information has been reclassified to include
interest paid on bonds and subordinated debt, which was previously shown
within operating activities, within financing activities.
2. Repayment of debt comprises GBP0.1m of the 2022 LIBOR + 2%
linked floating rate notes. 2017 comprised the 2017 LIBOR linked
floating rate subordinated liabilities of GBP5.7m and the 2017 average
standard mortgage rate linked floating subordinated liabilities of
GBP5.0m.
Notes to the Financial Statements
For the year ended 31 December 2018
1. Accounting policies
The principal accounting policies applied in the preparation of the
financial statements for the Group and the Bank are set out below.
a) Basis of preparation
The financial statements have been prepared in accordance with
International Financial Reporting Standards ('IFRSs') as adopted by the
European Union ('EU') and interpretations issued by the International
Financial Reporting Interpretations Committee ('IFRIC').
The financial statements have been prepared on a historical cost basis,
as modified by the revaluation of investment securities held at fair
value through other comprehensive income ('FVOCI') and derivative
contracts and financial assets held at fair value through profit or loss
('FVTPL').
As permitted by section 408 of the Companies Act 2006, no Statement of
Comprehensive Income is presented for the Bank.
b) Going concern
The Board undertakes regular rigorous assessments of whether the Group
is a going concern in the light of current economic conditions and all
available information about future risks and uncertainties.
Projections for the Group have been prepared, covering its future
performance, capital and liquidity for a period in excess of 12 months
from the date of approval of these financial statements including stress
scenarios. The stress scenarios include Brexit and Bank of England Term
Funding Scheme ('TFS') repayments. These projections show that the Group
has sufficient capital and liquidity to continue to meet its regulatory
requirements as set out by the Prudential Regulatory Authority ('PRA').
The Board has therefore concluded that the Group has sufficient
resources to continue in operational existence for a period in excess of
12 months and as a result it is appropriate to prepare these financial
statements on a going concern basis.
c) Basis of consolidation
The Group accounts include the results of the Bank and its subsidiary
undertakings. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group and are deconsolidated from the date
that control ceases. Upon consolidation, intercompany transactions,
balances and unrealised gains on transactions are eliminated. Unrealised
losses are also eliminated unless the transaction provides evidence of
impairment of the asset transferred. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency with the
policies adopted by the Group.
In the Bank's financial statements, investments in subsidiary
undertakings are stated at cost less provision for any impairment.
d) Foreign currency translation
The consolidated financial statements are presented in Pounds Sterling
which is the presentation currency of the Group. The financial
statements of each of the Bank's subsidiaries are measured using the
currency of the primary economic environment in which the subsidiary
operates (the 'functional currency'). Foreign currency transactions are
translated into the functional currencies using the exchange rates
prevailing at the date of the transactions. Monetary items denominated
in foreign currencies are retranslated at the rate prevailing at the
period end.
Foreign exchange ('FX') gains and losses resulting from the
retranslation and settlement of these items are recognised in profit or
loss. Non-monetary items measured at cost in the foreign currency are
translated using the spot FX rate at the date of the transaction. Non-
monetary items measured at fair value in the foreign currency are
translated into the functional currency at the spot FX rate at the date
of which the fair value is determined.
The assets and liabilities of foreign operations with functional
currencies other than Pounds Sterling are translated into the
presentation currency at the exchange rate on the reporting date. The
income and expenses of foreign operations are translated at the rates on
the dates of transactions. Exchange differences on foreign operations
are recognised in other comprehensive income and accumulated in the
foreign exchange reserve within equity.
e) Segmental reporting
IFRS 8 requires operating segments to be identified on the basis of
internal reports and components of the Group which are regularly
reviewed by the chief operating decision maker to allocate resources to
segments and to assess their performance. For this purpose, the chief
operating decision maker of the Group is the Board of Directors.
The Group lends within the UK and the Channel Islands.
The Group segments its lending by product, focusing on the customer need
and reason for a loan. It operates under two segments:
-- Buy-to-Let/SME ('BTL/SME')
-- Residential mortgages.
The Group includes asset finance leases (a new business lending line
developed internally with lending commencing in October 2018) and
personal loans (sold in June 2018) within the BTL/SME segment.
The Group has applied the aggregation criteria of IFRS 8 for the
segmental reporting in note 43 but has disclosed the risk management
tables in note 39 at a sub-segment level to provide the user with
granular level analysis of the Group's core lending business.
f) Interest income and expense
Interest income and interest expense for all interest-bearing financial
instruments measured at amortised cost are recognised in profit or loss
using the effective interest rate ('EIR') method. The EIR is the rate
which discounts the expected future cash flows, over the expected life
of the financial instrument, to the net carrying value of the financial
asset or liability.
When calculating the EIR, the Group estimates cash flows considering all
contractual terms of the instrument and behavioural aspects (for example,
prepayment options) but not considering future credit losses. The
calculation of the EIR includes all transaction costs and fees paid or
received that are an integral part of the interest rate, together with
the discounts or premiums arising on the acquisition of loan portfolios.
Transaction costs include incremental costs that are directly
attributable to the acquisition or issue of a financial instrument.
The Group monitors the actual cash flows for each acquired book and
where they diverge significantly from expectation, the future cash flows
are reset. In assessing whether to adjust future cash flows on an
acquired portfolio, the Group considers the cash variance on an absolute
and percentage basis. The Group also considers the total variance across
all acquired portfolios. Where cash flows for an acquired portfolio are
reset, they are discounted at the EIR to derive a new carrying value,
with changes taken to profit or loss as interest income.
The EIR rate is adjusted where there is a change to the reference
interest rate (LIBOR or Base Rate) affecting portfolios with a variable
interest rate which will impact future cash flows. The revised EIR is
the rate which exactly discounts the revised cash flows to the net
carrying value of the loan portfolio.
Interest income on FVOCI investment securities is included in interest
receivable and similar income. Interest on derivatives is included in
interest receivable and similar income or interest expense and similar
charges following the underlying instrument it is hedging.
Interest paid on equity Perpetual Subordinated Bonds ('PSBs') and AT1
securities is recognised directly in equity in the period in which they
are paid.
g) Fees and commissions
Fees and commissions which are an integral part of the EIR of a
financial instrument are recognised as an adjustment to the EIR and
recorded in interest income. The Group includes early redemption charges
within the EIR.
Other fees and commissions are recognised on the accruals basis as
services are provided or on the performance of a significant act, net of
VAT and similar taxes.
h) Taxation
Income tax comprises current and deferred tax. It is recognised in
profit or loss, other comprehensive income or directly in equity,
consistently with the recognition of items it relates to.
Current tax is the expected tax charge or credit on the taxable income
or loss in the period and any adjustments in respect of previous years.
Deferred tax is the tax expected to be payable or recoverable in respect
of temporary differences between the carrying amounts of assets or
liabilities for accounting purposes and carrying amounts for tax
purposes.
Deferred tax assets are recognised only to the extent that it is
probable that future taxable profits will be available to utilise the
asset. The recognition of deferred tax is mainly dependent on the
projections of future taxable profits and future reversals of temporary
differences. The current Board's projections of future taxable income
assume that the Group will utilise its deferred tax asset within the
foreseeable future.
The Bank and its UK subsidiaries are in a group payment arrangement for
corporation tax and show a net corporation tax liability and deferred
tax asset accordingly.
i) Dividends
Dividends are recognised in equity in the period in which they are paid
or, if earlier, approved by shareholders.
j) Cash and cash equivalents
Cash and cash equivalents comprise cash, non- restricted balances with
central banks and highly liquid financial assets with original
maturities of less than three months subject to an insignificant risk of
changes in their fair value.
k) Intangible assets
Purchased software and costs directly associated with the development of
computer software are capitalised as intangible assets where the
software is a unique and identifiable asset controlled by the Group and
will generate future economic benefits.
Costs to establish technological feasibility or to maintain existing
levels of performance are recognised as an expense.
Software is amortised on a straight line basis in profit or loss over
its estimated useful life, which is generally 5 years. The Group reviews
the amortisation period on an annual basis. If the expected useful life
of assets is different from previous assessments, the amortisation
period is changed accordingly.
l) Property, plant and equipment
Property, plant and equipment comprise freehold land and buildings,
major alterations to office premises, computer equipment and fixtures
measured at cost less accumulated depreciation. These assets are
reviewed for impairment annually, and if they are considered to be
impaired, are written down immediately to their recoverable amounts.
Gains and losses on disposals, calculated as the difference between the
net disposal proceeds with the carrying amount of the asset, are
included in profit or loss.
Items of property, plant and equipment are depreciated on a straight
line basis over their estimated useful economic lives as follows:
Buildings 50 years
Leasehold improvements 10 years
Equipment and fixtures 5 years
Land, deemed to be 25% of purchase price of buildings, is not
depreciated.
The cost of repairs and renewals is charged to profit or loss in the
period in which the expenditure is incurred.
m) Financial instruments
i. Recognition
The Group initially recognises loans and advances, deposits, debt
securities issued and subordinated liabilities on the date on which they
are originated. All other financial instruments are accounted for on the
trade date which is when the Group becomes a party to the contractual
provisions of the instrument.
The Group initially recognises financial assets and financial
liabilities at fair value plus, for instruments not at FVTPL,
transaction costs that are directly attributable to its acquisition or
issue. Transaction costs relating to the acquisition or issue of a
financial instrument at FVTPL are recognised in the profit or loss as
incurred.
ii. Classification
The Group classifies financial instruments based on the business model
and the contractual cash flow characteristics of the financial
instruments. Under IFRS 9, the Group classifies financial assets into
one of three measurement categories:
-- Amortised cost - assets held in a business model to hold financial
assets in order to collect contractual cash flows, where the contractual
terms of the financial asset give rise on specified dates to cash flows
that are solely payments of principal and interest ('SPPI') on the
principal amount outstanding.
-- Fair value through other comprehensive income ('FVOCI') - assets
held in a business model which collects contractual cash flows and sells
financial assets where the contractual terms of the financial assets give
rise on specified dates to cash flows that are SPPI on the principal
amount outstanding. The Group only measures investment securities under
this category, which were previously classified as available-for-sale
under IAS 39.
-- Fair value through profit or loss ('FVTPL') - assets not measured
at amortised cost or FVOCI. The Group only measures derivative assets
under this category.
The 2017 comparatives are classified in accordance with IAS 39 and IAS
32 into the following categories:
-- Loans and receivables
-- Available-for-sale ('AFS')
-- At fair value through profit or loss.
The Group classifies non-derivative financial liabilities as measured at
amortised cost.
The Group has no financial assets nor liabilities classified as held for
trading or held to maturity.
The Group classifies certain financial instruments as equity where they
meet the following conditions:
-- The financial instrument includes no contractual obligation to
deliver cash or another financial asset on potentially unfavourable
conditions
-- The financial instrument is a non-derivative that includes no
contractual obligation for the issuer to deliver a variable number of its
own equity instruments; or
-- The financial instrument is a derivative that will be settled only
by the issuer exchanging a fixed amount of cash or another financial
asset for a fixed number of its own equity instruments.
Equity financial instruments comprise own shares, equity PSBs and AT1
securities. Accordingly, the coupon paid on the equity PSBs and AT1
securities, and related tax effects, are recognised directly in retained
earnings when paid.
iii. Derecognition
The Group derecognises financial assets when the contractual rights to
the cash flows expire or the Group transfers substantially all the risks
and rewards of ownership of the financial asset. Where contractual cash
flows are significantly modified (e.g. through the broker-led Choices
programme) the original financial asset is derecognised with a new
financial asset recognised for the modified cash flows.
The forbearance measures offered by the Group are considered a
modification event as the contractual cash flows are renegotiated or
otherwise modified. The Group considers the renegotiated or modified
cash flows are not wholly different from the contractual cash flows, and
does not consider forbearance measures to give rise to a derecognition
event.
Financial liabilities are derecognised only when the obligation is
discharged, cancelled or has expired.
iv. Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the Statement of Financial Position when, and only when,
the Group currently has a legally enforceable right to offset the
amounts and it intends either to settle them on a net basis or to
realise the asset and settle the liability simultaneously in accordance
with the requirements of IAS 32.
The Group's derivatives are covered by industry standard master netting
agreements. Master netting agreements create a right of set-off that
becomes enforceable only following a specified event of default or in
other circumstances not expected to arise in the normal course of
business. These arrangements do not qualify for offsetting under IAS 32
and as such the Group reports derivatives on a gross basis.
Collateral in respect of derivatives is subject to the standard industry
terms of International Swaps and Derivatives Association ('ISDA') Credit
Support Annex. This means that the cash received or given as collateral
can be pledged or used during the term of the transaction but must be
returned on maturity of the transaction. The terms also give each
counterparty the right to terminate the related transactions upon the
counterparty's failure to post collateral. Collateral paid or received
does not qualify for offsetting under IAS 32, and is recognised in loans
and advances to credit institutions and amounts owed to credit
institutions respectively.
v. Amortised cost measurement
The amortised cost of a financial asset or financial liability is the
amount at which the financial asset or financial liability is measured
at initial recognition, plus or minus the cumulative amortisation using
the EIR method of any difference between the initial amount recognised
and the maturity amount, minus any reduction for impairment.
vi. Fair value measurement
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date in the principal or, in its absence,
the most advantageous market to which the Group has access at that date.
When available, the Group measures the fair value of an instrument using
the quoted price in an active market for that instrument. A market is
regarded as active if transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on
an ongoing basis. The Group measures the fair value of its investment
securities and PSBs using quoted market prices.
If there is no quoted price in an active market, then the Group uses
valuation techniques that maximise the use of relevant observable inputs
and minimise the use of unobservable inputs.
The Group uses LIBOR curves to value its derivatives, however, using
overnight index swap ('OIS') curves would not materially change their
value. The fair value of the Group's derivative financial instruments
incorporates credit valuation adjustments ('CVA') and debit valuation
adjustments ('DVA'). The DVA and CVA take into account the respective
credit ratings of the Bank and counterparty and whether the derivative
is collateralised or not. Interest rate derivatives are valued using
discounted cash flow models and observable market data and will be
sensitive to benchmark interest rate curves.
vii. Identification and measurement of impairment
During 2018 the Group used the IFRS 9 three stage expected credit loss
('ECL') approach for measuring impairment. The three impairment stages
under IFRS 9 are as follows:
-- Stage 1 - entities are required to recognise a 12 month ECL
allowance where there is no significant increase in credit risk ('SICR')
since initial recognition.
-- Stage 2 - a lifetime loss allowance is held for assets where a
SICR is identified since initial recognition. The assessment of whether
credit risk has increased significantly since initial recognition is
performed for each reporting period for the life of the loan.
-- Stage 3 - requires objective evidence that an asset is credit
impaired, at which point a lifetime ECL allowance is required.
During 2017 the Group used IAS 39 specific and collective provisioning
basis for measuring impairment.
The Group measures impairment through the use of individual and modelled
assessments.
Individual assessment
The Group's provisioning process requires individual assessment for
loans over GBP0.5m which are more than three months in arrears, have LPA
receivers appointed, the property is taken into possession or there are
any other events that suggest a high probability of credit loss. Loans
are considered at a connection level, i.e. including all loans belonging
to and connected to the customer.
The Group estimates cash flows from these loans, including expected
interest and principal payments, rental or sale proceeds, selling and
other costs. The Group obtains up-to-date independent valuations for
properties put up for sale.
If the present value of estimated future cash flows discounted at the
original EIR is less than the carrying value of the loan, a provision is
recognised for the difference. Such loans are classified as impaired. If
the present value of the estimated future cash flows exceeds the
carrying value no provision is recognised.
The Group applies its IFRS 9 (2017: IAS 39) models to all loans with no
individually assessed provision.
2018 IFRS 9 modelled impairment
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12 month (stage 1) or
lifetime basis depending on whether a SICR has occurred since initial
recognition (stage 2) or where an account meets the Group's definition
of default (stage 3).
The ECL calculation is a product of an individual loan's probability of
default ('PD'), exposure at default ('EAD') and loss given default
('LGD') discounted at the effective interest rate ('EIR'). The ECL
drivers of PD, EAD and LGD are modelled at an account level. The
assessment of whether a significant increase in credit risk has occurred
is based on the lifetime PD estimate.
Significant increase in credit risk (movement to stage 2)
The Group's transfer criteria determine what constitutes a SICR, which
results in an exposure being moved from stage 1 to stage 2.
At the point of recognition a loan is assigned a lifetime PD estimate.
For each monthly reporting date thereafter an updated lifetime PD
estimate is computed for the life of the loan. The Group's transfer
criteria analyses relative changes in lifetime PD versus the origination
lifetime PD, where if prescribed thresholds are met, an account will be
transferred from stage 1 to stage 2.
IFRS 9 includes a rebuttable presumption that if an account is more than
30 days past due it has experienced a SICR. The Group considers more
than 30 days past due to be an appropriate back stop measure and
therefore has not rebutted this presumption.
The Group's Risk function constantly monitors the ongoing
appropriateness of the transfer criteria, where any proposed amendments
are reviewed and approved by the Group's Management Committees and the
Risk and Audit Committees at least semi-annually or more frequently if
required.
A borrower will move back into stage 1 where the SICR definition is no
longer satisfied.
Definition of default (movement to stage 3)
The Group uses a number of quantitative and qualitative criteria to
determine whether an account meets the definition of default and
therefore moves to stage 3. The criteria currently include:
-- The rebuttable presumption that more than 90 days past due is an
indicator of default. The Group has not rebutted this presumption and
therefore deems more than 90 days past due as an indicator of default.
This also ensures alignment between the Group's Internal Ratings Based
('IRB') models and the Basel/Regulatory definition of default.
-- The Group has also deemed it appropriate to classify accounts that have
moved into an unlikeliness to pay position, which includes forbearance,
repossession and interest-only term expiry.
A borrower will move out of stage 3 when their credit risk improves such
that they no longer meet the 90 days past due and unlikeliness to pay
criteria and following this have completed an internally approved
probation period. The borrower will move to stage 1 or stage 2 dependent
on whether the SICR applies.
Forward-looking macroeconomic scenarios
IFRS 9 requires firms to consider the risk of default and expected
credit loss taking into consideration expectations of economic changes
that are deemed to be reasonably possible.
The Group uses a bespoke macroeconomic model to determine the most
significant factors which may influence the likelihood of an exposure
defaulting in the future. The macroeconomic factors relate to the HPI,
unemployment and the Bank of England Base Rate.
The Group has derived an approach for factoring probability weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates. An account's lifetime PD is impacted by the probability
weighted macroeconomic scenario and therefore impacts whether an account
meets the Group's SICR transfer criteria moving the exposure between
stage 1 and stage 2. The macroeconomic scenarios feed directly into the
ECL calculation, as the adjusted PD, lifetime PD and LGD estimates are
used within the individual account ECL allowance calculations.
The Group currently does not have an in-house economics function and
therefore sources economic forecasts from an appropriately qualified
third party. The Group will consider a minimum of three probability
weighted scenarios, including base, upside and downside scenarios.
During 2018, a fourth scenario was introduced relating specifically to a
disorderly 'no-deal' Brexit outcome.
The base case is also utilised within the Group's impairment forecasting
process which in turn feeds the wider business planning processes. This
economic forecast is also used to set the Group's credit risk appetite
thresholds and limits.
Expected life
IFRS 9 requires lifetime expected credit losses to be measured over the
expected life. Currently the Group considers the loan's behavioural life
is equal to the full mortgage term. This approach will continue to be
monitored and enhanced if and when deemed appropriate.
Purchased or originated credit impaired ('POCI')
Acquired loans that meet OSB's definition of default (90 days past due
or an unlikeliness to pay position) at acquisition are treated as a POCI
asset. These assets will attract a lifetime ECL allowance over the full
term of the loan, even when the loan no longer meets the definition of
default post acquisition. The Group does not originate credit impaired
loans.
2017 IAS 39 modelled impairment
All loans which have not been individually assessed are subsequently
assessed for impairment collectively, with each loan being assigned a
one year PD and a LGD generally consistent with the requirements of the
IRB approach, leading to the expected loss ('EL'). The provision is the
sum of all ELs. The calculation uses indexed valuations from ONS
statistics applied at a postcode level. All provisions on loans greater
than three months in arrears are treated as a specific provision as they
are considered to be impaired. Loans less than three months in arrears
are assigned a collective provision.
Different PDs are used for BTL/SME mortgages, Residential mortgages and
unsecured loans. Interest-only mortgages, which are predominantly within
the BTL/SME segment, are not differentiated further from capital
repayment mortgages. As PDs are generated from historic portfolio
performance using a mix of interest-only and repayment loans, they
capture the impact of interest-only mortgages as long as the mix remains
similar.
The Group has been contacting owner-occupied residential customers with
upcoming interest-only loan maturities and tracking responses and
outcomes through specific campaigns since 2014. There is no provision
for the non-repayment risk of these loans.
Second charge mortgages are considered separately to first charge
residential mortgages in that separate PDs are calculated and used in
loss calculations based on previous experience of losses on second
charge loans. The LGD calculation on second charge mortgages considers
the fact that the holder of the first charge on collateral has first
claim on the proceeds of a sale.
Incurred but not reported losses ('IBNR'), where a loss trigger has
occurred but the borrower has not yet missed a payment, are captured
through the Group's collective provisioning process. PD rates are
calculated for loans that are not in arrears based on historic loss data
and a provision value is calculated for these accounts. The calculation
of PD rates incorporates assumptions for emergence periods ('EP'), cure
rates and forbearance. The Group conducts detailed analysis to calculate
the time taken for a customer to fall into arrears post a loss event
occurring (e.g. loss of employment). This EP is then considered within a
wider observation period utilised to model the time taken post loss
event for the customer to reach a default state.
Loans and the related provision are written off when the underlying
security is sold or an unsecured loan customer has not paid for 12
months. Subsequent recoveries of amounts previously written off are
taken through profit or loss.
The Group classifies a loan as forborne at the point a concession is
granted based on the deteriorated financial status of the borrower.
Accounts are classified as forborne only for the period of time which
the loan is known to be, or may still be, in financial difficulty. When
the borrower is no longer experiencing financial difficulties the loan
will revert to standard terms. If the forbearance eliminates the arrears,
the loan is no longer considered past due.
None of the forbearance measures modify the overall cash flows to an
extent that requires derecognition of the existing and recognition of a
new loan under IAS 39.
Loans that have ever had forbearance applied are assigned a higher PD in
the collective provision calculation. Forborne accounts are not treated
differently in relation to impairments in any other way.
viii. Designation at fair value through the profit or loss account
The Group has not irrevocably designated any financial assets or
financial liabilities at FVTPL during the current and previous year.
n) Loans and receivables
Loans and receivables are predominantly mortgage loans and advances to
customers with fixed or determinable payments that are not quoted in an
active market and that the Group does not intend to sell in the near
term. They are initially recorded at fair value plus any directly
attributable transaction costs and are subsequently measured at
amortised cost using the EIR method, less impairment losses. Where
exposures are hedged by derivatives, designated and qualifying as fair
value hedges, the fair value adjustment for the hedged risk to the
carrying value of the hedged loans and advances is reported in fair
value adjustments for hedged assets.
Loans and the related provision are written off when the underlying
security is sold or an unsecured loan customer has not paid for 12
months. Subsequent recoveries of amounts previously written off are
taken through profit or loss.
Loans and advances over which the Group transfers its rights to the
collateral thereon to the Bank of England under the TFS and Indexed
Long-Term Repo ('ILTR') are not derecognised from the Statement of
Financial Position, as the Group retains substantially all the risks and
rewards of ownership, including all cash flows arising from the loans
and advances and exposure to credit risk. The Group classifies TFS and
ILTR as amortised cost under IFRS 9 Financial Instruments.
Loans and receivables also contain the Group's asset finance lease
lending. Finance leases are initially measured at an amount equal to the
net investment in the lease, using the interest rate implicit in the
finance lease. Initial direct costs are included in the initial
measurement of the net investment in the lease and reduce the amount of
income recognised over the lease term. Finance income is recognised over
the lease term, based on a pattern reflecting a constant periodic rate
of return on the net investment in the lease.
o) Investment securities
Investment securities comprise securities held for liquidity purposes
(UK treasury bills and supranational bonds in the nature of investment
securities). These assets are non-derivatives that are designated as
FVOCI (2017: AFS). These are held at fair value with movements taken to
other comprehensive income and accumulated in the FVOCI (2017: AFS)
reserve within equity, except for impairment losses which are taken to
profit or loss. When the instrument is sold, the gain or loss
accumulated in equity is reclassified to profit or loss.
p) Deposits and subordinated liabilities
Deposits and subordinated liabilities are the Group's sources of debt
funding. They comprise deposits from retail customers and credit
institutions, including collateralised loan advances from the Bank of
England under the TFS and ILTR and subordinated liabilities.
Subordinated liabilities include the Sterling PSBs where the terms allow
no discretion over the payment of interest. These financial liabilities
are initially measured at fair value less direct transaction costs, and
subsequently held at amortised cost using the EIR method.
Cash received under the TFS and ILTR is recorded in amounts owed to
credit institutions. Interest is accrued over the life of the agreements
on an EIR basis.
q) Sale and repurchase agreements
Financial assets sold subject to repurchase agreements ('repo') are
retained in the financial statements if they fail derecognition criteria
of IFRS 9 described in paragraph m(iii) above. The financial assets that
are retained in the financial statements are reflected as loans or
investment securities and the counterparty liability is included in
amounts owed to depositors, credit institutions or other customers.
Financial assets purchased under agreements to resell at a
pre-determined price where the transaction is financing in nature
('reverse repo') are accounted for as loans and receivables. The
difference between the sale and repurchase price is treated as interest
and accrued over the life of the agreement using the EIR method.
r) Derivative financial instruments
The Group uses derivative financial instruments (interest rate swaps) to
manage its exposure to the interest rate risk. In accordance with its
treasury policy, the Group does not hold or issue derivative financial
instruments for proprietary trading.
Derivative financial instruments are recognised at their fair value with
changes in their fair value taken to profit or loss. Fair values are
calculated by discounting cash flows at the prevailing interest rates.
All derivatives are classified as assets when their fair value is
positive and as liabilities when their fair value is negative. If a
derivative is cancelled, it is derecognised from the Statement of
Financial Position.
The Group is party to a limited number of options and warrants. These
are recognised as a derivative financial instruments as applicable where
a trigger event takes place and the fair value of the option or warrant
can be reliably measured.
s) Hedge accounting
The Group has chosen to continue to apply the hedge accounting
requirements of IAS 39 instead of the requirements in Chapter 6 of IFRS
9. The Group uses fair value hedge accounting for a portfolio hedge of
interest rate risk (IAS 39 - AG 114).
Portfolio hedge accounting allows for hedge effectiveness testing and
accounting over an entire portfolio of derivatives. To qualify for hedge
accounting at inception, the hedge relationship is clearly documented
and the derivative must be expected to be highly effective in offsetting
the hedged risk. In addition, effectiveness must be tested throughout
the life of the hedge relationship.
The Group applies fair value portfolio hedge accounting to its fixed
rate portfolio of mortgages and saving accounts. The hedged portfolio is
analysed into repricing time periods based on expected repricing dates,
utilising the ALCO approved prepayment curve. Interest rate swaps are
designated against the repricing time periods to establish the hedge
relationship. Hedge effectiveness is calculated as a percentage of the
fair value movement of the interest rate swap against the fair value
movement of the hedged item over the period tested.
Where there is an effective hedge relationship for fair value hedges,
the Group recognises the change in fair value of each hedged item in
profit or loss with the cumulative movement in their value being shown
separately in the Statement of Financial Position as fair value
adjustments on hedged assets and liabilities. The fair value changes of
both the derivative and the hedge substantially offset each other to
reduce profit volatility.
The Group has derivatives in place against the pipeline, with loans
originating in subsequent months. The derivative is included within
hedge accounting once loans have originated. Fair value movements prior
to loans originating, when the derivative is against the pipeline, are
recognised in full in the period in profit or loss. The accumulated
amount in profit or loss is subsequently amortised over the remaining
life of the derivative on a straight line basis from the period the
derivative is hedge accounted for against originated loans.
The Group discontinues hedge accounting when the derivative ceases
through expiry, when the derivative is cancelled or the underlying
hedged item matures, is sold or is repaid.
If a derivative no longer meets the criteria for hedge accounting or is
cancelled whilst still effective, the fair value adjustment relating to
the hedged assets or liabilities within the hedge relationship prior to
the derivative becoming ineffective or being cancelled remains on the
Statement of Financial Position and is amortised over the remaining life
of the hedged assets or liabilities. The rate of amortisation over the
remaining life is in- line with expected income or cost generated from
the hedged assets or liabilities. Each reporting period the expectation
is compared to actual with an accelerated run off applied where the two
diverge by more than set parameters.
t) Debit and credit valuation adjustments
The DVA and CVA are included in the fair value of derivative financial
instruments. The DVA is based on the expected loss a counterparty faces
due to the risk of the Group's default. The CVA reflects the Group's
risk of the counterparty's default.
The methodology is based on a standard calculation, taking into account:
-- the one-year PD, updated on a regular basis
-- the expected exposure at default
-- the expected LGD, and
-- the average maturity of the swaps.
u) Provisions and contingent liabilities
A provision is recognised when there is a present obligation as a result
of a past event, it is probable that the obligation will be settled and
the amount can be estimated reliably.
Contingent liabilities are possible obligations arising from past events,
whose existence will be confirmed only by uncertain future events, or
present obligations arising from past events which are either not
probable or the amount of the obligation cannot be reliably measured.
Contingent liabilities are not recognised but disclosed unless their
probability is remote.
v) Employee benefits - defined contribution scheme
Obligations for contributions to defined contribution pension
arrangements are recognised as an expense in profit or loss as incurred.
w) Share-based payments
In accordance with IFRS 2 Share-based payments, equity-settled options
and awards granted to employees over the Bank's shares under the Group's
share-based incentive schemes are measured at fair value at grant and
are charged on a straight line basis to profit or loss (with a
corresponding increase in the share -based payment reserve within
equity) over the vesting period in which the employees become
unconditionally entitled to the awards. The cumulative expense within
the share-based payment reserve is reclassified to retained earnings
upon vesting.
The amount recognised as an expense is adjusted to reflect the actual
number of awards for which the related service and non-market vesting
conditions are expected to be met, such that the amount ultimately
recognised as an expense is based on the number of awards that do meet
the related conditions at the vesting date. The amount recognised as an
expense for awards subject to market conditions is based on the
proportion that is expected to meet the condition as assessed at the
grant date. No adjustment is made for the actual proportion that meets
the market condition at vesting. Share-based payments that vest on grant
are immediately expensed in full with a corresponding increase in
equity.
The grant date fair value of a nil price award over the Bank's shares
which vests at grant or which carries the right to dividends or dividend
equivalents during the vesting period (IPO share awards) is the share
price at the grant date. The grant date fair value of awards of the
Bank's shares that do not carry automatic rights to dividends or
dividend equivalents (the Deferred Share Bonus Plan ('DSBP')) is based
on the Bank's share price at the grant date adjusted for the impact of
the expected dividend yield. The fair value at grant date of awards made
under the Sharesave Schemes is determined using a Black-Scholes model.
The grant date fair value of awards that are subject to non-market
conditions and which do not carry automatic rights to dividends or
dividend equivalents (the earnings per share ('EPS') element of the
Performance Share Plan ('PSP')) is based on the share price at the grant
date adjusted for the impact of the expected dividend yield. An
assessment is made at each reporting date on the proportion of the
awards expected to meet the related non-market vesting conditions.
The fair value of an award that is subject to market conditions (the
relative share price element of the PSP) is determined at grant date
using a Monte Carlo model. No adjustment is made for the actual
proportion that meets the market condition at vesting.
Where the allowable cost of share-based options or awards for tax
purposes is greater than the cost determined in accordance with IFRS 2,
the tax effect of the excess is taken to the share-based payment reserve
within equity. The tax effect is reclassified to retained earnings upon
vesting.
Employer's national insurance is charged to profit or loss at the share
price at the reporting date on the same vesting schedule as the
underlying options and awards.
x) Securitisation
The Group assesses whether it controls special purpose entities ('SPE')
and the requirement to consolidate them under the criteria of IFRS 10.
The criteria include the power to direct relevant activities, exposure
or rights to variable returns and the ability to use its power to affect
the amount of these returns.
The Group had no economic interest in SPEs at the 2018 and 2017
reporting dates.
y) Adoption of new standards
In 2018 the Group adopted the classification and measurement and
expected credit loss of financial instruments under IFRS 9 and revenue
recognition principles of IFRS 15, together with amendments to existing
standards that were endorsed for adoption by the EU and mandatory for
annual reporting periods beginning on or after 1 January 2018.
The Group has applied IFRS 15 retrospectively in accordance with IFRS 15
C3(b). There were no cumulative effects of initially applying IFRS 15 to
be recognised as an adjustment to the opening balance of retained
earnings.
Included below are standards and amendments which are being considered
for future reporting periods which have not been applied in preparing
these financial statements.
-- IFRS 16 Leases, effective from 1 January 2019, replaces IAS 17
Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease and
two related SIC interpretations. The new standard requires lessees to
recognise right-of-use assets and lease liabilities for most leases over
12 months long. Lessor accounting has largely remained unchanged. The
adoption of IFRS 16 in respect of rented properties is expected to have a
c. GBP3.9m effect on the Statement of Financial Position, as the Group
recognises a right-of-use asset and lease liability of this amount. The
Group will recognise the interest paid on the lease liability within the
financing activities section of the 2019 Statement of Cash Flows. The
Group will use its internal cost of funding excluding the impact of TFS
funding in discounting future cash flows to derive the right-of-use
assets. The adoption of IFRS 16 will have a negligible impact on the
Group's capital.
-- The Group will apply the changes to IAS 12 Income taxes from
annual improvements to IFRS Standards 2015-2017 cycle effective from 1
January 2019. The changes will require the Group to recognise the tax
consequences of payments on financial instruments classified as equity in
the Statement of Comprehensive Income. This will result in c. GBP1.8m of
tax on interest paid on equity PSBs and AT1 securities which is currently
recognised directly in equity being recognised in profit or loss.
2. Judgements in applying accounting policies and critical accounting
estimates
In preparing these financial statements, the Group has made judgements,
estimates and assumptions which affect the reported amounts within the
current and next financial year. Actual results may differ from these
estimates.
Estimates and judgements are regularly reviewed based on past experience,
expectations of future events and other factors.
Judgements
The Group has made the following judgments in applying the accounting
policies:
(i) Loan book impairments
Significant increase in credit risk for classification in Stage 2
The Group's transfer criteria determines what constitutes a significant
increase in credit risk, which results in an exposure being moved from
Stage 1 to Stage 2. The transfer criteria analyses relative changes in
lifetime PD versus the origination lifetime PD, where if prescribed
thresholds are met, an account will be transferred from Stage 1 to Stage
2. Setting the appropriate thresholds to determine what is a
'significant' increase is a key area of judgement.
Probation period for classification from Stage 3 into Stage 1 or 2
The Group has set a minimum probation period which an account must
undergo before returning to non-defaulted status. While supported by
analysis of re- default rates, the probation period is set judgementally
to ensure that only a limited number of accounts default soon after
returning to a non-defaulted status, whilst also allowing permanent
cures to return to non-default without excessive delay.
(ii) IFRS 9 classification
The Group has applied judgement in determining whether the contractual
terms of a financial asset give rise on specified dates to cash flows
that are SPPI on the principal amount outstanding when applying the
classification criteria of IFRS 9. The main area of judgement is over
the Group's loans and advances to customers which have been accounted
for under amortised cost.
Estimates
The Group has made the following estimates in applying the accounting
policies:
(i) Loan book impairments
This section provides details of the critical accounting estimates which
underpin loan impairment calculations. Less significant estimates are
not disclosed.
Individual impairment
Assessments for individually significant loans involve significant
estimates to be made by management in relation to estimating future cash
flows, including the cost of obtaining and selling collateral, the
likely sale proceeds and any rental income prior to sale. The most
significant area of estimation is the likely sale proceeds. The
individually assessed provisioning process is therefore underpinned by
updated external valuations being obtained once a case is adopted by the
collections team. All assets which do not have an individually assessed
provision are assessed using the Group's IFRS 9 impairment models (2017:
IAS 39 collective basis).
Modelled impairment
Modelled provision assessments are also subject to estimation
uncertainty, underpinned by a number of estimates being made by
management which are utilised within impairment calculations. Key areas
of estimation within modelled provisioning calculations include those
regarding the PD, the LGD and forward-looking macroeconomic scenarios.
Probability of Default models
The Group developed a number of PD models to assess the likelihood of a
default event occurring within the next 12 months, utilising internal
and external credit bureau information. Consequently the Group also
computes a lifetime PD estimate for each loan exposure once recognised,
underpinned by the 12 month PD estimate. A 10% relative worsening of
modelled PDs (e.g. a 1.0% PD increasing to 1.1% PD) would drive an
increase in total provisions by GBP0.7m as at 31 December 2018 under
IFRS 9 approach (2017: GBP0.4m under IAS 39 approach).
Loss Given Default model
The Group developed a single LGD model, which includes a number of
estimated inputs including propensity to go to possession given default
('PPD'), forced sale discount ('FSD'), time to sale ('TTS') and sale
cost estimates. PPD and FSD parameters are segmented by loan type, with
the LGD further segmented by LTV. The LGD is sensitive to the
application of the HPI. As at 31 December 2018 a 10% fall in house
prices would result in an incremental GBP11.0m (2017: GBP5.0m) of
provision being required. The sensitivity increase year on year is
primarily driven by the transition from IAS 39 to IFRS 9.
Forward-looking macroeconomic scenarios
The forward- looking macroeconomic scenarios affect both the PD and LGD
estimates. Therefore the expected credit losses calculations are
sensitive to both the scenarios utilised and their associated
probability weightings.
As the Group does not have an in- house economics function it sources
economic forecasts from an appropriately qualified third party. The
Group will consider a minimum of three probability weighted scenarios,
including base, upside and downside scenarios. Due to the current
uncertainty regarding Brexit negotiations the choice of scenarios and
weightings are subject to a significant degree of estimation. To address
the economic uncertainty, during 2018 a fourth scenario was introduced
relating specifically to a disorderly 'no-deal' Brexit outcome. As at 31
December 2018 an additional 10% of weighting attributed to this fourth
scenario would result in an incremental GBP4.3m of provision being
required. If a 100% probability weighting was applied to the severe
'no-deal' Brexit scenario, which was aligned to the Bank of England
scenario published on 28 November 2018, an incremental GBP40.9m of
provision would have been required as at 31 December 2018. This scenario
includes a peak 30% fall in HPI, unemployment rates rising to 7.5% and
base rates increasing to 5.25%.
IAS 39 Collective impairment
Provisions on loans three months plus in arrears are treated as specific
provisions. Provisions on loans less than three months in arrears are
treated as collective provisions.
(ii) Loan book acquisition accounting and income recognition
Acquired loan books are initially recognised at fair value. Significant
estimation is exercised in calculating their EIR using cash flow models
which include assumptions on the likely macroeconomic environment,
including HPI, unemployment levels and interest rates, as well as loan
level and portfolio attributes and history used to derive prepayment
rates, the probability and timing of defaults and the amount of incurred
losses.
The EIR on loan books purchased at significant discounts or premiums is
particularly sensitive to the cumulative prepayment rate ('CPR') and
cumulative default rate ('CDR') derived, as the purchase discount or
premium is recognised over the expected life of the loan book through
the EIR. New defaults are modelled at zero loss (as losses will be
recognised in profit or loss as impairment losses) and therefore have
the same impact on the EIR as prepayments.
Incurred losses at acquisition are calculated using the Group's modelled
provision assessment (see (i) Loan book impairments above for further
details).
The EIR calculated at acquisition is not changed for subsequent
variances in actual to expected cash flows. The Group monitors the
actual cash flows for each acquired book and where they diverge
significantly from expectation, the future cash flows are updated with a
reset gain or loss taken. In assessing whether to adjust future cash
flows on an acquired portfolio, the Group considers the cash variance on
an absolute and percentage basis. The Group also considers the total
variance across all acquired portfolios and the economic outlook. Where
cash flows for an acquired portfolio are reset, they are discounted at
the EIR calculated at acquisition to derive a new carrying value, with
changes taken to profit or loss as interest income. The Group recognised
a gain of GBP2.0m in 2018 as a result of resetting cash flows on
acquired mortgage books (2017: loss of GBP0.3m). A 10% increase/decrease
in prepayment cash flow performance to date across the acquired books
would result in a reset gain/loss of c. GBP0.7m in 2018 (2017: GBP0.8m).
(iii) Effective interest rate on organic lending
A number of estimates are made when calculating the EIR for newly
originated loan assets. These include their expected lives, likely
redemption profiles and the anticipated level of any early redemption
charges.
Certain mortgage products offered by the Group include significant
directly attributable net fee income, in particular Buy-to -Let, and/or
revert to the standard variable rate ('SVR') after an initial discounted
or fixed period. The Group estimates the expected rate of prepayment
during the discounted or fixed period of these mortgages and the
expected life of those that prepay. The Group uses historical experience
in its assessment.
A 10% increase/decrease in the rate of prepayments term for 2018 new
originations would decrease/increase interest income for 2018 by c.
GBP0.3m (2017: c. GBP0.1m).
Estimation is also used in assessing whether and for how long mortgages
that reach the end of the product term stay on SVR. The most significant
area of judgement is the period spent on SVR. Prior to 2018, the Group
prudently assumed no period on SVR, before borrowers refinance on to a
new product or redeem, as it waited for a stable trend to emerge
following the automation of the broker-led Choices programme in late
2016. Behavioural data on two year products was available in 2018, and
was used as the basis for assuming a period on SVR for both 2018 and
prior year origination. Estimates were used to assess how further
planned enhancements to and automation of the Choices programme and the
potential for changes in regulation might impact future behaviour. No
SVR period is recognised on three and five year products.
A three month longer/shorter period on SVR reflected within the EIR for
2018 originations would increase/decrease interest income in 2018 by c.
GBP0.1m (2017: c. GBP0.4/GBP0.3m). A three month longer/shorter period
on SVR for loans outstanding at the year end, assessed by discounting
back the additional future cash flows, would increase/decrease interest
income in 2018 by c. GBP0.9m/GBP0.3m.
3. Interest receivable and similar income
Group Group
2018 2017
GBPm GBPm
At amortised cost:
On BTL/SME mortgages(1) 318.3 245.4
On Residential mortgages(1) 89.8 93.7
On investment securities 0.3 0.1
On other liquid assets 7.6 2.0
At fair value through profit or loss:
Net expense on derivative financial instruments-lending
activities (8.1) (8.5)
407.9 332.7
1. The comparative information for Residential mortgages has
been reclassified following a change in allocation, with an additional
GBP1.9m of interest income disclosed compared to the previously reported
balance. This has decreased the BTL/SME mortgages interest income by
GBP1.9m.
4. Interest payable and similar charges
Group Group
2018 2017
GBPm GBPm
On retail deposits 109.6 86.1
On Bank of England borrowings 8.7 2.9
On Perpetual Subordinated Bonds 0.9 0.9
On subordinated liabilities 0.7 0.9
On wholesale borrowings 0.4 0.2
Net expense/(income) on derivative financial instruments-savings
activities 0.3 (3.7)
120.6 87.3
5. Fair value losses on financial instruments
Group Group
2018 2017
GBPm GBPm
Fair value changes in hedged assets 11.0 (8.7)
Hedging of assets (13.8) 10.0
Fair value changes in hedged liabilities (0.3) 2.9
Hedging of liabilities 0.4 (3.1)
Ineffective portion of hedges (2.7) 1.1
Net gains on unmatched swaps 2.4 -
Amortisation of fair value adjustments on hedged assets (4.6) (7.3)
Debit and credit valuation adjustment (0.2) (0.1)
(5.1) (6.3)
Amortisation of fair value adjustments on hedged assets relates to
hedged assets and liabilities where the hedges were terminated before
maturity and were effective at the point of termination. The
amortisation includes GBP3.0m (2017: GBP4.8m) of accelerated unwind due
to faster run-off on the long-dated fixed rate mortgages compared to the
run-off profile at cancellation date.
6. Loss on sales of financial instruments
During the year the Group disposed of its final portion of the personal
loan portfolio. The Group sold personal loans with a gross value of
GBP0.9m for proceeds of GBP0.4m. After removing loan loss provisions of
GBP0.3m and recovering servicing costs of GBP0.1m, the Group made a
GBP0.1m loss on disposal.
7. Administrative expenses
Group Group
2018 2017
GBPm GBPm
Staff costs 43.6 35.9
Facilities costs 3.3 2.4
Marketing costs 3.2 2.7
Support costs 9.2 8.4
Professional fees 7.7 5.0
Other costs(1) 7.9 7.2
74.9 61.6
1. Other costs mainly consist of irrecoverable VAT expense.
Included in professional fees are amounts paid to the auditors of the
Group, further analysed below:
Group Group
2018 2017
GBP'000 GBP'000
Fees payable to the Company's auditor for the audit
of the Company's annual accounts 626 638
Fees payable to the Company's auditor and its associates
for other services:
Audit of the accounts of subsidiaries 188 178
Audit-related assurance services 95 96
Tax compliance services 9 8
Other assurance services 31 47
Included within the audit of the Bank and Group accounts is GBP150k
(2017: GBP165k) relating to the audit of IFRS 9. Other assurance
services in 2018 include a review of data submitted to the Bank of
England under the TFS and a review of the OSB India Private Limited
financial statements as required by Indian income tax rules.
Staff costs comprise the following categories:
Group Group
2018 2017
GBPm GBPm
Salaries, incentive pay and other benefits 36.0 28.9
Share-based payments 2.5 2.4
Social security costs 3.4 3.3
Other pension costs 1.7 1.3
43.6 35.9
The average number of people employed by the Group (including Executive
Directors) during the year was 989 (2017: 813), analysed below:
Group Group
2018 2017
Operations 510 442
Support functions 479 371
989 813
8. Directors' emoluments and transactions
Bank Bank
2018 2017
GBP'000 GBP'000
Directors' emoluments(1) 2,116 1,914
Payments in respect of personal pension plans 109 104
Gains made on the exercise of share options(2) - 17
2,225 2,035
1. Directors' emoluments comprise salary costs, Non-Executive
Directors' fees and other short-term incentive benefits as disclosed in
the Annual Report on Remuneration.
2. Gains made on the exercise of share options relate to the
Sharesave Scheme, further discussed in note 9.
In addition to the total Directors' emoluments above, the Executive
Directors were granted a deferred bonus of GBP579k (2017: GBP346k) in
the form of shares deferred for three years under the DSBP. The DSBP
does not have any further performance conditions attached. However, it
is subject to clawback and is forfeited if the Executive Director leaves
prior to vesting unless a good leaver reason applies such as redundancy,
retirement or ill health.
The Executive Directors received a further share award under the PSP
with a grant date face value of GBP1,265k (2017: GBP895k) using a share
price of GBP4.20 (2017: GBP4.08) (the average mid- market quotation for
the preceding five days before grant). These shares vest in three years
subject to performance conditions discussed in note 9 and the Annual
Report on Remuneration.
There was no compensation for loss of office during either 2018 or 2017.
There were no outstanding loans granted in the ordinary course of
business to Directors and their connected persons as at 31 December 2018
and 2017.
The Annual Report on Remuneration and note 9 Share-based payments
provide further details on Directors' emoluments.
9. Share-based payments
The Group operates the following share-based schemes:
IPO Share Awards
Certain Directors, senior managers and other employees of the Bank
received one -off share awards in the form of nil price awards over
shares in the Bank on its admission to the London Stock Exchange in June
2014. A proportion of these awards vested on admission with the
remainder vesting over either a 12, 24 or 48 month period. The cost of
IPO Share Awards is reported within administrative expenses in profit or
loss and is offset fully by an additional capital contribution as the
awards were granted by OSB Holdco Limited, the Bank's major shareholder
at the time of the IPO. The Group's IPO awards were fully vested by the
end of 2018.
Sharesave Scheme
The Save As You Earn ('SAYE') or Sharesave Scheme is an all-employee
share option scheme which is open to all UK-based employees. The
Sharesave Scheme allows employees to purchase options by saving a fixed
amount of between GBP5 and GBP500 per month over a period of either
three or five years at the end of which the options, subject to leaver
provisions, are usually exercisable. The Sharesave Scheme has been in
operation since 2014 and is granted annually, with the exercise price
set at a 20% discount of the share price on the date of grant.
Deferred Share Bonus Plan
The DSBP applies to Executive Directors and certain senior managers and
requires 50% of their performance bonuses to be deferred in shares for
three or five years. There are no further performance conditions
attached, but the share awards are subject to clawback provisions. The
DSBP is a share-based award and as such is expensed over its vesting
period. The first DSBP relating to 2014 bonuses was granted in March
2015.
Performance Share Plan
Executive Directors and certain senior managers are also eligible for a
PSP based on performance conditions linked to EPS and total shareholder
return ('TSR') over a three year vesting period. The first award was
issued in March 2015.
The performance conditions applying to PSP awards are based on a
combination of EPS and TSR equally weighted and assessed independently.
For the EPS element, growth targets are linked to the Company's three
year growth plan, measuring growth from the base figure for the prior
year. For the TSR element, OSB share's relative performance is measured
against the FTSE All Share index excluding investment trusts.
The share-based expense for the year includes a charge in respect of the
remaining IPO awards with future vesting provisions, Sharesave Scheme,
DSBP and PSP. All charges are included in employee expenses within note
7 Administrative expenses.
The share-based payment expense during the year comprised of the
following:
Group Group
2018 2017
GBPm GBPm
IPO Share Award expensed in the year 0.1 0.3
Sharesave Scheme 0.3 0.2
Deferred Share Bonus Plan 1.1 0.9
Performance Share Plan 1.0 1.0
2.5 2.4
Movements in the number of share awards and their weighted average
exercise prices are presented below:
IPO Share Deferred Performance
Awards Sharesave Scheme Share Bonus Plan Share Plan
Weighted
average
exercise
Number Number price, GBP Number Number
At 1 January
2018 652,198 732,341 2.60 1,186,762 1,589,030
Granted - 313,443 3.35 376,231 708,146
Exercised (652,198) (162,093) 2.25 (301,575) (559,179)
Forfeited - (42,062) 2.86 (2,706) -
At 31
December
2018 - 841,629 2.93 1,258,712 1,737,997
Exercisable
at:
31 December
2018 - 2,861 3.15 - -
IPO
Share Deferred Performance
Awards Sharesave Scheme Share Bonus Plan Share Plan
Weighted
average
exercise
Number Number price, GBP Number Number
At 1 January
2017 652,198 818,253 1.78 758,381 1,080,991
Granted - 336,288 3.15 433,534 510,094
Exercised - (382,597) 1.35 - -
Forfeited - (39,603) 2.43 (5,153) (2,055)
At 31
December
2017 652,198 732,341 2.60 1,186,762 1,589,030
Exercisable
at:
31 December - - - - -
2017
For the share-based awards granted during the year, the weighted average
grant date fair value was 399 pence (2017: 383 pence).
The weighted average market price at exercise for IPO Share Awards
exercised in the year was 408 pence (2017: nil).
The range of exercise prices and weighted average remaining contractual
life of outstanding awards are as follows:
2018 2017
Weighted Weighted
average average
remaining remaining
contractual contractual
Exercise price Number life (years) Number life (years)
IPO share awards
Nil - - 652,198 0.4
Sharesave Scheme
134-335 pence 841,629 2.1 732,341 2.1
Deferred Share Bonus
Plan
Nil 1,258,712 1.3 1,186,762 1.4
Performance Share Plan
Nil 1,737,997 1.4 1,589,030 1.2
3,838,338 1.5 4,160,331 1.3
The grant date fair values of options/awards under the Group's
share-based payment schemes are determined using a Black-Scholes model.
The share price at the grant date for all schemes is adjusted for the
impact of dividends as the options/awards do not carry automatic rights
to dividends. The valuation of share options/awards is based on the
following input assumptions:
-- Expected volatility - for Sharesave volatility is based on a
benchmark of the FTSE 350 diversified financials whilst for DSBP and PSP
plans volatility is based on the Bank's share price volatility.
-- Attrition rate - based on the attrition rate of all UK employees
and updated annually for the DSBP and PSP awards.
-- Dividend yield - based on the average dividend yield across
external analysts' reports for the quarter prior to scheme grant date.
Sharesave Scheme
2018 2017 2016 2015 2014
Contractual life,
years 3 5 3 5 3 5 3 5 3 5
Share price at
issue, GBP 4.19 4.19 3.93 3.93 3.00 3.00 2.84 2.84 1.68 1.68
Exercise price,
GBP 3.35 3.35 3.15 3.15 2.40 2.40 2.27 2.27 1.34 1.34
Expected
volatility, % 16.1 16.5 18.0 17.3 18.4 20.1 16.6 19.4 20.0 20.0
Dividend yield, % 4.4 4.4 4.1 4.1 4.6 4.6 3.6 3.6 3.0 3.0
Grant date fair
value, GBP 0.40 0.43 0.75 0.70 0.10 0.15 0.75 0.79 0.31 0.34
Deferred Share Bonus Plan
2018 2017 2016 2015
Contractual life, years 3 3 5 3 3
Mid-market share price, GBP 3.80 4.04 4.04 3.09 2.51
Expected volatility, % 33.8 63.7 63.7 43.9 35.5
Attrition rate, % 9.7 11.8 11.8 12.0 11.1
Dividend yield, % 4.6 4.0 4.0 4.6 3.7
Grant date fair value, GBP 3.34 3.61 3.37 2.71 2.26
Performance Share Plan
2018 2017 2016 2015
Contractual life, years 3 3 3 3
Mid-market share price, GBP 4.11 4.04 3.09 2.51
Expected volatility, % 29.1 63.7 43.9 35.5
Attrition rate, % 9.7 11.8 12.0 11.1
Dividend yield, % 4.6 4.0 4.6 3.7
Vesting rate-growth, % 55.0 75.0 79.0 100.0
Vesting rate-TSR, % 54.0 60.0 60.0 60.0
Grant date fair value, GBP 3.61 3.61 2.71 2.26
A vesting rate is incorporated into the EPS element of the PSP, based on
the expectation that the required target growth will be achieved over
the vesting period. A vesting rate is also calculated for the TSR
element of the PSP, based on a Monte Carlo model using historical share
price performance data for the target benchmark FTSE All Share Index
excluding investment trusts and the FTSE 350 Diversified Financials as a
proxy for the Company's shares as insufficient history was available.
IPO Share Awards
The grant date fair value of the IPO Share Awards was the issue price of
GBP1.70 as they are in the form of nil price awards which carry rights
to dividends during the vesting period. The charge in respect of awards
with future vesting provisions assumed a weighted average attrition of
nil (2017: nil) per annum. This is lower than the overall expected
employee attrition rate as nil attrition was assumed for certain Senior
Managers who received larger awards. All IPO Share Awards were fully
vested at 31 December 2018.
10. Exceptional cost - Heritable option
The Heritable Development Finance business operates as a joint venture
('JV') between the Bank and certain senior members of the Heritable team
('the JV partners'). Under the JV, the parties agreed to co-operate in
developing the business and lend alongside each other, sharing revenues
in accordance with a profit waterfall. The JV agreement also includes a
put/call option over the JV partners' share of the business, exercisable
from 2019, subject to certain conditions. During 2018, the conditions of
exercise were met and an exceptional cost of GBP9.8m was recognised for
the fair value of the option.
Subsequent to the year end, the option was surrendered for a one off
payment of GBP9.8m and the Bank acquired the JV partners' interest in
the business. At the same time, a new revenue sharing arrangement was
signed allowing the JV partners to continue to lend alongside the Bank.
11. Taxation
Group Group
2018 2017
GBPm GBPm
Corporation taxation (42.8) (41.5)
Deferred taxation (0.7) 0.7
Total taxation (43.5) (40.8)
The taxation on the Group's profit before taxation differs from the
theoretical amount that would arise using the weighted average taxation
rate applicable to profits of the Group as follows:
2018 2017
GBPm GBPm
Profit before taxation 183.8 167.7
Profit multiplied by the weighted average rate of
corporation taxation in the UK during 2018 of 19.00%
(2017: 19.25%) (34.9) (32.3)
Bank surcharge (8.6) (8.3)
Taxation effects of:
Expenses not deductible for taxation purposes 0.1 (0.2)
Adjustments in respect of earlier years 0.1 (0.4)
Tax adjustments in respect of share-based payments 0.2 0.3
Impact of tax losses carried forward - 0.2
Timing differences on capital items (0.4) (0.1)
Total taxation charge (43.5) (40.8)
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) and a further reduction to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. An additional
reduction to 17% (effective 1 April 2020) was substantively enacted on 6
September 2016. This will reduce the Group's future tax charge
accordingly.
12. Earnings per share
EPS are based on the profit for the period and the number of ordinary
shares in issue. Basic EPS are calculated by dividing profit
attributable to ordinary shareholders by the weighted average number of
ordinary shares in issue during the year. Diluted EPS take into account
share options and awards which can be converted to ordinary shares.
For the purpose of calculating EPS, profit attributable to ordinary
shareholders is arrived at by adjusting profit for the year for the
after-tax amounts of the coupons on PSBs and AT1 securities classified
as equity. The tax on coupons is based on the rate of taxation
applicable to the Bank, including the bank surcharge:
Group Group
2018 2017
GBPm GBPm
Profit for the year 140.3 126.9
Adjustments:
Coupons on PSBs and AT1 securities classified as equity (6.5) (3.7)
Tax on coupons 1.8 1.0
Profit attributable to ordinary shareholders 135.6 124.2
Exceptional items:
Exceptional cost-Heritable option 9.8 -
Tax on above (2.6) -
Underlying profit attributable to ordinary shareholders 142.8 124.2
Group Group
GBPm GBPm
Weighted average number of shares, millions
Basic 244.2 243.2
Diluted 246.2 245.1
Earnings per share, pence per share
Basic 55.5 51.1
Diluted 55.0 50.7
Underlying earnings per share, pence per share
Basic 58.5 51.1
Diluted 58.0 50.7
13. Dividends
During the year, the Bank paid the following dividends:
Bank Bank
2018 2017
Pence Pence
GBPm per share GBPm per share
Final dividend for the prior year 22.7 9.3 18.5 7.6
Interim dividend for the current year 10.5 4.3 8.5 3.5
33.2 27.0
A summary of the Bank's distributable reserves from which dividends can
be paid are shown below:
Bank
2018 2017
GBPm GBPm
Net assets 535.8 475.8
Less:
- Share capital (2.4) (2.4)
- Share premium (158.8) (158.4)
- Other non-distributable reserves(1) (88.1) (93.1)
- Unrealised gains(2) (19.8) (31.9)
Distributable reserves 266.7 190.0
1. Other non-distributable reserves include the capital
contribution, equity bonds and FVOCI reserve.
2. Unrealised gains relate to the Bank's fair value adjustments
on hedged assets.
The Directors propose a final dividend of 10.3 pence per share (2017:
9.3 pence) payable on 15 May 2019 with an ex-dividend date of 21 March
2019 and a record date of 22 March 2019. This dividend is not reflected
in these financial statements as it is subject to approval by
shareholders at the AGM on 9 May 2019. Together with the interim
dividend of 4.3 pence (2017: 3.5 pence), the total dividend for 2018 is
14.6 pence (2017: 12.8 pence) per share.
14. Cash and cash equivalents
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Cash in hand 0.4 0.5 0.4 0.5
Unencumbered loans and advances to credit
institutions 1,323.8 1,165.4 1,316.5 1,157.5
1,324.2 1,165.9 1,316.9 1,158.0
15. Loans and advances to credit institutions
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Unencumbered:
Bank of England call account 1,295.2 1,136.9 1,295.2 1,136.9
Call accounts 28.6 24.5 21.3 20.6
Term deposits - 4.0 - -
Encumbered:
Bank of England cash ratio deposit 20.0 10.0 20.0 10.0
Swap margin given 3.5 11.8 3.5 11.8
1,347.3 1,187.2 1,340.0 1,179.3
16. Investment securities
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
UK and EU Sovereign debt 58.9 19.1
58.9 19.1
The Group had no investment securities sold under repos at the 2018 and
2017 reporting dates.
The Directors consider that the primary purpose of holding investment
securities is prudential. These securities are held as liquid assets
with the intention of use on a continuing basis in the Group's
activities and are classified as FVOCI.
Movements during the year of investment securities are analysed as
follows:
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
At 1 January 19.1 141.7
Additions 79.9 -
Disposals and maturities (39.9) (122.7)
Changes in fair value (0.2) 0.1
At 31 December 58.9 19.1
17. Loans and advances to customers
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Loans and advances (see note 18) 8,998.0 7,327.6 7,224.3 6,066.5
Finance leases (see note 19) 7.2 - - -
9,005.2 7,327.6 7,224.3 6,066.5
Less: Expected credit losses (see note 20) (21.9) (21.6) (16.1) (15.5)
8,983.3 7,306.0 7,208.2 6,051.0
18. Loans and advances
2018 2017
BTL/SME Residential Total BTL/SME Residential Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
Gross carrying
amount
Stage 1 7,032.1 1,247.5 8,279.6 - - -
Stage 2 247.6 189.2 436.8 - - -
Stage 3 102.0 123.4 225.4 - - -
Stage 3 (POCI) 0.3 55.9 56.2 - - -
IAS 39 - - - 5,654.1 1,673.5 7,327.6
7,382.0 1,616.0 8,998.0 5,654.1 1,673.5 7,327.6
Bank
Gross carrying
amount
Stage 1 5,528.8 1,128.2 6,657.0 - - -
Stage 2 166.6 180.0 346.6 - - -
Stage 3 70.6 94.2 164.8 - - -
Stage 3 (POCI) - 55.9 55.9 - - -
IAS 39 - - - 4,588.7 1,477.8 6,066.5
5,766.0 1,458.3 7,224.3 4,588.7 1,477.8 6,066.5
At 31 December 2018, mortgages with a carrying value of GBP2,629.7m
(2017: GBP2,303.2m) were pledged with the Bank of England under the
asset purchase facility, TFS. The Group considers these loans to be
encumbered.
At 31 December 2018, mortgages with a carrying value of GBP216.3m (2017:
nil) were pledged with the Bank of England under the ILTR facility. The
Group considers these loans to be encumbered.
Included within loans and advances to customers are mortgages totalling
GBP16.0m (2017: GBP28.9m) retained by the Group, who acts as master
servicer for securitisation vehicles, to comply with the EU risk
retention requirements. The Group considers these loans to be
encumbered.
The tables opposite show the movement in loans and advances to customers
by IFRS 9 stage during the year.
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) IAS 39 Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 7,327.6 7,327.6
IFRS 9
transitional
adjustment 6,782.5 292.4 183.0 69.7 (7,327.6) -
Restated at 31
December 2017 6,782.5 292.4 183.0 69.7 - 7,327.6
Originations(1) 3,043.4 - - - - 3,043.4
Repayments and
write-offs(2) (1,265.3) (50.8) (43.4) (13.5) - (1,373.0)
Transfers:
- To Stage 1 170.5 (150.0) (20.5) - - -
- To Stage 2 (353.8) 375.1 (21.3) - - -
- To Stage 3 (97.7) (29.9) 127.6 - - -
At 31 December
2018 8,279.6 436.8 225.4 56.2 - 8,998.0
Stage 3
Stage 1 Stage 2 Stage 3 (POCI) IAS 39 Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 6,065.5 6,065.5
IFRS 9
transitional
adjustment 5,679.0 185.8 131.6 69.1 (6,065.5) -
Restated at 31
December 2017 5,679.0 185.8 131.6 69.1 - 6,065.5
Originations(1) 2,276.2 - - - - 2,276.2
Repayments and
write-offs(2) (1,049.4) (28.7) (26.1) (13.2) - (1,117.4)
Transfers:
- To Stage 1 101.0 (83.6) (17.4) - - -
- To Stage 2 (279.0) 297.5 (18.5) - - -
- To Stage 3 (70.8) (24.4) 95.2 - - -
At 31 December
2018 6,657.0 346.6 164.8 55.9 - 7,224.3
1. Originations include further advances and drawdowns on
existing commitments.
2. Repayments and write-offs include customer redemptions.
The Group did not purchase any mortgage books during 2018 (2017: nil).
19. Finance leases
The Group commenced asset finance lending in October 2018 through an
existing subsidiary in the Group, InterBay Asset Finance Limited
(formerly 5D Lending Ltd).
Group Group
2018 2017
GBPm GBPm
Net investment in finance leases, receivable
Less than one year 2.2 -
Between one and five years 4.9 -
More than 5 years 0.1 -
7.2 -
The Group has recognised GBP0.1m of ECLs on finance leases as at 31
December 2018 (2017: nil). These are included within BTL/SME in note 20.
20. Expected credit loss
The Group's ECL by segment and IFRS 9 stage is shown below:
2018 2017
BTL/SME Residential Total BTL/SME Residential Total
GBPm GBPm GBPm GBPm GBPm GBPm
Group
Stage 1 3.0 1.3 4.3 - - -
Stage 2 2.1 3.5 5.6 - - -
Stage 3 5.7 4.5 10.2 - - -
Stage 3 (POCI) - 1.6 1.6 - - -
Undrawn loan
facilities 0.2 - 0.2 - - -
IAS 39 - - - 13.2 8.4 21.6
11.0 10.9 21.9 13.2 8.4 21.6
Bank
Stage 1 2.3 1.1 3.4 - - -
Stage 2 1.3 3.4 4.7 - - -
Stage 3 3.8 2.4 6.2 - - -
Stage 3 (POCI) - 1.6 1.6 - - -
Undrawn loan
facilities 0.2 - 0.2 - - -
IAS 39 - - - 9.4 6.1 15.5
7.6 8.5 16.1 9.4 6.1 15.5
The tables below show the movement in the ECL by IFRS 9 stage during the
year. ECLs on originations reflect the IFRS 9 stage of loans originated
during the year as at 31 December and not the date of origination.
Remeasurement of loss allowance relates to existing loans which did not
redeem during the year and includes the impact of loans moving between
IFRS 9 stages.
IAS 39
Stage 1 Stage 2 Stage 3 Stage 3 (POCI) Impairments Total
Group GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December
2017 - - - - 21.6 21.6
IFRS 9
transitional
adjustment 7.8 2.3 13.3 1.8 (21.6) 3.6
Restated at 31
December
2017 7.8 2.3 13.3 1.8 - 25.2
Originations 2.1 - - - - 2.1
Repayments and
write-offs (0.3) (0.2) (7.0) (0.2) - (7.7)
Remeasurement
of loss
allowance (6.1) 6.9 4.0 - - 4.8
Transfers:
- To Stage 1 1.4 (0.8) (0.6) - - -
- To Stage 2 (0.8) 1.3 (0.5) - - -
- To Stage 3 (5.8) (0.4) 6.2 - - -
- To Stage 3
(POCI) - - - - - -
Changes in
assumptions
and model
parameters 6.2 (3.5) (5.2) - - (2.5)
At 31 December
2018 4.5 5.6 10.2 1.6 - 21.9
Stage 3 IAS 39
Stage 1 Stage 2 Stage 3 (POCI) Impairments Total
Bank GBPm GBPm GBPm GBPm GBPm GBPm
At 31 December 2017 - - - - 15.5 15.5
IFRS 9 transitional
adjustment 5.1 1.4 8.6 1.8 (15.5) 1.4
Restated at 31
December 2017 5.1 1.4 8.6 1.8 - 16.9
Originations 1.8 - - - - 1.8
Repayments and
write-offs (0.1) (0.1) (4.1) (0.2) - (4.5)
Remeasurement of loss
allowance (1.7) 6.8 1.6 - - 6.7
Transfers:
- To Stage 1 0.9 (0.4) (0.5) - - -
- To Stage 2 (0.6) 1.0 (0.4) - - -
- To Stage 3 (4.4) (0.3) 4.7 - - -
- To Stage 3 (POCI) - - - - - -
Changes in
assumptions and
model parameters 2.6 (3.7) (3.7) - - (4.8)
At 31 December 2018 3.6 4.7 6.2 1.6 - 16.1
The table below shows the movement in the 2017 impairment provisions as
measured under the IAS 39 model of specific and collective provisions:
Group Bank
Specific GBPm GBPm
At 1 January 2017 23.4 17.7
Write-offs in year (7.8) (5.7)
Charge for the year net of recoveries 4.0 1.8
At 31 December 2017 19.6 13.8
Collective
At 1 January 2017 1.6 1.4
Charge for the year net of recoveries 0.4 0.3
At 31 December 2017 2.0 1.7
Total
At 1 January 2017 25.0 19.1
Write-offs in year (7.8) (5.7)
Charge for the year net of recoveries 4.4 2.1
At 31 December 2017 21.6 15.5
21. Impairment losses
Group Group
2018 2017
GBPm GBPm
Write-offs in year 11.1 7.8
Disposals 0.3 -
Decrease in provision (3.3) (3.4)
8.1 4.4
22. Derivatives
The table below reconciles the gross amount of derivative contracts to
the carrying balance shown in the Statement of Financial Position:
Contracts
Net amount of subject
financial to master
assets/ netting Cash collateral
Gross amount agreements
of (liabilities) not paid/(received)
presented in offset in not offset in
recognised the the the
financial Statement
assets/ Statement of of Statement of Net
Financial Financial Financial
(liabilities) Position Position Position amount
Group and
Bank GBPm GBPm GBPm GBPm GBPm
At 31
December
2018
Derivative
assets:
Interest rate
risk
hedging 11.7 11.7 (10.3) (1.0) 0.4
Derivative
liabilities:
Interest rate
risk
hedging (15.1) (15.1) 10.3 3.5 (1.3)
Heritable
option(1) (9.8) (9.8) - - (9.8)
(24.9) (24.9) 10.3 3.5 (11.1)
At 31
December
2017
Derivative
assets:
Interest rate
risk
hedging 6.1 6.1 (5.9) (0.2) -
Derivative
liabilities:
Interest rate
risk
hedging (21.8) (21.8) 5.9 11.8 (4.1)
1. The Group has a put/call option over Heritable Capital
('HCL') as part of the development finance joint venture, as further
discussed in note 10.
Included within derivative liabilities is GBP3.0m (2017: GBP4.6m) of
derivative contracts not covered by master netting agreements and
therefore no cash collateral has been paid.
The table below profiles the timing of nominal amounts for interest rate
risk hedging derivatives based on contractual maturity:
Total Less than 3-12 1-5 More than
nominal 3 months months years 5 years
Group and Bank GBPm GBPm GBPm GBPm GBPm
At 31 December 2018
Derivative assets 1,999.0 106.0 330.0 1,563.0 -
Derivative liabilities 4,532.2 195.0 2,090.0 1,966.2 281.0
6,531.2 301.0 2,420.0 3,529.2 281.0
At 31 December 2017
Derivative assets 1,636.1 151.1 702.0 783.0 -
Derivative liabilities 2,493.9 129.0 1,359.7 871.2 134.0
4,130.0 280.1 2,061.7 1,654.2 134.0
The Group and Bank has 206 (2017: 169) derivative contracts with an
average fixed rate of 1.23% (2017: 1.20%).
23. Fair value adjustments on hedged items
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Hedged assets
Current hedge relationships 2.5 15.9
Cancelled hedge relationships 17.3 16.0
19.8 31.9
Hedged liabilities
Current hedge relationships - -
The fair value adjustments on hedged assets in respect of cancelled
hedge relationships represent the fair value adjustment for interest
rate risk on legacy long-term fixed rate mortgages (c. 25 years at
origination) where the interest rate swap hedges were terminated before
maturity and were effective at the point of termination.
The movement in cancelled hedge relationships is as follows:
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
At 1 January 16.0 23.3
New cancellations(1) 5.9 -
Amortisation (see note 5) (4.6) (7.3)
At 31 December 17.3 16.0
1. Following an update of the fixed prepayment curve assumptions,
a long dated swap effective prior to the update was cancelled with the
designated hedge moved to cancelled hedge relationships to be amortised
over the original life of the swap.
24. Investments in subsidiaries, intercompany loans and transactions
with related parties
The balances between the Bank and its subsidiaries at the reporting date
are summarised in the table below:
Shares in Intercompany
subsidiary loans Intercompany
undertakings receivable loans payable Total
GBPm GBPm GBPm GBPm
At 1 January 2017 1.8 982.2 (1.9) 982.1
Additions - 298.4 (29.4) 269.0
Repayments - (88.1) 0.1 (88.0)
At 31 December 2017 1.8 1,192.5 (31.2) 1,163.1
Additions - 782.4 (231.4) 551.0
Repayments - (76.0) 0.2 (75.8)
At 31 December 2018 1.8 1,898.9 (262.4) 1,638.3
A list of the Bank's direct and indirect subsidiaries is shown below:
2018
Charged
by/(to) the Balance
Bank during due to/(by)
Class of the year the Bank
Direct
investments shares Activity Ownership GBPm GBPm
Easioption Holding
Limited Ordinary company 100% - 0.5
Guernsey Home
Loans Mortgage
Limited Ordinary provider 100% (0.3) 13.0
Guernsey Home
Loans Limited Mortgage
(Guernsey) Ordinary provider 100% (0.8) 36.8
Heritable
Development Mortgage
Finance originator
Limited(1) Ordinary and servicer 85% 1.5 (0.8)
Interbay Group
Holdings Holding
Limited Ordinary company 100% - -
Jersey Home
Loans Mortgage
Limited Ordinary provider 100% (0.1) 2.0
Jersey Home
Loans Limited Mortgage
(Jersey) Ordinary provider 100% (3.3) 152.3
OSB India
Private Back office
Limited(2) Ordinary processing 100% 6.8 5.7
Prestige Mortgage
Finance originator
Limited Ordinary and servicer 100% 2.7 (1.2)
Reliance
Property
Loans Mortgage
Limited Ordinary provider 100% (0.1) 3.8
Rochester
Mortgages Mortgage
Limited Ordinary provider 100% - -
Indirect
investments
Inter Bay
Financial I Holding
Limited Ordinary company 100% (0.3) 20.1
Inter Bay
Financial II Holding
Limited Ordinary company 100% (0.2) 6.8
Interbay Mortgage
Funding, Ltd Ordinary servicer 100% 2.1 (260.3)
Interbay ML, Mortgage
Ltd Ordinary provider 100% (19.3) 1,651.2
InterBay Holding
Holdings Ltd Ordinary company 100% - -
5D Finance Mortgage
Limited Ordinary servicer 100% - 0.4
InterBay Asset Asset finance
Finance and mortgage
Limited Ordinary provider 100% (0.1) 6.2
(formerly: 5D
Lending
Ltd)(3)
(11.4) 1,636.5
1. Heritable Development Finance Limited is a business
development partnership with HCL. The entity is majority owned and
controlled by the Bank. It has minimal retained earnings and immaterial
non-controlling interest which is not presented separately in the Group
reserves.
2. OSB India Private Limited is owned 70.28% by the Bank, 29.72%
by Easioption Limited and 0.001% by Reliance Property Loans Limited.
3. The Group launched its new asset finance business in 5D
Lending Ltd during 2018 and renamed the subsidiary to InterBay Asset
Finance Limited.
2017
Charged
by/(to) the Balance
Bank during due to/(by)
Class of the year the Bank
Direct
investments shares Activity Ownership GBPm GBPm
Easioption Holding
Limited Ordinary company 100% - 0.5
Guernsey Home
Loans Mortgage
Limited Ordinary provider 100% (0.3) 17.5
Guernsey Home
Loans Limited Mortgage
(Guernsey) Ordinary provider 100% (1.0) 46.6
Heritable
Development Mortgage
Finance originator
Limited Ordinary and servicer 85% 1.9 (0.9)
Interbay Group
Holdings Holding
Limited Ordinary company 100% - -
Jersey Home
Loans Mortgage
Limited Ordinary provider 100% (0.1) 3.2
Jersey Home
Loans Limited Mortgage
(Jersey) Ordinary provider 100% (4.3) 201.4
OSB India
Private Back office
Limited Ordinary processing 100% 5.4 5.9
Prestige Mortgage
Finance originator
Limited Ordinary and servicer 100% 3.2 (1.3)
Reliance
Property
Loans Mortgage
Limited Ordinary provider 100% (0.1) 4.1
Rochester
Mortgages Mortgage
Limited Ordinary provider 100% - -
Indirect
investments
Inter Bay
Financial I Holding
Limited Ordinary company 100% (0.3) 19.8
Inter Bay
Financial II Holding
Limited Ordinary company 100% (0.2) 17.7
Interbay Mortgage
Funding, Ltd Ordinary servicer 100% - (28.9)
Interbay ML, Mortgage
Ltd Ordinary provider 100% (10.2) 875.6
InterBay Holding
Holdings Ltd Ordinary company 100% - -
5D Finance Mortgage
Limited Ordinary servicer 100% - 0.2
Mortgage
5D Lending Ltd Ordinary provider 100% - (0.1)
(6.0) 1,161.3
All entities have the same registered address as the Company, except the
following:
-- Guernsey Home Loans Limited (Guernsey) - 1st floor, Tudor
House, Le Bordage, St Peter Port, Guernsey, GY1 1DB
-- Jersey Home Loans Limited (Jersey) - 26 New Street, St Helier,
Jersey, JE2 3RA
-- OSB India Private Limited - Salarpuria Magnificia, 9th & 10th
floor, 78 Old Madras Road, Bangalore, India, 560016
All of the above investments are reviewed annually for impairment. Based
on management's assessment of the future cash flows of each entity and
the support of the Bank, no impairment has been recognised.
In addition to the above subsidiaries, the Bank has transactions with
Kent Reliance Provident Society ('KRPS'), one of its founding
shareholders. KRPS runs member engagement forums for the Bank. In
exchange, the Bank provides KRPS with various services including IT,
finance and other support functions. During the year the Bank was
charged for services provided by KRPS amounting to GBP0.2m (2017:
GBP0.3m).
All related party transactions were made on terms equivalent to those
that prevail in arms length transactions. During the year there were no
related party transactions between the key management personnel and the
Bank other than as described below.
Transactions with key management personnel
The Board considers the key management personnel to comprise the
Directors. Directors' remuneration is disclosed in note 8 and in the
Annual Report on Remuneration.
No loans were issued to related parties during 2018 (2017: nil).
Key management personnel and connected persons held deposits with the
Group of GBP1.7m (2017: GBP1.5m).
25. Intangible assets
Intangible assets consist of computer software. There were no
capitalised costs related to the internal development of software during
the period.
Group Bank
GBPm GBPm
Cost
At 1 January 2017 8.5 6.8
Additions 4.2 3.9
Disposals and write-offs (0.3) (0.3)
At 31 December 2017 12.4 10.4
Additions 3.5 3.2
Disposals and write-offs(1) (2.3) (1.5)
At 31 December 2018 13.6 12.1
Amortisation
At 1 January 2017 3.8 2.7
Charged in year 1.8 1.6
At 31 December 2017 5.6 4.3
Charged in year 2.5 2.2
Disposals and write-offs(1) (2.3) (1.5)
At 31 December 2018 5.8 5.0
Net book value
At 31 December 2018 7.8 7.1
At 31 December 2017 6.8 6.1
1. During the year the Group and Bank wrote-off fully
depreciated assets.
26. Property, plant and equipment
Freehold land Leasehold Equipment
and buildings improvements and fixtures Total
Group GBPm GBPm GBPm GBPm
Cost
At 1 January 2017 8.7 0.5 7.5 16.7
Additions 7.5 0.1 2.5 10.1
Disposals and write-offs - - (0.1) (0.1)
At 31 December 2017 16.2 0.6 9.9 26.7
Additions - 0.3 2.5 2.8
Disposals and write-offs(1) - - (1.3) (1.3)
Foreign exchange difference (0.2) - (0.1) (0.3)
At 31 December 2018 16.0 0.9 11.0 27.9
Depreciation
At 1 January 2017 0.4 0.1 3.1 3.6
Charged in year 0.2 0.1 1.4 1.7
Disposals and write-offs - - (0.1) (0.1)
At 31 December 2017 0.6 0.2 4.4 5.2
Charged in year 0.2 0.1 1.9 2.2
Disposals and write-offs(1) - - (1.3) (1.3)
At 31 December 2018 0.8 0.3 5.0 6.1
Net book value
At 31 December 2018 15.2 0.6 6.0 21.8
At 31 December 2017 15.6 0.4 5.5 21.5
1. During the year the Group wrote-off fully depreciated assets.
Freehold land Leasehold Equipment
and buildings improvements and fixtures Total
Bank GBPm GBPm GBPm GBPm
Cost
At 1 January 2017 6.4 0.5 5.7 12.6
Additions 5.1 0.1 1.7 6.9
At 31 December 2017 11.5 0.6 7.4 19.5
Additions - 0.1 1.8 1.9
Disposals and write-offs(1) - - (1.0) (1.0)
At 31 December 2018 11.5 0.7 8.2 20.4
Depreciation
At 1 January 2017 0.4 0.1 2.2 2.7
Charged in year 0.2 0.1 1.1 1.4
At 31 December 2017 0.6 0.2 3.3 4.1
Charged in year 0.1 0.1 1.5 1.7
Disposals and write-offs(1) - - (1.0) (1.0)
At 31 December 2018 0.7 0.3 3.8 4.8
Net book value
At 31 December 2018 10.8 0.4 4.4 15.6
At 31 December 2017 10.9 0.4 4.1 15.4
1. During the year the Bank wrote-off fully depreciated assets.
27. Deferred taxation asset
Group
Losses IFRS 9
carried Accelerated Share-based transitional
forward depreciation payments adjustments Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2017 2.3 0.1 1.0 - 3.4
Profit or loss
credit 0.2 - 0.5 - 0.7
Tax taken directly
to equity - - 1.0 - 1.0
At 31 December 2017 2.5 0.1 2.5 - 5.1
IFRS 9 transitional
adjustments - - - 0.7 0.7
Restated at 31
December 2017 2.5 0.1 2.5 0.7 5.8
Profit or loss
credit (1.1) (0.2) 0.6 - (0.7)
Transferred to
corporation tax
liability - - (1.6) - (1.6)
At 31 December 2018 1.4 (0.1) 1.5 0.7 3.5
Bank
Losses IFRS 9
carried Accelerated Share-based transitional
forward depreciation payments adjustments Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2017 - - 0.8 - 0.8
Profit or loss
credit - - 0.7 - 0.7
Tax taken directly
to equity - - 1.0 - 1.0
At 31 December 2017 - - 2.5 - 2.5
IFRS 9 transitional
adjustments - - - 0.3 0.3
Restated at 31
December 2017 - - 2.5 0.3 2.8
Profit or loss
credit - (0.2) 0.6 - 0.4
Transferred to
corporation tax
liability - - (1.6) - (1.6)
At 31 December 2018 - (0.2) 1.5 0.3 1.6
The deferred tax has been calculated using the relevant rates for the
expected periods of utilisation.
As at 31 December 2018, the Group had GBP3.5m (2017: GBP3.5m) of losses
for which a deferred tax asset has not been recognised.
A reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017) and a further reduction to 18% (effective from 1
April 2020) were substantively enacted on 26 October 2015. An additional
reduction to 17% (effective 1 April 2020) was substantively enacted on 6
September 2016.
28. Other assets
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Prepayments 2.3 1.9 2.1 1.7
Other assets 3.4 3.0 3.4 3.0
5.7 4.9 5.5 4.7
29. Amounts owed to retail depositors
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Fixed rate deposits 5,155.5 4,305.6
Variable rate deposits 2,916.4 2,344.7
8,071.9 6,650.3
30. Amounts owed to credit institutions
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Bank of England TFS 1,502.9 1,250.0
Bank of England ILTR 80.1 -
Swap margin received 1.0 0.3
1,584.0 1,250.3
Bank of England TFS includes GBP250.0m of cash movement and GBP2.9m of
non-cash accrued interest.
Bank of England ILTR includes GBP80.0m of cash movement and GBP0.1m of
non-cash accrued interest.
31. Amounts owed to other customers
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Fixed rate deposits 32.9 25.7
32. Other liabilities
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Falling due within one year:
Accruals 11.0 10.9 9.5 9.0
Deferred income 2.0 0.9 0.9 0.8
Other creditors 5.7 4.5 4.3 3.6
18.7 16.3 14.7 13.4
33. FSCS and other regulatory provisions
The Financial Services Compensation Scheme ('FSCS') provides protection
of deposits for the customers of authorised financial services firms,
should a firm collapse. FSCS protects retail deposits of up to GBP85,000
for single account holders and GBP170,000 for joint holders.
The compensation paid out to consumers is initially funded through loans
from the Bank of England and HM Treasury. In order to repay the loans
and cover its costs, the FSCS charges levies on firms regulated by the
PRA and the Financial Conduct Authority ('FCA'). The Group is among
those firms and pays the FSCS a levy based on its share of total UK
deposits. In accordance with IFRIC 21 interpretation of IAS 37, the FSCS
liability for 2018 will be recognised in 2019. The FSCS balance at the
reporting date relates to the levy from previous years.
The Group has reviewed its current exposure to Payment Protection
Insurance ('PPI') claims and has maintained a provision of GBP0.4m as at
31 December 2018 (2017: GBP0.4m). The Group will reassess the provision
once the FCA deadline for PPI claims of 29 August 2019 has passed. The
Group has increased its provision for FCA conduct rules exposures and
has recognised a provision of GBP1.3m (2017: GBP0.5m) to cover potential
future claims.
An analysis of the Group and Bank's FSCS and other provisions is
presented below:
Other Other
regulatory regulatory
FSCS provisions Total FSCS provisions Total
2018 2018 2018 2017 2017 2017
Group and Bank GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 0.5 0.9 1.4 1.4 0.1 1.5
Paid during the year (0.3) (0.1) (0.4) (1.0) - (1.0)
(Credit)/charge (0.1) 0.9 0.8 0.1 0.8 0.9
At 31 December 0.1 1.7 1.8 0.5 0.9 1.4
34. Subordinated liabilities
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
At 1 January 10.9 21.6
Repayment of debt at maturity (0.1) (10.7)
At 31 December 10.8 10.9
The Group's outstanding subordinated liabilities are summarised below:
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Linked to LIBOR:
Floating rate subordinated loans 2022 (LIBOR + 5%) 0.3 0.3
Floating rate subordinated loans 2022 (LIBOR + 2%) 0.3 0.4
Fixed rate:
Subordinated liabilities 2024 (6.45%)(1) 5.1 5.1
Subordinated liabilities 2024 (7.45%) 5.1 5.1
10.8 10.9
1 The Group has the option to call the GBP5.0m second tranche
of the subordinated debt on 27 September 2019.
The fixed rate subordinated liabilities are repayable at the dates
stated or earlier, in full, at the option of the Group with the prior
consent of the PRA. All subordinated liabilities are denominated in
Pounds Sterling and are unlisted.
The rights of repayment of the holders of these subordinated liabilities
are subordinated to the claims of all depositors and all creditors.
35. Perpetual Subordinated Bonds
Group Group
and Bank and Bank
2018 2017
GBPm GBPm
Sterling Perpetual Subordinated Bonds 15.3 15.3
The bonds are listed on the London Stock Exchange. They were issued with
no discretion over the payment of interest and may not be settled in the
Group's own equity. They are therefore classified as financial
liabilities. The coupon rate is 5.9884% until the next reset date on 27
August 2019.
36. Share capital
Nominal
Number of value Premium
shares GBPm GBPm
At 1 January 2017 243,082,091 2.4 157.9
Shares issued under OSB employee share plans 382,597 - 0.5
At 31 December 2017 243,464,688 2.4 158.4
Shares issued under OSB employee share plans 1,022,849 - 0.4
At 31 December 2018 244,487,537 2.4 158.8
37. Other reserves
Transfer reserve
The transfer reserve of GBP12.8m (Bank: GBP15.2m) represents the
difference between the value of net assets transferred to the Group from
Kent Reliance Building Society in 2011 and the value of shares issued to
the A ordinary shareholders.
FVOCI reserve (2017: AFS reserve)
The FVOCI reserve debit of GBP0.1m (2017: credit of GBP0.1m) represents
the cumulative net change in the fair value of investment securities
measured at FVOCI.
Perpetual Subordinated Bonds
In addition to the PSBs in note 35, the Bank has issued GBP22.0m of PSBs
which are classified as equity in accordance with the conditions
contained in note 1(p). The classification of these PSBs means that any
coupon payments on them are treated within retained earnings rather than
through profit or loss. The coupon rate is 4.5991% until the next reset
date on 7 March 2021.
AT1 securities
On 25 May 2017 OSB issued GBP60.0m of Fixed Rate Resetting Perpetual
Subordinated Contingent Convertible Securities ('AT1 securities') that
qualify as Additional Tier 1 capital under the Capital Requirements
Directive and Regulation ('CRD IV'). The securities will be subject to
full conversion into ordinary shares of OSB in the event that its CET1
capital ratio falls below 7%. The AT1 securities will pay interest at a
rate of 9.125% per annum until the first reset date of 25 May 2022, with
the reset interest rate equal to 835.9 basis points over the five-year
semi-annual mid-swap rate for such a period. Interest is paid
semi-annually on 25 May and 25 November. OSB may, at any time, cancel
any interest payment at its full discretion and must cancel interest
payments in certain circumstances specified in the terms and conditions
of the AT1 securities. The AT1 securities are perpetual with no fixed
redemption date. OSB may, in its discretion and subject to satisfying
certain conditions, redeem all (but not some) of the AT1 securities at
the principal amount outstanding plus any accrued but unpaid interest
from the first reset date and on any interest payment date thereafter.
Transaction costs related to the AT1 securities issuance are recognised
directly in equity within retained earnings together with the related
tax.
38. Financial commitments and guarantees
a) As at 31 December 2018, the Group's contracted or anticipated
capital expenditure commitments not provided for amounted to GBP0.2m
(2017: GBP0.3m). 2018 consists of refurbishment and fixture costs for
the relocation of the InterBay office. 2017 consisted of branch
refurbishment costs.
b) The Group's minimum lease commitments under operating leases are
summarised in the table below:
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Land and buildings: due within:
One year 0.7 0.5 0.5 0.3
Two to five years 2.3 1.0 1.5 0.8
More than five years 1.5 - 0.5 -
4.5 1.5 2.5 1.1
c) Undrawn loan facilities:
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
BTL/SME mortgages 622.8 485.9 406.0 390.5
Residential mortgages 81.8 44.3 81.8 44.3
Asset Finance 6.1 - - -
710.7 530.2 487.8 434.8
Undrawn loan facilities are approved loan applications which have not
yet been exercised. They are payable on demand and are usually drawn
down or expire within three months.
d) The Group did not have any issued financial guarantees as at 31
December 2018 (2017: nil).
39. Risk management
Overview
Financial instruments form the vast majority of the Group's and Bank's
assets and liabilities. The Group manages risk on a consolidated basis,
and risk disclosures are provided on this basis.
Types of financial instrument
Financial instruments are a broad definition which includes financial
assets, financial liabilities and equity instruments. The main financial
assets of the Group are loans to customers and liquid assets, which in
turn, consist of cash in the Bank of England call account, call accounts
with other credit institutions and UK and EU sovereign debt. These are
funded by a combination of financial liabilities and equity instruments.
Financial liability funding comes predominantly from retail deposits and
drawdowns under the Bank of England TFS, supported by debt securities,
subordinated debt, wholesale and other funding. Equity instruments
include own shares, perpetual bonds and AT1 securities meeting the
equity classification criteria. The Group's main activity is mortgage
lending; it raises funds or invests in particular types of financial
assets primarily in order to satisfy banking industry regulations and
manage the risks arising from its operations. The Group does not trade
in financial instruments for speculative purposes.
The Group uses derivative instruments to manage its financial risks.
Derivative financial instruments ('derivatives') are financial
instruments whose value changes in response to changes in underlying
variables such as interest rates. Typically, the contract value of
derivatives is much smaller than that of the instruments they relate to,
which makes them a convenient tool for benefiting from value changes
without the need to buy or sell the whole underlying product. The most
common derivatives comprise futures, forwards and swaps. Among these,
the Group only uses swaps.
Derivatives are used by the Group solely to reduce ('hedge') the risk of
loss arising from changes in market factors. Derivatives are not used
for speculative purposes.
Types of derivatives and uses
The derivative instruments used by the Group in managing its risk
exposures are interest rate swaps. Interest rate swaps convert fixed
interest rates to floating or vice versa. As with other derivatives, the
underlying product is not sold and payments are based on notional
principal amounts.
Unhedged fixed rate liabilities create the risk of paying above-the-
market rate if interest rates subsequently decrease. Unhedged fixed rate
mortgages and liquid assets bear the opposite risk of earning
below-the-market income when rates go up. While fixed rate assets and
liabilities naturally hedge each other to a certain extent, this hedge
is usually never balanced.
The Group uses swaps to convert its instruments, such as mortgages,
deposits and liquid assets, from fixed or base rate-linked rates to
LIBOR-linked variable rates. This ensures a guaranteed margin between
the interest income and interest expense, regardless of changes in the
market rates.
The PRA and FCA have continued to encourage banks to transition away
from using LIBOR as a benchmark in all operations before the end of
2021. Throughout the UK banking sector LIBOR remains a key benchmark and
for each market impacted solutions to this issue are progressing through
various industry bodies.
In 2018 the Group set up an internal working group comprised of all of
the key business lines that are involved with this change with strong
oversight from the compliance and risk departments. Risk assessments are
currently underway to ensure this process is managed in a measured and
controlled fashion.
Types of risk
The principal financial risks to which the Group is exposed are credit,
liquidity and market risks, the latter comprising interest and exchange
rate risk. In addition to financial risks, the Group is exposed to
various other risks, most notably operational, conduct and regulatory,
which are covered in the Risk review on pages 41 to 46.
Credit risk
Credit risk is the risk that unexpected losses may arise as a result of
the Group's borrowers or market counterparties failing to meet their
obligations to repay.
The Group has adopted the Standardised Approach for assessment of credit
risk capital requirements. This approach considers risk weightings as
defined under Basel II and Basel III principles.
The classes of financial instruments to which the Group is most exposed
are loans and advances to customers, loans and advances to credit
institutions, cash in the Bank of England call account, call and current
accounts with other credit institutions and investment securities. The
maximum credit risk exposure equals the total carrying amount of the
above categories plus off-balance sheet undrawn mortgage facilities.
Credit risk - loans and advances to customers
Credit risk associated with mortgage lending is largely driven by the
housing market and level of unemployment. A recession and/or high
interest rates could cause pressure within the market, resulting in
rising levels of arrears and repossessions.
All loan applications are assessed with reference to the Group's lending
policy. Changes to the policy are approved by the Board, with mandates
set for the approval of loan applications.
The Credit Committee and ALCO regularly monitor lending activity, taking
appropriate actions to reprice products and adjust lending criteria in
order to control risk and manage exposure. Where necessary and
appropriate, changes to the lending policy are recommended to the Risk
Committee and the Board.
The following tables show the Group's maximum exposure to credit risk
and the impact of collateral held as security, capped at the gross
exposure amount, by impairment stage. Capped collateral excludes the
impact of forced sale discounts and costs to sell.
Group 2018 Group 2017
Gross Capped Gross Capped
carrying collateral carrying collateral
amount held amount held
GBPm GBPm GBPm GBPm
Stage 1 8,286.8 8,274.5 - -
Stage 2 436.8 436.8 - -
Stage 3 225.4 224.2 - -
Stage 3 (POCI) 56.2 56.1 - -
IAS 39 - - 7,327.6 7,313.5
9,005.2 8,991.6 7,327.6 7,313.5
Bank 2018 Bank 2017
Gross Capped Gross Capped
carrying collateral carrying collateral
amount held amount held
GBPm GBPm GBPm GBPm
Stage 1 6,657.0 6,653.2 - -
Stage 2 346.6 346.5 - -
Stage 3 164.8 164.7 - -
Stage 3 (POCI) 55.9 55.8 - -
IAS 39 - - 6,065.4 6,053.6
7,224.3 7,220.2 6,065.4 6,053.6
The Group's collateral held in relation to BTL/SME and Residential first
and second charge mortgage loans is property, based in the UK and the
Channel Islands. The Group's collateral held in relation to funding
lines is predominantly property. The Group's personal loan portfolio,
which was sold in June 2018, was unsecured.
The Group uses indexed loan-to-value ('LTV') ratios to assess the
quality of the uncapped collateral held. Property values are updated to
reflect changes in the HPI. A breakdown of loans and advances to
customers by indexed LTV is as follows:
LTV analysis by band for all loans:
2018
BTL/SME Residential Total
Group GBPm GBPm GBPm %
Band
0%-50% 935.8 784.4 1,720.2 19
50%-60% 1,105.9 249.7 1,355.6 15
60%-70% 2,021.4 194.1 2,215.5 25
70%-80% 2,864.5 177.3 3,041.8 34
80%-90% 414.1 162.2 576.3 6
90%-100% 32.9 32.3 65.2 1
>100% 14.6 16.0 30.6 -
Total mortgages before provisions 7,389.2 1,616.0 9,005.2 100
2017
BTL/SME Residential Total
Group GBPm GBPm GBPm %
Band
0%-50% 747.6 808.3 1,555.9 21
50%-60% 960.5 260.6 1,221.1 16
60%-70% 1,606.8 228.3 1,835.1 25
70%-80% 1,939.4 184.5 2,123.9 29
80%-90% 359.1 138.2 497.3 7
90%-100% 15.1 31.6 46.7 1
>100% 24.5 22.0 46.5 1
Total mortgages before provisions 5,653.0 1,673.5 7,326.5 100
Personal loans 1.1 - 1.1 -
Total loans before provisions 5,654.1 1,673.5 7,327.6 100
2018
BTL/SME Residential Total
Bank GBPm GBPm GBPm %
Band
0%-50% 738.6 717.6 1,456.2 20
50%-60% 882.4 219.5 1,101.9 15
60%-70% 1,547.3 168.3 1,715.6 24
70%-80% 2,201.9 158.3 2,360.2 33
80%-90% 368.1 156.5 524.6 7
90%-100% 27.7 26.9 54.6 1
>100% - 11.2 11.2 -
Total mortgages before provisions 5,766.0 1,458.3 7,224.3 100
2017
BTL/SME Residential Total
Bank GBPm GBPm GBPm %
Band
0%-50% 587.1 738.2 1,325.3 22
50%-60% 745.4 225.8 971.2 16
60%-70% 1,259.2 188.0 1,447.2 24
70%-80% 1,631.2 161.7 1,792.9 29
80%-90% 333.1 121.5 454.6 7
90%-100% 10.4 26.3 36.7 1
>100% 21.2 16.3 37.5 1
Total mortgages before provisions 4,587.6 1,477.8 6,065.4 100
Personal loans 1.1 - 1.1 -
Total loans before provisions 4,588.7 1,477.8 6,066.5 100
LTV analysis by band for BTL/SME:
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 663.9 71.2 108.7 92.0 935.8
50%-60% 964.8 72.2 38.8 30.1 1,105.9
60%-70% 1,843.9 163.1 7.3 7.1 2,021.4
70%-80% 2,617.1 233.5 - 13.9 2,864.5
80%-90% 408.3 4.8 1.0 - 414.1
90%-100% 7.5 0.4 - 25.0 32.9
>100% 12.0 2.6 - - 14.6
Total mortgages before
provisions 6,517.5 547.8 155.8 168.1 7,389.2
2017
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 567.0 66.8 88.3 25.5 747.6
50%-60% 841.2 62.3 42.8 14.2 960.5
60%-70% 1,437.7 120.6 8.9 39.6 1,606.8
70%-80% 1,811.5 112.8 3.9 11.2 1,939.4
80%-90% 343.1 2.5 - 13.5 359.1
90%-100% 14.2 0.4 - 0.5 15.1
>100% 19.1 5.4 - - 24.5
Total mortgages before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans before
provisions 5,654.1
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 532.5 5.4 108.7 92.0 738.6
50%-60% 810.9 2.6 38.8 30.1 882.4
60%-70% 1,527.0 5.9 7.3 7.1 1,547.3
70%-80% 2,180.6 7.4 - 13.9 2,201.9
80%-90% 367.0 0.1 1.0 - 368.1
90%-100% 2.7 - - 25.0 27.7
>100% - - - - -
Total mortgages before
provisions 5,420.7 21.4 155.8 168.1 5,766.0
2017
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Band
0%-50% 466.8 6.5 88.3 25.5 587.1
50%-60% 686.3 2.1 42.8 14.2 745.4
60%-70% 1,204.4 6.3 8.9 39.6 1,259.2
70%-80% 1,607.9 8.2 3.9 11.2 1,631.2
80%-90% 319.5 0.1 - 13.5 333.1
90%-100% 9.9 - - 0.5 10.4
>100% 17.0 4.2 - - 21.2
Total mortgages before
provisions 4,311.8 27.4 143.9 104.5 4,587.6
Personal loans 1.1
Total loans before
provisions 4,588.7
LTV analysis by band for Residential mortgages:
2018
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Band
0%-50% 651.9 123.2 9.3 784.4
50%-60% 160.9 81.8 7.0 249.7
60%-70% 117.2 74.3 2.6 194.1
70%-80% 125.2 48.3 3.8 177.3
80%-90% 137.1 24.4 0.7 162.2
90%-100% 25.1 6.8 0.4 32.3
>100% 6.5 9.2 0.3 16.0
Total mortgages before provisions 1,223.9 368.0 24.1 1,616.0
2017
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Band
0%-50% 647.1 150.2 11.0 808.3
50%-60% 163.3 94.2 3.1 260.6
60%-70% 147.9 78.4 2.0 228.3
70%-80% 136.1 47.2 1.2 184.5
80%-90% 116.4 21.6 0.2 138.2
90%-100% 22.2 9.3 0.1 31.6
>100% 7.6 14.4 - 22.0
Total mortgages before provisions 1,240.6 415.3 17.6 1,673.5
2018
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Band
0%-50% 585.1 123.2 9.3 717.6
50%-60% 130.7 81.8 7.0 219.5
60%-70% 91.4 74.3 2.6 168.3
70%-80% 106.2 48.3 3.8 158.3
80%-90% 131.4 24.4 0.7 156.5
90%-100% 19.7 6.8 0.4 26.9
>100% 1.7 9.2 0.3 11.2
Total mortgages before provisions 1,066.2 368.0 24.1 1,458.3
2017
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Band
0%-50% 577.0 150.2 11.0 738.2
50%-60% 128.5 94.2 3.1 225.8
60%-70% 107.6 78.4 2.0 188.0
70%-80% 113.3 47.2 1.2 161.7
80%-90% 99.7 21.6 0.2 121.5
90%-100% 16.9 9.3 0.1 26.3
>100% 1.9 14.4 - 16.3
Total mortgages before provisions 1,044.9 415.3 17.6 1,477.8
Analysis of mortgage portfolio by arrears and collateral held
The tables below provide further information on collateral, capped at
the value of each individual mortgage, over the mortgage portfolio by
payment due status and IFRS 9 stage. The 2017 comparatives are disclosed
by IAS 39 impairment stage, where impaired is defined as loans with a
specific provision against them.
Group 2018 Bank 2018
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Stage 1
Not past due 8,225.3 8,213.3 6,603.2 6,599.4
Past due < 1 month 61.5 61.2 53.8 53.8
8,286.8 8,274.5 6,657.0 6,653.2
Stage 2
Not past due 241.9 241.9 162.6 162.5
Past due < 1 month 124.9 124.9 117.9 117.9
Past due 1 to 3 months 70.0 70.0 66.1 66.1
436.8 436.8 346.6 346.5
Stage 3
Not past due 67.8 67.2 32.2 32.1
Past due < 1 month 16.2 16.2 11.4 11.4
Past due 1 to 3 months 30.4 30.4 27.2 27.2
Past due 3 to 6 months 57.2 57.2 54.7 54.7
Past due 6 to 12 months 32.0 31.9 24.7 24.7
Past due over 12 months 13.9 13.6 9.4 9.4
Possessions 7.9 7.7 5.2 5.2
225.4 224.2 164.8 164.7
Stage 3 (POCI)
Not past due 18.6 18.6 18.5 18.5
Past due < 1 month 6.7 6.6 6.5 6.4
Past due 1 to 3 months 6.6 6.6 6.6 6.6
Past due 3 to 6 months 7.4 7.4 7.4 7.4
Past due 6 to 12 months 7.7 7.7 7.7 7.7
Past due over 12 months 9.2 9.2 9.2 9.2
56.2 56.1 55.9 55.8
Total loans before provisions 9,005.2 8,991.6 7,224.3 7,220.2
Group 2017 Bank 2017
Loan Capped Loan Capped
balance collateral balance collateral
GBPm GBPm GBPm GBPm
Not impaired:
Not past due 6,792.9 6,784.8 5,613.8 5,606.5
Past due < 1 month 307.1 307.1 267.7 267.6
Past due 1 to 3 months 102.0 101.9 87.2 87.1
Past due 3 to 6 months 20.9 20.9 19.8 19.8
Past due 6 to 12 months 14.1 14.1 12.9 12.9
Past due over 12 months 7.6 7.6 6.3 6.3
Possessions(1) 0.5 0.5 0.5 0.5
7,245.1 7,236.9 6,008.2 6,000.7
Impaired(2) :
Not past due 12.3 7.7 7.0 2.7
Past due < 1 month 0.8 0.8 0.5 0.5
Past due 1 to 3 months 2.2 2.1 - -
Past due 3 to 6 months 23.7 23.7 20.8 20.8
Past due 6 to 12 months 16.3 16.3 12.4 12.4
Past due over 12 months 14.5 14.4 12.1 12.1
Possessions 11.6 11.6 4.4 4.4
81.4 76.6 57.2 52.9
Total mortgages before provisions 7,326.5 7,313.5 6,065.4 6,053.6
Personal loans 1.1 1.1
Total loans before provisions 7,327.6 6,066.5
1. Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of debt.
2. Impaired is defined as loans with a specific provision
against them.
Analysis of mortgage portfolio by arrears for BTL/SME
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 6,193.4 501.7 155.8 168.1 7,019.0
Past due < 1 month 18.5 1.8 - - 20.3
6,211.9 503.5 155.8 168.1 7,039.3
Stage 2
Not past due 102.8 39.1 - - 141.9
Past due < 1 month 74.7 1.0 - - 75.7
Past due 1 to 3 months 29.3 0.7 - - 30.0
206.8 40.8 - - 247.6
Stage 3
Not past due 40.6 2.5 - - 43.1
Past due < 1 month 3.3 0.4 - - 3.7
Past due 1 to 3 months 12.0 0.1 - - 12.1
Past due 3 to 6 months 24.5 0.1 - - 24.6
Past due 6 to 12 months 10.9 0.1 - - 11.0
Past due over 12 months 3.1 - - - 3.1
Possessions 4.4 - - - 4.4
98.8 3.2 - - 102.0
Stage 3 (POCI)
Not past due - 0.1 - - 0.1
Past due < 1 month - 0.2 - - 0.2
- 0.3 - - 0.3
Total loans before
provisions 6,517.5 547.8 155.8 168.1 7,389.2
2017
Residential Funding
Buy-to-Let Commercial development lines Total
Group GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,810.7 360.8 143.9 104.5 5,419.9
Past due < 1 month 160.4 2.8 - - 163.2
Past due 1 to 3 months 31.9 0.6 - - 32.5
Past due 3 to 6 months 2.7 - - - 2.7
Past due 6 to 12 months 0.7 - - - 0.7
Past due over 12 months 0.3 0.8 - - 1.1
5,006.7 365.0 143.9 104.5 5,620.1
Impaired:
Not past due 4.6 4.5 - - 9.1
Past due < 1 month - 0.1 - - 0.1
Past due 3 to 6 months 9.1 - - - 9.1
Past due 6 to 12 months 4.0 0.4 - - 4.4
Past due over 12 months 1.6 0.1 - - 1.7
Possessions 7.8 0.7 - - 8.5
27.1 5.8 - - 32.9
Total mortgages before
provisions 5,033.8 370.8 143.9 104.5 5,653.0
Personal loans 1.1
Total loans before
provisions 5,654.1
2018
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Stage 1
Not past due 5,170.6 17.8 155.8 168.1 5,512.3
Past due < 1 month 16.2 0.3 - - 16.5
5,186.8 18.1 155.8 168.1 5,528.8
Stage 2
Not past due 63.3 1.7 - - 65.0
Past due < 1 month 71.3 1.0 - - 72.3
Past due 1 to 3 months 29.3 - - - 29.3
163.9 2.7 - - 166.6
Stage 3
Not past due 17.9 0.4 - - 18.3
Past due < 1 month 2.6 - - - 2.6
Past due 1 to 3 months 11.0 0.1 - - 11.1
Past due 3 to 6 months 24.4 0.1 - - 24.5
Past due 6 to 12 months 7.4 - - - 7.4
Past due over 12 months 2.3 - - - 2.3
Possessions 4.4 - - - 4.4
70.0 0.6 - - 70.6
Total loans before
provisions 5,420.7 21.4 155.8 168.1 5,766.0
2017
Residential Funding
Buy-to-Let Commercial development lines Total
Bank GBPm GBPm GBPm GBPm GBPm
Not impaired:
Not past due 4,119.2 22.7 143.9 104.5 4,390.3
Past due < 1 month 145.7 0.5 - - 146.2
Past due 1 to 3 months 25.5 - - - 25.5
Past due 3 to 6 months 2.3 - - - 2.3
Past due 6 to 12 months 0.6 - - - 0.6
Past due over 12 months 0.3 - - - 0.3
4,293.6 23.2 143.9 104.5 4,565.2
Impaired:
Not past due 2.4 4.2 - - 6.6
Past due 3 to 6 months 7.6 - - - 7.6
Past due 6 to 12 months 3.0 - - - 3.0
Past due over 12 months 0.9 - - - 0.9
Possessions 4.3 - - - 4.3
18.2 4.2 - - 22.4
Total mortgages before
provisions 4,311.8 27.4 143.9 104.5 4,587.6
Personal loans 1.1
Total loans before
provisions 4,588.7
Analysis of mortgage portfolio by arrears for Residential mortgages
2018
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Stage 1
Not past due 906.6 275.6 24.1 1,206.3
Past due < 1 month 32.5 8.7 - 41.2
939.1 284.3 24.1 1,247.5
Stage 2
Not past due 80.8 19.2 - 100.0
Past due < 1 month 43.2 6.0 - 49.2
Past due 1 to 3 months 32.7 7.3 - 40.0
156.7 32.5 - 189.2
Stage 3
Not past due 22.2 2.5 - 24.7
Past due < 1 month 10.2 2.3 - 12.5
Past due 1 to 3 months 13.0 5.3 - 18.3
Past due 3 to 6 months 23.8 8.8 - 32.6
Past due 6 to 12 months 16.9 4.1 - 21.0
Past due over 12 months 8.8 2.0 - 10.8
Possessions 3.5 - - 3.5
98.4 25.0 - 123.4
Stage 3 (POCI)
Not past due 12.1 6.4 - 18.5
Past due < 1 month 4.4 2.1 - 6.5
Past due 1 to 3 months 4.1 2.5 - 6.6
Past due 3 to 6 months 3.5 3.9 - 7.4
Past due 6 to 12 months 3.4 4.3 - 7.7
Past due over 12 months 2.2 7.0 - 9.2
29.7 26.2 - 55.9
Total loans before provisions 1,223.9 368.0 24.1 1,616.0
2017
First Second Funding
charge charge lines Total
Group GBPm GBPm GBPm GBPm
Not impaired:
Not past due 1,023.6 331.8 17.6 1,373.0
Past due < 1 month 123.1 20.8 - 143.9
Past due 1 to 3 months 46.4 23.1 - 69.5
Past due 3 to 6 months 10.5 7.7 - 18.2
Past due 6 to 12 months 8.1 5.3 - 13.4
Past due over 12 months 3.2 3.3 - 6.5
Possessions(1) 0.5 - - 0.5
1,215.4 392.0 17.6 1,625.0
Impaired:
Not past due 2.9 0.3 - 3.2
Past due < 1 month 0.7 - - 0.7
Past due 1 to 3 months 2.2 - - 2.2
Past due 3 to 6 months 7.5 7.1 - 14.6
Past due 6 to 12 months 6.6 5.3 - 11.9
Past due over 12 months 2.2 10.6 - 12.8
Possessions 3.1 - - 3.1
25.2 23.3 - 48.5
Total mortgages before provisions 1,240.6 415.3 17.6 1,673.5
1. Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of debt.
2018
First Second Funding
charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Stage 1
Not past due 791.2 275.6 24.1 1,090.9
Past due < 1 month 28.6 8.7 - 37.3
819.8 284.3 24.1 1,128.2
Stage 2
Not past due 78.4 19.2 - 97.6
Past due < 1 month 39.6 6.0 - 45.6
Past due 1 to 3 months 29.5 7.3 - 36.8
147.5 32.5 - 180.0
Stage 3
Not past due 11.4 2.5 - 13.9
Past due < 1 month 6.5 2.3 - 8.8
Past due 1 to 3 months 10.8 5.3 - 16.1
Past due 3 to 6 months 21.4 8.8 - 30.2
Past due 6 to 12 months 13.2 4.1 - 17.3
Past due over 12 months 5.1 2.0 - 7.1
Possessions 0.8 - - 0.8
69.2 25.0 - 94.2
Stage 3 (POCI)
Not past due 12.1 6.4 - 18.5
Past due < 1 month 4.4 2.1 - 6.5
Past due 1 to 3 months 4.1 2.5 - 6.6
Past due 3 to 6 months 3.5 3.9 - 7.4
Past due 6 to 12 months 3.4 4.3 - 7.7
Past due over 12 months 2.2 7.0 - 9.2
29.7 26.2 - 55.9
Total loans before provisions 1,066.2 368.0 24.1 1,458.3
2017
Second Funding
First charge charge lines Total
Bank GBPm GBPm GBPm GBPm
Not impaired:
Not past due 874.1 331.8 17.6 1,223.5
Past due < 1 month 100.7 20.8 - 121.5
Past due 1 to 3 months 38.6 23.1 - 61.7
Past due 3 to 6 months 9.8 7.7 - 17.5
Past due 6 to 12 months 7.0 5.3 - 12.3
Past due over 12 months 2.7 3.3 - 6.0
Possessions(1) 0.5 - - 0.5
1,033.4 392.0 17.6 1,443.0
Impaired:
Not past due 0.1 0.3 - 0.4
Past due < 1 month 0.5 - - 0.5
Past due 1 to 3 months - - - -
Past due 3 to 6 months 6.1 7.1 - 13.2
Past due 6 to 12 months 4.1 5.3 - 9.4
Past due over 12 months 0.6 10.6 - 11.2
Possessions 0.1 - - 0.1
11.5 23.3 - 34.8
Total mortgages before provisions 1,044.9 415.3 17.6 1,477.8
1. Mortgages with properties in possession are not considered
impaired if the fair value of collateral exceeds the value of debt.
Forbearance measures undertaken
The Group has a range of options available where borrowers experience
financial difficulties which impact their ability to service their
financial commitments under the loan agreement. These are explained in
the Principal risks and uncertainties on pages 41 to 46.
A summary of the forbearance measures undertaken during the year is
shown below:
At At
Number of 31 December Number of 31 December
accounts 2018 accounts 2017
Forbearance type 2018 GBPm 2017 GBPm
Interest-only switch 26 3.7 35 3.8
Interest rate reduction 5 0.8 - -
Term extension 33 3.5 29 4.9
Payment holiday 31 0.6 50 1.5
Voluntary assisted sale 4 0.1 2 0.7
Payment concession (reduced
monthly payments) 75 3.5 42 0.8
Total 174 12.2 158 11.7
At At
Number of 31 December Number of 31 December
accounts 2018 accounts 2017
Loan type 2018 GBPm 2017 GBPm
First charge owner occupier 40 3.4 55 4.5
Second charge owner occupier 106 2.9 77 1.6
Buy-to-Let 28 5.9 26 5.6
Total 174 12.2 158 11.7
Geographical analysis by region
An analysis of loans by region is provided below:
Group 2018 Group 2017
Region GBPm % GBPm %
East Anglia 316.4 4 236.4 3
East Midlands 325.4 4 249.6 4
Greater London 3,965.5 43 3,173.0 43
Guernsey 61.7 1 73.8 1
Jersey 176.0 2 225.1 3
North East 115.6 1 103.0 1
North West 447.6 5 347.9 5
Northern Ireland 14.6 - 16.9 -
Scotland 45.2 1 51.1 1
South East 1,955.1 22 1,591.7 22
South West 634.2 7 522.3 7
Wales 187.1 2 142.9 2
West Midlands 557.5 6 425.4 6
Yorks and Humberside 203.3 2 167.4 2
Total mortgages before provisions 9,005.2 100 7,326.5 100
Personal loans - 1.1
Total loans before provisions 9,005.2 7,327.6
Bank 2018 Bank 2017
Region GBPm % GBPm %
East Anglia 267.3 4 212.4 4
East Midlands 245.5 3 203.8 3
Greater London 3,270.7 45 2,726.9 45
North East 94.7 1 86.3 1
North West 346.9 5 277.0 5
Northern Ireland 14.4 - 16.5 -
Scotland 44.0 1 50.3 1
South East 1,667.9 24 1,426.6 24
South West 515.5 7 439.1 7
Wales 151.3 2 126.1 2
West Midlands 454.9 6 374.6 6
Yorks and Humberside 151.2 2 125.8 2
Total mortgages before provisions 7,224.3 100 6,065.4 100
Personal loans - 1.1
Total loans before provisions 7,224.3 6,066.5
Credit risk - Loans and advances to credit institutions and investment
securities
The Group holds treasury instruments in order to meet liquidity
requirements and for general business purposes. The credit risk arising
from these investments is closely monitored and managed by the Group's
treasury department. In managing these assets, Group treasury operates
within guidelines laid down in the treasury policy approved by the Board
and performance is monitored and reported to ALCO monthly, including
through the use of an internally developed rating model based on
counterparty credit default swap spreads.
The Group has limited exposure to emerging markets (Indian operations)
and non-investment grade debt. ALCO is responsible for approving
treasury counterparties.
During the year, the average balance of cash in hand, loans and advances
to credit institutions and investment securities on a monthly basis was
GBP1,296.1m (2017: GBP710.7m).
The following table presents the credit quality of Group's assets
exposed to credit risk. The Group mainly uses external credit ratings
provided by Fitch, Moody's or Standard & Poor's.
Group
Less than
AAA AA A+ A A rating Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,315.2 - - - 1,315.2
Call accounts - - 0.7 24.7 6.7 32.1
Floating rate notes 19.1 - - - - 19.1
Treasury bills - 39.8 - - - 39.8
Total 19.1 1,355.0 0.7 24.7 6.7 1,406.2
2017
Bank of England(1) - 1,146.9 - - - 1,146.9
Call accounts - 0.2 - 11.0 29.1 40.3
Floating rate notes 19.1 - - - - 19.1
Total 19.1 1,147.1 - 11.0 29.1 1,206.3
Bank
Less than
AAA AA A+ A A rating Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Bank of England(1) - 1,315.2 - - - 1,315.2
Call accounts - - 0.7 24.1 - 24.8
Floating rate notes 19.1 - - - - 19.1
Treasury bills - 39.8 - - - 39.8
Total 19.1 1,355.0 0.7 24.1 - 1398.9
2017
Bank of England(1) - 1,146.9 - - - 1,146.9
Call accounts - 0.2 - 11.0 21.2 32.4
Floating rate notes 19.1 - - - - 19.1
Total 19.1 1,147.1 - 11.0 21.2 1,198.4
1. Balances with the Bank of England include GBP20.0m (2017:
GBP10.0m) held in the cash ratio deposit.
The below tables show the industry sector and asset class of the Group's
loans and advances to credit institutions and investment securities:
Group 2018 Group 2017
GBPm % GBPm %
Bank of England(1) 1,315.2 94 1,146.9 95
Other banks 32.1 2 40.3 3
Central government 39.8 3 - -
Supranationals 19.1 1 19.1 2
Total 1,406.2 100 1,206.3 100
Bank 2018 Bank 2017
GBPm % GBPm %
Bank of England(1) 1,315.2 94 1,146.9 96
Other banks 24.8 2 32.4 3
Central government 39.8 3 - -
Supranationals 19.1 1 19.1 1
Total 1,398.9 100 1,198.4 100
1. Balances with the Bank of England include GBP20.0m (2017:
GBP10.0m) held in the cash ratio deposit.
The below tables show the geographical exposure of the Group's loans and
advances to credit institutions and investment securities:
Group 2018 Group 2017
GBPm % GBPm %
United Kingdom 1,380.5 98 1,181.0 98
Rest of Europe 19.1 2 19.1 2
Canada - - 0.2 -
India 6.6 - 6.0 -
Total 1,406.2 100 1,206.3 100
Bank 2018 Bank 2017
GBPm % GBPm %
United Kingdom 1,379.8 99 1,179.1 98
Rest of Europe 19.1 1 19.1 2
Canada - - 0.2 -
Total 1,398.9 100 1,198.4 100
The Group monitors exposure concentrations against a variety of criteria,
including asset class, sector and geography. To avoid refinancing risks
associated with any one counterparty, sector or geographical region, the
Board has set appropriate limits. These are contained in the treasury
policy.
Liquidity risk
Liquidity risk is the risk of having insufficient liquid assets to
fulfil obligations as they become due or the cost of raising liquid
funds becoming too expensive.
The Group's approach to managing liquidity risk is to maintain
sufficient liquid resources to cover cash flow imbalances and
fluctuations in funding in order to retain full public confidence in the
solvency of the Group and to enable the Group to meet its financial
obligations. This is achieved through maintaining a prudent level of
liquid assets and control of the growth of the business. The Group has
established a call account with the Bank of England and has access to
its contingent liquidity facilities.
Liquidity management is the responsibility of ALCO, with day-to-day
management delegated to treasury as detailed in the treasury policy.
ALCO is responsible for setting limits over the level and maturity
profile of wholesale funding and for monitoring the composition of the
Group financial position. For each material class of financial liability
a contractual maturity analysis is provided below.
The Group also monitors a range of numeric triggers, defined in the
contingency funding plan and recovery and resolution plan, which are
designed to capture liquidity stresses in advance in order to allow
sufficient time for management action to take effect. These are
monitored daily by the Risk team, with breaches immediately reported to
the CRO, CEO, CFO and the Head of Treasury.
The tables below provide a contractual maturity analysis of the Group's
financial assets and liabilities:
Carrying Less than 3-12 1-5 More than
Group amount On demand 3 months months years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed to
retail
depositors 8,071.9 2,538.2 880.6 3,008.3 1,644.8 -
Amounts owed to
credit
institutions 1,584.0 1.0 40.1 40.0 1,502.9 -
Amounts owed to
other customers 32.9 - 10.5 22.4 - -
Derivative
liabilities 24.9 - 0.1 11.3 7.0 6.5
Subordinated
liabilities 10.8 - 0.2 0.1 0.5 10.0
Perpetual
Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 9,739.8 2,539.2 931.8 3,082.1 3,155.2 31.5
Financial asset
by type
Cash in hand 0.4 0.4 - - - -
Loans and
advances to
credit
institutions 1,347.3 1,327.3 - - - 20.0
Investment
securities 58.9 - - 58.9 - -
Loans and
advances to
customers 8,983.3 - 176.0 270.4 522.9 8,014.0
Derivative assets 11.7 - - - 11.7 -
Total assets 10,401.6 1,327.7 176.0 329.3 534.6 8,034.0
Carrying Less than 3-12 1-5 More than
Group amount On demand 3 months months years 5 years
2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed to
retail
depositors 6,650.3 2,051.8 862.0 2,590.7 1,145.8 -
Amounts owed to
credit
institutions 1,250.3 0.3 - - 1,250.0 -
Amounts owed to
other customers 25.7 - 0.5 25.2 - -
Derivative
liabilities 21.8 - 0.1 1.6 4.7 15.4
Subordinated
liabilities 10.9 - 0.2 0.1 0.6 10.0
Perpetual
Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 7,974.3 2,052.1 863.1 2,617.6 2,401.1 40.4
Financial asset
by type
Cash in hand 0.5 0.5 - - - -
Loans and
advances to
credit
institutions 1,187.2 1,177.2 - - - 10.0
Investment
securities 19.1 - - - 19.1 -
Loans and
advances to
customers 7,306.0 - 139.0 224.2 307.7 6,635.1
Derivative assets 6.1 - - 0.2 5.9 -
Total assets 8,518.9 1,177.7 139.0 224.4 332.7 6,645.1
Carrying Less than 3-12 1-5 More than
Bank amount On demand 3 months months years 5 years
2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed to
retail
depositors 8,071.9 2,538.2 880.6 3,008.3 1,644.8 -
Amounts owed to
credit
institutions 1,584.0 1.0 40.1 40.0 1,502.9 -
Amounts owed to
other customers 32.9 - 10.5 22.4 - -
Derivative
liabilities 24.9 - 0.1 11.3 7.0 6.5
Subordinated
liabilities 10.8 - 0.2 0.1 0.5 10.0
Perpetual
Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 9,739.8 2,539.2 931.8 3,082.1 3,155.2 31.5
Financial asset
by type
Cash in hand 0.4 0.4 - - - -
Loans and
advances to
credit
institutions 1,340.0 1,320.0 - - - 20.0
Investment
securities 58.9 - - 58.9 - -
Loans and
advances to
customers 7,208.2 - 131.8 165.1 232.4 6,678.9
Derivative assets 11.7 - - - 11.7 -
Total assets 8,619.2 1,320.4 131.8 224.0 244.1 6,698.9
Carrying Less than 3-12 1-5 More than
Bank amount On demand 3 months months years 5 years
2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed to
retail
depositors 6,650.3 2,051.8 862.0 2,590.7 1,145.8 -
Amounts owed to
credit
institutions 1,250.3 0.3 - - 1,250.0 -
Amounts owed to
other customers 25.7 - 0.5 25.2 - -
Derivative
liabilities 21.8 - 0.1 1.6 4.7 15.4
Subordinated
liabilities 10.9 - 0.2 0.1 0.6 10.0
Perpetual
Subordinated
Bonds 15.3 - 0.3 - - 15.0
Total liabilities 7,974.3 2,052.1 863.1 2,617.6 2,401.1 40.4
Financial asset
by type
Cash in hand 0.5 0.5 - - - -
Loans and
advances to
credit
institutions 1,179.3 1,169.3 - - - 10.0
Investment
securities 19.1 - - - 19.1 -
Loans and
advances to
customers 6,051.0 - 118.7 158.4 150.6 5,623.3
Derivative assets 6.1 - - 0.2 5.9 -
Total assets 7,256.0 1,169.8 118.7 158.6 175.6 5,633.3
Liquidity risk - contractual cash flows
The following tables provide an analysis of the Group's gross
contractual cash flows, derived using interest rates and contractual
maturities at the reporting date and excluding impacts of early payments
or non-payments:
Gross
Carrying inflow/ Up to 3-12 1-5 More than
amount outflow 3 months months years 5 years
Group 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 8,071.9 8,479.5 3,433.0 3,236.7 1,809.8 -
Amounts owed
to credit
institutions
and other
customers 1,616.9 1,646.2 54.5 71.2 1,520.5 -
Derivative
liabilities 24.9 27.1 3.3 15.6 5.0 3.2
Subordinated
liabilities 10.8 15.0 0.3 0.4 3.6 10.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 9,739.8 10,187.2 3,491.5 3,324.3 3,342.5 28.9
Off balance
sheet loan
commitments 710.7 710.7 710.7 - - -
Financial
asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and
advances to
credit
institutions 1,347.3 1,347.3 1,327.3 - - 20.0
Investment
securities 58.9 59.0 - 59.0 - -
Loans and
advances to
customers 8,983.3 18,311.2 183.6 841.5 2,649.6 14,636.5
Derivative
assets 11.7 12.2 0.4 1.0 10.8 -
Total assets 10,401.6 19,730.1 1,511.7 901.5 2,660.4 14,656.5
Cumulative
liquidity
gap (1,979.8) (4,402.6) (5,084.7) 9,542.9
Gross
Carrying inflow/ Up to 3-12 1-5 More than
amount outflow 3 months months years 5 years
Group 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 6,650.3 6,877.4 2,927.1 2,723.0 1,227.3 -
Amounts owed
to credit
institutions
and other
customers 1,276.0 1,296.5 1.9 29.5 1,265.1 -
Derivative
liabilities 21.8 21.7 1.2 4.8 8.2 7.5
Subordinated
liabilities 10.9 13.9 0.2 0.5 7.5 5.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 7,974.3 8,228.9 2,930.8 2,758.2 2,511.7 28.2
Off balance
sheet loan
commitments 530.2 530.2 530.2 - - -
Financial
asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and
advances to
credit
institutions 1,187.2 1,187.2 1,177.2 - - 10.0
Investment
securities 19.1 19.1 - 0.1 19.0 -
Loans and
advances to
customers 7,306.0 14,732.0 257.6 545.9 2,130.4 11,798.1
Derivative
assets 6.1 6.1 - (0.1) 6.2 -
Total assets 8,518.9 15,944.9 1,435.3 545.9 2,155.6 11,808.1
Cumulative
liquidity
gap (1,495.5) (3,707.8) (4,063.9) 7,716.0
Gross
Carrying inflow/ Up to 3-12 1-5 More than
amount outflow 3 months months years 5 years
Bank 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 8,071.9 8,479.5 3,433.0 3,236.7 1,809.8 -
Amounts owed
to credit
institutions
and other
customers 1,616.9 1,646.2 54.5 71.2 1,520.5 -
Derivative
liabilities 24.9 27.1 3.3 15.6 5.0 3.2
Subordinated
liabilities 10.8 15.0 0.3 0.4 3.6 10.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 9,739.8 10,187.2 3,491.5 3,324.3 3,342.5 28.9
Off balance
sheet loan
commitments 487.8 487.8 487.8 - - -
Financial
asset by
type
Cash in hand 0.4 0.4 0.4 - - -
Loans and
advances to
credit
institutions 1,340.0 1,340.1 1,320.1 - - 20.0
Investment
securities 58.9 59.0 - 59.0 - -
Loans and
advances to
customers 7,208.2 15,496.7 107.3 647.8 1,931.3 12,810.3
Derivative
assets 11.7 12.2 0.4 1.0 10.8 -
Total assets 8,619.2 16,908.4 1,428.2 707.8 1,942.1 12,830.3
Cumulative
liquidity
gap (2,063.3) (4,679.8) (6,080.2) 6,721.2
Gross
Carrying inflow/ Up to 3-12 1-5 More than
amount outflow 3 months months years 5 years
Bank 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial
liability by
type
Amounts owed
to retail
depositors 6,650.3 6,877.4 2,927.1 2,723.0 1,227.3 -
Amounts owed
to credit
institutions
and other
customers 1,276.0 1,296.5 1.9 29.5 1,265.1 -
Derivative
liabilities 21.8 21.7 1.2 4.8 8.2 7.5
Subordinated
liabilities 10.9 13.9 0.2 0.5 7.5 5.7
Perpetual
Subordinated
Bonds 15.3 19.4 0.4 0.4 3.6 15.0
Total
liabilities 7,974.3 8,228.9 2,930.8 2,758.2 2,511.7 28.2
Off balance
sheet loan
commitments 434.8 434.8 434.8 - - -
Financial
asset by
type
Cash in hand 0.5 0.5 0.5 - - -
Loans and
advances to
credit
institutions 1,179.3 1,179.3 1,169.3 - - 10.0
Investment
securities 19.1 19.1 - 0.1 19.0 -
Loans and
advances to
customers 6,051.0 12,668.8 203.1 411.8 1,649.1 10,404.8
Derivative
assets 6.1 6.1 - (0.1) 6.2 -
Total assets 7,256.0 13,873.8 1,372.9 411.8 1,674.3 10,414.8
Cumulative
liquidity
gap (1,557.9) (3,904.3) (4,741.7) 5,644.9
The actual repayment profile of retail deposits may differ from the
analysis above due to the option of early withdrawal with a penalty.
The actual repayment profile of loans and advances to customers may
differ from the analysis above since many mortgage loans are repaid
prior to the contractual end date.
Liquidity risk - asset encumbrance
Asset encumbrance levels are monitored by ALCO. The following tables
provide an analysis of the Group's encumbered and unencumbered assets:
Group 2018
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 3.5 20.0 1,295.2 28.6 1,347.3
Investment securities - - 58.9 - 58.9
Loans and advances to
customers 2,846.0 16.0 - 6,121.3 8,983.3
Derivative assets - - - 11.7 11.7
Non-financial assets - - - 58.6 58.6
2,849.5 36.0 1,354.5 6,220.2 10,460.2
Group 2017
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to
credit institutions 11.8 10.0 1,136.9 28.5 1,187.2
Investment securities - - 19.1 - 19.1
Loans and advances to
customers 2,303.2 28.9 - 4,973.9 7,306.0
Derivative assets - - - 6.1 6.1
Non-financial assets - - - 70.2 70.2
2,315.0 38.9 1,156.5 5,078.7 8,589.1
1. Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
2. Represents assets that are not restricted for use as
collateral, but the Group treats as available as collateral once they
are readily available to secure funding in the normal course of
business.
Bank 2018
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.4 - 0.4
Loans and advances to
credit institutions 3.5 20.0 1,295.2 21.3 1,340.0
Investment securities - - 58.9 - 58.9
Loans and advances to
customers 2,846.0 16.0 - 4,346.2 7,208.2
Derivative assets - - - 11.7 11.7
Non-financial assets - - - 1,950.3 1,950.3
2,849.5 36.0 1,354.5 6,329.5 10,569.5
Bank 2017
Encumbered Unencumbered
Pledged as Available as
collateral Other(1) collateral Other(2) Total
GBPm GBPm GBPm GBPm GBPm
Cash in hand - - 0.5 - 0.5
Loans and advances to
credit institutions 11.8 10.0 1,136.9 20.6 1,179.3
Investment securities - - 19.1 - 19.1
Loans and advances to
customers 2,303.2 28.9 - 3,718.9 6,051.0
Derivative assets - - - 6.1 6.1
Non-financial assets - - - 1,254.9 1,254.9
2,315.0 38.9 1,156.5 5,000.5 8,510.9
1. Represents assets that are not pledged but that the Group
believes it is restricted from using to secure funding for legal or
other reasons.
2. Represents assets that are not restricted for use as
collateral, but the Group treats as available as collateral once they
are readily available to secure funding in the normal course of
business.
Liquidity risk - liquidity reserves
The tables below analyse the Group's liquidity reserves, where carrying
value is considered to be equal to fair value:
Group Group
2018 2017
GBPm GBPm
Unencumbered balances with central banks 1,295.2 1,136.9
Unencumbered cash and balances with other banks 28.6 28.5
Other cash and cash equivalents 0.4 0.5
Unencumbered investment securities 58.9 19.1
1,383.1 1,185.0
Bank Bank
2018 2017
GBPm GBPm
Unencumbered balances with central banks 1,295.2 1,136.9
Unencumbered cash and balances with other banks 21.3 20.6
Other cash and cash equivalents 0.4 0.4
Unencumbered investment securities 58.9 19.1
1,375.8 1,177.0
Market risk
Market risk is the risk of an adverse change in the Group's income or
the Group's net worth arising from movement in interest rates, exchange
rates or other market prices. Market risk exists, to some extent, in all
the Group's businesses. The Group recognises that the effective
management of market risk is essential to the maintenance of stable
earnings and preservation of shareholder value.
Interest rate risk
The primary market risk faced by the Group is interest rate risk.
Interest rate risk is the risk of loss from adverse movement in the
overall level of interest rates. It arises from mismatches in the timing
of repricing of assets and liabilities, both on and off balance sheet.
It is most prevalent in mortgage lending where fixed rate mortgages are
not funded by fixed rate deposits of the same duration, or where the
fixed rate risk is not hedged by a fully matching interest rate
derivative. Exposure is mitigated on a continuous basis through the use
of derivatives and reserve allocations.
The Group measures interest rate risk using the impact of 14 different
interest rate curve shift scenarios on the Group's economic value of
equity. These 14 scenarios are defined by ALCO and are based on three
'shapes' of curve movement (shift, twist and flex). Historical data is
used to calibrate the severity of the scenarios to the Group's risk
appetite. The Board has set a limit on interest risk exposure of 2.25%
of CET1 as at 31 December 2018 (2017: 1.5%). In addition, the regulatory
scenario of an unfloored parallel shift of 200bps in both directions is
applied. After taking into account the derivatives entered into by the
Group, the maximum decrease under these scenarios as at 31 December 2018
would have been GBP5.6m (2017: GBP3.2m) and the maximum increase GBP1.8m
(2017: GBP1.2m). Against a parallel interest rate increase of 2%, the
impact would have been a decrease of GBP9.3m (2017: GBP2.8m decrease).
In Q1 2019 the scenarios have been updated to fully incorporate the EBA
guidance on the management of interest rate risk published in July 2018.
The interest rate sensitivity is impacted by behavioural assumptions
used by the Group, the most significant of which are prepayments and
reserve allocations. Expected prepayments are modelled based on
historical analysis and current market rates. The reserve allocation
strategy is approved by ALCO and set to reflect the current balance
sheet and future plans. There is no material difference between the
interest rate risk profile for the Group and that for the Bank.
The Group is also exposed to basis risk. Basis risk is the risk of loss
from an adverse divergence in interest rates. It arises where assets and
liabilities reprice from different variable rate indices. These indices
may be market rates (e.g. Bank Base Rate or LIBOR) or administered (e.g.
the Group's SVR, other discretionary variable rates, or that received on
call accounts with other banks).
The Group measures basis risk using the impact of five scenarios on net
interest income over a one year period including movements such as
diverging Base and LIBOR rates. Historical data is used to calibrate the
severity of the scenarios to the Group's risk appetite. The Board has
set a limit on basis risk exposure of 2.25% of CET1 as at 31 December
2018. As at 31 December 2018 the Group's assets and liabilities were
broadly matched under the basis risk scenarios and comfortably within
limits.
There is no material difference between the interest rate risk profile
for the Group and that for the Bank.
Foreign exchange rate risk
The Group has limited exposure to foreign exchange risk in respect of
its Indian operations. A 5% movement in exchange rates would result in
GBP0.3m (2017: GBP0.2m) effect in profit or loss and GBP0.3m (2017:
GBP0.3m) in equity.
The Bank is not exposed to foreign exchange risk since all its assets
and liabilities are denominated in Pounds Sterling.
Structured entities
The Group had no structured entities as at 31 December 2018 and as at 31
December 2017.
40. Financial instruments and fair values
i. Financial assets and financial liabilities
The following tables summarise the classification and carrying value of
the Group's financial assets and financial liabilities:
2018
Fair value through Amortised Total carrying
profit or loss FVOCI cost amount
Group Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances
to credit
institutions 15 - - 1,347.3 1,347.3
Investment
securities 16 - 58.9 - 58.9
Loans and advances
to customers 17 - - 8,983.3 8,983.3
Derivative assets 22 11.7 - - 11.7
11.7 58.9 10,331.0 10,401.6
Liabilities
Amounts owed to
retail
depositors 29 - - 8,071.9 8,071.9
Amounts owed to
credit
institutions 30 - - 1,584.0 1,584.0
Amounts owed to
other customers 31 - - 32.9 32.9
Derivative
liabilities 22 24.9 - - 24.9
Subordinated
liabilities 34 - - 10.8 10.8
Perpetual
Subordinated
Bonds 35 - - 15.3 15.3
24.9 - 9,714.9 9,739.8
2017
Fair
value
through Total
profit Available-for- Loans and Amortised carrying
or loss sale receivables cost amount
Group Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 - 0.5
Loans and
advances to
credit
institutions 15 - - 1,187.2 - 1,187.2
Investment
securities 16 - 19.1 - - 19.1
Loans and
advances to
customers 17 - - 7,306.0 - 7,306.0
Derivative
assets 22 6.1 - - - 6.1
6.1 19.1 8,493.7 - 8,518.9
Liabilities
Amounts owed
to retail
depositors 29 - - - 6,650.3 6,650.3
Amounts owed
to credit
institutions 30 - - - 1,250.3 1,250.3
Amounts owed
to other
customers 31 - - - 25.7 25.7
Derivative
liabilities 22 21.8 - - - 21.8
Subordinated
liabilities 34 - - - 10.9 10.9
Perpetual
Subordinated
Bonds 35 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
2018
Fair value through Amortised Total carrying
profit or loss FVOCI cost amount
Bank Note GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.4 0.4
Loans and advances
to credit
institutions 15 - - 1,340.0 1,340.0
Investment
securities 16 - 58.9 - 58.9
Loans and advances
to customers 17 - - 7,208.2 7,208.2
Derivative assets 22 11.7 - - 11.7
11.7 58.9 8,548.6 8,619.2
Liabilities
Amounts owed to
retail
depositors 29 - - 8,071.9 8,071.9
Amounts owed to
credit
institutions 30 - - 1,584.0 1,584.0
Amounts owed to
other customers 31 - - 32.9 32.9
Derivative
liabilities 22 24.9 - - 24.9
Subordinated
liabilities 34 - - 10.8 10.8
Perpetual
Subordinated
Bonds 35 - - 15.3 15.3
24.9 - 9,714.9 9,739.8
2017
Fair
value
through Total
profit Available-for- Loans and Amortised carrying
or loss sale receivables cost amount
Bank Note GBPm GBPm GBPm GBPm GBPm
Assets
Cash in hand - - 0.5 - 0.5
Loans and
advances to
credit
institutions 15 - - 1,179.3 - 1,179.3
Investment
securities 16 - 19.1 - - 19.1
Loans and
advances to
customers 17 - - 6,051.0 - 6,051.0
Derivative
assets 22 6.1 - - - 6.1
6.1 19.1 7,230.8 - 7,256.0
Liabilities
Amounts owed
to retail
depositors 29 - - - 6,650.3 6,650.3
Amounts owed
to credit
institutions 30 - - - 1,250.3 1,250.3
Amounts owed
to other
customers 31 - - - 25.7 25.7
Derivative
liabilities 22 21.8 - - - 21.8
Subordinated
liabilities 34 - - - 10.9 10.9
Perpetual
Subordinated
Bonds 35 - - - 15.3 15.3
21.8 - - 7,952.5 7,974.3
The Group has no financial assets nor financial liabilities classified
as held for trading or held to maturity.
ii. Fair values
The following tables summarise the carrying value and estimated fair
value of financial instruments not measured at fair value in the
Statement of Financial Position:
Group 2018 Group 2017
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 1,347.3 1,347.3 1,187.2 1,187.2
Loans and advances to customers 8,983.3 9,151.1 7,306.0 7,715.4
10,331.0 10,498.8 8,493.7 8,903.1
Liabilities
Amounts owed to retail depositors 8,071.9 8,097.5 6,650.3 6,684.0
Amounts owed to credit
institutions 1,584.0 1,584.0 1,250.3 1,250.3
Amounts owed to other customers 32.9 32.9 25.7 25.7
Subordinated liabilities 10.8 10.8 10.9 11.1
Perpetual Subordinated Bonds 15.3 14.3 15.3 15.3
9,714.9 9,739.5 7,952.5 7,986.4
Bank 2018 Bank 2017
Carrying Estimated Carrying Estimated
value fair value value fair value
GBPm GBPm GBPm GBPm
Assets
Cash in hand 0.4 0.4 0.5 0.5
Loans and advances to credit
institutions 1,340.0 1,340.0 1,179.3 1,179.3
Loans and advances to customers 7,208.2 7,340.1 6,051.0 6,408.4
8,548.6 8,680.5 7,230.8 7,588.2
Liabilities
Amounts owed to retail depositors 8,071.9 8,097.5 6,650.3 6,684.0
Amounts owed to credit
institutions 1,584.0 1,584.0 1,250.3 1,250.3
Amounts owed to other customers 32.9 32.9 25.7 25.7
Subordinated liabilities 10.8 10.8 10.9 11.1
Perpetual Subordinated Bonds 15.3 14.3 15.3 15.3
9,714.9 9,739.5 7,952.5 7,986.4
The fair values in this table are estimated using the valuation
techniques below. The estimated fair value is stated as at 31 December
and may be significantly different from the amounts which will actually
be paid on the maturity or settlement dates of each financial
instrument.
Cash in hand
This represents physical cash across the Group's branch network where
fair value is considered to be equal to carrying value.
Loans and advances to credit institutions
This mainly represents the Group's working capital current accounts and
call accounts with central governments and other banks with an original
maturity of less than three months. Fair value is not considered to be
materially different to carrying value.
Loans and advances to customers
This mainly represents secured mortgage lending to customers. The fair
value of fixed rate mortgages has been estimated by discounting future
cash flows at current market rates of interest. Future cash flows
include the impact of expected credit losses. The interest rate on
variable rate mortgages is considered to be equal to current market
product rates and as such fair value is estimated to be equal to
carrying value.
Amounts owed to retail depositors
The fair value of fixed rate retail deposits has been estimated by
discounting future cash flows at current market rates of interest.
Retail deposits at variable rates and deposits payable on demand are
considered to be at current market rates and as such fair value is
estimated to be equal to carrying value.
Amounts owed to credit institutions
This mainly represents amounts drawn down under the Bank of England TFS.
Fair value is considered to be equal to carrying value.
Amounts owed to other customers
This represents fixed rate saving products to corporations and local
authorities with original maturities greater than three months. The fair
value is estimated by discounting future cash flows at current market
rates of interest.
Subordinated liabilities and Perpetual Subordinated Bonds
The fair value of subordinated liabilities is estimated by discounting
future cash flows at current market rates of interest. The PSBs are
listed on the London Stock Exchange with fair value being the quoted
market price at the reporting date.
iii. Fair value classification
The following tables provide an analysis of financial assets and
financial liabilities measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Carrying Principal
amount amount Level 1 Level 2 Level 3 Total
Group and Bank 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Investment securities 58.9 59.0 58.9 - - 58.9
Derivative assets 11.7 1,999.0 - 11.7 - 11.7
70.6 2,058.0 58.9 11.7 - 70.6
Financial liabilities
Derivative liabilities 24.9 (4,532.2) - 24.9 - 24.9
Group and Bank 2017
Financial assets
Investment securities 19.1 19.0 19.1 - -19.1
Derivative assets 6.1 1,636.1 - 6.1 - 6.1
25.2 1,655.1 19.1 6.1 -25.2
Financial liabilities
Derivative liabilities 21.8 (2,493.9) - 21.8 -21.8
Level 1: Fair values that are based entirely on quoted market prices
(unadjusted) in an actively traded market for identical assets and
liabilities that the Group has the ability to access. Valuation
adjustments and block discounts are not applied to Level 1 instruments.
Since valuations are based on readily available observable market prices,
this makes them most reliable, reduces the need for management judgement
and estimation and also reduces the uncertainty associated with
determining fair values.
Level 2: Fair values that are based on one or more quoted prices in
markets that are not active or for which all significant inputs are
taken from directly or indirectly observable market data. These include
valuation models used to calculate the present value of expected future
cash flows and may be employed either when no active market exists or
when there are no quoted prices available for similar instruments in
active markets.
Level 3: Fair values for which any one or more significant input is not
based on observable market data and the unobservable inputs have a
significant effect on the instruments fair value. Valuation models that
employ significant unobservable inputs require a higher degree of
management judgement and estimation in determining the fair value.
Management judgement and estimation are usually required for the
selection of the appropriate valuation model to be used, determination
of expected future cash flows on the financial instruments being valued,
determination of the probability of counterparty default and prepayments,
determination of expected volatilities and correlations and the
selection of appropriate discount rates.
The following table provides an analysis of financial assets and
financial liabilities not measured at fair value in the Statement of
Financial Position grouped into Levels 1 to 3 based on the degree to
which the fair value is observable:
Estimated fair value
Carrying Principal
amount amount Level 1 Level 2 Level 3 Total
Group 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances
to credit
institutions 1,347.3 1,346.9 - 1,347.3 - 1,347.3
Loans and advances
to customers 8,983.3 9,121.4 - 4,195.3 4,955.8 9,151.1
10,331.0 10,468.7 - 5,543.0 4,955.8 10,498.8
Financial
liabilities
Amounts owed to
retail depositors 8,071.9 8,019.7 - 2,916.4 5,181.1 8,097.5
Amounts owed to
credit
institutions 1,584.0 1,581.0 - 1,584.0 - 1,584.0
Amounts owed to
other customers 32.9 32.8 - - 32.9 32.9
Subordinated
liabilities 10.8 10.6 - 10.8 - 10.8
Perpetual
Subordinated Bonds 15.3 15.0 14.3 - - 14.3
9,714.9 9,659.1 14.3 4,511.2 5,214.0 9,739.5
Group 2017
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 1,187.2 1,187.2 - 1,187.2 - 1,187.2
Loans and advances to
customers 7,306.0 7,441.9 - 2,788.8 4,926.6 7,715.4
8,493.7 8,629.6 - 3,976.5 4,926.6 8,903.1
Financial liabilities
Amounts owed to retail
depositors 6,650.3 6,610.1 - 2,474.4 4,209.6 6,684.0
Amounts owed to credit
institutions 1,250.3 1,250.3 - 1,250.3 - 1,250.3
Amounts owed to other
customers 25.7 25.5 - - 25.7 25.7
Subordinated liabilities 10.9 10.7 - 11.1 - 11.1
Perpetual Subordinated
Bonds 15.3 15.0 15.3 - - 15.3
7,952.5 7,911.6 15.3 3,735.8 4,235.3 7,986.4
Estimated fair value
Carrying Principal
amount amount Level 1 Level 2 Level 3 Total
Bank 2018 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.4 0.4 - 0.4 - 0.4
Loans and advances to
credit institutions 1,340.0 1,339.7 - 1,340.0 - 1,340.0
Loans and advances to
customers 7,208.2 7,337.6 - 3,123.7 4,216.4 7,340.1
8,548.6 8,677.7 - 4,464.1 4,216.4 8,680.5
Financial liabilities
Amounts owed to
retail depositors 8,071.9 8,019.7 - 2,916.0 5,181.1 8,097.5
Amounts owed to
credit institutions 1,584.0 1,581.0 - 1,584.0 - 1,584.0
Amounts owed to other
customers 32.9 32.8 - - 32.9 32.9
Subordinated
liabilities 10.8 10.6 - 10.8 - 10.8
Perpetual
Subordinated Bonds 15.3 15.0 14.3 - - 14.3
9,714.9 9,659.1 14.3 4,511.2 5,214.0 9,739.5
Estimated fair value
Carrying Principal
amount amount Level 1 Level 2 Level 3 Total
Bank 2017 GBPm GBPm GBPm GBPm GBPm GBPm
Financial assets
Cash in hand 0.5 0.5 - 0.5 - 0.5
Loans and advances to
credit institutions 1,179.3 1,179.3 - 1,179.3 - 1,179.3
Loans and advances to
customers 6,051.0 6,177.1 - 2,653.3 3,755.1 6,408.4
7,230.8 7,356.9 - 3,833.1 3,755.1 7,588.2
Financial liabilities
Amounts owed to
retail depositors 6,650.3 6,610.1 - 2,474.4 4,209.6 6,684.0
Amounts owed to
credit institutions 1,250.3 1,250.3 - 1,250.3 - 1,250.3
Amounts owed to other
customers 25.7 25.5 - - 25.7 25.7
Subordinated
liabilities 10.9 10.7 - 11.1 - 11.1
Perpetual
Subordinated Bonds 15.3 15.0 15.3 - - 15.3
7,952.5 7,911.6 15.3 3,735.8 4,235.3 7,986.4
41. Pension scheme
Defined contribution scheme
The amount charged to profit or loss in respect of contributions to the
Group's defined contribution and stakeholder pension arrangements is the
contribution payable in the period. The total pension cost in the year
amounted to GBP1.7m (2017: GBP1.3m).
Defined benefit scheme
Kent Reliance Building Society (the 'Society') operated a defined
benefit pension scheme ('the Scheme') funded by the payment of
contributions to a separately administered fund for nine retired
members. The Society's Board decided to close the Scheme with effect
from 31 December 2001 and introduced a new defined contribution scheme
to cover service for Scheme members from 1 January 2002.
The Scheme Trustees, having taken actuarial advice, decided to wind up
the Scheme rather than continue to operate it on a 'paid up' basis. The
winding up is largely complete. As at 31 December 2018 the liability to
remaining members is GBP2k (31 December 2017: GBP2k) matched by Scheme
assets.
42. Capital management
The Group's prime objectives in relation to the management of capital
are to provide a sufficient capital base to cover business risks and
support future business development. The Group is compliant with the
requirements set out by the PRA, the Group's primary prudential
supervisor.
Capital management is based on the three 'pillars' of Basel II. Under
Pillar 1, the Group calculates its minimum capital requirements based on
8% of risk weighted assets. The PRA then applies a multiplier to this
amount to cover risks under Pillar 2 of Basel II and generates an
individual capital guidance ('ICG'). The Group manages and reports its
capital on a solo consolidated basis and hence the Bank's capital
position is not disclosed separately.
To comply with Pillar 2, the Group completes an annual self- assessment
of risks known as the Internal Capital Adequacy Assessment Process
('ICAAP') reviewed by the PRA. Pillar 3 requires firms to publish a set
of disclosures which allow market participants to assess information on
that firm's capital, risk exposures and risk assessment process. The
Group's Pillar 3 disclosures can be found on the Group's website.
Basel III came into force through the CRD IV. Basel III complements and
enhances Basel I and II with additional safety measures. Basel III
changed definitions of regulatory capital, introduced new capital
buffers and liquidity ratios, and modified the way regulatory capital is
calculated.
The ultimate responsibility for capital adequacy rests with the Board of
Directors. The Group's ALCO, which consists of the CEO, CFO and other
senior executives, is responsible for the management of the capital
process including approving policy, overseeing internal controls and
setting internal limits over capital ratios.
The Group actively manages its capital position and reports this on a
regular basis to senior management via the ALCO and other governance
committees. Capital requirements are included within budgets, forecasts
and strategic plans with initiatives being executed against this plan.
The Group's Pillar 1 capital information is presented below:
(Unaudited) (Unaudited)
2018 2017
GBPm GBPm
Common Equity Tier 1 capital
Called up share capital 2.4 2.4
Share premium, capital contribution and share-based
payment reserve 170.0 169.8
Retained earnings 439.6 337.5
Transfer reserve (12.8) (12.8)
Other reserves (0.5) (0.1)
Total equity excluding equity bonds 598.7 496.8
Foreseeable dividends (25.2) (22.6)
Solo consolidation adjustments(1) (5.4) (4.8)
IFRS 9 transitional adjustment(2) 2.7 -
Deductions from Common Equity Tier 1 capital
Prudent valuation adjustment(3) (0.1) -
Intangible assets (7.7) (6.8)
Deferred tax asset (1.4) (2.5)
Common Equity Tier 1 capital 561.6 460.1
Additional tier 1 capital
AT1 securities 60.0 60.0
Total tier 1 capital 621.6 520.1
Tier 2 capital
Subordinated debt and PSBs 47.4 47.7
Collective provisions - 2.0
Deductions from tier 2 capital (3.3) (2.5)
Total tier 2 capital 44.1 47.2
Total regulatory capital 665.7 567.3
Risk weighted assets (unaudited) 4,211.8 3,348.5
1. The Bank has solo consolidation waivers for most of its
subsidiaries. The equity for unconsolidated entities has been removed
from CET1.
2. The regulatory capital includes a GBP2.7m add-back under IFRS
9 transitional arrangements. This represents 95% of the IFRS 9
transitional adjustment booked directly to retained earnings of GBP2.9m.
The full impact of IFRS 9, if applied, would reduce total regulatory
capital to GBP663.0m.
3. The Group has adopted the simplified approach under the
Prudent Valuation rules, recognising a deduction equal to 0.1% of fair
value assets and liabilities.
The movement in CET1 during the year was as follows:
(Unaudited) (Unaudited)
2018 2017
GBPm GBPm
At 1 January 460.1 365.6
Movement in retained earnings 102.1 96.8
Share premium from Sharesave Scheme vesting 0.4 0.5
Movement in other reserves (0.6) 3.1
Movement in foreseeable dividends (2.6) (4.1)
Movement in solo consolidation adjustment (0.6) 0.5
IFRS 9 transitional adjustment 2.7 -
Movement in prudent valuation adjustment (0.1) -
Net increase in intangible assets (0.9) (2.1)
Movement in deferred tax asset for carried forward
losses 1.1 (0.2)
At 31 December 561.6 460.1
43. Operating segments
The Group distinguishes two segments within its operations.
1. BTL/SME; secured lending on property for investment and
commercial purposes. This segment also includes the Group's new asset
finance business and personal loan portfolio (disposed of during 2018),
and
2. Residential mortgages; lending to customers who live in their
own homes, secured either via first or second charges against the
residential home.
The financial position and results of operations of the above segments
are summarised below:
Residential
BTL/SME mortgages Total
2018 GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 7,389.2 1,616.0 9,005.2
Provision for impairment losses on loans and
advances (11.0) (10.9) (21.9)
Loans and advances to customers 7,378.2 1,605.1 8,983.3
Capital expenditure 5.2 1.1 6.3
Profit or loss for the year
Net interest income 220.0 67.3 287.3
Other expense (1.0) (4.2) (5.2)
Total income 219.0 63.1 282.1
Impairment losses (5.7) (2.4) (8.1)
Contribution to profit 213.3 60.7 274.0
Operating expenses (79.6)
FSCS and other provisions (0.8)
Exceptional cost-Heritable option (9.8)
Profit before taxation 183.8
Taxation (43.5)
Profit for the year 140.3
Residential
BTL/SME mortgages Total
2017 GBPm GBPm GBPm
Balances at the reporting date
Gross loans and advances to customers 5,654.1 1,673.5 7,327.6
Provision for impairment losses on loans and
advances (13.2) (8.4) (21.6)
Loans and advances to customers 5,640.9 1,665.1 7,306.0
Capital expenditure 11.0 3.3 14.3
Profit or loss for the year
Net interest income 177.1 68.3 245.4
Other expense (1.5) (5.8) (7.3)
Total income 175.6 62.5 238.1
Impairment losses (0.8) (3.6) (4.4)
Contribution to profit 174.8 58.9 233.7
Operating expenses (65.1)
FSCS and other provisions (0.9)
Profit before taxation 167.7
Taxation (40.8)
Profit for the year 126.9
44. Country by country reporting
Country by Country Reporting ('CBCR') was introduced through Article 89
of CRD IV, aimed at the banking and capital markets industry.
From 1 January 2015, all institutions within the scope of CRD IV should
publish annually, on a consolidated basis, by country where they have an
establishment:
a) their name, nature of activities and geographic location
b) number of employees
c) their turnover
d) pre-tax profit or loss
e) corporation tax paid, and
f) any public subsidies received.
The ongoing reporting deadline is 31 December each year, starting from
31 December 2015, and disclosures should relate to the most recently
ended accounting period.
The name, nature of activities and geographic location of the Group's
companies are presented below:
Jurisdiction Country Name Activities
UK(1) England OneSavings Bank plc
Easioption Limited
Guernsey Home Loans Limited
Heritable Development Finance Limited
Interbay Group Holdings Limited
Jersey Home Loans Limited
Prestige Finance Limited
Reliance Property Loans Limited
Rochester Mortgages Limited
5D Finance Limited Commercial
banking
InterBay Asset Finance Limited (formerly: 5D Lending
Ltd)
Interbay Funding, Ltd
Inter Bay Financial I Limited
Inter Bay Financial II Limited
InterBay Holdings Ltd
Interbay ML, Ltd
Guernsey Guernsey Home Loans Limited
Jersey Jersey Home Loans Limited
India India OSB India Private Limited Back
office
processing
1. Guernsey Home Loans Limited (Guernsey) and Jersey Home Loans
Limited (Jersey) are incorporated in Guernsey and Jersey respectively
but are considered to be located in the UK as they are managed and
controlled in the UK with no permanent establishments in Guernsey or
Jersey.
Other disclosures required by the CBCR directive are provided below:
2018 UK India Consolidation(2) Total
Average number of employees 588 401 - 989
Turnover(1) , GBPm 281.7 7.2 (6.8) 282.1
Profit/(loss) before tax, GBPm 183.4 1.1 (0.7) 183.8
Corporation tax paid, GBPm 38.9 0.2 - 39.1
2017 UK India Consolidation(2) Total
Average number of employees 483 330 - 813
Turnover(1) , GBPm 238.0 5.4 (5.3) 238.1
Profit/(loss) before tax, GBPm 167.5 1.0 (0.8) 167.7
Corporation tax paid, GBPm 41.8 0.3 - 42.1
1. Turnover represents total income before impairment losses,
regulatory provisions and operating costs, but after net interest, net
commissions and fees, gains and losses on financial instruments and
external servicing fees.
2. Relates to a management fee from Indian subsidiaries to
OneSavings Bank plc for providing back office processing.
The tables below reconcile tax charged and tax paid during the year.
UK India Total
2018 GBPm GBPm GBPm
Tax charge 43.3 0.2 43.5
Effects of:
Other timing differences (0.8) - (0.8)
Tax outside of profit or loss (3.4) - (3.4)
Prior year tax paid during the year 19.5 - 19.5
Current year tax to be paid after the reporting date (19.7) - (19.7)
Tax paid 38.9 0.2 39.1
UK India Total
2017 GBPm GBPm GBPm
Tax charge 40.5 0.3 40.8
Effects of:
Other timing differences 0.8 - 0.8
Tax outside of profit or loss (1.2) - (1.2)
Prior year tax paid during the year 22.3 - 22.3
Current year tax to be paid after the reporting date (20.6) - (20.6)
Tax paid 41.8 0.3 42.1
45. Adjustments for non-cash items and changes in operating assets and
liabilities
Group Group Bank Bank
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Adjustments for non-cash items:
Depreciation and amortisation 4.7 3.5 4.0 3.0
Interest on subordinated liabilities 0.7 0.9 0.7 0.9
Interest on Perpetual Subordinated Bonds 0.9 0.9 0.9 0.9
Impairment charge on loans 8.1 4.4 7.1 2.0
Loss on sale of financial instruments 0.1 - 0.1 -
FSCS and other regulatory provisions 0.8 0.9 0.8 0.9
Fair value losses on financial instruments 5.1 6.3 5.1 6.3
Share-based payments 2.5 2.4 2.6 2.3
Exceptional cost-Heritable option 9.8 - 9.8 -
Total adjustments for non-cash items 32.7 19.3 31.1 16.3
Changes in operating assets and liabilities:
Increase in loans and advances to credit institutions (1.7) (6.3) (1.7) (6.3)
Increase in loans to customers (1,689.5) (1,371.2) (1,166.1) (1,159.5)
Increase in intercompany balances - - (475.2) (181.0)
Increase in retail deposits 1,421.6 697.9 1,421.6 697.9
Net increase/(decrease) in other assets (0.8) 7.0 (0.8) (0.9)
Net decrease in derivatives and hedged items (5.3) (0.1) (5.3) (0.1)
Net increase in credit institutions and other customers'
deposits 10.9 21.3 10.9 21.3
Net increase/(decrease) in other liabilities 2.9 (3.3) 1.3 5.5
Exchange differences on working capital (0.2) (0.3) - -
Total changes in operating assets and liabilities (262.1) (655.0) (215.3) (623.1)
46. Events after the reporting date
On 9 March 2019, a statement was released confirming that Charter Court
Financial Services and OneSavings Bank are in advanced discussions
regarding a possible all-share combination of the two companies. This
statement and any future public documents relating to the possible
combination will be placed on the Investor Relations section of the OSB
website at www.osb.co.uk.
In 2019, the Heritable option was surrendered for a one-off payment of
GBP9.8m and the Bank acquired the JV partners' interest in the business.
At the same time a new revenue sharing arrangement was signed allowing
the JV partner to continue to lend alongside the Bank.
47. Controlling party
As at 31 December 2018 there was no controlling party of OSB.
Glossary
AGM Annual General Meeting
ALCO Assets and Liabilities Committee
AT1 Additional Tier 1 Capital
BoE Bank of England
CEO Chief Executive Officer
CFO Chief Financial Officer
CRD IV Capital Requirement Directive and Regulation
CRO Chief Risk Officer
DSBP Deferred Share Bonus Plan
EAD Exposure at Default
ECL Expected Credit Loss
EIR Effective Interest Rate
EPS Earnings Per Share
EU European Union
FCA Financial Conduct Authority
FLS Funding for Lending Scheme
FRC Financial Reporting Council
FSCS Financial Services Compensation Scheme
FSD Forced Sale Discount
FTSE Financial Times Stock Exchange
HMRC Her Majesty Revenue and Customs
HPI House Price Inflation
HR Human Resources
IAS International Accounting Standards
ICAAP Internal Capital Adequacy Assessment Process
ICR Interest Coverage Ratio
IFRS International Financial Reporting Standards
ILAAP Internal Liquidity Adequacy Assessment Process
ILTR Indexed Long-Term Repo
IPO Initial Public Offering
IRB Internal Ratings-Based approach to credit risk
ISA Individual Savings Account
KRPS Reliance Provident Society
LCR Liquidity Coverage Ratio
LGD Loss Given Default
LIBOR London Inter Bank Offered Rate
LTIP Long-Term Incentive Plan
LTV Loan to value
NIM Net Interest Margin
NPS Net Promoter Score
ONS Office for National Statistics
PD Probability of Default
PPD Propensity to go to Possession Given Default
PRA Prudential Regulation Authority
PRS Private Rented Sector
PSBs Perpetual Subordinated Bonds
PSP Performance Share Plan
RMBS Residential Mortgage Backed Securities
RoE Return on equity
RWA Risk weighted assets
SAYE Save As You Earn or Sharesave
SDLT Stamp Duty Land Tax
SICR Significant Increase in Credit Risk SID Senior Independent
Director SME Small Medium Enterprises
SRMF Strategic Risk Management Framework
TFS Term Funding Scheme
TTS Time to Sale
Company information
Registered office and head office
Reliance House
Sun Pier
Chatham
Kent
ME4 4ET
United Kingdom
Registered in England no: 07312896
www.osb.co.uk
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 8LU
United Kingdom
Telephone: 0371 384 2030
International: +44 121 415 7047
Investor relations
Email: osbrelations@osb.co.uk
Telephone: 01634 838973
Private shareholders are welcome to contact the Company
Secretary if they have any questions or concerns they wish to
be raised with the Board.
www.osb.co.uk
Reliance House, Sun Pier, Chatham, Kent ME4 4ET
T +44 (0) 1634 848944
This announcement is distributed by West Corporation on behalf of West
Corporation clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: OneSavings Bank plc via Globenewswire
http://www.osb.co.uk/
(END) Dow Jones Newswires
March 29, 2019 09:19 ET (13:19 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Osb (LSE:OSB)
과거 데이터 주식 차트
부터 6월(6) 2024 으로 7월(7) 2024
Osb (LSE:OSB)
과거 데이터 주식 차트
부터 7월(7) 2023 으로 7월(7) 2024
