TIDMOSB
LEI: 213800WTQKOQI8ELD692
OneSavings Bank plc
(the Company)
2019 Annual Report and Accounts
The following regulated information, disseminated pursuant to DTR6.3.5,
comprises the 2019 Annual Report and Accounts which was sent to
shareholders of the Company on 31 March 2020. A copy of the Annual
Report and Accounts is available at
https://www.globenewswire.com/Tracker?data=e08_HVSVk8CrPYxBL281jGsu1X-k7C0FSu0sf3IewILa9dezeX8Trf_6S22QBG8d-nYVHjnK0IJVGLN8pXAhSA==
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 (OSB) began trading as a bank on 1 February 2011 and
was admitted to the main market of the London Stock Exchange in June
2014 (OSB.L). OSB joined the FTSE 250 index in June 2015. On 4 October
2019, OSB acquired Charter Court Financial Services Group plc (CCFS) and
its subsidiary businesses. 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.
OneSavings Bank
OSB primarily targets market sub-sectors that offer high growth
potential and attractive risk-adjusted returns in which it can take a
leading position and where it has established expertise, platforms and
capabilities. These include private rented sector Buy-to-Let, commercial
and semi-commercial mortgages, residential development finance, bespoke
and specialist residential lending, secured funding lines and asset
finance.
OSB originates mortgages organically via specialist brokers and
independent financial advisers through its specialist brands including
Kent Reliance for Intermediaries, InterBay Commercial and Prestige
Finance. It is differentiated through its use of highly skilled, bespoke
underwriting and efficient operating model.
OSB is predominantly funded by retail savings originated through the
long-established Kent Reliance name, which includes online and postal
channels, as well as a network of branches in the South East of England.
Diversification of funding is currently provided by securitisation
programmes, the Term Funding Scheme and the Bank of England Indexed
Long-Term Repo operation.
Charter Court Financial Services Group
CCFS focuses on providing Buy-to-Let and specialist residential
mortgages, mortgage servicing, administration and credit consultancy and
retail savings products. It operates through its three brands -- Precise
Mortgages, Exact Mortgage Experts and Charter Savings Bank.
It is differentiated through risk management expertise and best-of-breed
automated technology and systems, ensuring efficient processing, strong
credit and collateral risk control and speed of product development and
innovation. These factors have enabled strong balance sheet growth
whilst maintaining high credit quality mortgage assets.
CCFS is predominantly funded by retail savings originated through its
Charter Savings Bank brand. Diversification of funding is currently
provided by securitisation programmes, the Term Funding Scheme and the
Bank of England Indexed Long-Term Repo operation.
who we are
OneSavings Bank ('OSB') is a leading specialist mortgage lender,
primarily focused on carefully selected segments of the mortgage market.
Our specialist lending is supported by our Kent Reliance and Charter
Savings Bank retail savings franchises. Diversification of funding is
provided by sophisticated securitisation platforms.
OSB's unique cost-efficient operating model is supported by our
wholly-owned subsidiary OSBIndia.
On 4 October 2019, OSB combined with Charter Court Financial Services
Group plc ('CCFS'), bringing increased scale, diversification and
product capabilities to the Group.
Our purpose
To become our customers' favourite bank; one that delivers its very best,
challenges convention and opens doors that others can't.
Our strategy
} Be a leading specialist lender in our chosen market segments,
targeting customers in underserved, secured lending market segments that
offer attractive risk-adjusted returns
} Leverage OSB's bespoke, manual underwriting
with CCFS' automated risk assessment to offer a full range of specialist
mortgages to our target market segments through our specialist brands
-- Further deepen the relationships and reputation for delivery with our
intermediaries increasing breadth of channels to market
-- Deliver consistently good value savings products and excellent customer
service to build on the Kent Reliance and Charter Savings Bank
propositions
-- Pursue sophisticated wholesale funding and active balance sheet
management opportunities
View more online
Our investor site gives you direct access to a wide range of information
about OSB:
https://www.globenewswire.com/Tracker?data=e08_HVSVk8CrPYxBL281jMQvNDk5949Juw2bGUzkL_5q5jwzRCJk9dLcQsA6ZLpoFgObltT6N-w80yxPpmPshQ==
www.osb.co.uk
To find out more about our strategy, see Strategic framework on page 24
Why invest in OSB?
} Market-leading customer propositions
} Experienced leadership team
} Experts in specialist lending market segments, including professional
Buy-to-Let
} Sustainable growth, margin and returns
} Strong risk management framework
} Capital strength
Highlights
On 4 October 2019, OneSavings Bank plc ('OSB') combined with Charter
Gross new lending
Net loan book
Court Financial Services Group plc ('CCFS'), creating a leading
specialist lender.
As a result, throughout this Strategic Report, in addition to statutory
results, we also present pro forma underlying results.
Read more on page 46
+36% +10% +105% +16%
Net interest margin
Cost to income ratio
(0.62)
bps
(0.20)
bps
+4pts +1pt
} Group statutory 2019
} Group statutory 2018
} Group pro forma underlying 2019
} Group pro forma underlying 2018
Loan loss ratio Profit before tax Basic EPS
(pence per share)
+0.03
bps
+0.03
bps
+14%
+9%
(5)%
+9%
Return on equity
(7)
pts
(3)
pts
Explanation of statutory
and pro forma underlying results
Fully loaded Common Equity Tier 1 ratio
+2.7
pts
Statutory results
In this Annual Report, statutory results are the results prepared under
the requirements of accounting standards and constitute the Financial
statements.
Statutory results reflect 12 months
of OSB's results and CCFS' results from 4 October 2019, the date on
which the Combination completed and became effective, to 31 December
2019. The comparative period results reflect 12
months of OSB's results only as presented in the OSB 2018 Annual Report.
Pro forma underlying results
Pro forma underlying results are also presented in the Strategic Report,
as Management believes they provide a more consistent basis for
comparing the Group's performance between financial periods.
Pro forma underlying results assume that the Combination occurred on
1 January 2018, and include 12 months of results from CCFS. They also
exclude exceptional items, integration costs and other
acquisition-related items.
A reconciliation between results
on a pro forma underlying basis and statutory basis is presented on page
51, and the calculation of APMs is presented in the Appendix on page
260.
Full year dividend per share (pence per share)
+10%
1. To align calculation methods post Combination, OSB amended NIM
calculation to include average interest earning assets on a 13 point
average from a simple average. The comparative NIM ratio was restated.
2. To align calculation methods post Combination, loan loss ratio was
amended to include gross loans on a 13 point average from a simple
average. The comparative ratio remained unchanged.
1. Profit before tax was restated to recognise interest expense on the
GBP22m Perpetual Subordinated Bonds previously classified as equity.
2. To align calculation methods post Combination, return on equity was
amended to include average shareholders' equity on a 13 point average
from a simple average.
The comparative ratio was restated.
It is a year since we announced the
Combination and I am particularly pleased that both businesses
maintained momentum during the process of the transaction. Strong
financial and operational performances by both OSB and CCFS underpin the
first combined results for the Group.
As promised, we moved at pace to deliver the Combination and I will
introduce
you later to the newly combined Board. We have also created a single
Executive team and are well advanced in merging corporate and support
functions.
I am confident that we have the right team in place to complete the
integration and deliver greater shareholder value through the enhanced
capabilities we have across the Group. We are on target to create a
leading specialist lender in the UK.
Focused on our stakeholders
Your Board is focused on ensuring that the Group delivers value to all
our
stakeholders -- our customers, our people, our owners, our partners and
the wider community, all within a secure risk management framework. On
page 89 we talk in more detail about our stakeholder approach (s.172);
nonetheless, I would like to highlight a couple of achievements during a
year of significant change:
} Both OSB and CCFS achieved
exceptional customer Net Promoter Scores in the year, demonstrating
strong customer satisfaction, and
} Employees also continue to demonstrate their satisfaction and both OSB
and CCFS were included in the Sunday Times 100 Best Companies to Work
For in 2019.
Board and corporate governance framework
Following completion of the Combination,
I have the pleasure of introducing the Group's newly combined Board to
shareholders. All members are introduced on pages 96 and 97 of this
Annual Report. Changes were necessary in order to downsize the combined
Board and we are now at eight people. The combined Board is committed to
the highest standards of corporate governance and we have made several
changes to our Board and Committee membership.
I would like to thank the Board for its continued dedication during the
Combination and the integration work to date. I would also like to
personally thank Sir Malcolm Williamson, who recently retired from his
role as Non- Executive Chairman of the Board, for his contribution to
CCFS and OSB and for his stewardship that led to the successful
combination of the two groups. I would also like to thank Eric Anstee,
Rod Duke,
Tim Brooke, Margaret Hassall and
Ian Ward, who have stood down from the Board or are not standing for
election or re-election at the AGM, for their significant contributions
to OSB and CCFS; Eric as previous Chair of the OSB Audit Committee, Rod
as Senior Independent Director for OSB, Margaret as a member of various
Committees for OSB and Tim and Ian for their contributions to CCFS.
Dividend proposal
I am pleased to welcome all of our new shareholders to the register. In
recognition of the Group's continued excellent progress and confidence
in its future prospects, the Board is recommending the payment of a
final dividend of 11.2 pence per share. Together with the interim
dividend of 4.9 pence per share, this brings the total ordinary dividend
for the year to 16.1 pence per share.
Future prospects
The economic outlook remains uncertain, as it has been since the
decision to
leave the European Union was taken. Negotiations regarding trade deals
and our ongoing commercial relationships continue. The potential impact
of the Coronavirus on the global and UK economies is also very uncertain
at this time. However, we have continued to deliver excellent business
growth and increased returns. Now, with greater scale, enhanced
underwriting capabilities and leading positions in the market segments
we serve, we are better positioned to deliver attractive, sustainable
returns
for our shareholders, across the cycle.
Before I go, I cannot leave without mentioning the obvious; the critical
importance of all my colleagues (wherever they are based, in the UK or
in India) to the success of the business. I do so unashamedly and
would like to thank all of you for your dedicated contribution during
2019. You are building a fantastic business.
David Weymouth
Non-Executive Chairman
19 March 2020
The rationale behind the Combination
-- Create a leading specialist lender in the UK with greater scale and
resources to deploy on growth opportunities.
-- Leverage complementary strengths to create a comprehensive and
diversified platform across product capabilities, brands and team
cultures.
-- Leverage complementary underwriting capabilities to enhance the customer
proposition.
-- Establish well-balanced, resilient and diversified retail-wholesale
funding platform.
-- Maintain two leading, independent distribution platforms to create an
enhanced proposition to the broker community.
} Maintain operational centres of excellence
to drive service levels and platform efficiency.
Resources and relationships
Brands and heritage
We have a family of specialist
lending brands targeting
selected segments of the
mortgage market underserved
by large
and medium UK banking
institutions, as well
as our savings franchises
through Kent Reliance,
with its
150-year heritage, and
the Charter Savings Bank
brand.
-------------------------------------
Employees
Our team of highly skilled
employees possesses expertise
and in-depth knowledge
of the property, capital
and savings markets, risk
assessment and customer
management.
----------------------------------------
Infrastructure
We benefit from cost
and efficiency advantages
provided by our wholly-
owned subsidiary OSBIndia
as well as credit expertise
and mortgage administration
services provided by Exact
Mortgage Experts.
----------------------------------------
Relationships with intermediaries
Our strong and deep relationships
with mortgage intermediaries
that distribute our products
continue to win us
industry recognition.
----------------------------------------
Capital strength
We have a strong CET1
ratio and proven capital
generation and
management capability
to support significant
loan book
growth through profitability.
Sophisticated funding platform
Our key strengths
-- Stable savings funding via Kent Reliance and Charter
Savings Bank brands
-- Capital markets expertise with securitisation
platforms allowing for programmatic issuance of high
quality residential mortgage-backed securities ('RMBS')
Statutory retail deposits
GBP16.3bn
2018: GBP8.1bn
Specialist lending business
Our key strengths
} Strong levels of mortgage origination
} Excellent loan performance
} Award-winning product propositions
} Strong relationships with intermediaries
Statutory net loans to customers
GBP18.4bn
2018: GBP9.0bn
Unique operating model
Our key strengths
-- OSBIndia: Best-in-class customer service
-- Exact Mortgage Experts: credit expertise and mortgage
administration service
-- Continued, disciplined cost management
Statutory cost to income ratio
32%
2018: 28%
Strategic priorities
-- Provide cost-efficient funding through a resilient and diversified
funding platform to support our future growth
-- Deliver consistently good value savings products to our customers
-- Pursue sophisticated wholesale funding markets and efficient balance
sheet management
Strategic priorities
-- Be a leading specialist lender in our chosen market segments
-- Retain focus on our complementary underwriting platforms: OSB's bespoke
and manual and CCFS' automated risk assessment platforms
-- Further deepen relationships and distribution with intermediaries
Strategic priorities
-- Continue to leverage our unique and cost-efficient operating model
-- Leverage deep credit expertise and data analytics of Exact Mortgage
Experts
-- Maintain an efficient, scalable and resilient infrastructure
GBP5.7bn
2018: 13 securitisations worth GBP4.2bn
Assets administered by Exact as at
31 December 2019
GBP9.3bn
2018: GBP7.8bn
(pro forma underlying)
Outcomes and value creation
For shareholders
Statutory Dividend per
basic EPS share
52.6p 16.1p
For customers
OSB customer OSB customer
NPS1 retention2
+66 91%
CCFS customer CCFS
NPS1 retention2
+72 88%
For intermediaries
OSB broker CCFS broker
NPS1 NPS1
+27 +18
For employees
Total number Number of
of employees Group employees
at the end promoted in
of 2019 2019
1,834 206
For communities
Pro forma underlying sponsorship
and donations3
GBP398k
1. OSB customer score
relates to Kent Reliance
savings customers; CCFS
customer NPS relates to
Charter Savings Bank customers;
OSB broker NPS relates
to Kent Reliance brokers
and CCFS broker NPS relates
to Precise Mortgage brokers.
2 Retention is defined
as average maturing fixed
contractual retail deposits
that remain with the Bank
on their maturity date.
3. Includes pre-Combination
donations from CCFS.
Specialist lending
Buy-to-Let/SME sub-segments
Residential sub-segments
business
Gross loan book1
GBP10.8bn
2018: GBP9.0bn
Buy-to-Let
We provide loans to limited companies and individuals, secured on
residential property held for investment purposes. We target experienced
and professional landlords or high net worth individuals with
Residential development
We provide development loans to small and medium- sized developers of
residential property.
Funding lines
First charge
We provide loans to individuals, secured by a first charge against their
residential home.
Our target customers include those with a high net worth and complex
income streams.
Funding lines
We provide funding lines to non-bank lenders who operate in
high-yielding, specialist sub- segments such as residential bridge
finance.
originations1
GBP3.4bn
2018: GBP3.0bn
property portfolios.
Commercial mortgages
We provide loans to limited companies and individuals,
We provide loans to non-bank finance companies secured against
portfolios of financial assets, principally mortgages and leases.
Asset finance
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
Net interest
secured on commercial and
We provide loans to individuals
income1
GBP316m
2018: GBP286m
semi-commercial properties held for investment purposes or for
owner-occupation.
We provide loans under hire purchase, leasing and refinancing
arrangements to UK SMEs and small corporates to finance
business-critical assets.
seeking to raise additional funds secured by a second charge against
their residential home.
Sophisticated funding platform
Statutory retail deposits
GBP16.3bn
2018: GBP8.1bn
17
Securitisations since 2013 across OSB and CCFS worth over
GBP5.7bn
Retail savings Online
Kent Reliance is our award-
winning retail savings franchise with over 150 years of heritage,
attracting retail savings deposits via the internet.
Charter Savings Bank is a multi- award-winning online bank providing a
range of competitive savings products.
D irect
The direct channel sources savings products via telephone (Kent
Reliance) and post
(Kent Reliance and Charter Savings Bank).
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.
Charter Mortgage Funding ('CMF') franchises, completing 12
securitisations worth more than GBP3.8bn since 2013 to
31 December 2019.
OSB issued its inaugural securitisation under Canterbury Finance in July
2019, having previously issued two securitisations in the
Rochester programme.
Specialist lending business
Gross loan book2
GBP7.4bn
2018: GBP6.7bn
Organic originations2
GBP3.1bn
2018: GBP2.8bn
Net interest income2
GBP202m
2018: GBP181m
Buy-to-Let
We provide products to professional and non- professional landlords with
good quality credit history, through a wide product offering, including
personal and limited company ownership and lifetime trackers.
Residential
We provide a range of competitive products to prime borrowers, complex
prime borrowers (including self-employed, Help to Buy, Right to Buy and
new-build) and near-prime borrowers.
Bridging
We offer products with flexible features, focusing on lending to prime
borrowers only, for customers who need to fund short-term cash flow
needs, for example, to cover light
and heavy refurbishments, home improvements, auction purchases and also
to 'bridge' delays in obtaining mortgages and 'chain breaks'.
Second charge
We offer loans to prime residential and Buy-to-Let customers, with low
loan- to-value ratios, who require additional capital and who wish to
secure a loan with a charge against a property which is already charged
to another lender.
Unique operating model
Statutory cost to income ratio
32%
2018: 28%
Assets administered by Exact
GBP9.3bn
2018: GBP7.8bn (pro forma underlying)
OSBIndia
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 also 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.
Our vision is to become our customers' favourite bank; one that delivers
its very best, challenges convention and opens doors that others can't.
Strong relationships, built on regular engagement with all our
stakeholders, are fundamental to achieving this vision, central to the
Group's culture and embedded
in the Board's responsibilities.
The Combination with CCFS extended
In addition, the Management and the Board engage with customers through
the Kent Reliance Provident Society ('KRPS') which conducts customer
engagement activity studies for OSB. During 2019 KRPS conducted six such
studies.
For further information on how we focused on being our savings
customers' favourite bank in the year, see page 76.
Shareholders
As a result of the Combination with CCFS, we welcomed new investors to
OSB Group and some of our existing investors increased their holdings.
Even though our shareholder register has changed, our approach to
our stakeholder reach as we added new colleagues, customers, brokers and
shareholders. The Board is committed to doing the right thing for all of
our stakeholders as they fulfil their duty to promote the success of the
Group under section 172 of the Companies Act 2006.
The following pages outline how OSB Group engaged with its key
stakeholders during the year, which includes information on how the
Directors have discharged their duty under section
172 of the Companies Act 2006. For more information on how the Directors
discharged their duty under section 172 of the Companies Act 2006, see
page 89 and the Corporate Governance Report.
Customers
We pride ourselves on delivering straightforward and transparent
products and propositions to both our borrowers and our savers.
Each time that Kent Reliance savers call
or interact with the Bank, we offer them an opportunity to let us know
how we did. We listen to them and act upon what they tell us. The
feedback that we regularly gather informs and reflects our unique
product offering and the excellent customer service we offer. We
consistently achieve high satisfaction scores and in 2019 the Kent
Reliance customer Net Promoter Score increased to +66.
97% of customers who save via Charter Savings Bank had a good or
excellent experience with the Bank1 and the Net Promoter Score increased
to +72 in 2019.
Kent Reliance welcomed over 40,000 new savings customers in the year and
achieved a retention rate of 91%. Charter Savings Bank had nearly 27,000
new customers join in the year, reflecting our propositions being highly
valued in the marketplace, with an 88% retention rate.
The satisfaction scores, retention rates, together with the number of
complaints, and how long it took us to resolve them, form part of the
management and Board monthly reporting packs, ensuring the visibility of
the customer experience to management.
investor engagement has remained straightforward and uncomplicated as we
favour an open dialogue.
The Group's Chief Executive Officer ('CEO') and Chief Financial Officer
('CFO') are supported by the Investor Relations team and meet with
institutional investors and sell-side analysts. The Board's primary
contact with shareholders comes through the CEO and the CFO. The Board
is also regularly informed by Investor Relations updates which include
shareholders' feedback, analysts' recommendations and market views.
The Annual General Meeting is another opportunity for shareholders to
engage and it is attended by Board members and Management.
As a result of the Combination with CCFS, the Group conducted a
remuneration consultation regarding the Executive Directors during the
year, consulting with the top 20 shareholders. This included meetings
attended by the then Chairman, Sir Malcolm Williamson, and the new
Chairman, David Weymouth, providing
an opportunity to discuss not only the proposed remuneration, but also
any other topics of interest to our investors.
In 2019, for OSB only, the Investor Relations team met 140 individual
investors at one-to-one meetings, industry conferences and roadshows.
Our corporate website contains useful investor information, as well as
the Group's previous results: www.osb.co.uk/investors
For further information on how the Board engaged with the shareholders
in the year, please see
page 108.
Intermediaries
All of our lending products, with the exception of funding lines and
residential development loans, are distributed via mortgage brokers.
Needless to say, mortgage intermediaries are vital
to our success.
The unique and consistent lending propositions across all lending brands
fulfil our goal of making it easier for intermediaries to serve our
borrowers. However, our efforts extend beyond our proposition, as we
continuously
enhance the service we provide, grow our teams as the number of
intermediaries grows and regularly engage with
the broker community. Our business development managers listen and work
with intermediaries, making themselves available to discuss cases and
helping to obtain swift and reliable decisions.
The Board and Management track broker satisfaction scores in monthly
Board reporting packs. The Board is also presented with monthly
borrowers' satisfaction scores for both the OSB and CCFS brands and
details of complaints.
The OSB Sales team participated in 224 intermediary events and CCFS in
297 during 2019, interacting with brokers and keeping abreast of
industry developments and intermediary requirements. The OSB broker NPS
score was +27 and the CCFS score was +18 for 2019.
Colleagues
Our people are our key asset, and our success depends on the talented
individuals we employ. Following the
Combination with CCFS, the talent pool of the combined Group increased
and at
the end of 2019 we had 1,834 employees.
We have always favoured two-way communication between management and our
employees through regular town hall meetings, informal sessions with
management and opportunities to ask questions anonymously. These
interactions are a source of many initiatives undertaken throughout the
business to make OSB the best workplace it can be. We have introduced
'OneVoice', a platform for employees to express their ideas and
feedback. This increases the level of engagement that employees have
with the Board and operates as a formal forum. The forum meets quarterly
and representatives from each Group office location gather opinions from
employees and feed this back to the Board and Executives.
What our employees think is paramount to us and we also regularly ask
for their opinion in Group-wide surveys. Responses from UK employees
enabled us to enhance the working experience, resulting in
both OSB and CCFS being included in The Sunday Times 100 Best Companies
to Work For in 2019. OSB employees also
took part in the Banking Standards Board Survey for the third time.
OSBIndia was officially certified as a 'Great Place to Work' in 2019.
Detailed results of these surveys are also discussed by the Board and
feature frequently on the Board's agenda.
For more details on how we strived to make OSB the best workplace it can
be, see page 77.
Communities
OSB Group cares about the communities in which it is based. Each year,
OSB engages with charitable causes in Kent and supports a chosen
national charity by taking part in a variety of charitable events and
partnerships. CCFS is heavily involved in the West Midlands community
and every year supports a chosen local charity. OSBIndia is also active
in the community local to the office in Bangalore, as well as in areas
where there are critical needs.
In 2019, the combined Group raised
GBP398,0002 for its charity partners and
our employees dedicated time in a variety of volunteering activities.
For more information on how the Group engages with the communities it
operates in, see page 86.
Market review
UK Buy-to-Let gross advances
GBP41bn
Source: UK Finance, New and outstanding Buy-to-Let mortgages, 6 Feb
2020.
UK average house price inflation
2.2%
Source: ONS, UK House Price Index, 19 Feb 2020.
The UK housing and mortgage market
For the majority of 2019, the housing market continued to experience
slowing transaction levels from lacklustre buyer demand as recent trends
continued.
Political uncertainty surrounding Brexit continued and caused a market
drag,
with prospective buyers delaying decisions until the outlook became
clearer. The combination of affordability challenges and low housing
supply also contributed to slowing levels of transaction activity.
House price growth fell with price reductions again seen in some parts
of London and the South East.
However, the year ended on a more buoyant note for the housing market
following the results of the UK General Election in December 2019. There
was a boost in market activity in the final weeks of 2019 which has
continued into 2020, matched by strong house price growth in the first
month of the year. Reports of both new instructions and new buyer
enquiries are at their highest level since before the Brexit referendum
in 2016. As uncertainty reduces, pent-up demand is being released into
the marketplace. This demand is supported by low mortgage interest
rates as competition persists.
According to the Bank of England, gross mortgage lending reached
GBP267.6bn1
in 2019, broadly flat compared with
GBP269.3bn in 2018, with refinancing driving lending activity.
The UK savings market
The UK savings market continued to grow in 2019 with c.GBP71bn added in
the year to reach a total of GBP1,731bn2 (2018: GBP1,660bn).
Despite new competition entering the savings market (6% more providers
than a year ago2), rates showed a gradual decrease during 2019 as a
result of economic uncertainty caused in part by concerns around Brexit.
Average one-year fixed rate bonds were paying 1.23% in December 2019,
down from an average of 1.45% a year ago, with similar falls seen in the
longer-term bond market (34bps) and ISA fixed bond markets (17bps for
one- year ISA and 25bps for longer-term ISAs).2
Average rates also fell on no-notice accounts, down from 0.63% to 0.60%
at the end of 2019, with 'top of the market' rates falling by c. 15bps.2
Although the Bank of England base rate has remained at 0.75% since
August 2018, the percentage of accounts paying over base rate has now
fallen to 68.7%, the lowest percentage since September 2018.2
Despite the falling interest rates, variable rate products continued to
be popular with growth of GBP25bn2 in the year, 35% of total growth, as
customers sought flexibility and accessibility of their funds over
higher returns, potentially reflecting the macroeconomic uncertainty
during the year.
Aside from the rates offered, other trends in the savings market
included:
-- the growth of platforms in the UK, which offer a marketplace for savings
products and a 'one-stop shop' for consumers to maximise their Financial
Services Compensation Scheme coverage while benefiting from competitive
deposit rates, and
-- a resurgence in ISA accounts has been seen for the first time since the
introduction of the personal savings allowance in 2016.
The Group's lending segments
Buy-to-Let/SME
Positive dynamics for the specialist Buy-to-Let sector
Government and regulatory intervention in the Buy-to-Let segment of the
mortgage market slowed in 2019, following a period of sustained
regulatory change. The only notable changes during the year were the
penultimate instalment of the phased tax relief restrictions in April
(which will be fully implemented from 6 April 2020) and the
implementation of the Tenant Fees Act on 1 June 2019.
Whilst these changes have the potential to disrupt the Buy-to-Let sector,
the impact
is likely to be relatively small against the context of much larger
regulatory
changes in recent years. The culmination of these changes to the
regulatory and tax landscape has deterred amateur landlords from
entering the segment, while professional landlords have had to adjust
their approach by diversifying their portfolios -- benefiting the more
specialist aspects of the market such as limited company Buy-to-Let and
high-yielding property types.
The private rented sector, however, grew in 2019, showing its sustained
importance to the UK housing market, and new lending in the Buy-to-Let
segment increased 1% to GBP41.0bnfrom GBP40.5bn in 2018.3 Despite a
softening of house price inflation in 2019, house prices remain high,
and affordability measures remain stretched, as such, the market for
rental property is expected to remain strong. Landlord confidence did,
however, fall in 2019, weighed down by political and economic
uncertainty, and perhaps exacerbated by the introduction of the Tenant
Fees Act in June. This
could ultimately put upwards pressure on rents as landlords pass on
increased costs via rent hikes or sell properties, leading to reduced
supply. However, 2020 has started on a positive note with
reduced uncertainty fuelling a rise in sales expectations, consumer
confidence and housing market indicators.
The trend in amateur landlords withdrawing from the market looks set to
stay, leaving professional landlords, whose primary income is obtained
from their property portfolio, to pick up the
demand. The professional segment, 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.
Borrowing through limited company structures also continues to be a
feature of the market, with professional landlords continuing to
mitigate the impact of income tax changes via this route. The Group is a
respected lender within the specialist Buy-to-Let sector, through its
Kent Reliance, InterBay Commercial and Precise brands, with a strong
reputation for limited company lending which has been beneficial to date
and is expected to continue to be so.
Commercial
Resilience in UK yields
Investment in UK commercial property reduced to GBP48.4bn4 in 2019, a
fall
of c.GBP11.0bn compared with 2018, although that figure remains above
the ten-year average.
Since the UK General Election, anecdotal evidence suggests increased
investor activity, and there is optimism that greater political
certainty could lead to positive investment returns across the sector in
2020 and during the next five years.
The UK remains attractively priced, relative to other European markets,
largely due to perceived Brexit risk. Overseas investors continued to
dominate the segment in 2019, increasing market share to 49%,4 with a
significant rise in North American investors.
The office segment performed well
in 2019, with rents increasing in central London and other key UK cities,
while demand for industrial and logistics space is supported by
continued growth in e-commerce.
Once again, the retail property segment is expected to be challenging
during 2020, with values in high-yielding high streets and shopping
centres likely to be the hardest hit, and where excess space may need to
be redeveloped and repositioned for alternative uses.
The lending segment 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 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 segment.
The new-build segment 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, which form our core audience for
development finance, will continue to increase as high street lenders
appear to be pulling away from development finance.
Specialist residential lending
In spite of support from the Help to Buy scheme, political uncertainty
and lower remortgage activity impacted the market- wide residential
sector, which was largely flat in 2019 compared with 2018.
The Help to Buy scheme remains popular and has supported strong
first-time buyer activity in recent years and UK Finance suggests that
Government support for the scheme has had a material impact on the
supply of new homes. The Help to Buy scheme was originally due to end in
2021; however, it has been extended until April 2023 but will be
restricted to first-time buyers only and regional price caps will
be applied.
Market analysis by Savills estimates that 36%5 of current Help to Buy
sales across England could be lost once the new regional house price
caps are introduced if developers fail to adapt the size of homes they
deliver.
Residential remortgage activity decreased by 1.8% in 2019 to GBP80.2bn6
compared with GBP81.6bn in 2018. Remortgages
have been fuelled by low rates and uncertainty in recent years as
borrowers looked to lock in their repayments for the medium term. The
remortgage market slowed throughout 2019 due to the market shift towards
five-year fixed rate products and the concurrent growth in product
transfers.
The Group targets complex prime borrowers including those with non-
standard asset and income structures, the self-employed, Help to Buy,
Right to Buy, new-build and near-prime borrowers as well as those
seeking shared ownership mortgages. They are ill-served by the
commoditised and inflexible decision- making processes of mainstream
lenders.
Second charge lending
The second charge sector grew strongly in 2019, with approximately
GBP1.25bn7 of gross new lending (2018: GBP1.07bn). Growth has been
supported by increased house prices over the past few years, which
has reduced outstanding loan to values, increasing the capital available
for release via a second charge. Homeowners are also moving less
frequently, partly due
to market uncertainty, and are instead choosing to remain in their
current property and make home improvements which
may be financed by a second charge loan. There is also the potential for
the growing volume of borrowers on five-year fixed rate mortgages to use
a second charge mortgage rather than remortgage, to avoid the cost of
early repayment charges.
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 OSB 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.
1.
1. UK Finance, New mortgage lending by purpose of loan, 3 Feb 2020.
2. Moneyfacts, UK Savings Trends Treasury Report, Dec 2019.
3. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020.
4. Savills, UK Commercial outlook, January 2020.
5. Savills, Market in Minutes: New Homes and Help to Buy, December
2019.
6. UK Finance, UK residential originations, 18 February 2020.
7. FLA, Second charge mortgage market reports volumes up by 19% in
2019, Feb 2020.
Chief Executive Officer's statement
We successfully completed our Combination with Charter Court
We are in the early stages of integration, however, I am pleased with
progress so far and I am particularly happy to have many talented staff
from both organisations working really well together to benefit the
combined Group.
The logic for the Combination
remains compelling.
Andy Golding
CEO
I am delighted with OneSavings Bank's achievements in 2019 and
particularly pleased that we successfully completed our Combination with
Charter Court Financial Services Group plc ('CCFS'), whilst delivering
strong results for the year, in both Banks. We are in the early stages
of integration, however, I am pleased with progress so far and I am
particularly
happy to have so many talented staff from both organisations working
really well together to benefit the combined Group.
I am also pleased with progress to date on integration.
The logic for the Combination remains compelling: to create a leading
specialist lender, focused on providing fair financial solutions to our
customers, with greater scale and resources to deploy on growth
opportunities.
Statutory pre-tax profit was up 14% to
GBP209m for 2019, as a result of strong growth at attractive margins and
the inclusion of CCFS' profits from the date
of Combination, more than offsetting the impact of exceptional items,
integration costs and other acquisition-related adjustments. Despite the
increase in profit, statutory basic earnings per share decreased by 5%
to 52.6 pence per share, due to the increased share count post
Combination. On a pro forma underlying basis, profit before tax and
basic earnings per share both increased by 9%, due to strong growth at
attractive margins and continued cost-efficiency and discipline.
Statutory net interest margin ('NIM') for 2019 reduced to 243bps (2018:
restated 305bps1), primarily due to the dilutive impact of including
CCFS' results post Combination and the impact of the changing mix of the
OSB loan book, despite broadly stable asset pricing.
The CCFS business has a lower NIM than the OSB business and statutory
NIM in 2019 was also negatively impacted by the amortisation of the fair
value uplift on acquisition of the CCFS loan book. The mix of the OSB
loan book continued to change as the higher yielding back book
refinanced onto front book pricing. The impact of this mix effect had
largely run its course by the end of the first half, assuming stable
mortgage pricing, cost
of funds and swap spreads going forward.
On a pro forma underlying basis NIM was 266bps (2018: 286bps) and
reflected the changing asset mix of the OSB loan book and marginally
higher cost of funds of CCFS' business.
Our customer-focused propositions are designed to position the Group as
a credible partner of choice with
intermediaries in the specialist mortgage markets in which we operate.
The complementary nature of OSB's bespoke, manual underwriting approach
and CCFS' automated risk assessment, together with strong risk
management and enhanced stress testing, give us
a deep understanding of our lending market segments.
We strengthened our funding model during the year as OSB returned to the
securitisation market with our inaugural transaction under the
self-originated Canterbury Finance programme, and CCFS successfully
executed a transaction in its Buy-to-Let PMF programme. The expertise in
securitisation funding and balance sheet management is a capability that
has been enhanced through the Combination and demonstrates efficiency in
accessing the capital markets. I am pleased that in early 2020, we had
the opportunity to execute further transactions, demonstrating our
agility in this market by selling notes we held from the Canterbury
securitisation generating a gain on sale of c. GBP18m.
In addition, the Group sold its entire economic interest in PMF 2020-1B
resulting in a gain of GBP2m on a statutory basis
and GBP15m on an underlying basis.
An award-winning secured lender
Through the Combination and underlying growth, the Group's statutory
loan book more than doubled in 2019 to GBP18.4bn. On a pro forma
underlying basis, it grew by 16% from GBP15.6bn in 2018, or 23%
excluding the impact of structured asset sales in CCFS.
Mortgage originations in the year were
GBP6.5bn for the combined Group on a pro forma underlying basis. Such
strong new business volumes reflect the
attractiveness of our lending propositions to borrowers, particularly to
professional landlords, and the excellent levels of customer service the
Banks provide.
Our Buy-to-Let businesses grew in the year
as landlords continued to professionalise
Our target market of professional/ multi-property landlords accounted
for 81% of completions by value for
OSB during 2019, with a continued high proportion of professional
landlords choosing to remortgage with us as their existing mortgage
reaches maturity.
This performance demonstrates the success of our Choices programme and
the sustainable strength of OSB's proposition, in particular our
specialist, manual underwriting, as well as our deep and historical
relationships with mortgage intermediaries.
The OSB Buy-to-Let sub-segment gross loan book grew by 19% to GBP7,727m
from
GBP6,518m in 2018.
The commercial sub-segment of Buy- to-Let/SME, which lends through the
"Strong new business volumes reflect attractive lending propositions."
and look for a reliable lender with
specialism and expertise in lending to limited companies and portfolio
landlords. Both OSB and CCFS have distinct, but complementary,
propositions in their
InterBay brand, had a very successful year, with the loan book reaching
GBP888m at 31 December 2019 (2018: GBP548m),
an increase of 62%. We used our strong understanding of this sub-segment
target lending market segments, meaning
different customer and intermediary preferences can be satisfied,
ensuring the Group can maximise its share of new originations. We intend
to preserve and build on the value of OSB's and CCFS' individual lending
brands through a multi-brand lending strategy.
OSB and CCFS have further strengthened broker networks and relationships
with mortgage intermediaries in the year, especially amongst those that
support borrowers with more complex needs.
The Combination allows us to underwrite a wider range of customer cases
than would have been possible as standalone businesses. On a pro forma
underlying basis, the Group sustained its market share as industry-wide
gross Buy-to-Let advances reached GBP41bn2 in the year.
For 2019, the Group reported under two segments: OSB and CCFS.
The OSB's Buy-to-Let/SME sub-segment performed well during 2019, with
new Buy-to-Let/SME mortgage originations
of GBP2.8bn, as we continued to target both professional, large
portfolio landlords and those investing in commercial and semi-
commercial property.
and our investment in products, service and innovation to build a
proposition that proved increasingly popular with commercial borrowers.
In 2019, we further increased distribution among our intermediaries who
focus more on this market sub-segment. This business lends at sensible
loan to values ('LTVs'), and generates strong returns on a risk-
adjusted basis.
We continue to be cautious in our approach to asset finance, however,
InterBay Asset Finance performed well in the year as
we saw high-quality opportunities.
OSB'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 had commitments to finance the development of just
over 2,000 residential units as at the end of 2019.
The Bank's secured funding lines business in both Buy-to-Let/SME and
Residential segments continued to grow, with cautious risk fundamentals
applied. Total commitments have increased by 31% to
GBP571m, with total loans outstanding of
GBP234m. This increase was due to increased commitments with certain
existing customers and three new funding lines were added during the
year.
The OSB residential net loan book grew by 14% to GBP1,837m (2018:
GBP1,616m)
largely through increased originations, as we saw attractive
opportunities in more complex prime and second charge
segments and the products we introduced in 2018 continued to prove
popular with our borrowers.
CCFS originated GBP1.9bn of new Buy-to-Let
CCFS bridging finance activities maintained their focus on high-quality
lending in the year, and as a consequence saw strong repayments as well
as originations, leading to a reduction in net loans of 12% to GBP214m
during the full year on a pro forma underlying basis. We chose to be
cautious and did not react to increased price competition during the
year.
Both segments concentrate on new and existing customers, investing in
and improving our sales capability
across our brands. We continued to gain recognition from mortgage
customers and intermediaries, and in 2019 we won multiple awards. For
OSB these included Best Buy-to-Let Lender and Best Specialist Lender
from Mortgage Strategy Awards. I am particularly pleased that Kent
Reliance
was awarded Best Specialist Lender from
mortgages on a pro forma underlying basis, an increase of 15% from
GBP1.6bn in 2018. This growth reflects the continuing demand, whilst
maintaining a disciplined approach to underwriting. As with OSB,
CCFS observed a continued trend that is supportive of professional
landlords, with increased use of limited company structures and a move
towards higher
yielding property types. CCFS proactively improved service standards
early in
the year, which was well received by intermediaries. As a result, CCFS
was ranked highly according to research by BVA BDRC, as the lender
mortgage intermediaries are most likely to recommend to portfolio
landlords.
The CCFS residential net loan book grew by 27% to GBP2,167m on a pro
forma
underlying basis, despite a small reduction in originations, as no
portfolio asset sales took place in the year and there were fewer
maturities in the portfolio. We focused on segments of residential
lending where competitive pressure has not seen significant margin
erosion, such as self- employed applicants. CCFS' second charge
originations performed strongly with an increase of 44% in the year on a
pro forma underlying basis, as both products and distribution were
enhanced.
the UK's largest mortgage distributor: L&G Mortgage Club. Our more
specialist businesses were also recognised with the Bridging Funding
Partner of the Year award from Bridging and Commercial
Awards. CCFS was recognised by Mortgage Introducer, being named as both
Mortgage Lender of the Year and Specialist Lender of the Year.
Through OSB's mortgage product transfer scheme, Choices, the proportion
of borrowers who choose a new product within three months of their
initial product ending remained strong at around 69% by December 2019.
This is driven by success in highlighting opportunities available to
borrowers who might otherwise leave
the Group and enables them to actively choose appropriate mortgage
pricing and features.
We are excited about opportunities arising from the Combination with
CCFS and continue to believe in the advantages that will come from a
more resilient, diversified funding platform, together with greater
scale and resources. We now have a larger footprint in the UK Buy-to-Let
and residential markets, with an enhanced proposition to the broker
community to ensure we remain at the forefront of UK specialist mortgage
lending.
Sophisticated funding model
Through the Combination with CCFS we brought together OSB's established
Kent Reliance retail deposit franchise with Charter Savings Bank's
savings
deposit platform, and CCFS' sophisticated securitisation funding and
balance
sheet management. These capabilities create a more resilient and
diversified funding platform to support our future growth, with cost
efficient funding for the combined Group.
The combined Group remained predominantly retail funded in 2019 and we
had GBP16bn of retail deposits at the end of 2019. On a pro forma
underlying basis, retail deposits were up 23% from GBP13bn at the end of
2018. We offer a competitive retail savings proposition, which allows
the Group to raise significant funds as we require them. Over 40,000 new
savings customers joined Kent Reliance in 2019 and Charter Savings Bank
grew customer numbers by nearly 27,000 for the full year of 2019. Our
vision remains to become our customers' favourite bank and we
continue to put our customers at the heart of everything we do. This was
reflected
in a retention rate of 91% amongst Kent Reliance customers with maturing
fixed rate bonds and ISAs and a Net Promoter Score ('NPS') of +66 for
the year. 97% of Charter Savings Bank's customers had
a good or excellent experience with the Bank3 and the NPS was
exceptional, at
+72 for 2019. Charter Savings Bank had a retention rate of 88% at the
end of 2019.
I am delighted that Kent Reliance was highly commended with the Savers'
Choice Award by Savings Champion and we won Best Business Easy Access
Account Provider, also from Savings Champion.
CCFS won ISA Provider of the Year and Best Bank Savings Provider from
Moneyfacts and Best Savings Provider from Savings Champion amongst
others.
Our enhanced wholesale funding platforms enable us to maintain
optionality and benefit from the potential to execute structured balance
sheet management transactions across the combined Group's enlarged
balance sheet. Our track record in 2019 was impressive; CCFS
successfully executed a GBP734m securitisation transaction of Buy-to-Let
mortgages and took advantage of a strong residuals market, generating
gains of GBP59m on three structured asset sales prior to the
Combination. In July, OSB completed an inaugural transaction of
GBP500m of organically originated Buy-to- Let mortgages.
For further information on our securitisation platforms, see page 41
We have further demonstrated our expertise in the securitisation market
post Combination, with additional deals completed in early 2020,
benefiting from high demand and attractive market pricing. In January
2020, the Group disposed of its remaining notes under the Canterbury
securitisation and the notes in PMF 2020-1B. The capability
and experience of CCFS in sophisticated securitisation funding and
balance sheet management have been adopted across the Group and pave the
way for future transactions.
Retail savings and securitisation funding were complemented in the year
by the Bank of England's funding schemes; drawdowns under the Term
Funding Scheme remained unchanged for OSB and CCFS at GBP1.5bn and
GBP1.1bn, respectively, and Indexed Long-Term Repo borrowings were
GBP160m and GBP130m for OSB and CCFS, respectively as at 31 December
2019.
In addition, through the Combination, the Group now has access to
contingent wholesale funding, with a total of up to
GBP600m available to it through warehouse facilities, GBP94m of which
was utilised at the year end.
Our strong and sustainable business
The Combination provides opportunities to create centres of excellence
for core processes and capabilities on a best-in- class basis across
OSB's and CCFS' existing locations in Chatham, Wolverhampton and India.
This work is fully underway and we will report on progress later in the
year.
The combined Group achieved a statutory cost to income ratio of 32% for
the year, 29% on a pro forma underlying basis, reflecting our efficient
and scalable operating platform, despite additional investment in the
business, including
our ongoing Internal Ratings-Based ('IRB') projects. We also continued
with improvements to our technology infrastructure. As ever, we focus on
delivering further efficiencies in the cost of running the Bank on a
'business as usual' basis, through continued disciplined cost management,
benefits of scale and leveraging our unique operating platform
in India ('OSBI'), as well as delivering on the synergies identified due
to the Combination.
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 +66 in 2019 (2018:
+63).
Both OSB and CCFS are working towards IRB applications and we remain
pleased with the progress made and are seeing benefits from using the
enhanced risk models developed as part of the process. We remain of the
view that achieving
IRB will be beneficial to the Group's capital requirements, especially
under the new calibrations and final IRB output floors
as outlined in Basel III.
"The expertise in securitisation The Group continued to
exercise strong
2019 was a year of significant change for the Group and I would like to
thank my colleagues for their hard work and continued commitment
throughout the year. I look forward to us all working together for a
successful future.
Looking forward to 2020
I am delighted that the Combination with CCFS was successfully completed
and that all the hard work to achieve it did not distract the OSB and
CCFS teams from continuing to develop, manage and
grow the underlying businesses, achieving strong levels of originations
during the year. We have made good progress to date on the integration.
The UK and global economies are currently experiencing unprecedented
uncertainty stemming from COVID-19. Whilst we entered the year with a
robust pipeline,
funding and balance sheet management is a capability that has been
enhanced through the Combination..."
diligence over loan and customer assessment. The Group's statutory loan
loss ratio of 13bps as at 31 December 2019 (2018: 10bps) includes an
additional provision due to the initial recognition
of expected credit losses on CCFS' loan book and reflects an alignment
of IFRS 9 modelling methodologies. It also includes the impact of a
number of high-value Buy-to-Let cases in OSB having Law of Property Act
('LPA') receivers appointed during the first half of 2019, which
attracted higher provision requirement under the IFRS 9 modelling
approach.
During the second half of 2019, the number of LPA appointments
stabilised.
The weighted average LTV of OSB's mortgage book remained low at 68% at
the end of 2019, with an average LTV of 70% on new origination during
the year. CCFS had similarly low LTVs with the overall book weighted
average LTV of 70% and 71% for new origination in the year on a pro
forma underlying basis.
strong application levels in our core businesses and stable margins, it
is too soon to say what the impact will be and we therefore consider it
imprudent to provide forward guidance for 2020.
We enter this period of uncertainty as an enlarged business with the
strength of our combined lending and funding franchises, robust capital
position, secured loan book and strong risk management capabilities.
Andy Golding
Chief Executive Officer
19 March 2020
1. To align calculation methods post Combination, OSB amended NIM
calculation to include average interest earning assets on a 13 point
average from a simple average. The comparative NIM was restated.
2. UK Finance, New and outstanding buy-to-let mortgages, 6 Feb 2020
3. Based on the Charter Savings Bank Customer Satisfaction Survey
conducted throughout 2019.
Our 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.
Specialist lending business Specialist lending business
Priorities Be a leading specialist Focus on automated and
Our goals lender in our chosen market bespoke manual underwriting
segments High-quality decisions
Grow loan originations protecting the business
at attractive margins in
our chosen market segments -- Use deep credit experience to deliver high-quality
} Target market segments lending decisions
that offer attractive returns
on a risk-adjusted basis -- Leverage CCFS' automated approach in conjunction with
} Deliver incremental, OSB's skilled manual underwriting capabilities and
non-organic business in-house real estate expertise
-- Invest in highly responsive, customer-focused culture
-- Innovate to secure sustainable long-term market -- Deliver a quality, differentiated service supported
leadership by highly responsive decision-making
-- Clear decisions recognised by intermediaries for
their quality and fairness -- a critical friend
2019 progress
----------------------------
} The OSB Transactional
-- Organic originations of GBP4.1bn on a statutory Credit Committee met twice
basis. On a pro forma underlying basis organic a week in 2019 to assist
originations were GBP6.5bn, up 10% from GBP5.9bn in with more complex or larger
2018 new mortgage applications
} Increased stress testing
-- OSB commercial business loan book GBP888m, up 62% in specialist sub-segments
-- Multiple awards for Kent Reliance including Best
Specialist Lender and Best Buy-to-Let Lender from
Mortgage Strategy Awards and Best Specialist Lender
by the L&G Mortgage Club
-- CCFS was awarded Mortgage Lender of the Year and
Specialist Lender of the Year by Mortgage Introducer
Looking forward
----------------------------
-- Continue to evaluate the attractiveness and growth
opportunities in our current market sub-segments -- Bring together OSB's and CCFS' credit experience in a
-- Deploy greater scale and resources on organic growth best-of-both approach
opportunities
-- Identify new market sub-segments with high returns on -- Leverage differentiated but complementary
a risk-adjusted basis underwriting capabilities to enhance customer
} Identify potential revenue propositions
synergies
-- Increase underwriting efficiency to better serve
borrower needs across complementary brands
-- Create enhanced data insight and analysis by
combining OSB and CCFS data sets and analytic
capabilities
Key risks
----------------------------
} Market conditions affecting } Changing regulation
Key performance indicators long-term demand for underwriting
} Increased regulatory } More complex underwriting
pressure requirements
} Continued political and } Difficulty in recruiting
economic uncertainty experienced staff
} New specialist lenders } Increasing intermediary
entering the market demands
Read more on page 26 } Demands of ever-changing
Organic originations, pro technology
forma underlying Read more on page 26
GBP6.5bn Loan loss ratio,
2018: GBP5.9bn pro forma underlying
10bps
2018: 7bps
Specialist lending business Sophisticated funding platform
Unique operating model
Further deepen relationships and reputation for delivery with
intermediaries
Deliver a stable, high- quality diversified funding platform
Leverage our unique and cost-efficient operating model
Increase partner reach in response to demand
} Access to specialist products developed by listening to intermediary
partners
} Be accessible and available to intermediaries
-- Complementary distribution models for CCFS and OSB brands
-- Gain intermediary recognition for delivering sustainable propositions
-- Deliver bespoke solutions to meet intermediary and customer needs
Expertise in funding options
-- Create resilient and diversified funding platform to support future
growth and ensure liquidity requirements are met through the economic
cycle, and cost of funds is optimised
-- Be primarily funded through attracting and retaining a loyal retail
savings customer base
-- Maintain a sophisticated securitisation funding and balance sheet
management capability
-- Deliver a proposition offering transparent, straightforward savings
products, providing long- term value combined with excellent service
levels
Best-in-class customer service
-- Have customer service at the heart of everything that we do
-- Maintain centres of excellence across OSB's and CCFS' existing locations
in Chatham, Wolverhampton and Bangalore, India
-- Extend activity in OSBIndia ('OSBI'), developing high-quality areas of
excellence
-- Deliver cost efficiencies through excellent process design and management
-- The Kent Reliance Choices programme had another successful year with
retention rates in 2019 of 69%
-- CCFS enhanced service standards including direct to broker second charge
proposition
-- Increased attendance at intermediary events across our target geographies
for both CCFS and OSB to 521 in total
-- Published thought leadership pieces including periodic market-leading
Kent Reliance 'Buy-to-Let Britain' reports
-- Gained c. 67,000 new savings customers across both Banks for full year
2019
-- Achieved 91% customer retention for Kent Reliance and 88% for Charter
Savings Bank
-- Charter Savings Bank accessed four new third party funding pools of
savings bringing the total to six
-- Received multiple awards for savings products, including Best Business
Easy Access Account Provider from Savings Champion for Kent Reliance, and
Best Bank Savings Provider and ISA Provider of the Year by Moneyfacts for
Charter Savings Bank
-- Investments in training and process development contributed to enhanced
customer NPS of +66 for Kent Reliance and +72 for Charter Savings Bank
-- Continued to develop deep credit know-how through proprietary data
analytics at Exact Mortgage Experts
-- Increased number of employees in OSBI to 490 from 445 in 2018
-- Continue to deliver direct relationships with high-quality intermediaries
-- Increase breadth of channels to market via the direct to broker and
packager channels
-- Leverage best practice of CCFS and OSB across the combined Group to
maintain and further enhance best-in-class service performance to
brokers
-- Continue to invest in the established Kent Reliance retail deposit
franchise
-- Ensure optionality to benefit from the potential to execute structured
balance sheet management transactions across the combined Group's
enlarged balance sheet
-- Utilise CCFS' in-house expertise to enable efficient access to capital
markets
-- Use greater scale to deliver efficient, scalable and resilient
infrastructure including IT security
-- Deliver cost efficiencies and operational enhancements by leveraging
OSBI's lending, savings and support operations and capabilities
-- Deliver efficiencies and enhanced capabilities in centres of excellence
-- Use robotics technology and improve workflows to further enhance primary
servicing
} Loss of key broker relationships
-- Competition reducing pricing below the Group's risk-adjusted return
appetite
-- More complex underwriting requirements slowing the process
} Increased competition for retail funds
} Increased customer expectation for technology
} Volatility of capital markets
-- Increased burden of regulatory compliance -- for example, Open Banking
(which currently does not apply to the Group)
-- Difficulty in continuous service improvement as OSB grows
-- Global economic uncertainty increasing costs in India
-- Increasing complexity from compliance with changing regulation
} Lack of operational resilience due to rapid growth
Read more on page 26 Read more on page 28 Read more on page 30
OSB broker NPS CCFS broker NPS
+27 +18
2018: +28 2018: +41
17
securitisations since 2013 across OSB and CCFS worth over
GBP5.7bn
Cost to income ratio, pro forma underlying
29%
Creating a leading specialist lender in our chosen market segments
The Combination with CCFS provides us with greater scale, complementary
strengths and enhanced customer propositions to become a leading
specialist lender in the UK.
+16%
Pro forma underlying loan book
growth in 20191
Leading lender in our chosen market segments
Our market coverage and depth have increased as a result of the
Combination and we can now attract customers
who want an automated approach to underwriting in addition to those who
need a bespoke manual solution.
Through the Group's greater scale and resources, we:
-- are leaders and experts in our chosen specialist, secured market segments
-- offer both bespoke and automated underwriting capability
-- have strong relationships with intermediaries which provide us with rapid
and widespread distribution, supporting stronger origination volumes.
Our market segments
Through our lending brands we target specialist mortgage market segments
that are underserved by UK retail banks and building societies, and are
underpinned by positive long-term market dynamics. We continually
evaluate the attractiveness and growth opportunities within our current
market segments, together with assessing opportunities to move into new
specialist segments. We concentrate on areas where margins are
attractive relative to risk and lending is sustainable within our
conservative risk appetite. Our increased scale enables us to achieve
growth in market share and expand our reach
across specialist segments.
We currently lend in the following specialist market segments:
} Buy-to-Let
} commercial and semi-commercial
} residential development
} bespoke specialist and near prime residential
} second charge residential
} shared ownership residential
} bridging and short-term loans
} funding lines, and
} asset finance.
Deep credit expertise
Our credit expertise and extensive product knowledge will help us to
achieve market leadership. Each of our brands are led by experienced
industry professionals and are supported by highly skilled teams
with experience and insight spanning the entire mortgage life cycle.
Through Exact Mortgage Experts, we have gained
proprietary data analytics, enhancing our deep credit knowledge. The
Group uses this knowledge and data to adapt quickly to changing market
conditions, identifying niche lending opportunities and tailoring its
product offering accordingly.
Expanded underwriting capability
Bespoke underwriting
Our Kent Reliance brand does not use automated or scorecard-based
processes. All of its loans are underwritten by experienced and skilled
underwriters,
10
minutes -- average time to Decision
in Principle through Precise Mortgages
624
cases referred to OSB Transactional
Credit Committee during the year
supported by technology to reduce the administrative burden on
underwriters and mortgage intermediaries. We consider 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.
Automated underwriting platform
The Combination provided the Group with an automated underwriting
platform to manage mortgage applications, delivering a rapid decision in
principle, based on rigorous lending policy rules and credit scores. The
platform is underpinned
by extensive underwriting expertise, enabling identification of new
niches and determining appropriate lending
parameters. The platform enables Precise Mortgages to react quickly to
non-standard mortgage requests which
are common in the Group's target market segments, while ensuring
consistent underwriting within the Group's risk appetite. Quick response
times help the Group to compete for the 'first look' at credit
opportunities, while a robust manual verification process further
strengthens the disciplined approach to credit risk.
Expanded intermediary relationships
Both OSB and CCFS have developed extensive intermediary relationships
and combined, the Group can now leverage both sets of intermediaries to
support stronger origination volumes.
Sophisticated funding platform
The Combination with CCFS provides attractive diversification to the
Group's primarily retail savings base, through wholesale funding. This
enables the enlarged Group to optimise its cost of funds while prudently
managing funding and liquidity risks.
Retail savings
+23%
Customer satisfaction and transparent savings products
Our customers' satisfaction is key to how we do business and at the
heart of our corporate culture.
Our key strengths are:
} customer focus, and
} transparent, good-value savings products.
The outstanding customer service that we consistently provide to our
savings customers is evidenced by our high NPS.
For 2019, Kent Reliance had NPS of +66 and CSB +72. In addition, 91% of
Kent Reliance customers whose savings products matured in the year
renewed with us
and 97% of CSB's customers had a Good or Excellent experience with the
Bank1. During the year, Kent Reliance welcomed over 40,000 new customers
and CSB welcomed nearly 27,000 customers.
Both Banks were also recognised by the industry, winning multiple awards
in the year, including Best Business Easy Access
Pro forma underlying retail savings growth in 20191
OSB Group is predominantly funded by
retail savings deposits, operated under two brands: Kent Reliance and
Charter Savings Bank ('CSB').
Kent Reliance is a savings franchise with over 150 years of heritage and
eight branches in the South East of England. It also takes deposits via
post and online while CSB offers its products online
and via post.
Both Banks have a wide range of savings products, including easy access,
fixed term bonds, cash ISAs and business savings accounts. Kent Reliance
continued to offer its business savings account for SMEs
with total deposits of c. GBP83m at the end of 2019.
In line with its dynamic funding strategy, CSB continued to diversify
its retail funding sources by expanding the number of pooled funding
platforms from two to six in the year. The range of products sourced via
these platforms includes easy access and non-retail deposits.
Account Provider from Savings Champion
for Kent Reliance and ISA Provider of the Year and Best Bank Savings
Provider from Moneyfacts for CSB amongst others.
Kent Reliance's proposition for savers is simple: to offer consistently
good-value savings products that meet customer needs for cash savings
without having to price at the very top of the best buy tables. The Bank
also offers loyalty rates for its existing customers.
CSB's philosophy is to maintain and develop its award-winning business,
by further diversifying its product offering to access new funding
pools. It also aims to offer competitively priced new savings products
in its existing product lines.
Operating with an agile, nimble approach, CSB can respond quickly to the
funding requirements of the business, providing advantageous cost of
funds.
Wholesale funding
The Combination with CCFS in October 2019 provided the Group with
attractive diversification opportunities to
retail funding.
CCFS historically utilised its securitisation platform as a means of
providing low- cost, term duration funding. Wholesale funding enabled
the business to rebalance the weighted average life of liabilities away
from shorter duration retail funding, and thereby optimise the funding
mix. The Group recognises the cyclical nature of capital markets funding
and therefore utilises it opportunistically, taking advantage of
favourable
market conditions.
17
securitisations to date across
OSB and CCFS worth over
GBP5.7bn
CCFS has been a programmatic issuer of high-quality residential
mortgage-backed securities ('RMBS') through the Precise Mortgage Funding
and Charter Mortgage Funding franchises since 2013.
OSB returned to the securitisation market in July 2019, securitising
GBP500m of organically originated mortgages under its newly established
Canterbury Finance programme.
CCFS also maintains warehouse funding capacity through two tier 1
investment banks. These facilities act as a bridge
to RMBS funding, helping the Group to maximise the efficiency of its
liquidity position through the transition from retail deposit to
securitisation funding.
The Group also has the capability to engage in transactions which could
result in the full derecognition of the underlying mortgage assets,
through the sale of residual positions in its securitisation vehicles.
For more information about the Group's securitisation funding, see page
41.
Bank of England funding
The Group also takes advantage of the Bank of England's funding schemes.
Drawings under the Term Funding Scheme were GBP1.5bn for OSB and
GBP1.1bn for CCFS at 31 December 2019. In addition, borrowings under the
Indexed Long-Term Repo were
GBP290m at base rate +15bps, a total of 90bps as at 31 December 2019.
1. Based on the Charter Savings Bank Customer Satisfaction Survey
conducted throughout 2019.
Efficient and resilient infrastructure
and systems
Through its wholly-owned subsidiary OSBIndia, the Group leverages its
unique and cost-efficient operating model.
+29%
Pro forma underlying cost to income
ratio in 20191
Focus on customers
Our customer service functions, based in our wholly-owned subsidiary
OSBIndia and in Wolverhampton post the Combination, help us deliver on
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. In
2019, OSB
We are proud of our low employee turnover in India, with an excellent
16% regretted attrition rate, substantially outperforming local industry
averages.
Our key strengths:
} Excellent customer experience
} High customer NPS
} High employee retention rates
Focus on quality and cost discipline
achieved a customer NPS of +66 and
CCFS' was an excellent +72.
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 to invest in developing skills that enable
highly efficient service management, matching those to business needs
both in India
and the UK.
The Combination has increased the Group's scope to deliver efficient,
scalable and resilient infrastructure and invest in IT security,
supported by market-leading data security and resilience experts.
Both OSB and CCFS are extremely cost- efficient with low cost to income
ratios, reflecting historical high growth in income, the benefits of
OSBI to OSB and high operating leverage as the balance sheets have
grown.
OSBI colleagues at the end of 2019
490
2018: 445
Exact Mortgage Experts
Exact is a valuable addition to the Group's operating model, providing
an administration service for mortgages
originated by Precise Mortgages. Its proven collections capabilities and
expertise in case management, from initial arrears through to
repossession, provide the Group with access to the experience and
expertise of a larger-scale bank, supporting future growth and offering
valuable insights into, as well as the opportunity
to learn from, the performance of other lenders' mortgage loan products.
Over the years, Exact has developed deep credit expertise through
proprietary data analytics.
Operating review
The Combination with CCFS in October 2019 was an important milestone for
the Group on our journey to create a leading specialist lender in the UK,
with greater scale and resources to deploy on growth opportunities.
performance from its first charge residential sub-segment, where new
product ranges launched in 2018 proved popular and continued to gain
momentum during 2019. CCFS' residential segment also benefited from an
improved product range, with the gross loan book up 27% in the year on a
pro forma underlying basis.
During 2019, OSB's net loan book increased by 20% to GBP10,785.0m (2018:
GBP8,983.3m)
and CCFS' net loan book grew by 15% to GBP7,661.8m (2018: GBP6,661.5m),
or 27%
excluding the impact of structured assets sales, both on a statutory
basis. The combined Group's net loan book reached
GBP18,446.8m by the end of 2019 on a statutory basis. Buy-to-Let
comprised approximately 67% of the Group's total gross loan book at the
end of 2019.
The combined Group remained predominantly retail funded in 2019 with
GBP16,255.0m of retail deposits on a statutory basis (2018:
GBP8,071.9m). On a pro forma
underlying basis, retail balances were up
Statutory net loan book
GBP18.4bn
2018: GBP9.0bn
Statutory net interest income
GBP345m
2018: restated GBP286m1
Statutory total assets
GBP21.4bn
2018: GBP10.5bn
Group highlights
2019 was not only a year of continued strong business performance, but
also a year when we advanced on our strategic objective to create a
leading specialist lender of scale in the UK, through the Combination
with CCFS. The Combination provides us with the scale and resources to
deploy on growth opportunities across the economic cycle, to deliver
long-term value for our shareholders. We are committed to delivering on
that strategy, by leveraging our complementary strengths across products,
brands, distribution, underwriting, funding and team culture.
Against the backdrop of a competitive mortgage market, organic
originations in 2019 proved resilient at GBP4.1bn on a statutory basis
(2018: GBP3.0bn) with GBP0.8bn contributed by CCFS in the final three
months of the year. On a pro forma underlying basis, organic
originations were GBP6.5bn in 2019, compared with GBP5.9bn in 2018.
During 2019, 69% of Kent Reliance borrowers chose a new product within
three months of their initial product ending, totalling GBP885m (2018:
69%, GBP722m). This performance demonstrates the success of our Choices
programme. Buy-to-Let performed strongly in both businesses, due to
continued activity from professional landlords. OSB also saw exceptional
growth in lending through its InterBay Commercial brand and a strong
23% from GBP13,166.4m as at 31 December 2018. The savings proposition
offered
by the Kent Reliance brand continued to be in demand, as we welcomed
over
40,000 new retail customers in the year. Excellent customer service was
reflected in a +66 customer Net Promoter Score and
retention rate for maturing fixed term bond and ISA balances of 91% in
2019. Charter Savings Bank saw customer numbers
grow by almost 27,000 during the year as savings customers continued to
value the competitive interest rates and excellent customer service it
provides. CCFS also achieved an exceptional Net Promoter Score of +72
and a retention rate of 88% for 2019.
Diversification of funding was provided by access to the securitisation
market and Bank of England funding. Both Banks were active in the
securitisation market during the year. OSB completed an inaugural
transaction of c.GBP500m of organically originated mortgages under the
Canterbury Finance RMBS programme in July 2019.
CCFS successfully executed a GBP734m securitisation transaction of
Buy-to-Let mortgages and recognised gains of GBP58.7m on three
structured asset sales in the year, prior to the Combination.
For further information on the Group's securitisation platforms, see
page 41.
As at 31 December 2019, drawings under the Term Funding Scheme remained
unchanged at GBP1.5bn for OSB and GBP1.1bn for CCFS. In addition, the
Group had GBP290m of borrowings under the Bank of England's Indexed
Long-Term Repo across the two Banks at base rate +15bps, a total of
90bps, as at 31 December 2019 (2018: OSB GBP80m, CCFS GBPnil). Through
the Combination, the Group now has access to contingent wholesale
funding, with up to GBP600m available to it through the CCFS warehouse
facilities, GBP94m of which were utilised at year end.
Statutory pre-tax profit was up 14% to GBP209.1m for 2019 (2018:
restated
GBP182.8m1), as a result of strong growth at attractive margins and the
inclusion of
CCFS' profits from the date of Combination, more than offsetting the
impact of exceptional items, integration costs and other
acquisition-related items. On a pro forma underlying basis, profit
before tax increased by 9% due to strong growth at attractive margins
and continued cost efficiency and discipline.
Profitable lending and cost discipline and efficiency contributed to a
return on equity of 18% on a statutory basis (2018: restated 25%2) and
25% on a pro forma underlying basis (2018: 28%).
The Group ended the year with a CET1
ratio of 16.0% (2018: 13.3%), demonstrating the strength of the capital
generation capability of the business to support significant growth
through profitability
and the beneficial impact of the fair value uplift on CCFS' net assets
on Combination. The Group's total capital ratio of 17.3% and leverage
ratio of 6.5% remained strong (2018: 15.8% and 5.9% respectively).
1. Net interest income and profit before tax were restated as a result of
the recognition of interest expense on
the GBP22m of Perpetual Subordinated Bonds previously classified as
equity.
1. To align calculation methods post Combination, OSB amended its
calculation of return on equity to include average equity on a 13 point
average from a simple average. The comparative return on equity ratio
Segment review -- OneSavings Bank Buy-to-Let/SME
Following the Combination, the Group segmented its lending
Buy-to-Let/SME
Gross loan book*
GBP8,983.2m
+22%
2018: GBP7,389.2m
Net interest income*
GBP253.5m
+15%
business into two segments: OSB and CCFS.
Buy-to-Let/SME sub-segment: gross loans
31-Dec-2019 31-Dec-2018
GBPm GBPm
Buy-to-Let 7,727.0 6,517.5
Commercial 888.0 547.8
Residential development 146.1 155.8
Funding lines 222.1 168.1
Total 8,983.2 7,389.2
2018: restated GBP219.5m1
Contribution to profit*
GBP231.7m
+9%
2018: restated GBP212.8m1
* Statutory.
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.
The volume of new organic lending in our Buy-to-Let/SME sub-segment
reached
GBP2,847.2m in 2019, an increase of 3% on the prior year (2018:
GBP2,769.7m). Gross loans were GBP8,983.2m, up 22% from
GBP7,389.2m in 2018. The Buy-to-Let/SME net loan book represented 83% of
total OSB loans as at 31 December 2019.
Gross loans in the Buy-to-Let sub-segment increased by 19% to
GBP7,727.0m (2018:
GBP6,517.5m) with lending mostly dominated by professional,
multi-property landlords who remained at 81% of completions by value for
OSB in 2019. For our Kent Reliance brand, 75% (2018: 70%) of mortgage
applications were from landlords borrowing via a limited company, as
recent changes to personal taxation favour structuring portfolios in
this way.
Refinancing continued to represent 60% of Kent Reliance Buy-to-Let
completions and five-year fixed rate mortgages were 52% (2018: 58% and
56%, respectively). This mix reflected the wider market which saw
reduced purchases in 2019 and continued demand for five-year fixed rate
products. Our retention programme, Choices, continued to be popular,
with around 69% (2018: 69%) of existing borrowers choosing a new product
with the Bank within three months of their original product ending.
The weighted average loan to value ('LTV') of the Buy-to-Let book as at
31 December 2019 was 73% with an average loan size of GBP260,000 (2018:
70% and GBP260,000).
The weighted average interest coverage ratio for Buy-to-Let origination
during 2019 was 187% (2018: restated 185%2).
2019 was an exceptional year for our InterBay business with the
commercial and semi-commercial gross loan book up 62% to GBP888.0m
(2017: GBP547.8m) as we continued to expand our distribution
network to reach those brokers who work with borrowers with needs
closely aligned to InterBay's products. Through this brand OSB lends to
borrowers investing
in commercial, semi-commercial and bridging, reported in the Commercial
total, and more complex Buy-to-Let
properties, reported in the Buy-to-Let total. Lending was supported by
the business' core strengths in rapid and effective underwriting and our
ability to deal with large and complex cases. The weighted average LTV
in the commercial sub- segment remained low at 67% and the average loan
size was GBP375,000 in 2019 (2018: 66% and GBP360,000, respectively).
InterBay Asset Finance, which predominantly targets UK SMEs and small
corporates financing business-critical assets, was launched in 2018. The
gross carrying amount under finance leases was GBP47.7m as at 31
December 2019 (2018: GBP7.2m).
Our Heritable residential development business continues to provide
prudent development finance to small and medium-sized residential
developers. The preference is to fund house builders who operate outside
central London and provide relatively affordable family housing, as
opposed to complex city centre schemes where affordability and
construction cost control can be more challenging. New applications come
primarily from a mixture of repeat business from the team's extensive
existing relationships and referrals.
The residential development funding gross loan book at the end of 2019
was GBP146.1m, with a further GBP115.1m committed
(31 December 2018: GBP155.8m and GBP90.3m, respectively). Since
inception through to the end of 2019, the business has written
GBP1,013m of loans, of which GBP534m have been repaid to date. The
business had commitments to finance the development of just under 2,000
residential units as at the end of 2019, the majority of which are
houses located outside central London.
In addition, OSB 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
2019 were GBP540.0m with total loans outstanding of GBP222.1m (31
December 2018: GBP385.0m and GBP168.1m, respectively).
During 2019, three new funding lines were added and credit-approved
limits increased by a further GBP50.0m across three existing funding
lines. The pipeline remains robust, however, given the macroeconomic
uncertainty, the business continues to adopt a cautious approach.
Buy-to-Let/SME made a contribution to profit of GBP231.7m in 2019, up 9%
compared with the restated value of
GBP212.8m1 in 2018, primarily due to the growth in new lending,
partially offset by higher impairment losses of GBP13.8m
(2018: GBP5.7m). The increase in impairment
losses was driven by an increase in the number of Law of Property Act
('LPA') receivers appointed in the first half of the year, which attract
higher provision requirements under an IFRS 9 approach. During the
second half of 2019, the
LPA flow stabilised. Alignment of IFRS 9 modelling methodologies and
loan book growth also contributed to the increase in loan losses.
The Group remains highly focused on the risk assessment of new lending
as demonstrated by the average LTV in the Buy-to-Let/SME segment as at
31 December 2019 of 72% (31 December
2018: 70%) with only 1.8% of loans
exceeding 90% LTV (31 December 2018: 0.6%). The average LTV for new
Buy-to- Let/SME origination remained at 70%.
1. Net interest income and contribution to profit
were restated as a result of the recognition of interest expense on the
GBP22m of Perpetual Subordinated Bonds previously classified as equity.
1. Interest coverage ratio was restated for 2018 from 171% to 185% due to an
improvement in the calculation methodology.
Segment review -- OneSavings Bank Residential mortgages
31-Dec-2019 31-Dec-2018
GBPm GBPm
First charge 1,466.6 1,223.9
Second charge 358.6 368.0
Funding lines 12.2 24.1
Total 1,837.4 1,616.0
Residential sub-segment: gross loans
Residential mortgages
Gross loan book*
GBP1,837.4m
+14%
2018: GBP1,616.0m
Net interest income*
GBP62.7m
-6%
2018: restated GBP66.8m1
Contribution to profit*
GBP59.7m
-1%
2018: restated GBP60.2m1
* Statutory.
This segment comprises lending to owner-occupiers, secured via either
first or second charges against the residential home.
The Bank also provides funding lines to non-bank lenders who operate in
high-yielding, specialist sub-segments such as residential bridge
finance.
The Residential gross loan book was
GBP1,837.4m as at 31 December 2019, up 14% compared with the previous
year (2018: GBP1,616.0m) with organic originations nearly doubling in
the year to GBP540.5m (2018: GBP280.1m).
OSB's first charge gross loan book grew in the year to GBP1,466.6m,
which was 20% up from GBP1,223.9m in 2018. This strong performance was
largely due to new organic lending as the Bank's ability to make quick
underwriting decisions and the product range launched in 2018 proved
popular with borrowers.
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. The extended product
range launched in 2018 also includes near-
prime residential products. Kent Reliance also operates in the shared
ownership sector, where borrowers buy a property in conjunction with a
housing association and in 2019 the Bank's share of this sector
increased.
Our second charge mortgage brand, Prestige Finance, provides secured
finance to good credit quality borrowers who are seeking a loan to raise
funds without refinancing their first charge mortgage. Competitive
pressure in the second charge segment kept pricing low and OSB continued
to focus on pricing for risk. The second charge residential loan book
had a gross value of GBP358.6m as
at 31 December 2019 (2018: GBP368.0m).
OSB continued to provide secured funding lines to non-bank lenders which
operate in certain high-yielding, specialist sub- segments, such as
residential first and
second charge finance. The Bank continued to adopt a cautious approach
to these more cyclical businesses given macroeconomic uncertainty. Total
credit- approved limits
as at 31 December 2019 were GBP31.0m with total loans outstanding of
GBP12.2m (2018:
GBP51.8m and GBP24.1m, respectively).
Residential mortgages made a contribution to profit of GBP59.7m in 2019,
broadly flat compared with the restated value of GBP60.2m1 in 2018,
despite growth in the loan book, primarily due to the changing mix of
the book and EIR gains on acquired portfolios in the prior year,
partially offset by provision releases resulting from falling arrears
levels across both first and second charge lending.
The average LTV remained low at 58% (2018: 56%) with only 3.3% of loans
by
value with LTVs exceeding 90% (2018: 3%). The average LTV of new
residential origination during 2019 was 69%
(2018: 68%).
1.
1. Net interest income and contribution to profit were restated as a
result of the recognition of interest expense on the GBP22m of
Perpetual Subordinated Bonds previously classified as equity.
The following tables show the OSB segment's statutory loans and advances
and contribution to profit:
BTL/SME Residential Total
Year ended 31-Dec-2019 GBPm GBPm GBPm
BALANCES AT THE REPORTING DATE
Gross loans and advances to customers 8,983.2 1,837.4 10,820.6
Provision for impairment losses (21.6) (14.0) (35.6)
Loans and advances to customers 8,961.6 1,823.4 10,785.0
Risk-weighted assets 4,244.0 846.0 5,090.0
PROFIT OR LOSS FOR THE YEAR
Net interest income 253.5 62.7 316.2
Other expense (8.0) (4.9) (12.9)
Total income 245.5 57.8 303.3
Impairment (losses)/credit (13.8) 1.9 (11.9)
Contribution to profit 231.7 59.7 291.4
----------- ----------
BTL/SME Residential Total
Year ended 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 (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 income1 219.5 66.8 286.3
Other expense (1.0) (4.2) (5.2)
Total income1 218.5 62.6 281.1
Impairment losses (5.7) (2.4) (8.1)
Contribution to profit1 212.8 60.2 273.0
-----------
1. In 2019, the Group restated the prior year comparatives to recognise
interest expense on the GBP22m Perpetual Subordinated Bonds previously
classified as equity.
Segment review -- Charter Court Financial Services
The CCFS segment review is presented on a pro forma underlying
Charter Court Financial Services
Gross loan book*
GBP7,374.4m
+11%
2018: GBP6,665.1m
Net interest income*
GBP202.2m
+12%
2018: GBP180.5m
Contribution to profit*
basis, which assumes that the Combination occurred on 1 January 2018 and
includes 12 months of results from CCFS. It excludes acquisition-related
items.
Statutory information is shown in the table on page 40.
CCFS segment: gross loans
31-Dec-2019 31-Dec-2018
GBPm GBPm
Buy-to-Let 4,748.5 4,508.3
Residential 2,170.8 1,707.0
Bridging 214.4 244.1
Second charge 218.6 184.2
Other1 22.1 21.5
Total 7,374.4 6,665.1
1. Other relates to the net interest income from acquired loan
portfolios and fee income from third party mortgage servicing.
GBP254.8m
+14%
2018: GBP222.8m
* Pro forma underlying.
Charter Court Financial Services targets underserved specialist mortgage
market segments with a focus on specialist Buy-to-Let, residential,
bridging and second charge lending.
The CCFS gross loan book grew 11%
to GBP7,374.4m at the end of 2019 (2018:
GBP6,665.1m). Excluding the impact of structured asset sales, the gross
loan book would have been GBP8,491.9m, 27% higher than in 2018. This
growth was supported by organic originations of GBP3,108.2m at
attractive margins (2018: GBP2,846.1m).
Buy-to-Let sub-segment
During 2019, CCFS' organic originations in the Buy-to-Let sub-segment
were
GBP1,895.2m, an increase of GBP253.2m versus the prior year (2018:
GBP1,642.0m). The growth reflects continuing demand for the Group's
specialist lending proposition. The net loan book increased 5% in the
year to GBP4,745.0m after structured asset sales and on a pro forma
underlying basis, Buy-to-Let mortgages represented 64% of CCFS' total
net loan book.
All CCFS' Buy-to-Let products proved popular with borrowers, especially
with those investing via limited companies, which increased 21% in the
year, and those investing in specialist property types including houses
of multiple occupation, multi-unit properties and holiday lets, which
increased 63% in 2019.
In 2019, CCFS enhanced its product range which enabled it to grow in the
specialist Buy-to-Let market segments. The Precise branded Buy-to-Let
product mix became more diverse during the year, with particular growth
in shorter-term fixed rate products, following the introduction of a top
slicing proposition for landlords with excess income to contribute
towards a stressed affordability assessment. This resulted in a fall in
five-year fixed rate products as a percentage of total Buy-to- Let
originations to 72% from 77% in 2018.
The business maintained its position in the BVA BDRC's Project Mercury
rankings (effectiveness of lenders intermediary marketing) as the fourth
most frequently mentioned lender by intermediaries for Buy-to-Let,
reflecting CCFS' broad product offering across the Buy-to-Let segment.
On a pro forma underlying basis, Buy- to-Let made a contribution to
profit of
GBP112.3m in 2019, up 6% compared with
GBP105.7m in 2018. Net interest income increased 9% to GBP114.3m and
fees and commissions income reduced due to early repayment charges being
included in net interest income and not in fees and commissions as in
2018 following an accounting policy change. The increase in impairment
losses in 2019 was primarily driven by alignment in IFRS 9 modelling
methodologies post Combination.
On a statutory basis, the Buy-to-Let sub- segment made a contribution to
profit of GBP12.3m.
New lending average loan to value in this segment was 73% with an
average loan size of GBP183,000 (2018: 74% and GBP169,000). The book
loan to value was 71% as at
31 December 2019 (2018: 73%). The weighted average interest coverage
ratio for Buy-to-Let origination during 2019 was 202% (2018: 201%).
Residential sub-segment
CCFS' specialist residential lending decreased in 2019 compared with
2018, albeit still at a high level, with new originations down 3% to
GBP797.2m (2018:
GBP825.4m). CCFS concentrated on lending in areas that had stronger
risk-adjusted returns versus mainstream markets, where intense
competition reduced residential mortgage rates. The Help to Buy
proposition continued to perform particularly well and focus on self-
employed borrowers led to an increase in the residential gross loan book
of 27% to GBP2,170.8m in the year.
In 2019, CCFS enhanced its residential proposition with new products
targeting zero-hour contracts, Help to Buy in Scotland and Help to Buy
remortgages. The Group continues to maintain a strong new product
pipeline to support its growth in the specialist residential segment
going forward.
The average loan size for the residential sub-segment was GBP159,000
(2018:
GBP152,000) with average LTV for new lending of 71% (2018: 72%) and book
LTV of 67%
(2018: 70%) as at 31 December 2019.
On a pro forma underlying basis, residential mortgages represented 28%
of CCFS' total net loan book as at 31 December 2019.
The residential sub-segment made a contribution to profit of GBP62.1m on
a pro forma underlying basis, up 12% compared with GBP55.6m in 2018
reflecting growth in the loan book partially offset by higher impairment
losses due to loan book growth and alignment in IFRS 9 modelling
methodologies post Combination.
On a statutory basis, the Residential sub-segment made a contribution to
profit of GBP9.2m.
Bridging sub-segment
Short-term bridging originations increased by 4% in 2019, reaching
GBP333.7m (2018:
GBP321.8m). The business maintained its focus on high-quality lending in
regulated and unregulated markets, rather than reacting to increased
competition in
the short-term lending market. Strong repayments during the year saw the
gross loan book reduce to GBP214.4m compared with GBP244.1m at the end
of 2018.
The Standard and Refurbishment segments both increased along with the
Regulated and Non-Regulated segments. The Non-Regulated and
Refurbishment segments saw the strongest growth, boosted by the launch
of CCFS'
Refurbishment Buy-to-Let product at the end of 2018. These products
require
strong combined Buy-to-Let and bridging capability, areas of strength
for CCFS.
In addition, CCFS enhanced its distribution by expanding its reach to
direct brokers.
On a pro forma underlying basis, the bridging sub-segment made a
contribution to profit of GBP15.1m in 2019, broadly flat compared with
GBP15.2m in 2018 despite higher impairment losses of GBP0.5m
(2018: GBPnil) due to IFRS 9 modelling enhancements made during 2019.
On a statutory basis, the bridging sub- segment made a contribution to
profit of GBP3.4m.
Second charge sub-segment
The second charge gross loan book increased by 19% to GBP218.6m (2018:
GBP184.2m), supported by strong originations of GBP82.2m, which were up
44% on 2018.
During the year, CCFS enhanced its product offering and distribution
network, whilst maintaining its focus on the quality
of lending in this segment.
In response to market feedback, from early 2019, CCFS removed early
repayment charges in its residential second charge product range. This
brought a significant increase in applications. Distribution was also
enhanced in the year, with a focus on direct-to-broker business through
major networks and panels, which provides the business with a
competitive advantage over smaller players, which generally
deal through master brokers.
The second charge sub-segment made a contribution to profit of GBP7.0m
on a pro
forma underlying basis, up 8% compared with GBP6.5m in 2018.
On a statutory basis, the contribution to profit from the second charge
sub- segment was a loss of GBP0.1m as net interest income was more than
offset by higher impairment losses.
The following tables show CCFS' pro forma underlying and statutory
segment's loans and advances and contribution to profit:
Reverse
Total pre- Acquisition-
Second pro forma acquisition related Total
Buy-to-Let Residential Bridging charge Other1 underlying results items statutory
Year ended 31-Dec-2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
BALANCES AT THE
REPORTING DATE
Gross loans and
advances to customers 4,748.5 2,170.8 214.4 218.6 22.1 7,374.4 -- 294.7 7,669.1
Provision for impairment
losses (3.5) (3.6) (0.5) (0.4) -- (8.0) -- 0.7 (7.3)
Loans and advances
to customers 4,745.0 2,167.2 213.9 218.2 22.1 7,366.4 -- 295.4 7,661.8
Risk-weighted assets 2,002.4 934.0 127.9 95.4 8.4 3,168.1 -- 124.9 3,293.0
PROFIT OR LOSS
FOR THE YEAR
Net interest income 114.3 63.6 15.5 7.1 1.7 202.2 (152.1) (21.6) 28.5
Fees and commissions
income 0.1 0.2 0.1 -- 3.4 3.8 (3.7) -- 0.1
Fair value losses
on financial instruments -- -- -- -- (5.5) (5.5) 13.7 3.3 11.5
Gain on sale of
loans -- -- -- -- 58.7 58.7 (58.7) -- --
--------
Total income 114.4 63.8 15.6 7.1 58.3 259.2 (200.8) (18.3) 40.1
Impairment losses (2.1) (1.7) (0.5) (0.1) -- (4.4) 4.3 (3.6) (3.7)
Contribution to
profit 112.3 62.1 15.1 7.0 58.3 254.8 (196.5) (21.9) 36.4
------------- --------
Total
Second pro forma
Buy-to-Let Residential Bridging charge Other1 underlying
Year ended 31-Dec-2018 GBPm GBPm GBPm GBPm GBPm GBPm
-----------------
BALANCES AT THE REPORTING
DATE
Gross loans and advances
to customers 4,508.3 1,707.0 244.1 184.2 21.5 6,665.1
Provision for impairment
losses (1.5) (1.8) -- (0.3) -- (3.6)
Loans and advances to
customers 4,506.8 1,705.2 244.1 183.9 21.5 6,661.5
Risk-weighted assets 1,789.2 685.4 141.6 74.0 7.5 2,697.7
PROFIT OR LOSS FOR THE
YEAR
Net interest income 104.6 54.5 15.0 6.4 -- 180.5
Fees and commissions
income 1.9 2.2 0.2 0.3 3.4 8.0
Gain on sale of loans -- -- -- -- 36.4 36.4
Total income 106.5 56.7 15.2 6.7 39.8 224.9
Impairment losses (0.8) (1.1) -- (0.2) -- (2.1)
Contribution to profit 105.7 55.6 15.2 6.5 39.8 222.8
------------- ----------
1. Other relates to the net interest income from acquired loan
portfolios and fee income from third party mortgage servicing.
Wholesale funding overview
Securitisation is a key strategic funding source for the combined Group,
with historical issuances across CCFS and OSB since 2013 of GBP5.7bn.
As well as providing cost-efficient funding through securitisation, the
Group has benefited from the capability to accelerate organic capital
generation through the sale of residual positions. The Group's strategy
is to be nimble and dynamic rather than deterministic with its
securitisation issuance plans, enabling it to take advantage of a strong
market with repeat issuances, and utilise other options when market
conditions are
less favourable. To that end, the Group's activities in the wholesale
markets during 2019 were more limited than was the case during the
equivalent period in 2018. The ongoing uncertainty around negotiations
of the UK's exit from the European Union continued to hamper UK
residential mortgage-backed securities market ('RMBS'), with spreads
tracking relatively wide throughout the year, as they had through the
last few months of 2018.
The introduction of a raft of regulatory changes at the beginning of
2019, together with the market transitioning away from LIBOR as an index,
also acted as a brake on new issue supply, particularly during the first
quarter of 2019.
Nonetheless, the Group was able to complete a number of strategically
important wholesale transactions during the year. In January 2019,
despite facing a difficult political backdrop, CCFS was able to sell its
residual interest in the PMF 2018-1B and PMF 2018-2B transactions,
generating a gain on sale of GBP29.8m, equivalent to a 5.3% premium on
the underlying GBP564.3m of mortgage assets.
This excellent outcome was made possible through the earlier strategic
sales of significant components of CCFS' residual interest in these
transactions through 2018, at a time when the market was notably
stronger. This strategy minimised the market exposure faced by CCFS
when selling its final residual positions in these transactions in
January 2019. The trade enabled CCFS to increase its capital headroom
and provide the capital capacity to fully take advantage of the
commercial opportunities available to the business through its lending
activities during
the year.
CCFS re-entered the debt securitisation market in May 2019 with the PMF
2019-1B transaction, securitising GBP733.7m of prime Buy-to-Let
mortgages. PMF 2019-1B was the first SONIA-linked UK RMBS transaction to
issue mezzanine notes referencing
the index, and was well received by the market. The senior fast-pay
notes in the transaction were sold at SONIA plus 93bps, equivalent to a
spread over LIBOR of c.
80bps; on that basis the tightest such UK Buy-to-Let securitisation
achieved by any issuer in 2019.
In July 2019, CCFS sold its remaining junior residual interest in the
transaction to generate a further gain on sale of
GBP28.8m, bringing the total gains from such transactions for the year
to GBP58.7m.
In July 2019, OSB issued its inaugural RMBS transaction of
own-originated Buy-to-Let mortgage assets, Canterbury Finance No.1. The
transaction was well received, with senior funding in the order of SONIA
plus 117bps achieved across the GBP200m
of senior notes placed.
In addition to providing the Group with attractively priced term funding,
both the PMF and Canterbury transactions were structured in such a way
as to provide the Group with a significant portfolio of retained senior
bonds. These enhance the contingent funding options available to the
Group, and can be used to access commercial as well as central bank
repo facilities.
The PMF transaction also enabled CCFS to refinance assets held on its
committed warehouse facility. The facility, which provides committed
senior finance of up to GBP350m (31 December 2018: GBP350m for CCFS
only) against both prime residential and Buy-to-Let mortgage assets, was
extended during the year for a further
15 months. In combination with a second facility available for such
purposes, on a statutory basis, the Group had a total of up to GBP600m
(31 December 2018: GBPnil)
of contingent wholesale funding capacity available to it through its
warehouse facilities, GBP94m of which was utilised
at the year end.
The Group maintains commercial repo lines with eight counterparties, as
well as the ability to access ordinary course central bank funding
facilities, such as
the Bank of England's Indexed Long-Term Repo auctions.
OSB and CCFS issuances from 2013 to 31 December 2019 (GBPm)
PMF ROCHFIN ROCHFIN
No.1 No.1 PMF PMF PMF PMF PMF No.2 PMF CMF PMF PMF CMF PMF CANBY
2013 20131 2014-1 2014-2 2015-1 2015-2B1 2015-3R 20161 2017-1B1 2017-11 2018-1B1 2018-2B1 2018-11 2019-1B1 No.1
---------
Number
of accounts n/a n/a n/a n/a 4 2 13 179 2 7 0 2 8 1 3
3+ months
in arrears
Losses
to date n/a n/a n/a n/a 0 7 20 1,546 0 0 0 0 0 0 0
(GBPk)
Weighted
average n/a n/a n/a n/a 5.02% 4.76% 4.71% 3.53% 4.08% 4.79% 4.14% 4.06% 4.51% 3.66% 3.79%
mortgage
interest
rate
Senior
note spread 1.15% 1.45% 0.80% 0.95% 0.95% 1.25% n/a 1.30% 0.75% 0.50% 0.65% 0.68% 0.47% n/a n/a
(over LIBOR)
Senior
note spread n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 0.93% 1.17%
(over SONIA)
Weighted
average 1.43% n/a 0.88% 1.11% 1.10% 1.53% 1.00% n/a 1.02% 0.64% 0.74% 0.77% 0.55% 1.27% 1.45%
margin
at closing
1. Group derecognition deal.
PMF -- Precise ROCHFIN -- Rochester CMF -- Charter CANBY -- Canterbury
Mortgage Funding Finance plc Mortgage Funding Finance plc
plc plc
----------------- -------------------- ----------------- -------------------
Throughout the Strategic Report, we present KPIs on a statutory and a
pro forma underlying basis, which
Management believes provide a more consistent basis for comparing the
Group's performance between financial periods.
Pro forma underlying results assume that the Combination occurred on
1 January 2018, and include 12 months of results from CCFS. They also
exclude exceptional items, integration costs and other
acquisition-related items.
For a reconciliation of statutory
results to pro forma underlying results, see page 51.
} Group statutory 2019
} Group statutory 2018
} Group pro forma underlying 2019
} Group pro forma underlying 2018
} OSB
} CCFS
1. Gross new lending
Statutory GBP4.1bn (2018: GBP3.0bn)
Pro forma underlying GBP6.5bn (2018: GBP5.9bn)
Definition
Gross new lending is defined as gross new organic lending before
redemptions.
2019 performance
Gross new lending reflects strong growth in new origination. For both
OSB and CCFS,
Buy-to-Let and residential lending performed strongly as our specialist
propositions continued to appeal to professional landlords and
homeowners.
3. Cost to income ratio
Statutory 32% (2018: 28%)
Pro forma underlying 29% (2018: 28%)
Definition
Cost to income ratio is defined as administrative expenses as a
percentage of total income. It is a measure of operational efficiency.
2019 performance
Statutory cost to income ratio of 32% was impacted by the
acquisition-related adjustments, which reduced total income and the
inclusion of CCFS income and
administrative expenses post Combination.
On a pro forma underlying basis, cost to income remained strong at 29%
as the business retained its focus on cost efficiency and discipline.
2. Net interest margin ('NIM') Statutory 243bps (2018: restated 305bps1)
Pro forma underlying 266bps (2018: 286bps)
Definition
NIM is defined as net interest income as a percentage of a 13 point
average of interest earning assets (cash, investment securities, loans
and advances to customers and credit institutions). It represents the
margin earned on loans and advances and liquid assets after swap
expense/income and cost of funds.
2019 performance
Statutory NIM was lower primarily due to the dilutive impact of
including CCFS' results post Combination and the changing asset mix of
the OSB loan book, despite broadly stable asset pricing.
Pro forma NIM also reflects the changing asset mix of the OSB loan book
and marginally higher cost of funds in CCFS.
1. Loan loss ratio
Statutory 13bps (2018: restated 10bps1) Pro forma underlying 10bps
(2018: 7bps)
Definition
Loan loss ratio is defined as impairment losses expressed as a
percentage of a 13 point average of gross loans and advances. It is
a measure of the credit performance of the loan book.
2019 performance
The 2019 statutory and pro forma underlying loan loss ratios reflect an
alignment of IFRS 9 modelling methodologies post Combination and an
impact of a number of high value Buy- to-Let cases having LPA receivers
appointed during the first half of 2019 which attract higher provision
requirements under an IFRS 9 approach.
In addition, the statutory loan loss ratio included the initial
recognition of ECL provisions on the CCFS loan book on Combination.
1. Dividend per share Statutory 16.1 pence per share (2018: 14.6 pence per
share)
Definition
Dividend per share is defined as the sum of the recommended final
dividend for 2019 plus the interim dividend divided by the number
of ordinary shares in issue at the year end.
2019 performance
The Board will recommend a final dividend of
11.2 pence per share in respect of 2019 at the Bank's AGM on 7 May 2020.
This, together with the interim dividend of 4.9 pence per share, and the
pre-acquisition CCFS interim dividend, represents 25% of pro forma
underlying profit after tax after deducting coupons on AT1 securities.
For calculation of the final dividend, see page 262 in the Appendix.
1. Basic EPS
Statutory 52.6 pence per share (2018: 55.5) Pro forma underlying 64.9
pence per share (2018: 59.4)
Definition
Basic EPS is defined as profit attributable to ordinary shareholders,
which is profit after tax and after deducting coupons on AT1 securities,
gross of tax, divided by the
weighted average number of ordinary shares in issue.
2019 performance
The reduction in basic statutory EPS was due to the 14% increase in
profit after taxation being more than offset by the impact of the
additional shares issued for the all-share Combination with CCFS.
On a pro forma underlying basis, EPS increased broadly in line with the
increase in profit after taxation.
1. Return on equity
Statutory 18% (2018: restated 25%1)
Pro forma underlying 25% (2018: 28%)
Definition
Return on equity is defined as profit attributable to ordinary
shareholders, which is profit after tax and after deducting coupons
on AT1 securities, gross of tax, as a percentage of a 13 point average
shareholders' equity (excluding GBP60m of AT1 securities).
2019 performance
On a statutory basis, return on equity decreased, primarily due to
exceptional items, integration costs and other acquisition- related
items.
On a pro forma underlying basis, return on equity remained strong at
25%.
1. CRD IV fully-loaded Common Equity Tier 1 capital ratio Statutory 16.0%
(2018: 13.3%)
Definition
This is defined as Common Equity Tier 1 ('CET1') capital as a percentage
of risk- weighted assets (calculated on a standardised basis) and is a
measure of the capital strength of the Bank.
2019 performance
The CET1 ratio of 16.0% reflects the strong organic capital generation
capability of the business to support significant growth
through profitability and the beneficial impact of the fair value uplift
on CCFS' net assets
on Combination.
1. Net Promoter Score ('NPS')
OSB +66 (2018: +63)
CCFS +72 (2018: +39)
Definition
The NPS measures our customers' satisfaction with our service and
products. It is based
on customer responses to the question of whether they would recommend us
to a friend. The question scale is 0 for absolutely not to 10 for
definitely yes. Based on the score, a customer is defined as a detractor
between 0 and 6, a passive between 7 and 8 and a promoter between 9 and
10. Subtracting the percentage of detractors from the percentage of
promoters gives an NPS of between -100 and +100.
2019 performance
OSB's customer NPS improved to +66 and CCFS' was an outstanding +72.
1.To align calculation methods post Combination, OSB amended NIM, loan
loss and return on equity calculations to include average interest
earning assets for NIM, average gross loans for loan loss ratio and
average shareholders' equity for return on equity on a 13 point average
from a simple average. The comparative ratios were restated accordingly.
Review of the Group's performance presented on a statutory basis
including CCFS from the date
of the Combination
Strong profit growth
The Group reported 14% growth in statutory profit before taxation to
GBP209.1m (2018: restated GBP182.8m1) after exceptional items,
integration costs and other acquisition-related items of GBP33.2m2
(2018: exceptional cost of Heritable option of GBP9.8m) and including
GBP28.0m of profit before taxation from the CCFS business, after
exceptional transaction costs
of GBP15.7m.
Statutory profit after taxation in 2019 increased by 14% to GBP158.8m
(2018: restated GBP139.6m1) including the after tax exceptional items,
integration costs and other acquisition-related items of GBP27.4m2
(2018: exceptional cost of Heritable option of GBP7.2m) and including
GBP24.8m
of profit after taxation from the CCFS business, after post tax
pre-combination transaction costs of GBP15.5m.
The Group's effective tax rate was 22.8%3 in 2019 (2018: 23.7%),
primarily due to
a lower proportion of the Group's profits being subject to the Bank
Corporation Tax Surcharge.
Statutory return on equity for 2019 fell to 18% (2018: restated 25%4),
primarily due to exceptional items, integration costs and other
acquisition-related items. Statutory basic earnings per share fell by 5%
to 52.6 pence per share (2018: 55.5 pence per share), due to the 14%
increase in profit after taxation being more than offset by the impact
of the additional shares issued for the all-share Combination with CCFS.
Summary statutory results for 2019 and 2018
Restated1
Group
Summary Statement of Profit Group 31-Dec-2019 31-Dec-2018
or Loss GBPm GBPm
Net interest income 344.7 286.3
Net losses on financial instruments (3.4) (5.2)
Net fees and commissions 2.2 0.6
External servicing fees (0.1) (0.6)
Administrative expenses (108.7) (79.6)
Provisions -- (0.8)
Impairment losses (15.6) (8.1)
Gain on Combination with
CCFS 10.8 --
Integration costs (5.2) --
Exceptional items (15.6) (9.8)
Profit before taxation 209.1 182.8
Profit after taxation 158.8 139.6
Key ratios -- for more information,
see Appendix
Net interest margin1, 4 243bps 305bps
Cost to income ratio5 32% 28%
Management expense ratio6 0.76% 0.84%
Loan loss ratio4, 5 0.13% 0.10%
Basic EPS, pence per share5 52.6 55.5
Return on equity1, 4 18% 25%
Dividend per share, pence
per share5 16.1 14.6
Extracts from the Statement
of Financial Position GBPm GBPm
Loans and advances to customers 18,446.8 8,983.3
Retail deposits 16,255.0 8,071.9
Total assets 21,417.1 10,460.2
Key ratios -- for more information,
see Appendix
Common Equity Tier 1 ratio7 16.0% 13.3%
Total capital ratio 17.3% 15.8%
Leverage ratio 6.5% 5.9%
Notes
1. The Group restated the prior year comparatives to recognise interest
expense and taxation on the GBP22m Perpetual Subordinated Bonds
previously classified as equity.
2. This comprises GBP48.9m (GBP42.9m after tax) of acquisition-related items
as shown in the reconciliation of statutory to pro forma underlying
results on page 51, less CCFS' pre-acquisition transaction costs of
GBP15.7m (GBP15.5m after tax).
3. Effective tax rate excludes GBP2.7m of adjustments relating to prior
years.
4. To align calculation methods post Combination, OSB amended the NIM, loan
loss ratio and return on equity calculations to include average interest
earning assets for NIM, average gross loans for loan loss ratio and
average shareholders' equity for return on equity on a 13 point average
rather than a simple average. The comparative ratios were restated.
5. See definition in Key performance indicators on pages 44 and 45.
6. Administrative expenses as a percentage of 13 point average of total
assets.
7. Fully-loaded under Basel III/CRD IV.
Net interest margin ('NIM')
The Group reported an increase in net interest income of 20% to
GBP344.7m in 2019 (2018: restated GBP286.3m1), reflecting strong growth
in the loan book and the inclusion of CCFS' net interest income post
Combination.
Net interest income included effective interest rate ('EIR') reset gains
of GBP5.0m in 2019 (2018: GBP5.6m) due to assuming a period spent on
standard variable rate ('SVR') on additional products,
as behavioural trends emerged, and cash out-performance on purchased
mortgage portfolios.
Statutory NIM for 2019 reduced to 243bps (2018: restated 305bps1, 4),
primarily due to the dilutive impact of including CCFS' results post
Combination and the impact of the changing mix of the OSB loan book,
despite broadly stable asset pricing.
The CCFS business has a lower NIM than the OSB business and statutory
NIM in 2019 was also negatively impacted by the amortisation of the fair
value uplift on acquisition of the CCFS loan book.
The mix of the OSB loan book continued to change as the higher-yielding
back book refinanced onto front book pricing. The impact of this mix
effect had largely run its course by the end of the first half, assuming
stable mortgage pricing, cost
of funds and swap spreads going forward.
Losses on financial instruments
The statutory fair value loss on financial instruments in 2019 of
GBP3.4m
(2018: GBP5.2m) includes a net loss of GBP1.3m from the Group's hedging
activities (2018:
GBP0.3m net loss), GBP5.5m amortisation of fair value adjustments on
hedged assets relating to cancelled swaps (2018: GBP4.6m) and a gain of
GBP3.3m due to acquisition- related inception adjustments under hedge
accounting.
The net loss on hedging activities includes a loss of GBP4.8m in respect
of the ineffective portion of hedges and net gains on unmatched swaps of
GBP3.5m (2018: GBP2.7m loss and GBP2.4m gain respectively). The
net gains on unmatched swaps, which primarily relate to mortgage
pipeline hedges, include the impact of gains in CCFS post Combination
due to movements in the LIBOR curve.
The amortisation of fair value adjustments on hedged assets 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.
Net fees and commission
Statutory net fees and commission income of GBP2.2m (2018: GBP0.6m)
comprised fees and commission receivable of GBP3.4m (2018:
GBP1.7m) partially offset by commission expense of GBP1.2m (2018:
GBP1.1m).
Fees and commissions receivable doubled in the year mostly as a result
of the inclusion of GBP1.5m of fees and commissions from CCFS.
Fees and commissions payable in 2019 remained broadly flat and related
to branch agency fees and commissions paid to the Kent Reliance
Provident Society for conducting member engagement activities for OSB.
Efficient and scalable operating platform
Statutory administrative expenses were up 37% to GBP108.7m in 2019
(2018: GBP79.6m), due to growth in the balance sheet and the inclusion
of
GBP19.2m of CCFS administrative expenses post Combination.
The Group's statutory cost to income ratio of 32% (2018: 28%) was
impacted by the acquisition-related adjustments which reduced total
income on a statutory basis and the inclusion of CCFS income and
administrative expenses post Combination.
The management expense ratio was 0.76% (2018: 0.84%) reflecting cost
efficiencies in the day-to-day running
of the Group on a business as usual basis and further economies of scale,
despite continued investment in the business.
Provisions
Statutory regulatory provisions were
GBPnil in 2019 as the provision expense was fully offset by an FSCS
refund.
In 2018, regulatory provisions were
GBP0.8m and included levies due to Financial Services Compensation
Scheme and other regulatory provisions on acquired books.
Impairment losses
Statutory impairment losses increased to
GBP15.6m in 2019 (2018: GBP8.1m) representing 13bps on average gross
loans and advances (2018: 10bps).
Impairment losses included a provision relating to the initial
recognition of expected credit losses on the CCFS portfolios of GBP3.6m
and the impact of aligning IFRS 9 provision methodologies post
Combination. Impairment losses were also impacted by a number of
high-value Buy-to-Let cases in OSB having Law of Property Act ('LPA')
receivers appointed during the first half of 2019, which attracted a
higher provision requirement under an IFRS 9 modelling approach.
During the second half of 2019, the number of LPA appointments
stabilised.
Gain on Combination with CCFS
The Group recorded a gain of GBP10.8m which represents negative goodwill
on the Combination with CCFS. Negative goodwill arose as a result of a
decrease in the
OSB share price between announcement and completion dates and an
increase in the fair value of the loan book acquired due to movements in
the LIBOR curve between announcement and completion. For more
information, see note 4 to the Financial statements.
Integration costs
There were GBP5.2m of integration costs incurred in 2019 post completion
of the Combination.
Exceptional items
Statutory exceptional items of GBP15.6m in 2019 comprise transaction
costs incurred by OSB in relation to the Combination with CCFS.
The exceptional item of GBP9.8m in 2018 related to the fair value of the
Heritable option.
Dividend
The Board recommends a final dividend for 2019 of 11.2 pence per share.
Together with the 2019 interim dividend of 4.9 pence per share and the
pre-Combination CCFS interim dividend of 4.3 pence per share, this
represents 25% of pro forma underlying profit attributable to ordinary
shareholders. For the calculation of the 2019 final dividend, see the
Appendix on page 262.
Restated1
Group
Group 31-Dec-2019 31-Dec-2018
Summary Cash Flow Statement GBPm GBPm
----------------
Profit before tax 209.1 182.8
Net cash generated/(used in):
Operating activities (536.1) (85.8)
Investing activities 826.6 (45.6)
Financing activities 488.1 289.7
Net increase in cash and cash
equivalents 778.6 158.3
Cash and cash equivalents at the
beginning of the period 1,324.2 1,165.9
Cash and cash equivalents at the
end of the period 2,102.8 1,324.2
The proposed final dividend will be paid on 13 May 2020, subject to
approval at the AGM on 7 May 2020, with an ex-dividend date of 26 March
2020 and a record date of 27 March 2020.
Balance sheet growth
Net loans and advances to customers more than doubled in 2019 to
GBP18,446.8m (31 December 2018: GBP8,983.3m) on a statutory basis,
reflecting strong gross originations and the inclusion of the CCFS loan
book.
Retail deposits increased to GBP16,255.0m from GBP8,071.9m in 2018 on a
statutory basis, commensurate with the growth in the loan book.
Drawings under the Term Funding Scheme ('TFS') increased from GBP1.5bn
to GBP2.6bn for the Group, due to the inclusion of CCFS' drawings of
GBP1.1bn.
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 drawing to repay the existing
loans.
The Group also took the opportunity to complement its retail and TFS
funding in 2019 with further borrowing under the Bank of England's
Indexed Long-Term Repo scheme ('ILTR') which is an auction with
borrowings offered as a collateralised cash loan repayable in six
months. At
31 December 2019, the Group had
GBP290.0m (2018: GBP80.0m) of borrowings under the ILTR scheme at base
rate
+15bps, a total of 90bps.
The Group had up to GBP600m (2018: GBPnil) of contingent wholesale
funding capacity
available to it through the CCFS warehouse facilities, GBP94m of which
was utilised at the year end.
The Group also utilises sophisticated securitisation platforms to
complement its funding requirements. For more information on residential
mortgage- backed securities issuances in 2019,
see page 41.
Liquidity
Both OSB and CCFS operate under the Prudential Regulation Authority's
liquidity regime and are managed separately for liquidity risk. Both
Banks hold their own
significant liquidity buffer of liquidity coverage ratio ('LCR')
eligible high-quality liquid assets ('HQLA').
As at 31 December 2019, OSB had
GBP1,231.8m (2018: GBP1,354.6m) and CCFS
had GBP1,077.3m (2018: GBP868.3m) of HQLA LCR eligible assets. CCFS also
held a GBP186.2m (2018: GBP131.9m) portfolio
of RMBS qualifying as Bank of England level 3 collateral.
Both Banks operate within a target liquidity runway in excess of the
minimum LCR regulatory requirement, which is based
on internal stress testing. Both Banks have a range of contingent
liquidity and funding options available for possible stress periods.
As at 31 December 2019, OSB had a liquidity coverage ratio of 199%
(2018:
224%) and CCFS 145% (2018: 173%),
both significantly in excess of the 2019 regulatory minimum of 100%.
Capital
The Group's fully-loaded CET1 capital ratio under CRD IV strengthened to
16.0% as at 31 December 2019 (31 December
2018: 13.3%), demonstrating the strong organic capital generation
capability of the business to support significant growth through
profitability and the beneficial impact of the fair value uplift on
CCFS'
net assets on acquisition.
The Group had a total capital ratio of 17.3% and a leverage ratio of
6.5% as at 31 December 2019 (31 December
2018: 15.8% and 5.9% respectively).
The combined Group had a Pillar 2a requirement of 1.67% of risk-weighted
assets (excluding a static integration add- on) as at 31 December 2019
(31 December
2018: 1.1% for OSB only).
Cash flow statement
The Group's cash and cash equivalents increased by GBP778.6m during the
year to
GBP2,102.8m as at 31 December 2019.
Loans and advances to customers increased by GBP2,230.8m during the year,
partially funded by GBP1,637.8m of deposits from retail customers. The
movements in loan book and retail funds exclude the acquired positions
from CCFS due to the merger being a share for share exchange. Additional
funding was provided by cash generated from financing activities of
GBP488.1m and included GBP170.0m of net drawings under the Indexed
Long-Term Repo scheme, GBP220.4m of proceeds from securitisation of
mortgages, warehouse funding of GBP93.5m and GBP41.3m from commercial
repos offset by dividend payment of GBP37.3m. Cash generated from
investing activities increased to GBP826.6m largely as a result of
GBP870.4m of cash
and cash equivalents acquired on the Combination with CCFS.
In 2018, 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.
1. The Group restated the prior year comparatives to recognise interest
expense and taxation on the GBP22m Perpetual Subordinated Bonds
previously classified as equity.
Review of the Group's performance on a pro forma underlying basis
Strong profit growth
Pro forma underlying profit before taxation was GBP381.1m in 2019, up
9% from
GBP350.8m in 2018, due primarily to strong growth in the loan book, net
of structured asset sales, at attractive margins and continued cost
discipline.
Pro forma underlying profit after taxation was GBP294.2m in 2019, up 10%
from GBP267.6m in 2018. On a pro forma underlying basis, the Group's
effective
tax rate was 22.8% in 2019 (2018: 23.7%), with a lower proportion of the
Group's profits subject to the Bank Corporation Tax Surcharge.
On a pro forma underlying basis, return on equity for 2019 remained
strong at 25% (2018: 28%) and basic earnings per share increased by 9%
to 64.9 pence per
share (2018: 59.4 pence per share), broadly commensurate with the
increase in profit after taxation.
Net interest margin
On a pro forma underlying basis, net interest income was up 11% from
GBP466.8m in 2018 to GBP518.4m in 2019 due to growth in the loan book at
attractive margins.
Net interest income included EIR reset gains of GBP5.0m in 2019 (2018:
GBP5.6m) due to assuming a period spent on standard variable rate on
additional products,
as behavioural trends emerged, and cash out-performance on purchased
mortgage portfolios.
On a pro forma underlying basis,
NIM reduced to 266bps (2018: 286bps), primarily reflecting the impact of
the changing asset mix of the OSB loan book, despite broadly stable
asset pricing and a marginally higher cost of funds in the CCFS
business.
The mix of the OSB loan book continued to change as the higher-yielding
back book refinanced onto front book pricing. The impact of this mix
effect had largely run its course by the end of the first half, assuming
stable mortgage pricing, cost of funds and swap spreads going forward.
Summary pro forma underlying results for 2019 and 2018
Group
Summary Statement of Profit Group 31-Dec-2019 31-Dec-2018
or Loss GBPm GBPm
Net interest income 518.4 466.8
Gain on sale of loans 58.6 36.4
Net losses on financial instruments (20.3) (5.2)
Net fees and commissions 5.9 8.6
External servicing fees (0.1) (0.6)
Administrative expenses (165.1) (144.2)
Provisions -- (0.8)
Impairment losses (16.3) (10.2)
Profit before taxation 381.1 350.8
Profit after taxation 294.2 267.6
Key ratios -- for more information,
see Appendix
Net interest margin 266bps 286bps
Cost to income ratio 29% 28%
Management expense ratio 0.84% 0.88%
Loan loss ratio 0.10% 0.07%
Basic EPS, pence per share 64.9 59.4
Return on equity 25% 28%
Extracts from the Statement
of Financial Position GBPm GBPm
Loans and advances 18,151.4 15,644.8
Retail deposits 16,248.6 13,166.4
Total assets 21,166.5 18,246.7
Alternative performance measures
The Group presents alternative performance measures ('APMs') in this
Strategic Report as Management believes they provide a more consistent
basis for comparing the Group's performance between financial periods.
Pro forma underlying results assume that the Combination occurred on
1 January 2018, and include 12 months of results from CCFS. They also
exclude exceptional items, integration costs and other
acquisition-related items.
APMs reflect an important aspect of the way in which operating targets
are defined and performance is monitored by the Board. However, any APMs
in this document are not a substitute for IFRS measures and readers
should consider the IFRS measures as well.
For more information on the APMs and the reconciliation between APMs and
the statutory equivalents, see page 260 in the Appendix.
Gain on sale of loans
The gain on sale of loans of GBP58.6m on a pro forma underlying basis
relates to sales of residual interests in three CCFS securitisations to
third party investors in 2019, prior to the Combination (2018:
GBP36.4m).
Losses on financial instruments
Pro forma underlying net fair value loss on financial instruments
increased to GBP20.3m (2018: GBP5.2m loss). This increase was largely
due to GBP13.3m of losses on unmatched swaps, primarily relating to
mortgage pipeline hedges, due to movements in the LIBOR curve during
2019.
Net fees and commissions
Pro forma underlying net fees and commissions of GBP5.9m (2018: GBP8.6m)
primarily relate to CCFS' fees for servicing third party mortgage
portfolios.
Administrative expenses
Pro forma underlying administrative expenses were GBP165.1m in 2019, up
14% from GBP144.2m in 2018, primarily due
to balance sheet growth.
The cost to income ratio on a pro forma underlying basis remained strong
at 29% (2018: 28%) as the business retained its focus on cost efficiency
and discipline.
The management expense ratio reduced to 0.84% on a pro forma underlying
basis (2018: 0.88%), reflecting this cost discipline and benefits of
scale, despite continued investment in the business.
Provisions
Provisions on a pro forma underlying basis were GBPnil in 2019 as the
provision expense was fully offset by an FSCS refund.
In 2018, provisions were GBP0.8m and included levies due to Financial
Services Compensation Scheme and other regulatory provisions on acquired
books.
Impairment losses
Impairment losses on a pro forma underlying basis increased to GBP16.3m
in 2019 (2018: GBP10.2m) representing 10bps (2018: 7bps) on average
gross loans and advances.
The loan loss ratio remained strong as both Banks delivered strong
credit
performance driven by robust underwriting and prudent lending policies.
The year-
on-year increase in the loan loss ratio was primarily due to the impact
of aligning IFRS 9 modelling approaches post Combination and the impact
of a number of high value Buy-to-Let cases having LPA receivers
appointed during the first half of 2019, attracting higher provision
requirements under the IFRS 9 modelling approach.
The number of LPA appointments stabilised in the second half of 2019.
Balance sheet
On a pro forma underlying basis, the loan book increased by 16% to
GBP18,151.4m (2018: GBP15,644.8m), primarily due to strong levels of
originations in the year for both OSB and CCFS, partially offset by
structured asset sales by CCFS prior to the
Combination. The loan book growth would have been 23% excluding the
impact
of these sales.
Retail deposits increased by 23% during 2019 to GBP16,248.6m (2018:
GBP13,166.4m)
as both Banks continued to attract new savers by offering attractively
priced savings products and outstanding customer service.
Total assets increased in the year by 16% to GBP21,166.5m (2018:
GBP18,246.7m).
Drawings under the TFS were GBP2.6bn on a pro forma underlying basis,
unchanged from 2018.
In 2019, the Group also took the opportunity to complement its retail
and TFS funding with further borrowing under the Bank of England's ILTR
and at 31 December 2019 it had GBP290.0m (2018: GBP80.0m) of borrowings
under the
ILTR scheme at base rate +15bps, a total of 90bps.
The Group had up to GBP600m (2018:
GBP600m) of contingent wholesale funding capacity available to it
through the CCFS warehouse facilities, GBP94m of which was utilised at
the year end.
The Group also utilises sophisticated securitisation platforms to
complement its funding requirements. For more information on RMBS
issuances in 2019, see page 41.
Reconciliation of statutory to pro forma underlying results
2019 2018
--------------------------
CCFS Reverse Restated14
pre- acquisition- Pro forma OSB CCFS Reverse Pro forma
Statutory acquisition related underlying statutory statutory exceptional underlying
results results items results results results item results
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------- ------------- -------------- --------------
Net interest income 344.7 152.1 21.61 518.4 286.3 180.5 -- 466.8
(Loss)/gain on sale
of loans (0.1) 58.7 -- 58.6 -- 36.4 -- 36.4
Net losses on financial
instruments (3.3) (13.7) (3.3)2 (20.3) (5.2) -- -- (5.2)
Net fees and commissions 2.2 3.7 -- 5.9 0.6 8.0 -- 8.6
External servicing fees (0.1) -- -- (0.1) (0.6) -- -- (0.6)
------------
Total income 343.4 200.8 18.3 562.5 281.1 224.9 -- 506.0
Administrative expenses (108.7) (57.7) 1.33 (165.1) (79.6) (64.6) -- (144.2)
Provisions -- -- -- -- (0.8) -- -- (0.8)
Impairment losses (15.6) (4.3) 3.64 (16.3) (8.1) (2.1) -- (10.2)
Gain on Combination
with CCFS 10.8 -- (10.8)5 -- -- -- -- --
Integration costs (5.2) -- 5.26 -- -- -- -- --
Exceptional items (15.6) (15.7) 31.37 -- (9.8) -- 9.8 --
-------------- -------------
Profit before tax 209.1 123.1 48.9 381.1 182.8 158.2 9.8 350.8
Profit after tax 158.8 92.5 42.9 294.2 139.6 120.8 7.2 267.6
Summary Balance Sheet
Loans and advances to
customers 18,446.8 -- (295.4)8 18,151.4 8,983.3 6,661.5 -- 15,644.8
Other financial assets 2,878.2 -- 63.29 2,941.4 1,438.1 1,111.4 -- 2,549.5
Other non-financial
assets 92.1 -- (18.4)10 73.7 38.8 13.6 -- 52.4
------------
Total assets 21,417.1 -- (250.6) 21,166.5 10,460.2 7,786.5 -- 18,246.7
Amounts owed to retail
depositors 16,255.0 -- (6.4)11 16,248.6 8,071.9 5,094.5 -- 13,166.4
Other financial
liabilities 3,544.0 -- 10.012 3,554.0 1,690.2 2,198.7 (7.2) 3,881.7
Other non-financial
liabilities 141.1 -- (63.1)13 78.0 39.7 43.0 -- 82.7
------------
Total liabilities 19,940.1 -- (59.5) 19,880.6 9,801.8 7,336.2 (7.2) 17,130.8
-------------- ------------- ------------
Net assets 1,477.0 -- (191.1) 1,285.9 658.4 450.3 7.2 1,115.9
-------------- ------------- ------------
1.
1. Amortisation of the net fair value uplift to CCFS' mortgage loans
and retail deposits on Combination.
2. Inception adjustment on CCFS' derivative assets and liabilities on
Combination.
3. Amortisation of intangible assets recognised on Combination.
4. Recognition of expected credit losses arising on acquisition of
CCFS' loan book.
5. Recognition of negative goodwill on Combination as a result of a
decrease in the OSB share price between announcement and
completion and an increase in the fair value of the loan book
acquired due to movements in the LIBOR curve between announcement
and completion.
6. Costs of integration of the two Banks post Combination.
7. Transaction costs include consultant, legal, professional and
success fees in relation to the Combination.
1.
1. Recognition of a fair value uplift to CCFS' loan book of GBP317.0m
less amortisation of the fair value uplift of GBP22.6m and a
movement on credit provisions of GBP1.0m.
2. Fair value adjustment to hedged assets of GBP63.2m.
3. Adjustment of GBP0.7m to deferred tax asset and GBP19.1m relating
to recognition of acquired intangibles on Combination.
4. Fair value adjustment to CCFS' retail deposits of GBP7.4m at
Combination less amortisation of GBP1.0m.
5. Fair value adjustment to hedged liabilities of GBP10.0m.
6. Adjustment to deferred tax liability of GBP63.1m relating to the
fair value adjustments on the loan book and retail deposits and
other acquisition-related adjustments.
7. The Group restated the prior year comparatives to recognise
interest expense and taxation on the GBP22m Perpetual Subordinated
Bonds previously classified as equity.
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 industry and regulatory
standards.
By leveraging its Strategic Risk Management Framework ('SRMF'), the
Group actively managed its risk profile in accordance with the
Board-approved risk appetite. Through continuous
monitoring and assessment of underlying risk drivers, the Group took
appropriate and timely actions in response to the changing economic,
political, business and regulatory environment.
The Group maintained its focus on
risk-based investment to enhance data governance and controls, and made
good progress towards building Internal Ratings- Based ('IRB') approach
capabilities.
The discipline associated with effective operational resilience
continued to be an area of focus. The Group established effective and
scalable operating models across all risk types, which included
leveraging its OSBI operations.
The Group delivered strong and profitable growth whilst maintaining a
low and stable risk profile. Loan assets continued to perform strongly
in 2019 and the Group maintained high quality capital and liquidity
buffers to meet both current and future requirements.
Ongoing stress testing demonstrates that the Group is resilient to
extreme, but plausible, scenarios in the context of 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 successfully managed its funding and liquidity profile
throughout the year, ensuring that it supported the continued growth of
the balance sheet.
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
on the opposite page outlines the comparative analysis of the leading
risk indicators
with supporting commentary.
Key achievements in 2019
Following the Combination with CCFS, significant progress was made on
aligning a number of key risk management items, while two Chief Risk
Officers were retained to ensure an appropriate level of oversight
across the two regulated Banks. Significant work was undertaken during
due diligence, and progress continued post completion to identify and
manage risks associated with the integration. The risk management
frameworks of the two Banks were
well aligned pre-integration, which will support both the integration
process and the ongoing risk management oversight of both Banks.
Work is underway to produce a combined Group Internal Capital Adequacy
Assessment Process ('ICAAP') in addition to individual OSB and CCFS
ICAAPs. A consistent approach has been agreed to ensure risks to capital
are fully assessed across the two Banks and the Group.
The Group also made significant progress throughout the year in further
enhancing its SRMF, with a view to ensuring that it is not only fit for
purpose today but also in the future, as the Group continues to grow.
The Group undertakes a full review of the appropriateness of its risk
appetite at least twice a year. During 2019, enhancements were made
across a number of risk types including credit, conduct and compliance
and regulatory risk.
Improvements were 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.
During 2019, further enhancements were made to the Group's credit risk
management information and reporting capabilities, with more
granular information being provided to the Credit and Group Risk
Committees. Particular focus was given to providing more segmented
information to allow management and the Board to identify
any changes in sub-segment performance, with respect to
organically-originated business and acquired portfolios.
The Group continued to enhance its operational risk and operational
resilience activities with increased training and awareness being rolled
out across the organisation. A successful live scenario exercise was
carried out with senior management and the Board over a two day period,
testing the Group's operational and financial resilience.
The Group continued to positively drive forward the vulnerable customer
agenda via the Vulnerable Customer Review Committee to ensure all
customers continue to consistently receive
fair outcomes.
Key risk indicators
Loan loss ratio Liquidity coverage ratio 3+ months in arrears
Commentary
The Group's statutory loan loss ratio remained low at 13bps (2018:
10bps), on a pro forma underlying basis1 the loan loss ratio was 10bps
(2018: 7bps).
During 2019 impairment losses included initial recognition of expected
credit losses across the CCFS book following the Combination, as well as
a one-off charge across the OSB Group aligning IFRS 9 provisioning
methodologies.
During the first half of 2019, the Group implemented a more focused
collections approach across the OSB Buy-to-Let portfolio which increased
the number of cases where Law of Property Act receivers were appointed,
which resulted in higher provisions. The number of LPA appointments
stabilised
in the second half of 2019.
Commentary
As at 31 December 2019, both OSB and CCFS continued to hold strong
levels of liquidity, significantly in excess of the 2019 regulatory
minimum of 100%.
Both Banks operate within a target liquidity runway in excess of the
minimum LCR regulatory requirement, which is based on internal stress
testing. Both Banks have a range of contingent liquidity and funding
options available for possible stress periods.
Commentary
Across the OSB lending portfolios the percentage of loans more than
three months in arrears at the end of 2019 was 1.3% (2018: 1.5%). This
trend was driven by changes in the loan book mix, improvement in arrears
performance across the Residential segment and the impact of more
targeted collections activity across Buy-to-Let lending.
The CCFS lending portfolios continue to display low levels of arrears of
0.3% as at 31 December 2019 (2018: 0.2%), with a marginal increase
observed as the lending portfolios continued to season in line with
expectations.
Statutory CET1 ratio
Commentary
The Group remained well above targeted capital levels throughout 2019,
with lending portfolios continuing to generate strong levels of organic
capital.
Statutory total capital ratio
Commentary
The Group's total capital ratio remained strong at 17.3% in 2019 (2018:
15.8%).
1.
1.
1. Pro forma underlying basis assumes that the Combination
completed on 1 January 2018 and includes 12 months of OSB
and CCFS results.
Priority areas for 2020
The Group will continue to enhance its risk management activities in
2020, ensuring appropriate oversight of both Banks, while also focusing
on the risks posed by the Combination. The Group will manage integration
risk as a principal risk, ensuring appropriate oversight by identifying
and assessing key risks, developing a risk appetite and reporting to
Management and Board Committees.
During 2020, the Group will further refine and embed its risk management
capabilities in the context of changing economic, business and operating
conditions. Priority areas for enhancement include:
-- Alignment of risk management frameworks across OSB and CCFS.
-- Development of a combined Group risk appetite across all principal risk
types, with supporting monitoring and reporting capabilities.
-- Integration of second generation IRB credit risk models within credit
portfolio monitoring, stress testing and capital planning, risk appetite
and risk-based pricing.
-- Development of IRB waiver documentation, demonstrating compliance with
approval requirements.
-- Alignment of operational risk management systems and integration of the
operational risk management frameworks across OSB and CCFS.
-- Enhancements to operational resilience and business continuity testing to
incorporate live data to create a more realistic testing environment.
-- Enhanced conduct risk awareness training, including bespoke face-to-face
training for key business areas.
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.
Pandemic risk factors
The outbreak of Coronavirus (COVID-19) has now been labelled a global
pandemic by the World Health Organization. If this continues to spread
through contagion, it is likely to further intensify the disruptive
impact on the global and UK economy.
This would result in deteriorating market sentiments, falling investment
and consumer spending and diminishing trade flows. Government actions,
both fiscal and monetary, may prove to be slow to take effect and/or
uncertain in their impact.
The financial services sector in a global pandemic could be adversely
impacted as a consequence of deteriorating credit risk profile, market
uncertainty, declining liquidity and curtailed operational capacity.
A spreading global pandemic could adversely impact the Group across a
number of key financial and operational areas.
The asset quality profile could be impacted through declining customer
affordability, increasing delinquency and diminishing underlying
security values. This would feed through into increasing credit
write-offs, credit provisions and capital requirements. Use of
forbearance may also need to be reassessed to manage the asset quality
profile in a prudent and a conduct sensitive manner. The Group may also
be required to re-evaluate the key judgements and assumptions
underpinning its business, capital, provisioning and wider risk models.
The Group's capital requirements may reduce relative to the
business-as-usual plans owing to reduced lending volumes. However, this
may be offset by increasing contingency and risk- based requirements.
Additionally, opportunities to effectively deploy capital may also
diminish as capital generating capacity is impacted by declining net
interest margins and increasing inefficiencies in the underlying
operating model.
The Group's funding sources could be impacted as retail savers
prioritise their diminishing available funds towards daily essentials.
Retail deposits may also decline as customers reduce savings and
investments to operate within the deposit insurance scheme limit. Retail
savings and investments could
also be impacted by reduced confidence in the UK banking sector.
Wholesale are also expected to experience reduced liquidity and risk
appetite though this may be offset by more aggressive central bank open
market operations.
The Group's operational capacity could be adversely impacted as a
consequence of sickness-based absenteeism, remote and distributed
working arrangements and restricted international and local travel.
The Group's service quality levels could be adversely impacted as a
consequence of increased information requests and transactional support
requirements. This would put additional pressure on already diminished
customer facing teams. This would adversely impact service quality
levels and may result in poor customer outcomes and remediation costs.
The Group's operational risk and resilience profiles would also be
adversely impacted as a consequence of reduced staffing levels,
declining effectiveness of third-party support services and increased
propensity for human error owing to a reduced and stretched workforce.
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 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
risk-based decisions to be taken in a timely manner by allowing for the
interests and expectations
of key stakeholders.
The SRMF also provides a structured mechanism to align all critical
components of an effective approach to risk management. The SRMF links
overarching risk principles to day-to-day risk monitoring and management
activities.
The modular construct of the SRMF provides 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 -- the Group has established a set of risk
principles which inform and guide all risk management activities and has
a strong, proactive and transparent 'risk culture' where all employees
across the Group are aware of their responsibilities in relation to risk
management.
2. Risk strategy and appetite -- the Group has a clear business mission,
vision and strategy which is supported by an articulated risk vision and
underlying principles. The Group calibrates its risk appetite to reflect
the Group's strategic objectives and business operating plans, as well as
external economic, business and regulatory constraints.
3. Risk assessment and control -- the Group's business model and strategy
exposes it to a defined risk profile and the risk governance structure is
informed by this risk profile such that
the Group can identify and manage its risks in an effective and
efficient manner.
1. Risk definitions and categorisation -- the Group sets out its principal
risks which represent the primary risks to which the Group is exposed.
1. Risk analytics (including stress testing and scenario development) -- the
Group uses quantitative analysis and statistical modelling to help
improve its business decisions.
2. Risk data and IT -- the maintenance of high quality risk information,
along with the Group's data enrichment and aggregation capabilities, are
central to the Risk function's objectives being achieved.
3. Risk frameworks, policies and procedures -- risk frameworks, policies and
supporting documentation outline the process by which risk is effectively
managed and governed within the Group.
4. Risk management information ('MI') and reporting -- the Group has
established a comprehensive suite of risk MI and reports covering all
principal risk types.
5. Risk governance and function organisation -- risk governance refers to
the processes and structures established by the Board to ensure that
risks are assumed and managed within the Board-approved risk appetite,
with clear delineation between risk taking, oversight and assurance
responsibilities. The Group's risk governance framework is structured to
adhere
to the 'three lines of defence' model.
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.
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.
The Group risk appetite is articulated by means of a series of
statements which outline the level and nature of risks that the Group is
able and willing to assume in pursuit of its strategic and business
objectives. These statements are further supported
by a suite of risk thresholds which ensure that the Group's risk profile
is monitored and controlled within defined parameters and appetite
breaches are subject to appropriate management and Board oversight. The
Risk Appetite Framework also helps to outline roles and responsibilities
pertaining to all aspects of the risk appetite, based on a defined
structure, processes, procedures and governance.
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 Group 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.
The Group risk appetite is subject to a full refresh annually across all
principal risk types and an additional mid-year review where any metrics
can be assessed and updated as appropriate.
The Group's principal risks are set out in the below heat map and in
detail, on pages 58 to 66.
(END) Dow Jones Newswires
March 31, 2020 13:00 ET (17:00 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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