REG - CYBG PLCClydesdale Bank PLC - Final Results <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 2
21/11/2017 07:06
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(1) Impairment losses on credit exposures relate solely to loans and advances to customers (refer to note 3.6 to the
financial statements) and exclude the credit risk adjustments on loans at fair value through profit or loss which are
incorporated in the movement in other assets and liabilities at fair value within non-interest income (refer to note 2.3 to
the financial statements).
Business and financial review
Measuring financial performance
Underlying adjustments to the statutory view of performance
In arriving at an underlying basis, the effects of certain items that do not promote an understanding of historical or
future trends of earnings or cash flows are removed; with management believing this presents a set of results that provide
a more reflective year-on-year comparison. These items are:
Item FY2017£m FY2016£m Description Reason for exclusion from the Group's current underlying performance
Conduct charges (58) (51) These are customer redress and associated costs arising from legacy products and past sales practices. These costs are historical in nature and are not indicative of the Group's current underlying performance.
Restructure expense (67) (45) Restructuring of the business is currently ongoing with costs including redundancy payments, property vacation costs and associated enablement costs. These costs are significant and are part of the Group's strategic objective in simplifying and streamlining operations and processes to enhance productivity. Consequently, this expense is not viewed as a normal ongoing operating cost to the Group.
Separation costs (8) (11) Costs incurred directly relating to the demerger from NAB. Specific costs relating to the demerger from NAB are historic and not indicative of the Group's current underlying performance.
Net gains on debt restructuring - 1 These are the net gains arising on the repurchase of subordinated debt from NAB at the time of the demerger. Losses or gains from one-off or infrequent transactions, such as those rising from debt restructures, are not indicative of the Group's current underlying performance.
Impairment of intangible assets - (45) This relates to the impairment of historic development costs and legacy software developed pre demerger. Specific costs (or gains) relating to the demerger from NAB are historic and not indicative of the Group's current underlying performance. This includes the impact on the impairment of legacy intangible assets where post demerger, the Group had greater flexibility in its digital direction.
Gain on disposal of VocaLink/Visa share 20 7 A one-off gain recognised on the disposal of the Group's VocaLink and Visa Europe Limited share. Losses or gains from one-off or infrequent transactions are not indicative of the Group's current underlying performance.
Gain on DB pension scheme reforms 88 - A one-off gain on the closure of the defined benefit pension scheme to future accrual for the majority of members. Losses or gains from one-off or infrequent transactions are not indicative of the Group's current underlying performance.
Responsibility statement
Responsibility Statement of the Directors
in respect of the Annual Report and Accounts
The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for
the year ending
30 September 2017. Certain parts thereof are not included within this announcement.
We confirm to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and
fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in
the consolidation taken as a whole; and
· the business and financial review includes a fair review of the development and performance of the business and the
position of the Company and the Group, together with a description of the principal risks and uncertainties that they
face.
The Directors consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group's position and performance, business model and strategy.
This responsibility statement was approved by the board of directors on 20 November 2017 and is signed on its behalf by:
David Duffy
Chief Executive Officer
20 November 2017
Financial statements
Consolidated income statement
for the year ended 30 September Note 2017 £m 2016 £m
Interest income and similar income 1,075 1,101
Interest expense and similar charges (231) (295)
Net interest income 2.2 844 806
Gains less losses on financial instruments at fair value 6 9
Other operating income 186 182
Non-interest income 2.3 192 191
Total operating income 1,036 997
Personnel expenses (166) (280)
Restructuring expenses (67) (45)
Depreciation and amortisation expense (87) (88)
Other operating and administrative expenses (400) (468)
Total operating and administrative expenses before impairment losses 2.4 (720) (881)
Operating profit before impairment losses 316 116
Impairment losses on credit exposures 3.6 (48) (39)
Profit on ordinary activities before tax 268 77
Tax expense 2.5 (86) (241)
Profit/(loss) for the year 182 (164)
Profit/(loss) attributable to ordinary shareholders 146 (206)
Profit attributable to other equity holders 36 42
Profit/(loss) for the year attributable to equity holders 182 (164)
Basic earnings/(loss) per share (pence) 2.6 17.3 (22.5)
Diluted earnings/(loss) per share (pence) 2.6 17.2 (22.5)
All material items dealt with in arriving at the profit before tax for the above years relate to continuing activities.
The notes on pages 23 to 72 form an integral part of these financial statements.
Financial statements
Consolidated statement of comprehensive income
for the year ended 30 September Note 2017 £m 2016 £m
Profit/(loss) for the year 182 (164)
Items that may be reclassified to the income statement
Change in cash flow hedge reserve
(Losses)/gains during the year (84) 105
Transfers to the income statement (4) (1)
Taxation thereon 21 (25)
(67) 79
Change in available for sale reserve
(Losses)/gains during the year (7) 29
Transfers to the income statement (20) (8)
Taxation thereon 7 (6)
(20) 15
Total items that may be reclassified to the income statement (87) 94
Items that will not be reclassified to the income statement
Remeasurement of defined benefit pension plans 3.16 154 (179)
Taxation thereon (35) 43
Total items that will not be reclassified to the income statement 119 (136)
Other comprehensive income/(losses), net of tax 32 (42)
Total comprehensive income/(losses) for the year, net of tax 214 (206)
Total comprehensive income/(losses) attributable to ordinary shareholders 178 (248)
Total comprehensive income attributable to other equity holders 36 42
Total comprehensive income/(losses) attributable to equity holders 214 (206)
The notes on pages 23 to 72 form an integral part of these financial statements.
Financial statements
Consolidated balance sheet
as at 30 September Note 2017 £m 2016 £m
Assets
Cash and balances with central banks 3.1 6,937 5,955
Due from other banks 1,174 952
Financial assets available for sale 3.2 2,076 1,731
Other financial assets at fair value 3.3 477 750
Derivative financial instruments 3.4 282 585
Loans and advances to customers 3.5 31,293 29,202
Due from customers on acceptances 4 4
Current tax assets - 2
Property, plant and equipment 3.8 86 99
Investment properties 3.9 14 22
Intangible assets 3.10 339 256
Deferred tax assets 3.11 154 183
Defined benefit pension assets 3.16 207 -
Other assets 188 188
Total assets 43,231 39,929
Liabilities
Due to other banks 3.12 3,817 1,309
Other financial liabilities at fair value 3.3 26 48
Derivative financial instruments 3.4 376 598
Due to customers 3.13 27,718 27,090
Liabilities on acceptances 4 4
Provisions for liabilities and charges 3.14 554 852
Debt securities in issue 3.15 4,785 4,501
Retirement benefit obligations 3.16 3 79
Deferred tax liabilities 3.11 75 27
Other liabilities 3.17 2,471 2,210
Total liabilities 39,829 36,718
Equity
Share capital 4.1 88 88
Other equity instruments 4.1 450 450
Capital reorganisation reserve 4.1 (839) (839)
Merger reserve 4.1 633 633
Other reserves 4.1 15 100
Retained earnings 3,055 2,779
Total equity 3,402 3,211
Total liabilities and equity 43,231 39,929
The notes on pages 23 to 72 form an integral part of these financial statements.
These financial statements were approved by the Board of Directors on 20 November 2017 and were signed on its behalf by:
David Duffy Ian Smith
Chief Executive Officer Chief Financial Officer
CYBG PLC, Registered number: 09595911
Financial statements
Consolidated statement of changes in equity
Note Sharecapital £m Sharepremiumaccount £m Capitalreorganisationreserve £m Mergerreserve £m Otherequityinstruments £m Other reserves Retainedearnings £m Totalequity £m
Equity basedcompensationreserve £m Assetrevaluationreserve £m Availablefor salereserve £m Cash flowhedgereserve £m
As at 223 670 - - 450 3 2 12 (13) 2,096 3,443
1 October 2015
Loss for the year - - - - - - - - - (164) (164)
Other comprehensive income/(losses), net - - - - - - - 15 79 (136) (42)
of tax
Total comprehensive income/(losses) for - - - - - - - 15 79 (300) (206)
the year
AT1 distribution paid - - - - - - - - - (28) (28)
(net of tax)
Insertion of new parent company (223) (670) 893 - - - - - - - -
Share for share exchange 1,099 - (1,732) 633 - - - - - - -
Share capital reduction (1,011) - - - - - - - - 1,011 -
Capital note repurchase (net of tax) - - - - (450) - - - - (5) (455)
Capital note issued - - - - 450 - - - - - 450
Transfer from equity based compensation reserve - - - - - (4) - - - 4 -
Transfer from asset revaluation reserve - - - - - - (1) - - 1 -
Equity based compensation expensed - - - - - 5 - - - - 5
Equity based compensation settled - - - - - 2 - - - - 2
As at 4.1 88 - (839) 633 450 6 1 27 66 2,779 3,211
30 September 2016
Profit for the year - - - - - - - - - 182 182
Other comprehensive (losses)/income, net - - - - - - - (20) (67) 119 32
of tax
Total comprehensive (losses)/income for - - - - - - - (20) (67) 301 214
the year
AT1 distribution paid - - - - - - - - - (29) (29)
(net of tax)
Transfer from equity based compensation reserve - - - - - (4) - - - 4 -
Equity based compensation expensed - - - - - 6 - - - - 6
As at 4.1 88 - (839) 633 450 8 1 7 (1) 3,055 3,402
30 September 2017
The notes on pages 23 to 72 form an integral part of these financial statements.
Financial statements
Consolidated statement of cash flows
for the year ended 30 September Note 2017 £m 2016 £m
Operating activities
Profit on ordinary activities before tax 268 77
Adjustments for:
Non-cash or non-operating items included in profit before tax 5.2 (728) (643)
Changes in operating assets 5.2 (1,857) (2,285)
Changes in operating liabilities 5.2 919 1,587
Interest received 1,123 1,101
Interest paid (258) (200)
Tax received/(paid) - Group relief 1 4
Net cash used in operating activities (532) (359)
Cash flows from investing activities
Interest received 11 11
Proceeds from sale or maturity of investments 20 101
Proceeds from sale of tangible fixed assets (1) 19 17
Purchase of tangible fixed assets (1) (21) (22)
Purchases of investments (492) (357)
Proceeds from sale of available for sale investments 60 56
Purchase and development of intangible assets (148) (99)
Net cash used in investing activities (551) (293)
Cash flows from financing activities
Interest received 3 1
Interest paid (90) (98)
Proceeds from other equity instruments issued - 450
Repurchase of other equity instruments - (457)
Repurchase of subordinated debt - (474)
Redemption and principal repayment on residential mortgage backed securities 3.7 (740) (1,029)
and covered bonds
Issuance of residential mortgage backed securities and covered bonds 3.7 750 750
Issuance of medium-term notes/subordinated debt 3.15 298 475
Amounts drawn under the TFS 1,900 -
Net decrease in amounts due from related entities - 786
Net decrease in amounts due to related entities - (106)
Equity based compensation - 2
AT1 distributions (36) (35)
Net cash provided by financing activities 2,085 265
Net increase/(decrease) in cash and cash equivalents 1,002 (387)
Cash and cash equivalents at the beginning of the year 5,950 6,337
Cash and cash equivalents at the end of the year (2) 5.2 6,952 5,950
(1) Tangible fixed assets include property, plant and equipment, investment properties and property inventory.
(2) Cash and cash equivalents is cash and balances with central banks less mandatory deposits plus cash equivalents within
other assets, less due to other banks, due to related entities and other liabilities.
The notes on pages 23 to 72 form an integral part of these financial statements.
Financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation
OverviewThis section sets out the Group's accounting policies that relate to the consolidated financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. This section also shows new accounting standards, amendments and interpretations, relevant to the Group, and whether they are effective in 2017 or later years. We explain how these changes are expected to impact the financial position and performance of the Group.
1.1 General information
The Company is a public company limited by shares, incorporated in the United Kingdom under the Companies Act and
registered in England and Wales.
The consolidated financial statements comprise those of the Company and its controlled entities, together the 'Group'.
1.2 Basis of accounting
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and in accordance
with the provisions of the Companies Act 2006.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of land
and buildings, investment properties, financial assets available for sale and certain other financial assets and
liabilities at fair value through profit or loss. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
1.3 Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and
position, are set out in the Strategic report contained within the Group's Annual Report and Accounts. In addition, the
Risk report included within the Group's Annual Report and Accounts includes the Group's risk management objectives and the
Group's objectives, policies and processes for managing its capital.
In assessing the Group's going concern position as at 30 September 2017, the Directors have considered a number of factors,
including the current balance sheet position, the principal and emerging risks which could impact the performance of the
Group and the Group's strategic and financial plan which includes future projections of profitability, capital adequacy,
liquidity and funding. The assessment concluded that, for the foreseeable future, the Group has sufficient capital to
support its operations; has a funding and liquidity base which is strong, robust and well managed with future capacity; and
has expectations that performance will continue to improve as the Group's strategy is executed.
As a result of the assessment, the Directors have a reasonable expectation that the Company and the Group have adequate
resources to continue in operational existence for the foreseeable future and therefore believe that the Group is well
placed to manage its risks successfully in line with its business model and strategic aims. Accordingly, they continue to
adopt the going concern basis in preparing the consolidated financial statements.
1.4 Basis of consolidation
Controlled entities are all entities (including structured entities) to which the Company is exposed, or has rights, to
variable returns from its involvement with the entity and has the ability to affect those returns through its power over
the entity. An assessment of control is performed on an ongoing basis.
Controlled entities are consolidated from the date on which control is established by the Group until the date that control
ceases. The acquisition method of accounting is used to account for business combinations other than those under common
control. A non-controlling interest is recognised by the Group in respect of any portion of the total assets less total
liabilities of an acquired entity or entities that is not owned by the Group. Post-acquisition, income received and
expenses incurred by the entity or entities acquired are included in the consolidated income statement on a line by line
basis in accordance with the accounting policies set out herein. Balances and transactions between entities within the
Group and any unrealised gains and losses arising from those transactions are eliminated in full upon consolidation.
The consolidated financial statements have been prepared using uniform accounting policies.
Financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.5 Foreign currency
Functional and presentation currency
Items included in the financial statements of each of the Group's entities are measured using the currency of the primary
economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements are
presented in pounds sterling (GBP), which is also the Group's presentation currency, rounded to the nearest million pounds
sterling (£m) unless otherwise stated.
Transactions and balances
The Group records an asset, liability, expense or revenue arising from a transaction using the closing exchange rate
between the functional and foreign currency on the transaction date. At each subsequent reporting date, the Group
translates foreign currency monetary items at the closing rate. Foreign exchange differences arising on translation or
settlement of monetary items are recognised in the income statement during the year in which the gains or losses arise.
Foreign currency non-monetary items measured at historical cost are translated at the date of the transaction, with those
measured at fair value translated at the date when the fair value is determined. Foreign exchange differences are
recognised directly in equity for non-monetary items where any component of associated gains or losses is recognised
directly in equity. Foreign exchange differences arising from non-monetary items, whereby the associated gains or losses
are recognised in the income statement, are also recognised in the income statement.
1.6 Financial assets and liabilities
Recognition and derecognition
A financial asset or a financial liability is recognised on the balance sheet when the Group becomes party to the
contractual provisions of the instrument. Purchases and sales of financial assets classified within fair value through
profit or loss are recognised on trade date.
The Group derecognises a financial asset when the contractual cash flows from the asset expire or it transfers the right to
receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of
ownership are transferred. Financial liabilities are derecognised when the Group has discharged its obligation to the
contract, or the contract is cancelled or expires.
Offsetting
This can only occur, and the net amount be presented on the balance sheet, when the Group currently has a legally
enforceable right to set off the recognised amounts and intends either to settle on a net basis, or to realise the asset
and settle the liability simultaneously.
1.7 Critical accounting estimates and judgements
The preparation of financial statements requires the use of certain critical accounting estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent
liabilities. Assumptions made at each balance sheet date are based on best estimates at that date. Although the Group has
internal control systems in place to ensure that estimates can be reliably measured, actual amounts may differ from those
estimates. The Group considers the most significant use of accounting estimates and judgements relate to the following
areas:
· financial assets and liabilities at fair value through profit or loss (note 3.3);
· impairment provisions on credit exposures (note 3.6);
· deferred tax (note 3.11);
· PPI redress provision and other conduct related matters (note 3.14); and
· retirement benefit obligations (note 3.16).
Financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.8 New accounting standards and interpretations
The Group has adopted the following International Accounting Standards Board (IASB) pronouncements in the current financial
year. Except where otherwise stated, these did not have a material impact on the Group's consolidated financial
statements:
· amendments to IAS 16 and IAS 38: 'Clarification of Acceptable Methods of Depreciation and Amortisation', issued May
2014 and effective for financial years beginning on or after 1 January 2016. IAS 16 and IAS 38 both establish the principle
for the basis of depreciation and amortisation being the expected pattern of consumption of the future economic benefits of
an asset. This amendment provides clarification that the use of certain revenue based methods to calculate depreciation is
not appropriate.
· 'Annual Improvements to IFRS Standards 2012-2014 Cycle', issued September 2014 and effective for financial years
beginning on or after 1 January 2016. The IASB has made amendments to the following standards that are relevant to the
Group: IFRS 5: 'Non-current Assets Held for Sale and Discontinued Operations'; IFRS 7: 'Financial Instruments:
Disclosures'; IAS 19: 'Employee Benefits'; and IAS 34: 'Interim Financial Reporting'.
· amendments to IAS 1: 'Disclosure Initiative', issued December 2014 and effective for financial years beginning on or
after 1 January 2016. This includes a narrow scope amendment providing clarification to existing IAS 1: 'Presentation of
Financial Statements' requirements.
New accounting standards and interpretations not yet adopted
IFRS 9 'Financial Instruments' (issued July 2014) and IFRS 15 'Revenue from Contracts with Customers' (issued September
2015) are both effective for financial years beginning on or after 1 January 2018 and have been endorsed by the EU. IFRS 16
'Leases' was issued in January 2016 and is effective for financial years beginning on or after 1 January 2019 and has been
endorsed by the EU. Separate updates on the Group's implementation of these new standards can be found at the end of this
section.
There are a number of other standards and amendments that are either not available for adoption in the EU or are otherwise
not mandatory at 30 September 2017 and have not been applied by the Group in preparing these financial statements. The
pronouncements, while relevant to the Group, are not anticipated to have a material impact and include:
· amendments to IAS 12: 'Recognition of Deferred Tax Assets for Unrealised Losses' (1), issued in January 2016 and
effective for financial years beginning on or after 1 January 2017. The amendments clarify the requirements on the
recognition of deferred tax assets for unrealised losses;
· amendments to IAS 7: 'Disclosure initiative' (1), issued in January 2016 and effective for financial years beginning
on or after 1 January 2017. The amendments to IAS 7: 'Statement of Cash Flows' require disclosures that enable users of the
financial statements to evaluate changes in liabilities arising from an entity's financing activities;
· amendments to IFRS 2: 'Classification and Measurement of Share-based Payment Transactions' (2), issued in June 2016
and effective for financial years beginning on or after 1 January 2017. The amendments provide guidance on the effects of
vesting and non-vesting conditions on the measurement of cash-settled share-based payments; classification of share-based
payments with a net settlement feature for withholding tax obligations; and accounting for modifications to a share-based
payment that change the classification from cash-settled to equity-settled;
· amendments to IFRS 9: 'Prepayment Features with Negative Compensation' (2), issued in October 2017 and effective for
financial years beginning on or after 1 January 2019. The amendments allow companies to measure particular prepayable
financial assets with so-called negative compensation at amortised cost or at fair value through other comprehensive income
if a specified condition is met, instead of at fair value through profit or loss;
· 'Annual Improvements to IFRS Standards 2014-2016 Cycle' (2), issued December 2016 and effective for financial years
beginning on or after 1 January 2017 or 1 January 2018. The IASB has made amendments to the following standards: IFRS 12:
'Disclosure of Interests in Other Entities' (clarification of the scope of the standard - effective 1 January 2017), and
IAS 28: 'Investments in Associates and Joint Ventures' (measuring an associate or joint venture at fair value - effective 1
January 2018);
· IFRIC interpretation 22: 'Foreign Currency Transactions and Advance Consideration' (2), issued December 2016 and
effective for financial years beginning on or after 1 January 2018. The new interpretation provides requirements on which
exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when payment is made or
received in advance; and
· IFRIC interpretation 23: 'Uncertainty over Income Tax Treatments' (2), issued June 2017 and effective for financial
years beginning on or after 1 January 2019. The new interpretation applies to any situation in which there is uncertainty
as to whether an income tax treatment is acceptable under tax law and is not limited to actual ongoing disputes.
(1) Endorsed by the EU
(2) Not yet endorsed by the EU
Financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
1.8 New accounting standards and interpretations continued
Updates on the implementation of IFRS 9: 'Financial Instruments', IFRS 15: 'Revenue from Contracts with Customers'
and IFRS 16: 'Leases'
The Group continues to assess the requirements of these Standards as it seeks to ensure that the methodology and approach
to the key impacts and challenges of the Standards result in a high quality implementation, while continuing to recognise
emerging and evolving industry practice.
IFRS 9
CYBG implementation strategy and approach
IFRS 9 was endorsed for adoption in the EU in November 2016 and will be adopted by the Group with effect from 1 October
2018.
Classification and measurement
IFRS 9 changes the classification of financial assets by reducing the number of categories to just three (amortised cost,
fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL)). The final
classification is based on a combination of the Group's business model and the contractual cash flow characteristics of the
instruments. The option to designate a financial asset at FVTPL in IAS 39 is largely retained in IFRS 9, with IFRS 9 also
affording a further option to designate certain equity instruments at FVOCI instead of accounting for these as FVTPL. The
Group has undertaken an assessment to determine the potential impact of these changes. These are unlikely to result in
significant changes to existing measurement bases; however, the final impact will be dependent on the circumstances
prevailing on 1 October 2018.
Impairment overview
The Group's IFRS 9 implementation programme is progressing as planned with models built and an end-to-end parallel run
exercise to commence during the year beginning 1 October 2017. As expected, there will be a period of refinement required
where the series of complex decisions, judgements and assumptions made, particularly in relation to the Group's model
methodology, that will be reviewed, sufficiently tested and benchmarked. It is only after a period where the testing
environment has stabilised, that the results of the parallel run will provide an indication of the likely impact.
The Group's approach to the new expected credit loss (ECL) methodology in IFRS 9 will leverage, as far as possible, off the
model development work that has been undertaken to support the Group's IRB accreditation application. A lifetime ECL
calculation will be required for scenarios where the credit quality of a financial asset has been identified through the
Group's staging criteria as having significantly deteriorated since original recognition.
The Group's 12 month and lifetime ECL calculation will be based around a 'PD x EAD x LGD' formula:
Term Defined as To be IFRS 9 compliant
PD Probability of default (PD) is an estimate of the probability that a customer will default Forward-looking 12 month and lifetime PD, which needs to be capable of reflecting changes in the economic environment
EAD Exposure at default (EAD) is an estimate of the amount the customer will owe at the time of default Forward-looking and based on contractual limits with certain exceptions for revolving products (such as credit cards) that may contain both a drawn and undrawn element
LGD Loss given default (LGD) is an estimate of the loss that the Group will suffer if the customer defaults (incorporating any collateral held) Forward-looking with no prescribed floors
Financial statements
Notes to the consolidated financial statements
Section 1: Basis of preparation continued
There are a number of specific key elements to the IFRS 9 ECL calculation which require the Group to define and articulate
the direction it will take in meeting these - that is ensuring that the ECL calculation is forward-looking and encompasses
a probability weighted multiple scenario approach.
The Group currently adopts economic scenario methodology for capital planning and credit stress testing purposes and views
the introduction of the IFRS 9 requirements as an extension to these established processes. The Group will align the
specific requirements of IFRS 9 to these to ensure a consistent approach is adopted.
The exact nature and number of the economic scenarios (including the necessary economic inputs required for the scenarios),
along with their relevant probability weightings, were finalised following experienced credit judgement, discussion and
agreement with stakeholders. This will be subject to refinement as the parallel run period progresses.
The adoption of IFRS 9 may result in an increase in the Group's balance sheet provisions for credit losses and may
therefore have a negative impact on the Group's regulatory capital position.
Hedge accounting
Macro hedge accounting is being considered in a separate IASB project. There is an option available to retain the existing
IAS 39 hedge accounting requirements until the completion of the macro hedge accounting project. The Group proposes to
continue applying the hedge accounting requirements of IAS 39 in accordance with this option.
Regulatory capital
The Group notes the pronouncements regarding transitional relief for the likely regulatory capital impact of adopting IFRS
9 from the Basel Committee and also the European Parliament and Commission and will continue to monitor the regulatory
landscape over the year ahead in the lead up to the Group's adoption of IFRS 9 for final details on the regulatory capital
treatment of the change to an ECL methodology.
The Group will consider the option of spreading the effect of the change to an ECL methodology for regulatory capital
purposes should this feature in the finalised version of the rules.
IFRS 15
IFRS 15 was issued in May 2014 and endorsed for use in the EU in September 2016. It is effective for financial years
beginning on or after 1 January 2018, and it will be adopted by the Group with effect from 1 October 2018.
The Standard is unlikely to have a significant impact as the majority of the Group's income is generated from financial
instruments and is therefore not in scope of the Standard. For those revenues that are in scope (typically fees and other
commissions), the Group continues to assess the related performance obligations to identify any fees or other commissions
that may require a change in recognition. The Group continues to assess the new disclosure requirements of the Standard.
IFRS 16
IFRS 16 was issued in January 2016 and endorsed for use in the EU. It is effective for financial years beginning on or
after 1 January 2019.
The Group continues to work on and assess the new estimates and judgements required by the Standard and their implications.
Operating leases will be brought onto the Group balance sheet with an asset recognised for the contractual 'right of use'
and a liability recognised for the contractual payments. The Group expects this work to progress throughout the 2018
reporting period.
Financial statements
Notes to the consolidated financial statements
Section 2: Results for the year
2.1 Segment information
The Group's operating segments are operating units engaged in providing different products or services and whose operating
results and overall performance are regularly reviewed by the Group's Chief Operating Decision Maker, the Executive
Leadership Team.
The Group's business is organised into two principal operating segments: SME banking and Retail banking. In addition,
Central Functions consist of the Group's back office support functions.
SME banking
The Group's established regional SME franchise offers a full range of banking products and services to meet business
customers' banking needs across its small business, commercial, corporate and specialist and acquisition finance segments.
The Group's SME franchise comprises small businesses (which the Group defines as businesses with lending of up to £0.5m but
less than £2.0m in turnover) and commercial businesses (which the Group defines as businesses with lending of more than
£0.5m and greater than £2.0m in turnover).
Through its SME franchise, the Group offers a full range of lending products and services across a portfolio consisting of
term lending, overdrafts and working capital solutions:
· term lending: the Group offers a wide variety of term loans, both secured and unsecured, and offers customers a
range of repayment and interest rate options. The majority of the Group's business term lending is LIBOR based;
· overdrafts: business overdrafts are the primary type of revolving variable rate credit facility offered by the Group
to business customers;
· invoice finance: the Group advances funds against the customer's trade receivables;
· asset finance: these products provide a method of financing capital equipment purchases;
· international trade services: these products facilitate transactions between a buyer and seller located in different
countries. The Group offers import loans, export loans, documentary collections and currency guarantees, together with
letters of credit for securing trade; and
· business current accounts: the Group provides business customers day to day banking, current account facilities
(including debit cards, cheque books, regular statements, direct debits and standing orders), and online banking.
Retail banking
The Group has a comprehensive regional and national retail banking product proposition with a personal deposit portfolio
comprising personal current accounts (PCA), savings accounts and term deposits. The Group's Retail lending portfolio
comprises mortgages, personal loans, credit cards, overdrafts and introductions to insurance and investment products
through its branch network:
· PCA: the Group offers a full range of PCAs, including, for example, B, a newly launched digital proposition,
together with a packaged bank account and a basic bank account;
· savings accounts: the Group offers a variety of savings accounts that pay a variable rate of interest. It also
offers cash ISAs that provide depositors tax free returns;
· term deposits: offer a fixed interest rate for a fixed term;
· mortgages: the Group provides mortgage loans on a capital repayment basis, where the loan is required to be repaid
during its life, and on an interest-only basis, where the customer pays interest during the term of the mortgage loan with
the principal balance required to be repaid in full at maturity. The Group offers both owner occupied mortgage loans and
BTL loans;
· personal loans: the Group provides unsecured personal loans through its branch network and through its digital and
telephone distribution channels;
· credit cards: the Group currently offers four credit card products; Private MasterCard, Business MasterCard, Gold
MasterCard and B MasterCard; and
· overdrafts: the Group provides overdraft lending across a variety of PCA products, subject to the account holder's
status.
Financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
Geographical areas
The Group has no operations outside the UK and therefore no secondary geographical area information is presented.
Operating segments2017 SMEbanking £m Retailbanking £m Centralfunctions £m Other (1) £m Total £m
Net interest income 251 644 (51) - 844
Non-interest income 83 100 (11) 20 192
Operating income 334 744 (62) 20 1,036
Operating and administrative expenses (61) (97) (517) (45) (720)
Impairment losses on credit exposures(2) (33) (15) - - (48)
Segment operating profit/(loss) before tax 240 632 (579) (25) 268
Average interest earning assets 10,154(3) 20,577 6,966 - 37,697
Operating segments(4)2016 SMEbanking £m Retailbanking £m Centralfunctions £m Other (1) £m Total £m
Net interest income 242 627 (63) - 806
Non-interest income 87 100 (4) 8 191
Operating income 329 727 (67) 8 997
Operating and administrative expenses (70) (119) (540) (152) (881)
Impairment losses on credit exposures(2) (30) (9) - - (39)
Segment operating profit/(loss) before tax 229 599 (607) (144) 77
Average interest earning assets 10,404(3) 19,063 6,790 - 36,257
(1) 'Other' reflects underlying adjustments to the statutory view of performance and is therefore not recharged to the
Group's two principal operating segments, such as conduct related provisions and restructuring costs. For a breakdown of
the items included in this category, refer to 'Measuring financial performance - glossary'.
(2) The impairment losses on credit exposures of £15m (2016: £9m) for Retail banking includes losses on certain retail
products attributable to SME (private banking) customers.
(3) Average interest earning assets for SME banking include £2.9bn (2016: £3.3bn) of mortgages originated by private
banking.
(4) Comparative disclosures have been amended to conform with the current period's presentation.
Liabilities are managed on a centralised basis and therefore are not disclosed by segment.
Financial statements
Notes to the consolidated financial statements
Section 2: Results for the year continued
2.2 Net interest income
Accounting policyInterest income is reflected in the income statement using the effective interest method which discounts the estimated future cash payments or receipts over the expected life of the financial instrument to the net carrying amount of the financial asset or liability.When calculating the effective interest rate, cash flows are estimated considering all contractual terms of the financial instrument (e.g. prepayment, call and similar options) excluding future credit losses. The calculation
includes all fees and points paid or received that are an integral part of the effective interest rate such as transaction costs and all other premiums or discounts. Where it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments) are used.Loan origination and commitment fees are recognised within the
effective interest rate calculation. Non-utilisation of a commitment fee is recognised as revenue upon expiry of the agreed commitment period. Loan related administration and service fees are recognised as revenue over the period of service. Interest income and interest expense on hedged assets and liabilities and financial assets and liabilities designated as fair value through profit or loss are also recognised as part of net interest income. Where a trading derivative is economically hedging an interest
-bearing financial asset or liability designated at fair value through profit or loss, the interest income and expense attributable to the derivative is recognised within net interest income and not as part of the fair value movement of the trading derivative.
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