REG - CYBG PLCClydesdale Bank PLC - Final Results <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 4
21/11/2017 07:06
- Part 4: For the preceding part double click ID:nRSU0461Xc
Assets
Securitised mortgage loans 5,435 1,149 6,584
Other movements consist of exchange rate movements on currency denominated bonds and fair value hedge accounting
adjustments.
The following table sets out the net position of the fair value of financial assets relating to the securitisation
programmes where the counterparty to the associated liabilities has recourse only to the financial assets:
2017 £m 2016 £m
Fair value of transferred assets 6,074 5,417
Fair value of associated liabilities 3,262 3,233
2,812 2,184
There were no events during the year that resulted in any Group transferred financial assets being derecognised.
The Group has contractual and non-contractual arrangements which may require it to provide financial support as follows:
Securitisation programmes
The Group provides credit support to the structured entities via reserve funds, which are partly funded through
subordinated debt arrangements and by holding junior notes. Exposures totalled £47m in subordinated debt (2016: £20m) and
£856m in junior notes held (2016: £610m). The Group has a beneficial interest in the securitised mortgage portfolio held by
the structured entities of £711m (2016: £977m).
Furthermore, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the
programme criteria.
Looking forward through future reporting periods there are a number of date based options on the notes issued by the
structured entities which could be actioned by them as issuer. These could require the Group, as sponsor, to provide
additional liquidity support.
Covered bond programme
The nominal level of over-collateralisation was £681m (2016: £599m) of the outstanding covered bonds. From time to time the
obligations of the Group to provide over-collateralisation may increase due to the formal requirements of the programme.
Furthermore, the Group has an obligation to repurchase mortgage exposures if certain mortgage loans no longer meet the
programme criteria.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.8 Property, plant and equipment
Accounting policyThe Group's freehold and long-term leasehold land and buildings are carried at their fair value as determined by the Directors, taking account of advice received from independent valuers. Fair values are determined in accordance with guidance published by the Royal Institution of Chartered Surveyors, including adjustments to observable market inputs reflecting any specific characteristics of the land and buildings. Directors' valuations are performed annually in July, with the independent
valuations carried out on a three-year cycle on an open market basis. The valuations are classified in Level 3 of the fair value hierarchy as defined in note 3.18.All other items of property, plant and equipment are carried at cost, less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to acquisition of the asset. Impairment is assessed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. With the
exception of freehold land, all items of property, plant and equipment are depreciated or amortised using the straight line method, at rates appropriate to their estimated useful life to the Group. The annual rates of depreciation or amortisation are: Buildings 50 years Leases (leasehold improvements) the lower of the expected lease term or the asset's remaining useful life Fixtures and equipment
3-10 yearsResidual values and useful lives of assets are reviewed at each reporting date. Depreciation is recognised within depreciation expense in the income statement.
Freeholdland andbuildings £m Long-termleaseholdland andbuildings £m Buildingimprovements £m Fixturesandequipment £m Total £m
Cost or valuation
At 1 October 2015 10 3 171 105 289
Additions - - 15 7 22
Disposals (4) - (32) (12) (48)
At 30 September 2016 6 3 154 100 263
Additions - - 14 7 21
Disposals (1) - (25) (5) (31)
At 30 September 2017 5 3 143 102 253
Accumulated depreciation
At 1 October 2015 1 - 105 74 180
Charge for the year - - 15 10 25
Disposals - - (30) (11) (41)
At 30 September 2016 1 - 90 73 164
Charge for the year (note 2.4) - - 14 8 22
Disposals - - (16) (3) (19)
At 30 September 2017 1 - 88 78 167
Net book value
At 30 September 2017 4 3 55 24 86
At 30 September 2016 5 3 64 27 99
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
Valuations
A comparison of the carrying value between the revaluation basis and the historical cost basis, for freehold and long-term
leasehold land and buildings, is shown below:
2017 £m 2016 £m
Carrying value as included under the revaluation basis 7 8
Carrying value if the historical cost basis had been used 6 7
3.9 Investment properties
Accounting policyInvestment properties are measured at fair value and are revalued annually by the Directors. The valuations are based upon advice received from independent valuers and performed on an open market basis. Adjustments are made to observable market data for comparable properties for specific characteristics such as the nature, location or condition of the asset. Fair value movements are recognised in the income statement in the period in which they arise. Investment properties are classified in
Level 3 of the fair value hierarchy as defined in note 3.18.
2017 £m 2016 £m
At 1 October 22 32
Disposals (7) (10)
Revaluation (1) -
At 30 September 14 22
During the year 86% (2016: 97%) of the investment properties generated total rental income of £1m (2016: £1m) and incurred
operating and administrative expenses of £1m (2016: £1m). The operating and administrative expenses of the investment
properties that did not generate rental income were £Nil (2016: £Nil).
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.10 Intangible assets
Accounting policyCapitalised software costs are stated at cost, less amortisation and any provision for impairment.Identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense as incurred. Capitalised computer
software costs are amortised on a straight line basis over their expected useful lives, usually between three and 10 years. Impairment losses are recognised in the income statement as incurred.Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, which typically arises when the benefits associated with the software were substantially reduced from what had originally been anticipated or the
asset has been superseded by a subsequent investment. In such situations, an impairment loss is recognised for the amount by which the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of an asset is the higher of its fair value less costs of disposal or its value in use.Intangible assets which are fully amortised are reviewed annually to consider whether the assets remain in use.
Capitalised software costs
2017 £m 2016 £m
Cost
At 1 October 463 427
Additions 148 99
Write-off (22) (63)
At 30 September 589 463
Accumulated amortisation
At 1 October 207 162
Charge for the year (note 2.4) 65 63
Write-off (22) (63)
Impairment (note 2.4) - 45
At 30 September 250 207
Net book value at 30 September 339 256
£3m (2016: £13m) of the £148m (2016: £99m) software additions do not form part of internally generated software projects.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.11 Deferred tax
Accounting policyDeferred tax assets and liabilities are recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. A deferred tax asset is recognised for unused tax losses and unused tax credits only if it is probable that future taxable amounts will arise against which those temporary differences and losses may be utilised.Critical accounting estimates and judgementsThe Group has deferred tax assets of
£154m (2016: £183m); the reduction from the previous balance sheet date is due to the movement in the defined benefit pension scheme to a surplus and the utilisation of the capital allowance deferred tax asset. The Group has assessed the recoverability of these deferred tax assets at 30 September 2017 and considers it probable that sufficient future taxable profits will be available against which the underlying deductible temporary differences can be utilised over the corporate planning horizon. At 30
September 2017, the Group had an unrecognised deferred tax asset of £180m (2016: £202m) representing trading losses with a gross value of £1,058m (2016: £1,186m). Although there is no prescribed period after which losses expire, a deferred tax asset has not been recognised in respect of these losses as the Directors have insufficient certainty over their recoverability in the foreseeable future.
Movement in net deferred tax asset
2017 £m 2016 £m
At 1 October 156 379
Recognised in the income statement (note 2.5) (69) (232)
Recognised directly in equity (8) 9
At 30 September 79 156
The Group has recognised deferred tax in relation to the following items:
2017 £m 2016 £m
Deferred tax assets
Tax losses carried forward 28 35
Capital allowances 120 127
Cash flow hedge reserve 1 1
Transitional adjustment - available for sale reserve 3 -
Employee equity based compensation 2 2
Defined benefit pension scheme deficit - 18
154 183
Deferred tax liabilities
Defined benefit pension scheme surplus (72) -
Cash flow hedge reserve - (21)
Gains on unlisted available for sale investments (3) (6)
(75) (27)
Net deferred tax asset 79 156
The statutory rate of UK corporation tax is 19% from 1 April 2017 and as enacted in Finance Act 2016 will fall to 17% from
1 April 2020. In accordance with IAS 12, these rates are taken into account in assessing the value at which assets are
expected to be realised and liabilities settled.
Finance Bill (No. 2) 2017 contains draft legislation in respect of the Corporate Tax Loss Restriction and the Corporate
Interest Restriction which was due to apply from 1 April 2017. As the legislation was not substantively enacted at the
balance sheet date it has not been applied in the calculation of the tax position at 30 September 2017. Management expects
that given the Group's particular asset profile in respect of losses, application of the new rules would have resulted in
an immaterial increase in the deferred tax asset recognised on the balance sheet. This is expected given that the new rules
are designed to accelerate the payment of corporation tax.
The rate at which deferred tax is recognised in respect of the defined benefit pension scheme has changed due to the
closure of the Scheme to the majority of members (note 3.16). The surplus is accounted for as a potential refund to the
employer, rather than a reduction in future contributions. In accordance with tax legislation this 'authorised surplus
payment' is recognised as a deferred tax liability at 35%. There is an overall rate change in respect of the pension of
£37m with £30m charged in the income statement and £7m charged directly to equity.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.12 Due to other banks
Accounting policyRepurchase agreementsSecurities sold subject to repurchase agreements ('repos') are retained in their respective balance sheet categories. The associated liabilities are included in amounts due to other banks based upon the counterparties to the transactions.The difference between the sale and repurchase price of repos is treated as interest and accrued over the life of the agreements using the effective interest method.
2017 £m 2016 £m
Securities sold under agreements to repurchase 1,864 1,226
Transaction balances with other banks 21 23
Deposits from other banks 31 60
Secured loans 1,901 -
3,817 1,309
The underlying securities sold under agreements to repurchase have a carrying value of £2,660m (2016: £1,657m).
Secured loans comprise amounts drawn under the TFS.
3.13 Due to customers
2017 £m 2016 £m
Non-interest bearing demand deposits 2,548 2,160
Interest bearing demand deposits 19,130 19,328
Term deposits 5,957 5,454
Other wholesale deposits 18 12
27,653 26,954
Accrued interest payable 65 136
27,718 27,090
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.14 Provision for liabilities and charges
Accounting policyProvisions for liabilities and charges are recognised when a legal or constructive obligation exists as a result of past events, it is probable that an outflow of economic benefits will be necessary to settle the obligation, and the obligation can be reliably estimated. Provisions for liabilities and charges are not discounted to the present value of their expected net future cash flows except where the time value of money is considered material.Critical accounting estimates and
judgementsPPI redress provision and other conduct related mattersManagement has exercised significant judgement around the key assumptions that underpin the estimates and used estimation techniques to quantify them. Ongoing regulatory review and input, as well as rulings from the Financial Ombudsman Service over time, and the Group's internal reviews and assessments of customer complaints, will continue to impact upon the nature and extent of conduct related customer redress and associated costs for which
the Group may ultimately become liable in future periods. Significant judgement is required in determining the key assumptions used to estimate the quantum of the provision, including the level of future complaint volumes, uphold rates (how many claims are, or may be, upheld in the customer's favour), and redress costs (the average payment made to customers). Also factored into the estimate is the effect of the judgements required around the outcome of the remediation activity. The provision is therefore
subject to inherent uncertainties as a result of the subjective nature of the assumptions used in quantifying the overall estimated position at 30 September 2017, consequently, the provision calculated may be subject to change in future years if outcomes differ to those currently assumed. Sensitivity analysis indicating the impact of reasonably possible changes in key assumptions on the PPI provision is presented within this note.There are similar uncertainties and judgements for other conduct risk related
matters, however the level of liability is materially lower.
2017 £m 2016 £m
PPI redress provision
Opening balance 725 774
Charge to the income statement (note 2.4) 48 44
Charge reimbursed/reimbursable under Conduct Indemnity 446 406
Utilised (797) (499)
Closing balance 422 725
Customer redress and other provisions
Opening balance 101 214
Charge to the income statement (note 2.4) 10 8
Charge reimbursed/reimbursable under Conduct Indemnity 88 27
Utilised (90) (148)
Closing balance 109 101
Restructuring provision(1)
Opening balance 26 18
Charge to the income statement 58 39
Utilised (61) (31)
Closing balance 23 26
Total provisions for liabilities and charges 554 852
(1) Restructuring provision includes surplus lease space provision.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.14 Provision for liabilities and charges continued
PPI redress
In common with the wider UK retail banking sector, the Group continues to deal with complaints and redress issues arising
out of historic sales of PPI. During the year, the Group reassessed the level of provision that was considered appropriate
to meet current and future expectations in relation to the mis-selling of PPI policies and concluded that a further charge
of £494m was required incorporating the Group's estimate of the impact of PS17/3 issued on 2 March 2017 relating to a
proposed time bar for complaints in August 2019. It also incorporated a reassessment of the costs of processing cases and
the impact of experience adjustments. Only 9.7% of the charge impacts the Group's income statement (£48m) as a result of
the Capped Indemnity. The total provision raised to date in respect of PPI is £2,140m (2016: £1,646m), with £422m of this
remaining (2016: £725m) comprising £201m for customer initiated complaints and proactive customer contact (2016: £299m);
£80m for the remediation of complaints closed prior to August 2014 (2016: £257m); and £142m for costs of administering the
redress programme (2016: £169m).
To 30 September 2017, the Group has received 361,000 complaints (2016: 282,000) and has allowed for 73,000 further walk in
complaints. This reflects an expectation that the volume of walk in complaints will reduce compared to most recent
experience as the time bar approaches. Future complaint volumes could differ from the Group's assumption, which could
result in a further provision being required.
The Group implemented a comprehensive new PPI complaint handling process from August 2014 which involved making a number of
significant changes to the PPI operations which resulted in an increase in operational and administrative costs. As
reported previously, the Group is in the process of re-opening approximately 180,000 complaints and reviewing the original
decision reached in light of the new PPI complaint handling processes. As at 30 September 2017, this exercise is
approximately 83% complete.
In addition to the remediation activity described above, the Group has completed a past business review (PBR) of certain
PPI sales, to determine if there was actual or potential customer detriment in the sales process leading to a risk of
mis-sale and the potential for proactive redress. The review indicated a more favourable outcome than allowed for in the
assumptions underpinning the provision as at 30 September 2016.
The increase in provision has taken into account all of the above factors as well as a revision in the Group's expectation
of new customer initiated complaints in light of current experience with the overall provision based on a number of
assumptions derived from a combination of past experience, estimated future experience, industry comparison and the
exercise of judgement in the key areas identified. There remain risks and uncertainties in relation to these assumptions
and consequently in relation to the ultimate costs of redress and related costs, including: (i) the number of PPI claims
(and the extent to which this is influenced by the activity of claims management companies, the application of a time bar,
Plevin, and FCA advertising); (ii) the number of those claims that ultimately will be upheld; (iii) the amount that will be
paid in respect of those claims; (iv) any additional amounts that may need to be paid in respect to previously handled
claims; (v) the response rates to the proactive customer contact; and (vi) the costs of administering the remediation
programme.
As such, the factors discussed above mean there is a risk that existing provisions for PPI customer redress may not cover
all potential costs. In light of this, the eventual costs of PPI redress and complaint handling may therefore differ
materially from that estimated and further provision could be required.
The table below sets out the key assumptions and the effect on the provision at 30 September 2017 of future, potential,
changes in key assumptions:
Assumptions
Change inassumption Sensitivity (1)
Number of expected future customer initiated complaints (73,000 cases) +/-10% £22m
Uphold rates:
Future complaints +/-1% £3m
Pre August 2014 complaints review +/-1% £1m
Average redress costs(2) +/-1% £2m
(1) There are inter-dependencies between several of the key assumptions which add to the complexity of the judgements the
Group has to make. This means that no single factor is likely to move independently of others, however, the sensitivities
disclosed above assume all other assumptions remain unchanged. The sensitivities disclosed do not incorporate the impact,
if any, on the administrative cost element of the provision.
(2) Sensitivity to a change in average redress across customer initiated complaints, pre August 2014 complaints review and
PBR customer populations.
The number of complaints received is monitored against past experience and future expectations and the Group will continue
to reassess the adequacy of the provision for this matter and the assumptions underlying the provision calculation based
upon experience and other relevant factors as matters develop.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
Customer redress and other provisions
In addition to PPI redress set out above, provision for customer redress is held in those instances where the Group expects
to make payments to customers whether on an ex-gratia or compensatory basis. Provisions can arise as a result of legal or
regulatory action and can incorporate the costs of skilled persons, independent reviewers, and where appropriate other
elements of administration.
The Group has reassessed the level of provision considered necessary in light of the current and future expected claims for
all of these matters and concluded that no additional provisions are required to cover the expected tail of new complaints
received at this stage.
Other provisions also include amounts in respect of a number of other non-PPI conduct related matters, legal proceedings,
and claims arising in the ordinary course of the Group's business. Over the course of the year, the Group has raised
further provisions of £98m for these matters, but only 9.7% of the charge impacts the Group's income statement (£10m) as a
result of the Capped Indemnity. The ultimate cost to the Group of other customer redress matters is driven by a number of
factors relating to offers of redress, compensation, offers of alternative products, consequential loss claims and
administrative costs. The matters are at varying stages of their life cycle and in certain circumstances, usually early in
the life of a potential issue, elements of the potential exposure are contingent. These factors could result in the total
cost of review and redress varying materially from the Group's estimate. The final amount required to settle the Group's
potential liabilities in these matters is therefore uncertain and further provision could be required. During the year £Nil
(30 September 2016: £1m) was also recognised for provisions not related to customer redress/conduct risk.
Conduct Indemnity Deed
The Group's economic exposure to the impact of historic conduct related liabilities is mitigated by a Capped Indemnity from
NAB. The Company and NAB have an agreement under which NAB has provided the Company with a Capped Indemnity to meet the
costs of dealing with conduct matters related to products sold in the period prior to the date of the Group's demerger from
NAB (the Conduct Indemnity Deed). The legacy conduct matters covered by the Capped Indemnity are referred to as Relevant
Conduct Matters. The Capped Indemnity provides the Group with economic protection against certain costs and liabilities
(including financial penalties imposed by a regulator) resulting from conduct issues relating to:
a) PPI, standalone interest rate hedging products, voluntary scope tailored business loans and fixed rate tailored business
loans; and
b) other conduct matters, subject to certain limitations and minimum financial thresholds.
Amounts payable under the Capped Indemnity include, subject to certain limitations, payments to customers to satisfy,
settle or discharge a Relevant Conduct Matter and the direct costs and expenses of satisfying, settling, discharging or
administering such Relevant Conduct Matter.
It has been agreed that NAB will meet 90.3% of Qualifying Conduct Costs claimed by the Company, up to the amount of the
Capped Indemnity.
Claims under the Capped Indemnity are recognised in the consolidated income statement simultaneously with the charge for
Relevant Conduct Matters. The conduct expense and associated reimbursement income are presented net within Other operating
and administrative expenses. A reimbursement receivable is recognised on the consolidated balance sheet within Due from
other banks; this receivable is periodically settled by NAB. The reimbursement receivable is not offset against the
provision amount on the Group's consolidated balance sheet. The provision expense and reimbursement income are disclosed
above.
No reimbursement income or receivable is recognised on the consolidated balance sheet in relation to contingent liabilities
for Relevant Conduct Matters. Any possible future reimbursement income linked to contingent liabilities in respect of
Relevant Conduct Matters is not disclosed as a contingent asset as the amounts cannot be reliably estimated and are not
virtually certain to be received.
To the extent that it is no longer probable that provisions for a Relevant Conduct Matter previously raised will be
required to settle conduct obligations and a provision for a Relevant Conduct Matter is released as unutilised, the related
Capped Indemnity amounts received will become repayable to NAB.
Should the Qualifying Conduct costs exceed the Capped Indemnity, any excess cost will be borne by the Group.
To the extent that tax relief is expected in relation to provisions for which reimbursement income is applicable, amounts
may become repayable to NAB. In the consolidated financial statements, deferred tax assets are only recognised in respect
of the loss share proportion (9.7%) of unused tax losses on Relevant Conduct Matters, on the basis that the Group does not
obtain the economic benefit of the future tax relief which is repayable to NAB.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.14 Provision for liabilities and charges continued
The utilisation and undrawn balance of the Capped Indemnity is set out below:
Conductprotection £m
Conduct protection provided by NAB 1,700
Capital injected into CYBI prior to demerger (1) (120)
Drawn in the period to 30 September 2016(2) (898)
Undrawn Conduct Indemnity as at 30 September 2016 682
Drawn in the year to 30 September 2017 (171)
Amount to be drawn relating to the year to 30 September 2017 (363)
Undrawn balance as at 30 September 2017 148
(1) £120m of the £670m of capital injected in CYBI on 24 September 2015 related to the Conduct Indemnity Deed.
(2) £465m of the £898m represents the pre-covered provision amount.
Duration and termination
The indemnity protection provided by NAB to the Company in respect of Relevant Conduct Matters under the Capped Indemnity
is perpetual in nature, except in the following circumstances:
(a) it is fully utilised by the Group; or
(b) in the event that, at any time:
(i) the PRA determines that NAB's remaining exposure under the Capped Indemnity; or
(ii) the Unutilised Indemnity Amount,
is £100m or less, NAB will have the right (with the approval of the PRA (at its sole discretion)) to terminate the Capped
Indemnity by subscribing for shares (at a price equivalent to the prevailing five-day average market price for the shares)
in an amount equal to the Unutilised Indemnity Amount, provided that the maximum value of the shares to be subscribed for
does not exceed a value equal to 9.9% of the issued share capital of the Group (on an undiluted basis) at such time (a
'£100m Termination').
(c) NAB and the Group may also agree arrangements to terminate or replace the Capped Indemnity with the consent
of the PRA. In particular, NAB and the Group have agreed that they will, on the fifth anniversary of the demerger (and, if
relevant, each subsequent anniversary of the demerger), seek to agree arrangements to terminate the Capped Indemnity. If
any such arrangements are agreed between NAB and the Group, they will be required to obtain the approval of the PRA (at its
sole discretion) before commencing the implementation of such arrangements. In relation to proposals made by NAB to the
Group in connection with such termination of the Capped Indemnity, the Group cannot unreasonably withhold its agreement to
the Capped Indemnity being replaced by a payment equal to the Unutilised Indemnity Amount to be applied (in whole or in
part) in subscribing for shares (at a price equivalent to the prevailing five-day average market price for the shares),
provided that the maximum value of the shares to be subscribed for pursuant to such proposal would not exceed £200m or if
lower, a value equal to 9.9% of the issued share capital of the Group (on an undiluted basis) at such time (a 'Post-5 Year
Equity Subscription Termination').
If £100m Termination or Post-5 Year Equity Subscription Termination occurs, the Group will not be entitled to make any
further claims under the Capped Indemnity, but will be entitled to retain in a designated account for a period of three
years following such termination, any Unutilised Covered Amount and any amount to be withdrawn from the designated account
in respect of conduct costs that fall within the scope of the Capped Indemnity which have been incurred and paid by the
Group prior to such termination. The Company will be required to return to NAB any other amounts in a designated account
and to release to NAB all amounts remaining in the collateral account. Following the expiry of such three-year period, the
Group will be required to repay all remaining amounts in a designated account net of any amount to be withdrawn from a
designated account in respect of conduct costs that fall within the scope of the Capped Indemnity which have been incurred
and paid by Group prior to such anniversary.
Restructuring provision
Restructuring of the business is currently ongoing and a provision is held to cover redundancy payments, property vacation
costs and associated enablement costs. During the year £67m (2016: £45m) was charged to the income statement, of which £9m
(2016: £6m) was charged directly to the income statement and £58m (2016: £39m) was provided for in accordance with the
requirements of IAS 37. £61m (2016: £31m) of the total provision was utilised in the year.
Included within the restructuring provision is an amount for committed rental expense on surplus lease space consistent
with the expected exposure on individual leases where the property is unoccupied. This element of the provision will be
utilised over the remaining life of the leases or until the leases are assigned, and is measured at present values by
discounting anticipated future cash flows.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.15 Debt securities in issue
Accounting policyDebt securities comprise short- and long-term debt issued by the Group including commercial paper, medium-term notes, term loans, covered bonds and residential mortgage backed securities (RMBS). Debt securities are initially recognised at fair value, being the issue proceeds, net of transaction costs incurred. These instruments are subsequently measured at amortised cost using the effective interest method resulting in premiums, discounts and associated issue costs being recognised in the
income statement over the life of the instrument.
The breakdown of debt securities in issue is shown below:
Medium-term notes Subordinated debt Securitisation Covered bonds 2017Total £m 2016Total £m
Amortised cost 297 476 3,242 698 4,713 4,383
Fair value hedge adjustments - - - 50 50 99
Total debt securities 297 476 3,242 748 4,763 4,482
Accrued interest payable 3 3 6 10 22 19
300 479 3,248 758 4,785 4,501
There were no new issuances of covered bonds during the year. The following new issuances of securitised debt occurred:
· 5 July 2017 - GBP 350m Lanark 2017-1 1A.
· 5 July 2017 - GBP 400m Lanark 2017-1 2A.
The following securitised debt redemptions occurred during the year in line with the scheduled programme terms:
· 22 August 2017 - EUR 300m Lanark 2014-1 1A.
On 22 June 2017, the Group issued a £300m 8-year, callable, 3.125% fixed to floating medium term note with a final maturity
of 22 June 2025.
Medium-term notes 2017 £m 2016 £m
8-year, 3.125% fixed to floating rate callable senior notes due 2025 297 -
Accrued interest payable 3 -
Total medium-term notes 300 -
Subordinated debt 2017 £m 2016 £m
10-year, non-call five years, with a final maturity of 9 February 2026 - fixed 5% 476 477
Accrued interest payable 3 3
Total subordinated debt 479 480
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.15 Debt securities in issue continued
Details of the terms and conditions of the notes issued under the securitisation and covered bond programmes as at 30
September 2017 were as follows:
Issue date Currency Carrying value £m Coupon rate Call date
Class A Lanark RMBS
27 July 2012 GBP 288 3M GBP LIBOR + 1.63% 22 November 2017
20 March 2014 GBP 265 3M GBP LIBOR + 0.50% 22 November 2018
11 December 2014 EUR 368 3M EURIBOR + 0.40% 22 August 2018
11 December 2014 GBP 274 3M GBP LIBOR + 0.60% 22 February 2020
6 August 2015 GBP 120 3M GBP LIBOR + 0.50% 22 August 2018
6 August 2015 EUR 247 3M EURIBOR + 0.45% 22 May 2021
4 August 2016 GBP 606 3M GBP LIBOR + 1.00% 22 February 2019
5 July 2017 GBP 349 3M GBP LIBOR + 0.42% 22 November 2020
5 July 2017 GBP 399 3M GBP LIBOR + 0.55% 22 August 2022
Class A Lannraig RMBS
30 September 2011 GBP 326 3M GBP LIBOR + 2.20% 19 November 2017
3,242
Covered bonds
31 May 2012 GBP 748 4.63% 8 June 2026
Total securitised notes and covered bonds (note 3.7) 3,990
3.16 Retirement benefit obligations
Accounting policyThe Group makes contributions to both defined benefit and defined contribution pension schemes which entitle employees to benefits on retirement or disability. Defined contribution pension schemeThe Group recognises the obligation for contributions to the scheme as an expense in the income statement as incurred. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payment is available.Defined benefit pension schemeA liability or
asset in respect of the defined benefit scheme is recognised on the balance sheet and is measured as the present value of the defined benefit obligation less the fair value of the defined benefit scheme assets at the reporting date. The present value of the defined benefit obligation for the scheme is discounted by high quality corporate bond rates that have maturity dates approximating to the terms of the Group's defined benefit obligation. Surpluses are only recognised to the extent that they are
recoverable through reduced contributions in the future or through refunds from the scheme. In assessing whether a surplus is recoverable, the Group considers its current right to obtain a refund or a reduction in future contributions and does not anticipate any future acts by other parties that could change the amount of the surplus that may be ultimately recovered.Pension expense attributable to the Group's defined benefit scheme comprises current service cost, net interest on the net defined benefit
obligation/asset, past service cost resulting from a scheme amendment or curtailment, gains or losses on settlement and administrative costs incurred. Where actuarial remeasurements arise, the Group recognises such amounts directly in equity through the statement of comprehensive income in the period in which they occur. Actuarial remeasurements arise from experience adjustments (the effects of differences between previous actuarial assumptions and what has actually occurred) and changes in actuarial
assumptions.
The Group operates both defined benefit and defined contribution arrangements. The Group's principal trading subsidiary,
Clydesdale Bank PLC, is the sponsoring employer in one funded defined benefit pension scheme, the Yorkshire and Clydesdale
Bank Pension Scheme ('the Scheme'). The Scheme was established under trust on 30 September 2009 as a result of the merger
of the Clydesdale Bank Pension Scheme and the Yorkshire Bank Pension Fund. The assets of the Scheme are held in a trustee
administered fund, with the Trustee responsible for the operation and governance of the Scheme, including making decisions
regarding the Scheme's funding and investment strategy.
The Scheme is subject to the funding legislation outlined in the Pensions Act 2004 which came into force on 30 December
2005. This, together with documents issued by the Pensions Regulator, sets out the framework for funding defined benefit
occupational pension plans in the UK.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
The Group also provides post-retirement health care under a defined benefit scheme for pensioners and their dependant
relatives for which provision has been made on a basis consistent with the methodology applied to the defined benefit
pension scheme. This is a closed scheme and the provision will be utilised over the life of the remaining scheme members.
The following table provides a summary of the present value of the defined benefit obligation and fair value of plan assets
for the Scheme:
2017 £m 2016 £m
Active members' defined benefit obligation(1) (807) (1,264)
Deferred members' defined benefit obligation (1,549) (1,776)
Pensioner and dependant members' defined benefit obligation (1,618) (1,497)
Total defined benefit obligation (3,974) (4,537)
Fair value of Scheme assets 4,181 4,462
Net defined benefit pension asset/(liability) 207 (75)
Post-retirement medical benefits obligations (3) (4)
(1) Active members include current employees who became deferred members on 1 August 2017 as part of the Scheme closure
exercise.
The Group has implemented a number of reforms to the Scheme to manage the liability. It closed the Scheme to new members in
2004 and since April 2006 has determined benefits accruing on a career average revalued earnings basis. On 1 August 2017,
the Scheme was closed to future benefit accrual for the majority of current employees, with affected employees' future
pension benefits being provided through the existing defined contribution scheme, 'Total Pension'. The Total Pension income
statement charge for the year is shown in note 2.4. The closure of the Scheme for the majority of current employees has
resulted in a reduction in the defined benefit obligation, recognised as a past service credit in the year.
During the year, Clydesdale Bank PLC reached agreement with the Trustee on the Scheme funding valuation at 30 September
2016, with a calculated deficit of £290m. In the recovery plan dated 31 July 2017 the Group agreed to contribute £50m per
annum until 31 March 2022 and £55m in the year to 31 March 2023 to eliminate this deficit.
Reconciliation of the net defined benefit pension asset/(liability)
2017 £m 2016 £m
Opening net defined benefit pension scheme (liability)/asset (75) 52
Service credit/(cost) 54 (31)
Interest on net defined benefit (liability)/asset (1) 3
Remeasurement effects recognised in SOCI 154 (179)
Employer contributions 69 84
Administrative expenses (7) (4)
Curtailments and settlements 13 -
Closing fair value of net defined benefit pension scheme asset/(liability) 207 (75)
Reconciliation of the defined benefit pension scheme assets
2017 £m 2016 £m
Opening fair value of defined benefit pension scheme assets 4,462 3,565
Interest income on Scheme assets at discount rate 104 135
Return on Scheme assets (less)/greater than discount rate (195) 791
Employer contributions (note 5.3) 69 84
Benefits paid (102) (90)
Transfer payments (150) (19)
Administrative costs paid (7) (4)
Closing fair value of defined benefit pension scheme assets 4,181 4,462
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
3.16 Retirement benefit obligations continued
Reconciliation of the defined benefit pension scheme obligations
2017 £m 2016 £m
Opening defined benefit pension scheme obligations (4,537) (3,513)
Current service cost (26) (27)
Past service credit/(cost) 80 (4)
Interest expense on the defined benefit obligation (105) (132)
Actuarial gain - experience adjustments 76 51
Actuarial gain - demographic assumptions 88 -
Actuarial gain/(loss) - financial assumptions 185 (1,021)
Benefits paid from Scheme assets 102 90
Transfer payments 150 19
Curtailments and settlements 13 -
Closing defined benefit pension scheme obligations (3,974) (4,537)
The major categories of plan assets for the Scheme, stated at fair value, are as follows:
2017 £m 2016 £m
Quoted
Equities 804 784
Government bonds 1,495 1,640
Global sovereign bonds 33 38
Corporate bonds 829 968
Alternative credit 97 -
Infrastructure 272 254
Secure income alternatives 209 124
Derivatives(1) 169 440
Other 4 6
Cash 124 93
Unquoted
Property 145 115
Fair value of defined benefit pension scheme assets 4,181 4,462
(1) Derivative financial instruments are used to modify the profile of the assets of the Scheme to better match the
Scheme's liabilities. Derivative holdings may lead to increased or decreased exposures to the physical asset categories
disclosed above.
The Scheme is not invested in any of the Group's own financial instruments.
Through its defined benefit pension plan and post-employment medical plan, the Group is exposed to a number of risks. The
main risk to the Group is that additional contributions are required if the Scheme's assets are not sufficient to pay for
the benefits (which will be influenced mainly by inflation and the longevity of members). The level of asset returns will
be a key factor in the overall investment return. The investment portfolio is subject also to a range of risks typical of
the assets held, in particular equity risk, credit risk on bonds and exposure to the property market.
The Trustee has implemented an investment structure (including physical assets and derivatives) that seeks to reduce the
Scheme's exposure to inflation and interest rate risks. The current hedge ratio is around 60% of liabilities when measured
on a self-sufficiency basis. This strategy reflects the Scheme's liability profile and the Trustee's and the Group's
attitude to risk. The Trustee monitors the investment objectives and asset allocation policy on a regular basis.
Financial statements
Notes to the consolidated financial statements
Section 3: Assets and liabilities continued
Amounts recognised in the income statement
2017 £m 2016 £m
Current service cost 26 27
Past service cost 8 4
Past service credit on closure of Scheme (88) -
Curtailment and settlement gains (13) -
Net interest on net defined benefit liability/(asset) 1 (3)
Defined benefit (income)/expense for the year (66) 28
Administration costs incurred 7 4
(Credit)/cost recognised in the income statement (note 2.4) (59) 32
The Group incurred a past service cost of £8m (2016: £4m) in relation to enhanced early retirement entitlements on
redundancy; in both years these were fully offset in the income statement by a corresponding release from the restructuring
provision. In contrast, the income statement benefited from a curtailment gain of £13m (2016: £Nil) due to a higher than
normal level of redundancies in the current year with no enhancement entitlement; this gain has been offset against the
related restructuring costs.
Amounts recognised in the statement of comprehensive income
2017 £m 2016 £m
Opening cumulative actuarial losses (849) (670)
Actuarial gain due to
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