REG - CYBG PLCClydesdale Bank PLC - Final Results <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 6
22/11/2016 07:08
- Part 6: For the preceding part double click ID:nRSV7721Pe
The Group currently owns a 3.24%
shareholding in VocaLink. Following the announcement of the sale, the fair value of the Group's investment in VocaLink
increased by £20m to £25m at 30 September 2016 (2015: £5m), with the corresponding gain recognised in the available for
sale reserve within equity.
Visa Inc.
Included within financial assets available for sale - unlisted securities at 30 September 2016 is £2m (2015: £Nil)
representing the fair value of Visa Inc. preferred stock received as partial consideration for the sale of the Group's
share in Visa Europe (note 6). The preferred stock is convertible into Visa Inc. common stock or its equivalent at a future
date, subject to potential reduction for certain litigation losses that may be incurred by Visa Europe.
Other financial assets
The other AFS financial asset of £7m represents deferred consideration receivable and consists of the rights to future
commission.
For further information on valuation methodology for available for sale assets and their classification within the fair
value hierarchy, refer to note 37.
Credit quality of investments 2016 2015
£m £m
Available for sale
Senior investment grade 1,695 1,447
Other 36 15
──────── ────────
1,731 1,462
════════ ════════
14. Other financial assets and liabilities at fair value
2016 2015
£m £m
Other financial assets at fair value through profit or loss
Loans and advances 750 1,097
════════ ════════
Other financial liabilities at fair value through profit or loss
Due to customers - term deposits 48 67
════════ ════════
Derivatives which do not meet the requirements for hedge accounting and that are related to loans held at fair value
through profit or loss are accounted for as held for trading derivative financial instruments (note 15).
CYBG PLC
Notes to the consolidated financial statements (continued)
14. Other financial assets and liabilities at fair value (continued)
Loans and advances
Included in other financial assets at fair value is a historical portfolio of loans (sales ceased in 2012). Interest rate
risk associated with these loans is managed using interest rate derivative contracts and the loans are recorded at fair
value to avoid an accounting mismatch. The maximum credit exposure of the loans is £750m (2015: £1,097m). The cumulative
loss in the fair value of the loans attributable to changes in credit risk amounts to £24m (2015: £38m) and the change for
the current year is a decrease of £14m (2015: decrease of £36m).
The loans are classified as Level 3 in the fair value hierarchy (note 37).
Due to customers - term deposits
Included in other financial liabilities at fair value are fixed rate deposits, the interest rate risk on which is hedged
using interest rate derivative contracts. The deposits are recorded at fair value to avoid an accounting mismatch.
The change in fair value attributable to changes in the Group credit risk is £Nil (2015: £Nil). The Group is contractually
obligated to pay £3m (2015: £4m) less than the carrying amount at maturity to the deposit holder.
The term deposits are classified as Level 3 in the fair value hierarchy (note 37).
15. Derivative financial instruments
The Group uses derivatives for risk mitigation purposes and does not have a trading book. However, derivatives that do not
meet the hedging criteria within IAS 39, or those for which hedge accounting is not desirable, are accounted for as held
for trading (although they are used for risk mitigation). The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading.
2016 2015
£m £m
Fair value of derivative financial assets
Designated as hedging instruments 351 103
Designated as held for trading 234 182
──────── ────────
585 285
════════ ════════
Fair value of derivative financial liabilities
Designated as hedging instruments 257 244
Designated as held for trading 341 290
──────── ────────
598 534
════════ ════════
Cash collateral on derivatives placed with banks totalled £337m as at 30 September 2016 (2015: £246m). Cash collateral
received on derivatives totalled £57m as at 30 September 2016 (2015: £Nil). These amounts are included within due from
other banks and due to other banks respectively.
The derivative financial instruments held by the Group are further analysed below with the notional contract amount being
the amount from which the cash flows are derived and is not an indication of the amounts at risk relating to these
contracts.
CYBG PLC
Notes to the consolidated financial statements (continued)
15. Derivative financial instruments (continued)
Total derivative contracts as at 30 September 2016 Notional
contract Fair value Fair value
amount of assets of liabilities
Derivatives designated as hedging instruments £m £m £m
Cash flow hedges
Interest rate swaps 15,526 154 79
Cross currency swaps 760 88 -
Forward contracts 5 - -
──────── ──────── ────────
16,291 242 79
Fair value hedges
Interest rate swaps 1,452 109 178
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward contracts 2,202 84 78
Cross currency swaps 150 11 11
Options 216 5 5
──────── ──────── ────────
2,568 100 94
Interest rate related contracts
Swaps 1,512 123 233
Swaptions 47 - 1
Options 569 2 4
──────── ──────── ────────
2,128 125 238
Commodity related contracts 127 9 9
──────── ──────── ────────
Total derivative contracts 22,566 585 598
════════ ════════ ════════
CYBG PLC
Notes to the consolidated financial statements (continued)
15. Derivative financial instruments (continued)
Total derivative contracts as at 30 September 2015 Notional
contract Fair value Fair value
amount of assets of liabilities
Derivatives designated as hedging instruments £m £m £m
Cash flow hedges
Interest rate swaps 16,655 46 76
Cross currency swaps 843 8 53
──────── ──────── ────────
17,498 54 129
Fair value hedges
Interest rate swaps 1,452 35 115
Cross currency swaps 499 14 -
──────── ──────── ────────
1,951 49 115
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward contracts 1,990 47 38
Cross currency swaps 150 5 5
Options 273 2 2
──────── ──────── ────────
2,413 54 45
Interest rate related contracts
Swaps 2,084 105 217
Swaptions 67 - 1
Options 706 1 5
──────── ──────── ────────
2,857 106 223
Commodity related contracts 160 22 22
──────── ──────── ────────
Total derivative contracts 24,879 285 534
════════ ════════ ════════
Derivatives traded to manage the Group's interest rate exposure on a net portfolio basis are accounted for as cash flow
hedges. Derivatives traded to manage interest rate risk on certain fixed rate assets, such as UK Government Gilts, are
accounted for as fair value hedges. In addition, the Group cash flow hedges its foreign currency exposure on material,
highly probable non-GBP denominated transactions.
The Group hedging positions also include those designated as foreign currency and interest rate hedges of debt issued from
the Group's securitisation and covered bond programmes respectively. As such certain derivative financial assets and
liabilities have been booked in consolidated structured entities.
Cash flow hedged derivatives include vanilla interest rate swaps within macro hedges and cross currency swaps within a
structured entity. The Group has notional commitments in the following periods:
Nominal values per time period 2016 2015
£m £m
Within 0 to 3 months 1,452 4,230
Between 3 and 12 months 6,710 2,028
1 to 5 years 8,063 11,148
Greater than 5 years 66 92
──────── ────────
16,291 17,498
════════ ════════
CYBG PLC
Notes to the consolidated financial statements (continued)
15. Derivative financial instruments (continued)
The Group has hedged the following forecast future cash flows, which vary primarily with interest or foreign exchange
rates. These cash flows are expected to impact the income statement in the following periods:
Forecast Forecast Forecast Forecast
receivable payable receivable payable
cash flows cash flows cash flows cash flows
2016 2016 2015 2015
£m £m £m £m
Within 1 year 29 261 47 112
Between 1 and 2 years 16 368 38 235
Between 2 and 3 years 15 59 26 319
Between 3 and 4 years 14 77 21 57
Between 4 and 5 years 8 112 9 68
Greater than 5 years - 6 - 96
─────────────────── ─at the reporting date of £977m (2015: £1,308m).
Furthermore, the Group has an obligation to repurchase mortgage exposures if certain representations and warranties are
breached.
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 bonds
At the reporting date the nominal level of over-collateralisation was £599m (2015: £855m) 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 representations and warranties are
breached.
CYBG PLC
Notes to the consolidated financial statements (continued)
19. Property, plant and equipment
Long term
Freehold leasehold Fixtures
land and land and Building and
buildings buildings improvements equipment Total
£m £m £m £m £m
Cost or valuation
At 1 October 2014 11 3 161 114 289
Additions - - 10 9 19
Disposals (1) - (7) (11) (19)
Transfers - - 7 (7) -
──────── ──────── ──────── ──────── ────────
At 30 September 2015 10 3 171 105 289
Additions - - 15 7 22
Disposals (4) - (32) (12) (48)
──────── ──────── ──────── ──────── ────────
At 30 September 2016 6 3 154 100 263
──────── ──────── ──────── ──────── ────────
Accumulated depreciation
At 1 October 2014 1 - 92 75 168
Charge for the year - - 14 12 26
Disposals - - (4) (10) (14)
Transfers - - 3 (3) -
──────── ──────── ──────── ──────── ────────
At 30 September 2015 1 - 105 74 180
Charge for the year (note 7) - - 15 10 25
Disposals - - (30) (11) (41)
──────── ──────── ──────── ──────── ────────
At 30 September 2016 1 - 90 73 164
──────── ──────── ──────── ──────── ────────
Net book value
At 30 September 2016 5 3 64 27 99
════════ ════════ ════════ ════════ ════════
At 30 September 2015 9 3 66 31 109
════════ ════════ ════════ ════════ ════════
Valuations
The Group's freehold and long term leasehold land and buildings are carried at their fair value as determined by
independent valuers and the Group's own directors' valuations. 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 (Level 3 of the fair value hierarchy as defined in note 37). Valuations
are performed annually in July.
There has been no change to the valuation technique during the year. There were no transfers between levels of the fair
value hierarchy during the year.
A comparison of the carrying value under the revaluation basis and if the historical cost basis had been used is shown
below:
2016 2015
£m £m
Carrying value as included under the revaluation basis 8 12
Carrying value if the historical cost basis had been used 7 10
CYBG PLC
Notes to the consolidated financial statements (continued)
20. Investment properties
2016 2015
£m £m
At 1 October 32 44
Disposals (10) (11)
Revaluation - (1)
──────── ────────
At 30 September 22 32
════════ ════════
Investment properties are stated at fair value, which has been determined based on valuations performed by independent
valuers and the Group's own directors' valuations.
Investment property is compared to property for which there is observable market data about its realisable value on
disposal. Adjustments to this observable data are applied for specific characteristics of the property such as the nature,
location or condition of the specific asset. Investment properties are classified in Level 3 of the fair value hierarchy
as defined in note 37. There has been no change to the valuation technique during the year. There were no transfers
between levels of the fair value hierarchy during the year.
During the year 97% (2015: 99%) of the investment properties generated total rental income of £1m (2015: £2m) and incurred
operating and administrative expenses of £1m (2015: £1m). The operating and administrative expenses of the investment
properties that did not generate rental income were £Nil (2015: £Nil).
21. Investments in controlled entities and associates
Group
2016 2015
£m £m
At 30 September - 2
════════ ════════
Associates
Associates are undertakings over which the Group exerts significant influence but not control. Investments in associates
are accounted for using the equity method. The attributable share of profit and reserves of the associated undertaking is
based on the management accounts as at 30 September 2016. The Group has an interest in The Scottish Agricultural
Securities Corporation PLC which is registered and operates in Scotland. This investment is accounted for as an associate
undertaking on the basis that the Group has significant influence but not control. The associated undertaking's principal
activity was the provision of finance and the Group's interest of 33.33% in the issued equity capital of £Nil is held by
Clydesdale Bank PLC. The associated undertaking has a 31 March year end. As at 30 September 2016, The Scottish
Agricultural Securities Corporation PLC was in the process of being liquidated.
The controlled entities of the Group and Company are provided in note 42.
CYBG PLC
Notes to the consolidated financial statements (continued)
21. Investments in controlled entities and associates (continued)
Structured entities
The Group sponsors the formation of structured entities, primarily for the purpose of facilitation of asset securitisation
and covered bond transactions to accomplish certain narrow and well defined objectives. Although the Group has no
shareholding in these entities, where it is exposed, or has rights to, variable returns from its involvement with the
entities and it has the ability to affect those returns through its power over the entity, they are regarded as controlled
entities as described in note 2 and are consolidated in the Group's financial statements.
Details of the Group's interests in consolidated structured entities are set out in note 18.
The following companies are consolidated structured entities:
Other controlled entities as at 30 September 2016 Nature of business Country of incorporation
Clydesdale Covered Bonds No. 2 LLP Acquisition of mortgage loans England
Lanark Holdings Limited Holding company England
Lanark Trustees Limited Mortgages trustee Jersey
Lanark Trustees Limited Mortgages trustee England
Lanark Funding Limited Funding company England
Lanark Master Issuer PLC Issuer of securitised notes England
Lannraig Holdings Limited Holding company England
Lannraig Trustees Limited Mortgages trustee Jersey
Lannraig Funding Limited Funding company England
Lannraig Master Issuer PLC Issuer of securitised notes England
On 15 July 2016 the business activities of Lanark Trustees Limited (Jersey) transferred to Lanark Trustees Limited
(England)
All of the above controlled entities have a financial year end of 30 September.
Common control business combinations
As described in note 2, business combinations involving entities under common control, where all combining entities are
ultimately controlled by the same entity before and after the business combination, are accounted for using the predecessor
values method of accounting. This involves recognising assets and liabilities of the acquired business at book values.
Any difference between the cost of acquisition and the aggregate book value of the assets and liabilities as of the date of
the transfer of the acquired entity is recorded as an adjustment to equity. No additional goodwill is created by the
business combination.
Significant restrictions
As is typical for a Group of its size, there are restrictions on the ability of certain subsidiary entities to make
distributions of cash or other assets to the parent company. These are considered below:
Contractual requirements - asset encumbrance
The Group uses its financial assets to raise finance in the form of securitisations and through the sale of securities
subject to repurchase agreements leading to the assets becoming encumbered. Once encumbered, the assets are not available
for transfer around the Group. The assets encumbered in relation to securitisation are disclosed in note 18.
CYBG PLC
Notes to the consolidated financial statements (continued)
22. Intangible assets
Capitalised software costs 2016 2015
£m £m
Cost
At 1 October 427 354
Additions 99 119
Disposals - (41)
Write-off (63) (5)
──────── ────────
At 30 September 463 427
──────── ────────
Accumulated amortisation
At 1 October 162 141
Disposals - (41)
Charge for the year (note 7) 63 57
Write-off (63) (5)
Impairment (note 7) 45 10
──────── ────────
At 30 September 207 162
──────── ────────
Net book value at 30 September 256 265
════════ ════════
Impairment testing of capitalised software assets is performed in accordance with IAS 36. The impairment charge follows a
detailed review of the recoverable amount of the various assets. Where 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, the software has been written down to its recoverable amount. An impairment charge of £45m has been recognised
in the year to 30 September 2016 (2015: £10m).
Intangible assets are reviewed annually to consider whether these assets are currently in use. Fully amortised intangible
assets of £63m (2015: £5m) that were no longer in use were written off during the year.
23. Deferred tax
Movement in net deferred tax asset 2016 2015
£m £m
At 1 October 379 339
Recognised in the income statement (note 8) (232) 37
Recognised directly in equity 9 3
──────── ────────
At 30 September 156 379
════════ ════════
CYBG PLC
Notes to the consolidated financial statements (continued)
23. Deferred tax (continued)
The Group has recognised deferred tax in relation to the following items:
2016 2015
£m £m
Deferred tax assets
Tax losses carried forward 35 273
Capital allowances 127 108
Cash flow hedge reserve 1 4
Impairment provision on credit exposures - 3
Employee equity based compensation 2 1
Defined benefit pension scheme deficit 18 -
──────── ────────
183 389
Deferred tax liabilities
Defined benefit pension scheme surplus - (10)
Cash flow hedge reserve (21) -
Gains on unlisted available for sale investments (6) -
──────── ────────
(27) (10)
──────── ────────
Net deferred tax asset 156 379
════════ ════════
At 30 September 2016, the Group had an unrecognised deferred tax asset of £202m (2015: £16m) representing trading losses
with a gross value of £1,186m (2015: £80m). 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. Under current UK tax
legislation there is no prescribed time period for loss utilisation, however, as outlined in the "Emerging/principal risks
and uncertainties" section of the business and financial review, the UK tax environment for banks in particular is
unsettled and has been subject to repeated change and increased restrictions, principally on the use of historic losses as
discussed below. As a result, the period over which brought forward losses will be used to offset taxable profits in the
future has lengthened considerably.
The statutory rate of UK corporation tax is 20% from 1 April 2015. A series of reductions in that rate have been enacted
by subsequent legislation, in particular to 19% from 1 April 2017 and 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. In addition, from 1 April 2016, only 25% of a bank's profits can be relieved by brought forward losses,
significantly extending the timeframe taken to realise value for existing tax losses. This is a further significant
restriction on top of the 50% limit imposed at 1 April 2015.
As a result and in accordance with IAS 12, the directors have assessed the recoverability of the deferred tax assets, and
have chosen to derecognise deferred tax assets relating to those losses that the Group does not expect to be able to
utilise within the Group's current corporate planning horizon. The combined impact of the legislative changes outlined
above, and the directors' reassessment of the recoverable horizon, is £226m, within a total deferred tax charge (Note 8) of
£232m.
The deferred tax asset of £0.6m and liability of £21.3m in respect of cash flow hedge reserves (2015: £4.0m asset) relate
to different entities within the Group.
24. Other assets
2016 2015
£m £m
Prepayments and accrued income 29 35
Other (including items in the course of collection) 159 142
──────── ────────
188 177
════════ ════════
CYBG PLC
Notes to the consolidated financial statements (continued)
25. Due to other banks
2016 2015
£m £m
Transaction balances with other banks 23 -
Securities sold under agreements repurchase (1) 1,226 -
Deposits from other banks 60 393
──────── ────────
1,309 393
════════ ════════
(1) The underlying securities sold under agreements to repurchase have a fair value of £1,657m (2015: £Nil).
26. Due to customers
2016 2015
£m £m
Non-interest bearing demand deposits 2,160 1,986
Interest bearing demand deposits 19,328 18,786
Term deposits 5,454 5,416
Other wholesale deposits 12 94
──────── ────────
26,954 26,282
Accrued interest payable 136 125
──────── ────────
27,090 26,407
════════ ════════
Included within term deposits is £Nil (2015: £3m) relating to the Group's associated entity (notes 12 and 21).
CYBG PLC
Notes to the consolidated financial statements (continued)
27. Provision for liabilities and charges
2016 2015
£m £m
PPI redress provision
Opening balance 774 515
Charge to the income statement (note 7) 44 390
Charge reimbursed under Conduct Indemnity 406 -
Utilised (499) (131)
──────── ────────
Closing balance 725 774
──────── ────────
Customer redress and other provisions
Opening balance 214 413
Charge to the income statement (note 7) 8 76
Charge reimbursed under Conduct Indemnity 27 -
Utilised (148) (275)
──────── ────────
Closing balance 101 214
──────── ────────
Restructuring provision (1)
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