REG - CYBG PLCClydesdale Bank PLC - Half-year Report <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 3
16/05/2017 07:06
- Part 3: For the preceding part double click ID:nRSP1995Fb
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Conduct costs (8)
Other (1)
At 31 March 2017 12.5%
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During the first half of 2017 the Group continued to maintain its strong capital position with a fully loaded CET1 ratio,
after accruing for foreseeable dividends on AT1, of 12.5%.
Underlying capital generation by the core business pre AT1 dividend was 4bps, largely driven by strong underlying profits
offset by growth in mortgages and SME lending, with RWAs increased by £352m. After absorbing the net impact of AT1
payments, pension movements, and below the line charges such as the Group's proportion of conduct provision charges,
separation costs and restructuring charges, the Group's CET1 ratio was 10bps lower at 12.5%. This represents a surplus of
4.1% to the CRD IV Maximum Distributable Amount threshold and 5.5% to the CET1 trigger on CYBG's AT1 capital instrument.
The Group continues to maintain its strong funding and liquidity position and seeks to achieve an appropriate balance
between profitability and liquidity risk. LDR increased from 112% to 117% due to growth in customer lending combined with
a managed reduction in short term corporate and higher rate term deposits. This remains well within our FY2017 target of
<120%.
Capital requirements
The Group's capital requirements are set by the PRA, consisting of an Individual Capital Guidance plus Capital Buffer
Requirements and the Group had a surplus to these requirements at 31 March 2017. This included a Pillar 2A requirement set
at 4.6% of RWAs, 2.6% of which must be met by CET1 capital. The Capital Buffer Requirements include a Capital Conservation
Buffer (CCB), Counter-cyclical Buffer (CCyB) and PRA Buffer. The CCB is currently 1.25% of RWAs and will increase each
year to reach 2.5% on 1 January 2019. The CCyB is currently 0% but, dependent on the BoE's view of the economy, could rise
in future years.
In March 2017 the BoE announced details of its 2017 stress tests to assess the resilience of major UK banks. Under the
BoE's stress-test hurdle rate framework each bank continues to be expected to meet its minimum Pillar 1 and Pillar 2A CET1
capital requirements after the stress, which for the Group is 7.1% as at 31 March 2017.
On 1 January 2022 the Group will have to meet a Minimum Requirement for Own Funds and Eligible Liabilities (MREL). The BoE
provided the Group's MREL guidance, including transitional arrangements, in late 2016. An interim MREL requirement of 18%
of RWAs has been set at the Group level from 1 January 2020 until 31 December 2021. The BoE will advise the Group on its
ultimate MREL requirement in 2020. The Group is working towards implementation of the requirement and plans to issue new
senior unsecured securities gradually over the next 5 years which are eligible to meet MREL. These issuances have been
reflected in the Group's strategic plans.
Business and financial review (continued)
Principal risks and mitigating actions
The Board is responsible for determining the nature and extent of the principal risks it is willing to take in order to
achieve its strategic objectives.
In line with the UK Corporate Governance Code (the 'Code') requirements, the Directors have performed a robust assessment
of the principal risks facing the Group, including those that would threaten its business model and future performance,
solvency or liquidity.
Principal risks Key mitigating actions
Credit Risk is the risk of loss of principal or interest stemming from a borrower's failure to meet contracted obligations to the Group in accordance with the terms agreed. Credit risk is evident at both a portfolio and transactional level. · Significant credit risk strategies, credit risk appetite and tolerances for credit risk are approved and reviewed by the Board and the Risk Committee, and inherent in the Group's business model.· Alongside changes in the economic environment,
the credit portfolio is closely monitored including risk sensitivity analysis and reviews of asset quality metrics, with actions initiated where required.
Balance Sheet & Prudential Regulation Risks cover a number of categories of risk which, combined, affect the manner in which the Group can support its customers in a safe and sound manner. Balance sheet risks include the risks of an inability to withstand times of stress for the loss of funding (liquidity), the impact of restricted access to future sources of deposits (funding), the impact of providing a defined benefit pension scheme to employees (pension) and the need to withstand severe unexpected losses (capital). In addition the Group may face changes in values of assets and liabilities as a result of movements in market factors such as interest rates, foreign exchange rates, volatility and credit spreads which may give rise to losses (market risks). Balance sheet risks are subject to rules and guidance (Prudential Regulation) and these are subject to a high level of change. There is a risk of failing to understand and comply with · Liquidity is managed in accordance with standards that are approved by the Board and supported by annual Funding and Contingency Funding Plans.· Liquidity is managed on a daily basis, ensuring normal daily cash requirements are met and adequate
relevant rules or inadequate change management. sources of liquidity are available to support unforeseen cash outflows.· The Group completes a formal annual assessment of Liquidity and Capital requirements and these are shared with the PRA. These assessments include analysis of key risks with
consideration of stress scenarios and inform the setting of risk appetite.· Capital is forecast and monitored on a monthly basis by Treasury overseen by the Asset and Liability Committee (ALCO).· The Group has a designated Prudential Risk team
who independently monitor, oversee and challenge Balance Sheet risks.· The Group is undertaking a review of the manner in which pension benefits are provided as part of the total reward for employees.
Regulatory and Compliance Risk consists of regulatory strategy and change risk, regulatory relationship risk and the risk of failing to understand and comply with relevant laws, regulations, licence conditions, supervisory requirements, industry codes of conduct and voluntary initiatives. Failure to manage these risks could result in adverse regulatory scrutiny, enforcement, censure, reputational damage and reduced customer trust and confidence. · The Group proactively assesses the impacts of legal and regulatory developments, liaises with the various regulatory bodies and participates in industry fora.· Continued and significant senior management focus and levels of business resource
are directed towards maintaining full regulatory compliance and this is considered when setting Risk Appetite.· The Executive Risk Committee approves all material changes to regulatory policy and protocols. The Group's governing principles include
the management and maintenance of regulatory policies and regulatory engagement.
Conduct Risk is defined as the risk of treating Customers unfairly and / or delivering inappropriate outcomes resulting in regulatory fines, compensation, redress costs and / or reputational damage. · The Group has a Conduct Framework, with supporting target outcomes and operating principles.· Products are designed to meet Customer needs and expectations, with governance processes, e.g. Product Governance Forum and Fairness Committee,
embedded to ensure those objectives are met.· The Board and the Risk Committee are kept informed of progress with respect to remediation of key legacy conduct issues, and receive regular updates on the implementation and effective execution of the
Group Conduct Framework which captures progress made to meet specific conduct principles, including those relating to product design.
Business and financial review (continued)
Principal risks (continued) Key mitigating actions (continued)
Operational Risk is the risk of loss resulting from inadequate or failed internal processes and systems or from external events. It includes legal risk, and operational risks associated with the execution of the strategy. Impacts from Operational Risks arise from the day to day activities of the Group, which may result in direct or indirect losses and could adversely impact the Group's financial performance and position. · The Group has an established Operational Risk Framework to enable identification, management and mitigation of Operational Risks.· Risk categories are used to categorise and facilitate the consistent identification, assessment, mitigation,
monitoring and reporting of risks and events.· Supplier relationships are categorised based on criticality of the support provided. Contingency planning focuses on alternative options and management approaches in the event of an outage with regular
scenario tests performed.· Regular reviews and oversight of the Group's systems and infrastructure including the risk of cyber-attack.
Financial Crime Risk is the risk that the Group's Products and Services will be used to facilitate Financial Crime against the Group, its Customers or third parties. It encompasses the risk of failing to understand and comply with relevant laws, regulations and supervisory requirements relating to money laundering, terrorism financing, bribery and corruption and sanctions and embargoes. It also includes risks associated with external or internal acts intended to defraud, misappropriate, and circumvent policy, funds, information, regulations and property. · The Group has an established Financial Crime Framework supporting ongoing management, monitoring and mitigation of Financial Crime Risk.· The Group completes ongoing risk assessments, monitoring and reporting, with appropriate Know Your
Customer procedures.· The Group operates zero tolerance for internal fraud and has a control framework in place to mitigate against this risk.
Strategic, Business and Financial Performance Risk is the risk of significant loss, loss of earnings and / or damage arising from business decisions that impact the long term interests of stakeholders or from an inability to adapt to external developments. · The Board approves and oversees the execution of the Strategic Plan and associated strategic risk following the recommendations of the Chief Executive Officer and Executive Leadership Team.· A consolidated report outlining the triggers and
exposure to strategic risk is independently prepared and presented to the Risk Committee by the Chief Risk Officer.
People Risk is the risk of not having sufficiently skilled and motivated employees who are clear on their responsibilities and accountabilities and who behave in an ethical way. This could lead to inappropriate decision making that is detrimental to customers, other employees or shareholders and could ultimately lead to Regulatory sanction. · Roles, responsibilities and performance expectations are defined in role profiles and expanded through objective setting and ongoing performance management.· The quality and continuity of the Group's leadership is continually reviewed and
assessed including succession planning and talent management.· Management constantly review people capabilities and wellbeing to ensure that any potential people risk is mitigated. This is also reviewed at Board level.· Decision making
authorities and delegations are clearly articulated and approved at least annually by the Board.· A robust and proportionate employment screening policy is applied at the point of recruitment.· A mandatory suite of compliance learning is assigned
to all employees.
Business and financial review (continued)
The Group monitors the environment in which it operates to identify emerging risks that may have an impact on its
operations and strategy; the Group currently considers its top emerging risks to be:
Emerging risks Key mitigating actions
Geopolitical uncertainty - the outcome of the EU Referendum and subsequent triggering of Article 50 has created a period of economic uncertainty for the UK. Without certainty as to exit plans, there have been predictions of a potential slowdown in the economy. The announcement of a UK General Election in June 2017 and uncertainty around the potential for a second Scottish Independence referendum could also create greater uncertainty on proposed exit plans. · The Group has implemented appropriate monitoring and oversight activities with external implications continuing to be assessed and has, where possible, established mitigating actions.
Macroeconomic environment - while the Group's customer base is, and is expected to remain, predominantly UK based, its business will be subject to inherent risks arising from macroeconomic conditions in the UK. The impact of the sustained low interest rate environment following reduction in the BoE base rate places increased pressure on NIM. Conversely, should interest rates rise sharply there is a risk of increased default rates and credit losses. · The Group has implemented appropriate monitoring and oversight activities with external implications continuing to be assessed and has, where possible, established mitigating actions.· The Group's credit portfolio continues to be monitored
closely with appetite adjusted where appropriate and risk sensitivity analysis conducted on an ongoing basis. · Regular assessments of strategic plans are undertaken to minimise and negate, where possible, potential impacts.
Cybercrime - in a growing digital market where cybercrime continues to evolve, there is a risk that the Group is unable to maintain pace with the increased threat of cybercrime that digital expansion presents. · The availability and resilience of our IT systems is critical to providing the levels of service desired for our customers and as such in the past year the Group has continued to focus on enhancing our cyber security controls to protect our
customers and colleagues from the evolving cyber threat landscape. The Group's control environment is regularly assessed through internal and third party testing.· The Group cyber security strategy was recently updated and approved by the Board and is
directed by senior leaders within our business, who ensure our capability enhancements are aligned to the current and future threats. We are members of a number of key confidential intelligence sharing forums (e.g. the Cyber Security Information Group),
which provides us with the latest threat intelligence relative to the financial sector.· To support the technical security controls we have in place and as part of our Cyber Security Strategy, we are focused on three key areas which are detect and
prevent cyber attacks, security of data and manage access to Group IT systems.
Regulatory capital requirements - the Basel Committee on Banking Supervision (BCBS) is consulting on changes to the standardised approaches for calculating credit risk and Operational Risk as well as assessing the requirement for a Pillar 1 floor based on the standardised approach for banks using a model based approach for regulatory capital (e.g. IRB). In addition to the above, changes are being proposed on the IRB approach to calculating credit risk, which need to be considered in the context of the Group's IRB ambitions. These proposals are still in the draft consultation phase with no specific timeline confirmed for implementation into EU law. · The Group continually assesses the impact of the changes to prudential requirements and will continue to liaise with the appropriate regulators.
Business and financial review (continued)
Emerging risks (continued) Key mitigating actions (continued)
Banking reform, ring fencing and resolution - Regulatory authorities in the UK and Europe have proposed reforms to a number of aspects of banking sector regulation. While the impact remains uncertain, the evolution of these reforms and future initiatives · The Group has a project in place to ensure adherence to any applicable ring fencing requirements and is engaged with industry bodies to ensure that the necessary steps are taken to support customers through reinforcing the industry's existing anti-fraud communications.
may impact on the business, financial conditions and, ultimately, results. The majority of the Group's activities are expected to be permitted activities for the purposes of UK ring fencing requirements and, therefore, the Group does not expect to make
material changes to its current legal structure or operations to address these. There is a risk, however, that whilst changes are happening within the banking industry, there may be heightened attempts to defraud customers.
MREL - The BoE has published its policy to implement the Bank Recovery and Resolution Directive (BRRD) requirement for firms to meet the Minimum Requirements for own funds and Eligible Liabilities (MREL). These rules are designed to ensure firms have · The Group's plan to achieve the IRB approach will improve competitive positioning, enhance risk management capabilities and also lower the intensity of RWAs and future bail-in debt requirement for MREL.· The Group's capital and funding plans include the issuance of debt that will support the Group's expectations of MREL requirements. These plans include an assessment of the costs to ensure that the financial plan is appropriately informed.
sufficient loss absorbing capacity and continuity of critical functions without making recourse to public funds. MREL is set annually on a case by case basis by the BoE and the requirement for firms to meet MREL will be phased in between 2016 and 2022. The
BoE has communicated the Group's interim MREL for the period to 31 December 2021. The end-state MREL from 1 January 2022 is subject to further guidance to be issued by the BoE before the end of 2020. To meet interim and end-state MREL the Group may have
to issue MREL eligible instruments, potentially at a relatively higher cost. This could lead to deterioration in the Group's financial results. Amongst other factors, the cost will be influenced by the market's response to MREL and the Group's credit
rating. It is uncertain what impact MREL will have on credit ratings. MREL requirements will be applied across the industry and the relative impact on the Group compared to competitors is not known, however there is a risk that it may adversely impact the
Group's competitiveness.
Competition - the competitive landscape continues to evolve as non-traditional players enter the market and new innovative products and services change the dynamic. There is a risk that the Group fails to maintain pace and offer the innovative banking · The Group continually monitors the competitive landscape and considers the appropriateness of its strategy to ensure it remains relevant in a changing and increasingly digital market.
solutions customers increasingly seek, ultimately affecting financial performance.
Use of data - The EU Commissions General Data Protection Regulation (GDPR) is to be introduced from 25 May 2018 meaning the Group will be subject to increased regulatory burden when processing personal customer, employee and other data in the course of its · A project has been mobilised to implement GDPR, with the support of a third party to provide peer comparison. · The Group has mobilised a project to implement PSD2 with activities including the introduction of strong customer authentication systems and the deployment of a robust consent model by the Group to manage the sharing of confidential customer financial data.
business and may be subject to increased sanctions for breach. Sanctions include fines of up to 4% of annual worldwide turnover. Changes to legislation may also inhibit the Group's ability to use data to carry out certain of its business
objectives.Additionally, the Payment Services Directive 2 (PSD2), which requires to be implemented from 13 January 2018, introduces changes to the use and control of customer data. Assuming that customers provide consent, their banks will have to provide
merchants, Third Party Payment Providers and Account Information Service Providers, such as aggregator sites, access to details of their bank accounts and transaction history. There is concern that this data sharing could create, at an industry level, an
increased risk of customer data being misappropriated or misused.
Business and financial review (continued)
Emerging risks (continued) Key mitigating actions (continued)
UK tax environment - The tax environment for all UK large businesses remains unsettled. A further restriction on loss utilisation, broadly to 50% of taxable profits in excess of £5m, and a cap on tax deductibility of net interest expense was announced in · The Group does not expect to be in a net interest expense position, so there should be no adverse financial consequence of this new legislation but there will be a compliance burden. Compliance with other Government announcements, for example Making Tax Digital, and tax reporting of customer tax matters under the Common Reporting Standard, will increase the systems and administrative costs on many organisations, in particular those providing financial services.
the 2016 autumn statement. It has been announced that these restrictions will be effective 1 April 2017, however they were not included in the version of Finance (No 2) Bill 2016-17 substantively enacted on 26 April 2017. These changes impact all large
businesses, not just banks. As noted in the 2016 annual report and accounts, banks already suffer restrictions on loss utilisation; this new legislation will tighten the rules applicable to certain "pools" of losses and make technical changes to the order
of certain reliefs. The final impact for the Group has yet to be determined, but is not expected to be materially detrimental.
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge these interim condensed consolidated financial statements have
been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" ("IAS 34") as adopted
by the European Union and that the interim management report includes a fair review of the information required by DTR
4.2.7R and DTR 4.2.8R, namely:
a) an indication of important events that have occurred during the six months ended 31 March 2017 and their impact on the condensed consolidated interim financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
b) material related party transactions in the six months ended 31 March 2017 and any material changes in the related party transactions described in the last annual report of CYBG PLC.
Signed by order of the Board
David Duffy
Chief Executive Officer
15 May 2017
Independent review report to CYBG PLC
Introduction
We have been engaged by CYBG PLC to review the condensed set of financial statements in the interim financial report for
the six months ended 31 March 2017 which comprises the interim condensed consolidated income statement, interim condensed
consolidated statement of comprehensive income, interim condensed consolidated balance sheet, interim condensed
consolidated statement of changes in equity, interim condensed consolidated statement of cash flows and the related
explanatory notes 1 to 21. We have read the other information contained in the interim financial report and considered
whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are
responsible for preparing the interim financial report in accordance with International Accounting Standard 34, "Interim
Financial Reporting," as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's
Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International
Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this
interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial
Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to CYBG PLC a conclusion on the condensed set of financial statements in the interim
financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements 2410 (UK and Ireland), "Review of
Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of
persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland)
and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial
statements in the interim financial report for the six months ended 31 March 2017 is not prepared, in all material
respects, in
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