REG - CYBG PLCClydesdale Bank PLC - Half-year Report <Origin Href="QuoteRef">CYBGC.L</Origin> - Part 5
16/05/2017 07:06
- Part 5: For the preceding part double click ID:nRSP1995Fd
22: 'Foreign Currency Transactions and Advance Consideration', issued December 2016 and
effective for financial years beginning on or after 1 January 2018. The new interpretation provides requirements on which
exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when payment is made or
received in advance.
· Amendments to IAS 40: 'Transfers of Investment Property', issued December 2016 and effective for financial years
beginning on or after 1 January 2018. The amendments clarify the requirements on transfers to, or from, investment
property.
Update on the implementation of IFRS 9: 'Financial Instruments'
IFRS 9 was endorsed for adoption in the EU on 22 November 2016 and will be formally implemented by the Group with effect
from 1 October 2018 in line with the Standard's requirements to apply for annual periods beginning on or after 1 January
2018.
The Group's current view on the three phases of IFRS 9 (classification and measurement, impairment and hedging) was
provided on pages 214 to 215 of the Group's annual report and accounts for the year ended 30 September 2016. The most
significant impact of IFRS 9 on the Group's performance will be from the impairment phase and results from the move to an
"expected credit loss" (ECL) methodology from an "incurred" loss methodology.
As highlighted in the 2016 annual report, this change in methodology requires a series of complex judgements; the Group
continues to assess and develop its thinking around these and make refinements where required. This is particularly
relevant given the Group's IRB Programme which runs in parallel to IFRS 9 and will provide the underlying model methodology
that will ultimately be used for IFRS 9 purposes. The IRB models will require an element of modification in order for them
to be IFRS 9 compliant, such as the incorporation of forward looking information using reasonable and supportable forecasts
of future economic conditions, the need to consider multiple economic scenarios (which will consider amongst other things
the Group's current planning processes and stress testing scenarios), and the development of a lifetime ECL.
In addition to developing an impairment approach and methodology that is compliant with the requirements of IFRS 9, the
Group has also taken account of the recent guidance on credit risk and ECLs issued by the European Banking Authority and
the BCBS, and other recent publications such as the Global Public Policy Committee (GPPC) paper on "The implementation of
IFRS 9 impairment requirements by banks". The Group also notes the recent BCBS Standards on the regulatory treatment of
accounting provisions and will continue to monitor developments on how these will be applied by the Group's regulators.
The Group continues to focus on and develop the necessary frameworks, structures and models required to support a high
quality IFRS 9 implementation, and ensure that the new IFRS 9 approach is fully embedded into the Group's processes.
The Group's IFRS 9 implementation programme continues to work towards the completion of all decisions, judgements and
models in time to commence an end-to-end parallel run during the year beginning on 1 October 2017. A further update on the
Group's IFRS 9 implementation will be provided in the annual report and accounts for the year to 30 September 2017.
Update on the implementation of IFRS 15: 'Revenue from Contracts with Customers' and IFRS 16: 'Leases'
The Group is reviewing the requirements of the new Standards to ensure that the Group's methodology and approach to the key
impacts and challenges introduced by the Standards result in the delivery of a high quality implementation, while
recognising evolving industry practice.
IFRS 15
IFRS 15 was issued in May 2014 and is effective for financial years beginning on or after 1 January 2018, meaning that it
will be mandatorily adopted by the Group with effect from 1 October 2018.
The work performed to date has included views on the new estimates and judgements required by the Standard and includes,
for example, items such as the estimation of variable consideration and determining when performance obligations are met,
and changes to systems and processes that may be required to capture and maintain additional data on revenues for
measurement and disclosure purposes.
IFRS 16
IFRS 16 was issued in January 2016 and is effective for financial years beginning on or after 1 January 2019, meaning that
it will be mandatorily adopted by the Group with effect from 1 October 2019.
Notes to the interim condensed consolidated financial statements (continued)
1. Basis of preparation and accounting policies (continued)
Update on the implementation of IFRS 15: 'Revenue from Contracts with Customers' and IFRS 16: 'Leases' (continued)
The work performed to date has included initial views on the new estimates and judgements required by the Standard. In
addition, whilst the Group has comprehensive data on property lease arrangements (which will be where the majority of IFRS
16 changes impact the Group), new systems and processes may be required to identify, capture and maintain lease data.
Further updates on the Group's IFRS 15 & 16 implementation progress will be provided in the annual report and accounts for
the year to 30 September 2017.
Critical accounting estimates and judgements
The preparation of financial statements requires the use of certain critical accounting estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and the disclosed amount of contingent
liabilities. Assumptions made at each balance sheet date are based on best estimates at that date. Although the Group has
internal control systems in place to ensure that estimates can be reliably measured, actual amounts may differ from those
estimated.
There have been no significant changes to the bases upon which estimates have been determined, compared with those applied
at 30 September 2016.
Presentation of risk disclosures
Certain disclosures outlined in IFRS 7 'Financial Instruments: Disclosure' concerning the nature and extent of risks
relating to financial instruments have been included within the supplementary risk management disclosures section of this
report.
2. Segment information
The Group's operating segments are operating units engaged in providing different products or services and whose operating
results and overall performance are regularly reviewed by the Group's Chief Operating Decision Maker, the Chief Executive
Officer.
The Group's business is organised into two principal operating segments: SME Banking and Retail Banking. The Central
Functions of the Group consist of Finance, Risk Management, Chief Operating Office, Corporate Development and Stakeholder
Engagement, Legal and Governance, Products, Propositions & Marketing, Internal Audit and Human Resources.
'Other' reflects elements of income and expenditure that are not recharged to the Group's two principal operating segments
such as conduct related provisions, impairment of intangibles and restructuring costs.
SME Banking
The Group's established regional SME franchise offers a full range of banking products and services to meet business
customers' banking needs across its small business, commercial, corporate and specialist and acquisition finance segments.
The Group offers a full range of lending products and services across a portfolio consisting of term lending, overdrafts
and working capital solutions through its SME franchise:
· Term lending: the Group offers a wide variety of term loans, both secured and unsecured, and offers customers a
range of repayment and interest rate options. The majority of the Group's business term lending is LIBOR based.
· Overdrafts: business overdrafts are the primary type of revolving variable rate credit facility offered by the Group
to business customers.
· Invoice finance: the Group advances funds against the customer's trade receivables.
· Asset finance: these products provide a method of financing capital equipment purchases.
· International trade services: these products facilitate transactions between a buyer and seller located in different
countries. The Group offers import loans, export loans, documentary collections and currency guarantees, together with
letters of credit for securing trade.
· BCAs: the Group provides business customers day to day banking, current account facilities (including debit cards,
cheque books, regular statements, direct debits and standing orders), and online banking.
Notes to the interim condensed consolidated financial statements (continued)
2. Segment information (continued)
Retail Banking
The Group has a comprehensive regional and national retail banking product proposition with a personal deposit portfolio
comprising of personal current accounts (PCA), savings accounts and term deposits. The Group's retail lending portfolio
comprises of mortgages, personal loans, credit cards and overdrafts:
· PCA: a stable source of funding provided under the Clydesdale Bank, Yorkshire Bank and B brands.
· Savings accounts: the Group offers a variety of savings accounts that pay a variable rate of interest. It also
offers cash ISAs that provide depositors tax free returns.
· Term deposits : offer a fixed interest rate for a fixed term.
· Mortgages: the Group provides mortgage loans on a capital repayment basis, where the loan is required to be repaid
during its life, and on an interest-only basis, where the customer pays interest during the term of the mortgage loan with
the principal balance required to be repaid in full at maturity. The Group offers both owner-occupied mortgage loans
(pursuant to which the borrower is the owner and occupier of the mortgaged property) and buy-to-let (BTL) loans (pursuant
to which the borrower intends to let the mortgaged property).
· Personal loans: the Group provides unsecured personal loans through its branch network and through its digital and
telephone distribution channels.
· Credit cards: the Group currently offers three credit card products, Private MasterCard, Business MasterCard and
Gold MasterCard.
· Overdrafts: the Group provides overdraft lending across a variety of PCA products, subject to the account holder's
status.
Major customers
Revenues from no one single customer amount to greater than 10% of the Group's revenues.
Geographical areas
The Group has no operations outside the UK and therefore no secondary geographical area information is presented.
Net interest income 146 238 27 - 411
Non-interest income 38 42 6 - 86
───────── ───────── ───────── ───────── ─────────
Operating income 184 280 33 - 497
Operating and administrative expenses (27) (57) (264) (77) (425)
Impairment losses on credit exposures (1) (15) (11) - - (26)
───────── ───────── ───────── ───────── ─────────
Segment operating profit/(loss) before tax 142 212 (231) (77) 46
═════════ ═════════ ═════════ ═════════ ═════════
Average interest-earning assets 10,294(2) 19,952 6,717 - 36,963
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36,963
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Operating segments6 months ended 31 March 2016(unaudited) SMEBanking£m RetailBanking£m CentralFunctions£m Other£m Total£m
Net interest income 139 234 27 - 400
Non-interest income 39 42 10 1 92
───────── ───────── ───────── ───────── ─────────
Operating income 178 276 37 1 492
Operating and administrative expenses (36) (59) (258) (50) (403)
Impairment losses on credit exposures (1) (20) (11) - - (31)
───────── ───────── ───────── ───────── ─────────
Segment operating profit/(loss) before tax 122 206 (221) (49) 58
───────── ───────── ───────── ───────── ─────────
Average interest-earning assets 10,430(2) 18,653 6,911 - 35,994
═════════ ═════════ ═════════ ═════════ ═════════
Notes to the interim condensed consolidated financial statements (continued)
2. Segment information (continued)
Net interest income 285 472 49 - 806
Non-interest income 77 77 29 8 191
───────── ───────── ───────── ───────── ─────────
Operating income 362 549 78 8 997
Operating and administrative expenses (70) (119) (540) (152) (881)
Impairment losses on credit exposures (1) (30) (9) - - (39)
───────── ───────── ───────── ───────── ─────────
Segment operating profit/(loss) before tax 262 421 (462) (144) 77
───────── ───────── ───────── ───────── ─────────
Average interest-earning assets 10,406(2) 19,049 6,802 - 36,257
═════════ ═════════ ═════════ ═════════ ═════════
36,257
═════════
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(1) The impairment losses on credit exposures of £11m (31 March 2016: £11m and 30 September 2016: £9m) for Retail Banking includes losses on certain retail products attributable to SME (private banking) customers
(2) Average interest earning assets for SME Banking include £3.2bn (31 March 2016: £3.3bn and 30 September 2016: £3.3bn) of mortgages originated by private banking.
3. Net interest income
6 months to31 Mar 2017(unaudited)£m 6 months to31 Mar 2016(unaudited)£m 12 months to30 Sep 2016(audited)£m
Interest income and similar income
Loans and advances to other banks 5 12 22
Financial assets available for sale 5 5 11
Loans and advances to customers 511 516 1,037
Financial assets at fair value through profit or loss 10 15 27
Due from related entities - 1 1
Other interest income 3 1 3
───────── ───────── ─────────
Total interest income and similar income 534 550 1,101
Less: interest expense and similar charges
Due to other banks 6 2 8
Financial liabilities at fair value through profit or loss - - 1
Due to customers 73 97 188
Debt securities in issue 44 40 87
Due to related entities - 11 11
───────── ───────── ─────────
Total interest expense and similar charges 123 150 295
───────── ───────── ─────────
Net interest income 411 400 806
═════════ ═════════ ═════════
Notes to the interim condensed consolidated financial statements (continued)
4. Non-interest income
Gains less losses on financial instruments at fair value
Interest rate derivatives 26 6 3
Other assets and liabilities at fair value (21) (2) 7
Ineffectiveness arising from fair value hedges (2) (1) -
Ineffectiveness arising from cash flow hedges - - (1)
───────── ───────── ─────────
3 3 9
Other operating income
Fees and commission 73 77 151
Margin on foreign exchange derivative brokerage 9 10 19
Gains on disposal of available for sale financial assets - - 8
Net fair value movement on investment properties - - (1)
Other income 1 2 5
───────── ───────── ─────────
83 89 182
───────── ───────── ─────────
Total non-interest income 86 92 191
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═════════
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═════════
Gains less losses on financial instruments at fair value incorporate valuation movements for certain financial assets which
are designated at inception as fair value through profit or loss. These assets are predominantly fixed interest rate loans
and movements in fair value are recognised in the income statement as part of non-interest income. The fair value of these
loans is derived from the future loan cash flows using appropriate discount rates and includes adjustments for credit risk
and credit losses. The valuation technique used is reflective of current market practice. A credit risk gain on fair value
loans and associated liabilities of £4m, offset by a fair value loss of £25m, has been recognised in the current period (31
March 2016: £5m and £7m, 30 September 2016: £11m and £4m).
Notes to the interim condensed consolidated financial statements (continued)
5. Operating and administrative expenses
6 months to31 Mar 2017(unaudited)£m 6 months to31 Mar 2016(unaudited)£m 12 months to30 Sep 2016(audited)£m
Personnel expenses
Salaries, wages, non-cash benefits and social security costs 93 101 211
Defined contribution pension expense 8 9 20
Defined benefit pension expense 20 15 28
Equity based compensation 3 5 5
Other personnel expenses 11 7 16
───────── ───────── ─────────
135 137 280
Restructuring expenses
Restructuring expenses (note 14) 53 - 45
Depreciation and amortisation expense
Depreciation of property, plant and equipment 12 13 25
Amortisation of intangible assets 30 28 63
───────── ───────── ─────────
42 41 88
Other operating and administrative expenses
Operating lease charges 16 15 30
Other occupancy charges 17 19 39
Related entity charges (note 8) - 4 5
Impairment losses on software - - 45
PPI redress expense (note 14) 15 44 44
Other conduct expenses (note 14) 4 2 7
Separation costs 5 4 11
Other operating and administrative expenses 138 137 287
───────── ───────── ─────────
195 225 468
───────── ───────── ─────────
Total operating and administrative expenses 425 403 881
═════════ ═════════ ═════════
Notes to the interim condensed consolidated financial statements (continued)
6. Taxation
Current tax 6 months to31 Mar 2017(unaudited)£m 6 months to31 Mar 2016(unaudited)£m 12 months to30 Sep 2016(audited)£m
UK corporation tax
Current period 4 9 12
Adjustment in respect of prior periods - - (3)
───────── ───────── ─────────
4 9 9
Deferred tax
Current period 8 11 236
Adjustment in respect of prior periods 4 2 (4)
───────── ───────── ─────────
12 13 232
───────── ───────── ─────────
Tax expense for the period 16 22 241
═════════ ═════════ ═════════
The tax assessed for the period differs from that arising from applying the expected rate of corporation tax in the UK
(19.5%). A reconciliation from the expense implied by the expected rate to the actual tax expense is as follows:
Profit on ordinary activities before tax 46 58 77
═════════ ═════════ ═════════
Tax expense based on the expected rate of corporation taxin the UK of 19.5% (March and September 2016: 20%) 9 12 15
───────── ───────── ─────────
Effects of:
Impact of rate changes 7 5 (11)
Disallowable expenses 4 5 8
Conduct indemnity adjustment (5) (4) (1)
Deferred tax assets (recognised)/written off (3) 2 237
Adjustments in respect of prior periods 4 2 (7)
───────── ───────── ─────────
Tax expense for the period 16 22 241
═════════ ═════════ ══ue hierarchy (note 20).
The derivatives related to the assets and liabilities at fair value through profit or loss do not meet the requirements for
hedge accounting and are classified as held for trading derivatives (note 10).
10. 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 (despite being used for risk mitigation). The tables below analyse derivatives between those designated as
hedging instruments and those classified as held for trading.
Fair value of derivative financial assets
Designated as hedging instruments 254 351
Designated as held for trading 102 234
───────── ─────────
356 585
═════════ ═════════
Fair value of derivative financial liabilities
Designated as hedging instruments 224 257
Designated as held for trading 187 341
───────── ─────────
411 598
═════════ ═════════
═════════
═════════
Notes to the interim condensed consolidated financial statements (continued)
10. Derivative financial instruments (continued)
Cash collateral on derivatives placed with banks totalled £327m as at 31 March 2017 (30 September 2016: £337m). Cash
collateral received on derivatives totalled £34m as at 31 March 2017 (30 September 2016: £57m). 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. The notional contract amount is the
amount from which the cash flows are derived, and does not represent the principal amounts at risk relating to these
contracts.
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps 14,103 86 79
Cross currency swaps 722 76 -
Forward foreign exchange 3 - -
───────── ───────── ─────────
14,828 162 79
Fair value hedges
Interest rate swaps 1,452 92 145
Derivatives designated as held for trading
Foreign exchange rate related contracts
Spot and forward foreign exchange 2,390 58 58
Cross currency swaps 150 12 12
Options 166 3 3
───────── ───────── ─────────
2,706 73 73
Interest rate related contracts
Swaps 1,073 23 105
Swaptions 45 - 1
Options 492 1 3
───────── ───────── ─────────
1,610 24 109
Commodity related contracts 119 5 5
───────── ───────── ─────────
Total derivative contracts 20,715 356 411
═════════ ═════════ ═════════
411
═════════
═════════
═════════
Notes to the interim condensed consolidated financial statements (continued)
10. Derivative financial instruments (continued)
Total derivative contracts as at 30 September 2016 (audited) Notional contractamount£m Fair valueof assets£m Fair valueof liabilities£m
Derivatives designated as hedging instruments
Cash flow hedges
Interest rate swaps 15,526 154 79
Cross currency swaps 760 88 -
Forward foreign exchange 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 foreign exchange 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
═════════ ═════════ ═════════
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 special purpose entities.
Notes to the interim condensed consolidated financial statements (continued)
11. Loans and advances to customers
Overdrafts 1,572 1,536
Credit cards 393 400
Lease finance 538 515
Mortgages 22,376 21,836
Other term lending - SME 4,526 4,393
Other term lending - retail 681 690
Other lending 34 26
───────── ─────────
Gross loans and advances to customers 30,120 29,396
Accrued interest receivable 75 76
Unearned income (26) (26)
Deferred and unamortised fee income (32) (29)
Impairment provisions on credit exposures (223) (215)
───────── ─────────
29,914 29,202
═════════ ═════════
═════════
═════════
The Group has transferred £4,740m (30 September 2016: £5,435m) of mortgages through securitisation arrangements that do not
qualify for derecognition from the balance sheet. The mortgages do not qualify for derecognition because the Group remains
exposed to the risks and rewards of ownership on an ongoing basis. Prior to any relevant hedging arrangements, the Group
continues to be exposed primarily to the credit, liquidity and interest rate risk of the mortgages. The Group is also
exposed to the residual rewards of the mortgages as a result of its ability to benefit from the future performance of the
mortgages through the receipt of deferred consideration. The carrying amount of the associated liabilities is £2,904m (30
September 2016: £3,208m).
Included within loans and advances to customers are £995m (30 September 2016: £1,149m) of mortgages assigned to a
bankruptcy remote special purpose entity, Clydesdale Covered Bonds No. 2 LLP. These loans provide security for covered
bond issuances made by the Group. These transactions do not qualify for derecognition from the balance sheet. At 31 March
2017 there were £766m (30 September 2016: £797m) of covered bonds in issue under the covered bond programme.
The Group also has a portfolio of fair valued business loans and advances of £570m (30 September 2016: £750m) (note 9).
Combined with the above this is equivalent to total loans and advances of £30,484m (30 September 2016: £29,952m).
Notes to the interim condensed consolidated financial statements (continued)
12. Deferred tax
The Group recognises deferred tax attributable to the following items:
31 Mar 2017(unaudited)£m 30 Sep 2016(audited)£m
Deferred tax assets
Capital allowances 112 127
Tax losses carried forward 37 35
Defined benefit pension scheme deficit 7 18
Employee equity based compensation 2 2
Cash flow hedge reserve 1 1
Transitional adjustment - available for sale reserve 3 -
───────── ─────────
162 183
═════════ ═════════
Deferred tax liabilities
Cash flow hedge reserve (12) (21)
Gains on unlisted available for sale investments (6) (6)
Available for sale reserve (6) -
───────── ─────────
(24) (27)
═════════ ═════════
Net deferred tax asset 138 156
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